The Option Investor Newsletter Sunday 05-18-2003 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: Expired Futures Market: Conflicting Signals Index Trader Wrap: What Me Worry? Editor's Plays: Competition is Good Market Sentiment: Least Resistance? Ask the Analyst: Shut down your account for vacation? No way! 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 5-16 WE 5-09 WE 5-02 WE 4-25 DOW 8678.97 + 74.37 8604.60 + 18.92 8582.68 +276.33 - 31.30 Nasdaq 1538.53 + 18.38 1520.15 + 17.27 1502.88 + 68.34 - .96 S&P-100 475.72 + 3.47 472.25 + .38 471.87 + 15.77 + 2.49 S&P-500 944.30 + 10.89 933.41 + 3.33 930.08 + 31.27 + 5.23 W5000 8989.85 +106.51 8883.34 + 49.28 8834.06 +308.17 + 59.04 RUT 414.67 + 1.14 413.53 + 5.86 407.67 + 19.17 + 4.80 TRAN 2419.31 - 42.87 2462.18 + 1.38 2460.80 +108.19 - 9.58 VIX 21.01 - 1.03 22.04 - 1.57 23.61 - 0.29 - .69 VXN 31.02 - 1.07 32.09 - 0.27 32.36 - 1.34 - 2.18 TRIN 0.93 0.83 0.66 1.95 Put/Call 0.52 0.82 0.71 0.87 *************************************************************** Expired by Jim Brown Another option expiration Friday has expired and traders were very eager to escape the week with no major losses. All the major indexes finished the week higher except for the transports, which lost some of the ground recently gained. It was a good week despite the repeated defeat at higher levels. Call it a consolidation week and chalk one up for the bulls. Dow Chart - Daily Nasdaq Chart - Daily Wilshire-5000 Chart - Daily If this week were a football game the economists would have lost. They had a lot of fumbles on bad news and each time the bulls recovered the ball and went on to score. The trend continued on Friday with the CPI headline number dropping -0.3% and the core rate holding at zero for the second month after only a +0.1% gain in February. Drops in energy were responsible for the larger than expected headline rate. The core rate has not seen two consecutive months of zero growth since the 1981/82 depression. No deflation? Tell that to the apparel makers after the eighth consecutive month of declines in prices for that component. Even the perennial rise in health care costs nearly broke even with the smallest gain of the year at +0.2%. The market reacted to the report with a gain at the open as the bad news bulls bought the potential for aggressive Fed action once again. Also depressing the sentiment before the open was the -6.8% drop in Housing Starts in April. This was about twice as bad as was expected. If you remember there was a +6.6% gain in March which was unexpected and this simply reversed that gain. The prior month was a -10.3% drop in February. Homebuilder stocks had rallied on last months number and they crashed on Friday's news. The biggest decline was in multifamily homes. There was a big jump in permits which would indicate a strong jump in starts for next month. Given the lower mortgage rates this month and the prospect for even lower rates ahead this number should rise next month. Traders bought the jump in permits and ignored the drop in starts. The biggest surprise for the day was the jump in Michigan Sentiment to 93.2 and much higher than the expected 87 and last months 86. The biggest jump came in the expectations component, which rose from 79.3 in April to 92.7 in May. The present conditions component actually dropped from 96.4 to 94.1 as relief over the end of the war waned. Current unemployment levels are depressing the present conditions component despite the gains in the market and the lower interest rates. Everyone has bought the second half recovery story hook, line and sinker and we are setting up for a major blow if that recovery does not come. Comments from Intel on Thursday about no recovery in sight appeared to be ignored. The bad news bulls did not know what to do with the good sentiment news and the market quickly sold off from spike to 8742. 8743 was the high for the year on the 12th. Coincidence? There was some negative news on Friday that did not get bought. Prudential downgraded GM to a sell and joined the auto bears with comments that targets would be tough to hit, prices are falling and incentives are becoming more costly. They also hit the auto parts manufacturers like JCI, VC, GNTX and DPH on expectations of lower sales. The big drop in the Semi book-to-bill on Thursday night pressured the Nasdaq but some semis drew "buy on weakness" comments from analysts. Traders faced with falling orders and a negative outlook were encouraged to load up. Dell was hit with downgrades on valuation and comments they were not bullish enough on their outlook, costs could not be cut significantly from here and there was only so much market share they could take from others without an economic rebound to fill the pipeline. Sometimes you just cannot win. I thought Michael Dell was not dodging the pointed questions very well on CNBC Thursday night but at least he did not say anything negative. Analysts saw the evasiveness and attacked like sharks on a blood trail. Fund flow numbers from last week showed a -$67 million outflow from equity funds. Outflows after two weeks at new market highs? Yes, there is still no real conviction from retail traders. Bond funds were still suffering from overloads of cash but that should be about to change. The U.S. may be an economic island of prosperity despite the current slump but it still depends on the world for consumption. Global economies are not healthy and with other countries already in recession it provides little comfort that the U.S. can avoid a similar drop. Current GDP numbers announced this week include Germany -0.2%, Italy -0.1%, Netherlands -0.3% and Japan flat at 0.0%. This is why there are increasing concerns about the Fed's coded mention of the "D" word in the last FOMC release. Surprise, it is not coded any more. Fed Vice Chairman Roger Ferguson came right out and put markets on notice that the Fed was on guard and ready to attack it in advance in a speech given Friday afternoon. Initially using the other "D" word, disinflation, he said "the possibility that the process of disinflation will cumulate to the point that price levels actually decline for a sustained period of time - that is, we enter into deflation - remains quite remote". He actually spoke the dreaded economic curse word. He said the Fed has to be on guard against such a development and preferred to act in advance of the event rather than in reaction to these economic developments. Analyst immediately were split on what their reaction should be. Should they be terrified that the Fed was now trying to prepare us for a period of deflation? Or should they be ecstatic that the Fed was going to act aggressively in advance to prevent the deflation from occurring. The speech hit the wires at 2:PM just as the markets were testing the highs of the day again and they quickly sold off into the close. Not seriously but they did sell off. There were also numerous large blocks of stock dumped in order on close transactions. 4.4 million in GE alone, an average of one million each of MSFT, INTC, KO, WMT. Somebody was definitely exiting large positions at the close. Bonds which had been selling off on the afternoon stock market rebound soared again pushing the yields to near the 45 year low for the week. Next week should be really exciting. The comments by Ferguson on Friday would seem to either guarantee a rate cut by the Fed either at or before the June-24th Fed meeting unless the economy actually began to improve. Either way the conventional wisdom would indicate a bottom in sight. According to the Fed Funds futures at noon on Friday there was a 66% chance of a 25 point cut by the June meeting. That chance has definitely increased with Ferguson's speech. There was another news item on Friday that the St Louis Fed and the San Francisco Fed had requested a cut in the discount rate in March. All of these items combined to push bonds to an even higher high for the week. Next week has almost no economic reports of importance. The only two being Leading Indicators on Monday and Treasury Budget on Tuesday. Neither of which are market movers. The weekly Jobless Claims on Thursday is a bigger mover than either of those. This means stocks will be left to move on stock news alone and there are almost no big name companies left to report. There are a few retailers on Mon/Tue with HPQ the headliner on Tuesday. CIEN leads the list on Thursday with ADKS, MRVL, SRNA and TIVO as the supporting cast. Definitely not a stunning week for earnings. The markets will be left to chew on existing economic snippets and cuss and discuss the stimulus versus recovery potential. The bad news bulls will have no bad news to feed on and limited potential for good news. With no economics and no earnings and too early for earnings warnings it is possible the focus will return to global events. As I am typing this there are several new terrorist warnings for different countries overseas. The trail back to Osama has heated up again and they are saying the global risk is increasing. Personally I think without an attack in the U.S. the markets will not suffer. Traders have become immune to global news. They have almost become immune to U.S. news. This should be a sign to some that things are about to change. If you read my wrap on Thursday night you know I am expecting an asset allocation shift out of bonds and into stocks soon. The ideal scenario was a consolidation pull back to provide the incentive for bond holders to feel better about taking profits and moving into stocks for the long run. I believe we are the crossroads and next week will be a defining moment for the markets. The Dow came to a sudden stop this week at the downtrend resistance from last August at 8725. It has held at this resistance all week and put in higher lows on Thr/Fri. There is a very strong bullish wedge building on the Dow with weaker confirmation on the Nasdaq and S&P. Traders have been buying the dips with abandon and ignoring all bad news as pro stimulus good news. With a news blackout next week it remains to be seen if we will forge ahead or pull back to rest. The VIX closed at a low not seen since last May-23 and just before the market began its long descent into oblivion. This May conditions are different. Prices are much lower, about 1500 points lower on the Dow. We are also well off our lows by 1300 points and three years into a bear market. Dead in the middle at down trend resistance. Time to raise, call or fold. Conditions are ripe for either direction. Weekly VIX Warning I view last week as a major win for the bulls. They held at new yearly highs and even managed to add a few points despite some very bad news. I think the market sentiment has changed. Trading volume is increasing, market breadth is increasing. There is not a lot of volume but there are simply no sellers. Despite the bad news this week and the negative markets on Friday the new 52 week highs were 562 and new lows only 26. This is a huge indicator of positive market sentiment even at these lofty levels. There may not be any conviction in terms of volume but there is definitely conviction in terms of breadth. Based on this updated $NYSI chart from last week they should be worried. This is the most extreme reading since Feb-1991 and should be a warning for anyone bullish. NYSE Summation Index Before I get too bullish I need to restate the bearish case for next week. We failed at the new highs for five consecutive days. The VIX is approaching the historical sell signal at 20. There is a very good case for a deflation spiral already underway. Intel's Andy Bryant said "I see no recovery in sight but I am hoping for a better 2004." IBM said technology was facing a tough time ahead even though conditions were stabilizing. Jobless Claims have been over 400K for thirteen straight weeks. Retail sales are in the tank. I could go on but you have heard it before. We are far from out of the woods but do traders really care? Markets discount future events very well. We have seen it time and time again. When the last recession occurred in the 2Q of 2001 the market was already rebounding as traders looked ahead 6-12 months. It eventually came back to bite them six months later but the theory remains the same. Investors are always betting on the future and not the past. With the aggressive Fed, stimulus coming out of the Senate and company costs cut to the bone the odds are good they are entering the discount period again. The challenge remains timing. We are entering the weakest period of normal years in the May-September time frame. Will institutions wait for the end of summer for the typical September/October dip to spend the big money? OR, will they dive in immediately once the bonds begin rolling over? The odds are probably both. I doubt we are going straight up and I doubt we are going to sell off very far. I think we may continue to be stuck in a range bound market between 8200-9000 until more economic data becomes available. Whoa! Big range. Yes, unless the bond market self destructs soon I think 8800-9000 is going to be a tough range to break. If we continue to get weak economic data the overseas money will continue to bleed from the market. Once really good economic news appears the starter gun will fire and we will be off to the races. Until then we are likely to remain stuck in the Twilight Zone below 9000. It may continue to be a buy the dip market but the dips could be lower soon. Dow 8500 should provide decent support unless the news turned really negative. The reason for the 8200 low end of the range is the tendency for markets to over react to sudden changes. Everybody may be bullish today but that can change in a heartbeat if the big boys decide to take profits and flush the weak holders out of the market one more time. While 8200 may seem like a long way off it is only a 38% retracement of the rally from the March lows. In summary, I think the worst is over. Traders looking at a 3.5% before tax yield on ten year treasuries will soon be starting to think stocks are very attractive for the long term. If a +75 point gain for the week was the worst damage we suffered after a week of terrible economics then what else is in front of us that can make it worse. The Fed is going out of its way to assure investors that better times are ahead even if they have to buy them at a high price. In short, don't get your hopes up for a blow out rally next week but you can stop looking over your shoulder for that next lower low. Even though I hate the bond watchers always telling me that the bonds are the key to stocks, this time I believe they are right. If the bond bubble bursts the resulting explosion could be very good for option investors. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Conflicting Signals by Jim Brown 05-18-2003 High Low DJIA 8682.96 - 34.17 8742.37 8682.96 NASDAQ 1538.53 - 12.85 1550.44 1534.35 S&P 500 944.30 - 2.37 948.65 938.60 NDX 1154.48 - 8.45 1162.64 1146.29 ES03M 944.25 - 2.00 949.75 938.00 YM03M 8675.00 - 22.00 8734.00 8628.00 NQ03M 1156.50 - 7.00 1166.00 1147.00 Daily Pivots (rounded to nearest point) R2 R1 Pivot S1 S2 DJIA 8788 8735 8690 8638 8593 COMPX 1557 1548 1541 1532 1525 ES03M 956 950 944 938 932 YQ03M 8785 8730 8679 8624 8573 NQ03M 1175 1166 1156 1147 1137 I cannot remember in the last five years when so many signals conflicted so completely. The stock market continues to rise despite a falling economy, falling dollar, rising gold and rising bonds. Repeated resistance levels have fallen prey to the ever rising indexes. However, despite excellent market breadth the market volume has been lethargic. It has been a broad based rally, which constantly built on successive dips but without any real excitement. Maybe this is why I continue to be skeptical despite obvious signs. The stealth rally, sounds silly when you look at a long term chart because the trend is definitely there and it has crept up inch by inch on the charts with analysts predicting its demise on a weekly basis. I am sure this week is going to be no different. Everyone will be focused on S&P 950, W5000 at 9000, Nasdaq at 1550 and thinking, how much longer can this go on without a real bout of profit taking? Currently our run has stretched since March 31st without any real profit taking. Nearly two months. Does that strike anyone else as nearly unbelievable? Since about April 10th the Dow has traded in a 200 point uptrend channel with no significant deviation. We have seen a strong revival of old fashioned dip buying. The point of this long-winded essay is that everyone has been straining so hard to see the reversal that each mini breakout has caught most professional traders by surprise. Three years of bearish bias is hard to overcome without any confirmation from the economy. If we were seeing decreasing Jobless claims each week or upticks in things like the ISM then traders could feel good about the rally and their bias would change. I think the fund managers have been watching the rally with one eye and the economy with the other. They cannot afford not to buy something at the risk of falling behind the competition but they are afraid to dip too far into their precious cash in case a bad case of reality hits. Hence the lack of volume. The market is drifting up not because there is strong buying pressure but because there is little selling pressure. The bears have become afraid to short in volume just like the bulls are afraid to buy in volume. This may be the week that the pattern changes. The Dow has butted heads with the down trend resistance for a week and failed to drop significantly. It closed just below 8700 after failing to hold over that down trend resistance at 8720 numerous times. Still close enough to strike but every attempt is quickly swatted back. If you look closely at the 15 min chart there is an almost imperceptible downward tilt since last Monday. Granted there are higher lows as well so there is not a real conclusion to draw other than it held near the highs on bad news. On the S&P the index is showing a little more strength and edging ever closer the electric fence at 950. Once over that level the bulls should feel a little more confident but there is significant resistance waiting. The longer we hold and continue to penetrate on an intraday basis above the 947 level the better chance we have of breaking out. Every upward spike takes out a few more sellers. The same story is true of the Nasdaq and 1550. We tried to take out that resistance six times last week and failed each time. The pattern of higher lows still exists and indicates buyers getting more confident at higher levels. The intraday range on thr/fri was only 15 points. This is slowly eating away at the sellers confidence. On the surface the previous comments would appear bullish. The lack of economic reports for the coming week should also be bullish as no bad news should be good news. However the markets have a strange way of doing exactly the opposite of what you expect. Just when you think they are going to take the ball and charge across the finish line the game changes. Just like the hype around the Matrix Reloaded movie this weekend. For weeks the intensity built with clips, interviews and appearances on talk shows. The theaters scheduled round the clock showings beginning at 12:01 AM on Thursday with some holding multiple sneak previews at 10:PM to add to the hype. The grand opening came and although the picture did well at the box office due to the 8500 simultaneous showings they hype was stronger that the movie. The picture was panned by many reviewers and according to Saturday reports attendance is already dropping below expectations. It would probably have been a decent movie without the hype but expectations had been pressed to the limit. As Spock would say, "having is not always as exciting as wanting. It is illogical but it is true." For weeks we have been watching the markets rise on little substance always in fear of the next economic report. Now that the worst is over until month end the natural tendency would be for a relief rally. Instead it is entirely possible we will get a sell the news (or lack of news) event. I actually see no indication of it yet other than the overbought extremes in things like the $NYSI and the VIX but everything appears to be lining up too perfectly for the bulls. When conditions appear too bullish the gremlins normally appear. The number one condition that could change the sentiment is of course the bonds. If they implode the markets should explode. The amount of cash pouring into bonds is astronomical in my opinion. With yields at 45 year lows there is nowhere to go. The potential is huge for an asset allocation event where funds start taking profits in bonds and shifting assets back into stocks. The only thing holding it back in my opinion is the level of the stock market. The ideal scenario would be for a dip in the market to further raise bonds one last time and give fund managers a little more comfort about not buying stocks at the high. The bigger the dip the more bond cash would switch sides. All these points are simply conjecture and about the only thing I can guarantee for this week is a major move. The odds of us closing around 8700 again next Friday are very slim. In the Sunday market wrap I suggested a future trading range of 8200-9000. A big range and we are much closer to the highs than the lows. Initial strong support is around 8500 with critical support at 8200. How does this relate to the futures? For the ES contract we have been seeing a slight uptick in the highs all week with higher lows. It clearly wants to test the 950 range soon. Every time we get close the market depth shows significant orders to sell in the 948-950 range. It will not be a simple trade through event and it will more likely be a challenge when it comes. Strong support is in the 935-938 range with 920 as the backup. That up trending support at 935 has been bought every time since April 1st. Without a significant change in market sentiment it should be bought strongly again. The NQ futures are actually showing a little more weakness than the ES which is probably due to the semi book-to-bill, Intel "no recovery" comments and the lack of "economic" bullishness by Dell. The 1165 level has proven to be a top all week and there is a slight down trend to the intraday highs since Tuesday. If there was going to be a weakness for next weeks markets I would think it would be the NQ. Uptrend support is still rising at 1150 and the bullish wedge has to either break out or fail soon. 15 points is not enough room for the NQ to trade and something is about to give. The Dow contract has support at uptrending support at 8600 and a solid top at 8715. Again, something has to break soon. 8450-8500 is second level support with 8250 the bottom. The Dows trend has been very strong and stable. This was the first week without a significant dip back to the longer term support in over a month. We are due and it could be soon. My outlook for next week is unbiased. I could build a case for either direction. The ideal scenario would be for an early dip to provide a last pop for bonds and an entry point for those still flat. An initial Drop to Dow cash 8600 would probably be bought with a secondary failure highly desirable to 8500. I suspect that dip would attract a lot of interest. Without a dip we could bleed up to strong resistance at 8800-8850, which would precipitate an even bigger sell off when it finally occurs. Dow Chart - 240 min Nasdaq Chart - 120 min ES03M Chart - 120 min NQ03M - 120 min YM03M Chart - 30 min While I claimed to be unbiased earlier the more I looked at the charts the more resistance I am seeing. Without SOME selling in bonds I would be very surprised to see a further rally. Time will tell. Monday after expiration is typically flat as positions are squared away and option premiums for June become the front month. Trading should pick up on Tuesday. See you in the Futures Monitor! Jim Brown ******************** INDEX TRADER SUMMARY ******************** What Me Worry? By Leigh Stevens THE BOTTOM LINE – While the market has been holding up quite well overall (and was again on the week), with more new highs than new lows as it chugs higher, there are technical warnings of a further correction coming. The Nasdaq which is leading the market, is in turn being led by the recovering semiconductor index (SOX), but the SOX has formed a bearish rising wedge on its chart, signaling a possible fall. Moreover, the Composite (COMPX) is at an overbought extreme and has fallen out of its hourly uptrend channel. Volume and price trends for the key bellwether stocks, including QQQ, are also suggesting that the market will retrace some of its gains. A bearish rising wedge pattern is also seen on the OEX daily chart, although in a less pronounced manner than the SOX. All in all, technically momentum has slowed significantly and the market is vulnerable to accelerated selling on negative news. Fundamentally, a real concern from Friday is the drop in the CPI and the implied inability for companies to raise prices and lift earnings. This and the decline in producer prices may raise further concern about a possible deflationary cycle and draw more comparisons between the U.S. and the stuck Japanese economy. FRIDAY'S TRADING ACTIVITY – Relative to deflationary or downward trends in prices - what might not be so good for stocks is heaven to bond holders. Treasury prices mounted a strong rally into the end of Friday trading. Bonds rose early on news that suggested a deflationary price trend, then fell on a round of profit taking and finally rallied again into the close. 