The Option Investor Newsletter Sunday 06-08-2003 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: Sell The News? Futures Market: DOH! Index Trader Wrap: WHERE'S THE GOOD NEWS? Editor's Plays: So Many Choices Market Sentiment: Too Fast, Too Furious Ask the Analyst: Gaps... Breakaway, running then exhaustion 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 6-06 WE 5-30 WE 5-23 WE 5-16 DOW 9062.79 +212.53 8850.26 +248.88 8601.38 - 77.59 + 74.37 Nasdaq 1627.42 + 31.51 1595.91 + 85.82 1510.09 - 28.44 + 18.38 S&P-100 495.67 + 12.47 483.20 + 13.45 469.75 - 5.97 + 3.47 S&P-500 987.76 + 24.17 963.59 + 30.37 933.22 - 11.08 + 10.89 W5000 9452.54 +233.65 9218.89 +302.66 8916.23 - 73.62 +106.51 RUT 453.94 + 12.94 441.00 + 22.60 418.40 + 3.73 + 1.14 TRAN 2481.54 - 4.81 2486.35 +102.99 2383.36 - 35.95 - 42.87 VIX 23.43 + 1.73 21.70 + .32 21.38 + 0.37 - 1.03 VXN 36.13 + 4.47 31.66 + 1.93 29.73 - 1.29 - 1.07 TRIN 1.06 0.92 1.09 0.93 Put/Call 0.78 0.67 0.74 0.52 ****************************************************************** Sell The News? by Jim Brown What the heck happened? That is what bulls wanted to know as the +170 point Dow rally on good Jobs numbers fizzled into only a +21 point gain. The Nasdaq did even worse percentage wise by dropping nearly -60 points from its high of 1684. Friday was a major reversal day by most standards but the Dow did manage to close positive and over 9050. It was not a bad day despite the results. Dow Chart - Daily Nasdaq Chart - Daily The major report for Friday was the Nonfarm Payrolls, which came in bristling with surprises. The decline in the headline number to only -17,000 job losses was significantly better than expected. More important was the revision to April to flat from -48,000. The January jump in employment was cut but the huge Feb drop in jobs was cut by almost two-thirds. Going into Friday's report we were looking at a drop of nearly -550,000 jobs since January. After the giant revisions that same period accounted for only a -272,000 job drop. This 50% haircut in bearishness should have been a clear sign of better than expected business conditions. There were some negatives with the unemployment rate rising to 6.1% and manufacturing losing -53,000 jobs in May. Also, and this is a big one, they changed the counting process to something called the benchmark process. As a result of the change in the counting process the actual employment shifted lower by 264,000 from April. 2002 jobs were revised down by another -650,000 to -2.5 million. Where those jobs went and why is unknown. The actual total unemployment rose +212,000 in May to nearly nine million. 43% of those who received unemployment have dropped off the roles and are no longer receiving checks. The employment picture is improving although we are not to the point where jobs are being created. The market should be thankful for small favors, even if they were doled out by sharp pencils. Unemployment gains going into the summer will be more difficult as high school and college students that graduated will be entering the already decimated workforce. Consumers went on a credit spending spree in April with a $10.7 billion rise in credit. The consensus was for only a gain of +2.0 billion. This gain was largely in the nonrevolving category which is highly volatile due to how changing auto incentives attract buyers. After you average the losses in the same category over the last two months the rate of increase is actually down to the lowest level since 1993. The low interest rates have prompted many consumers to refinance their homes and pay off normal consumer debt. The combination of the Jobs numbers and the credit numbers spiked the market at the open as bond traders sold on a knee jerk reaction to a reduced possibility of future cuts. The chances of a premeeting cut or a 50 point at the June-25th meeting decreased with the jobs revisions. There is still a 100% chance of a 25 point cut to head off deflation and match the ECB but the chance for a 50 point went to zero. Or maybe I should say almost zero. Of 25 dealers surveyed on Friday 21 thought the Fed would cut rates at the June meeting. Seven of those 21 still think there is a chance of a 50 point cut. The Fed fund futures are only showing a 2% chance of that coming to pass. That chance increases to 29% for another 25 points at the August meeting. With economics taking a sudden turn upward the ten-year treasuries, where yields dropped as low as 3.25% on Thursday, spiked to 3.41% on Friday. In bond terms this is a big move. There was a little buying just before the close but the early dump fueled the stock market with rocket fuel. The second stage of that rocket failed to ignite and it never broke free of the earths gravity. The Dow soared +170 points to 9215 before