The Option Investor Newsletter Sunday 05-04-2003 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: Bad News Bulls Futures Market: Confirmation Day Index Trader Wrap: Climbing a Wall of Worry Editor's Plays: Short Squeeze Market Sentiment: Out In A Cheer Ask the Analyst: Risk/Reward, Point & Figure, and minimizing risk with options 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 5-02 WE 4-25 WE 4-17 WE 4-11 DOW 8582.68 +276.33 8306.35 - 31.30 8337.65 +134.24 - 73.74 Nasdaq 1502.88 + 68.34 1434.54 - .96 1425.50 + 66.65 - 24.66 S&P-100 471.87 + 15.77 456.10 + 2.49 453.71 + 12.74 - 5.72 S&P-500 930.08 + 31.27 898.81 + 5.23 893.58 + 25.28 - 10.55 W5000 8834.06 +308.17 8525.89 + 59.04 8466.85 +239.31 - 92.43 RUT 407.67 + 19.17 388.50 + 4.80 383.70 + 12.40 - 1.98 TRAN 2460.80 +108.19 2352.61 - 9.58 2326.19 +131.63 + 6.28 VIX 23.61 - 0.29 23.90 - .69 24.59 - 3.68 - 4.53 VXN 32.36 - 1.34 33.70 - 2.18 35.88 - 3.74 - 2.83 TRIN 0.66 1.95 0.50 0.88 Put/Call 0.71 0.87 0.52 0.79 *************************************************************** Bad News Bulls by Jim Brown Feeding the bulls a diet of bad economic news has made them tougher than a pack of junk yard dogs. Falling jobs numbers, contracting economy, terrorist alerts, no problem let's rumble. Rumble they did and pushed the indexes to new highs and above resistance which has held for months. Dow Chart - Daily Nasdaq Chart - Daily Friday morning started slow with the Jobs Report showing a loss of another -48,000 jobs. While this was bad it was not as bad as was expected and the talking heads spun the news as positive for the entire day. The March number was revised upward to -124,000 from -108,000. The unemployment number rose to a high of 6%, a number only seen two other times in the last two years, Apr-02 and Dec-02. Reporters made a big deal of the smaller loss than the prior two months. (-353,000, -124,000) The actual number was only about a third as bad as the worst whisper number of -150,000 and in reality this is the reason the markets celebrated. With the new Jobless Claims still rising to obscene levels everyone thought the Jobs Report would be terrible and the bad news was already priced into the market. Was it a bad report or should we celebrate only losing -48,000? We need to remember this report is done by survey during a one week period early in the month. Three weeks ago the war had just ended and euphoria was rising along with the markets. Did that affect the survey responses? Did the strong losses the prior two months provide us a layoff lull in April while employers seeing the war end were holding firm to see if an instant recovery appeared? Three weeks ago Jobless Claims were at the lowest level for the month (412,000) as the war was ending on TV. The bottom line will be the May numbers. If the report improves then February layoffs were the bottom and all is well in the economy. If May surges back to a -100,000 or higher then April was just an end of war induced lull and we are back to problems again. We have lost jobs in five of the last six months and new Jobless Claims have been over -400K and rising for eleven weeks. Analysts do not expect any material job growth until mid-2004 and they expect 6.2% unemployment by year end. Anther point to emphasize is that there are 600,000 more full time workers employed in part time jobs than there was this time last year. It means full timers have resorted to part time employment in order to pay the bills while they continued to search for a permanent job. Despite this surge in temporary employment the unemployment rate continues to rise. Historically we have not had three months of job losses in recent decades without having a recession. Not a good historical precedent. Also, we have not had three months of losses without the Fed cutting rates. We have an FOMC meeting on Tuesday and the Fed Funds Futures are only showing a 19% chance of a cut at that meeting. Clearly the Fed is not telegraphing any change in rates and they will want to see if the trend continues and if the wars end changed the economy before making a move. There are so many external factors that the Fed is likely to sit on their hands. Factory Orders surprised traders with a +2.2% gain compared to only a +1.2% estimate. This was surprising considering it was for the March period when all the company guidance was for gloom and doom due to the war beginning. For investors expecting a bearish prewar drop it actually showed some increases in things like new orders +2.2%, back orders +0.3% and shipments +1.9%. Suddenly there was new hope that a recovery was actually underway. Traders should be aware that this report is a month older than the ISM, which we received on Thursday. That would indicate that the Factory Orders for March at +2.2% and the weak ISM for April shows that the economy is deteriorating from a March bounce. Obviously bulls will read these reports many different ways and ignore the facts on which they disagree. Nobody will know the real answer until another 30-60 days have passed in the postwar economy. Bulls not only ignored the economics but they ignored several reports of problems in the tech sector. JP Morgan said they had surveyed manufacturers and fabricators and in all cases the days of inventory on hand had increased over the last four weeks as the impact from SARS filters back through the supply chain. IBM, FLEX, TSM, UMC and others had reported an increase in inventory levels as sales slowed. Several chip companies had reported delayed orders due to SARS as well. I think this is only temporary but there has been an undeniable dip in 2Q revenue worldwide. Contrary to the above comments Soundview spent a day at IBM and came away saying they expected revenue to come in above estimates. Those minor negative points were disregarded by traders as they bought the dip again and did not stop until they had pushed the indexes over strong resistance and to highs not seen in many months. Airlines posted strong gains on bargain hunting from investors that feel the worst is over. No attacks, no AMR bankruptcy and oil dropping like a rock. The transports broke resistance at 2425 that has held since last October. The chart is showing a clear breakout and confirming the Dow move. Traders seeing this felt if the transports were on fire then everything else could not be far behind. The Banking Index also broke to a new high at 806 and over resistance dating back to last August. With banks and transports leading it probably brought tears to long time traders. Could it be, a REAL rally? On the surface it sure looks like it and there is little anyone can say to deflate the expectations. The predominant theme was "maybe it is not as bad as we thought." We will get to test that theory next week. JPM is holding a tech conference where HPQ, MOT, IBM and INTC will be among the top presenters. It will be a dog and pony show more than an update on the state of the economy but traders are hoping to get a few positive indications of how business is going. While earnings are about over with 411 S&P companies already reported there are some major companies still to report next week. Of those 411 companies 58% have already warned about the 2Q and 24% have raised guidance. (2:1) Some of the major announcements for next week include MET (Monday), CSCO, ERTS, PRU, G (Tuesday), EDS, PIXR, THQI (Wednesday), NVDA, LTR, XMSR (Thursday) and BRKa on Friday. Obviously the biggest names for tech followers are CSCO and EDS. The week is weighted to the smaller tech and biotech companies but those two giants will be the ones to watch. Cisco has made comments in the last couple weeks that would lead investors to believe things are improving. Obviously this positive expectation is already priced into the stock. Cisco is hovering near strong resistance at $15.50 that has held it back since Aug-2002. EDS has under performed the market after rocking techs with a massive warning in September. After dropping from $40 to $10 on the warning the company is easing up to the $20 level again with strong resistance at $21. Should EDS, which competes with IBM for services contracts, says things are improving we might see a strong rebound not only for EDS but for IBM and techs in general. I mentioned this earlier but it bears another comment. The Fed meets on Tuesday and while there is no change in interest rates expected we have seen three months of negative job growth and historically they take action. Traders may bid up stocks in advance of the meeting in the hopes they follow suit again. Either way the guidance they give in the announcement will be key. Several Fed governors have gone on record recently with positive comments and should those comments bleed into the official guidance we could see another celebration in the markets. The celebration on Friday was very strong. Volume over all exchanges was over four billion shares with the NYSE almost reaching the two billion mark. Advancers were 3:1 over decliners on the NYSE. On the Nasdaq at 1.86 billion and little more than 2:1 ratios the action was good but not as great as it appeared on the surface. Don't get me wrong. I am not complaining about the Nasdaq closing over 1500. This is a banner day not only for the Nasdaq but for almost every index on the board. The Nasdaq is only a few ticks away from the last major resistance for the last year. That is the 1521 high on December 2nd. We have a strong higher low in Feb/Mar, a month of consolidation just under 1425 and now several days of breakout trading at higher highs. I know there was applause somewhere when the Nasdaq closed over 1500 because there was definite excitement in my office. The Dow also broke out over the 8520 resistance that has kept it in check since March 21st. This is a strong signal and the breakout of the bullish wedge is a very good sign. Next resistance on the Dow begins around 8700 and gets stronger around 8850-8900. Make no mistake. The trading on Friday turned a lot of heads and Monday could be exciting. If Ma and Pa Investor look at the "New Highs" headline in Saturday's paper they could decide the 1% return of their money market funds is no longer attractive. That makes Monday confirmation day. The volume on Friday was good but not great. I attribute that to being an early summer Friday. If we can get a strong volume confirmation on Monday then the race could be on. I am not expecting a vertical rise to old highs but I do think the current performance in the face of absolutely terrible economic news is very strong. We will have pullbacks and there are some hair pin turns and sharp objects in the road but the road was heading uphill at least on Friday. We still have SARS. We still have terrorists. There was a new alert issued by homeland security on Friday. We still have rising unemployment but traders are convinced these factors do not matter. They are convinced the third time is the charm. You know, the second half recovery of 2001 and then 2002 and now 2003. Actually there is good historical precedence for a 2003 recovery as it is the third year of a presidential term, normally bullish, and the campaigning has already begun. Next week is a wasteland in the economic arena with very little in the way of reports to feed the bears. The ISM Services is Monday but it should be ignored if bad and cheered if better than last months negative report. Tuesday is the FOMC meeting and the only thing important there is the guidance. Wednesday we get Wholesale Inventories and short of a disaster nobody will notice. The week ends with Jobless Claims and FOMC minutes on Thursday. After 11 weeks over 400,000 new claims there could be a dip at any time to something starting with a three and it will be heralded as a clear sign the recovery has sparked into life. Life is good when the indexes tack on triple digits in a week that breaks strong resistance. It is like leaving on a long vacation trip to some exotic destination. You are full of hope for the excitement ahead and the cares of the office are left behind. Everything is wonderful until the tire blows or the radiator overheats or both. Your trip is still intact but suddenly the excitement fades with greasy hands and complaining passengers. We cleared the traffic jam of strong resistance today and we are cruising down the highway for those cool mountain tops ahead. Dow 9000, Nasdaq 1600? Who knows, half the fun of the getting there is the journey or so they say. We all know what comes next. Detours, traffic jams at higher levels and the required pit stops for repairs and profit taking. The bottom line is that the trend has changed. Baring a catastrophic event next week the markets could continue climbing higher on the backs of the disbelieving bears. Trust me, there are a bunch of us, ahh, them. Yes, I am converting, almost. I don't believe it for a minute. I see an economic disaster behind every rock and believe we are in a recession. However, it does not matter what I believe. The market wants to go up. Just like it did in October and again in March. There was no economic justification for either of those events. The bears just kept denying it and shorting every resistance level. The bulls just kept denying it and waiting for the pull back that never came. Eventually it became and race until those advances simply became so over bought they just could not advance any more. Short, chase, cover, chase, short, chase, cover, chase. I know so many readers that are short to their eyebrows it is crazy. The ones that are not short were sending those "is this it, I don't want to miss it" emails all day Friday. If the volume had been 25% stronger and the advance/decline 4:1 or 5:1 then I would feel better about saying this is it. I can't because the internals were just not that strong. BUT, this was a summer Friday and Monday is a new day in new territory. If we get confirmation on Monday then there could be a lot of real money come off the sidelines. Quit worrying if this is it and trade what you see. If you see strong upside volume on Monday then go for it. If the volume is mediocre and the price does not confirm with a new high then be afraid. Breaking out of a downtrend does not guarantee success. I think we are seeing another breakout of the SIE virus (Severely Irrational Exuberance) and until the bulls get their vaccination it could spread rapidly to borderline bears. This virus is very contagious among weary traders. Tonight the rally looks very good on paper but Monday is a new day. Trade what you see and keep looking for sharp objects in the roadway ahead. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Confirmation Day by Jim Brown 05-02-2003 High Low DJIA 8582.68 +128.43 8593.25 8409.29 NASDAQ 1502.88 + 30.32 1504.22 1469.84 S&P 500 930.08 + 13.78 930.56 912.35 NDX 1136.51 + 23.30 1137.45 1109.66 ES03M 927.25 + 12.50 930.25 910.75 YM03M 8556.00 +115.00 8570.00 8385.00 NQ03M 1139.50 + 25.50 1139.50 1111.00 Daily Pivots (rounded to nearest point) R2 R1 Pivot S1 S2 DJIA 8712 8648 8528 8464 8344 COMPX 1527 1515 1492 1480 1458 ES03M 942 935 923 915 903 YQ03M 8689 8622 8503 8437 8318 NQ03M 1158 1149 1130 1120 1101 Friday opened with a dip on the Jobs Report to support at 910, which rebounded and never looked back. There was a brief pause at 920 resistance which had held since April-23rd but the pause was only temporary. The intraday lull found support at 925 and the afternoon bounce found new resistance at 930. Monday will be confirmation day. All the indexes appear poised to rally to next resistance but it will require more volume and conviction than we saw Friday. The volume was good but not great and the A/D ratio was just over 2:1 across all markets. This would normally have been a great day in a normal market but considering the magnitude of the resistance broken the internals should have been much stronger. I am attributing this lack of strong volume to an early summer Friday and hope we will see confirmation on Monday. The ES chart shows a complete retracement to the January resistance highs of 935. The high from Friday at 930 does not give us much room to the upside before this strong resistance is hit. With a strong volume breakout we could see virgin territory for the contract. ES03M Chart - Daily This breakout needs support from the other indexes to continue. The NQ is testing uptrend resistance from January between 1140-1150 and will be fighting its own battle to continue the up trend. Initial support for the NQ is well below at 1100 with critical support at 1050. NQ03m Chart - Daily The Dow futures appear the least restricted of the futures. The YM does not have any resistance until somewhere around the 8700 level with stronger resistance at 8800-8850. The Dow should be the controlling influence on all the markets on Monday. YM03M Chart - Daily With the resistance on the Dow cash so close at 8610 and the bullish sentiment from Friday we should get carry over on Monday morning that will take us over 8610 at the open. If the Dow can hold on to those gains we should have a good day. I want to stress this again. Everything appears strongly bullish but we need volume to confirm Friday's move and any continuation on Monday. This is going to be a crucial test. If traders who have been waiting patiently on the sidelines sat home over the weekend and decided they were just going to watch for a couple more days we could be in trouble. Fund managers with cash to burn are going to be looking for confirmation as well. Retail traders will also be looking for clues. If everyone just waits on everyone else then this bounce could fail. Somebody need to take the first step of buying the top at the open on Monday to jump start the Dow over that 8610 resistance and the Nasdaq Compx over its 1521 resistance. Once over those levels we should be good to go for several days. Shorts, if there are any left would cover and retail traders would begin chasing prices. (I can hope can't I?) See you in the Futures Monitor on Monday! ******************** INDEX TRADER SUMMARY ******************** Climbing a Wall of Worry By Leigh Stevens lstevens@OptionInvestor.com The market, especially in a transition out of a full-blown bear market will sometimes seem to be climbing a "wall of worry" - and investors have plenty to be concerned about: record high unemployment, less available work for those who are working and economic policies that lack a bold new prescription for change. The public has seen the winning effects of a daring foreign policy, not seemingly matched on the home front by an administration banking mostly on cutting federal taxes still further as an engine of renewed economic growth. The states are strapped and may take the money back. Time will tell - hope they're right cause there is no back up plan as far as I know. THE BOTTOM LINE – Tech stocks, which have lost the most have had the best rebound off their March lows. With stocks like eBay nearly doubling off it's recent bottom - and, with substantial gains in share prices of the likes of Amazon and Yahoo, it's not surprising that investors have some enthusiasm for tech heck. The key test of demonstrating an actual up trend is still ahead however, as the Composite (COMPS) approaches its prior (Dec.'02) peak of 1520. The S&P 500 or SPX will need to manage to a weekly close over 960 to suggest a turnaround in the major bear trend. Fortunately, to make money in options (and not having a crystal ball showing where the economy is going), us trader types don't need to bank on a sustained trend of months' duration. The current advance has had some legs and momentum. There was no excess of bullish sentiment last week - had there been it would have suggested more danger for a further bull trend. The market IS overbought, so is vulnerable to reversals - to overstay on the long side as we approach old highs is not the best bet. If you have call profits, you could start taking them off the table. An opportunity in puts is coming, maybe at the top of the uptrend channels we can see on most of the hourly index charts below. FRIDAY'S TRADING ACTIVITY – A bit of an early damper was provided by the Labor Department report on jobs - our economy lost 48,000 of them in April after 124,000 of them were lost in March, along with a decline of some 350,000 in February. Still, stock enthusiasts could see a declining trend - maybe the next month will go into plus territory and new job CREATION due to the resolution of uncertain economic fallout from the Iraqi conflict. Total hours worked in April fell by 0.7%, with the average workweek falling 34 hours, matching the lowest level since the recession began. Economists had forecasted the average hourly workweek at 34.2 hours. As Jeff Bailey pointed out in a Friday mail, the 18-minute loss in hours worked is equivalent to losing more than 1 million jobs in terms of output. The average weekly paycheck fell by 0.7% (to $513.74). As I noted, those that are working are getting less money. But hey, they got a job and the growing unemployed ranks probably would take less money and at least reverse money flows from out to in. An upgrade from mother Merrill (Lynch) on the airlines gave a boost to this very depressed sector. The Merrill Lynch analyst speculated that the worst may be over - how bad can it get ahead with what has already been - SARS, war with Iraq and recession. The Dow Transportation Index popped to a multimonth high, although this is from very depressed levels, not seen in its sister index, the Dow 30 Industrials. Stocks upgraded from neutral to buy included Alaska Air (ALK), Continental (CAL), Delta (DAL), and Frontier Airlines (FRNT). As it happens these are still ones I tend to fly (Alaska, when I can get up to visit Brother Jeff in Talkeetna) and think have their "act" together in one way or another. These guys and Southwest Airlines of course. More economic data came along midmorning to give the bulls still more encouragement - March factory orders came in at nearly DOUBLE the consensus forecast. The U.S. Commerce Dept. reported that manufacturing orders rose 2.2%, the biggest increase since last summer and well above an anticipated 1.2% rebound. For the day, the Dow climbed 128.43 points, or 1.5%, to 8582.68, the Nasdaq Composite 30.3 points (2.1%) to 1502.88, which was its first climb above the 1500 mark since last June. The S&P 500 Index (SPX) was also up 1.5 percent. The Russell 2000 (RUT) small-cap index was up even more, with a closing gain of 2.2%. The Nasdaq Composite has advanced a bit over 15% since its March low, while the Dow has tacked on some 12%. During the past week, COMPX was up nearly 5%, with SPX and the Dow up a little over 3 percentage points. NOT BAD! Record oil profits announced by the big multinationals have boosted the oil sector and the S&P also. Investors are banking on lower oil prices, an accommodative FED policy, improved corporate cash flow, some improvement in capital expenditures, some inventory accumulation and some added tax relief to lead to a better year end economy - better than the economy being on its rear end! Oh, this all and some pretty decent earnings seen in the last quarterly reports too. OTHER MARKETS - The 10-year T-bond fell a substantial 22/32, as money came out of bonds and into equities. The 10-year yield rose to 3.925%. It may not complete much with stocks until it's back at or above 4%. The dollar was up a bit against the Yen and flat against the Euro, which continues to advance - it ended the week at a buck 12 (1.12). Better take that trip to Spain or Italy - not to politically incorrect France or Germany - sooner rather than later folks! MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Weekly, Daily & Hourly charts: A downswing I thought might have taken SPX to around 885, based on a possible bear flag pattern on the hourly chart, was not to be - the oversold stochastic trumped "pattern" this time. The key technical event was the ability for SPX to pierce resistance in the 920 area - (prior) resistance now "becomes" near support. 