10-year T-bonds rose 20/32 to 101 13/32, to yield 3.46%. The 30-year Treasury gained 23/32, to yield 4.45%. Bond market participants pointed to the release of the April Consumer Price Index or CPI by the Labor Department and which came after Thursday's release of the wholesale price report (PPI), which contracted by the widest margin in over 50 years. The April CPI fell 0.3% after a 0.3% increase in March. Falling post-Iraq conflict energy prices were behind the overall decline; the core index, which excludes food and energy items, held steady for a second consecutive month. The flat reading of core CPI in April meant the annualized rate of core inflation for the first four months of the year is now running at 0.6% compared with a rate of 2.0% during the second half of 2002 - quite a drop. The price declines fed into the market's current concern about deflation - despite economists that were suggesting caution in reading too much into the report. Concerns derive from the Federal Reserve's meeting of just over a week ago, in which policy makers said the chief risk to the economy is that already low inflationary pressures will fall even further. A significant aspect of the report was the unchanged reading for the core inflation rate. Unlike Thursday's PPI report, softness in the core was broadly based and may bring us closer to a further Fed easing - Morgan Stanley's chief economist noted that this becomes even more likely if the next jobs report is poor. What concerns me is that the Fed has less and less room to ease rates - they can come down to a Fed funds rate of .75% from the current 1.25%, but they aren't going to go to zero like Japan. Normally influential for the market, the U of M consumer- sentiment data was mostly ignored as the focus was on the inflation numbers. The midmonth report on consumer sentiment showed the preliminary estimate for May sentiment at 93.2, versus 86.0 in April and 77.6 in March. The reading came in well above economists' forecasts. The (positive) "expectations" number increased dramatically to 92.7, from 79.3 in April, which was up from 69.6 in March. In other economic data released Friday, housing starts fell by 6.8% in April to an annual rate of 1.630 million, with single- family starts down 3.0% to 1.356 million and multifamily starts down a much sharper 22.5% to 244,000. Consensus estimates were for a drop of 3.1%. The S&P 500 or SPX fell 2 points (0.3%) on Friday to 944. The Dow ended the day off 34 points at 8678.97. The Nasdaq Composite Index closed down 12.85 to 1538.53. The Russell 2000 Index (RUT) of small-cap stocks was off 1.7% on the day. Despite what looks like mostly a sideways and sluggish trend this past week, only the rate of upside momentum slowed - there were overall gains and it was the 5th straight week of higher highs for the benchmark SPX. The Nasdaq Composite and the S&P 500 each finished 1.2% higher for the week with the Dow up 0.9%. Volume totaled a decent 1.5 billion shares on the NYSE and 1.75 billion on the Nasdaq Market. New York Stock Exchange market breadth was positive with advancers slightly outnumbering decliners - 16.6 to 15.9. On the Nasdaq, decliners beat out advancers by 18 to 13. Trim Tabs estimated that equity funds that invest primarily in U.S. stocks got an infusion of $200 million versus inflows of $400 million during the prior week. Bond funds got inflows of $2 billion vs. inflows of $2.2 billion the prior week. You can see where the money is going primarily in the past two weeks. In sector action Friday, retail and brokerage fell, with the broker-dealer index dragged down by negative analyst comments. GM was a Dow decliner following a downgrade while Dell Computer dropped after releasing it last quarter earnings. Dell Computer (DELL) fell 3% on Friday, after the company reported Q1 results that only matched Wall Street targets - buy the hope (hype?) sell the fact I suppose. General Motors (GM) dropped 1.3% after Prudential lowered its rating on the Dow stock to a "sell" from a "hold," citing negative market share. Prudential - an influential research group as the firm does not have investment banking operations - also was cited as a key influence on brokerage stocks after cutting its rating on the industry sector (XBD) to a "market perform" rating from a "market outperform". Their report cited a belief that stocks in the group will remain in a trading range due to current valuations. Pru cut Merrill Lynch (MER) to a "hold" from a "buy" due to it current (P/E) valuation. Merrill fell 1.3% while Goldman Sachs ran up 0.8% and Morgan Stanley gave up 0.4%. OTHER MARKETS - Gold has been advancing again - go figure, what with no inflationary trend. Best I can figure, as far as basic economic reasoning, is the decline in the dollar causes gold to rise as the metal is priced in dollars. I find this tendency for gold to rebound unsettling for an overly bullish outlook on equities - Maybe the rebound in gold doesn't bode exactly well for equities in general, but anyone who played these stocks and the sector off from technical support as indicated above, has a nice bullish play going. Speaking of the dollar, it fell again on Friday. The greenback was down against the yen (to 115.91, from 116.5) and also slipped against the euro, which changed hands at $1.1582, compared with $1.1390 the week before. MY INDEX OUTLOOKS – The Semiconductor Index (SOX) daily chart leads off the indices - The rising wedge pattern is outlined above. This usually signals a correction ahead as lower highs and higher lows tend to suggest the exhaustion of buying. I anticipate a correction that might take SOX back to its main (up) trendline, intersecting currently around 318. S&P 500 Index (SPX) – Weekly, Daily & Hourly charts: Resistance appears on the charts as likely in the 950 area, then at 960. I don't see how SPX will break out above 960, at its prior weekly closing peaks, without a decline in the overbought extreme suggested by the 8-week and 14-day RSI readings (see the weekly and daily charts below). Overbought oscillator readings are never an "automatic" sell. But they do suggest where a market is vulnerable to shocks. Given that the trend is up, traders can wait to see if there are definite signs of a breakdown in the trend such as a decline through a prior low - around 937 in the case of the hourly chart. The other strategy is to buy puts with SPX around 950, or up at 960 if there is a further upswing, and exit on a close above this same resistance say by a 5% margin. On this later trading strategy, it is my preference to buy calls at support or puts at possible major resistance before their premiums get inflated - as they do as soon there is a definite signs of breakdown or breakout. I suppose you could call this the "assumed" top or assumed bottom. Taking this approach also depends on how many factors line up to suggest the probabilities of a correction or reversal to the trend. And a profitable outcome also depends on adherence to exiting on a decisive penetration of such a well-defined line of resistance or support. By the way, the end of the current bear market is not really confirmed on even a preliminary basis, until we witness the S&P 500 (SPX) close above 960 on the week and then maintain that level as support on subsequent pullbacks. S&P 100 Index (OEX) – Daily & Hourly charts: I mentioned a slight upward sloping or rising wedge type pattern that can be seen on the OEX daily chart. A much more pronounced and "classic" pattern is seen on the SOX chart above. But this pattern and the fact the current levels are pretty extended above the key moving averages, goes suggest a correction back down toward the "mean" so to speak - in this case, back toward the moving average. Its pretty common to see a re-test of the moving average later on, such as is seen on the chart (more than once) where prices rallied to, but not above, the 200-day average. Resistance implied by the top of the hourly channel and by prior daily highs comes in around 482-485. Near support is at 473, then more key technical support in the 467 area. A break of 465-467 would suggest a deeper correction such as back to 450. On a longer-term trend basis, I would also note that last week saw the first bullish upside crossover of the 50-day average above the 200-day. Market "sentiment", at least as measured by my equities option call to put volume ratio (seen below the daily chart above, left), is neither at a bullish or bearish extreme. It seems that the current rally is more led by the institutional fund managers who need to put money to work as the market rises rather than by a bullish "public" - typically, they have little faith in stocks at the end of a bear market if this is that. Nasdaq Composite Index (COMPX) – Weekly, Daily & Hourly: The Composite or COMPX has cleared 1520 on the weekly chart, which is a bullish development. Now the question becomes whether it can maintain this level. Resistance, once broken, should "become" support to be a valid breakout and bear trend turnaround. As mentioned with the S&P, COMPX is overbought. The bearish signs of possible failing (upside) momentum is that prices are slipping below its uptrend channel. This might signal a pullback to at least initial support around 1480-1490. It would take a close above 1552-1555, and the ability to maintain this level, to suggest a renewed up leg. Another bearish omen for the Composite, beside the waning momentum and overbought condition is the bearish Price/RSI divergence that has developed, as is highlighted on the daily chart above. Prices have made new highs but the RSI has registered a lower low. Such divergences are so often a sign of an upcoming trend reversal - at least signaling a deeper correction than has come before. Given the factors I've discussed above, I suggest bearish trading strategies by buying NDX or QQQ puts on further rallies in the Composite. Basis the Composite, I can foresee a move back down to at least 1485-1490, from recent highs around 1550. QQQ charts - Daily & Hourly: As prices have moved higher on balance, On Balance Volume or OBV is suggesting that volume is picking up on down days, not on up days, which does not maintain a strong bullish picture. 29.00 is near resistance, then 29.50. Short the stock in this zone. Near support is at 28.00 to around 27.60-27.75 currently. A close under 28 would be bearish, suggesting a possible correction back to the 27 area or to as low as 25.50-26. I am not suggesting that a correction to this area would spell an end to a bullish trend - a correction to this degree would still fall within a "normal" correction in an emerging uptrend. QQQ is registered an overbought extreme on the daily stochastic, although not in terms of the hourly model (measuring 21 hours) so another rally may well develop - to my favor, as I would rather short a further rally than take out a new long position on another minor price dip. I believe that the risk (to profits) is on overstaying on the long side currently. Good Trading Success! ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** Competition is Good Unless it is in your market where you were the sole manufacturer for several years and derived a large part of your income from that single product. I am speaking about QCOM. With the announcement this week that TXN, Nokia and STM would all start making chipsets that compete directly with the CDMA chips that QCOM produces. Qualcomm produces 90% of all CDMA chips. Unfortunately they sell a large portion of those chips to Nokia. I am guessing those days are about over and QCOM is going to be fighting for orders to anybody else making phones. Could be a tough battle for a market where QCOM could name its price for the last three years. QCOM grossed a 30-40% margin on CDMA chips in the past and that could be about to change. I am far from a telecom analyst but I think the weakness in QCOM since the announcement is just the beginning. With the summer doldrums ahead of us the competition for investor dollars could be fierce and I cannot see any reason to be chasing QCOM until the real impact of the new manufacturers is known. These are not little guys and they would not be entering the market if they thought they could not take market share from QCOM. This play does not have a lot of explanation behind it and it should be easy for everyone to understand. There was a small bounce to $30.70 on Friday but the down trend reasserted itself by the close and I think we are seeing a quick buying opportunity for the puts above $30. The puts I am considering are the July-$27.50 and the Oct-$27.50. The July is cheap at $1.15 but we only have 60 days and we can only get about half way through the summer. I do not have a confirmed earnings date for July but based on the last earnings on Apr-23rd I would say something in the July-23rd range. That means any negative guidance with the July earnings would come after the July put had expired. That makes the October $27.50 put at $2.20 my target. This gets us through the summer and the normally dreadful September period. If we are lucky we might get an earnings warning in September. Qualcomm's trend has not been all that exciting to begin with so the bounce on Friday may be our last chance to get in over $30. BUY OCT-$27.50 PUT AAW-VY $2.20 close on Friday QCOM 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. DIA - Strangle $86.99 5/11/03 ($86.17 when recommended) Close but no cigar. Everything went according to plan with the exception of the market selling off on bad news. We entered the May-$87 calls on Monday morning for 40 cents followed by the May-$85 puts also at 40 cents. We sold the calls for 95 cents on Monday afternoon when the Dow failed at 8740. I would have been in good shape to just let it ride but I averaged down with some more May-$85 puts at 20 cents making my average cost 30 cents and my net out of pocket five cents. (-80, +95, -20 = 5) The Dow low on Wednesday was 8632 and the puts never made it back over 25 cents before the market rebounded again. The bad news came in as expected on Thursday but there was no drop. It only cost me a nickel to play so I can't complain too loudly. IVX - Calls - $17.80 4/27/03 ($15.28 when recommended) Still no pullback to $14 and we are setting new highs. Our $2.00 calls closed Friday at $3.80. Cancel the orders for the additional contracts and set a stop loss at $16.75 on the play. http://members.OptionInvestor.com/editorplays/edply_042703_1.asp QQQ - Put - $28.69 4/20/03 ($26.82 when recommended) The QQQ puts expired worthless. We had a cost basis of 15 cents but they never came back. The QQQ has been holding just below $29 despite the bad news. At least the losses was minimal but that is a slim consolation. http://members.OptionInvestor.com/editorplays/edply_042003_1.asp http://members.OptionInvestor.com/editorplays/edply_041303_1.asp CY - Cypress Semi Call - $9.78 ($10.29 week high) 3/2/03 ($6.41 when recommended) http://members.OptionInvestor.com/editorplays/edply_030203_1.asp EMC Call from Feb-2nd $9.85 ($10.40 week high) ($7.70 when recommended) http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball RFMD remains the worst performer but several others are beginning to slip into the green. Only down $295 this week and still eight months remaining. 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 ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Least Resistance? - James Brown Last week held a ton of economic data and looking back at the numbers we don't see anything that really suggests the economy is on the comeback trail. Sure, there are bits and pieces that might suggest some improvement but overall it's as if the U.S. economic machine has stalled. The CPI numbers showed virtually no growth. The housing starts were twice as bad as expected. The semiconductor book to bill ratio was disappointing. So what's keeping the market rally alive? That is if you call the INDU's 74-point gain and the NASDAQ Composite's 18-point gain on the week a rally. It seems like we just drifted higher. The answer is still investor hope. Hope that the worst really is behind us. Yet surprisingly it's not the individual investor. Fund flow numbers actually showed a $67 million out flow from equity funds. Meanwhile fund managers appear to be doing a lot of buying. That's what some reports hinted at after looking through the latest round of SEC filings. As one Intel VIP said this week, they're encouraged about the second half but cautious about tomorrow. If investors get the feeling that the second half recovery is going to fail to show up for the third year in a row, then this rally could be over real quick. Fortunately, the sentiment numbers this last week were stronger than expected. Let's hope they stay that way. Let me correct myself. I stated that the individual investor isn't contributing to the rally. That's not true. Yes, there were net outflows from equity funds but Schwab came out this week and said that April (and so far May as well) trading activity was vastly improved. It's great to see the comeback of the small trader but I'm concerned it is exactly at the wrong time. The markets are way overbought. The bullish percent numbers have almost all reached the "70" mark, which denotes overbought and risk-reward right now favors the bear, not the bull. Unfortunately for the bears, they've been getting run over by the bulls these last six to eight weeks and the bears may be a little gun shy. There has been so many conflicting signals lately that something has to give. Wall Street seems perplexed that gold and oil and equities are all going up at the same time while the dollar drops and the Fed worries about deflation and higher unemployment. Jim hinted that we could see another massive round of asset allocation out of bonds, with yields near 55 year lows, to equities. Yet at the same time the VIX is approaching its historic market-top signal levels near 20. Frame the entire picture with contrasting historic trends of May-October being the worst six months of the year and the third year of a Presidential term almost always being bullish. It would seem that the path of least resistance has been up but I suspect we'll get some resistance soon. We just don't know where it will come from as the economic calendar is pretty light this week. To throw another wildcard in the deck, the recent round of terrorist bombings (Riyadh, Israel, and Morocco) will not be a positive influence on the global markets. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 8679 Moving Averages: (Simple) 10-dma: 8622 50-dma: 8295 200-dma: 8325 S&P 500 ($SPX) 52-week High: 1107 52-week Low : 768 Current : 944 Moving Averages: (Simple) 10-dma: 936 50-dma: 887 200-dma: 883 Nasdaq-100 ($NDX) 52-week High: 1351 52-week Low : 795 Current : 1154 Moving Averages: (Simple) 10-dma: 1147 50-dma: 1074 200-dma: 1005 ----------------------------------------------------------------- Same old song? Yes, but the volume is getting louder and offering a greater warning as the VIX approaches the 20 level. CBOE Market Volatility Index (VIX) = 20.83 -0.84 Nasdaq-100 Volatility Index (VXN) = 31.02 -1.16 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.54 1,013,415 543,432 Equity Only 0.40 851,224 340,036 OEX 0.86 53,400 46,142 QQQ 0.74 89,152 65,886 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 59.6 + 1 Bull Confirmed NASDAQ-100 78.0 + 1 Bull Confirmed Dow Indust. 