quickly rolling over once the internals of the jobs report filtered through the trading desks. Bonds quit selling and the extreme volume of the first hour dropped off sharply. There were simply not enough buyers, even with the flood of bond money, to sustain the rally at that rarified altitude. The selling was concentrated in the previous leaders which indicated traders were simply locking in profits not a broad based correction. The internals were still very strong and very broad. The new 52-week highs hit a new 52-week high at 1305 compared to only 13 new lows. Even after the sell off Friday afternoon the broader market was almost evenly split on advance/declines. NYSE volume was over 2.3 billion shares and the Nasdaq traded 2.996 billion shares. That totals nearly 5.7 billion shares when you include all markets. This is huge volume in what was basically a down day. The Dow did finish higher but the Nasdaq did not on very heavy volume. I am not trying to make a bear case. On the contrary I think the market needed to sell off to relieve some of the excess. The Dow has serious resistance at 9053. The opening spike shot it to 9215 and well over that resistance. However, when the selling ended the Dow came to a dead stop at 9053 which is now acting as support. This was a major victory in my opinion and the positive close is a bonus. The Nasdaq dropped -60 points from its high and ended up nearly -20 negative. This was not a sterling performance. I am still positive despite the drop. We needed the drop. We needed the profit taking. Getting it from a +170/+40 point spike and ending close to even is a plus. The high volume shows that there were willing buyers for every seller. Technically this was a reversal day. The extremely high pole on Friday's candle is normally a clean sell signal. Especially if it comes at the end of a rally. Check out the candles on 9/11, 12/2, 4/7. In candle stick charting the candles from Friday and April 7th are called a Gravestone Doji. The market gaps open above the previous day's close in an uptrend. It rallies to a new high then loses strength and closes near its low. This represents a bearish change of momentum. Confirmation of this reversal is an open below the candle body on Monday. That would be under 9040 for the Dow. Dow Chart with candle examples The candle on the Nasdaq Compx can be viewed as several things including a Dark Cloud Cover but they are all bearish and represent a reversal. Ordinarily I would be bearish based on the market action today but I have been expecting a couple consolidation days. The fact that we may have started with the very high volume from a very high gap open could have mitigated much of the damage already. The nearly six billion shares traded gave anyone the chance to exit at the highs if they desired. I am not naove enough to believe that the selling is over. That would be nice but I think we have come too far too fast. We need several days of consolidation to appease the bears. The first three days of next week are very light in terms of economic reports. There is a very good possibility we could see some more selling with nothing to fixate on for guidance. This has been the pattern in the recent rally. No reports, no progress. We could also see an increase in earnings warnings beginning next week. These events could provide a couple days of retracement. That is fine if you are a bear and are short. However, if you are looking for an entry point then Monday/Tuesday could be your cup of tea along with several million others. Look at the facts. TrimTabs said investors added $1.52 billion in new cash in the last week. Not a truckload but a continued positive flow. Many bond holders may have been reluctant to dump at the open Friday and are waiting for next week to make a more orderly exit. The 25 point cut is already 100% priced into the market and the odds of the second 25 points are now at only 2%. Do you hold for the long shot while everyone else is leaving? Probably not. It was also confirmed again on Friday that the State of Illinois was going to sell $10 billion in bonds and 60% of the proceeds would go into stocks to help heal their pension funds. I heard two reports on the topic and depending on who you heard there are between 17 and 29 other states planning on doing the same thing in the month of June. This represents a huge influx of cash. We also have a tax cut in the works with stock favorable terms and 25 million checks going directly to consumers over the next 90 days. It is also the end of the quarter. Those mutual funds that have extra cash and have been waiting for a pullback are probably chomping at the bit to invest it before month end. Next week is also the week before expiration week. This week has been trending positive for