935 is the current top end of the rising hourly uptrend channel. The 935-940 area if reached, is where I would look for a lid on the current rally and do some put buying for an objective to 920, as I think it's likely that that area will be re-tested at least once. You can see on the weekly chart above (left), the key trading range and suggesting 960 as both resistance and a possible "breakout" point for SPX. If the S&P gets to the 960 area it will likely be registering a longer-term overbought on the 13- week RSI. Meanwhile on the daily chart, the RSI is registering that kind of extreme (overbought) already. This usually if not always suggests that the market is vulnerable to downdrafts and shocks, which is not to say just WHEN they may happen. No excess is seen in the 10-day TRIN measuring buying and selling activity in the NYSE. Lack of a fever pitch of buying or selling or a quiet market is common in turnarounds in bear markets, if that's what this is (and that I have been suspecting that it is, based on the long-term up trendlines). There is usually not a lot of bullish conviction prior to when the economy starts growing again. S&P 100 Index (OEX) – Daily & Hourly charts: This past week saw no extreme readings in my Call to Put indicator, so the extreme in call buying seen the week before was not "confirmed" so to speak. Rallies tend to go further when there is disbelief in the climb out of the pits. 475-477 looms as important potential technical resistance based on the hourly uptrend channel and an approach to the March top - I would bet on the selling to be in this area and look to buy OEX puts if sellers take charge and overwhelm buying interest. The oversold hourly stochastic readings that existed coming into this past week was more telling than the overbought daily readings on these type indicators. OEX is now approaching my upper trading band or envelope line and provides another indication that the market is getting extended on the upside - this does not have to indicate a reversal - it does suggest that the further potential for extending gains is limited without a pause, meaning at least a slow down in upside momentum. The top end of the OEX price range will likely be in the 475 to 480 area. The downside of the expected range is to 458-460 in the coming week. A close under the last hourly low in the 458 area, which is also the approximate low end of the hourly uptrend channel suggests a deeper correction, such as back down to the low 450's. Dow Industrials - Daily & Hourly: While a retest of the March top around 8800 is a key longer range target, important near resistance is at 8600 at the top end of the hourly uptrend channel in DJX. I anticipate a 8600 to 8400 range in the Dow. If the Average holds at or above the prior tops around 8530-8550 - (prior) resistance "becoming" support - a strong buying interest is being demonstrated and more of a sideways correction may be in the offing. This is a tricky market to call - our "usual" expectation for the rally to go to expected zones of resistance then fall apart, has not been happening at least yet. Nasdaq Composite Index (COMPX) – Weekly, Daily & Hourly: I mentioned 1520 before as an area of technical importance, which can be seen by this area being both the top of the hourly uptrend channel and especially by it being the prior weekly high - dating back to December (2002). If the prior peak is pierced, especially on a daily and weekly closing basis, the potential implied by the "V" weekly bottom begins to be more fully realized. If so, an eventual upside "measured move" objective, assuming rally potential equal to the first move up, is to around 1660. A objective for a second up "leg" that was 1.6 times the first, which is not uncommon, would be closer to 1900 in the Composite. This is a second longer-term objective as a possibility assuming a decisive move above the prior top - an uptrend only being established when the prior upswing high is passed. Last week, the Composite did maintain its bullish chart per my comments, by finding support at and above the prior highs at the low-1430 area, as the line of prior resistance "became" a new support. As well, the oversold hourly stochastic model lent support for an assumption for rally potential from this area. The use of the 6% trading envelopes on the COMPX chart above, relative to its 21-day moving average (middle line), gives an idea of where the COMPX reaches an overbought or extended price area. It does not tell how soon that will happen, which is of almost the same importance to trading the index options. However, its a better than even bet that if a move to 1520 develops, there is significant likelihood of a pullback again to the low end of the hourly channel around 1475. Nasdaq 100 (NDX) Index - Daily & Hourly charts: Since we can't trade the Composite directly, we move on to the Nas 100 chart that we can buy/sell. 1160 is resistance and 1110 near support, implied by the hourly trend channel. A break of 1100 suggests a move back to 1080 at least and a close below 1080 in turn suggests possible downside back to as low as a retest of support in the 1020 area but this is probably too bearish a view. QQQ charts - Daily & Hourly: Near QQQ support looks to be 26-26.50 or a bit higher, judging by the relevant trendlines. The rally this past week came before any next dip and my suggestion to buy the Q's if they got back to the 25.5 area was something that was not to be. Right idea, WRONG price! I haven't had a lot of bullish conviction due to the relatively low volume, but then again this is not uncommon in this kind of market. If there is a turnaround developing that is more than another bear market rally, there is not a lot of initial bullish enthusiasm. I can find this in myself certainly as its hard to get enthused about stocks in such an uncertain economy. If the market is starting to account for or "discount" better times ahead, a common characteristic of stocks, then that's another thing. Hey, if it (the market) was easy to figure, we'd all be rich(er)! As with NDX, the tracking stock exceeded both its March high and early-December closing high, which is bullish action. (NDX would have to get above 1155 to take out its early-December intraday peak and QQQ would need to top 28.79 for this same hat trick.) At this juncture, there are a couple of possible hourly uptrend channels that can be drawn - one narrower, one wider, as I have drawn them above. One resistance point intersects around 28.5 as shown - the other, comes in around 29.75. There is near-term upside momentum suggested by the hourly stochastic mode, but with the daily stochastic up at an overbought extreme. Being at an extreme does not suggest that the rally is going to stop just yet, so we have to see. If QQQ falters in the 28.50 area it's a good indication for shorting. If the stock goes though this implied resistance and upside momentum continues AND if 29.50-29.70 is seen, shorting/put buying in this area becomes a good opportunity in my estimation. Good trading success! ************************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 ************** Short Squeeze We have seen several short squeezes lately on individual stocks. Look at AMZN when it surprised with earnings last week. Amazing. Look at CY, a current play in this column when it broke $9 yesterday. There are gaps happening everywhere with the market breaking down resistance that has held for months. Back in February I profiled HLTH as a short squeeze candidate with 23 million shares shorted and strong resistance at $10. Sadly the resistance held and the stock spent a couple more months consolidating before beginning a strong up move again. I am not going to rewrite the entire article again but the reasons remain the same. Here is the link to the initial article. http://members.OptionInvestor.com/editorplays/edply_022303_1.asp HLTH has risen to resistance at $10 on the strength of EBAY, YHOO and AMZN and the realization that there are companies making money on the Internet. At the close on Friday HLTH squeaked to $10.08 at the bell. Volume was very heavy at nearly three times normal with numerous big blocks. It has not traded more than a few cents over $10 since Jan-2001 and that is a long way from its 1999 high of $126. With an improving profit picture, much improved business model and a rising market there could be a lot of shorts ready to bolt if that $10 level really breaks. With an average volume 1.5 million and a short interest of 23 million we could see a serious squeeze. A word of caution. HLTH is not a rapid mover. It is simply a short term play that we are going to play for the breakout and quit. I personally like it for the long term but it would be like watching paint dry. I am thinking about the June $10 call at 75 cents or the July $10 call at 90 cents. The July call will hold value better if the breakout does not come and at only 15 cents more it is the one I am suggesting. I would love to see a pop to $12 on a break out. I am going to recommend a profit stop at $1.75 on the July option. Hope for an explosion and then exit. BUY Call July-$10.00 HUT-GB $.90 (Friday close) Set profit stop at $1.75 WebMD 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. IVX - Calls - $16.38 4/27/03 ($15.28 when recommended) I guess we can kiss that pullback to $14 goodbye. The stock opened up on Monday and never looked back. The theory was to buy 2 contracts of the Jan-2004 $15 call at the open on Monday and then buy one more on a pullback to $14.50 and two more on a pullback to $14.00. I would leave the other orders active just in case lightning strikes. The KIV-AC opened at $2.00 on Monday and closed at $2.85 on Friday. http://members.OptionInvestor.com/editorplays/edply_042703_1.asp QQQ - Put - $28.27 4/20/03 ($26.82 when recommended) I think we can kiss our 15 cent May-$25 puts goodbye with the QQQ on steroids. With the ask a nickel and no bid we do not have to worry about selling them. Let's continue to hold them because you never know what can happen in two weeks. http://members.OptionInvestor.com/editorplays/edply_042003_1.asp http://members.OptionInvestor.com/editorplays/edply_041303_1.asp ORCL - Put - $12.20 4/6/03 ($11.37 when recommended) Oracle has not dropped due to the market support but it has not gone up either. It is still stuck at $12.00. I am closing this trade today for lack of progress. The stock is only up +83 cents but that is small consolation. http://members.OptionInvestor.com/editorplays/edply_040603_1.asp CY - Cypress Semi Call - $10.70 ($11.15 week high) 3/2/03 ($6.41 when recommended) Cypress has almost doubled in price since we picked it back in March. The stock spiked on Friday to a seven month high on short covering when it passes the $9 resistance. The June $7.50 call that was profiled at 75 cents traded as high as $3.60 on Friday. The Jan-$7.50 call that was recommended at $1.45 closed at $3.90 on Friday. http://members.OptionInvestor.com/editorplays/edply_030203_1.asp EMC Call from Feb-2nd $9.44 ($9.61 week high) ($7.70 when recommended) http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball - From 12/29/02 FLEX, RFMD and TLAB still hogging the top spots on the losers list. We still have nine months until expiration. If the Nasdaq keeps exploding we could be in the green soon. 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 **************** Out In A Cheer - James Brown All those traders who were holding their breath must have released it and when they did it came out in a cheer. No doubt some market watchers are perplexed that a rally occurred when the nation's unemployment rate number rose to six percent with another 48,000 jobs lost last month. Well, nowadays instead of corporate earnings whisper numbers we have to contend with economic report whisper numbers, which shouldn't be a surprise given the total focus on the economy. The employment report's -48,000 jobs was a lot less than the whisper number of -150,000 jobs. Creating the one-two punch that has temporarily stunned the bears was a surprise in the recent factory orders. Economists were expecting 1.2% growth and the result was +2.2%. Good news indeed. If you don't want to believe it's the economy then maybe America was feeling a little optimistic after George Bush's almost perfectly scripted address to the nation from the deck of a moving aircraft carrier on Thursday night. Yet it wasn't just the U.S. markets that rallied. Sure, the Dow Jones Industrials jumped 128 points to breakthrough resistance at 8525 and close at 8582. Sure the NASDAQ Composite rose 30 points or 2% to close at 1502, which happens to be the first close over 1500 in almost a year. Sure the NDX rose 23 points or 2% to 1136 and the small-cap Russell 2000 rose 8.8 points or 2.2% to breakthrough resistance at 400 and close at 407. Even the S&P 500 rose 1.5% to 930 producing a confident close over the pivotal 920 area. But the global markets cheered as well. The NIKKEI 225 index jumped almost 44 points to 7907. The Hang Seng rallied 90.9 points to 8808 and the Singapore Strait Times added 17.8 to 1299. Across the pond the FTSE 100 rose 72 points or 1.87% to 3952 and the German DAX 30 ended 44 points higher or +1.49% to 2986. The U.S. market internals echo this exceedingly strong bullish optimism. Advancing stocks over decliners were nearly 22 to 6 on the NYSE and 22 to 8 on the NASDAQ. New 52-week highs continue to crush new 52-week lows at 388 to 41, respectively. Up volume beat down volume by more than 5 to 1 on the NYSE and more than 7.5 to 1 on the NASDAQ. It's tough to be a bear in this market. The strength of the market is also showing up in the year-to-date numbers. The Industrials are up 2.9% YTD. The S&P 500 is up 5.7% YTD. The Russell 2000 (RUT) is up 6.4% YTD. The NASDAQ Composite is up 12.5% YTD. The perception on Friday, at least at the moment, is one of hope. People are feeling hopeful that things will finally improve. Wall Street is hopeful that corporations have turned the earnings corner and are working their way back to growth. Economists are hopeful that the much lower oil prices and a low interest rate environment will reduce costs and stimulate businesses. The taxpayer is hopeful that the President will actually be able to accomplish some form of tax relief that will benefit them immediately. The investor is hopeful that the recent SEC-Wall Street settlement will have brokerage firms actually telling the truth. Finally, the average citizen is hopeful that maybe, just maybe, after three years of looking for it, we'll see a second half recovery. That's the good news. Now for the less than good news. The markets can't keep this pace up forever. It's a game of give and take, of ebb and flow. The money has been flowing into stocks and it's going to be time to ebb soon. Consider these indicators. The 5-day moving average of the ARMS index is at 0.86. Traditionally, ARMS watchers translate moves to 0.85 as bearish. Keep in mind that these signals tend to be few and far between and usually a little bit early. The bullish percent indicators are looking a little top heavy. The NASDAQ-100 (NDX) has seen the rally push its bullish percent number to 73. The 70 and above level is considered overbought. Jeff Bailey likes to compare the bullish percent indicator as a football field. When the bulls get the reading to 70, they have "scored". Well, what happens after a team scores? They kick the ball to the other team. Now this indicator can go higher but I'd be watching for "ball" to change hands sooner rather than later. What might give us some time is the S&P 100 bullish percent is only at 61 and the S&P 500 bullish percent is at 59. They don't have to get to 70 before reversing. Bears can steal the ball at any time but for the S&P indices we can still hope for the bulls to "score". Needless to say the VIX and VXN are very low and continue to drop. Unfortunately, both are turning from big yellow flags of caution to big red flags of warning for the bulls. Also of note is the equity-only put-to-call ratio. As of Friday's close it dropped to 0.51. Jon Levinson, our own prolific MarketMonitor commentator, would consider that a bearish sentiment indicator. Now I fully believe in trading what you see and not what you believe, thus the overabundance of calls on the play list. However, given the extremely bullish market overtones I continue to encourage strong risk management and vigilant stop loss monitoring. Consider these numbers over the weekend. From the March 2003 lows, the Industrials are up 13.6%. The S&P 500 is up 15.6%. The NASDAQ Composite is up 19.8%. While short-term the markets looks ready to go higher, there's a lot of profit on the table and traders don't like to leave it there. Next week it will be interesting to look back and see what the fund flow numbers were for this week. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 8583 Moving Averages: (Simple) 10-dma: 8457 50-dma: 8138 200-dma: 8308 S&P 500 ($SPX) 52-week High: 1106 52-week Low : 768 Current : 930 Moving Averages: (Simple) 10-dma: 913 50-dma: 867 200-dma: 879 Nasdaq-100 ($NDX) 52-week High: 1350 52-week Low : 795 Current : 1137 Moving Averages: (Simple) 10-dma: 1107 50-dma: 1046 200-dma: 995 ----------------------------------------------------------------- The fresh upside breakout in the major averages will further drive the market volatility indices even lower. It's speculation on our part, but the turning point could be the 20 area on the VIX and the 30 area on the VXN. Historically speaking, the VIX traditionally signals market tops when it approaches or trades at or below 20. These are new all time lows for the VXN and the index does not have a lot of history behind it. CBOE Market Volatility Index (VIX) = 23.61 -0.89 Nasdaq-100 Volatility Index (VXN) = 32.36 -0.13 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.72 632,075 452,423 Equity Only 0.51 514,596 260,367 OEX 1.38 22,160 30,609 QQQ 0.91 37,824 34,561 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 53.5 + 1 Bull Confirmed NASDAQ-100 73.0 + 3 Bull Confirmed Dow Indust. 56.7 + 7 Bull Confirmed S&P 500 59.4 + 2 Bull Confirmed S&P 100 61.0 + 3 Bull Confirmed 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 0.86 10-Day Arms Index 1.01 21-Day Arms Index 1.07 55-Day Arms Index 1.25 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 2199 2194 Decliners 639 860 New Highs 157 231 New Lows 16 25 Up Volume 1553M 1567M Down Vol. 280M 208M Total Vol. 1855M 1789M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 04/29/02 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 Hmmm...not much new to report here. The report is dated April 29th. The markets were still consolidating sideways and had not yet seen the Friday session breakout. The numbers below show a slight strengthening of the Commercials' net long positions and a very small increase in the Small Traders' net short position. Considering the Friday breakout, guess who was "right"? Commercials Long Short Net % Of OI 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% 04/29/03 432,710 419,245 13,465 1.6% 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 04/08/03 136,173 122,006 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% 04/29/03 149,616 154,782 5,166 1.7% 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 Yet again, the positions are reversed on the E-mini numbers. The Commercials bumped up their net shorts while the Small Traders significantly added to their longs. Commercials Long Short Net % Of OI 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%) 04/29/03 134,751 472,247 (337,496) (55.6%) Most bearish reading of the year: (337,496) - 04/29/03 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% 04/29/03 459,687 50,030 409,657 80.4% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 Again, there isn't much change to be seen here as by April 29th, the markets were mostly churning sideways, albeit with an upward bias. Commercials Long Short Net % of OI 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% 04/29/03 45,497 37,557 7,940 9.5% 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 04/08/03 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%) 04/29/03 11,219 19,760 ( 8,551) (27.6%) 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 Commercial traders remain net long the Dow Jones Industrials with a slight increase in their overall long positions. Small Traders maintained their net short position but saw a drop in overall long positions during the week. Commercials Long Short Net % of OI 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% 04/29/03 17,927 14,083 3,844 12.0% 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 04/08/03 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%) 04/29/03 7,081 8,604 (1,523) ( 9.7%) 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 *************** Risk/Reward, Point & Figure, and minimizing risk with options PnF on Astrazenaca (AZN)... I'm looking at the PnF chart and want to know if my analysis is correct. I figure an upside to 47, counting from the column that has a red A. How do I figure the downside risk? Is it to 31 where the current column of X's started? Fantastic! The trader is actually trying to forecast a future upside price objective (reward), but also assessing potential downside risk. Hopefully, by the time we get done with this "Ask the Anlayst" column, we'll have a better feel for risk/reward in the trade. Before I start, I want to check the SECTOR that a stock like Astrazenaca (NYSE:AZN) $41.51 +1.84% (05/02/03 close) is associated with. According to Dorsey/Wright and Associates, AZN is a "drug" stock and the sector bullish % ($BPDRUG) is currently in "bull alert" status at 50%. This means that in a "universe" of drug stocks, for every 100 stocks, 50 have a "buy signal" currently associated with their point and figure chart, while 50 have a "sell signal" associated with their PnF chart. In December of 2002 (a red C on a point and figure chart), this sector's bullish % reached a relative high of 52%, then fell to 26% in early March (red 3 on a PnF chart), then reversed up to the current "bull alert" status in late March (just before a red 4 on a PnF chart) and has been building "buy signals" since that time. So... the drug sector is gaining favor, or at least finding more and more stocks generating PnF "buy signals," so this sector would attract a bullish trader's attention. Now, the subscriber needs to do some work on their bullish vertical count technique, but that is what the "Ask the Analyst" column is intended to do. Help try and educate and polish some of the techniques for using the tools in our toolbox. For future reference, traders can bookmark this article for "bullish vertical count" or a prior article I wrote in the Bailey's Basics section titled "The BULLISH vertical count." There's also an article in that section titled "The BEARISH vertical count." Let's take a look at Astrazeneca's (AZN) $41.51 point and figure chart and not only calculate the bullish vertical count, but also assess longer-term risk/reward in a trade. As always, we'll view the stock's chart from both a bull and bear's objective. That way we try and keep an unbiased view on first perusal. We've already addressed the sector as being "bull alert" and more and more stocks generating "buy signals" so I've already developed a more BULLISH stance toward the sector. Let's see if that carries forward with the stock. Astrazeneca (AZN) Chart - $1-box First off, I think it is always interesting to tie in the bullish % data and timeframe with the chart of the stock I'm thinking about trading. We talked about the "red C", then "red 3" and a period just before the "red 4" when the sector started to show some renewed bullishness. It's interesting, that AZN chart shows the stock giving a "double top buy signal in April and demand has been outstripping supply into early May (red 5). Now, the trader "thought" the bullish vertical count was $47. I think I know where he/she got this from. I think they were counting the column of "X" dating back to October (red A) and that column of X from $29 to $34. Using the formula in the above chart, that would have been the bullish vertical count back in October. However, that bullish vertical count was then NEGATED by the "double-bottom sell signal" at $34 in January (red 1). "Finding" the bullish vertical count column is kind of like turning a light switch on and off. The simplest way to explain it is to look for the FIRST buy signal (where we haven't seen a sell signal since) that would have NEGATED the FIRST sell signal. Does anyone remember where the various MAJOR INDEX bullish % were in December (red C)? If memory serves me correct, the S&P 100 Bullish % ($BPOEX) and S&P 500 Bullish % ($BPSPX), which are MARKETS that AZN would most likely be associated with were at 76% and 68% respectively. Hmmmm.... MARKET were either "overbought" above 70%, or nearing "overbought" of 70%. Who has the risk at 70% or higher? Bullish traders right? Right! Trader can check me by visiting