70.0 + 3 Bull Confirmed S&P 500 68.6 + 1 Bull Confirmed S&P 100 67.0 + 2 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 0.78 10-Day Arms Index 1.01 21-Day Arms Index 1.04 55-Day Arms Index 1.24 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 1396 1241 Decliners 1468 1792 New Highs 210 130 New Lows 16 8 Up Volume 983M 730M Down Vol. 790M 977M Total Vol. 1792M 1743M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/13/03 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 Just as the major averages barely moved on the week, we're seeing the same hesitation in the futures positions. No one is shifting any money around as they wait for the next move. Commercials Long Short Net % Of OI 04/22/03 430,758 423,295 7,463 0.9% 04/29/03 432,710 419,245 13,465 1.6% 05/06/03 429,519 419,545 9,974 1.2% 05/16/03 429,028 419,553 9,475 1.1% 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 04/22/03 147,068 140,153 6,915 2.4% 04/29/03 149,616 154,782 5,166 1.7% 05/06/03 150,345 148,681 1,664 0.6% 05/16/03 151,883 148,479 3,404 1.1% 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 Again, this is a repeat of what we're seeing with the S&P 500 futures. There is little change in the overall net long or net short positions for either the commercials or the small trader. Commercials Long Short Net % Of OI 04/22/03 124,200 437,597 (313,397) (55.7%) 04/29/03 134,751 472,247 (337,496) (55.6%) 05/06/03 169,388 447,330 (277,942) (45.1%) 05/16/03 178,679 452,727 (274,048) (43.4%) 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 04/22/03 395,596 40,480 355,116 81.4% 04/29/03 459,687 50,030 409,657 80.4% 05/06/03 423,918 55,932 367,986 76.7% 05/16/03 421,540 57,483 364,057 75.9% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 Hmmmm.. now we're seeing some movement here. Commercials have lightened up on their bullish positions while small traders have lightened up on their shorts. Is this forecasting a potential trend change in the NDX? Commercials Long Short Net % of OI 04/22/03 45,647 38,531 7,116 8.5% 04/29/03 45,497 37,557 7,940 9.6% 05/06/03 46,327 38,216 8,111 9.6% 05/16/03 43,539 39,046 4,493 5.4% 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 04/22/03 10,929 20,376 ( 9,447) (30.2%) 04/29/03 11,219 19,760 ( 8,551) (27.6%) 05/06/03 13,482 21,010 ( 7,528) (21.8%) 05/16/03 11,706 16,104 ( 4,398) (33.0%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL We're not seeing a lot of change here either. Yes, the commercials added to both long and short positions and the small trader beefed up their shorts but there is nothing to suggest a change in sentiment. Commercials Long Short Net % of OI 04/22/03 16,942 14,750 2,192 6.9% 04/29/03 17,927 14,083 3,844 12.0% 05/06/03 16,772 13,568 3,204 10.6% 05/16/03 18,265 14,396 3,869 11.8% 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 04/22/03 8,081 8,275 ( 194) ( 1.2%) 04/29/03 7,081 8,604 (1,523) ( 9.7%) 05/06/03 7,829 8,642 ( 813) ( 4.9%) 05/16/03 7,873 9,058 (1,185) ( 6.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *************** ASK THE ANALYST *************** Shut down your account for vacation? No way! You mentioned you might open a newspaper while visiting Dorothy but certainly not watching the markets. I was wondering with the summer coming up whether you could pen an education piece on what to do before you go on vacation. I.e., do you close all positions or keep them open with stops or keep only those, which are risk capital with no stops. Evidently, there are other people in this world that are traders and investors, that will pull themselves away from the markets for a week or two and go on vacation. Here's the post I made in the OptionInvestor.com Market Monitor the evening I went on vacation. All positions were also previously profiled positions in either the Market Monitor or intra-day commentary, were also positions I held/hold in my own account, and how I looked to handle things while on vacation. In "pink," I've reflected on my state of mind, and quickly review. Market Monitor Post - 05/06/2003 11:35:51 PM EST I can only answer the subscriber's question as it relates to me personally, but I would have to start with this. First, be true to yourself and ask yourself this question. Am I the kind of person, that can enjoy my vacation, not think, no...make that WORRY, about the markets or my open positions, to the extent that it will RUIN my hard-earned vacation, or would RUIN a special time that I get to spend with family and friends. When I'm sitting in insect-infested woods, taking in fresh air on my vacations, I'll think about the markets, but I'll be darned if I'll carry a large position in my account and then sit and worry about it while listening to a turkey gobble or elk bugle. If your answer to the above question was ... "No, I will worry or want to steal away from family and friends to check the markets 2 or 3 times a day while I'm on vacation," then close out your open positions and have a wonderful vacation! Life is too short to not enjoy time off with your family and friends. If however, you view things a little differently, then here's my take on things. First of all, EVERYONE that has read anything I've written as it relates to RISK management, ESPECIALLY as it relates to the use of options to better MANAGE THAT RISK, should know that I DO NOT OVERLEVERAGE in options (if I'd only buy 100 shares of the underlying stock, then I'd only buy 1 options contract), and will tend to buy at LEAST 2-3 months expiration. This all goes back to an article I wrote regarding "Your account is your business" in this column on Sunday, November 17, 2002. This is my (Jeff Bailey's) foundation that I operate my business on. Now. Some proprietors choose to shut down their flower shop or when they're gone. They KNOW that by doing so, they will not have had the opportunity to make any money while they were on vacation. The store can get robbed while they're gone, but there's some comfort in not worrying about things and just closing the doors and considering it an opportunity cost. For me, I'm not that type of person. If you're a STOCK trader/investor and looking to go on vacation, then I'd do one of two things. First of all, the trade that is open in your account, you've ALREADY established a stop level and profit level BEFORE you initiated the trade. As long as you are COMFORTABLE with the capital exposed (100 shares of a $25 stock is $2,500 of RISK capital exposed), and do not feel the stock you're trading has a high likelihood of "gapping" against your position (if you're long and don't feel it would stand a great chance of gapping below your stop price based on historical trading) then by all means, place a stop loss limit, or stop market order on the downside. Stop limit orders: This is a stop that a trader would place where the "limit" is the price you place with the broker. For instance, if I place an order that says... "stop limit $22.50" then if the stock were to gap down to $22.00, my order would NOT be filled, but would become active and if the stock were to trade $22.50 to $22.51, then my orders should be triggered as sold. Stop market: This is a stop loss order that a trader would place where the "market" means that the stated price or ANY PRICE below (for bullish position) becomes the price your order could be filled at. For instance, if I place an order that says... "stop market $22.50," Then if the stock "gaps" below $22.50, then my order immediately becomes a MARKET order and my broker sells the stock for me at whatever the market price is at. Ugh! Is what a stock trader might say. I'm not sure I like either of those choices. You're thinking.. "if I weren't on vacation, and able to watch my trades like a hawk, I'd be much better able to assess things, and make a much more informed decision when it comes to a gap situation." Ahhhh! But now think about OPTIONS as a RISK mitigating instrument! Especially when you're headed out on vacation! Remember! OPTIONS were created as instruments to mitigate and HEDGE risk! OPTIONS were NOT created to used as a tool for SPECULATION. Oh... you can still speculate, but risk to call/put buyers is ALWAYS limited to the price of the option. Let's say you do own 100 shares, or 1,000, you pick the size, of a $25.00 stock and the stock still has room to your upside target (for a bullish trade) and your still comfortable with the $22.50 stop. The only thing you're NOT COMFORTABLE with is the fact that you are about to embark on a wonderful vacation and you just don't want to worry about this stock and potential "gap down" type of situation. "Gosh darn it!" you proclaim. I think this bugger still has some upside to my bullish target. Why the heck did I have to plan this vacation at such a critical time! Hmmmm.... If you are willing to risk $2.50 per share on a $25.00 stock to your stop of $22.50, then it might make sense to do this. What if you closed out your 100 shares, or 1,000 shares right now at $25.00, took $2,500 or $25,000 of RISK CAPITAL out of the MARKET and then turned to the OPTIONS MARKET to mitigate your RISK? Then bought either 1 contract (100 shares), or 10 contracts (1,000 shares) of an option, priced close to $2.50 per contract? Boom! You've instantly assessed your risk as it relates to an underlying stock position, shifted that RISK to the options market, but NOW you've still got bullish exposure to 100, or 1,000 shares (the most you can lose is $250 per contract right?) and you can enjoy a worry free vacation! You've taken care of EVERYTHING, as long as you have NOT OVERLEVERAGED in your options! Think about it. Is that $250.00 for one contract any different than a $22.50 stop from $25.00 on 100 shares? The ONLY difference really, is that to MITIGATE your risk, allow yourself opportunity to further profit, while still being able to enjoy your vacation, is the cost of 2 commissions. Let me say this. If a trade EVER comes down the commissions you pay, then STOP trading immediately. NEVER base a buy/sell decision on commissions. If commissions are that bothersome to a trader, then I don't think you should be trading. The IRS treats commissions as an EXPENSE and is accounted for as capital gains/losses. As a business owner in your account, it is simply a cost of doing business as a trader/investor. That's it! Now, you don't have to worry about a stop loss in the option. After all, who in their right mind trades options with stops to begin with? Ooops! You and I both know who trades stops with their options. It's the silly options trader that OVERLEVERAGES in their options trading. Once you've properly positioned yourself in a call or put option contract, have only exposed an equivalent amount of capital as it related to the original risk capital to a 10% stop in the underlying stock, all you have to do now is place a profit limit order with your broker on the call option! Hey, that's the way you've learned to trade options anyway isn't it? For example: Let's say your target for that $25.00 stock is $31.00. If you "switch" from the stock to an "in-the-money" or "at-the-money" $25.00 call option, then you KNOW for a fact that if the stock trades $31.00 then the option should be worth $6.00 (give or take the spread, say within $0.40). You see. I (Jeff Bailey) think a trader/investor can still utilize the options market to help mitigate risk, but still hold a position in a stock/index you feel has profitable potential, even while you're on vacation. Sometimes, I think we all get a false sense of security, with the thought that by us actually watching things on a minute by minute basis, that we somewhat have ULTIMATE CONTROL on how things play out, and that if I go away for a week or two, then I don't stand a chance to make money. I don't think my being here to watch my account the past several days, would have had any impact on getting stopped out of Intel (INTC), or made the QQQ go lower, or had my GERN Sept. $5 calls trading $2.90. However, whatever did happen, I was comfortable enough with things to fully enjoy my vacation. Now, before I let you go, to enjoy what's left of the weekend, I might also ask that you take some of what was written above, and then quickly review an Ask the Analyst column I wrote on April 6, 2002 titles "Breaking a losing streak." Only read the second column as it relates to this article. While I would in NO WAY equate a vacation, to an unexpected/unplanned trip to the hospital for an extended period of time, there's always a lesson to be learned. Whether its life in general, or a vacation, ALWAYS try and expect the unexpected, and think RISK! When you go on vacation this summer, you've got 2 risks to measure. One risk is RISK to CAPITAL. The second risk is OPPORTUNITY RISK. Don't let a vacation "ruin" your trading account potential. At the same time, learn to use options as a RISK management tool, that allows you're account to still potentially profit, while you're enjoying your well-earned vacation. Life's short! Trade smart! Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of May 19th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- A Agilent Technologies Mon, May 19 After the Bell -0.15 BAB British Airways Mon, May 19 Before the Bell N/A CPB Campbell Soup Mon, May 19 Before the Bell 0.27 LTD Limited Brands Mon, May 19 Before the Bell N/A LOW Lowe's Companies Mon, May 19 Before the Bell N/A MDT Medtronic Inc. Mon, May 19 -----N/A----- N/A JWN Nordstrom Mon, May 19 After the Bell N/A TOY Toys R Us Mon, May 19 Before the Bell N/A ------------------------- TUESDAY ------------------------------ BLI Big Lots, Inc. Tue, May 20 Before the Bell 0.08 BJ BJ's Wholesale Club Tue, May 20 Before the Bell 0.16 BGP Borders Group Inc. Tue, May 20 After the Bell -0.05 ERF Enerplus Res Fund Tue, May 20 -----N/A----- N/A HPQ Hewlett-Packard Tue, May 20 After the Bell N/A HD Home Depot Inc Tue, May 20 Before the Bell N/A MBT Mobile Telesystems Tue, May 20 -----N/A----- N/A ROST Ross Stores, Inc. Tue, May 20 Before the Bell N/A SKS Saks Incorporated Tue, May 20 Before the Bell N/A SPLS Staples, Inc. Tue, May 20 Before the Bell N/A ----------------------- WEDNESDAY ----------------------------- ADCT ADC Wed, May 21 After the Bell -0.03 BCM Can Imp Bank of Comm Wed, May 21 -----N/A----- N/A EV Eaton Vance Corp. Wed, May 21 Before the Bell 0.39 OOM mm02 Wed, May 21 Before the Bell N/A NGG National Grid Transco Wed, May 21 Before the Bell N/A PETC PETCO ANIMAL SUPPLIES Wed, May 21 After the Bell N/A RL Polo R Lauren Corp Wed, May 21 Before the Bell N/A SNPS Synopsys Wed, May 21 After the Bell N/A TLB Talbots Wed, May 21 Before the Bell N/A ------------------------- THURSDAY ----------------------------- ADSK Autodesk, Inc. Thu, May 22 After the Bell 0.05 BKS Barnes&Noble Thu, May 22 Before the Bell -0.09 BTY BT Group PLC Thu, May 22 Before the Bell N/A CBRL CBRL Group Thu, May 22 -----N/A----- 0.45 CIEN CIENA Corporation Thu, May 22 Before the Bell -0.12 CLE Claire's Stores Thu, May 22 -----N/A----- 0.26 FL Foot Locker, Inc. Thu, May 22 Before the Bell 0.27 GPS Gap Inc. Thu, May 22 After the Bell 0.21 HRL Hormel Foods Corp Thu, May 22 Before the Bell N/A KUB Kubota Limited Thu, May 22 Before the Bell N/A MRVL Marvell Tech Group Thu, May 22 After the Bell N/A PDCO Patterson Dental Thu, May 22 Before the Bell N/A TKP TECHNIP COFLEXIP Thu, May 22 -----N/A----- N/A TD Toronto Dominion Bank Thu, May 22 -----N/A----- N/A UU United Utilities Thu, May 22 Before the Bell N/A WSM Williams-Sonoma Thu, May 22 Before the Bell N/A ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable NYB NY Bancorp 4:3 May 21st May 22nd FNF Fidelity National 5:4 May 23rd May 27th AMN Ameron Intl 2:1 May 27th Apr 28th AMFC AMB Financial 5:4 May 29th Apr 30th FLIR FLIR Systems 2:1 May 29th May 30th ERES eResearchTech 2:1 May 29th May 30th -------------------------- Economic Reports This Week -------------------------- Whew! After last week's flood of economic reports, this week looks almost empty. We have leading indicators on Monday and the weekly initial jobless claims on Thursday. ============================================================== -For- Monday, 05/19/02 ---------------- Leading Indicators (DM) Apr Forecast: 0.0% Previous: -0.2% Tuesday, 05/20/02 ----------------- Treasury Budget (DM) Apr Forecast: $52.0B Previous: $67.2B Wednesday, 05/21/02 ------------------- None Thursday, 05/22/02 ------------------ Initial Claims (BB) 05/17 Forecast: N/A Previous: 417K Friday, 05/23/02 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ We got trailing stops! 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The Option Investor Newsletter Sunday 05-18-2003 Sunday 2 of 5 In Section Two: Market Watch: Break Outs & Break Downs! Daily Results Put Play of the Day: JCI Dropped Calls: KLAC Dropped Puts: PG ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************ Market Watch ************ Break Outs & Break Downs! Wellpoint Health Network - WLP - close: 81.05 change: +3.09 Wow! We've been watching WLP and its rival UNH for weeks now. Both gave traders a 38.2% retracement from its Feb-April rally before bouncing higher again. The latest trend of higher lows has given birth to twin breakouts above resistance for WLP and UNH. We like how shares of WLP traded sideways above the $80 mark intraday on Friday. We also like how WLP has more room to run on a percentage basis, before hitting old highs, than UNH. A pull back to $80.00 looks like a tempting entry to buy calls for WLP. Chart= --- General Electric - GE - close: 27.85 change: -0.63 Once thought of as a proxy for the broader market as a whole, shares of GE have fallen out of favor with investors. The stock has been suffering from a trend of lower highs since mid-April and the Friday close under $28.00 looks like a recipe for a bearish play. Chart= --- Borg Warner - BWA - close: 56.57 change: -2.62 BWA is another auto stock that was hit hard by the Friday downgrade of the sector (namely GM). Shares of BWA had been trying to break out above the $60.00 level for weeks but the reversal on Friday may have doomed it to retest support at its 200-dma or even the $50.00 level again. Another failed rally, this time at $58.00, might be an entry to go short. Chart= --- Viacom - VIA - close: 45.70 change: +0.60 The move over $45.00 actually breaks a very long-term descending trendline of resistance on VIA's weekly chart. However, it's still very fresh and could be reversed. Also watch for resistance at $47.50 from last fall. Chart= --- Pixar - PIXR - close: 53.20 change: -1.07 Four days of declines have brought shares of PIXR to its long- term rising trendline of support. This could be make or break it time for the stock. A bounce here and bulls might push it back to $60.00. A break here and who knows when the selling stops? Chart= --- Exelon Corp - EXC - close: 56.07 change: +0.72 This electric utility company is breaking out to new 52-week highs. Helping lift the entire sector is the President's stimulus package that has been modified by the Senate but still includes, at least a temporary, ban on dividend taxes. Utilities are famous for paying strong dividends and this will increase investor interest as the effective yields may have just doubled. Chart= --- eBay Inc - EBAY - close: 99.19 change: +1.11 Gosh, I still can't get anyone in the office to volunteer and take one for the team by shorting EBAY at natural psychological resistance of $100.00. As Jim likes to put it, no one wants to step in front of the EBAY train. Aggressive bears could open short positions here with a very tight stop just north of $100.00. That seems like a low risk entry. You either lose a little or you win big. The problem is bears have been trying to pick "low risk" entries since $60.00 last October. Chart= =================================== RADAR SCREEN - more stocks to watch =================================== UNH $95.41 - We came very close to adding UNH or WLP to the OI call list this weekend. Keep an eye on UNH. The next resistance level is $100.00 and the stock has a 2:1 split coming soon. SUP $37.14 - The auto sector downgrade on Friday hit the entire group hard and SUP is no exception. The recent failures at $40.00 and now the close under the 50-dma look like a set up to test recent lows. GPI $27.94 - Investor fear knows no limit and the downgrade of GM on Friday actually showed up in profit taking for GPI as well. The breakdown in the rising trend could call for a pull back to $25.00. SEPR $20.61 - The bullish trend for this drug/biotech company has remained intact. Entries near $20.00 with a tight stop (19.44 ?) might be profitable. DISH $31.29 - The steady profit taking in DISH has been slow and methodical, not panicky. We think this looks like an entry point to go long but one could wait and see if it dips to $30.00 again. ELY $13.99 - Is anyone interested in a seasonal play on Callaway Golf? The move may already have been had. Shares moved from $10.50 to almost $15.00 and have now pulled back to what should be support at $14.00. A break here and it could looking at a retest of the 200-dma. AMZN, YHOO, INSP, ASKJ... seems like old times doesn't it. These Internet stocks have been incredibly strong and we don't see any fundamental reason for the buying spree. Do you? *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS LAST Mon Tue Wed Thu Week AMGN 62.31 0.75 -0.49 -0.14 0.78 1.07 Still Strong IBM 88.99 1.45 0.98 -0.30 1.20 1.44 Ready to Go KLAC 40.61 1.30 -0.88 -1.06 0.43 -1.72 DROP, on weakness MEDI 34.32 1.10 -0.13 0.13 0.89 0.42 Long-term, No update PUTS AIG 57.95 0.10 -0.73 0.31 0.85 1.70 Un-triggered GM 34.41 0.72 -0.39 -0.34 -1.03 -1.56 Downgraded GS 76.70 0.49 -0.54 -0.05 1.15 1.70 Caution! JCI 81.61 1.64 0.52 0.11 -1.17 -2.07 NEW, downgraded MTG 45.96 0.68 0.29 -1.03 -1.64 -0.73 Better entry? PG 90.32 -0.37 -0.94 0.11 1.30 1.07 DROP, un-triggered RYL 55.90 2.30 0.16 -0.39 -0.35 0.20 NEW, un-triggered ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* THE PLAY OF THE DAY ******************* Put *** Johnson Controls - JCI - close: 81.61 change: -2.14 stop: 85.25 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 ^^^^^ KLA-Tencor - KLAC - close: 40.61 change: -1.36 stop: 40.95 Will it hold? We're talking about the bullish patterns on the point-and-figure charts for KLAC and the $SOX. Friday night's semi-book to bill numbers were not encouraging and cautious traders might take it as a sign to take more profits off the table. Shares of KLAC broke down through its recent trend of higher lows and we were stopped out. We would keep an eye on the $40 level but KLAC may have some more consolidating to do. Picked on May 4th at $42.15 Change since picked: -1.54 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 11.4 Million Chart link: PUTS ^^^^ Procter & Gamble - PG - close: 90.32 change: +0.42 stop: 90.00 What can you say? Buyers just haven't given up yet. After spending weeks in what looks like a topping pattern between $88 and $91.00, shares of PG fell below the $88.00 mark last week. Yet it stalled right at its converging 50 & 200-dma's. We suggested a new put play IF and ONLY IF shares of PG traded at or below $87.45. We never got the chance as dip buyers saw their opportunity and pounced. Furthermore, the recent strength in PG has been buoyed by this "new" perspective that "oh, a weak dollar isn't bad. Look at all the big multi-national companies that can benefit by selling more products overseas." Sure enough, PG has been selling more products as the weaker dollar means its American products are cheaper overseas and thus more attractive (competitive) than they were when the dollar was strong. The stock still has not been able to break out above the $91.00 level but we're not going to wait for it and look elsewhere for potential put plays. Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/28/03 (confirmed) Average Daily Volume = 3.3 Million 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. ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** 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 05-18-2003 Sunday 3 of 5 In Section Three: New Calls: (See Note) Current Calls: AMGN, IBM New Puts: DJX, JCI, RYL ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** NEW CALL PLAYS ************** No New Calls This Weekend Check out this weekend's Watch List at OptionInvestor.com ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** Amgen, Inc. - AMGN - close: 62.31 change: -0.32 stop: 59.25 Company Description: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why we like it: After surging strongly higher for most of the past week, the Biotechnology index (BTK.X) paused for a breather on Friday, slipping back towards the $398-400 support level. Given that it had also been up for most of the week, AMGN decided to relax as well and drifted back to the tune of 0.5%. Neither of these retracements appear to be cause for concern as both the BTK and AMGN remain in their ascending trends. Also, the selling volume on AMGN was paltry at only just over half the ADV. One interesting thing we've noticed lately is that the stock appears to be finding support at the 20-dma, which has now risen to $61.96. So traders looking to enter the play may want to consider new positions on a rebound from the $62 area. Stronger support exists near $61 and entries there look good too. Critical to the stock being able to advance further is going to be the bulls' willingness to push price through the short-term descending trendline connecting the recent highs. Once above that level (currently $63.40), which was just above Friday's intraday high, look for AMGN to gather speed and take another run at the $64 resistance level. While momentum traders could chase the stock higher on such a move, remember the way AMGN trades -- slow and steady with virtually all breakout moves being followed by a pullback to test old resistance for its validity as new support. For that reason, we're still recommending sticking to buying the dips for new entries into the play. Suggested Options: Shorter Term: The June 65 Call will offer short-term traders the best return on an immediate move, but this is a higher risk approach due to AMGN's slow-moving nature. Traders with less tolerance for risk will want to use the June 60 Call. Longer Term: Due to the slow and deliberate price action for which AMGN is known, traders looking to capitalize on a breakout move above $64 will want to look to the July 65 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. BUY CALL JUN-60 YAA-FL OI= 3330 at $3.40 SL=1.75 BUY CALL JUN-65 YAA-FM OI=11107 at $0.95 SL=0.50 BUY CALL JUL-60 YAA-GL OI=42561 at $4.40 SL=2.75 BUY CALL JUL-65 YAA-GM OI=26388 at $1.75 SL=0.75 Annotated Chart of AMGN: Picked on May 11th at $61.24 Change since picked: +1.07 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.5 mln Chart link: --- Intl Business Mach - IBM - cls: 88.99 chg: -0.91 stop: 86.89 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: Is the bull market back? One might think so if they followed the hardware sector. The GHA hardware index is closing at levels not seen since last June. Contributing to the rally is a growing expectation that (finally) the worst is behind us. The last two weeks have heard a growing chorus that this year (unlike the last two) we would see a second half recovery. There are still plenty of nay sayers out there and investors should be careful now that we're in the worst six months of the year but IBM did recently state that the industry appears to have "stabilized". If the markets are going to keep this rally alive then IBM looks like one of the stocks ready to lead the way. Shares have been butting up against long-time resistance and flirting with 52-week highs. A recent Fidelity Insight newsletter revealed that Fidelity the mutual company's fund managers bought some 13 million shares of IBM this latest quarter, which is a huge increase over the fourth quarter purchases. Sounds like the "smart" money is turning more bullish on the markets, or at least tech. The chart below shows that we look for a dip to the $88-87 area as a possible entry as well as any move over the $90.00 mark for momentum traders. 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 on dips or if you can afford them. BUY CALL JUN 85 IBM-FQ OI= 8684 at $5.30 SL=2.50 BUY CALL JUN 90 IBM-FR OI=16483 at $2.05 SL=1.00 BUY CALL JUL 90 IBM-GR OI=33074 at $3.40 SL=1.75 BUY CALL OCT 90 IBM-JR OI= 8065 at $5.80 SL=3.00 Annotated chart for IBM: Picked on May 4th at $87.37 Change since picked: +1.62 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million Chart link: ************* NEW PUT PLAYS ************* Elliott Wave Plays By Steve Gould Company Profile The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 of the largest, most liquid NYSE and NASDAQ listed stocks. The DJX is a cash-settlement index option representing 1/100 of the value of the DJIA. Chart Analysis Rather than repeat the analysis here, please read the article, "Where is the Dow Going?" for 5/18/2003. Trade Setup Since the move down in the Dow will most likely take several months, the December 2003 options should offer enough time for the play to complete. The price for the December 2003 options are as follows: Option Sym Strike Type Bid Ask Delta Vol OI DJXXB 76 Put 1.95 2.10 -20.0 771 96788 DJXXB 80 Put 2.90 3.00 -24.3 404 47290 DJXXB 82 Put 4.10 4.50 -38.0 85 12706 DJVXR 96 Put 11.00 11.50 -57.5 3 866 The recommended option would be the Dec 80 Puts because of the delta being so close to -25%. Other options deeper in the money would offer a lower risk, but also a lower reward. Options further out of the money offer a higher risk, but with a higher reward. What If We Are Right Chart: DJX Position Analysis for First Target The first target is the March 12 low of 7416. Once the Dow starts its downward move, it should happen rather quickly. I am allowing for three months. At that time, should the Dow be at 7400, the options would be worth at least 7.70. I say at least because as the Dow plunges, the volatility will increase raising the value of the option even more. Along the way, we will be taking partial profits when the price of the option double. This will make it a risk free trade. What If We Are Wrong If the Dow reaches 8870, it will invalidate the current wave count. That does not mean that the Dow will not go down, it just means that it may take a little bit longer before the decline starts. A break above the current wave 2 peak at 8870 would also signal a move higher before it starts the decline. These moves should happen before the end of the month. Scenario 1 Chart: Wrong Scenario 1 If the Dow reaches 8770 by the end of the month, the value of the option will decrease to 2.55 for a loss of .45 or 15%. Chart: Wrong Scenario 2 If the Dow reaches 8870 by the end of the month, the value of the option will decrease to 2.30 for a loss of .70 or 23%. Picked on May 19th at $86.79 Change since picked: -0.00 Average Daily Volume = 248 million --- Johnson Controls - JCI - close: 81.61 change: -2.14 stop: 85.25 Company Description: Johnson Controls, Inc. is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems and batteries. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Why we like it: While auto manufacturing stocks have been languishing lately due to falling sales, stocks of their suppliers have been charging ever higher for the past 2 months, and we were wondering what it would take for reality to set in. We got the answer on Friday when Prudential downgraded a group of the parts suppliers, including our new play JCI. The firm believes that clouds on the near-term horizon are likely to halt share price gains, citing their expectation that May sales are likely to disappoint, coming in well below 16.5 million units. Apparently the firm got investors' attention with its comments, as JCI gapped down nearly $2 at the open and spent the rest of the day treading water between $81-82, ending right in the middle of that range. Probably the only thing that held the stock up was the fact that the broad market held up rather well. Friday's decline inflicted some significant damage on JCI's chart, as price plunged below both the bottom of the 6-week ascending channel (see below) and the 20-dma ($82.56). Broken channels have a tendency to retrace about half of the advance when in the channel, so that gives us a preliminary target of about $78.50. That coincides nicely with solid historical support near $78 and the 50-dma ($78.37). But before heading down to that target, we're counting on JCI to hold to another common habit of stocks that break down from ascending channels - bounce to retest the bottom of that channel as new-found resistance. Such a test would require JCI to pop back up to the $84 area, but given the severity of today's drop, we have doubts whether it can get that far. So our targeted entry will be for a rollover in the $83-84 area, followed by a continued decline. The first downside objective will be the 200-dma just below $80, and then a drop to the 50-dma. Place stops initially at $85.25, just above last Thursday's intraday high. Suggested Options: Short-term traders will want to focus on the June 85 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $78 level will want to utilize the July 80 Put, which provides greater insulation from the spectre of time decay. BUY PUT JUN-85 JCI-RQ OI= 20 at $4.70 SL=2.75 BUY PUT JUN-80 JCI-RP OI=2255 at $2.05 SL=1.00 BUY PUT JUL-80 JCI-SP OI= 111 at $2.85 SL=1.50 Annotated Chart of JCI: Picked on May 18th at $81.61 Change since picked: +0.00 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 620 K Chart link: --- Ryland Group Inc - RYL - close: 55.90 change: -1.70 stop: 59.01 Company Description: With headquarters in Southern California, Ryland is one of the nation's largest homebuilders and a leading mortgage-finance company. The Company, which currently operates in 25 markets across the country, has built more than 205,000 homes and financed over 175,000 mortgages since its founding in 1967. (source: company press release) Why We Like It: It's not what it looks like. We know it "looks" like we're picking a top here in the housing sector and more specifically shares of RYL. While it might be a short-term top we're NOT going to initiate any bearish plays until we can get more of a breakdown in the stock price. Shares did pull back strongly on Friday after two days of weakness when the housing starts number came out. Analysts had been expecting a drop of 3.1% but instead received a drop of 6.8% in housing starts. This completely reversed the 6.6% gain in March, which came on the backs of a 10.3% drop in February. Keep in mind that most economists who follow the housing sector usually need four months of data to start considering any change in trend but we also need to consider other factors. February witnessed huge snowstorms across multiple areas of the country and there was a media blitz on the military build up on the borders of Iraq. So the weather and Iraq concerns played a part in February's results. March's weather was much more agreeable and the housing starts were buoyed by the bounce in the stock market, which was a result of the successful conflict in Iraq and a rebound in consumer confidence. So what about April? Consumer confidence seemed to slip a bit and retail sales numbers were worse than expected. The rising unemployment in the U.S. and slow job market can weigh on the conscience of anyone consider such a big decision as a home. Do we think the housing market is going to slow down? Honestly, we don't know. If the economic data continues to show no signs of improvement, then the answer is probably yes if the U.S. consumer grows more and more cautious. However, with interest rates at 40 year lows and bond prices near 50 year lows these are major influences on the mortgage industry and the housing sector should continue to do well for months even if rates start to creep higher again. So why consider a bearish play on RYL? Well frankly, shares of RYL have appreciated by more than 50% since their March lows and even more since their December 2002 lows. Let's just say this strategy is based on the market maxim that nothing goes up in a straight line (forever). We had to add that "forever" in there because several housing stocks have been going up in a straight line or at least a very narrow channel since mid-March. That's actually a great thing for us because we can clearly see when the stock breaks out of that channel. There are a lot of traders who have been sliding their stops up as the stock rises and when it rolls over there will be profit taking. Here is our plan. IF and ONLY IF shares of RYL trade at or below $54.85 will we open a bearish play on RYL. Right now the stock is very near the bottom of its narrow, rising channel and we could easily see a rebound as dip buyers do their thing and pick up shares near the $55.00 mark. Honestly, if shares were not so extremely oversold, we'd consider the bullish side of this trade with a very, very tight stop just under $55.00. If we get triggered we'll start with a stop loss at $59.01. Our initial target will be $50.00 and we'll re-evaluate our strategy if we get close to it. REMEMBER, we are NOT opening a bearish play until shares trade at or below $54.85. Whether you're bullish on the housing sector or not, this group and this stock price need to digest some of these gains. We just want to take advantage of any downturn. Check out the weekly chart attached below. Suggested Options: We're going to suggest June and July put options since stocks tend to fall a lot faster than they go up. If you're longer-term bearish on the industry then October options should work. BUY PUT JUN-55.00 RYL-RK OI=206 at $1.80 SL=0.90 BUY PUT JUN-50.00 RYL-RJ OI=429 at $0.60 SL=0.00 BUY PUT JUL-50.00 RYL-SJ OI=304 at $1.35 SL=0.60 BUY PUT OCT-50.00 RYL-VJ OI= 82 at $2.90 SL=1.50 Annotated Chart for RYL: Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 633 thousand Chart link: ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Sunday 05-18-2003 Sunday 4 of 5 In Section Four: Current Put Plays: AIG, GM, GS, MTG Leaps: Anti-Gravity Traders Corner: Our Profit Song - "Money, Money, Money By The Pound" Traders Corner: Where is the Dow Going? Traders Corner: Corrections Part I Futures Corner: Size Really Does Matter ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** American Intl Group - AIG - cls: 57.95 chg: +0.64 stop: $58.00 Company Description: American International Group, Inc. (AIG) is the world's leading international insurance and financial services organization, with operations in approximately 130 countries and jurisdictions. AIG member companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In the United States, AIG is the largest underwriter of commercial and industrial insurance and a top-ranked life insurer through AIG American General. AIG's global businesses also include financial services, retirement savings and asset management. AIG's financial services businesses include aircraft leasing, financial products, trading and market making. AIG's growing global consumer finance business is led in the United States by American General Finance. AIG also has one of the largest U.S. retirement savings businesses through AIG SunAmerica and AIG VALIC, and is a leader in asset management for the individual and institutional markets, with specialized investment management capabilities in equities, fixed income, alternative investments and real estate. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in London, Paris, Switzerland and Tokyo. (source: company press release) Why We Like It: Buyers just won't seem to give up and they have driven the IUX insurance index back towards overhead resistance near 265. A breakout above 265 might be just the catalyst bulls need to push shares of AIG above its own overhead resistance at its 200-dma. So far we have been regulated to observers. OptionInvestor.com is still UNTRIGGERED in this suggested put play for AIG. If AIG can close above $58.50 we'll throw in the towel and admit the rally in insurance still has farther to go. However, on the slim chance (and growing slimmer) that AIG does trade at or below our trigger of $54.94, then we would initiate the play with a stop loss at $58.00. In the meantime, if you're looking for possible put plays... check out the new put on RYL. Suggested Options: By the looks of it, we're pretty close to dropping AIG as a potential put play. Therefore we're not going to list any suggested put options until we get a bit more momentum in our direction. Should we get triggered, then the June 55's or 50's are probably our best bet. Annotated Chart for AIG: Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 7.2 Million Chart link: --- General Motors - GM - close: 34.41 change: -0.47 stop: 37.00*new* 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: We didn't know what the catalyst was for the sharp decline on Thursday afternoon, but we got our answer first thing on Friday as Prudential cut the stock to a SELL rating, issuing a $22 price target. Sounds good to us! We haven't minced any words about the fundamental problems confronting this beleaguered car maker. Following up on Thursday's slight decline under the $35 level, GM plunged early on Friday, hitting an intraday low of $33.77 (interestingly only 3 cents below the bottom of the 4/02 gap) before rebounding with the rest of the market. But as we see it, the damage has been done, and the close under the 50-dma ($34.66) on volume well over double the ADV only confirms the weakening technical picture. As good as things look this weekend though, caution is warranted due to the stubborn way GM has resisted selling off in recent weeks. For that reason, we made GM a long- term play so that it only gets updated when price action warrants it. More importantly though, it is a warning to not chase price action lower. Wait for the subsequent rebound and enter on the rollover. Right now, the important resistance level appears to be near $36, so a failed bounce in the $35-36 area looks good for new entries. The highest intraday level for GM over the past few weeks has been $36.94, so we're lowering our stop to $37, even though that level is below the 200-dma and long-term descending trendline. Traders willing to give GM more breathing room can leave stops just above those important resistance measures at $37.75. Suggested Options: Since we're covering GM as a long-term play, we're only listing September options. The 35 strike will provide the best balance of risk and reward. More aggressive traders can use the 32 or even the 30 strike, which although they are currently out of the money, should have plenty of time to move in the money if our expectations for GM are realized. BUY PUT SEP-35 GM-UG OI= 1901 at $3.70 SL=2.00 BUY PUT SEP-32 GM-UZ OI= 5608 at $2.55 SL=1.25 BUY PUT SEP-30 GM-UF OI= 5718 at $1.70 SL=0.75 Annotated Chart of GM: Picked on May 4th at $35.80 Change since picked: -1.39 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 5.10 mln Chart link: --- Goldman Sachs - GS - close: 76.70 change: +0.60 stop: 77.50*new* Company Description: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net- worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why we like it: If there's a way in which we would like our GS play to behave, this isn't it. Actually that's not entirely true, but we certainly would feel better about the play if the bears had been able to crack the $74 support level before this latest bounce. At any rate, it looks like we're going to get a resistance test at the short-term descending trendline and the bottom of the broken channel near $77, possibly as early as Monday. Given the significantly improved picture on the Broker/Dealer index (XBD.X) we aren't as excited about entering near that level as we were this time last week. The XBD plowed right through the $465 resistance level on Thursday and held onto the bulk of those gains on Friday, raising the concern that GS might follow suit, only just a bit later. But that resistance looks too strong for us to just abandon the play this weekend. A sharp reversal from the $77 level can be used for aggressive entries, but we'll feel a lot better about taking entries once GS is back under $75, preferably with a breakdown under $74. Due to our heightened concern, we're lowering the stop tonight to $77.50, which is just above both the short-term descending trendline, as well as the trendline that began in January of last year. Suggested Options: Short-term traders will want to focus on the June 80 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the early April gap will want to utilize the June 75 Put or even the July 75 put, which provides greater insulation from the spectre of time decay. BUY PUT JUN-80 GS-RP OI= 385 at $4.30 SL=2.50 BUY PUT JUN-75 GS-RO OI=3207 at $1.75 SL=0.75 BUY PUT JUL-75 GS-SO OI=5495 at $2.70 SL=1.25 Annotated Chart of GS: Picked on May 8th at $74.06 Change since picked: +2.66 Earnings Date 06/19/03 (unconfirmed) Average Daily Volume = 4.30 mln Chart link: --- MGIC Invest. Corp. - MTG - close: 45.96 change: +0.75 stop: 48.50 Company Description: MGIC Investment Corporation is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), is a provider of private mortgage insurance coverage in the United States to the home mortgage lending industry. Private mortgage insurance covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes with less than 20% down payments. Private mortgage insurance also facilitates the sale of low down payment mortgage loans in the secondary mortgage market, principally to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Why we like it: When we initiated bearish coverage of MTG on Thursday, we just couldn't get excited about chasing the stock lower, in large part because of the technical action points seen on Thursday's sharp decline. The intraday low came right on the 2-month ascending trendline ($44.40), and the rebound ended just above the 200-dma (then at $45.13). Sure enough, our concerns were warranted, as MTG dipped just a few pennies below the 200-dma on Friday and then rebounded for the remainder of the day, ending just 2 cents shy of its intraday high. This doesn't dissuade us from the premise of the play, as fundamentally the company could be in trouble if mortgage defaults start to rise (or even if investors believe they will). It just confirms that this is a play that is best entered on failed rallies at resistance, not breakdowns below support. To that end, we've got our eye on the $47 level, as it appears to be a firm resistance zone. A failed rally there should be good for new entries, with stops in place at $48.50. Traders that absolutely insist on entering on confirmed weakness will need to see MTG break the $44 level before playing. Suggested Options: Short-term traders will want to focus on the June 45 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $40 target will want to utilize the September 45 Put, which provides greater insulation from the spectre of time decay. Note that the open interest is largest on the June 45 strike, so that one will likely provide the best liquidity. BUY PUT JUN-50 MTG-RJ OI= 5 at $5.00 SL=3.00 BUY PUT JUN-45 MTG-RI OI=475 at $1.90 SL=1.00 BUY PUT SEP-45 MTG-UI OI= 80 at $3.70 SL=2.00 Annotated Chart of MTG: Picked on May 15th at $45.21 Change since picked: +0.75 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 1.05 mln Chart link: ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** Anti-Gravity By Mark Phillips mphillips@OptionInvestor.com That's the only explanation I could come up with late last week, as the broad market inexplicably refused to show any appreciable weakness in the face of what I would call more disappointing economic reports. The bond markets certainly responded as I would have expected with yields drilling down to new 45-year lows in response