sometime while the actual expiration week has been less exciting. Lastly, the economics are improving. Slowly but surely there is a glimmer of hope on the horizon. If we get some positive earnings guidance begin to appear from those companies that over warned due to the war then things could heat up fast. 54% of the S&P warned for the 2Q during the last earnings cycle. That sets up the potential for some better than expected numbers. With the Sarbanes-Oxley Act there is no reason for any company to give optimistic or even mildly uplifting guidance when any outside event, like the war, could make them subject to suit or worse. I suspect we will see more upside surprises then previously expected. Obviously this is all conjecture. The markets have literally refused to go down for so long that the easy prediction would be for a fall. I just do not see it in the internals. I do believe we will see some selling but I believe the dip buyers are alive and well and will be softening all the blows. The Nasdaq has minor support at 1620 and slightly stronger support just below 1600. Neither of these levels represent a major bout of selling. 1535 and 1485 are the real support levels if there is a real change in the trend. We could easily retreat to there but it would take a serious change in sentiment just when economic conditions were improving. The Dow has clung to 9000 for 3 of the last 5 days and it is likely to cling to that level for several more. That does not mean we cannot go lower. The dip last week to 8900 was bought in a rush and it would probably happen again. In short, look for some more selling on Monday/Tuesday but also look for willing buyers to appear on every dip. Until that trend is broken the longer term rally will remain intact. Most of our readers are familiar with Alan Knuckman and Andy Aronson who ran the Preferred Trade Live office in Chicago for Preferred Trade. They have partnered with Mann Financial to open OneStopOption.com. They are trading stocks, options and futures for not only U.S. residents but traders outside the country as well. Beginning Monday they will offer Autotrading of the CPTI trades from Mike Parnos and the covered calls, naked puts and combo sections from Ray Cummins and Mark Wnetrzak. These are the most consistently profitable sections on the website in both bear and bull markets. We suggest you contact Alan/Andy at www.OneStopOption.com or by phone at 888.281.9569 to sign up for these services. You can also email them at Aknuckman@OptionInvestor.com. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** DOH! Jonathan Levinson Don't just do something Stand there! That's what many bears did on the cataclysmic gap up open, relentless push higher, and rounded top that mercifully arrived at a little past 10AM. From 8AM until well into the morning, most bears were frozen in the headlights. After a bit of chop, the indices proceeded to return to the gap and then fill it, ending the day near their lows. It was a huge volume day, 2.3B NYSE shares and 2.95B Nasdaq shares changing hands. A gravestone doji reversal was printed on volume, and while we've seen these during the rally, we haven't seen any on such huge volume or such a perfect one-eighty "doji moodswing". Bears were completely caught flatfooted, capitulating, meditating, hyperventilating. The reversal was so perfect that many were buying the dips by that point, and few, myself included, were able to trust the head and shoulders neckline failure when it finally came. Particularly on the Nasdaq indices, the day went from perfectly bullish to perfectly bearish, and a tip of the hat to Jim, who warned us in the Market Monitor not to lunge for the obvious reaction to the bullish employment report that kicked the bulls' premarket party into high gear. The indices closed at their lows of the day. Intraday QQQ chart Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03M 1017 1002 994 980 972 YM03M 9275 9163 9104 8992 8932 NQ03M 1286 1249 1230 1193 1174 10 minute chart of the US Dollar Index The US Dollar Index hit pure nitrous on the 8:30AM jobs data, and despite the ripcord escape in equities, it consolidated at the top in what looks like a bullish triangle forming a possible cup and handle formation. Daily chart of June gold The action was bearish for gold, which had gotten a lift on Thursday and gave it back Friday, but still remained well above the 359 support line we've been discussing. The downphase remains a sideways consolidation and bodes bullish for gold. The Commodity Futures Index, the CRB, closed higher by 1.27 at 237.43, led by sugar, soybeans, crude oil, corn, heating oil and silver. Daily chart of the ten year note yield Bonds sold off more than the fed's 2B net repo drain would have implied, with the TNX adding 6.1 basis points to 3.352% after having printed a spike low of 3.25% yesterday. Daily NQ3M candles The gravestone doji print is so perfect that I felt disinclined to draw the ascending trendline over it. The upper candle spike on Friday's candle violated the upper trendline, and the body closed below it. As predicted yesterday, we saw a higher low and higher high, and if not for the big volume on Friday's reversal, the day would appear far more bullish than it actually felt. Note that the oscillators did not give sell signals, but they appear to be topping, with the slower MacD lagging the stochastic. 