www.stockcharts.com and looking at the various bullish % charts for FREE! Was anything necessarily "wrong" with AZN in December, or were the markets just a little more "overbought?" Anyway.... I digress, but just trying to show HOW IMPORTANT it is to try and understand MARKET RISK, and how that RISK can also impact SECTORS and the stocks within those sectors. The current risk/reward profile as I see it for AZN is that I, or the MARKET for that matter, is assessing risk of $12 to potentially make $64. This would represent a risk of $1 to potentially make $2 longer-term. Does this fit your business plan? For many, this is probably a threshold at least. Now, would I (Jeff Bailey) actually risk $1,200 (100 shares with risk of $12) to potentially make $2,400? Mmmmmmm, probably not. IF the stock pulled back to its recent double-top buy signal at $37, then the risk/reward profile improves doesn't it? The predicament right now is... "what if the bullish vertical count continues to grow? Then what? Ahhhhh..... options. The perfect instrument for mitigating risk. Let's pretend that a FULL position for a trader would be 200 shares of AZN. It could well be that AZN is embarking on a very bullish long-term run. After all, the stock has been under some strong accumulation the past two months (as have the MARKETS) and hasn't been able to reverse 3-boxes at this point. I'm looking at the AZN October $40 Call (AZNJH) $4.40 x $4.60. A 1/2 position would have me risking not $1,200, but $460 (plus commission) for exposure to this stock over the next 5-months. Should the stock trade $29, then I'm not happy at all, but I've also mitigated my risk by exposing just $460, while allowing 5- months for the stock to "work its magic." Now.... as TIME progresses, I would surely think that the PnF chart of AZN would build some type of "higher low", where I would eventually raise a stop under, but right now, the AZN chart would put risk to $29. Even under the most recent bearish of MARKET conditions, AZN didn't trade $29. Now... last weekend's column also generated a lot of interest as it relates to using the point and figure charts on a 1% box size scale. Instead of displaying price movement on a standard point and figure $-basis, we displayed price action in terms of %. Now... on the above chart, where did the PnF chart say to "buy" AZN? At $37 right? Where the "red 4" is. Let's say you reviewed your business plan, and that business plan says that you CANNNOT take more than a 10% loss in the price of the UNDERLYING security (the stock or index price itself) you're trading (bullish or bearish trade loss) for FULL POSITION. One- half position might then allow for 20% risk. One-quarter position, even greater risk still. Is there a tool or technique that you're now aware of that could help analyze if AZN is/was the trade for you? Remember..... "red 4" ..at $37.00. At this time, the bullish vertical count would have been building at $52, while downside risk was still being assessed to $29. Risk $8 to potentially make $15 was still roughly 1:2. Note: ALWAYS HONOR the conventional point and figure chart FIRST, then use the techniques you've learned to "fine tune" and better assess risk/reward in the trade. Astrazeneca (AZN) Chart - 1% box scale at time of $37 This is what the 1-PERCENTAGE box size scale point and figure chart would have looked like when AZN traded $37 on April 23rd. Technically, a BULLISH trader could have assessed downside risk of 8% to a sell signal and if they're trade DISCIPLINE stated a MAXIMUM allowable loss/risk of 10%, that could have been referenced and tied in with the chart. Was $37 or $37.11 a good trade for you? Now that we have an "understanding" of percentage risk at perhaps an OPTIMUM trade entry point, lets fast forward to present. Is current price still OPTIMUM, or what position size might be used to compensate for RISK assessment? Astrazeneca (AZN) Chart - 1% box scale at time of $37 Wow! Nice little move from $37, but the 1% chart shows how BULLISH risk in new entries has grown. What's the bull from $33.59 thinking? What's the bull from $37 thinking? In past commentary, we've discussed 1/4, 1/2 and FULL positions and how the strategy of defining what a FULL position is for YOU as it relates to the UNDERLYING security (then translating that to options contracts where 1 contract = 100 shares) should become more and more apparent as to why OPTIONS traders need to think "stock" first, then "option" second. Do you see how at "optimum" bullish trade entry, a trader that has bullish thoughts for AZN at $37, could indeed have taken a FULL position at that point, and tied in some technical significance with a 10% risk assessment, which would have been above the $29 mark from the conventional $1-box scale of the p/f chart? Do you see how "benchmarking" back now has new bullish entry perhaps RISKING 20% to the very same $33.59 level? Based on RISK assessment, a NEW BULL looking to establish and perhaps build a position might now only establish 1/2 bullish position. A trader set on FULL position, with a STATED MAXIMUM ALLOWABLE risk of 10% decline in the underlying security could place a 10% line on the chart as shown above, but we see that there is little "technical significance" as it relates to the point and figure charts. So... we've answered the trader's question as to calculating the bullish vertical count, and discussed 2 techniques of assessing risk. Risk to $29 is considered LONGER-TERM risk and would be measured against the LONGER-TERM bullish vertical count. Let's face it. The SMARTEST money in the market bought AZN on March 12th at $29.41, that's also when the "dumbest money" sold the stock. SMART money bought at $37, when demand began outstripping supply on a more meaningful basis and a "buy signal" was generated. Using the percentage scale, we've tied in the conventional $1-box scale and began testing the supply/demand chart against our stated discipline of not taking more than 10% downside risk in the UNDERLYING security we are trading on FULL position, and then began incorporating the successfull strategy of limiting position size to still account for RISK, but allow BULLISH exposure to a security that certainly has the sector and the stock exhibiting longer-term bullish potential. We have perhaps further limited risk, with bullish exposure to a stock with the use of a call option. A trader that does consider 10% downside risk on a full position, with full position being roughly $5,000 in the underlying security, may well see that with AZN trading $41.51, then 10% would be a risk of roughly $4.10. The prior mentioned Oct. $40 call, priced at $4.60, would be relatively equivalent to 10% risk. The nice thing about an option is that it gives the trader the OPTION of time and perhaps honoring the conventional supply demand chart and monitoring the MARKET/SECTOR internals over time as the trade progresses. You see, while AZN may decline 10% in the next three weeks and equity trader may indeed follow their stated DISCIPLINE and limit their losses at that point. However, the OPTION trader, that properly addresses risk to begin with, and carried that risk to their option's contract, already took care of their downside risk assessment. It could well be that when/if AZN were to decline 10% from a bull's entry point, that MARKET or SECTOR internals as depicted by the bullish% indicate that the trade should be cut from the portfolio, there are also times when a stock's price action will be influenced by "sympathetic" price movement as it relates to news, and with the passage of time, the news either wares off or the "knee-jerk" reaction to the news was eventually deemed insignificant. When properly used and NOT over leveraged, options can indeed give traders/investors and edge over underlying stock traders/investors. True, there's a premium associated with options, but we all know why. It's because options mitigate and limit risk to the capital invested. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of April 28th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- AOC Aon Corporation Mon, May 5 Before the Bell 0.47 CHD Church & Dwight Co. Mon, May 5 Before the Bell 0.40 CUZ Cousins Prop Inc Mon, May 5 Before the Bell 0.93 COX Cox Comm Inc. Mon, May 5 Before the Bell -0.03 CCI Crown Castle Intl Mon, May 5 After the Bell -0.36 CSKKY CSK Corporation Mon, May 5 -----N/A----- N/A DVA DaVita Mon, May 5 Before the Bell 0.47 DECA Decoma International Mon, May 5 -----N/A----- 0.25 EPN El Paso Energy Part Mon, May 5 After the Bell 0.35 ENH Endurance Spec Hldng Mon, May 5 Before the Bell 0.60 ETM Entercom Commu Mon, May 5 Before the Bell 0.16 EOG EOG Resources Mon, May 5 Before the Bell 1.20 GLG Glamis Gold Ltd Mon, May 5 -----N/A----- 0.04 HNT Health Net, Inc. Mon, May 5 Before the Bell 0.55 HEW Hewitt Associates Mon, May 5 Before the Bell 0.27 MET MetLife Inc. Mon, May 5 After the Bell 0.65 OHP Oxford Health Plans Mon, May 5 Before the Bell 0.89 PRE PartnerRe Ltd. Mon, May 5 After the Bell 1.49 QGENF Qiagen N.V. Mon, May 5 After the Bell 0.07 RA Reckson Ass Realty Mon, May 5 After the Bell 0.57 TDS Telephone Data Mon, May 5 Before the Bell 0.45 PFG The Principal Fin Grp Mon, May 5 After the Bell 0.55 USM U.S. Cellular Mon, May 5 Before the Bell 0.31 WFT Weatherford Intl Mon, May 5 Before the Bell 0.27 HLTH WebMD Mon, May 5 After the Bell 0.10 ------------------------- TUESDAY ------------------------------ ADVP AdvancePCS Tue, May 6 After the Bell 0.47 AEG AEGON N.V. Tue, May 6 Before the Bell 0.19 AAA Altana AG Tue, May 6 Before the Bell N/A AMH AmerUs Group Co. Tue, May 6 After the Bell 0.90 AIV Aprtmnt Invest & Man Tue, May 6 After the Bell 0.91 ITU Banco Itau Hldng Fin Tue, May 6 -----N/A----- N/A BRW Broadwing Commu Tue, May 6 Before the Bell -0.05 CDX Catellus Dvlpmnt Corp Tue, May 6 After the Bell 0.36 CPG Chelsea Prop Group Tue, May 6 After the Bell 0.75 CSCO Cisco Systems Tue, May 6 After the Bell 0.14 CZN Citizens Comm Tue, May 6 Before the Bell 0.07 CSR Credit Suisse Group Tue, May 6 Before the Bell N/A CEI Cres Rl Estate Eq Tue, May 6 Before the Bell 0.34 CMLS Cumulus Media Inc. Tue, May 6 After the Bell -0.07 CVS CVS Corporation Tue, May 6 Before the Bell 0.48 DISH EchoStar Comm Tue, May 6 Before the Bell 0.10 ERTS Electronic Arts Tue, May 6 After the Bell 0.34 EMR Emerson Electric Tue, May 6 After the Bell 0.62 HSIC Henry Schein Tue, May 6 -----N/A----- 0.53 ITY Imperial Tobacco Grp Tue, May 6 Before the Bell N/A KG King Pharmaceuticals Tue, May 6 Before the Bell 0.35 LAF Lafarge North America Tue, May 6 After the Bell -0.84 LM Legg Mason Tue, May 6 Before the Bell 0.69 MVL Marvel Enterprises Tue, May 6 Before the Bell 0.36 MAS Masco Tue, May 6 -----N/A----- 0.31 MBI MBIA Inc. Tue, May 6 Before the Bell 1.08 NXY Nexen Tue, May 6 Before the Bell 1.25 PRU Prudential Fncl, Inc. Tue, May 6 After the Bell 0.56 REG REGENCY CTRS CORP Tue, May 6 After the Bell 0.65 TRK Speedway Motorsports Tue, May 6 Before the Bell 0.45 TLM Talisman Energy Tue, May 6 -----N/A----- 2.29 G The Gillette Company Tue, May 6 Before the Bell 0.24 TOT Total Fina Elf Tue, May 6 Before the Bell 1.68 UVV Universal Corporation Tue, May 6 After the Bell 1.21 WPI Watson Pharm, Inc. Tue, May 6 Before the Bell 0.42 WRC Westport Resrcs Corp Tue, May 6 -----N/A----- 0.34 ----------------------- WEDNESDAY ----------------------------- AEE ARG Airgas Wed, May 7 After the Bell 0.25 AMLN Amylin Pharm, Inc. Wed, May 7 Before the Bell -0.33 BAY Bayer Wed, May 7 Before the Bell N/A BHP BHP Billiton Ltd Wed, May 7 Before the Bell 0.16 VNT C. A. Nac Tele Ven Wed, May 7 After the Bell -0.29 CNQ CANADIAN NAT RES LTD Wed, May 7 Before the Bell 1.33 CEPH Cephalon, Inc. Wed, May 7 After the Bell 0.20 CPWR Compuware Corporation Wed, May 7 After the Bell 0.08 EDS Electronic Data Sys Wed, May 7 After the Bell 0.31 ENB Enbridge Inc. Wed, May 7 -----N/A----- N/A EPC Epcos Wed, May 7 -----N/A----- N/A EXPD Expeditors Int WA Wed, May 7 After the Bell 0.23 FRT Fed Rlty Invst Trust Wed, May 7 After the Bell 0.62 FMS Fresenius Med Care Wed, May 7 Before the Bell N/A FBR Friedman, Ramsey Grp Wed, May 7 Before the Bell N/A LAMR LAMAR ADVERTISING CO Wed, May 7 Before the Bell -0.16 MME Mid Atlantic Med Srvs Wed, May 7 After the Bell 0.64 NEM Newmont Mining Corp Wed, May 7 -----N/A----- 0.17 PNP Pan Pac Ret Prprts Wed, May 7 Before the Bell 0.78 PSC Philadelphia Suburban Wed, May 7 Before the Bell 0.19 PIXR Pixar Anim Studios Wed, May 7 After the Bell 0.11 DNY RR Donnelley Wed, May 7 Before the Bell 0.02 SPI Scottish Power Wed, May 7 Before the Bell N/A SPG Simon Prop Grp Inc. Wed, May 7 -----N/A----- 0.86 SDX Sodexho Alliance S.A. Wed, May 7 Before the Bell N/A TELN Telenor ASA Wed, May 7 -----N/A----- N/A TRLY Terra Lycos Wed, May 7 -----N/A----- -0.04 WFMI Whole Foods Market Wed, May 7 -----N/A----- 0.41 ------------------------- THURSDAY ----------------------------- ATVI Activision Thu, May 8 After the Bell -0.13 ATK Alliant Techsys Inc. Thu, May 8 Before the Bell 0.88 RMK Aramark Corporation Thu, May 8 Before the Bell 0.22 BCH Banco de Chile Thu, May 8 -----N/A----- 0.33 CLX Clorox Thu, May 8 Before the Bell 0.50 CNA CNA Financial Corp Thu, May 8 Before the Bell 0.61 CMCSA COMCAST HOLDINGS CORP Thu, May 8 -----N/A----- -0.09 DF Dean Foods Thu, May 8 Before the Bell 0.63 DEG Delhaize Group Thu, May 8 Before the Bell N/A DVN Devon Energy Corp Thu, May 8 Before the Bell 2.26 ECA EnCana Corporation Thu, May 8 -----N/A----- 1.11 ENO Enodis plc Thu, May 8 Before the Bell N/A FST Forest Oil Corp Thu, May 8 After the Bell 0.72 FS Four Seasons Hotels Thu, May 8 -----N/A----- 0.09 GFI Gold Fields Limited Thu, May 8 Before the Bell 0.12 HCC HCC Insurance Hlds Thu, May 8 After the Bell 0.46 HB Hillenbrand Ind Thu, May 8 Before the Bell 0.99 KPP Kaneb Pipe Line L.P. Thu, May 8 Before the Bell 0.80 LTR Loews Corp. Thu, May 8 Before the Bell 1.34 CLI Mack-Cali Realty Corp Thu, May 8 Before the Bell 0.89 MGA Magna Int Inc. Thu, May 8 -----N/A----- 1.46 MDG Meridian Gold Inc. Thu, May 8 After the Bell 0.11 MYL Mylan Laboratories Thu, May 8 Before the Bell 0.37 NXL Nw Pln Excl Rlty TrustThu, May 8 -----N/A----- 0.48 NVDA NVIDIA Corporation Thu, May 8 After the Bell 0.10 PSA Public Storage Thu, May 8 After the Bell 0.63 ROIAK Radio One Thu, May 8 -----N/A----- -0.01 RRI Reliant Resources Thu, May 8 Before the Bell -0.07 SPP Sappi Limited Thu, May 8 -----N/A----- 0.23 SRV Service Corp Intl Thu, May 8 -----N/A----- 0.12 SHU Shurgard Storage Cent Thu, May 8 -----N/A----- 0.69 TLD TDC A/S Thu, May 8 Before the Bell N/A TLSN TELIASONERA AB Thu, May 8 -----N/A----- N/A IPG Interpublic Grop Co Thu, May 8 After the Bell 0.07 MNY The MONY Group Inc. Thu, May 8 During the Market 0.02 TRZ Trizec Properties, Thu, May 8 Before the Bell 0.42 UVN Univision Comm Thu, May 8 After the Bell 0.04 WGR Western Gas Resources Thu, May 8 Before the Bell 0.69 WBK Westpac Banking Thu, May 8 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- ABV AmBev Co Bebidas Am Fri, May 9 -----N/A----- 0.33 CEP Centerpulse AG Fri, May 9 -----N/A----- N/A E ENI SpA Fri, May 9 During the Market N/A MLS Mills Corporation Fri, May 9 Before the Bell 0.78 NZT Telecom Corp New Zlnd Fri, May 9 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable ZQK Quicksilver 2:1 May 8th May 9th ESBF ESB Financial Corp. 6:5 May 15th Apr 29th FBC Flagstar Bancorp 2:1 May 15th May 16th NOVB North Valley Bancorp 3:2 May 15th May 16th -------------------------- Economic Reports This Week -------------------------- Earnings announcements are starting to slow down a bit this week. The economic reports are also ebbing from last week's deluge. However, the FOMC does meet on Tuesday. There is not much hope for a rate cut at this meeting. ============================================================== -For- Monday, 05/05/02 ---------------- ISM Services (DM) Apr Forecast: 50.0 Previous: 47.9 Tuesday, 05/06/02 ----------------- FOMC Meeting (DM) Wednesday, 05/07/02 ------------------- Wholesale Invntories(DM)Mar Forecast: 0.1% Previous: 0.3% Consumer Credit (DM) Mar Forecast: $4.0B Previous: $1.5B Thursday, 05/08/02 ------------------ Initial Claims (BB) 05/03 Forecast: N/A Previous: 448K FOMC Minutes (DM) Friday, 05/09/02 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** 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. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 05-04-2003 Sunday 2 of 5 In Section Two: Market Watch: (See Note) Daily Results Call Play of the Day: IBM Put Play of the Day: None Dropped Calls: ERTS, IMDC Dropped Puts: FITB, INTU ************************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 ************ The Market Watch will be emailed out tomorrow (Sunday, May 4th, 2003) and posted on Monday, May 5th. *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS LAST Mon Tue Wed Thu Week ADTN 43.65 0.53 1.20 -0.22 0.92 4.61 Shooting ahead AZO 82.47 1.27 1.02 0.47 0.15 4.42 Secondary Target ERTS 61.77 1.33 -1.35 -0.39 -0.18 2.22 DROP, earnings HLTH 10.05 NEW, High Risk IBM 87.57 NEW, Strong Techs KLAC 42.15 NEW, Chip Catch up? IMDC 39.98 0.95 -0.15 0.24 1.71 3.73 DROP, Target reached MEDI 36.11 0.81 0.15 -0.47 0.00 1.15 Long-term, no update NXTL 15.18 0.75 0.63 -0.29 0.54 1.18 Pause to rally? SLM 114.79 0.57 -1.48 -0.35 0.03 1.31 Perfect bounce PUTS FITB 50.54 1.10 -0.16 -0.36 -0.48 1.89 DROP, never triggered GM 35.80 NEW, Relative Weakness INTU 39.90 -2.17 3.95 0.08 -0.35 2.94 DROP, Software strong KSS 55.45 1.67 0.59 -0.48 -1.31 0.43 Relative Weakness ************************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: ********************* Intl Business Mach - IBM - cls: 87.57 chg: +1.68 stop: 84.00 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 ^^^^^ Electronic Arts - ERTS - close: 61.78 change: +2.82 stop: 58.00 It was a tough decision, opting to drop our ERTS play this weekend, especially after such a strong move on Friday. But with earnings scheduled for Tuesday after the close, there just isn't enough time to contemplate new positions. If the stock had managed to close above the $62 level (which would have been a clean breakout), we might have kept it active. As it is, there wasn't enough buying interest to hold the stock above that solid resistance. So we're closing it out with a small gain from our picked price of $59.99. Traders already in the play will want to use any upward continuation on Monday as an opportunity to exit at a more favorable level. Stops should now be raised to breakeven or better just in case of a sharp pullback on Monday. Picked on April 20th at $60.04 Change since picked: +1.79 Earnings Date 05/08/03 (unconfirmed) Average Daily Volume = 2.92 mln --- Inamed Corp - IMDC - close: 39.98 change: +0.98 stop: 36.00 We hope traders did well with the IMDC play. The cooperating bullish market environment and some decent earnings news worked out in favor of the bulls. Per our update on Thursday, the plan was to exit on any intraday spike to $40.00 during Friday's session. We got several chances. By the looks of the intraday chart on Friday the buyers are still in control but the stock looks pretty extended right now and the risks here at the $40 mark are to the bulls, not the bears. Given the success of trading IMDC's channel, we'll keep it in mind for another play should it pull back to the bottom edge (see chart). Annotated Chart for IMDC: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/IMDC050403.gif Picked on April 17th at $35.00 Change since picked: +5.00 Earnings Date 04/30/03 (confirmed) Average Daily Volume = 215 K PUTS ^^^^ Fifth Third Bancorp - FITB - cls: 50.52 change: +1.78 stop: 50.25 A perfect example of a well-executed, but failed play, FITB moves to the drop list tonight. We were looking for the stock to break down below the $47 level in conjunction with the Banking index (BKX.X) once again failing at the $800 resistance level. Neither happened, and on Friday the BKX broke out to its highest level since early July. FITB went along for the ride, finally cracking above its own resistance at $50.25. The reason we're calling this a well-executed play is that we set a trigger at $47 to make the stock prove its weakness before entry. Since that never occurred, no entries should have been taken and nobody got hurt. Now we move on to fresh candidates. Picked on April 24th at $47.73 Gain since picked: +2.79 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 2.69 mln --- Intuit Inc. - INTU - close: 39.90 change: +1.43 stop: 40.00 The market rally and technology strength is putting the kibosh on our plans for a put play in INTU. The first day we opened it, shares crashed but after hours news and a positive spin had shorts covering. We thought puts might still be a potential winner with two days of failure at the $40 level. Unfortunately, Friday's big day pushed the software sector higher by 3.7%. That's giving INTU bulls a lot of courage and we'd rather not get stopped out on Monday. There is still overhead resistance at $41 but we would be apprehensive about opening new short positions until we saw some more weakness. Picked on April 27th at $37.24 Change since picked: -2.66 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 4.53 mil Chart link: *********** 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 05-04-2003 Sunday 3 of 5 In Section Three: New Calls: HLTH, IBM, KLAC Current Calls: ADTN, AZO, NXTL, SLM New Puts: GM ************************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 ************** WebMD - HLTH - close: 10.05 change: +0.30 stop: 9.49 Company Description: WebMD Corporation provides services that help physicians, consumers, providers and health plans navigate the complexity of the healthcare system. Our products and services streamline administrative and clinical processes, promote efficiency and reduce costs by facilitating information exchange, communication and electronic transactions between healthcare participants. WebMD Health is the leading provider of online information, educational services and communities for physicians and consumers. WebMD Medical Manager is the leading provider of physician practice management software and related services. WebMD Envoy is the leading provider of electronic data interchange services for healthcare providers and commercial health plans. (source: company press release) Why We Like It: Time to trade like it's 1999! Okay, that may be going too far but the Internet sector has been a big winner for investors lately. EBAY, YHOO, AMZN...all of the major online survivors have been beating expectations and running higher after their earnings announcement. We're going to roll the dice on HLTH and hope it doesn't come up craps. That's right, we're breaking our own rule here. HTLH is expected to announce its Q1 earnings after the bell on Monday just after 4:00 PM ET. Those traders willing to speculate on a high-risk gamble can continue reading. If you're not interested in using high-risk capital then please skip to the next play. REPEAT - THIS IS A HIGH RISK PLAY. THE OPPORTUNITY to lose money is substantial if HLTH botches their earnings report. Last time they announced, which was only March 13th, was their Q4 numbers. HLTH actually beat estimates by 4 cents. They reported a net loss of $24 million or 1-cent a share. This was a drastic improvement over the Q4 the prior year where HTLH lost $199.5 million or 62 cents a share. At their Q4 conference call HLTH said revenues were expected to rise 10 to 12% this year. This is their chance to let us know if they are on track or not. The stock has huge multi-year resistance in the $10.00 to 10.50 area dating back to January 2001. As one of the current TOP 20 most shorted stocks any positive earnings surprise could create a HUGE short squeeze. To get the biggest bang for your high-risk buck, look to take a position before the earnings event at Monday's close. Doing a little speculation on a potential profit target, we'd look to the $12.50 area, which correlates with the overhead bearish resistance on HLTH's point-and-figure chart. FYI...keep in mind that any pre-earnings rumors could seriously affect the stock price during Monday's session. Suggested Options: Remember, this is a Lottery-ticket style of play. You buy your ticket and it's either a winner or a loser and the odds are against you. Of course this time we're hoping the odds are just a little bit better than slim-to-none. We're going to list the June and July 10's. Real lotto-style players might consider the 12.50's and if you really want to put your money on the