to the weak economic data. But in response to the heavy buying of bonds, equity bulls simply yawned. Maybe they've discovered how to control gravity! Hey, last week I invoked the Heisenberg Uncertainty Principle, why not the stuff of science fiction this week? Here's the conundrum that bothers me the most right here, and Jim mentioned it in one of his Wraps last week. Over the past year, we've seen some explosive asset-allocation rallies launched as money managers have jumped out of bonds and into equities at extreme lows for both yields and equities. So last week's drop to new lows on yields certainly brings up the possibility of an asset allocation driven rally. The problem is that all the major indices are already sitting at new highs for the year and very near their highest levels since last July. If we were to get that asset allocation move, it could be just the catalyst to break above some very significant overhead resistance in the major indices. The problem with that occurring is that on so many other measures, the market is in dangerously overbought territory. The Investor's Intelligence poll is now showing bullish advisors outnumber those in the bearish camp by 55.8% vs. 24.4%. When sentiment in the advisory community becomes this skewed to the bullish camp it nearly always is predictive of a near-term top in the market. Looking at some more quantifiable measures certainly bears out the fact that the bulls are once again bearing most of the risk in the market. Bullish percent measures are now looking extended, with the following readings: NASDAQ-100 - 78% (12/02 high of 82%) NASDAQ Composite - 59.99% (highest reading going back to 1996) DOW Industrials - 70% (11/02 high of 73%, 4/02 high of 76%) S&P 500 - 68% (12/02 high of 68%, 3/02 high of 77%) S&P 100 - 67% (12/02 high of 76%, 3/02 high of 79%) In all cases, the major indices BP is either in or very near overbought territory, but with further upside possible from a historical standpoint. The one notable exceptions is the COMPX, which is currently sporting its highest BP reading ever. The new high vs. new low readings have been in nosebleed territory for a while now, but those measures are starting to weaken. Linda Piazza managed to cobble together some interesting symbols for us last week (with the help of some readers), and what I'm looking at is the number of new highs minus new lows for the NYSE and NASDAQ. The symbols for these values on StockCharts.com are $NAHL for the NASDAQ and $NYHL for the NYSE. I find it interesting that the $NAHL PnF chart finally generated a Sell signal on Friday, and I take that as one of the early signs of weakness that we're looking for. The VIX is sending its own signals for bulls to start becoming increasingly wary, as it dipped below the 21 level ever so briefly on Friday. From our past discussions, we know that a drop into the 19-21 area is always a predictor of dangerous territory for the bulls. The VIX could continue to fall from Friday's 21.01 close, but as it does it makes a better and better case for long- term bearish plays. With all of these factors pointing towards the markets drawing ever closer to a top, we're continuing to bias our playlist more towards the downside, with two more bearish Watch List plays making the transition into the Portfolio last week. Despite that bias, we have our one remaining Portfolio Call play still holding tough and our new Watch List play this week is one for the bulls. See below for all the details. Portfolio: EMC - This play has certainly been a good performer for us, but it sure seems to be getting a bit long in the tooth. Last week, EMC probed above the $10 level on 4 out of 5 days, ending right on that mark on Friday. The ascending trendline has now risen to $9.30, the 20-dma is now at $9.48, and the last reaction low was at $9.28. Something has got to give soon, and while I'm hoping for one more push up the charts, my tolerance for downside risk is steadily decreasing, especially now that we have a nice gain on the play (120% on the '04 LEAP and 80% for the '05 LEAP). So I'm raising the stop to $9.25 this weekend. Without question, we'll close the play on any push up near the $11 level. The PnF chart still gives a bullish price target of $15.50, but the strength of the $11 resistance level hints to me that we may be running out of steam over the near term. Certainly, I wouldn't fault anyone for just harvesting a gain here. Remember how we choked down on our ADBE play a few weeks back and finally just took our leave of the play near $38? Look at the stock today and you can see that it is starting to weaken with Friday's close back under $36. I'm viewing EMC in much the same light. Either it pushes higher and we take a targeted gain or we get taken out on an aggressive trailing stop Either way, at this point we win! AIG - Is anyone else getting nervous about our AIG play? After several failed breakout attempts, the stock is pushing back towards the strong $58-59 resistance level, which is also the site of the 200-dma. Additionally, the broken ascending trendline from the rally off the March lows is right there at $58.75 as well. If the bulls manage a breakout here, the last chance for the bears to exert their influence will be near the top of the late January gap just over $60. Traders still looking for an entry can certainly use a failed rally from one of these resistance levels to initiate that position, but ONLY after signs of a failure. For now, we're maintaining our position with a $61 stop and we'll just wait for price action to unfold, either proving us right or wrong. Watch List: NEM - I don't have anything new to report on NEM. Gold prices continue to recover, with NEM hugging its descending trendline. I expect price action to release from this resistance area over the next several weeks and drift back down towards its ascending trendline (just below $25) at which point we'll start looking for a new entry point. For now, the play remains on HOLD. AMZN - I'm just about at the end of my rope on AMZN, as the stock continues its relentless surge up the chart in action reminiscent of the Internet bubble of a few years back. I still expect a sharp retracement in the months ahead, but there is no sense initiating a bearish position in the stock until it starts showing signs of weakness. A quick look at the action of EBAY (hitting $100 on Friday for the first time since March of 2000) and YHOO (trading at new 52-week highs) shows that investors are hungry for these Internet stocks. But AMZN still looks to me like it should head much lower -- I just haven't been able to find a compelling technical entry. So, I'm changing the approach a bit this week. I'd still like to see a rally failure for an entry point, but realize we may have to catch a breakdown under recent support in order to really have any confidence in the trade. So the upper entry target now moves to $35-36, while we'll also initiate a position on a drop through the $32 level, which is just below last week's intraday support. DJX - The DOW is certainly getting closer to a bearish entry point. Either that or it is preparing for an impressive explosion upwards. But with the VIX down at 21, and the DOW Bullish Percent hitting 70% on Friday, I can't help thinking there's not a lot more upside left. That lack of bullish energy was certainly evident last week, with the DJX continually rejected from just above the $87 level, right at the descending trendline from the August, December and January highs. Despite this inability to break out last week, I'm not falling for an early entry. Technically, I still think there is another upward push in store, with the $88.50 level being the logical target in my mind. That's where we'll look to enter the play (preferably with the VIX under 20) and set a liberal stop at $91, just above the August and December intraday highs. GS - Uh-oh! Despite all the fundamental factors that I feel should be weighing on the Brokerage stocks, the Broker/Dealer index (XBD.X) solidly breaking above the $465 level last week for the first time since late May of last year. GS hasn't broken above its own descending trendline near $77.50, but if the XBD continues its relentless rise, I expect that breakout to occur. So why am I not dropping GS this weekend? Because I want to force price action to prove me wrong -- there's no risk in that, and we still may get a solid entry out of the process. A failure below the April highs is still a viable (albeit aggressive) entry, but if GS closes above $79, then we'll end up dropping the play from the Watch List. Closing Thoughts: As cited above, conditions in the market are edging ever closer to that important inflection point, with my expectation that the next directional move will be to the downside. However, we have not yet reached that point, with the bulls still refusing to give up any significant ground. To me, that means we're still early to start aggressively lining up in the bears' camp, although it certainly makes sense to get ready to do so. As I'm sure you can infer from my commentary above, I've had a hard time interpreting all the different and somewhat confusing cross-currents in the market in the past couple weeks. We've gone further to the upside than I thought likely a couple months ago, but not far enough to do any serious damage to the framework of an overall secular bear market that has yet to see its conclusion. My approach going into next week is to continue being aggressive in harvesting gains on bullish positions, but still be rather passive about entering new bearish plays. We need to see a bit more downside in the VIX and the Bullish Percent readings start to tip over before getting more aggressive to the downside. That is typical how I tend to trade near inflection points in the market - - protect gains aggressively and gingerly test the waters with new positions that appear to have good potential during the next trending market move. 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 $ 3.10 +121.4% $9.25 '05 $ 7 ZUE-AU $ 2.15 $ 3.90 +81.40% $9.25 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 4.60 -17.86% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 7.60 -10.59% $61.00 GM 05/13/03 '04 $ 35 LGM-MG $ 4.10 $ 5.10 +24.39% $38.00 '05 $ 30 ZGM-MF $ 4.60 $ 5.30 +15.22% $38.00 KO 05/15/03 '04 $ 40 LKO-MH $ 1.70 $ 1.85 + 8.82% $47.00 '05 $ 40 ZKO-MH $ 3.85 $ 4.10 + 6.49% $47.00 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 03/09/03 HOLD JAN-2004 $ 25 LIE-AE CC JAN-2004 $ 20 LIE-AD JAN-2005 $ 25 ZIE-AE CC JAN-2005 $ 20 ZIE-AD AMGN 05/18/03 $59-60 JAN-2004 $ 60 YAA-AL CC JAN-2004 $ 55 YAA-AK JAN-2005 $ 60 ZAM-AL CC JAN-2005 $ 55 ZAM-AK PUTS: AMZN 04/13/03 $32-33 JAN-2004 $ 30 LOH-MF JAN-2005 $ 30 ZWE-MF DJX 05/04/03 $88-89 DEC-2003 $ 84 DJX-XF DEC-2004 $ 84 YDJ-XF GS 05/04/03 $76.50-77.50 JAN-2004 $ 75 KGS-MO JAN-2005 $ 75 ZSD-MO New Portfolio Plays GM - General Motors $36.30 **Put Play** Now that didn't take very long! My preference for our LEAPS plays is to see what happened with GM last week. We put the stock on our Watch List and got an entry point early in the week and then a nice move in our direction to round out the week. We were looking for a failed rebound in the $37.00-37.50 area, and Monday's intraday high was $36.94 looked good enough to me. Since the stock closed fairly close to its intraday high, I gave it one more day and since GM didn't get anywhere close to that level on Tuesday, I decided to initiate the Portfolio position. As it turned out, the timing couldn't have been much better. Inexplicably, GM took quite a tumble on Thursday, cracking fractionally below the $35 level on Thursday on no news. My expectation at the time was that the stock would be pinned near that level on expiration Friday and a continuation of the bearish move would have to wait for next week. Wrong! Prudential gave GM a push off that price level early on Friday with their downgrade of the stock to Sell, with a price target of $22. Concerns cited by the firm included an ugly pricing environment in the North American market and the fact GM's US market share is still under pressure. My favorite comment though was the concern listed about GM's pension plan problems, with the expectation that the underfunding will soak up all of the company's free cash for the next 4-5 years. That drove the stock all the way down to the $33.80 level (the bottom of the 4/02 gap), before a decent midday rebound back to the 50-dma, which provided afternoon resistance. The combination of the close under the 50-dma and the strong selling volume certainly hints that the downward move is underway. I don't expect GM to just fall out of bed though, as the dip buyers are still very active in this market. Watch for a failed rebound in the $35.00-35.75 area to provide yet another favorable entry point. Initial stops are set at $38, which is above the highest point in April, as well as the declining trendline ($37.50) and the 200-dma ($37.66). BUY LEAP JAN-2004 $35 LGM-MG $4.10 BUY LEAP JAN-2005 $30 ZGM-MF $4.60 KO - Coca Cola $44.64 **Put Play** Nobody was more surprised than I to see the recent rally in shares of KO through the $43 level. But I believe the push up near the $45 level was simply a gift of an entry point for the bears. The rally that began on May 7th was prompted by a Morgan Stanley upgrade, where the firm cited their belief that the outlook was improving, along with their expectation of better pricing power in 2004. The bloom on that rose seems to be fading right at the descending trendline though. KO has been testing that 9-month trendline (also testing the 200-dma just below $45) for the past week and looks to have failed on Friday. I may have jumped the gun by initiating the Portfolio position on Thursday, but the failure to actually trade the $45 level looked like a good entry to me. After Friday's slide back under the $44 level, with daily Stochastics starting to roll down from overbought, it looks like we caught a nice top. That doesn't mean that another test of the $45 level isn't possible, just that the odds favor the bears right now, especially with the overall market looking close to a near- term top. There is strong historical resistance in the $45-46 area as well and that should keep KO under pressure. Just to be in the safe side, our stop will start out just above that resistance zone at $47. BUY LEAP JAN-2004 $40 LKO-MH $1.70 BUY LEAP JAN-2005 $40 ZKO-MH $3.85 New Watchlist Plays AMGN - Amgen, Inc. $62.31 **Call Play** Biotechnology stocks have certainly enjoyed an impressive bullish run in recent months, with the Biotechnology index (BTK.X) having finally pushed through the $380 resistance level that has kept it rangebound for the past year. Not only that, but last week's rally propelled the index through its descending trendline that began in late 2000. By any measure, this sector appears to really be on the mend, and to its credit is less susceptible to fluctuations in the overall economy. Health care is one of the few areas of the economy that is still growing at a respectable pace, and given our obsession with living longer and healthier lives, that trend is projected to continue. When thinking of Biotechnology, you can't help but think of AMGN, one of the largest and most well-established companies in this arena. At first, you might think I'm nuts for listing AMGN as a new Call play with weekly Stochastics already having dropped out of overbought territory, but a closer look shows that every drop out of overbought since last September has only resulted in a mild dip, resulting in an attractive entry point for the next leg up the chart. AMGN broke above its own long-term descending trendline in March and has only continued that bullish trend. The trend may look a bit mature for new bullish entries, but a quick look at the PnF chart shows a bullish price target of $72, providing still more upside potential. Note the ascending trendline that has continued to support price action for the past 6 months. That action should continue so long as AMGN continues to deliver with revenue and earnings growth. That trendline is currently at $59.25, reinforced by the rising 50-dma at $59.64 and should be a firm floor for the stock. AMGN is not a fast mover, as it moves a bit higher, pulls back, and then pushes to new recent highs. So our approach will be to target entries on the next significant pullback for a ride up towards its PnF price target. Target entries on a pullback into the $59-60 area, and set stops at $57, just below the strong support level built up during the March/April consolidation before the breakout over that long-term descending trendline, which is currently at $58.50. BUY LEAP JAN-2004 $60 YAA-AL BUY LEAP JAN-2004 $55 YAA-AK **Covered Call** BUY LEAP JAN-2005 $60 ZAM-AL BUY LEAP JAN-2005 $55 ZAM-AK **Covered Call** Drops GD - $64.80 All right, I give up. I got too stingy on the entry into GD a month ago just above $52. Right on timing and direction, but just a bit too conservative in terms of entry price. Sometimes these things happen and our job as successful traders is to not succumb to the urge to chase. Not only is GD up more than $12 from that missed entry, but it has now reached what I thought was the most optimistic upside target of $65 for this post-war rebound cycle. Weekly and daily oscillators are topped out and the stock is back at strong resistance. GD could continue higher from here, but this is no longer the sort of play that makes sense for LEAPS players. We'll drop the play for now and come back to revisit it in the future when it presents another compelling technical setup. ************** TRADERS CORNER ************** Our Profit Song - "Money, Money, Money By The Pound" By Mike Parnos, Investing With Attitude It's music to our ears. Each month we, at the CPTI, take our pound of flesh from the 500-pound gorilla known as the stock market. A pound here, a pound there and, before we know it we're in Fat City. The fatter, the better. The song, "Money, Money, Money By The Pound," is from Disney's wonderfully entertaining musical feature "Pete's Dragon." The song was based on a plot of an evil doctor who wanted to chop up a lovable animated dragon (Elliott) and sell it by the pound for enormous profit. Needless to say, the doctor was foiled – but we won't be. Our CPTI profit machine keeps generating dollars – a pound or two at a time. Fat City, here we come. _____________________________________________________________ This Month's Profit Summary This option cycle (May) we're proud to add a solid $2,275 to our piggy bank of profits. Soon we're going to need a bigger piggy bank. It doesn't get much better than that. The new total is $24,385 - for seven months of relatively stress-free trading. Out of the four positions, three were profitable (SPX, SMH, MSFT) for a total of $2,875. Our DJX position lost $600. There's now another $2,275. Is that a roll of bills in your pocket, or are you just glad to see me? It was exciting this month. The market damn near ran away from us. But, that's why we build in room for error in our positions. If the markets trade within reason (whatever that may be), we will normally be able to pull out some profits – and not overdose on Tums, Valiums, chocolate chip ice cream, phone sex, or have to schedule any extra shrink appointments. _____________________________________________________________ Review Of May CPTI Portfolio Positions Position #1 -- SMH Baby Condor. Friday's Close: $28.31 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. Our safety range was $23.95 to $28.55. On Friday morning, SMH traded down to about $27.60. There was some support there from Thursday. When SMH did not continue down and began to bounce off that support, it was time to act. We bought back the short $27.50 call for $.30. Since we took in $1.05, we recorded a profit of $750. ____________________________________________________________ Position #2 – SPX Iron Condor. Thursday's Close: 946.31 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 behaved nicely and expired Thursday below our 950 short May call – but not before scaring the putting a few extra years on a number of CPTI trader. Isn't it nice when resistance levels actually resist and the Valium kicks in? We realized our maximum profit of $1,475. ______________________________________________________________ Position #3 – MSFT Minage-A-Qua – Friday's Close: $25.57 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. On Friday morning, MSFT dipped to $25.55 – right to a Thursday support level. Then, it began to bounce and, once again, it was time to act. We bought back the short $25 call for $.70. We originally took in $1.35, so our profit was $650. _____________________________________________________________ Position #4 – DJX Minage-A-Qua – Friday's Close: $86.79 The DJX tracks the DOW. It looks like the DOW is in a minor uptrend with resistance at $86 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. Oh well, we can't be right all the time. We're taking a little hit on this one. When the DOW dipped into negative territory for about 20 minutes today, I decided that, we'd hang on if it continued down, or we'd bail if it bounced back up. Guess what! We had to buy back the short DJX $84 call for $2.85. That means we took a $600 loss on this position. ______________________________________________________________ June Position #1 – SPX Iron Condor – Currently at 944.30 Sell 5 contracts of SPX June 995 calls Buy 5 contracts of SPX June 110 calls Net credit of $1.35 Sell 5 contracts of SPX June 895 calls Buy 5 contracts of SPX June 880 calls Net credit of $1.55 Total net credit of $2.90. We're giving the S&P 500 a 100-point range. We'll get our maximum profit of $1,450 if SPX closes within a huge 895 to 995 range. Our exposure is $12.10 ($15 points less the $2.90 credit). If it works, it's about a 24% return on risk. The SPX trades only on the CBOE. The net credit includes shaving a little bit from each option price. Hopefully, you'll be able to submit the trades as a spread with a net credit. Even if you come within $.25 of the total net credit, it should still be a good trade. ____________________________________________________________ June Position #2 - BBH Iron Condor – Currently at $104.19 Sell 10 contracts of BBH June $100 puts @ $1.55 Buy 10 contracts of BBH June $95 puts @ $.75 Net credit of $.80 Sell 10 contracts of BBH June $110 calls @ $.85 Buy 10 contracts of BBH June $115 calls @ $.30 Net credit of $.55 Total credit of $1.35. We're giving BBH a 10-point range. The biotechs have been moving up and it looks like BBH is establishing a new range. There's support near $100. We'll get our maximum profit of $1,350 if BBH closes between $100 and $110. Our exposure is $3,650 ($5 points less the $1.35 credit). If it works, it's about a 36% return on risk. Note: For CPTI traders who are more patient and appreciate a higher degree of safety, you can take in a credit of $1.00 on a July $95/$115 iron condor with a 20-point range. It's a two-month exposure, but there's double the range. ____________________________________________________________ June Position #3 – TOL – Bear Call Spread Plus – Currently at $25.56 Sell 10 contracts of June TOL $25 calls @ $1.40 Buy 20 contracts of June TOL $30 calls @ $.15 Net credit of $1.10 We're slightly bearish on the housing market and believe TOL will finish below $25. But, just in case we're wrong, we're buying 10 additional contracts of the $30 calls to protect ourselves. You might even be able to get the $30 calls for $.10 instead of $.15 on Monday. Maximum potential profit is $1,100. ______________________________________________________________ June Position #4 – COF Iron Condor – Currently at $44.84 Sell 10 contracts of June COF $47.50 calls @ $1.55 Buy 10 contracts of June COF $50 calls @ $.95 Net credit of $.60 Sell 10 contracts of June COF $40 puts @ $1.05 Buy 10 contracts of June COF $37.50 puts @ $.65 Net credit of $.40 Total credit of $1.00. We're giving COF a $7.50 range. This is a credit card stock that appears to have topped out and there's support around $40. We'll get our maximum profit of $1,000 if COF closes between $40 and $47.50. The nice part is that our exposure is only $1.25 ($2.50 less our $1.00 credit). If it works, it's an 80% return on risk. ______________________________________________________________ June Position #5 – QQQ ITM Baby Strangle – Currently at $28.70 Buy 10 contracts of the July QQQ $30 puts @ $2.05 Buy 10 contracts of the July QQQ $28 calls @ $1.80 Total debit of $3.85. The QQQs have made a big move up. It's either going to break through resistance or bounce of and head back down. Our objective is for a $3-4 move in the next month. One of our long options will hopefully pay for almost the entire position. That will leave our other long option, which is now practically free, poised for the bounce back as the QQQs reverse. Our exposure is only $1.85 because we have $2.00 of intrinsic value. This worked quite well in the past for us. It will take some time to play out so be a little patient. For those who want to review how this strategy works, go to: http://members.OptionInvestor.com/traderscorner/tc_082502_1.asp ______________________________________________________________ Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since last July. To find past CPTI (Mike Parnos) articles, look under "Education" and then click "Traders Corner." They're waiting for you 24/7. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP GO PISTONS!!! ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould I remember when I was about 10 years old, my parents gave me this mechanical alarm clock. I would wind up the spring on the bell and set the time for it to go off. Of course, the more I wound up the spring on the bell, the louder and longer it would ring. Instead of winding up the spring on an alarm clock, the Dow is winding up a spring on the next break out. Every week now it is getting tighter and tighter and tighter. Soon, very soon, the time is going to come and the bell is going to go off very loud and very long. Chart: Dow Hourly 5/16/2003 Here is an hourly chart of the Dow. For the first two days after the Dow reached its peak on the C wave, it looked like it was starting the wave i of the wave 1 down. Then on 5/14, the Dow spiked up and has been fibrillating ever since. The Dow never breached the trend line and is trading within a narrow range. The pattern the Dow is tracing out is a classic ending diagonal pattern. An ending diagonal has a distinctive meaning and exhibits special characteristics. Ending diagonals can appear in either the 5 wave of a 5 wave basic pattern or in the 5 wave of a C wave. In either case, they signal the end of a larger pattern and a dramatic reversal in trend. The Dow breached the trend line as the C wave/v wave peaked. This is called a throw over and is a characteristic of an ending diagonal. This is a good sign as it helps to identify the pattern. Another characteristic of an ending diagonal is that the 4 wave will penetrate into the territory of the 1 wave. This violates one of the hard and fast rules of Elliott Waves, but this is one of the exceptions. So what does this mean in terms of the Dow? Very soon the alarm is going to go off and the Dow is going to go down...decisively. The pattern is rather clear and the outcome very predictable. Ending diagonals typically precede large moves in the opposite direction. Since this ending diagonal is on the upside, the move will be down. Unless of course, it doesn't. I was talking with a buddy of mine and we were discussing this ending pattern. He said that he has only seen one time where this pattern failed to produce the dramatic trend reversal. It was in Gold. Gold traced out a very similar pattern and instead of heading down, it took an unexpected upswing in price. Of course, one time out of the hundreds of patterns that he has seen does not make for a high percentage trade, but it is something to be aware of. Finally take a look at this comparison of the Dow and the VIX. Chart: Weekly Dow/Vix I know this graph didn't copy well, but it does show the "big" picture of what is going on. The Dow and VIX form an inverse relationship. In other words, when the Dow goes down, the VIX goes up. When the Dow goes up, the VIX goes down. Right now the VIX is at a low. Only two times in the last 5 years was it lower. At those two times, the Dow went down dramatically. We are at one of those points right now. Let's say that the Dow meanders for a little while longer. The VIX will decline even further, setting the Dow up for an even bigger move to the downside. If history repeats itself, we are in for a very large decline, very shortly. The bottom line is I believe the Dow is setting itself up for a huge imminent decline. ************** TRADERS CORNER ************** Corrections Part I By Steve Gould One of the beauties of Elliott Waves is its simplicity. All you have to do is know how to count to three and five. (For those needing remedial help, Sesame Street is an excellent resource.) But in simplicity comes complexity. One would think that the complexity would be in the five counts. But no. The complexity is in the three count. Elliott Waves fall into two categories. Either the wave is in the direction of the larger trend or it is not. Waves in the direction of the larger trend are called motive waves and they are always a five count. Waves counter to the larger trend are called counter trend or corrective waves and they are never five counts. They are always three counts. Five waves are relatively easy. They always subdivide into another five wave. Three waves are not so easy. They subdivide into no less than 14,824,749 different combinations. Well, not really, but it sure seems that way at times. It is said that the best way to eat an elephant is to eat it one bite at a time. The best way to learn corrective waves is to study them one bite at a time. Corrective waves fall into four main categories. They are Zigzags Flats Triangles Combination It is best to start with a simple one. Let's begin with zigzags. Figure 1: Zigzags On the left in figure 1 is a typical zigzag. Zigzags have several defining features. Zigzags, like all corrective waves, are a three wave pattern. Note how the B wave does not fully retrace the A wave. Typically, wave B will retrace somewhere between 50- 75% of wave A. Also note how the C wave extends beyond the top of the A wave. Looking at the chart on the right in figure 1, we can examine the subdivisions more closely. Note that the A wave is a 5 wave basic pattern. The B wave is a 3 wave corrective pattern and the C wave is another 5 wave basic pattern. The zigzag subdivisions are therefore 5-3-5. Chart: Alcoa Zigzag Chart Here is a weekly chart of Alcoa (AA) for the year 2000. At this juncture in time, Alcoa is undergoing a 4 wave correction. Since 4 waves are counter trend waves, it will print out one of the many A-B-C corrective patterns. See how this A-B-C wave clearly shows a zigzag pattern. We can see that the A wave clearly subdivides into a 5 wave basic pattern. Furthermore, the B wave retraces 50%, the C wave extends past the peak of the A wave and the C wave subdivides into a 5 wave basic pattern. Classic. A rule of thumb for corrections is that the correction will end at about the level of the last 4 wave. In the Alcoa chart, you can see the last 4 wave occurred in 1999 at around the $28 level. The A-B-C correction actually went a bit lower to the $23 level. As a side note, notice the differences in wave A and wave C. The A wave lasted about 6 months and was a slow, steady, progressive 5 wave basic pattern. The C wave, on the other hand, lasted only about 3 months and was a sharp decline. This illustrates what is called the rule of alternation. The rule of alternation states that whatever happens in one type of wave will not be expected to happen again in the next incarnation of the same type of wave. In this particular case, wave A and wave C are the same type of wave. Both are 5 wave basic patterns within the 4 wave. Since the A wave was a long, slow, meandering 5 wave basic pattern, we would expect the C wave to be a short, fast, sharp 5 wave basic pattern. This is exactly what Alcoa traced out. Let's now take the second bite out of the elephant and discuss flats. At first glance, flats look a lot like zigzags, but they have major fundamental differences. Figure 2: Flat chart On the left in figure 2 is a typical flat. Flats have several defining features. Again flats, being a corrective wave, are a three wave pattern. Note how the B wave fully retrace the A wave. Typically, wave B will retrace somewhere between 75-100% of wave A. Also note how the C wave only extends to the top of the A wave. Looking at the chart on the right in figure 2, we can examine the subdivisions more closely. Note that the A wave is a 3 wave corrective pattern. The B wave is another 3 wave corrective pattern and the C wave is a 5 wave basic pattern. The flat subdivisions are therefore 3-3-5. Chart: AMD Flat Chart Here is a weekly chart of Advanced Micro Devices (AMD) for the year 1994. For six months within 1994, AMD underwent a wave 4 correction. Again, since 4 waves are counter trend waves, it will print out one of the many A-B-C corrective patterns. See how this A-B-C wave clearly shows a flat pattern. We can see that the A wave shows the 3 wave corrective, the B wave retraces 85%, the C wave extends about to the peak of the A wave (actually a little bit past) and the C wave subdivides into a 5 wave basic pattern. The B wave may seem like it is longer than it should be in relation to the other waves, but remember that the C wave is always a 5 wave basic pattern. This labeling accurately labels this flat and the subsequent 5 wave. If instead, we ended the 4 wave at the 2 wave of the 5 blue circle wave, we would be forced to have a very short 3 wave within the 5 blue circle wave. This would violate a rule that states that the 3 wave is never the shortest wave. One of the variations of the flat is where the C wave extends significantly past the A wave. It looks very much like a zigzag but the A wave is still a 3 wave corrective pattern. The other variation of note is called the expanded flat. This is where the B wave extends beyond the origin of the A wave and the C wave extends past the peak of the A wave. The next chart traces out what an expanded flat would look like. Chart: Expanded Flat This type of correction takes a little getting used to when labeling a chart. The clues to use are the subdivision of the 1 wave must be a 5 wave basic pattern and the A-B-C waves must be a 3-3-5 pattern. Take a look at the following chart. Chart: Dow Labeled by the Program This is a chart of the Dow at the beginning of the year. This may be subtle, but think about how the 2 wave would be labeled. According to Elliott Wave rules, we need an A-B-C pattern and within that pattern, the C wave must trace out a 5 wave basic pattern. It is just not possible to follow all the rules by labeling the 1 wave and 2 wave this way. Now look at the labeling in the next chart. Chart: Dow Labeled Correctly9 By labeling the 2 wave as an expanded flat, we are better able to resolve the 5 wave basic pattern within the C wave. This label more accurately depicts what is happening in the chart pattern. You may be thinking, what does it matter? We need to correctly label all waves because each wave count is built upon the previous wave labeling. If our wave count is inaccurate, we could be more prone to label future waves incorrectly with potentially disastrous results. Corrective waves are the hardest part of Elliott Waves because there are so many different combinations. We have just covered a few of them. We will cover more in future articles, but for now, it would be instructive to look at charts and just try to identify the ones we have studied so far. ************** FUTURES CORNER ************** Size Really Does Matter 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 Title: Size Really Does Matter This article shall discuss how one determines what SIZE to trade with Index Futures Trades – that is, now many contracts or lots provide for good money management given various market conditions. For those new to futures trading, the amount of money required to DAY-trade ONE futures contract can vary from : $500 to approximately $1800-2000 per contract. This will simply depend on the Futures Broker and/or the Clearing Firm used and your arrangement with them. Please note, I referred to day-trading and not taking a position home overnight. A large money management error is to trade futures over-leveraged. By that, if your account has $10,000 in it, and you are with a broker who requires $1,000 per contract to daytrade, you are able to trade 10 lots – but that does not mean you should be just because you can. That would be a classic example of over-extending your leverage. By the same token, if some unusual event occurs, that does not mean you should not VERY carefully do that full maximum trade. Example: MSFT CSCO DELL and GE all warn at the same time at Monday’s Open: (grins), in that scenario it is OK to grab that 7 or 8 lot ES Short. Needless to say, how many contracts you put down on any given Futures Trade is an extremely important Trade Tool. SIZE does matter. If your futures trade account is very small, and you can only do 1 or 2 contracts, that makes scaling into Entries and scaling out of Exits more difficult. Likewise, if your average size is 12 contracts; you may prefer to Enter a position with the full 12 lot, and then scale out your Exits 4 lots at a time. I would compare this to Stock Option Trading: how many option contracts is the right size for each position? Some traders simply buy a 20 lot each and every time, others tie it to a dollar amount perhaps buying $10,000 worth of options regardless of how many contracts that will get them. I wish to make one thought VERY clear: In no possible way am I suggesting you over-leverage your Futures Account Trading !! Since most of you reading this come from a Stock Options trading background and perhaps are somewhat new to futures I will make this reference. Remember when you first starting option trading? You paper traded for a bit, then did some very tiny sized option trades. Maybe just buying 1 lots to gain some real-world experience for a week, and then buying 2 to 5 lots for a month. Slowly over a period of time, you increased your option trade size to whatever became comfortable for you. Perhaps you have been slowly learning futures and doing mostly 1 to 2 lots of size for a month with some success. For sake of discussion, assume a $50,000 futures account with $1000 margin required to daytrade each contract. Given your personal financial risk/reward issues, you decide the right size for you is 5 contracts to daytrade ($5000 on the table); and perhaps just a 1 lot if you decide to take a position home. Very often in the Market we have seen for many months, there are very few outstanding-bet-the-house type signals. Most are average quality long or short signals. Therefore, most trade positions are done on Average Size. That is, very often, you do the majority of your trades with 5 contracts (using the above scenario). However, and this is an extremely important point: Everyone knows there are times that if your account is able to, it is good risk/reward to do more size than Average. A good recent example was this past week: Every futures trader knew what a large area of resistance the ES 950 level is/was. Last week, the first time it got close to there in the 948 area, and you felt SHORT was the right trade but that you also felt this was going to be a GREAT Entry area : then you might consider doing DOUBLE the Average Size. (using the example here, that would be an Entry of 10 contracts rather than the 5 lot you do on average). Likewise, there are times when the tape is much less clear. So instead of doing your Average size of 5 lot, you just do 2 or 3 contracts, or perhaps just 1 lot. Another example: ES is downticking from 945s and selling hard, and is now 936s. You know ES 935-936 to be an area of large support and are Flat. You buy 5 lot at 935s (Average Size). You ponder doing a Double size entry, but decide to wait to confirm that you are correct, and will ADD to the existing position at 938; and do so. You buy 5 more ES at 938 for a total size of 10 lots. Another example: Tape is chop between pivots of 941 and 943s. You sense no clear breakout or breakdown is coming, but this is a SCALP situation. Your entire goal for the Trade is only 1 ES point. Your signal is very good and you are confident of the trade. Rather than just doing an Average size entry of a 5 lot, there are times to consider doing the 1 point ES SCALP for a Double Size of 10 lot. Likewise, there are times of CHOP, when the signal is much less certain and in that case you might only do the 1 pt ES SCALP on one-half Average Size of 2 to 3 contracts. I respect that much of this article is very basic. I did however wish to let new futures traders know that Daytrade margin does vary greatly from Broker to Broker, and also from Clearing firm to Clearing firm. Please PLEASE note I am NOT suggesting that anyone ever trade futures over-leveraged. However, the main thought I wished to leave you with is that SIZE is a Trade Tool. I would rather trade a much larger number on contracts for a smaller goal on lower-risk signals. Example: this past Friday near 9:45 AM provided an excellent Short opportunity around ES 948-949 : taking that lower-risk Entry on perhaps TRIPLE size *BUT* only going into the trade seeking 3-5 pts as the final goal are trades that I personally like. That one trade would produce more overall profit than scalping Average size all day long, or trading Average size and trying to catch home runs of ES 8 to 10 points profit. Trade Confidence and Size: Some traders take the next trade on the same size they took their last 10 trades without any thought for how good a win/lose streak they are on. Other traders if they are having a good trade day, or good trade week, may slightly add to their size on following trades. Some, if they are having a losing day, will trade very small size until their personal trade confidence returns. There is no one right or wrong method and everyone must decide what is right for their personal trade style. Summary: Just as with Stock or Stock Option Trading : There are times to trade AVERAGE size (whatever that may be for YOU) AND There are times to trade ABOVE-AVERAGE size (if some unusual event occurs, or the stock/index hits major support or resistance) AND There are times to trade LESS-THAN-AVERAGE size (when there’s a weak trade signal, or you think you are right but certainly not sure). Warmest, Alan Hewko ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** 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 05-18-2003 Sunday 5 of 5 In Section Five: Covered Calls: Adjustment Strategies For Covered-Calls Naked Puts: Q&A With The Editor Spreads/Straddles/Combos: Equities Retreat: Is It Just A Necessary Consolidation? Updated In The Site Tonight: Market Posture: Higher Still ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: Adjustment Strategies For Covered-Calls By Mark Wnetrzak The recent upside activity in the market has made selling calls on portfolio stocks a difficult strategy for some investors. Attn: Covered-Calls Editor Subject: Adjustment Strategies Hi, I know you cannot give specific advice. My question is a general one. I bought 1000 shares of a stock and I shorted the May calls. Now the calls are $5 in the money and the trade is profitable. My question is: how to deal with a situation like this when expiration is near? Do I hold the trade until expiration and the stock will be taken away; or buy back the calls back and sell the stock simultaneously right now; or wait until near expiration on Friday and buy back the stock and sell the stock? Your comments are highly appreciated. P.S. Is there a book or article that deals with similar situations? Thank You AD Regarding Covered-Call adjustments: Adam, remember we view the covered-call strategy as a single trade targeting the higher probability of a low but reasonable return. When the market becomes extremely bullish as it is now, one of the drawbacks to plague CC writers is "seller's remorse". If you are extremely bullish on a company and do not want to lose the stock, DO NOT sell covered calls. Many investors discard the covered call strategy because they cannot stand to limit their profits. To the conservative ITM covered-call writer, your present position could simply be regarded as a successful trade. Generally, there are several choices available to the covered-call writer: One, do nothing, let the underlying stock be assigned after expiration (called away) and accept the original profit; Two, after evaluating the cost of extra commissions verses the increase in the annualized return, close the position early if the call is trading near parity (usually this needs to occur fairly quickly after the entering the position); Three, an investor can attempt to increase the potential profit by rolling the sold calls forward and/or up. When closing a covered-call position, an extra option commission must be taken into account. To ensure a proper exit and avoid excessive slippage (due to stock movement), a "net order" could be used. You would place an order to "sell the stock and buy-to- close the calls for a net credit of $xx.xx" (a price reasonably close to parity). The goal is to produce a reasonable profit in a shorter time frame so that the annualized return of the new yield is at least equal if not greater than that of the original position. Rolling-up or buying back the current calls and selling new calls with a higher striking price (usually incurring a debit), is one method to increase the profit potential at the expense of losing downside protection. The cost basis or break-even point will be raised by the amount of debit required to roll-up (cost of buying back the original calls less the premium of selling the new calls). Many professional traders frown at putting more money on the table (by increasing the cost basis) to increase the potential profit. In an attempt to limit the debit of rolling up, investors may find it advantageous to roll forward (and up) to a later expiration. Moving to a future