roulette wheel you could try May options that expire in two weeks. ALERT! MAY OPTIONS EXPIRE IN TWO WEEKS BUY CALL JUN 10 HUT-FB OI= 739 at $0.80 SL=0.00 high risk! BUY CALL JUL 10*HUT-GB OI=14577 at $0.95 SL=0.00 high risk! Annotated Chart for HLTH: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/HLTH050403.gif Picked on May 4th at $10.05 Change since picked: +0.00 Earnings Date 05/05/03 (confirmed) Average Daily Volume = 2.3 Million Chart link: --- Intl Business Mach - IBM - cls: 87.57 chg: +1.68 stop: 84.00 Company Description: Big Blue is being heralded as the world's largest technology company. Considering their massive hardware and software business across the globe it's not surprising. However, IBM's services and consulting business is growing by leaps and bounds and is a major source of revenues. Why We Like It: We're making another bet on technology with this IBM play. The markets are in breakout mode and companies with real revenues should out-perform their struggling brethren. IBM last reported earnings on April 14th. While the headline number was a one-cent miss, income was up 8% to 79 cents or $1.39 billion. More importantly, IBM's revenues grew by 11 percent to $20.07 billion. This surpassed the estimates for $19.85 billion in revenues. Given the strong growth, investors appeared to forgive the miss. Especially since IBM offered an easy scapegoat with the purchase of both PWC Consulting and Rational Software. Shares of Big Blue have been trading sideways between $84 and $86 for almost two weeks. The big rally on Friday was a breakout above $86 and we're looking for it to continue. Yes, there is potential resistance near $89 and $90 but the market is in breakout mode. Maybe IBM can follow suit again. Potentially driving the stock this coming week is news of their new mainframe computer expected out on May 13th. Plus, IBM is presenting at the JPM tech conference Tuesday and Wednesday. On top of that, word has it SoundView met with IBM recently and the analyst believes IBM will beat the revenue estimates again. Suggested Options: We listed mostly 90-strike options but that reflects our expectation of a breakout above the 89-90 level. It would not hurt to use the 85 strikes. We're not listing any May options given their time left to expiration. ALERT! MAY OPTIONS EXPIRE IN TWO WEEKS BUY CALL JUN 85 IBM-FQ OI= 7456 at $4.60 SL=2.25 BUY CALL JUN 90 IBM-FR OI= 8771 at $1.75 SL=0.80 BUY CALL JUL 90 IBM-GR OI=32914 at $3.00 SL=1.50 BUY CALL OCT 90 IBM-JR OI= 7378 at $5.10 SL=3.00 Annotated chart for IBM: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/IBM050403a.gif Picked on May 4th at $87.37 Change since picked: +0.00 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million Chart link: --- KLA-Tencor - KLAC - close: 42.15 change: +1.11 stop: 39.95 Company Description: About KLA-Tencor: KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. Headquartered in San Jose, Calif., the company has sales and service offices around the world. An S&P 500 company, KLA-Tencor is traded on the Nasdaq National Market under the symbol KLAC. (source: company press release) Why We Like It: It's all about hope. The markets are rising on hopes that the worst for corporate profits and America's economy is behind us. That dream of a second half recovery that has failed to materialize the last two years is still alive and well for 2003. Despite these dreams the chip sector as measured by the SOX index, while positive on Friday, has failed to breakout to new relative highs. We're betting that the semiconductor sector will play catch up with the broader indices, especially if the Nasdaq and the Dow Jones keep up the pace and build on their Friday success. So why KLAC? There were a lot of chip stocks to consider. KLAC announced earnings on April 23rd, 2003. The company managed to beat estimates by two-cents due to strictly managed cost cutting. Net income fell by 21% over the same quarter a year ago and management guided lower for its June quarter. So why did shares react positively to the news? Again, it is that dream of a second half recovery. Many analysts now believe that the worst for the semiconductor industry is behind it. After a two-year downturn things are starting to look up. KLAC's management confirmed the optimism with their own expectation for the equipment industry to grow by 5% in 2003. Besides, if KLAC has already warned that the June quarter will be bad then the news is already out. Investors don't have to worry about an earnings warning down the road. We also like how KLAC actually managed to close at new relative highs while most other chips are still stuck below their mid-April high. Some traders may want to look for a dip to $40-41 as their entry. Others may want to wait for a move above $42.50. Whatever you choose, keep a sharp eye on the $SOX. Where the SOX goes, KLAC will follow. Keep your ears open for any positive comments from KLAC when they present at the JPM tech conference this week. Suggested Options: We're not going to list any May options due to their two-week lift span. Thus, Junes look like the best bet. Septembers look good if you feel like you need the extra time. We didn't list the 42.50 strikes but they do exist for those traders interested in them. ALERT! MAY OPTIONS EXPIRE IN TWO WEEKS BUY CALL JUN 40.00 KCQ-FH OI=5008 at $4.00 SL=2.00 BUY CALL JUN 45.00 KCQ-FI OI=7726 at $1.40 SL=0.70 BUY CALL SEP 45.00 KCQ-II OI=3012 at $3.40 SL=1.50 Annotated Chart for KLAC http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/KLAC050403.gif Picked on May 4th at $42.15 Change since picked: +0.00 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 11.4 Million Chart link: ************************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 ****************** ADTRAN, Inc. - ADTN - close: 43.65 change: +2.25 stop: 40.00*new* Company Description: ADTRAN, Inc. develops products and services that simplify access to telecommunications networks. The company's high-speed, digital transmission products improve the operation of, and reduce the costs associated with, building and using communications networks. Small and large telephone companies, long-distance carriers and other network service providers use the company's products to deliver high-speed data, voice, video and Internet services to their customers. Businesses, schools and government agencies use ADTN's products to connect facilities, remote offices and mobile workers, enabling corporate information services, Internet access, telecommuting and videoconferencing within their organizations. Why we like it: Apparently, Thursday's marginal breakout was just a taste of things to come. With the broad market surging through major resistance, the stock used the $41.40 breakout level as a launching pad for a 5.4% gain, with volume running almost double the ADV. There was no news to speak of. This was just a plain old-fashioned momentum breakout over resistance and there were likely more than a few shorts caught on the wrong side of the move. Putting the stock's strength into perspective, Friday's close puts ADTN at its best level since late October of 2000. So what's next? There is significant resistance in the $44-45 area, so it is probably no coincidence that the stock fell short of that region on Friday. Conservative traders that entered on the initial breakout will want to consider harvesting some gains on a move into that zone. Traders still looking for an entry into the play will want to look for a pullback into the $41-42 area. While daily Stochastics are entering overbought, they are still on the rise, leading to the possibility of further upside in the immediate future. While the PnF chart is on a strong Buy signal, with a bullish price target of $60, our eventual target is the $48-50 area, where the stock will run into strong historical resistance. We're raising our stop to $40 this weekend, which is just below the ascending trendline. Suggested Options: Shorter Term: The May 45 Call will offer short-term traders the best return on an immediate move, with manageable risk. Note that May options expire in 2 weeks. Longer Term: Traders looking to capitalize on a sustained breakout move to and possibly above the $45 level will want to look to the June 45 Call or even the August 45 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. ALERT: MAY options EXPIRE in TWO WEEKS BUY CALL MAY-45 RQA-EI OI=170 at $0.95 SL=0.50 BUY CALL JUN-45 RQA-FI OI= 43 at $2.05 SL=1.00 BUY CALL AUG-45 RQA-HI OI=361 at $3.40 SL=1.75 Annotated Chart of ADTN: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/ADTN050403a.gif Picked on April 29th at $40.70 Change since picked: +2.95 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 767 K --- AutoZone, Inc. - AZO - close: 82.47 change: +1.51 stop: 80.00*new* 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: Like the Energizer Bunny, AZO just keeps going and going, posting higher highs and higher lows. With four consecutive closes above the $80 level and the stock ending Friday's session at its highest level since late November, the uptrend is definitely becoming more mature. With its elevated price, risk to the bulls is increasing at these levels and only the most aggressive players should be considering new entries. Our first target area for harvesting gains ($82-83) was achieved on Friday, and conservative traders should have harvested gains on that move. The only viable entry point for new entries would be on a dip and rebound from above our new stop at $80. That $84-85 level represents strong resistance from last fall, and it seems unlikely that the bulls will be able to push through that level ahead of earnings in early June. For that reason, we'll look to close out the play for a nice gain should price move into that upper resistance zone early next week. Suggested Options: Shorter Term: The May 80 Call will offer short-term traders the best return on an immediate move, with manageable risk. More aggressive traders can utilize the May 85 Call. Longer Term: Traders looking to minimize their exposure to time decay over the next week will want to look to the June 85 Call. This option is 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. Note that May options expire in 2 weeks. ALERT: MAY options EXPIRE in TWO WEEKS BUY CALL MAY-80 AZO-EP OI=1163 at $3.50 SL=1.75 BUY CALL MAY-85 AZO-EQ OI= 380 at $0.85 SL=0.40 BUY CALL JUN-85 AZO-FQ OI= 938 at $2.20 SL=1.00 Annotated Chart of AZO: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/AZO050403.gif Picked on April 13th at $75.24 Change since picked: +7.23 Earnings Date 06/03/03 (unconfirmed) Average Daily Volume = 1.17 mln --- Nextel Communications - NXTL - cls: 15.18 chg: -0.12 stop: 13.90 Company Description: Nextel Communications, a Fortune 300 company based in Reston, Va., is a leading provider of fully integrated wireless communications services and has built the largest guaranteed all- digital wireless network in the country covering thousands of communities across the United States. Nextel and Nextel Partners, Inc., currently serve 197 of the top 200 U.S. markets. Through recent market launches, Nextel and Nextel Partners service is available today in areas of the U.S. where approximately 240 million people live or work. (source: company press release) Why We Like It: It's nice to see some corporate profits again. NXTL recently announced their Q1 results and the numbers were pretty positive. Not only that, it was their fourth consecutive quarterly profit. Earnings came out on April 23rd and the Q1 numbers showed a 21% jump in revenues. Net income was 20 cents a share or $240 million, which is a huge improvement over the same quarter a year ago with an 82-cent loss. Analyst estimates for the latest quarter were just 16 cents. The company said the higher earnings were driven by much better than expected subscriber growth. New customers totaled 480,000 for the quarter. This brought total subscribers to 11.1 million. At an average monthly revenue per subscriber of $67, the new additions really boosted revenues. The company also shared that customer churn, the rate at which customers leave their service, was down to 1.9%. This was the lowest level in four years. Management also said they would meet or exceed their 2003 goals. How's that for guidance? As a matter of fact, the entire "wireless" industry is doing pretty well despite previous slow downs from the go-go days of the late 90's. Verizon Wireless saw a big jump in revenues and AT&T Wireless (AWE) isn't doing so bad either. Some Wall Street pundits are speculating that the bigger telecom companies in the U.S. may actually have to buy NXTL or AWE to have an edge against the competition. This play on NXTL initially came out last Tuesday evening with a trading range of $15.00 to $14.50 as our "entry point". The next day, Wednesday, shares of NXTL pulled back as expected and closed at $14.76. Our official entry was now $15.00. The pull back continued on Thursday and NXTL dipped to $14.45 before bouncing strongly back over $15.00 again. So far the play has performed as scripted. What is suddenly concerning to us is the stock's lack of participation in the Friday rally. The stock actually lost 12 cents. We still believe NXTL offers a tempting call play but it's possible that the stock may need to digest some of its recent gains for a few more sessions. Dips to $14.50 can still be considered entry points but be very vigilant with your stop. We are going to keep our stop at $13.90. More conservative traders might be able to get away with $14.45. Fortunately, there really is no serious resistance overhead until the $18.25 area. Suggested Options: Most of the volume is going to be in the short-term front month options in May but there are only two-weeks left. That's not much time and a wrong turn can be painful. Thus, we're going to roll out to the next available time frame. Traders with a longer-term time frame can consider August or Novembers. You don't have to hold them that long and can close the position at any time. ALERT: MAY options EXPIRE in TWO WEEKS BUY CALL JUN 15.00*FQC-FC OI= 4590 at $1.25 SL=0.00 BUY CALL JUN 17.50 FQC-FS OI= 1865 at $0.40 SL=0.00*much riskier* BUY CALL AUG 15.00 FQC-HC OI=10526 at $1.85 SL=0.90 BUY CALL NOV 17.50 FQC-KS OI= 1939 at $1.50 SL=0.75 Annotated Chart of NXTL: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/NXTL050403.gif Picked on April 30th at $15.00 Change since picked: +0.18 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 21.6 Million Chart link: --- SLM Corp. - SLM - close: 114.79 change: +2.61 stop: 111.00*new* Company Description: SLM Corporation is engaged in the provision of a broad array of education credit and related services to the education community, including student loan origination, student loan and guarantee servicing and debt management and collection services. The company participates in all phases of the student loan process by holding and servicing the loan from origination and guarantee through ultimate collection, and in some cases, post default collection. SLM manages a large portfolio of student loans under the Federal Family Education Loan Program, serving over seven million borrowers through its ownership and management of $79 billion in student loans. Why we like it: When we initiated coverage of SLM on Thursday, it looked like the stock was poised for a nice reversal from the recent bout of profit taking. Imagine our surprise to see the stock launch higher right from the open on Friday, reaching right up to the $115 resistance level before a very slight relaxation into the close. Daily Stochastics are now turning quite bullish, and another strong day like we saw on Friday could have the stock moving up to hit our first upside target near $117. Since there was no second test of the $111 level on Friday, we're raising our stop to $111 (just below the 50-dma) this weekend. After Friday's strong rally, SLM should not fall back to test that level if this rebound is for real. A pullback near the $113 level, which is the center of the 8-month ascending trendline, looks to be the best setup for new entries, although aggressive momentum types can consider new positions on a breakout over Friday's intraday high of $115.08. Conservative traders will want to consider harvesting gains near the 117 level, while those with a higher risk tolerance can hold for a move to the $120 bullish price target from the PnF chart. Watch the Banking index (BKX.X) for confirmation of sector strength. This index finally broke through the $800 resistance level on Friday and if it extends its gains early next week, it will likely portend more upside for SLM. Suggested Options: Shorter Term: The May 115 Call will offer short-term traders the best return on an immediate move, but this is a higher risk approach with May expiration only 2 weeks away. Traders with less tolerance for risk will want to use the May 110 Call. Note that May options expire in 2 weeks. Longer Term: Traders looking to capitalize on a breakout move toward the $120 bullish price target will want to look to the June 115 Call. This option is currently at the money, and should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. ALERT: MAY options EXPIRE in TWO WEEKS BUY CALL MAY-110 SLM-EB OI= 191 at $5.40 SL=3.50 BUY CALL MAY-115 SLM-EC OI=1984 at $1.60 SL=0.75 BUY CALL JUN-115 SLM-FC OI= 151 at $3.20 SL=1.50 BUY CALL JUN-120 SLM-FD OI= 168 at $1.25 SL=0.60 Annotated Chart of SLM: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/SLM050403.gif Picked on May 1st at $112.18 Change since picked: +2.61 Earnings Date 07/17/03 (unconfirmed) Average Daily Volume = 915 K ************* NEW PUT PLAYS ************* General Motors - GM - close: 35.80 change: +0.69 stop: 38.10 Company Description: General Motors Corporation provides automotive-related products and services by primarily designing, manufacturing and marketing vehicles, as well as providing communications services and financial services. The company operates in two segments, Automotive, Communications Services and Other Operations, and Financing and Insurance Operations. It's automotive business segment consists of General Motors Automotive, which encompasses four regions: GM Norma America, GM Europe, GM Latin America/Africa/Mid-East and GM Asia Pacific. The communication services include digital entertainment, information and communications services and satellite-based private business networks. The company's other operations include the design, manufacturing and marketing of locomotives and heavy-duty transmissions. GM's Financing and Insurance Operations primarily relate to General Motors Acceptance Corporation (GMAC). Why we like it: Automotive manufacturers are having to pay the piper after 18 months of aggressive incentives to lure in prospective buyers. By their own admission, GM has found that any time they try to back off on the incentives, sales fall significantly and have therefore management has resigned themselves to continuing the incentives in order to maintain market share. The net result is that the company is losing money on vehicle sales. So with the company continuing to post what appear to be solid earnings, one might ask how they're doing it. The short answer is from their financing unit, as well as the "estimated" gains from their pension plan. The pension plan is another source of problems though, as it is grossly underfunded, while at the same time future estimates are for gains of 9-10% for the next several years -- a rate of appreciation that seems wholly unattainable. If pension gains continue to come in below these pie-in-the-sky estimates, the only way to correct the underfunding is to funnel cashflow into the pension plan, which will reduce reportable earnings. All of these problems seem to be having a detrimental effect on the stock, which has been unable to really participate in the recent market rally. Certainly the recent trend of falling sales isn't helping, with April's report showing a 9% drop. Apparently the analyst community is starting to get the picture as well, with Lehman lowering their rating to Underweight on Friday, citing a belief that GM is losing its ability to control market share through price leadership. The firm also lowered its price target for the stock to $28. We note that price would represent a new 11-year low for the stock, and based on the fundamentals and technicals, it certainly looks achievable. The stock has been in a persistent trend of lower highs and lower lows for the past 3 years, and this latest bounce looks like another attractive opportunity to play the downside. The descending trendline from the December and January highs is just fractionally below the 200- dma ($38.07) and should represent a very firm resistance level. More importantly, the April high near $37.50 is probably the highest price we're going to see for quite some time. GM plunged on the downgrade on Friday, but the positive tone in the rest of the market helped it to bounce back to close with a fractional gain. Since daily Stochastics are trying to turn up, we'll look for a slight rebound from current levels to provide the best entry into the play. Looking at the bigger picture on Stochastics, we can see bearish divergence (see chart), and that certainly doesn't portend bullish things for the stock. A rollover in the $36.50-37.00 looks like an ideal setup for entering new positions. With the choppy trading range GM has been in for the past couple months, it is difficult to make the case for an entry on a breakdown until the stock falls below $33. So we're going to focus on entries at resistance for the time being. Initial stops will be set at $38.10, just above the 200-dma. Suggested Options: Short-term traders will want to focus on the May 37 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 35 strike. Note that May options expire in 2 weeks. BUY PUT MAY-37 GM-QU OI= 1773 at $2.50 SL=1.25 BUY PUT MAY-35 GM-QG OI= 9360 at $0.85 SL=0.40 BUY PUT JUN-35 GM-RG OI=17030 at $1.70 SL=0.75 ONLY TWO-WEEKS LEFT for MAY OPTIONS Annotated Chart of GM: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/GM050403.gif Picked on May 4th at $35.80 Change since picked: +0.00 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 5.11 mln ************************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. 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The Option Investor Newsletter Sunday 05-04-2003 Sunday 4 of 5 In Section Four: Current Put Plays: KSS Leaps: Breakout! Traders Corner: Meet Miss Direction – Our Own Prestidigitator Traders Corner: Dow Theory Traders Corner: How Do You Trade Your Options? Traders Corner: Where is the Dow Going? Futures Corner: What to do when a Futures Exchange Halts unexpectedly. ************************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 ***************** Kohl's Corporation - KSS - close: 55.45 change: -0.04 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: The action in KSS was certainly perplexing early last week, as the stock dipped under our $54.70 entry target Monday morning, before rebounding strongly. Fortunately, that rebound failed under the $58 resistance level and the last 3 days have seen the stock continuing with its downward trend. The $55 support level is still holding, supported by the 50-dma ($55.05), but appears to be weakening. With the strong bullish performance by the broad market on Friday, as even the Retail index (RLX.X) posted a 1.67% gain, KSS' inability to post a gain certainly looks bearish. We're still looking for a solid break under that $55 support level to usher in another wave down. While the 10-period Stochastics (shown below) is trying to turn up, the faster 5-period Stochastics (not shown) is rolling over at its 4th consecutive lower high in the past 6 weeks and also portends near-term weakness. Another failed rebound below the $57 level (just below the 20-dma at $57.34) can be used for aggressive entries, while a break below last Monday's intraday low of $54.35 should work for more conservative players. We're leaving our stop set at $58 until we get a close under the 50-dma. 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. Note that May options expire in 2 weeks. ALERT! MAY OPTIONS EXPIRE IN TWO WEEKS BUY PUT MAY-55 KSS-QK OI=18583 at $1.85 SL=1.00 BUY PUT MAY-50 KSS-QJ OI=15279 at $0.70 SL=0.35 BUY PUT JUN-50 KSS-RI OI= 1003 at $1.40 SL=0.75 Annotated Chart of KSS: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-04/KSS050403.gif Picked on April 27th at $55.02 Change since picked: +0.43 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 3.64 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 ***** Breakout! By Mark Phillips mphillips@OptionInvestor.com There's no other way to say it. The market broke out from some formidable resistance last Friday and the bulls should be proud of themselves. The SPX powered through the 920 level, breaking the trendline from the August and November highs. But more importantly, the SPX broke out of its descending channel for the first time since it began back in 2000. Is this the beginning of a new bull market? It might be, but that's certainly not the way I'd be placing my long-term bets! First let's look at the bulls' other significant achievements last week. The DOW finally busted out above the 8521 level, giving an apparent bullish resolution to the bullish triangle pattern that had been building since 3/21. If that breakout sees some follow through next week, the next challenge for the bulls will be in the Additionally, the NASDAQ Composite closed above 1500 for the first time since last June. On a percentage basis, the NASDAQ is definitely showing the best performance of all the major indices this year, just as I had expected. Alas, I couldn't get a decent bullish QQQ entry over the past several weeks and we had to let that play go. If in the play, I'd be looking to exit on strength now that the Nasdaq-100 Bullish % is sitting at 73%. From a price perspective, the next bullish test will come at the 1525 resistance from the 2-year descending trendline. If the bulls power through that level, then 1600 is the next target, as it is an important historical level, both on the way up in the late 1990's and on the way down in 2001-2002. One factor that I actually found encouraging for the bulls last Friday was that even with the strong gains across the major indices, the volatility indices didn't implode. The VIX only fell to 23.79, and the VXN only dropped to 32.36. In other words, investors did not continue their recent trend of indiscriminate complacency -- they at least kept an air of skepticism about them, which lends credence to the notion of more upside in the markets. As I noted in my MOPO articles last week, as long as the VIX can refrain from dropping into the 19-21 area, then there is likely still enough skepticism in the market to prevent it from falling. Additionally, we need to monitor those bullish percent readings to make sure we remain on the right side of the big money. Right now, it still seems to be in an accumulation mode, and will likely remain that way until the Bullish percents turn down from overbought territory. The NDX is finally in overbought, but not yet showing any signs of weakness. The DOW, OEX and SPX still have a ways to go before reaching the overbought area near 70%, so pressing the downside at this juncture is not a prudent move. However, it is a good idea to start harvesting gains on those bullish trades that have treated you well in recent weeks. We did just that with our ADBE play this weekend and we may be getting close to doing the same thing with EMC. For details on the rest of the list, let's go through each play one at a time. Portfolio: EMC - While the bulls weren't able to power EMC to a new high last week, neither were the bears able to inflict any significant damage. The stock spent the bulk of the week consolidating near its recent highs, but we haven't yet seen the convincing breakout. The stock has been finding support at the ascending trendline connecting the October and December lows again, after that line presented itself as resistance in March and early April. EMC looks like it wants to break out over the $9.50 level, but will likely need to see the overall NASDAQ Composite push up towards the 1525 area in order to get the job done. There is one risk to the play on tap next week, which is earnings from CSCO. Any negative comments from the CEO could put a crimp in the current rally. Erring on the side of caution, I'm raising the stop on EMC to $8.50, as this is just below the prior low of $8.68 and the 20- dma ($8.53). Given the gains in the play, I'm more inclined to be aggressive in the pursuit of harvesting gains than to hold out for a home run. I still favor locking in gains on a push up into the $10-11 area. AIG - So much for last week's breakdown! This week, AIG popped back above the $55 level and pushed right back up to the 200-dma, where it has remained pinned for the past 3 days. Part of the rebound may be due to the abating fears related to SARS, but I think the lion's share of the stock's rebound has been due to the broad market strength. The Insurance index (IUX.X) is continuing to work higher along its ascending trendline, but has a couple of significant obstacles to deal with. First up is the descending trendline from the August highs ($265) and then there is strong horizontal resistance at $272. This correlates nicely with the resistance AIG is currently encountering at the 200-dma and the April high near $58. Then we have January's gap resistance from $58.50-60.00. I still like new entries near current levels for traders not yet on board. Watch List: NEM - What can I say? It looks like we missed the boat on the NEM play, and all because I was a bit too stingy on the entry point. The stock has been putting in a series of higher highs and higher lows since the end of March, and a pullback to the long-term ascending trendline is now looking quite unlikely in the near term. We'll try this one more time, raising the entry target to $26, which is right at the shorter-term (6-week) ascending trendline, as well as a significant historical support level. A pullback into that area could still prove to be a solid entry as gold continues its bottoming process. If we do get an entry, the stop will be set at $24, just below the lows in March, and also below the long-term trendline. GD - After launching higher in the wake of its better-than- expected earnings report on 4/16, GD seems to be relaxing off its recent highs, giving the impression that the stock just might come back and give us a second chance. We're not going to chase it any further -- a pullback and rebound from the $56-57 area can still be used for new entries, but we will need to carefully monitor the weekly Stochastics as well. They've gone screaming higher over the past several weeks and if they turn south, we'll pull the plug on this Watch List play in a hurry. AMZN - I know what you're thinking. AMZN is right in the middle of the targeted entry zone. Isn't it an entry yet? Sadly, no. I certainly haven't seen anything I would characterize as weakness in the stock as it remains right at the top of its ascending channel. At the same time, it is looking grossly overextended up here, at least in my opinion. I'm still expecting the $30 level to represent impenetrable resistance, but there is no reason to try to pick a top until that weakness begins to appear. That said, Stochastics are looking toppy on both the daily and weekly charts. I'm willing to wait for a test of the $30 level and see how AMZN responds up there. Remember, this is a higher-risk play, as we are attempting to pick a top in a grossly overvalued and over-extended Internet stock. We may turn out to be geniuses, or we might get burned by Internet Craze, Scene II. Time will tell. KO - Patience is required on our KO play, as it is truly a slow- moving stock. Friday's action finally pushed the stock up to the $41 level, but we're in no hurry on this one. We're looking for a rally failure as close as we can get it to the top of the $41.50- 42.50 area as our entry trigger. With the market still rising, we have time to allow the bulls to have their fun. When they're done, then it is our turn. As we've discussed here today and in the recent past, I see the still rising indices and bullish percent readings and my senses are attuned to the greater risks being assumed by those in the bullish camp. But at the same time, I really see nothing (other than complacency and overt bullish sentiment) to indicate the market is ripe for a fall. So we're in the process of closing out our bullish plays and getting ready to play the downside when the time is right. Note that we've added two more bearish Watch List plays this weekend, so getting set up for those ought to keep everyone busy. But before you head off to stage those orders, let me caution you that I am going to be exceedingly cautious about entries on these new bearish plays. Our job is not to plunge in ahead of the stampeding bulls and turn them around. No, if we're smart, we'll wait until they run out of energy, and that's when we'll find those high-odds bearish entries. I'll be trying to keep things updated in the Market Monitor over the next couple weeks, but it is entirely possible, we'll do a follow up article on the DJX play if warranted by market conditions. My bias is down for the next few months, primarily because I can't see the catalyst that justifies current prices, much less higher ones. But at the same time, I have never claimed to be infallible. I see major resistance for the DOW near 8800-8900 and for the SPX either at 940 or as high as 960. We may not test any of those levels, we may tag them precisely and reverse, or the bulls may just plow right through them. Being right is not our toughest job in this business, it is to minimize our losses on those occasions when we are wrong, thereby keeping us in a position to profit handsomely when we are wrong. If we are in fact entering the transition phase I envision over the next few weeks, then there will be plenty of time to take advantage of those entry setups. Use the time between now and then to get your action plan in place. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: EMC 03/12/03 '04 $ 7 LUE-AU $ 1.40 $ 2.90 +107.1% $8.50 '05 $ 7 ZUE-AU $ 2.15 $ 3.60 +67.44% $8.50 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 4.80 -14.29% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 7.70 - 9.41% $61.00 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 03/09/03 $26 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 $56-57 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 DJX 05/04/03 $88-89 DEC-2003 $ 84 DJX-XF DEC-2004 $ 84 YDJ-XF GS 05/04/03 $78-79 JAN-2004 $ 75 KGS-MO JAN-2005 $ 75 ZSD-MO New Portfolio Plays None New Watchlist Plays DJX - Dow Jones Industrials $85.83 **Put Play** Readers that caught my MOPO articles last week don't need a lot of explanation to see what I'm after with this play. The market is looking awfully extended here, but we're looking for some other points of confirmation before trying to game the downside using the DJX. First up, the VIX has a bit further to fall, preferably near 20-21. Secondly, we need to see the bullish percent readings get extended up towards overbought and then tip over. The DOW Bullish % is currently at 56% and has some room to run before reaching overbought levels. The BP high in March of 2002 was 76%, while the high last December was 73%, so we can see that readings over 70% are certainly possible. Now that the $85.21 resistance level has finally been broken to the upside, the goal becomes picking the most likely resistance level where the market will run out of steam at the same time as the confirming signals come from the VIX and the BP. Clearly, we're early to the game here with this play as none of the requirements have been fulfilled yet. But hopefully by setting things up early, we'll get a nice entry and ride the DJX lower through the summer. My initial target entry is in the $88-89 area, with initial stops set at $91.00. That is just above the intraday highs of last August and December. A break of that level would confirm that something has definitely changed, although there are few things that would surprise me more. Just to be perfectly clear, regardless of price, this play will not be initiated until the VIX falls below 22 and the DOW's BP rises above 65%. BUY LEAP DEC-2003 $84 DJX-XF BUY LEAP DEC-2004 $84 YDJ-XF GS - Goldman Sachs $76.60 **Put Play** Regardless of the recent market trend, the Brokerage stocks are in trouble. Anyone that thinks the recent $1.4 billion fraud settlement between the big Wall Street firms and U.S. market regulators is the end of that story doesn't have a clear grasp of the litigious nature of this country's citizenry. With the term "fraud" actually used in the settlement, there are going to be class-action suits a-plenty, and every one of them are going to paint the big brokerage firms in a very unfavorable light. Add to that the declining business from retail investors/traders and the virtually non-existent investment banking business, and it is no wonder the Broker/Dealer index (XBD.X) is still mired in its persistent 16-month downtrend. There are lots of pundits saying this rally is different, and maybe they're right. But going with the law of averages, it seems unlikely that the XBD index or GS are going to be able to break out of their downtrends, especially as we head into the summer. The XBD has descending trendline resistance at $450 and then horizontal resistance just a bit higher at $460-465 (which also happens to be the 62% retracement of the rebound off the post-9/11 lows). For its part, GS is facing a couple descending trendlines of its own, first the long- term descending trend at $78 and then the shorter-term trendline connecting the August and November highs, which currently sits at $78.75. So that $78-79 area is setting up to be a real battleground, and a failed rally near that area looks like a great time to enter a bearish play. We'll initially set our stop at $82.50, just above the intraday peaks from May, August and November of last year. Our target on the downside will be for a retest of the 200-dma, and quite possibly a drop back to confirm the early-March lows in the $62-65 area. BUY LEAP JAN-2004 $75 KGS-MO BUY LEAP JAN-2005 $75 ZSD-MO Drops ADBE - $37.92 Now that's the way things are supposed to work in this game! After giving us a great entry near the ascending trendline back in late February, our ADBE play has risen steadily for the past couple months (albeit in staccato fashion), now up nearly 38% from where we initiated the Portfolio position. This play actually exceeded my expectations, as I was looking for the $36 gap resistance to provide a firm lid on the stock. Thursday and Friday's strong upward surge is the kind of surprise I like and I'm not one to let that sort of gift get away. With well over a 100% gain on the '04 LEAP, this is a perfect example of when it makes sense to harvest gains on strength. While I know there are traders that will hold on, hoping for more gains, I would advise them to tighten stops to no lower than $36 (just below Friday's opening low) and plan on aggressively exiting the play in the $40- 42 area, if reached. ************** TRADERS CORNER ************** Meet Miss Direction – Our Own Prestidigitator By Mike Parnos, Investing With Attitude At the Couch Potato Trading Institute, we aren’t big on picking direction because we don’t claim to know the future and we rarely try to guess. It's a lot like magic – slight of hand. The market can pick your pocket and you'll be lucky to be left with your Fruit-of-the-Looms. So, my revered audience, meet Miss Direction. She's this week's CPTI centerfold. She's a temptress. She's magical. Go ahead and make your move. You just might get lucky. You might also get your heart broken. She's an exciting illusion. But remember, she can saw a brokerage account in half (and not restore it!). A few years back, people were making fortunes by throwing darts at the stock pages. But that was then. For these same people, picking a direction eventually became the fastest way for them to go from Armani and Rolex to J.C. Penny and Timex. Nevertheless, there are those who still dare to defy the gods of logic and throw caution to the wind. The least I can do is offer a practical, less risky way to place your directional bet – using a Calendar Spread. ____________________________________________________________ The Calendar Spread In the following hypothetical example, we will use a horizontal calendar spread on BBH -- the Biotech Holders Trust – an index that recently broke out over some long-term resistance. The market seems like it wants to continue higher. Let's look at how we can take advantage of a slow and steady move up. The “Horizontal" Calendar Spread The “horizontal” calendar spread consists of the purchase of a long-term option and the simultaneous sale of a short-term option at the same strike price. BBH closed Friday at $104.50. We will: a) Buy the BBH October $110 calls @ $5.10 b) Sell the BBH June $110 calls @ $1.40 Total debit is: $3.70 Regardless of where BBH moves, our total risk is limited to $3.70. How We’ll Make Money If we’re right about the direction of BBH, it will move up slowly. The delta of the October $110 call is 46. The delta of the June $110 call is 29. That means that for every $1.00 BBH goes up, the value of the June call will increase $.46 and the February call will go up only $.29. Deltas are important because they’ll tell us if, and when, to make adjustments to the position later on. There are four option cycles left until the October expiration after the sale of the June call. In a perfect world (and who’s kidding who?) BBH would move up to $109.90 by June expiration and the June call would expire worthless. Then, we could sell the July $115 call – retaining the increased value of the long October call, taking in additional premium while leaving the long October call five more points of room to move up at a much higher delta. What happens if . . . a) What if the BBH is at $107 at June expiration? The June $110 call would expire worthless. The October $110 call would have increased in value and we’re now free to sell the July $110 call and take in another $1.00. That would further reduce the cost basis of the October $110 call to $2.70. If we take in an about a buck a month, we will have paid for the October call in less than four months. Everything above and beyond is profit. b) What if the BBH is at $101 at June expiration? The June $110 call would obviously expire worthless. If you believe a negative trend has developed, you have a few choices. 1) Simply sell your long October $110 call for about $2.70 and take a small $1.00 loss, or, if you believe the uptrend is still intact, 2) Sell the July $110 for about $.40 while you patiently wait for a bounce back up. c) What if the BBH moves above $110 prior to June expiration? It’s moved up a little too quickly. That’s one scenario you want to head off at the pass. Why? Because the delta of the June $110 call may soon surpass the delta of the October $110 call. That will cost you money if you don’t make an adjustment before that plays out. It means the June $110 call will be increasing in value faster than the October $110 call. You may have to close the spread when the deltas are no longer in your favor. You will likely have made a respectable profit. Then, if you’re still bullish, you can put on another calendar spread using higher strikes. Closing Early There are times, during the course of an option position, that it may be a good idea to close out your position early. Look at the chart. Let's say you guessed right about the direction. BBH has moved up nicely, but is about to bump into some overhead resistance at the $110 level. Take a look at the spread and figure out how much you would take in if you closed out the position. With your cost at $3.70, perhaps you could buy back the short call and sell the long call for a total of $4.70. That's $1.00 profit on a $3.70 risk – a very nice return. There's nothing wrong with unwinding the spread and putting that $1.00 in your pocket. How much profit would you accept and in what time frame. Just because there are three or four months left on the long option doesn't obligate you to keep the position going. _____________________________________________________________ The “Diagonal” Calendar Spread A “diagonal calendar spread” is basically the same as the “horizontal” calendar spread except the strike prices are different. Using the example above, a “diagonal” spread might consist of: Buying the October $105 call @ $7.50 Sell the June $110 call @ $1.40 Total debit of: $6.10. The main benefit is that you are basically buying more delta. October $105 call has a delta of 57 vs. the 46 delta of the October $110 call. With a "diagonal calendar spread," it's also the months of time you buy in the long option that gives you flexibility. You can buy more or less time, depending on how long you think it will take for the underlying to go in your direction. Remember that, in both the “horizontal” or “diagonal” calendar spreads, you have many choices. You can take profits (if they exist) by liquidating at any time during the life of the long option. _____________________________________________________________ Gut Check Time The market has been moving up lately. Some of the positions in our CPTI portfolio are nearing their upper limits. We're due for a pullback because our upper limits were placed at resistance levels. This week should be interesting. _____________________________________________________________ May CPTI Portfolio Positions Position #1 -- SMH Baby Condor. Friday's Close: $27.25 SMH is the Semiconductor Holder Trust. We feel that semiconductor stocks have moved up a little too far and too fast. We created a baby condor by selling the May SMH $25 puts and $27.50 calls. For protection, we bought the May $22.50 puts and $30 calls. The net credit is $1.05 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. SMH has been bouncing around within the range – but then, that's what it's supposed to do. Actually, it traded as high as $27.78. Our safety range is $23.95 to $28.55. It's still within the range. ____________________________________________________________ Position #2 – SPX Iron Condor. Friday's Close: 930.08 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. SPX traded up to 930+. It's still within the range, but the market is moving up. We'll watch it, but we won't obsess over it. ______________________________________________________________ Position #3 – MSFT Minage-A-Qua – Friday's Close: $26.13 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. _____________________________________________________________ Position #4 – DJX Minage-A-Qua – Friday's Close: $85.83 The DJX tracks the DOW. It looks like the DOW is in a minor uptrend with resistance at $85 and support at $82. We sold 10 contracts of the May DJX $84 puts and bought the May DJX $80 puts. Then sold 10 contracts of the May DJX $84 calls and bought the May DJX $88 calls for a credit of $.80 for a total net credit of $2.25. We'll receive our maximum profit if the DOW closes right at 8400. However, we 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 ______________________________________________________________ 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 ************** TRADERS CORNER ************** Dow Theory By Jane Fox On July 3, 1884 Charles Dow published the first stock market average composed of the closing prices of eleven stocks: nine railroad companies and two manufacturing firms. Dow felt that these eleven stocks provided a good indication of the economic health of the country. In 1897, Dow determined that two separate indexes would better represent that health, and created a 12 stock industrial index and a 20 stock rail index. The idea came to life when industrial production and railroads were the two staples of American economic growth. Although seemingly different, they were both important pieces to one puzzle. After all, if goods were being produced in factories, they also had to be shipped. This was a win-win situation for production and rail transport. If demand for goods dropped, then factories slowed production. And if factories produced less, then the rail carriers suffered from a lack of demand for their services. That was a lose-lose scenario. By 1928 the industrial index grew to its current size of 30 stocks. Dow never wrote a book on his theories but set down his ideas of stock market behavior in a series of editorials that The Wall Street Journal published around the turn of the century. In 1903, the year after Dow’s death, S.A. Nelson compiled these essays into a book called the “The ABC of Stock Speculation” and coined the phrase “Dow Theory.” Richard Russell, who wrote the introduction to a 1978 reprint, compared Dow’s contribution to stock market theory to Freud’s contribution to psychiatry. Basic Tenets 1. The Averages discount everything “The sum and tendency of the transactions of the stock exchange represent the sum of all Wall Street’s knowledge of the past, immediate and remote, applied to the discounting of the future. There is no need to add to the averages, as some statisticians do, elaborate compilations of commodity price index numbers, bank clearings, fluctuations in exchange, volume of domestic and foreign trades or anything else. Wall Street considers all these things” (Hamilton, pp 40-41) What this is saying is that the market reflects every possible knowable facet that affects supply and demand and discounts it all. The theory applies to market averages, as well as to individual markets and even makes allowances for acts of God (or exchanges going down) by not anticipating them but almost instantaneously assimilating their affects into the price action. 