time frame or LEAP can more than offset the cost of buying back the original calls. Again, evaluating the annualized return of the new position with the increased commission costs and time frame is a must. Generally, professionals do not roll up if a 10% correction in the stock price cannot be withstood (though this percentage may not be applicable to the more volatile stocks). Timing the adjustment is also important. Professionals will wait for the time premium to dissipate from the written calls before rolling forward and/or up. Be advised that with deep in-the-money calls, the time premium can disappear quickly and well before expiration. As long as there is time premium left in the calls, there is little risk of early assignment (and you are earning time premium by staying with the original position). However, once the option trades at parity or a discount, there is a significant probability of exercise by arbitrageurs (floor traders who don't pay commissions). As always, you need to evaluate the risk-reward scenarios above and make a decision that fits your trading plan based on your outlook for the underlying equity and stock market. Larry McMillan's book, "Options: As a Strategic Investment," is an excellent resource for option traders. In Chapter 2, he explains the various strategies (and possible adjustments) involved in writing covered-calls. Best Regards, Mark W. OIN SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield AMR 5.47 6.58 MAY 5.00 0.70 0.23* 10.5% TER 12.75 14.31 MAY 12.50 0.75 0.50* 9.1% XICO 5.09 5.68 MAY 5.00 0.45 0.36* 8.4% OSTE 8.39 13.60 MAY 7.50 1.30 0.41* 8.4% GRP 12.52 13.60 MAY 12.50 0.45 0.43* 7.7% IMMU 2.95 4.81 MAY 2.50 0.65 0.20* 7.6% ASML 7.59 9.09 MAY 7.50 0.55 0.46* 7.1% CYBX 23.87 22.55 MAY 22.50 2.05 0.68* 6.8% ABGX 10.77 11.18 MAY 10.00 1.05 0.28* 6.3% CAL 5.68 11.60 MAY 5.00 1.00 0.32* 5.9% SEAC 7.80 10.44 MAY 7.50 0.75 0.45* 5.5% OSIP 21.19 23.97 MAY 17.50 4.10 0.41* 5.2% CCRD 11.05 13.48 MAY 10.00 1.50 0.45* 5.1% IGEN 38.90 36.30 MAY 35.00 4.70 0.80* 5.1% ALTR 15.78 17.61 MAY 15.00 1.45 0.67* 5.1% IFX 8.17 8.20 MAY 7.50 1.00 0.33* 5.0% CTLM 5.18 8.91 MAY 5.00 0.45 0.27* 5.0% NEOL 13.50 15.56 MAY 12.50 1.80 0.80* 5.0% UNTD 19.23 21.67 MAY 17.50 2.80 1.07* 4.7% RINO 13.29 15.66 MAY 12.50 1.40 0.61* 4.5% BMRN 12.06 11.25 MAY 10.00 2.35 0.29* 4.3% COMS 5.17 5.62 MAY 5.00 0.45 0.28* 4.3% PDE 15.17 18.72 MAY 15.00 0.60 0.43* 4.3% MVSN 15.97 17.55 MAY 15.00 1.40 0.43* 4.3% AAII 11.43 12.82 MAY 10.00 1.80 0.37* 4.2% PLCE 13.34 13.28 MAY 12.50 1.40 0.56* 4.1% UNTD 19.67 21.67 MAY 17.50 2.95 0.78* 4.1% NEOL 13.60 15.56 MAY 12.50 1.65 0.55* 4.0% MSCC 11.77 11.72 MAY 10.00 2.25 0.48* 3.7% OVRL 18.02 16.97 MAY 17.50 0.95 -0.10 0.0% MOSY 7.50 7.99 JUN 7.50 0.60 0.60* 6.3% TER 13.06 14.31 JUN 12.50 1.40 0.84* 5.2% MDR 5.08 5.85 JUN 5.00 0.40 0.32* 5.0% FFIV 15.45 16.68 JUN 15.00 1.30 0.85* 4.4% GNTA 8.78 9.88 JUN 7.50 1.70 0.42* 4.3% MRVL 26.72 27.98 JUN 25.00 3.10 1.38* 4.2% GP 17.99 19.20 JUN 17.50 1.40 0.91* 4.0% * Stock price is above the sold striking price. Comments: "Bullishness" continued to prevail throughout the week with only the Russell 2000 Index (RUTX) acting a bit worrisome on Friday. The May covered-call portfolio almost batted a 1000 with only Overland Storage (NASDAQ:OVRL) missing the mark as it consolidated to its 50-dma. Even our closed position in Tommy Hilfiger (NYSE:TOM) rallied back to positive territory, serving additional proof of Murphy's Law. I should do some research, but I think every time the portfolio has performed exceptionally well in the past, that has signaled at least an intermediate-term market top. Just something to consider for those suffering a bit of seller's remorse. Positions Previously Closed: Tommy Hilfiger (NYSE:TOM). 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 NOR 2.67 JUN 2.50 NOR FZ 0.40 552 2.27 35 8.8% ABGX 11.18 JUN 10.00 AZG FB 1.90 538 9.28 35 6.7% IDNX 5.60 JUN 5.00 IDX FA 0.90 2372 4.70 35 5.5% OVER 14.55 JUN 12.50 GUO FV 2.75 3404 11.80 35 5.2% PLUG 5.39 JUN 5.00 PQL FA 0.65 419 4.74 35 4.8% CELG 31.48 JUN 30.00 LQH FF 2.80 1433 28.68 35 4.0% BRCM 21.40 JUN 20.00 RCQ FD 2.25 18944 19.15 35 3.9% 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). ***** NOR - NorthWestern $2.67 *** Cheap Speculation *** NorthWestern Corporation (NYSE:NOR) is a service and solutions company providing integrated energy, communications, heating, air conditioning, ventilation, plumbing and related services and solutions to residential and business customers throughout North America. The company owns and operates a regional electric and natural gas utility in the upper Midwest of the United States. The company distributes electricity in South Dakota and natural gas in South Dakota and Nebraska through its energy division, NorthWestern Energy (formerly NorthWestern Public Service). The company is also responsible for distributing electricity and natural gas in Montana. NorthWestern continues to wallow in the mud of executive resignations, restatement of results, and on Thursday, an informal inquiry by the SEC. And the stock rallied strongly on heavy volume? Pure (and cheap) speculation for those looking to bottom-fish in the utility sector. JUN-2.50 NOR FZ LB=0.40 OI=552 CB=2.27 DE=35 TY=8.8% ***** ABGX - Abgenix $11.18 *** Rally Mode! *** 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 continues to rally higher and the resistance area near $9.50 (the AUG, NOV, and early APR highs) should now provide near term support. Investors can "target shoot" and entry point in Abgenix with this position. JUN-10.00 AZG FB LB=1.90 OI=538 CB=9.28 DE=35 TY=6.7% ***** IDNX - Identix $5.60 *** On The Mend? *** Identix (NASDAQ:IDNX) provides a broad range of fingerprint and facial recognition technology offerings that facilitate the identification of individuals who wish to gain access to information or facilities, conduct transactions and obtain identifications. The company's products serve a broad range of industries and market segments, most notably, government and law enforcement, aviation, financial, healthcare and corporate enterprises. Identix' offerings can be classified into five categories: technology, products, platforms, project management services and fingerprinting services. The current technical outlook for Identix is recovering and our conservative position offers excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. JUN-5.00 IDX FA LB=0.90 OI=2372 CB=4.70 DE=35 TY=5.5% ***** OVER - Overture Services $14.55 *** Buyout Potential? *** Overture (NASDAQ:OVER) is engaged in the Pay-For-Performance search on the Internet. The company's search service is comprised of advertiser's listings, which are screened for relevance and accessed by consumers and businesses through Overture's affiliates, a network of Web properties that have integrated its search service into their sites or that direct user traffic to Overture's own site. In some cases, consumers and businesses access the company's search listings directly at its site. The search listings are ranked by the advertisers' bid; the higher the bid, the higher the ranking. Advertisers pay Overture the bid price for clicks on the advertisers' search listing, click-through or a paid click. As of December 31, 2002, Overture and its wholly owned subsidiaries operated the search service in the United States, United Kingdom, Germany, France and Japan. What's up with Overture Services? The stock rallied sharply on Friday on speculation of an acquisition by Yahoo! (NASDAQ:YHOO). Overture is an ongoing candidate for a buyout or merger by larger companies trying to compete with Google. We simply favor the abrupt technical change and traders can speculate on the outcome of the rumors with this conservative position. JUN-12.50 GUO FV LB=2.75 OI=3404 CB=11.80 DE=35 TY=5.2% ***** PLUG - Plug Power $5.39 *** Fuel Cell Rally? *** Plug Power (NASDAQ:PLUG) designs, develops and manufactures on- site electric power generation systems utilizing proton exchange membrane (PEM) fuel cells for stationary applications. Plug's initial product is a fully integrated, grid parallel 5-kilowatt fuel cell system that operates on natural gas. This initial product is intended to offer quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. The company's R&D facility contains over 150 test stations where its conduct design optimization and verification testing, rapid-aging testing, failure mode and effects analysis, multiple technology evaluations, and endurance testing in the company's effort to accelerate the development and commercialization of its fuel cell systems. Shares of several fuel cell developers rallied this week on no news. Plug Power has been forging a Stage I base near $5 for almost a year and traders can use the inflated premiums to establish a bullish, low-risk position in the issue. JUN-5.00 PQL FA LB=0.65 OI=419 CB=4.74 DE=35 TY=4.8% ***** CELG - Celgene $31.48 *** Bullish Biotech! *** 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. This position offers investors who wouldn't mind owning the stock, a reasonable entry point near technical support. JUN-30.00 LQH FF LB=2.80 OI=1433 CB=28.68 DE=35 TY=4.0% ***** BRCM - Broadcom $21.40 *** Bottom Fishing *** Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. Broadcom's diverse product portfolio includes solutions for digital cable set-top boxes and cable modems; high-speed local, metropolitan and wide area and optical networks; home networking; Voice over Internet Protocol; carrier access; residential broadband gateways; direct satellite and terrestrial digital broadcast; DSL; wireless communications; SystemI/OTM server solutions, and for broadband network processors. Broadcom appears to be completing a bottom formation with the move through resistance around $20. Our opinion is simply that Broadcom is an industry leader and a technology stock we would love to have in our long-term growth portfolio. JUN-20.00 RCQ FD LB=2.25 OI=18944 CB=19.15 DE=35 TY=3.9% ***** ***************** 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 ENMD 2.61 JUN 2.50 QMA FZ 0.35 180 2.26 35 9.2% IPXL 8.00 JUN 7.50 UPR FU 1.15 247 6.85 35 8.2% MEDX 5.00 JUN 5.00 MWM FA 0.40 430 4.60 35 7.6% CTIC 10.21 JUN 10.00 CUC FB 1.00 1575 9.21 35 7.5% AMT 7.66 JUN 7.50 AMT FU 0.65 835 7.01 35 6.1% EXTR 5.33 JUN 5.00 EXJ FA 0.65 8006 4.68 35 5.9% SEAC 10.44 JUN 10.00 UEG FB 1.05 143 9.39 35 5.6% FCEL 8.09 JUN 7.50 FQG FR 1.00 413 7.09 35 5.0% PLCM 12.76 JUN 12.50 QHD FV 0.90 106 11.86 35 4.7% SKYW 14.95 JUN 15.00 UWQ FC 0.70 28 14.25 35 4.3% T 18.12 JUN 17.50 T FW 1.40 6646 16.72 35 4.1% ANPI 28.27 JUN 25.00 AUJ FE 4.40 1091 23.87 35 4.1% SOHU 22.83 JUN 20.00 UZK FD 3.70 1473 19.13 35 4.0% ***************** NAKED PUT SECTION ***************** Options 101: Q&A With The Editor By Ray Cummins One of our readers has some questions about the differences in the calculations for return on investment with covered-calls and naked-puts. Attn: Naked Puts Editor Subject: Profit Calculations Hello Ray, I have been looking at the plays in the naked puts and covered calls sections and I noticed that some of the positions with the same strike price will have different return on investment numbers. I always thought a covered call and a naked put were basically the same strategy. If you are doing one or the other at exactly the same time, with the same cost basis, why would a naked put have such a large profit with regard to covered calls? I assume the numbers are correct, so then why would anyone sell covered calls instead of naked puts? Thanks! KT Regarding the "return on investment" comparison with naked-puts: The calculations are correct and they are based on the customary collateral formulas used by online brokers such as E-trade, Schwab and Ameritrade. The reason such a disparity exists is because the covered-call returns do not include the use of margin (buying the stock at 50% of its actual price), whereas the naked-put collateral requirements are often only 20% of the underlying issue's current value. Such is the case in the positions you often see duplicated in the "Supplemental Candidates," where one play requires that you purchase the stock outright, at full price, while another involves only the commitment of cash (or portfolio securities) of a much smaller amount. Your assessment regarding the similar risk-reward outlook in both covered-calls and naked-puts is accurate. There are no fundamental differences in the two strategies other than the basic collateral requirements and commission costs, thus writing cash-secured puts is (theoretically) the more favorable of the two techniques. You asked, "Why would anyone do covered-calls?" since an equivalent naked-put outperforms the covered-write. Remember, our goal is to provide a range of candidates in both strategies as there are many novice investors who cannot sell "uncovered" options (due to the requirement for a higher level of experience and account value) as well as those who are simply looking for conservative strategies to improve the performance of their individual retirement accounts. Also, some investors aren't comfortable writing "naked" options and many have yet to learn (as you have) that buying and selling stock options outright can be more profitable than many strategies which involve ownership in the underlying issue. Finally, the duplication of a stock as a "New Play" in both sections is rare and it is something we attempt to avoid (as we are trying to provide a large selection of potentially profitable plays), but it will happen occasionally when there is a shortage of good candidates or we believe the position offers uncommonly favorable technical or fundamental characteristics. In most cases, duplicate positions are listed only as a "supplemental" candidates (explained in that segment of the newsletter) in one section when it is a primary candidate in another portfolio. Obviously, the Covered-Calls section of the OIN can be used as a Naked-Put candidate list, even though we try to post a variety of viable plays in both portfolios. I hope this explanation helps you understand the difficulty we have in producing these sections (for a variety of different traders) and with any luck, you will eventually profit from some of the plays we offer. 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 IMCLE 21.00 21.20 MAY 17.50 0.35 0.35* 4.4% 14.5% WYNN 17.02 19.01 MAY 15.00 0.50 0.50* 5.0% 13.7% KOSP 21.97 23.09 MAY 20.00 0.45 0.45* 5.0% 13.5% APPX 24.30 27.77 MAY 20.00 0.35 0.35* 3.9% 13.2% RMBS 15.75 14.96 MAY 12.50 0.55 0.55* 3.3% 10.8% LSCC 8.54 8.53 MAY 7.50 0.25 0.25* 3.7% 10.3% PHSY 30.20 37.27 MAY 27.50 0.70 0.70* 3.8% 10.1% MSTR 30.35 29.82 MAY 25.00 0.50 0.50* 3.0% 9.9% NFLX 19.55 23.79 MAY 15.00 0.60 0.60* 3.0% 9.6% WYNN 16.22 19.01 MAY 12.50 0.40 0.40* 2.9% 9.5% CYBX 23.87 22.55 MAY 20.00 0.25 0.25* 2.8% 9.2% AVID 25.54 27.79 MAY 22.50 0.80 0.80* 3.2% 8.7% EYE 11.96 15.75 MAY 10.00 0.35 0.35* 2.6% 8.0% BOBJ 20.75 21.45 MAY 17.50 0.40 0.40* 2.5% 8.0% OVTI 25.29 31.44 MAY 20.00 0.40 0.40* 2.2% 8.0% SEPR 19.00 20.61 MAY 17.50 0.35 0.35* 3.0% 7.9% JCOM 32.12 36.25 MAY 25.00 0.75 0.75* 2.2% 7.6% SEPR 15.77 20.61 MAY 12.50 0.30 0.30* 2.1% 7.5% VRTS 21.20 25.77 MAY 20.00 0.40 0.40* 3.0% 7.5% XLNX 27.30 28.41 MAY 25.00 0.30 0.30* 2.6% 7.3% GTRC 21.10 21.86 MAY 20.00 0.65 0.65* 2.9% 7.1% SEPR 16.35 20.61 MAY 12.50 0.35 0.35* 2.1% 7.0% BCGI 18.90 15.95 MAY 15.00 0.25 0.25* 1.8% 6.7% RIMM 14.88 18.33 MAY 12.50 0.35 0.35* 2.1% 6.5% JCOM 31.96 36.25 MAY 22.50 0.50 0.50* 2.0% 6.3% ADTN 43.65 43.79 MAY 40.00 0.40 0.40* 2.2% 6.1% MRVL 23.15 27.98 MAY 20.00 0.35 0.35* 1.9% 5.9% NFLX 20.77 23.79 MAY 15.00 0.30 0.30* 1.8% 5.9% BOBJ 18.31 21.45 MAY 15.00 0.35 0.35* 1.7% 5.8% INTC 18.66 19.50 MAY 17.50 0.35 0.35* 2.2% 5.7% ADRX 14.71 17.59 MAY 12.50 0.25 0.25* 1.8% 5.5% CMCSA 31.73 31.26 MAY 30.00 0.40 0.40* 2.0% 5.1% CMCSK 28.44 30.07 MAY 25.00 0.60 0.60* 1.8% 5.1% GTRC 23.25 21.86 MAY 22.50 0.50 -0.14 0.0% 0.0% ANPI 25.20 28.27 JUN 17.50 0.75 0.75* 3.2% 9.4% OVTI 28.64 31.44 JUN 22.50 0.80 0.80* 2.7% 8.9% NVDA 21.37 21.26 JUN 17.50 0.55 0.55* 2.3% 7.6% CELG 27.42 31.48 JUN 22.50 0.70 0.70* 2.3% 7.5% ITMN 23.89 25.76 JUN 20.00 0.60 0.60* 2.2% 6.9% ARTI 22.75 21.28 JUN 20.00 0.50 0.50* 1.9% 5.3% APPX 23.40 27.77 JUN 15.00 0.35 0.35* 1.7% 5.0% * Stock price is above the sold striking price. Comments: Another month has come and gone and the recent bullish market activity has offered very profitable opportunities for option traders. Our portfolio has enjoyed a wonderful success rate in the optimistic environment, however the buying binge won't last forever so it is important for traders to remain careful in their position selection and attentive in their portfolio management. The only issue on the "watch" list is Artisan Components (NASDAQ:ARTI) and the large decline Friday, on no news, suggests this is a candidate for early exit. Previously Closed Positions: Footstar (NYSE:FTS), which ended the expiration period profitably. 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 USG 11.85 JUN 7.50 USG RU 0.35 571 7.15 35 4.3% 11.2% ANPI 28.27 JUN 22.50 AUJ RX 0.80 308 21.70 35 3.2% 10.8% CTIC 10.21 JUN 7.50 CUC RU 0.25 609 7.25 35 3.0% 9.5% IMCLE 21.20 JUN 15.00 QCI RC 0.50 549 14.50 35 3.0% 9.2% APPX 27.77 JUN 22.50 AQO RX 0.65 812 21.85 35 2.6% 8.7% ITMN 25.76 JUN 22.50 IQY RX 0.60 149 21.90 35 2.4% 6.8% SOHU 22.83 JUN 17.50 UZK RW 0.35 195 17.15 35 1.8% 6.2% SFA 20.29 JUN 17.50 SFA RW 0.35 257 17.15 35 1.8% 5.4% NVDA 21.26 JUN 17.50 UVA RW 0.30 3556 17.20 35 1.5% 5.2% 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). ***** USG - USG Corporation $11.85 *** Asbestos Speculation! *** USG Corporation (NYSE;USG) produces a range of products for use in new residential, new non-residential and repair and remodel construction, as well as products used in certain industrial processes. Its operations are organized into three operating segments: North American Gypsum, which manufactures Sheetrock brand gypsum wallboard and related products in the United States, Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region, and Building Products Distribution, which distributes gypsum wallboard, drywall metal, ceiling products, joint compound and other building products throughout the United States. The company and 10 of its United States subsidiaries are currently in voluntary reorganization under chapter 11 of the United States Bankruptcy Code. Stocks of firms that are burdened by asbestos litigation have soared in recent weeks on reports that a bill to create a $108 billion fund for asbestos claims will soon be introduced in Congress. The trust fund theoretically would pay asbestos-related medical costs and cap liability for defendant companies. Traders who want to speculate on the outcome of this "potential" legislation should consider this position. JUN-7.50 USG RU LB=0.35 OI=571 CB=7.15 DE=35 TY=4.3% MY=11.2% ***** ANPI - Angiotech $28.27 *** Stent-Coating Maker *** Angiotech Pharmaceuticals (NASDAQ:ANPI) is engaged in the fusion of medical device technologies and pharmaceutical therapies. The company's first product was a drug-coated stent. Angiotech's goal is to develop other products to enhance the performance of medical devices and biomaterials through the use of pharmatherapeutics. In September 2002, the company and Cohesion Technologies, Inc. agreed to a merger in which Cohesion will merge with a wholly owned subsidiary of Angiotech, with Cohesion continuing as a wholly owned subsidiary of the company. Angiotech shares rallied at the end of February after announcing a strategic alliance with Baxter and a submission by its partner Boston Scientific, of the first module of Boston's PMA application for its TAXUS paclitaxel-eluting coronary stent system. A 12-month study on a Boston Scientific drug-coated coronary stent, Taxus II, is expected to bolster already strong sales of the newly introduced device in Europe. Friday's rally to a new 52-week high suggests further upside potential and traders can profit from that outcome with this position. JUN-22.50 AUJ RX LB=0.80 OI=308 CB=21.70 DE=35 TY=3.2% MY=10.8% ***** CTIC - Cell Therapeutics $10.21 *** Break-Out! *** Cell Therapeutics (NASDAQ:CTIC) develops and commercializes novel treatments for cancer. The firm's lead product is called arsenic trioxide (Trisenox), which was acquired in January 2000. Trisenox is marketed for patients with a type of blood cell cancer, called acute promyelocytic leukemia, who have relapsed or failed standard therapies. The company is also developing a new way to deliver cancer drugs more selectively to tumor tissue in order to reduce the toxic side effects and also improve the anti-tumor activity of existing chemotherapy agents. In addition, the firm has identified a novel drug target, lysophosphatidic acid acyltransferase (LPAAT-_) that, when inhibited, has been shown to reduce tumor cell growth in preclinical models. Despite the lack of public news, CTIC shares vaulted to a 52-week high on heavy volume during Friday's session. The break-out from a 2-month trading range (near $8-$9) suggests further upside potential in the short-term and this conservative position offers a way to participate in the future movement of the issue with relatively low risk. JUN-7.50 CUC RU LB=0.25 OI=609 CB=7.25 DE=35 TY=3.0% MY=9.5% ***** IMCLE - ImClone $21.20 *** Drug Stock Speculation! *** 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. In early May, 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. After a brief consolidation, IMCL shares rebounded this week amid reports of their plan to regain compliance with NASDAQ listing requirements. Investors appear to be happy with the news and traders wouldn't mind owning IMCLE at a cost basis near $15 should consider this position. JUN-15.00 QCI RC LB=0.50 OI=549 CB=14.50 DE=35 TY=3.0% MY=9.2% ***** APPX - American Pharmaceutical $27.77 *** 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). Despite a recent downgrade by UBS Warburg, APPX continues to be a popular stock among speculative traders and the inflated option premiums offer a good opportunity for investors who wouldn't mind owning the issue at a substantially reduced cost basis. Due diligence is a "must" with this issue. JUN-22.50 AQO RX LB=0.65 OI=812 CB=21.85 DE=35 TY=2.6% MY=8.7% ***** ITMN - Intermune $25.76 *** Shorts Cover The Rally! *** InterMune (NASDAQ:ITMN) develops and commercializes products for the treatment of serious pulmonary and infectious diseases and cancer. The company has the exclusive license rights in the U.S. to Actimmune injection for a wide range of indications, including chronic granulomatous disease, osteopetrosis, idiopathic pulmonary fibrosis, cancer, mycobacterial and systemic fungal infections, and cystic fibrosis. The company has active development programs underway for these indications, several of which are in mid- or advanced-stage human testing, known as clinical trials. InterMune recently announced that data from a Phase II trial of pirfenidone suggests it may be more effective than prednisone, an popular anti-inflammatory glucocorticoid drug, in patients with idiopathic pulmonary fibrosis. Last week, InterMune said results of trials of its Actimmune drug "continues to support the potential survival benefit" of the drug