2. The Market has Three Trends In Dow theory an uptrend is successive higher highs and higher lows, a downtrend is successive lower highs and lower lows, which is the cornerstone of technical analysis. “Records of trading show that in many cases when a stock reaches a top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance.” I think he just described a head and shoulders here. Dow then considered a trend to have three parts, Primary, Secondary and Minor which can be compared to the tide, then the waves which make up the tide and ripples making up the waves. You can see the direction of the tide my looking at the highest point on the beach reached by each successive wave. If each wave is reaching higher on the beach then the tide in coming in, if each successive wave reaches a lower spot than the previous one then the tide in going out. Dow determined that the direction of primary trends (tides) could last for several years whereas the secondary trend (a correction within the larger trend) usually lasted three weeks to three months and most frequently retrace 50% of the previous move. Dow also stated that these retracements could be 1/3 or 2/3, which I see tying into Fibonancci analysis very nicely. 3. Major Trends have Three Phases Dow theory states that the primary trend (the tide) has three phases: accumulation, public participation and distribution. If the previous trend was bearish the bullish trend start with the accumulation phase represented by informed buying by the most astute buyers because they have recognized that the market has assimilated all the so-called “bad” news. The public participation phase is where most of the technical trend followers begin to participate and prices begin to advance rapidly. The distribution phase takes place when the newspapers begin to print increasingly bullish stories, economic news is better than ever and speculative volume increases. It is during this phase that the informed investors begin to distribute before anyone else. 4. The Averages Must Confirm Each Other Dow theory says that no important bull or bear market signal could take place unless both averages (industrial and transportation) confirmed one another by giving the same signal. Both averages must exceed a previous secondary peak to confirm the inception or continuation of a bull market. He did not believe the signals had to occur simultaneously, but recognized that a shorter length of time between the signals provided a stronger confirmation. The theory, then, is that the two indexes should behave in tandem. Typically one leads the other, but the lagger shouldn't be far behind. It is widely accepted that the transportations are more apt to lead, since factories and capital goods producers make shipping arrangements well in advance (sometimes even before they actually have made the goods they're going to ship). Assuming a stable business cycle, they should even both make news highs and new lows in almost perfect synchronization (again, the theory says that one typically leads the other slightly). As long as this is happening, forecasting the general direction of stocks is fairly transparent. 5. Volume Must Confirm the Trend Dow theory says that volume is important but secondary. Simply stated, volume should expand or increase in the direction of the major trend. 6. A Trend is Assumed to be in Effect Until it Gives a Definite Signal that it has Reversed This tenet relates to the physical law a body in motion tends to stay in motion until some external force causes it to change direction. But what constitutes a change in direction? A number of technical tools are available to traders to assist in the difficult task of spotting reversal signals, including the study of support and resistance, price patterns, candlestick patterns, trendlines, moving averages, etc. And here is where the molasses gets real thick, is the move we are currently in a correction of the prior move or a reversal, i.e. is the tide now moving out instead of in. Although Dow theory has stood the test of time, it has not gone without its criticism. A Dow signal usually occurs in the second phase of a trend as price penetrates a previous intermediate peak. This is also, incidentally is about where most trend-following technical systems begin to identify and participate in the existing trends. In all fairness though, Dow never intended to anticipate trends, rather he sought to recognize the emergence of major bull or bear markets and to capture the middle portion of important moves. An understanding of Dow theory provides a solid foundation of a study of technical analysis, whether it be trendlines, support and resistance, candlesticks or just plain price patterns. The standard definition of a trend, the classification of a trend into three categories and phases, the principles of confirmation and the use of percentage retracements all derive in on way or another from Dow Theory. ************** TRADERS CORNER ************** How Do You Trade Your Options? By Steve Gould My son is going through that dreaded "what is the best" phase. You dads know what I am talking about. Dad, what is the best car? Dad, what is the best pistol? Dad, what is the best airplane? And the list goes on. My answer is always the same. Son, that depends. He is now old enough to understand stocks and options. In fact, I took him to one of my seminars. Not only was he the youngest one there, he actually asked the instructor well thought out question. I inevitably got that dreaded question, dad, what is the best option to buy? My answer, as always, was son, that depends. So what is the best option to buy? I could not even begin to opine as to what is the best option to buy. It is going to be different for each person depending on their risk tolerance. What I am going to do is present the risks and rewards associated with different types of options and let you decide what your risk tolerance is and how you want to trade. When we trade options, we can buy either in the money (ITM), at the money (ATM) or out of the money (OTM) options. Taking this just one stop further, we can also purchase way out of the money options or deep in the money options. The basic difference between each of these choices is the delta. The delta determines how much the option changes value with each $1 move of the stock. ATM options generally have a delta around 50. The further out of the money the option goes, the closer to zero the delta becomes. The deeper in the money the option goes, the closer to 100 the delta becomes. For example, let's take a stock that is trading at $37. The $40 call option cost $2.00 and has a delta of 35. When the stock increases in value by $1, the option increases in value by $0.35. Therefore, when the stock reaches $38, the option will now be worth $2.35. The profit and loss scenarios are slightly different for each of the different types of options. This is because the delta changes the risk curves. I think the easiest way to present the risk and rewards is to run through a sample trade and see what the numbers are for each option. Let's take my favorite stock, the Diamonds. Here is a weekly chart of the Dow as of 5/1/2003. Chart: Weekly Dow as of 5/1/2003 Until proven otherwise, this is the path I think the Dow is going to take over the summer. (Unless, of course, it doesn't.) I am anticipating a move to 6967 by 9/1/2003. My stop loss is the high over the II wave at 9043. As of this writing (5/1/2003) the Dow is at 8454 making the DJX worth $84.54. So an approximately 6 point move up on the DJX would invalidate the current wave count and I would exit the trade. If the Dow moves above 9043, it will most likely do so within the next month. Otherwise I am expecting approximately a 15 point move down. Since I am anticipating the move by 9/1/2003, I am going to be looking at December 03 DJX options so I do not have to consider theta (time) decay. Here are how the options are priced as of 5/1/2003. OpSym Strike Type Bid Ask Delta Vol OI ----- ------ ---- --- --- ----- --- -- DJYXD 56 Put 0.30 0.45 -3.5 0 3343 DJYXH 60 Put 0.50 0.60 -5.2 0 3828 DJXXL 64 Put 0.70 0.90 -7.5 53 13295 DJXXP 68 Put 1.20 1.40 -11.3 5 6031 DJXXR 70 Put 1.40 1.65 -13.3 5 8869 DJXXT 72 Put 1.85 2.00 -16.0 6 4121 DJXXX 76 Put 2.75 2.90 -21.9 1080 93665 DJXXB 80 Put 4.00 4.10 -29.0 373 46249 DJXXF 84 Put 5.50 5.80 -36.8 49 9568 DJXXJ 88 Put 7.40 7.90 -45.1 20 8583 DJVXN 92 Put 10.00 10.50 -53.0 1 1938 DJVXR 96 Put 13.00 13.60 -59.8 0 760 DJVXV 100 Put 16.40 17.00 -65.2 5 6826 DJVXZ 104 Put 20.00 20.60 -69.4 0 132 DJVXD 108 Put 23.80 24.40 -72.3 0 614 DJVXH 112 Put 27.70 28.30 -74.2 0 281 DJWXL 116 Put 31.60 32.20 -75.8 0 199 Various theories abound as to which options to trade with. Some people think that you should buy only deep in the money options. Others believe that at the money options are best. Still others think that out of the money options with a delta around 25 (or -25 for puts) are the best. For the sake of illustration, we will choose the following options, trying to account for each point of view. Note the deltas for each. Category Strike Delta -------- ----- ----- Way out of the money 64 -8 Out of the money 80 -29 At the money 84 -37 In the money 96 -60 Deep in the money 116 -76 To make things as equal as we can, we will buy an appropriate number of contracts to approximate the same dollar amount. Way out of the money: .90 * 36 contracts = $3,240 Out of the money: 4.10 * 8 contracts = $3,280 At the money: 5.80 * 6 contracts = $3,480 In the money: 13.60 * 3 contracts = $4,080 Deep in the money: 32.20 * 1 contract = $3,220 Let's graph the risk curves for each option. (I have to do a little fudging because the Options Toolbox only allows me to enter strike prices in increments of 5. I do not think that is going to throw the calculations off that much.) For the way out of the money options. Chart: Way out of the money options risk On June 1, the options lose $1,980 Chart: Way out of the money options reward On September 1, the options profit $4,392. For the out of the money options. Chart: Out of the money options risk On June 1, the options lose $1,568 Chart: Out of the money options reward On September 1, the options profit $5,416. For the at the money options. Chart: At the money options risk On June 1, the options lose $1,554 Chart: At the money options reward On September 1, the options profit $5,730. For the in the money options. Chart: In the money options risk On June 1, the options lose $1,182 Chart: In the money options reward On September 1, the options profit $3,519. For the deep in the money options. Chart: Deep in the money options risk On June 1, the options lose $505 Chart: Deep in the money options reward On September 1, the options profit $1,313. Here is a summary of the results. Option Total Loss Loss Profit Profit Cost Percent Percent ------ ----- ---- ------- ------ ------- Way OTM $3,240 $(1,980) 61% $4,392 136% OTM $3,280 $(1,568) 48% $5,416 165% ATM $3,480 $(1,554) 45% $5,730 165% ITM $4,080 $(1,182) 29% $3,519 86% Deep ITM $3,220 $ (505) 16% $1,313 41% Below are risk graphs of all the options together. Note: the graph is minus the way OTM options. The program only allows for 4. Also, these were calculated on 5/2/2003 so the P&L is going to be slightly different from the above chart. Chart: All options risk Chart: All options reward So which are the best options to buy? It depends on your risk tolerance. The message is clear though. The deeper in the money you buy options, the lower the risk, but the lower the reward. The further out of the money you buy options, the greater the risk, but the greater the reward. The reward seems to reach a point of diminishing returns the further out of the money you go. As you approach way out of the money, the delta is so small that the profit potential is limited. Given this data, you can now decide how you wish to trade options based on your goals and risk tolerance. ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould Many moons ago, when I had more time on my hands, I saw a TV commercial for a local car dealership. The starting scene was a picture of the Milky Way galaxy. The next picture was a close up of the Milky Way sector that Earth was in. Then one of our solar system. Then one of the Earth from far away. Then one of the Earth from the moon. Then one of the Earth from a satellite. Then one of the United States. Then one of Oregon. Then one of Portland. Then one of the city block where the car dealership was in and eventually we saw a bird's eye view close up of the bald head of the owner of the dealership. It was interesting to see the "big" picture and the perspective of where we are and how we fit in to the grand scheme of things. Some how, the fine details didn't seem so important any more. In order to know where the Dow is going, it is really crucial to see the "big" picture. It is impossible to look at the last week, month or even year to get a perspective as to why I think the Dow is ultimately headed down to at least 6000, possibly even 4000 before the year's end. I would like to take you back to the 1700's when the United States stock market was born, but my data does not go back that far. My data only goes back to 1915. At that time the Dow was at 56. The high for the Dow has been over 10,000. In order to see the whole progression, we must use a log scale. Chart: Dow Monthly since 1915 This is a monthly chart of the Dow since 1915. I labeled the Elliott Wave progression of the major wave (I, II, III) and the 5 wave pattern within wave III. The wave III peak occurred on January 14, 2000. According to this chart, the Dow is now in a wave IV counter trend. How far down it will go and how long it will last are the questions of the day. It is impossible to know exacts, but we do have three clues to help us. Clue number one is that we know that 4 waves generally retrace between 38 – 62% of the 3 wave. The 38% retracement is approximately 7300 while the 68% retracement is about 4500. Clue number two is the rule of alternation. This rule states that what happened in the previous type of wave will probably not happen in the current one. Specifically here, if we look at the wave II counter trend, we see a very sharp decline. Using the rule of alternation, the wave IV counter trend should be a sideways correction. We can see how this rule expresses itself very clearly by looking at wave 2 and wave 4 within the III wave. Wave 2 was a sharp correction while wave 4 was a sideways correction. Finally, clue three is that all counter trend waves are A-B-C waves. Granted, A-B-C corrections can be rather complex, but we know it is coming and can anticipate the count. Now that the Dow is known to be in a wave IV, we can zoom in on the chart and concentrate on the timeframe from January 14, 2000 to the present. But first a quick review of Elliott Waves. As the market progresses, it will unfold in waves. All a wave is is a specific series of up and down movements in a particular direction. Bull waves traverse up, bear waves traverse down. Each basic wave is segmented into five parts. For a bull wave, three segments move up and two segments move down. The net movement is up. The opposite is true for bear waves. The basic pattern looks like this: Chart: Basic 5 wave pattern Note that waves 1, 3 and 5 move up. These are called motive waves. Waves 2 and 4 move counter trend and are called corrective waves. A complete cycle is made up of 8 waves: a five wave motive wave and a 3 wave corrective wave. The complete cycle looks something like this. Chart: Complete Elliott Wave Cycle Each wave within the 8 wave cycle can be subdivided. Waves 1, 3, 5 and C will subdivide into another 5 wave basic pattern. Waves 2 and 4 will divide into another 3 wave corrective pattern. Because waves 1, 3, 5 and C subdivide into a basic 5 wave pattern, their behavior is rather predictable. Waves A and B will also subdivide, but the permutations are numerous. Now, let's take a look at a closer view of the Dow. Chart: Dow Weekly Long Term This is a weekly chart of the Dow starting from the wave III peak on January 14, 2000. We are now in the A wave of the wave IV, A- B-C counter trend. Wave A is the green arrow. A waves typically will be either another A-B-C wave pattern or a 5 wave basic pattern. Right now, we do not know if we are in the C wave of an A-B-C pattern or the 3 wave of a 5 wave basic pattern. In either case, both C waves and 3 waves subdivide into a 5 wave basic pattern so the analysis is the same. For now, let us assume we are in a 5 wave basic pattern within the A wave. The red arrow traces out the 1, 2 and 3 waves. This means that we are currently in the 3 wave down which started on March 19, 2002. Subdividing further, the 3 wave will trace out a 5 wave basic pattern, here marked in purple. I can see two possible paths for the Dow here. The preferred path is that the Dow has already traced out the (1) and (2) waves and is in the midst of a (3) wave down. This sounds like an old tune, but that (3) will subdivide into a 5 wave basic pattern and so far within that (3) wave, the i and ii waves are complete. If this scenario plays out, we are about to start the iii wave of the (3) wave of 3 wave. 3 waves are the strongest and most powerful wave of the five so prepare yourself for a 5G drop down. (That is rollercoaster lingo for all you non-amusement park enthusiasts.) The other possibility is that the Dow is taking a different path for the (2) wave. Chart: Dow Weekly Long Term Alternative Here the (2) wave is taking a slightly longer path. The (2) wave is tracing out a much larger a-b-c correction, possibly all the way up to 9350. At the conclusion of the (2) wave, the Dow will continue its downward track. So how will we know which path the Dow is tracking out? Take a look at daily chart of the Dow for the last several months. Chart: Dow Daily Long Term close up I left all the lines in from the previous chart for reference. If the Dow has indeed completed the A-B-C correction of wave ii, then it will start a strong decline very, very shortly. But, if the Dow goes above 8612, the c wave may not yet be complete and it may track a bit higher. Then it will start its strong decline. If the Dow goes above 9043 (current wave (2)), then the alternate scenario is in place. The next several days should determine the direction of the Dow. The S&P and NASDAQ will follow. I have put my money (literally) on the preferred count where the Dow is starting back down. If it does start, it will be swift and decisive. I have not been recommending many stock plays recently as I am awaiting the direction of the Dow (and S&P and NASDAQ). I have a few stocks waiting in the wings. Some are bull plays, others are bear plays. I will bring them out once the Dow shows its direction. Stay tuned for the next action packed, fun filled episode. ************** FUTURES CORNER ************** What to do when a Futures Exchange Halts unexpectedly. 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 On Thursday, May 1 2003 something very unusual happened. Something that I do not recall every happening before. For almost an entire trade day, the CME Futures Exchange had halts on its two largest electronically traded contracts of ES and NQ. The Trade Halt came on at 11:40AM EST and they did not resume trading until approximately 7:00 PM EST that evening. This was the day President Bush landed on the Aircraft Carrier off the coast of San Diego via Fighter Jet. This outage ONLY affected the electronic Emini Contracts. Trade halts have certainly occurred before for various technical reasons, but they usually last 1-2 hours at most. A very important note: the full-size, pit-traded SP 500 (SP) and NDX (ND) contracts continued their trading in the pits during the Emini Halt of ES and NQ. Also, the CBOT exchange never experienced any outage as they are in a different building (both are in Chicago) and use different software and hardware completely. Once upon a time, big money never traded the ES or NQ and only used the full size pit traded contracts. Since the volume on ES and NQ has increased so greatly, in current times, big money will indeed use ES and NQ as either a trade or a hedge. Naturally, when problems such as this Emini problem happen, big money will simply turn to Chicago's full-size pits. So we the retail trader must also have a ready solution in mind when a Halt occurs. Perhaps you are new to futures trading and have never experienced a Halt of this nature before and on Thursday were not quite sure what to do if you had been holding a ES/NQ position prior to the Halt. This article will address some of the ways in which some money management might have been used if you had. Reality of the world is that "bad stuff sometimes happens". Maybe you had a Short ES 907 position with a stop at 910 and decided to just hold it expecting the Halt to end in an hour or two and were then shocked and panic-attacked when it re-opened at 916s; blowing out your stop in the process as Stops were cancelled by CME. Easy to say and hard to do, but take the Loss and move on for no one can predict or control any type of technical issue; whether on your end, or at the Exchange. Let's examine some things you could have done during this Halt. SCENERIO 1 : Short 10 ES at 905 You are Short 10 contracts of ES at 905 and you are stuck Short in the Halt near 11:40AM You bring up the Dow cash chart, and SPX (SP500 cash) chart. They are upticking quite strongly so you normally would be exiting your ES short but are not able to because of the Halt. You have several choices: Note: 10 ES contracts = 2 full-size SP contracts Note: 10 ES contracts = 10 YM Dow$5 contracts A. Use the full-size SP contract (this depends on your futures broker) Buy to Cover 2 Full-size SP (SP500 futures) either on the phone or online. You are now short 10 ES at 905, and Long 2 SP at 907 and your net position is now flat. Most brokers do not require additional margin for this as it’s a 100% Hedge. B. Use the YM Dow$5 Futures Go Long 10 YM Dow futures contracts to 100% hedge your 10 Short ES contracts. Again, some brokers do not require additional day-trade margin for this. C. Stock Options Go Long (buy to open) Stock Options, either Index options such as DJX for the Dow, or perhaps Buy OEX Calls (S&P 100). One could even buy Calls on stocks that usually follow the general market such as GE, MSFT, MMM, IBM, etc. The harder part is being able to QUICKLY compute how many stock option contracts you would need to buy to 100% Hedge those 10 Short ES 905 contracts you have during this Halt. It can get very complicated as you need to compute the Option Greeks and try to guess where ES might open up at in order to hedge properly. Example: IBM is $85, the May 85 calls are $3.50; and we are 2 weeks to May expiry; the Delta on these calls is 60. How many Long 85 calls must I buy to Hedge those 10 Short ES futures contracts ? (not only is it complicated math, it's also subjective for no one knows how much the market will move during the Halt). D. SSFs Single Stock Futures Hedging that ES 905 Short via Single Stock Futures is also another choice. They do not trade at the CME, and remained open all day. Once again, it becomes a bit complicated math-wise trying to quickly figure out how many you must buy in order to hedge 100%. Also, as these are on a different exchange, your broker will require normal full margin for these contracts. E. Panic Panic is a "choice" for what to do the moment you learned ES was Halted for an unknown amount of time and you saw