for patients with IPF (idiopathic pulmonary fibrosis). The stock rallied on the report and "short covering" helped the issue move to a 5-month high. Investors who want to participate in the future performance of ITMN should consider this position. JUN-22.50 IQY RX LB=0.60 OI=149 CB=21.90 DE=35 TY=2.4% MY=6.8% ***** SOHU - Sohu.com $22.83 *** All-Time High! *** Sohu.com (NASDAQ:SOHU) is an Internet portal in China. The firm's portal consists of sophisticated Chinese language Web navigational and search capabilities, 15 main content channels, Internet-based communications and community services, and a unique platform for e-commerce and short messaging services. Each of the company's interest-specific main channels contains multi-level sub-channels that cover a range of topics; news, business, entertainment, sports and careers. The firm also offers free Web-based e-mail. Sohu.com offers a universal registration system, and the company's portal attracts consumers and merchants alike. One of the key features is a proprietary Web navigational and search capabilities that reflects the cultural characteristics and thinking and viewing habits of the People's Republic of China Internet users. Internet use is growing exponentially among foreign countries and China enjoys the largest population in the world. Investors who want to participate in the country's Internet explosion should consider this position. JUN-17.50 UZK RW LB=0.35 OI=195 CB=17.15 DE=35 TY=1.8% MY=6.2% ***** SFA - Scientific-Atlanta $20.29 *** Elevator Going Up! *** Scientific-Atlanta (NYSE:SFA) is a provider of end-to-end networks used by programmers and cable operators and a provider of worldwide customer service and support for the cable TV industry. The firm's products include satellite communications equipment that transports programming from its source to geographically distributed headends, optical communications products that transport information within metropolitan areas to individual neighborhoods and radio frequency electronics products that provide local neighborhood connectivity to each consumer's home. Its products include integrated computer systems and software at the cable operators' head-ends that manage video and data services for large networks. Products that reside in the consumer's home include digital interactive set-tops and high-speed cable modems. Shares of Scientific-Atlanta are on a "moon-shot" trajectory and one of the few ways to play the bullish trend conservatively is by selling an "out-of-the-money" put. Our position establishes a cost basis near $17 for investors who favor the outlook for Scientific-Atlanta. The bid listed below is $0.05 higher than the published prices at the CBOE, thus investors should "target" a slightly better entry point in SFA with this position. JUN-17.50 SFA RW LB=0.35 OI=257 CB=17.15 DE=35 TY=1.8% MY=5.4% ***** NVDA - Nvidia $21.26 *** An Old NASDAQ Favorite! *** Nvidia (NASDAQ:NVDA) designs, develops and markets graphics and media communication processors and related software for personal computers (PCs), workstations and digital entertainment platforms. The company provides an architecturally compatible top-to-bottom family of unique, performance 3-D graphics processors and graphics processing units that set the standard for performance, quality and features for a broad range of desktop PCs. Nvidia's graphics processors are used for a wide variety of applications, including games, digital image editing, business productivity, the Internet and industrial design. Its graphics processors are designed to be architecturally compatible backward and forward between computer generations, giving its original equipment manufacturers (OEMs), customers and end users a low cost of ownership. Shares of NVDA soared recently on news that the company expects revenue for its fiscal second quarter to grow 12% to 18% from the first quarter on increased Xbox sales. In addition, Nvidia plans to launch a new high-end graphic chip for computers (NV35) and investors are bullish on the company's outlook. This position offers a low risk method to profit from the current upside activity in the issue. JUN-17.50 UVA RW LB=0.30 OI=3556 CB=17.20 DE=35 TY=1.5% MY=5.2% ***** ***************** 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 RNWK 7.93 JUN 7.50 QRN RU 0.45 100 7.05 35 5.5% 12.3% VECO 18.69 JUN 17.50 QVC RW 0.60 15 16.90 35 3.1% 7.6% FDRY 13.77 JUN 12.50 OUJ RV 0.40 506 12.10 35 2.9% 7.5% ILXO 16.13 JUN 15.00 IUE RC 0.50 700 14.50 35 3.0% 7.5% SRNA 19.71 JUN 17.50 NHU RW 0.50 63 17.00 35 2.6% 7.0% DRIV 18.20 JUN 15.00 DQI RC 0.35 669 14.65 35 2.1% 6.9% ISPH 15.15 JUN 10.00 JPU RB 0.25 2498 9.75 35 2.2% 6.6% CA 19.98 JUN 17.50 CA RW 0.40 4277 17.10 35 2.0% 5.9% OSIP 23.97 JUN 20.00 GHU RD 0.40 868 19.60 35 1.8% 5.8% SNDK 29.09 JUN 25.00 SWQ RE 0.50 1211 24.50 35 1.8% 5.4% VRTY 18.85 JUN 17.50 YQV RW 0.40 87 17.10 35 2.0% 5.3% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Equities Retreat: Is It Just A Necessary Consolidation? By Ray Cummins Stocks edged lower Friday after another round of negative reports raised concerns about the health of the U.S. economy. Worries about the record decline in the Producer Price Index and falling housing starts weighed heavily on investors, helping to pull the blue-chip Dow industrials 34 points lower to 8,678. The technology segment fared no better with the NASDAQ down 12 points to 1,538 on weakness in semiconductor and computer hardware shares. The broader S&P 500 index slid 2 points to 944, just one day after reaching a new 9-month high. Trading volume totaled a robust 1.5 billion on the NYSE and 1.75 billion on the NASDAQ. Breadth was positive on the Big Board with winners barely outnumbering losers. On the NASDAQ, decliners outpaced advancers by a 3 to 2 ratio. In the bond market, government treasuries enjoyed new gains with the the 10-year note up 6/32 to yield 3.51% while the 30-year long bond edged up 1/32 to yield 4.48%. On the fund flow front, Trim Tabs estimated that all equity funds had outflows of $300 million over the week ending May 14 compared with outflows of $200 million in the prior week. Equity funds that invest primarily in U.S. stocks received an infusion of $200 million versus inflows of $400 million during the prior week. ***************** 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 or 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 84.00 MAY 65 70 0.55 69.45 $0.55 Closed BSTE 42.33 51.32 MAY 30 35 0.50 34.50 $0.50 Closed GILD 44.15 47.45 MAY 37 40 0.30 39.70 $0.30 Closed OIH 54.58 62.35 MAY 45 50 0.55 49.45 $0.55 Closed MDT 46.90 48.55 MAY 42 45 0.35 44.65 $0.35 Closed NBR 41.11 43.55 MAY 35 37 0.30 37.20 $0.30 Closed BBBY 39.52 39.99 MAY 35 37 0.30 37.20 $0.30 Closed PFCB 42.47 42.38 MAY 35 40 0.55 39.45 $0.55 Closed GENZ 39.82 43.16 MAY 35 37 0.30 37.20 $0.30 Closed IVGN 31.45 36.14 MAY 27 30 0.30 29.70 $0.30 Closed SEE 41.62 44.08 MAY 35 40 0.50 39.50 $0.50 Closed BZH 71.80 76.38 JUN 60 65 0.55 64.45 $0.55 Open CECO 60.52 60.53 JUN 50 55 0.50 54.50 $0.50 Open FDC 40.22 41.11 JUN 35 37 0.30 37.20 $0.30 Open RCII 65.35 65.85 JUN 55 60 0.50 59.50 $0.50 Open ADTN 45.05 43.79 JUN 35 40 0.45 39.55 $0.45 Open KLAC 42.49 40.61 JUN 35 37 0.30 37.20 $0.30 Open LLTC 36.34 35.25 JUN 30 32 0.30 32.20 $0.30 Open ROST 40.09 39.49 JUN 35 37 0.40 37.10 $0.40 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CAM 49.39 52.30 MAY 60 55 0.45 55.45 $0.45 Closed DRYR 67.40 75.00 MAY 75 70 1.10 71.10 ($0.90) Closed * HCA 37.70 32.97 MAY 45 42 0.25 42.75 $0.25 Closed VAR 49.04 52.48 MAY 60 55 0.60 55.60 $0.60 Closed OIH 54.58 62.35 MAY 65 60 0.50 60.50 ($1.85) Closed BAC 71.34 74.16 MAY 80 75 0.60 75.60 $0.60 Closed OEX 440.97 475.72 MAY 480 475 0.55 475.55 ($0.17) Closed WLP 76.80 81.05 MAY 90 85 0.50 85.50 $0.50 Closed SYK 66.35 65.10 MAY 75 70 0.65 70.65 $0.65 Closed INTU 37.24 42.42 MAY 45 40 0.40 40.40 ($2.02) Closed * NVLS 27.21 29.08 MAY 32 30 0.25 30.25 $0.25 Closed NBR 39.21 43.55 JUN 45 42 0.30 42.80 ($0.75) Closed * PG 90.15 90.32 JUN 100 95 0.40 95.40 $0.40 Open GS 75.00 76.70 JUN 85 80 0.60 80.60 $0.60 Open MMM 122.81 125.45 JUN 135 130 0.50 130.50 $0.50 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss With the recent rally in oil service shares, our Holdrs (AMEX:OIH) position endured a closing debit and Nabors Industries (NYSE:NBR) has quickly achieved "early-exit" status. Dreyer's (NASDAQ:DRYR) was closed on Tuesday (the summary reflects the loss on that date) as the issue rallied amid speculation that regulators are near an approval of Nestle's takeover of the company. Intuit shares rose after a favorable earnings report, forcing an early departure from the bearish play. Spreads in McKesson (NYSE:MCK), GlaxoSmithKline (NYSE:GSK), International Game Technology (NYSE:IGT), and L-3 Communications (NYSE:LLL) have previously been closed to limit potential losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status BGEN 35.67 39.55 MAY 30 32 2.20 32.20 0.30 Closed GILD 44.04 47.45 MAY 37 40 2.25 39.75 0.25 Closed SLM 115.05 112.76 MAY 105 110 4.50 109.50 0.50) Closed AXP 38.46 40.62 JUN 32 35 2.20 34.70 0.30 Open GENZ 41.47 43.16 JUN 35 37 2.20 37.20 0.30 Open BSX 46.91 48.70 JUN 37 40 2.25 39.75 0.25 Open MERQ 35.75 37.32 JUN 30 32 2.25 32.25 0.25 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 52.92 MAY 60 55 4.30 55.70 0.70 Closed CCMP 42.68 44.51 MAY 50 45 4.30 45.70 0.70 Closed LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss The position in Boston Scientific (NYSE:BSX) has previously been closed to limit potential losses. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status OVRL 15.99 16.97 MAY 17 15 0.10 1.00 Closed DCTM 16.09 18.87 MAY 17 15 (0.30) 2.25 No Play SMH 26.43 27.81 AUG 30 22 0.10 1.20 Open SLAB 30.17 26.82 JUL 30 22 0.10 0.00 Closed MRVL 26.72 27.98 JUN 30 22 (0.20) 0.50 Open The speculative position in Silicon Laboratories (NASDAQ:SLAB) has suffered from the issue's renewed downtrend and it may be prudent to close the play before the stock tests support near the sold put at $22.50. 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. A similar situation exists with our new position in Marvell Technology (NASDAQ:MRVL). The target price was available in the Semiconductor Holdrs (AMEX:SMH) and the position has 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 28.70 MAY 24 27 0.10 0.00 Closed As previously noted, 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 28.78 JUL-30C JUN-30C (0.70) 0.40 Open ESI 29.11 28.34 OCT-30C JUN-30C 1.35 1.60 Open OCR 27.07 27.32 JUN-27C MAY-27C 0.60 1.00 Closed MO 32.13 33.30 JUN-27P MAY-27P 0.95 0.45 Closed FILE 13.75 15.45 JUL-15C JUN-15C 0.10 0.20 Open IBM 87.57 87.55 JUL-90C JUN-90C 0.25 1.20 Open GDT 39.98 41.13 OCT-45C JUN-45C 1.45 1.55 Open NSM 21.80 24.00 JAN-25C JUN-25C 2.10 2.40 Open Among the new positions, Guidant (NYSE:GDT) was the most difficult issue, requiring an initial debit that was higher than expected as the stock gapped higher at the open during Monday's bullish session. Biomet (NASDAQ:BMET) closed near maximum profit and the longer-term play in ITT Educational Services (NYSE:ESI) is also performing well. Positions in Altria Group (NYSE:MO), which previously achieved a small profit, and Omnicare (NYSE:OCR), which finished the expiration period with a gain, were not available at the suggested entry prices. The "Reader's Request" time spread in Action Performance (NYSE:ATN) was not available due to a sharp decline in the stock price prior to the opening bell on 4/28/03. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status LNC 29.88 32.21 MAY 30 30 3.00 3.70 Closed 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. ***** BSX - Boston Scientific $48.70 *** Stent-makers Rally! *** Boston Scientific (NYSE:BSX) is a global developer, manufacturer and marketer of less-invasive medical devices. The firm's unique products are offered by two major business groups, Cardiovascular and Endosurgery. The Cardiovascular segment focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. BSX - Boston Scientific $48.70 PLAY (conservative - bullish/credit spread): BUY PUT JUN-37.50 BSX-RU OI=4516 ASK=$0.85 SELL PUT JUN-40.00 BSX-RH OI=13628 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$39.75 ***** PNC - PNC Financial Services $47.52 *** Bullish Banker! *** PNC Financial Services Group (NYSE:PNC) is a bank holding company and its operating businesses engage in regional community banking; wholesale banking, including corporate banking, real estate finance and asset-based lending; wealth management; asset management and global fund processing services. The company provides financial products and services nationally and in its primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. It also provides certain banking, asset management and global fund processing services internationally. PNC Financial's corporate legal structure consists of two subsidiary banks, with their subsidiaries and over 70 active non-bank subsidiaries. PNC Bank, National Association (PNC Bank), headquartered in Pittsburgh, Pennsylvania, is PNC Financial's principal bank subsidiary. PNC - PNC Financial Services $47.52 PLAY (conservative - bullish/credit spread): BUY PUT JUN-42.50 PNC-RV OI=476 ASK=$0.25 SELL PUT JUN-45.00 PNC-RI OI=2094 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$44.70 ***** UNH - UnitedHealth Group $95.41 *** Bullish Sector! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The firm's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes the UnitedHealthcare and Ovations businesses; Specialized Care Services, and Ingenix. UNH - UnitedHealth Group $95.41 PLAY (conservative - bullish/credit spread): BUY PUT JUN-85.00 UHB-RQ OI=1669 ASK=$0.55 SELL PUT JUN-90.00 UHB-RR OI=2401 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$89.40 ***** WLP - WellPoint Health $81.05 *** Low Risk = Low Reward! *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare firm. As a result of the January 2002 completion of its merger with RightCHOICE Managed Care, the company has over 12 million members. The company offers a broad spectrum of network-based managed care plans, including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), as well as point-of-service (POS) and other hybrid plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The firm also provides an array of specialty and other products, including pharmacy, dental, workers' compensation managed care services, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. WLP - WellPoint Health $81.05 PLAY (very conservative - bullish/credit spread): BUY PUT JUN-70.00 WLP-RN OI=1157 ASK=$0.25 SELL PUT JUN-75.00 WLP-RO OI=1256 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$74.60 ***** ANF - Abercrombie & Fitch $27.25 *** Mediocre Outlook! *** Abercrombie & Fitch Company (NYSE:ANF), through its subsidiaries as specialty retailers, operates stores selling casual apparel, personal care and other accessories for men, women and kids under the Abercrombie & Fitch, abercrombie and Hollister Co. brands. As of February 2, 2002, the company operated 491 stores in the United States. A&F's stores and point-of-sale marketing are designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are carefully planned and coordinated to create a shopping experience that is consistent with the A&F lifestyle. ANF - Abercrombie & Fitch $27.25 PLAY (conservative - bearish/credit spread): BUY CALL JUN-32.50 ANF-FZ OI=329 ASK=$0.15 SELL CALL JUN-30.00 ANF-FF OI=423 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$30.30 ***** GM - General Motors $34.41 *** Another Downgrade! *** General Motors (NYSE:GM) is a diversified automotive business with interests in communications services, locomotives, finance and insurance. GM's automotive business designs, manufactures, and/or markets vehicles primarily in North America under the Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn and Hummer nameplates, and outside North America under the Vauxhall, Opel, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac nameplates. GM's communications services relate to its Hughes Electronics Corporation subsidiary, which includes its digital entertainment, information and communications services, and satellite-based private business networks. GM also is engaged in the design, manufacturing and marketing of locomotives and heavy-duty transmissions. The firm's financing and insurance operations are conducted through the General Motors Acceptance Corporation, which provides a broad range of financial services. GM - General Motors $34.41 PLAY (conservative - bearish/credit spread): BUY CALL JUN-40.00 GM-FH OI=18719 ASK=$0.20 SELL CALL JUN-37.50 GM-FU OI=17356 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.80 ***** JCI - Johnson Controls $81.61 *** Sector Slump! *** Johnson Controls (NYSE:JCI) is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems, and batteries. For non-residential facilities, Johnson Controls also provides building control systems and services, energy management and integrated facility management. Johnson Controls conducts its business in two operating segments: Controls Group and Automotive Systems Group. The Controls Group is a global supplier of control systems, services and unique integrated facility management to the non-residential buildings market. The Automotive Systems Group makes automotive interior systems for OEMs (original equipment manufacturers) and automotive batteries for the replacement and original equipment markets. JCI - Johnson Controls $81.61 PLAY (less conservative - bearish/credit spread): BUY CALL JUN-90.00 JCI-FR OI=18 ASK=$0.20 SELL CALL JUN-85.00 JCI-FQ OI=137 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.75-$0.80 POTENTIAL PROFIT(max)=17% B/E=$85.75 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** WMT - Wal-Mart $52.92 *** Same Play -- Different Month! *** With annual sales of $218 billion, Wal-Mart Stores (NYSE:WMT) operates more than 2,800 discount stores, Super-Centers and Neighborhood Markets, and more than 515 SAM'S CLUBS in the U.S. Internationally, the firm operates over 1,200 units and employs 1.3 million associates worldwide. Last year, Wal-Mart associates raised and contributed $196 million to support communities and local non-profit organizations. FORTUNE magazine recently named Wal-Mart the third "most admired" company in America and one of the 100 best companies to work for in the U.S. According to a recent study, Americans say Wal-Mart is the company they think of first in supporting local causes and issues, and that is one of the main reasons people shop at Wal-Mart. WMT - Wal-Mart $52.92 PLAY (conservative - bearish/debit spread): BUY PUT JUN-60.00 WMT-RL OI=1165 A=$7.20 SELL PUT JUN-55.00 WMT-RK OI=13176 B=$2.65 INITIAL NET-DEBIT TARGET=$4.45-$4.50 POTENTIAL PROFIT(max)=11% B/E=$55.50 **************** 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. ***** BRCM - Broadcom $21.40 *** LEAPS & Covered-Calls *** Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. Broadcom's diverse product portfolio includes solutions for digital cable set-top boxes and cable modems; high-speed local, metropolitan and wide area and optical networks; home networking; Voice over Internet Protocol; carrier access; residential broadband gateways; direct satellite and terrestrial digital broadcast; DSL; wireless communications; SystemI/OTM server solutions, and for broadband network processors. BRCM - Broadcom $21.40 PLAY (conservative - bullish/calendar spread): BUY CALL JAN04-25.00 LGJ-AE OI=2798 ASK=$2.65 SELL CALL JUN03-25.00 RCQ-FE OI=1282 BID=$0.35 INITIAL NET DEBIT TARGET=$2.15-$2.20 INITIAL TARGET PROFIT=$1.15-$1.40 ***** SRNA - Serena Software $19.71 ** Cheap Earnings Speculation! ** Serena Software (NASDAQ:SRNA) is the Enterprise Change Management (ECM) industry leader. For over twenty years Serena has focused exclusively on providing application change management solutions to the world's leading enterprises, and today its products are in use at over 2,750 customer sites, including 42 of the Fortune 50. Serena leads the way in ECM by offering a single point of control to manage software code and Web content changes throughout the enterprise, from the mainframe to the Internet. This ensures the application's availability and speeds time to market, while also reducing development costs. With headquarters in California, the firm serves customers worldwide through local offices and an international network of distributors. SRNA - Serena Software $19.71 PLAY (very speculative - bullish/calendar spread): BUY CALL AUG-22.50 NHU-HX OI=154 ASK=$1.05 SELL CALL JUN-22.50 NHU-FX OI=80 BID=$0.35 INITIAL NET DEBIT TARGET=$0.65-$0.75 INITIAL TARGET PROFIT=$0.35-$0.50 ***** VRTY - Verity $18.85 *** The Long Road To Recovery! *** Verity (NASDAQ:VRTY) is a provider of infrastructure software that powers corporate portals and e-commerce sites, as well as e-business applications. The firm develops, sells and supports infrastructure products for corporate intranets, extranets, corporate portals, business applications, online publishers, e-commerce providers and original equipment manufacturer (OEM) toolkits for independent software vendors. Verity's products are organized under Enterprise Business Portal Products, which includes Verity K2 Enterprise, Verity K2 Catalog, Verity K2 Spider, Verity Gateways and Verity Publisher, and OEM and Custom Application Development Tools, which includes Verity K2 Developer, Verity Profiler Kit, Verity Export, Verity Filter SDK, Verity KeyView Developer's Kit and Verity KeyView Pro. VRTY - Verity $18.85 PLAY (conservative - bullish/calendar spread): BUY CALL SEP-20.00 YQV-ID OI=414 ASK=$1.60 SELL CALL JUN-20.00 YQV-FD OI=291 BID=$0.45 INITIAL NET DEBIT TARGET=$1.00-$1.10 INITIAL TARGET PROFIT=$0.40-$0.65 *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** NXTL - Nextel Communications $13.60 *** A Reader's Request! *** Nextel Communications (NASDAQ:NXTL) is a provider of wireless communications services in the United States. The company's service offerings include digital wireless service; Nextel Direct Connect, its long-range digital walkie-talkie service; wireless data, including e-mail and text messaging, and Nextel Online services, which provide wireless access to the Internet, an organization's internal databases and other applications. The firm's all-digital packet data network is based on Motorola's integrated digital enhanced network wireless technology. The firm's handsets offer a wide range of features that may include built-in speakerphone, additional lines, conference calling, an external screen that allows customers to view caller ID, voice activated dialing for hands-free operation, a voice recorder for calls and memos, an advanced phonebook that manages contacts and datebook tools to manage calendars and alert users of business and personal meetings. NXTL - Nextel Communications $13.60 PLAY (moderately aggressive - neutral/credit strangle): SELL CALL JUN-15.00 FQC-FC OI=11899 BID=$0.35 SELL PUT JUN-12.50 FQC-RR OI=3919 BID=$0.40 INITIAL NET-CREDIT TARGET=$0.80-$0.90 PROFIT(max)=22% UPSIDE B/E=$15.80 DOWNSIDE B/E=$11.70 ***** ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. 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