SPX rallying very hard in a classic "Short and Wrong" situation. It goes without saying, "panic" as a choice is not good money management but nonetheless is a very real possibility especially if you are new to Futures and this is your first time in a Halt. Summary: My advice would be to (the moment you realize you are Short 10 ES and Wrong) INSTANTLY and I mean INSTANTLY either hedge with 2 SP Longs -or- 10 YM Longs thus creating a 100% Hedge. Once you are filled in those, the panic goes away and you now can "forget" about this position and even ponder putting a new trade down, such as going Long some more size as the tape is indeed moving higher. When the Halt comes off, you simply exit both sides to go back to Flat; in this case that would be: Sell to Close 10 YM Longs Buy to Cover 10 ES Shorts Bottom line is that INSTANT hedging is wise and allows for the emotions to ease and to more calmly evaluate the Market. SCENERIO 2 : you are LONG 10 ES at 902 when it is Halted And just as in the last example, you note the Dow and SP500 cash indices are leaking higher and while you are not happy about having your ES position be Halted, you remain "Long and Happy". Look at the below chart of the Market that day. You suspect that many ES traders were caught Short and now are covering those shorts creating a Squeeze Higher; so you decide to do nothing. You had a case of panic when the Halt came, but are now quite happy an hour later at 1pm to still be Long, so you decide there's no reason for you at this moment to Hedge that 902 ES long via Shorting YM. After being surprised that hours later at 2:30pm, ES is still Halted for trading, ES is now at 920. You know this to be a large area of resistance and IF you were able to - you would be selling to close out your 902 Long in this area and being delighted with your 18 point gain. But you cannot because of the Halt. So, you take your Profits by Selling 2 Full-Size SP contracts (or Selling 10 YM contracts). If it were me, and given that choice, I would Sell the 2 SP contracts. You now have your 18 point ES gain locked in; and it doesn't matter where ES opens at when it comes off its Halt; for your futures clearing firm will offset your "Long 10 ES / Short 2 SP position" to FLAT. SCENERIO 3 : you are FLAT all futures when the Halt occurs After realizing it is possible an ES short-squeeze is occurring, you decide to trade the YM, which trades on the CBOT and is not affected. This becomes just a normal trade for you, other than not being to electronically trade the ES and NQ. SUMMARY: I recall once that the NYSE stock exchange was down on technical reasons for about two hours. Nasdaq was still open. On that day, neither the SP or ES traded during the NYSE halt; nor did Dow futures trade either until the NYSE re-opened. The CBOT (for technical trouble) has briefly halted the Dow Futures trading while ES and NQ remained open. On Sept 11 2001, everything was Halted: YM ES NQ. There have been times the Exchanged are fully open, but your Broker (or the clearing firm) is having technical trouble and your online futures account cannot trade. This is one reason some Futures traders maintain two separate Futures accounts making sure two different clearing firms are used, so if Broker A is down for 30minutes for a technical reason, you can use Broker B. Every trader has been "caught" in a Halt at one point or another. You the Trader can either be "right" or "wrong" in your existing position when the Halt occurs, and there's nothing you can do except not to panic and to quickly come up with a way to Hedge if you believe you are Wrong. Do NOT "HOPE" that your position will become ok once the Halt comes off. "HOPE" is foolish for a trader. HOPE is a town in Arkansas [smiles] (birthplace of former President Clinton actually). "Sh*t Happens" ~ That is a fact in Life as well as Trading, but how we deal with things after it happens is what is more important. Alan Hewko 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 05-04-2003 Sunday 5 of 5 In Section Five: Covered Calls: Understanding Stop-Loss Strategies Naked Puts: Diversify For Success! Spreads/Straddles/Combos: Some Good Ol' Fashioned "Irrational Exuberance" Updated In The Site Tonight: Market Posture: Full Speed Ahead ************************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 ************* Trading 101: Understanding Stop-Loss Strategies By Mark Wnetrzak This week's discussion concerns the use of stop-loss orders for position management with covered-calls. Attn: Covered-Calls Editor Subject: Help With Exit Strategy Mark, I have been using the covered-call strategy with limited success and the problem seems to be my loss management. I know that I should have an exit plan in place when I buy the stock but I don't always know which type is best to use. Most books recommend some kind of trading stop for straight option plays but does this work with covered-calls too? JK Concerning position management: Stop-loss strategies protect investors from an excessive drain on their capital by making a quick exit from a losing position when a sell signal is triggered. This could be a percentage (5%, 10%, ??%) decline in position value or overall capital, a technical violation in the stock chart, or simply a move to the break-even point. This method is not dependent on option expiration but rather a mechanical (or mental) signal that is activated as soon as it is hit. However, stop-loss strategies are not a "perfect" solution and generally will not protect against a catastrophic drop in the underlying stock's price, especially after the close (and before the open) of trading. There are other alternatives that can be used in losing positions such as adjusting the covered-write by rolling forward and/or down; a technique described adeptly in Larry McMillan's book, Options: As a Strategic Investment. Some of the best suggestions regarding position management come from our readers and the following comments are from a letter I received last year during the widespread market slump. Although this method works for some people, you will need to find a technique that fits your personal risk-reward tolerance and investing style. ************ Mark, I notice many readers ask how much they should lose on a covered write play and the answer is usually in percentage and psychological terms. My method is easier. The cost basis for each play is listed in OIN. This is equivalent to "break even." I simply place a stop loss order at the cost basis and a "buy to close" (order) on the option contingent on that price. No muss no fuss. Since the cost basis is usually about 15%-20% below the original cost of the stock, it's a pretty good bet that if it sinks that low, it's time to go. This results in little or no loss and easy management. It's also important to figure your profit going in. Is it worth risking $250 to make $500? I think not. OIN's plays have a terrific average and I rarely lose overall. (I do this on OptionsXpress, which has the best covered-write screens I've seen.) S7 ************ As you can see, this investor offers an excellent way to implement mechanical stops in a "no muss no fuss" exit strategy. Regardless of which method an investor uses, success is based on effectively limiting the downside losses (and the potential for catastrophic portfolio damage) in a losing position. Stop-loss orders work well most of the time, but they are not a solution to every losing play. The key to consistent profits is to carefully evaluate the risk and reward potential before entering any position, then utilize proven money-management techniques in a timely manner, in order to maximize gains and minimize losses. Trade Wisely! 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 6.38 MAY 5.00 0.45 0.36* 8.4% OSTE 8.39 10.50 MAY 7.50 1.30 0.41* 8.4% IMMU 2.95 4.09 MAY 2.50 0.65 0.20* 7.6% ASML 7.59 9.13 MAY 7.50 0.55 0.46* 7.1% CAL 5.68 11.80 MAY 5.00 1.00 0.32* 5.9% SEAC 7.80 7.92 MAY 7.50 0.75 0.45* 5.5% CCRD 11.05 12.70 MAY 10.00 1.50 0.45* 5.1% ALTR 15.78 16.51 MAY 15.00 1.45 0.67* 5.1% IFX 8.17 7.80 MAY 7.50 1.00 0.33* 5.0% CTLM 5.18 7.75 MAY 5.00 0.45 0.27* 5.0% NEOL 13.50 15.10 MAY 12.50 1.80 0.80* 5.0% UNTD 19.23 21.90 MAY 17.50 2.80 1.07* 4.7% RINO 13.29 13.50 MAY 12.50 1.40 0.61* 4.5% BMRN 12.06 11.62 MAY 10.00 2.35 0.29* 4.3% COMS 5.17 5.24 MAY 5.00 0.45 0.28* 4.3% PDE 15.17 16.23 MAY 15.00 0.60 0.43* 4.3% MVSN 15.97 18.20 MAY 15.00 1.40 0.43* 4.3% AAII 11.43 11.25 MAY 10.00 1.80 0.37* 4.2% PLCE 13.34 15.23 MAY 12.50 1.40 0.56* 4.1% UNTD 19.67 21.90 MAY 17.50 2.95 0.78* 4.1% NEOL 13.60 15.10 MAY 12.50 1.65 0.55* 4.0% TOM 8.01 8.28 MAY 7.50 0.70 0.19* 3.8% MSCC 11.77 12.66 MAY 10.00 2.25 0.48* 3.7% OVRL 18.02 17.48 MAY 17.50 0.95 0.41 3.5% * Stock price is above the sold striking price. Comments: The bulls continue to run as investors ignore rather lackluster economic news and look (back) to the future. Yes, it almost feels like 1999. Regardless, the covered-call portfolio is in fine shape though it may be the source of some "call" selling regret. Noven Pharmaceuticals (NASDAQ:NOVN), a covered-call play for the previous week, was generous in announcing before Monday's bell that U.S. regulators rejected its application to market a transdermal patch to treat ADHD. As the listed play wasn't viable, the position will not be shown in the summary. As for the "early exit" watch-list, look for issues that act weaker than expected such as Infineon Technologies (NYSE:IFX), or aaiPharma (NASDAQ:AAII), etc., and monitor the positions closely as we enter the final two weeks of the May expiration. 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 AMR 5.47 MAY 5.00 AMR EA 0.70 70283 4.77 14 10.5% TER 12.75 MAY 12.50 TZY EV 0.75 21261 12.00 14 9.1% GRP 12.52 MAY 12.50 GRP EV 0.45 8 12.07 14 7.7% CYBX 23.87 MAY 22.50 QAJ EX 2.05 164 21.82 14 6.8% ABGX 10.77 MAY 10.00 AZG EB 1.05 1418 9.72 14 6.3% OSIP 21.19 MAY 17.50 GHU EW 4.10 1054 17.09 14 5.2% IGEN 38.90 MAY 35.00 GQ EG 4.70 4440 34.20 14 5.1% 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). ***** AMR - American Airlines $5.47 *** Bottom Fishing: Part I *** AMR Corporation's (NYSE:AMR) operations fall almost entirely in the airline industry. American Airlines, Inc. is AMR's principal subsidiary. In April 2001, American Airlines, Inc. purchased substantially all of the assets and assumed certain liabilities of Trans World Airlines, Inc. (TWA). At the end of 2001, AMR provided scheduled jet service to more than 161 destinations throughout North America, the Caribbean, Latin America, Europe and the Pacific. AMR is also a scheduled air freight carrier, providing a full range of freight and mail services to shippers throughout its system. Shares of large U.S. airlines jumped on Friday as analysts said the worst of the downturn may soon be over though huge losses will continue. American Airlines appears to have averted bankruptcy in the near-term and this speculative position offers a reasonable reward for those who believe the airline stocks can fly higher. A June covered-call play is listed in the supplemental candidate list below. MAY-5.00 AMR EA LB=0.70 OI=70283 CB=4.77 DE=14 TY=10.5% ***** TER - Teradyne $12.75 *** Bottom Fishing: Part II *** Teradyne (NYSE:TER) is a supplier of automatic test equipment, high- performance interconnection systems and electronic manufacturing services. The company's automatic test equipment products include Semiconductor Test Systems, Circuit Board Test and Inspection Systems and Broadband Test Systems. Teradyne's interconnection systems products and services (Connection Systems) include high- bandwidth backplane assemblies and associated connectors used in electronic systems, and electronic manufacturing services of assemblies that include Teradyne backplanes and connectors. TER has been forming a Stage I base for almost a year and the stock appears poised to move higher in the coming sessions. Traders who believe the issue is destined for a future rally can profit from upside movement with this position. MAY-12.50 TZY EV LB=0.75 OI=21261 CB=12.00 DE=14 TY=9.1% ***** GRP - Grant Prideco $12.52 *** Earnings Rally *** Grant Prideco (NYSE:GRP) is a manufacturer & supplier of oilfield drill pipe and other drill stem products, and a North American provider of high-performance premium connections and tubular products. The company also provides a variety of products and services to the worldwide offshore and deepwater market through its marine products and services segment. Grant's drill stem products are used to drill oil and gas wells, while its premium connections and tubular products are used to complete oil and gas wells once they have been successfully drilled. Its marine products & services are used for subsea construction, installation and production. The company's customers include major, independent and state-owned oil companies, drilling contractors, oilfield service companies and North American oil country tubular goods distributors. Grant operates 22 manufacturing facilities located in the United States, Mexico, Canada, Europe, and Asia, and 30 sales, service and repair locations globally. On Friday, GRP reported 1st-quarter net income of $4 million, or 3 cents per share, compared with $1.1 million, or a penny per share, last year, on revenues that increased 25%. The news was apparently well received as the issue vaulted higher on Friday. Investors who want to own a popular issue in the Oil and Gas Services sector should consider this position. MAY-12.50 GRP EV LB=0.45 OI=8 CB=12.07 DE=14 TY=7.7% ***** CYBX - Cyberonics $23.87 *** Still Moving Higher! *** Cyberonics (NASDAQ:CYBX) designs, develops, manufactures and markets the NeuroCybernetic Prosthesis, an implantable medical device that delivers a novel therapy, Vagus Nerve Stimulation, for treating epilepsy and debilitating neurological, psychiatric diseases and other disorders. In July 1997, the NCP System was approved by the United States Food and Drug Administration for commercial distribution in the United States for the treatment of epilepsy, which the firm sells using its own employee-based direct marketing organization. In addition, the NCP System is marketed internationally for the treatment of epilepsy (mainly in Europe) using a combination of Cyberonics' own direct sales organization and independent distributors. During fiscal 2001, the firm obtained approval for commercial distribution of the NCP System for the treatment of depression in Europe and Canada. CYBX is in a bullish sector and the company has a product that is proven and well known for treating epilepsy. In addition, the firm's fundamentals are improving with sales up 50% to $27 million in the last quarter in a sixth straight quarter of 20% or better revenue growth. Investors can establish a cost basis near $22 in the issue with this position. MAY-22.50 QAJ EX LB=2.05 OI=164 CB=21.82 DE=14 TY=6.8% ***** ABGX - Abgenix $10.77 *** Breaking Out! *** Abgenix (NASDAQ:ABGX) is a biopharmaceutical company that is focused on the discovery, development and manufacture of human therapeutic antibodies for the treatment of a variety of disease conditions, including cancer, inflammation, metabolic disease, transplant-related diseases, cardiovascular disease and infectious diseases. Abgenix has proprietary technologies that facilitate rapid generation of highly specific, antibody-therapeutic product candidates that contain fully human protein sequences and that bind to disease targets appropriate for antibody therapy. Abgenix developed its XenoMouse technology, a technology using genetically modified mice to generate fully human antibodies. It also owns a technology that enables the rapid ID of antibodies with desired function and characteristics, referred to as SLAM technology. Abgenix rallied this week and broke-out above a resistance area near $9.50 (the AUG, NOV, and early APR highs). Traders who believe the rally will continue can profit from that outcome with this short-term play. "Target shooting" a lower net-debit initially will increase the potential yield and lower the cost basis point. A June position is also listed in the supplemental candidate list below. MAY-10.00 AZG EB LB=1.05 OI=1418 CB=9.72 DE=14 TY=6.3% ***** OSIP - OSI Pharmaceuticals $21.19 *** Rally Mode! *** OSI Pharma (NASDAQ:OSIP) is a biotechnology company focused on the discovery, development and commercialization of oncology products that both extend life and improve the quality of life for cancer patients worldwide. The company has established a balanced pipeline of oncology drug candidates that includes both next-generation cytotoxic chemotherapy agents and novel mechanism- based, gene-targeted therapies. The company's most advanced drug candidate, Tarceva (erlotinib HC1), is a small-molecule inhibitor of the epidermal growth factor receptor (HER1/EGFR). The protein product of the HER1/EGFR gene is a receptor tyrosine kinase that is over-expressed or mutated in many major solid tumors. After faltering a bit in Mid-April on some clinical trial news, OSIP rallied after Merrill Lynch raised its rating on the company to "buy" from "neutral" based on a greater probability of success for Tarceva, its cancer drug. Investors who agree with the firm's bullish outlook can establish a reasonable cost basis in the issue with this position. Due diligence is a "must" with this issue. MAY-17.50 GHU EW LB=4.10 OI=1054 CB=17.09 DE=14 TY=5.2% ***** IGEN - IGEN Int'l $38.90 *** Growing Stronger Everyday *** IGEN International (NASDAQ:IGEN) develops and markets products that incorporate its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. ORIGEN is incorporated into instrument systems and related consumable reagents, and IGEN also offers assay development and other services used to perform analytical testing. Products based on IGEN's ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. IGEN recently said it is selling its Origen- based botulinum toxin test to the Food Safety and Inspection Service of the U.S. Department of Agriculture. We simply favor the bullish breakout above the March high and 150-dma and this short-term position offers investors a favorable reward scenario at the risk of owning IGEN near a technical support level. MAY-35.00 GQ EG LB=4.70 OI=4440 CB=34.20 DE=14 TY=5.1% ***** ***************** 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 OIIM 12.63 MAY 12.50 XQQ EV 0.70 114 11.93 14 10.4% HLTH 10.05 MAY 10.00 HUT EB 0.50 1686 9.55 14 10.2% MUSE 7.52 MAY 7.50 QUM EU 0.30 1158 7.22 14 8.4% MVL 17.75 MAY 17.50 MVL EW 0.90 530 16.85 14 8.4% AMR 5.47 JUN 5.00 AMR FA 1.05 4438 4.42 49 8.1% WFII 7.75 MAY 7.50 QUU EU 0.50 966 7.25 14 7.5% NVDA 15.90 MAY 15.00 UVA EC 1.40 8705 14.50 14 7.5% CMOS 7.70 MAY 7.50 CQS EU 0.40 98 7.30 14 6.0% ALKS 10.29 MAY 10.00 QAL EB 0.55 1808 9.74 14 5.8% ACTL 20.43 MAY 20.00 LQA ED 0.95 25 19.48 14 5.8% FTUS 5.28 JUN 5.00 FEQ FA 0.70 84 4.58 49 5.7% ABGX 10.77 JUN 10.00 AZG FB 1.60 299 9.17 49 5.6% WFII 7.75 JUN 7.50 QUU FU 0.85 3 6.90 49 5.4% ALKS 10.29 JUN 10.00 QAL FB 1.05 532 9.24 49 5.1% GNTA 8.46 JUN 7.50 GJU FU 1.50 1068 6.96 49 4.8% CNCT 17.96 MAY 17.50 UXU EW 0.80 286 17.16 14 4.3% ***************** NAKED PUT SECTION ***************** Options 101: Diversify For Success! By Ray Cummins All experienced traders agree on the wisdom of diversification. Those who participate in the financial markets know a diversified group of investments is one of the fundamental prerequisites to long-term success. By spreading out across industries, you can avoid the agony of violent swings in a particular stock or sector and limit losses when unexpected events occur. This reality is the main reason trader who have limited capital should divide their portfolio efficiently among a few positions in different industry groups or market segments. When your capital assets are small, you must manage the collateral effectively and it has been our experience that most of the issues in a specific sector will perform in a similar manner. For example, if one or two of the primary companies in a given industry move in a bearish manner, the rest of the stocks in that segment or category also have a high probability of performing poorly. In contrast, when a stock performs well, the odds are high that the rest of the issues in that sector will react in a comparable manner. Unfortunately, new traders usually have little margin (capital) for error in their portfolios and when they put all their eggs in one basket, the result is rarely favorable. Choosing issues in a variety of industries, as well as different growth categories, can help you take advantage of a wider range of trading opportunities. In the current economic environment, many experts believe that small-cap firms offer the best growth opportunities because they generally have innovative products and services. At the same time, they may have higher share-price volatility and the associated liquidity risks because of their limited stature and relative instability. Those who endorse "value" investing would recommend owning under-priced stocks of well-established businesses that have a faster growth rate than large companies but also more stability than small companies. A blue-chip portfolio would focus primarily on the stocks of large companies that, because of their asset size, tend to be the most stable. Another area of diversification includes the geographic component; buying stocks of companies located both in the United States and in other countries and regions around the globe. The best combination of these groups would blend expanding companies priced below their long-term valuation with strong potential for above-average earnings growth in the future. Some traders believe that diverse portfolios should also contain a few issues which will react differently to changes in economic conditions or the outlook for a specific sector or industry. We often identify these candidates as "hedge" positions and one way to illustrate the concept involves the oil sector. A conservative investor might hedge a portfolio by initiating positions in both an electric utility and a major oil service company. Higher fuel costs will have negative impact on the utility, but will boost the value of the oil service issue. Obviously, the reverse is also true; lower oil prices will impact the oil service company negatively while improving the utility's outlook. This strategy not only protects your portfolio against unexpected downturns in a particular industry, it also enables you to take greater risks with a few positions, which in some cases can increase your total return. Regardless of the manner in which you diversify your portfolio, it's important to remember that the activity is more than just a one-time event. In all cases, you should follow a precise and well-developed trading plan and you must adjust that process when a change is warranted due to unexpected conditions. 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 WYNN 17.02 17.15 MAY 15.00 0.50 0.50* 5.0% 13.7% RMBS 15.75 14.65 MAY 12.50 0.55 0.55* 3.3% 10.8% LSCC 8.54 8.80 MAY 7.50 0.25 0.25* 3.7% 10.3% PHSY 30.20 35.07 MAY 27.50 0.70 0.70* 3.8% 10.1% MSTR 30.35 28.75 MAY 25.00 0.50 0.50* 3.0% 9.9% NFLX 19.55 22.63 MAY 15.00 0.60 0.60* 3.0% 9.6% FTS 10.06 9.77 MAY 7.50 0.25 0.25* 3.0% 9.6% WYNN 16.22 17.15 MAY 12.50 0.40 0.40* 2.9% 9.5% AVID 25.54 27.38 MAY 22.50 0.80 0.80* 3.2% 8.7% GTRC 23.25 22.88 MAY 22.50 0.50 0.50* 3.3% 8.0% EYE 11.96 16.38 MAY 10.00 0.35 0.35* 2.6% 8.0% BOBJ 20.75 22.18 MAY 17.50 0.40 0.40* 2.5% 8.0% OVTI 25.29 26.19 MAY 20.00 0.40 0.40* 2.2% 8.0% SEPR 19.00 19.23 MAY 17.50 0.35 0.35* 3.0% 7.9% JCOM 32.12 29.30 MAY 25.00 0.75 0.75* 2.2% 7.6% SEPR 15.77 19.23 MAY 12.50 0.30 0.30* 2.1% 7.5% VRTS 21.20 23.69 MAY 20.00 0.40 0.40* 3.0% 7.5% GTRC 21.10 22.88 MAY 20.00 0.65 0.65* 2.9% 7.1% SEPR 16.35 19.23 MAY 12.50 0.35 0.35* 2.1% 7.0% BCGI 18.90 18.69 MAY 15.00 0.25 0.25* 1.8% 6.7% RIMM 14.88 16.58 MAY 12.50 0.35 0.35* 2.1% 6.5% JCOM 31.96 29.30 MAY 22.50 0.50 0.50* 2.0% 6.3% MRVL 23.15 23.99 MAY 20.00 0.35 0.35* 1.9% 5.9% NFLX 20.77 22.63 MAY 15.00 0.30 0.30* 1.8% 5.9% BOBJ 18.31 22.18 MAY 15.00 0.35 0.35* 1.7% 5.8% INTC 18.66 19.05 MAY 17.50 0.35 0.35* 2.2% 5.7% ADRX 14.71 15.98 MAY 12.50 0.25 0.25* 1.8% 5.5% CMCSA 31.73 30.49 MAY 30.00 0.40 0.40* 2.0% 5.1% CMCSK 28.44 28.91 MAY 25.00 0.60 0.60* 1.8% 5.1% * Stock price is above the sold striking price. Comments: Stocks finished the week in "rally mode" as optimistic investors came off the sidelines to support the renewed upside activity in share values. The recent bullish technical indications suggest a basing pattern may finally be emerging in the multi-year "bear" market however all the major equity averages are approaching key resistance levels, thus it is important to be very selective when choosing new positions. Traders should also continue to monitor any portfolio issues with less than outstanding chart patterns as the rally will likely enter a consolidation phase in the coming week. One stock that is not benefiting from the recent activity is Footstar (NYSE:FTS) and the issue plunged 10% Wednesday after saying it would not file its annual report as expected because its financial statements are still under review. Conservative traders should consider closing this position to limit potential losses. Issues on the watch-list include j2 Global (NASDAQ:JCOM), Guitar Center (NASDAQ:GTRC) and Comcast (NASDAQ:CMCSA). 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 IMCLE 21.00 MAY 17.50 QCI QW 0.35 3667 17.15 14 4.4% 14.5% KOSP 21.97 MAY 20.00 KQW QD 0.45 10 19.55 14 5.0% 13.5% APPX 24.30 MAY 20.00 AQO QD 0.35 2354 19.65 14 3.9% 13.2% CYBX 23.87 MAY 20.00 QAJ QD 0.25 35 19.75 14 2.8% 9.2% XLNX 27.30 MAY 25.00 XLQ QE 0.30 10245 24.70 14 2.6% 7.3% CELG 27.52 MAY 22.50 LQH QX 0.20 2829 22.30 14 1.9% 7.0% ADTN 43.65 MAY 40.00 RQA QH 0.40 857 39.60 14 2.2% 6.1% 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). ***** IMCLE - ImClone $21.00 *** New Sheriff In Town! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL's shares rallied in early March amid optimism that new data about the firm's experimental cancer drug Erbitux will be released shortly and prove positive. The rally continued after the biotech firm received a $60 million cash payment from Bristol-Myers Squibb under the companies' amended March 2002 agreement to develop Erbitux. This week, IMCL moved higher on news that Bristol-Myers will tighten its control over the company after the resignation of Harlan Waksal, the biotech firm's chief executive, and Robert Goldhammer, chairman. Investors appear to be happy with the news and traders wouldn't mind owning IMCLE at a cost basis near $17 should consider this position. MAY-17.50 QCI QW LB=0.35 OI=3667 CB=17.15 DE=14 TY=4.4% MY=14.5% ***** KOSP - KOS Pharmaceuticals $21.97 *** Earnings Are Due! *** KOS Pharmaceuticals (NASDAQ:KOS) is a fully integrated specialty pharmaceutical company engaged in the development of proprietary prescription products for the treatment of chronic cardiovascular and respiratory diseases. The company manufactures its marketed products, Niaspan and Advicor, and markets such products directly through its own specialty sales force and through a sales force provided by a contract sales organization. Their cardiovascular products are based on controlled-release, once-a-day, oral dosage formulations. The company's respiratory products in development consist of aerosolized inhalation formulations to be used mainly with its proprietary inhalation devices. Shares of KOSP climbed to a new 6-month high this week as investors speculated on the company's upcoming quarterly report, which should be delivered on Tuesday morning. Investors who agree with a bullish outlook for the issue can profit from a favorable earnings report with this position. MAY-20.00 KQW QD LB=0.45 OI=10 CB=19.55 DE=14 TY=5.0% MY=13.5% ***** APPX - American Pharmaceutical $24.30 *** 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). American Pharmaceutical Partners is a controversial issue that intrigues both investors and traders alike and the inflated option premiums offer a unique opportunity to speculate on the company's future share value. MAY-20.00 AQO QD LB=0.35 OI=2354 CB=19.65 DE=14 TY=3.9% MY=13.2% ***** CYBX - Cyberonics $23.87 *** New 14-Month High! *** Cyberonics (NASDAQ:CYBX) designs, develops, manufactures and markets the NeuroCybernetic Prosthesis, an implantable medical device that delivers a novel therapy, Vagus Nerve Stimulation, for treating epilepsy and debilitating neurological, psychiatric diseases and other disorders. In July 1997, the NCP System was approved by the United States Food and Drug Administration for commercial distribution in the United States for the treatment of epilepsy, which the firm sells using its own employee-based direct marketing organization. In addition, the NCP System is marketed internationally for the treatment of epilepsy (mainly in Europe) using a combination of Cyberonics' own direct sales organization and independent distributors. During fiscal 2001, the firm obtained approval for commercial distribution of the NCP System for the treatment of depression in Europe and Canada. CYBX is in a bullish sector and the company has a product that is proven and well known for treating epilepsy. In addition, the firm's fundamentals are improving with 6 straight quarters of 20% or better revenue growth. Investors can establish a cost basis near $20 in the issue with this position. MAY-20.00 QAJ QD LB=0.25 OI=35 CB=19.75 DE=14 TY=2.8% MY=9.2% ***** XLNX - Xilinx $27.30 *** Semiconductor Sector Rally *** Xilinx (NASDAQ:XLNX) is the world's leading supplier of complete programmable logic solutions. Xilinx develops, manufactures, and markets a broad line of advanced integrated circuits, software design tools and intellectual property. Their customers use the automated tools and intellectual property, which are predefined system-level functions delivered as software cores, from Xilinx and its partners to program the chips to perform custom logic operations. The semiconductor sector has been a driving force behind the recent rally in technology stocks and one of the more well-known issues in the group is XLNX. The company has a solid fundamental outlook and the issue has excellent upside potential. Investors who have a bullish outlook on the stock can speculate on the company's future share value with this position. MAY-25.00 XLQ QE LB=0.30 OI=10245 CB=24.70 DE=14 TY=2.6% MY=7.3% ***** CELG - Celgene $27.52 *** (Almost) Free Money! *** Celgene (NASDAQ:CELG) is a commercial-stage biopharmaceutical company. The company is primarily engaged in the discovery, development and commercialization of small molecule drugs that are designed to treat cancer and immunological diseases through gene and protein regulation. Small molecule drugs are man-made, chemically synthesized drugs that, because of their relatively small size, can typically be administered orally. The firm's drugs are designed to modulate multiple disease-related genes, including cytokines (which are proteins) such as Tumor Necrosis Factor alpha, or TNF(alpha), growth factor genes such as those that control angiogenesis, blood vessel formation and apoptosis genes. Because the company's drugs can be administered orally, they have the potential to advance the standard of care beyond current injectible protein drugs that inhibit TNF (alpha) and other disease-causing cytokines. Celgene expects to meet or exceed 2003 financial targets, as its new cancer drug Thalomid propels the company to profitability. Celgene also recently said it has discovered a new class of anti-cancer compounds and is in the early stages of developing them in the lab. Investors wouldn't mind owning the stock near a cost basis of $22 should "target-shoot" a slightly higher premium to open this position. MAY-22.50 LQH QX LB=0.20 OI=2829 CB=22.30 DE=14 TY=1.9% MY=7.0% ***** ADTN - Adtran $43.65 *** New Multi-Year High! *** Adtran designs, develops, manufactures, markets and services a broad range of high-speed network access products utilized by providers of telecommunications services and corporate end users to implement advanced digital data services over both public and private networks. The company's business is arranged with two divisions, the Carrier Networks Division (CN) and the Enterprise Networks Division (EN), to enable it to quickly respond to the needs of the two important market segments that its products address. These two market segments are CN products for use in the service provider's Local Loop, including central office, remote terminal and customer premises, and EN products for use at enterprise headquarters, remote offices and telecommuting locations. Adtran offers more than 500 products built around a set of core technologies, and developed to address high-speed digital communications over the last mile of the Local Loop. This company's stock is at a multi-year high and option traders can use the favorable option premiums to establish a bullish, low-risk position in the issue. MAY-40.00 RQA QH LB=0.40 OI=857 CB=39.60 DE=14 TY=2.2% MY=6.1% ***** ***************** 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 OSIP 21.19 MAY 17.50 GHU QW 0.55 2066 16.95 14 7.0% 22.4% UTSI 23.36 MAY 22.50 UON QX 0.45 590 22.05 14 4.4% 10.9% VRTS 23.69 MAY 22.50 VIV QX 0.40 2552 22.10 14 3.9% 10.0% COF 42.80 MAY 40.00 COF QH 0.60 3305 39.40 14 3.3% 8.7% EYE 16.38 MAY 15.00 EYE QC 0.20 1041 14.80 14 2.9% 8.1% NFLX 22.63 MAY 20.00 QNQ QD 0.25 1408 19.75 14 2.8% 8.1% IGEN 38.90 MAY 32.50 GQ QZ 0.35 968 32.15 14 2.4% 8.0% IRF 23.86 MAY 22.50 IRF QX 0.25 212 22.25 14 2.4% 6.4% LLTC 35.49 MAY 32.50 LLQ QZ 0.30 2188 32.20 14 2.0% 5.7% BA 28.62 MAY 27.50 BA QY 0.25 5007 27.25 14 2.0% 5.1% PHSY 35.07 MAY 32.50 HYQ QZ 0.25 374 32.25 14 1.7% 4.6% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Some Good Ol' Fashioned "Irrational Exuberance" By Ray Cummins The major equity averages soared Friday as investors ignored yet another negative economic report and chose instead to focus on optimistic forecasts in expectation of an eventual recovery in share values. The Dow Jones Industrial Average finished 128 points higher at 8,582 with 28 of the 30 blue-chip components enjoying bullish activity during the session. The technology-laden NASDAQ ended up 30 points at 1,502, its highest level since June, 2002 on strength in chip and computer hardware stocks. The broader S&P 500-stock index rose 13 points to 930 with finance and airline shares among the best performers. Advancers pounded decliners by roughly 3 to 1 on both the New York Stock Exchange and the NASDAQ. Trading volume was moderate, with 1.5 billion shares changing hands on the Big Board and 1.8 billion shares swapped on the technology exchange. In the U.S. treasury market, the 10-year note lost 21/32, pushing its yield to 3.93%. ***************** 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 82.47 MAY 65 70 0.55 69.45 $0.55 Open BSTE 42.33 49.70 MAY 30 35 0.50 34.50 $0.50 Open GILD 44.15 47.25 MAY 37 40 0.30 39.70 $0.30 Open OIH 54.58 55.88 MAY 45 50 0.55 49.45 $0.55 Open MDT 46.90 48.25 MAY 42 45 0.35 44.65 $0.35 Open NBR 41.11 39.21 MAY 35 37 0.30 37.20 $0.30 Open BBBY 39.52 39.95 MAY 35 37 0.30 37.20 $0.30 Open PFCB 42.47 43.25 MAY 35 40 0.55 39.45 $0.55 Open GENZ 39.82 41.47 MAY 35 37 0.30 37.20 $0.30 Open IVGN 31.45 33.83 MAY 27 30 0.30 29.70 $0.30 Open SEE 41.62 43.29 MAY 35 40 0.50 39.50 $0.50 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Nabors Industries (NYSE:NBR) is on the "early-exit" watch-list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CAM 49.39 47.35 MAY 60 55 0.45 55.45 $0.45 Open DRYR 67.40 69.01 MAY 75 70 1.10 71.10 $1.10 Open? HCA 37.70 33.05 MAY 45 42 0.25 42.75 $0.25 Open VAR 49.04 53.54 MAY 60 55 0.60 55.60 $0.60 Open OIH 54.58 55.88 MAY 65 60 0.50 60.50 $0.50 Open BAC 71.34 74.91 MAY 80 75 0.60 75.60 $0.60 Open? GSK 38.09 43.45 MAY 42 40 0.30 40.30 ($1.20) Closed OEX 440.97 471.87 MAY 480 475 0.55 475.55 $0.55 Open WLP 76.80 76.47 MAY 90 85 0.50 85.50 $0.50 Open SYK 66.35 66.57 MAY 75 70 0.65 70.65 $0.65 Open IGT 79.55 87.28 MAY 90 85 0.55 85.55 ($1.73) Closed INTU 37.24 39.90 MAY 45 40 0.40 40.40 $0.40 Open? MCK 23.94 29.12 MAY 27 25 0.30 25.30 ($1.55) Closed NVLS 27.21 29.00 MAY 32 30 0.25 30.25 $0.25 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The big surprise this week was McKesson (NYSE:MCK) as the stock soared over 10% after posting a 43% increase in fourth-quarter net income on double-digit revenue growth in its pharmaceuticals and information-solutions segments. Needless to say, a "timely" exit or adjustment was necessary in the bearish credit spread and traders who chose to close the spread Wednesday morning (after the earnings report and the ensuing rally) endured a net loss of $1.50-$1.75, on a simultaneous order basis. The other candidates for early exit included GlaxoSmithKline (NYSE:GSK), which gapped higher during Thursday's trading and was closed at the end of the session, and International Game Technology (NYSE:IGT), which used Friday's market-wide rally to achieve a new "all-time" high. The bearish position in L-3 Communications (NYSE:LLL) has previously been closed to limit potential losses. Issues on the watch-list include Bank of America (NYSE:BAC), Dreyer's (NASDAQ:DRYR), and Intuit (NASDAQ:INTU). CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status BGEN 35.67 38.97 MAY 30 32 2.20 32.20 0.30 Open GILD 44.04 47.27 MAY 37 40 2.25 39.75 0.25 Open SLM 115.05 114.79 MAY 105 110 4.50 109.50 0.50 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status WMT 52.98 56.15 MAY 60 55 4.30 55.70 (0.45) Open? BSX 42.19 45.88 MAY 47 45 2.10 45.40 (0.48) Closed CCMP 42.68 43.80 MAY 50 45 4.30 45.70 0.70 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 $57 seems to be limiting its trading range. We will continue to monitor the issue for signs of further upside activity in the coming sessions. Boston Scientific (NYSE:BSX) has broken above a recent resistance area (near $44) on heavy volume and conservative traders should consider closing the position to limit potential losses. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status OVRL 15.99 17.48 MAY 17 15 0.10 1.00 Open? DCTM 16.09 19.98 MAY 17 15 (0.30) 2.25 No Play SMH 26.43 27.25 AUG 30 22 0.10 0.45 Open Documentum (NASDAQ:DCTM) did not offer the target entry price, but the position was very profitable for traders who paid a small debit to initiate the play. The suggested entry price was available in the Semiconductor Holdrs (AMEX:SMH) and the position has already achieved a favorable profit. SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Put Call Credit Value Status QQQ 25.51 28.28 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 30.74 JUL-30C MAY-30C (0.20) 0.70 Open ESI 29.11 30.00 OCT-30C MAY-30C 2.00 2.40 Open OCR 27.07 25.83 JUN-27C MAY-27C 0.60 0.40 Open MO 32.13 30.97 JUN-27P MAY-27P 0.95 0.45 Open ATN 23.73 18.75 JUL-25C MAY-25C 0.00 0.00 No Play FILE 13.75 15.39 JUL-15C MAY-15C 0.60 0.65 Open Biomet (NASDAQ:BMET) and ITT Educational Services (NYSE:ESI) are trading near maximum profit. Positions in Altria Group (NYSE:MO), which has already offered a small profit, and Omnicare (NYSE:OCR) were not available at the suggested entry prices, however we are tracking the plays at the higher initial debits. The "Reader's Request" calendar spread in Action Performance (NYSE:ATN) was not available as the issue gapped lower prior to Monday's session on news of a weak revenue outlook. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status LNC 29.88 33.05 MAY 30 30 3.00 3.70 Open? 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. ***** BZH - Beazer Homes $71.80 *** Homebuilders Rally! *** Beazer Homes USA (NYSE:BZH) designs, builds and markets single family homes in the following locations within the United States: Florida, Georgia, North Carolina, South Carolina, Tennessee, Arizona, California, Colorado, Nevada, Texas, Maryland, Virginia, New Jersey, and Pennsylvania. The company designs its homes to appeal primarily to entry-level and first time move-up homebuyers. The company's objective is to provide its customers with homes that incorporate quality and value while seeking to maximize its return on invested capital. Beazer's homebuilding and sales activities are conducted under the name of Beazer Homes in each of its markets except in Colorado (Sanford Homes) and Tennessee (Phillips Builders). BZH - Beazer Homes $71.80 PLAY (conservative - bullish/credit spread): BUY PUT JUN-60.00 BZH-RL OI=58 A=$0.50 SELL PUT JUN-65.00 BZH-RM OI=114 B=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.70 POTENTIAL PROFIT(max)=12% B/E=$64.45 ***** CECO - Career Education $60.52 *** Bullish Industry! *** Career Education Corporation (NASDAQ:CECO) is a provider of private, for-profit post-secondary education, with 51 campuses throughout the United States, Canada, France, the United Kingdom and the United Arab Emirates. The company also offers online programs through American InterContinental University-Online, its e-learning division. The company's schools have master's degree, bachelor's degree, associate's degree and a range of diploma programs in career-oriented disciplines. The company's schools offer educational programs principally in five major career-related fields of study: visual communication and design technologies, offered at 34 campuses; business studies, offered at 32 campuses; information technology, including Internet and intranet technology, offered at 27 campuses; culinary arts, offered at 10 campuses, and health education, offered at three campuses. CECO - Career Education $60.52 PLAY (conservative - bullish/credit spread): BUY PUT JUN-50.00 CUY-RJ OI=40 A=$0.40 SELL PUT JUN-55.00 CUY-RK OI=30 B=$0.85 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$54.50 ***** FDC - First Data Corporation $40.22 *** New 10-Month High! *** First Data Corporation (NYSE:FDC) operates in four major business segments: payment services, merchant services, card issuing and emerging payments. The company provides money transfer, official check, money order, electronic payment and other stored-value card services in its payment services segment; credit and debit card transaction processing services on behalf of merchants, check verification and guarantee services and also operates an automated teller machine network in the merchant services segment; card issuing and processing services for financial institutions issuing credit and debit cards and to issuers of oil/fuel, retail/private label, stored-value and smart cards in its card issuing services segment, and mobile payments, government payments and enterprise payment solutions in its emerging payments segment. FDC - First Data Corporation $40.22 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-35.00 FDC-RG OI=95 A=$0.30 SELL PUT JUN-37.50 FDC-RU OI=347 B=$0.55 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$37.20 ***** RCII - Rent-A-Center $65.35 *** Why Buy When You Can Rent? *** Rent-A-Center (NASDAQ:RCII) is a store operator in the rent-to-own industry. Rent-A-Center operates over 2,200 company-owned stores in 50 states, the District of Columbia and Puerto Rico. RCII's subsidiary, ColorTyme, is a national franchisor of rent-to-own stores with over 300 franchised stores in 42 states. The firm's stores offer consumer products including electronics, appliances, computers and furniture, and accessories under rental purchase agreements that typically allow the customer to obtain ownership of the merchandise at the conclusion of an agreed-upon rental period. These agreements cater to customers who have a temporary need, or who simply desire to rent rather than purchase, the merchandise. RCII - Rent-A-Center $65.35 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-55.00 RQG-RK OI=99 A=$0.45 SELL PUT JUN-60.00 RQG-RL OI=188 B=$1.00 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$59.40 ***** PG - Procter & Gamble $90.15 *** Trading Range? *** The Procter & Gamble Company (NYSE:PG) manufactures and markets more than 250 products to more than five billion consumers in 130 countries throughout the world. The company categorizes its business operations as follows: Baby, Feminine and Family Care, Fabric and Home Care, Beauty Care, Health Care, and Food and Beverage. The company acquired Clairol, a manufacturer of hair color and hair care products, from Bristol Myers Squibb in 2001. PG - Procter & Gamble $90.15 PLAY (conservative - bearish/credit spread): BUY CALL JUN-100.00 PG-FT OI=160 A=$0.15 SELL CALL JUN-95.00 PG-FS OI=2574 B=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$95.50 ***** NBR - Nabors Industries $39.21 *** Sector Slump! *** Nabors Industries (NYSE:NBR) operates in two primary business segments within the oilfield services industry, contract drilling and manufacturing and logistics. The company provides drilling, workover, well-servicing and related services on land and offshore in the lower 48 states of the United States (lower 48 states), Canada and Alaska, as well as international markets. The company also manufactures and leases (or sells) top drives, drilling instrumentation systems and rig-reporting software domestically and internationally, and provides oil rig construction, logistics services and marine transportation and support services in Alaska and the lower 48 states. NBR - Nabors Industries $39.21 PLAY (less conservative - bearish/credit spread): BUY CALL JUN-45.00 NBR-FI OI=1250 A=$0.30 SELL CALL JUN-42.50 NBR-FV OI=3122 B=$0.60 INITIAL NET-CREDIT TARGET=$0.35-$0.45 POTENTIAL PROFIT(max)=16% B/E=$42.85 ************* 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. ***** AXP - American Express $38.46 *** Recovery Underway! *** American Express Company (NYSE:AXP) is primarily engaged in the business of providing travel-related services, financial advisory services and international banking services worldwide. Through American Express Travel Related Services Company, the firm offers travel-related products and services including charge cards, card member lending products, travelers checks and corporate as well as consumer travel services. Financial advisory services and products include financial planning and advice, investment advisory services and various products, including insurance and annuities, investment certificates and mutual funds. Through American Express Bank, the firm provides private, financial institution and corporate banking, as well as personal financial services and global trading. AXP - American Express $38.46 PLAY (very conservative - bullish/debit spread): BUY CALL JUN-32.50 AXP-FZ OI=20 A=$6.30 SELL CALL JUN-35.00 AXP-FG OI=137 B=$4.00 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$34.75 **************** GENZ - Genzyme General $41.47 *** Aldurazyme 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 $41.47 PLAY (very conservative - bullish/debit spread): BUY CALL JUN-35.00 GZQ-FG OI=1781 A=$7.20 SELL CALL JUN-37.50 GZQ-FO OI=423 B=$4.90 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$37.25 **************** 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. ***** IBM - International Business Machines $87.57 *** Go Big Blue! *** International Business Machines Corporation (NYSE:IBM) makes and sells computer services, hardware and software. The company also provides financing services in support of its computer business. The firm's major operations comprise a Global Services segment; three hardware product segments (Enterprise Systems, Personal and Printing Systems, and Technology); a Software segment; a Global Financing segment; and an Enterprise Investments segment. IBM offers its products through its global sales and distribution organizations. The Company operates in more than 150 countries worldwide and derives more than half of its revenues from sales outside the United States. IBM - International Business Machines $87.57 PLAY (speculative - bullish/calendar spread): BUY CALL JUL-90.00 IBM-GR OI=32914 A=$2.70 SELL CALL MAY-90.00 IBM-ER OI=14728 B=$0.45 INITIAL NET DEBIT TARGET=$2.10-$2.20 INITIAL TARGET PROFIT=$0.60-$0.90 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** SLAB - Silicon Laboratories $30.17 *** Chip Sector Rally! *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells proprietary high-performance mixed-signal integrated circuits for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. The company's mixed-signal design engineers utilize standard complementary metal oxide semiconductor (CMOS) technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. SLAB - Silicon Laboratories $30.17 PLAY (speculative - bullish/synthetic position): BUY CALL JUN-35.00 QFJ-FG OI=124 A=$0.70 SELL PUT JUN-25.00 QFJ-RE OI=347 B=$0.60 INITIAL NET CREDIT TARGET=$0.05-$0.10 INITIAL TARGET PROFIT=$0.45-$0.90 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $750 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25). ***** ************************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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