30 minute 20 day chart of the NQ3M The weaker NQ contract led the way with a potential downside breakout of a sloppy bear flag formation on the 30 minute candles. The oscillators are in clear downphases, and the stochastic is in oversold territory but with no sign of a turn just yet. A weak open looks very likely, but whether this goes deep enough to start a sell signal on the daily will have to be seen. Daily ES3M candles The ES contract was far stronger than the NQ as the above chart depicts. The low was far higher than we had on the NQ, and indeed, the NQ closed on a -1.78% loss, while the ES closed lower by just -.33%. Nonetheless, the oscillators are telling the same story. While both the NQ, ES and YM are still well within the ascending channels, Friday's session was a high volume failure to violate those channels to the upside. 20 day 30 minute chart of the ES3M The strength in the ES relative to the NQ contract is plain on the 30 minute candles, which show no downside channel failure comparable to that on the NQ. Daily YM3M candles Nothing to add on the YM, which rose to an astounding high of 9215 but closed at 9044, still bullish except for the high volume reversal and toppy oscillators. 20 day 30 minute chart of the YM Once again, good relative strength between the YM and the NQ. As we've seen, the Nasdaq related indices tend to lead the others. We'll have to see on Monday whether this holds true again. What's clear is that Friday might have been a key reversal, but it will take further downside to give bears reason to relax. On the daily and even 30 minute charts (except for the NQ on the latter), the uptrends are firmly intact. As reader Matt put it: "OK, they closed the Dow's day and week over the August '02 highs. That plus the $Tran's prior taking out of its highs gives more than a short-term Dow Theory buy signal (given earlier this week), it signals a full blown multi-month (to maybe even Bush's reelection) bear rally. We should hear all about the Dow Theory Bull signal on CNBC and in the financial press this weekend (odd the way they didn't popularize the Dow Theory sell signals and then the big Bear signal a few years ago). So the next week or so should be great distribution weeks as traders fail to realize that Dow Theory signals aren't short-term market timing signals. But I think the bulls with a longer term agenda will step aside for a while. They've proven their case." We'll be watching closely from Monday's open. In any event, bears survived Friday's session, a statement which would have shocked most traders Friday morning. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** WHERE'S THE GOOD NEWS? By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE - I may have been thinking it week before last, but the last spurt up, especially in the tech-heavy Nasdaq may have finally gotten the Composite Index (COMPX) Index ready for a correction. At a minimum, I anticipate that the S&P 500 (SPX) will now have better relative performance as these sectors get more of a play from investors and traders as they play catch up. Market psychology has changed significantly to the glass is half full, from half empty. It's part of the "charm" (how about perversity?) of the market, that when it reverses it doesn't take too many along for the ride. In the present instance, too many don't believe that the market is suddenly now "undervalued" or should be rebounding so strongly. Hey, if there were a lot of pauses along the way, we would say, "see I told you that it wasn't going anywhere". My dear ol pappy said to me about the market: "Son, it ain't what ya know, its what ya don't know" that makes it go". So, maybe I didn't know what the heck was going on - except that market participants were in a mood to buy. Cause, last week saw such great news as the Commerce Department saying that outlays on construction spending fell 0.3% in April, the lowest level since December of 2002. The Labor Department said initial filings for state unemployment benefits rose by 16,000 to 442,000 in the latest week. Factory orders fell 2.9% in April after a 2.2% gain in March. The 2.9% decline in April's factory orders was the biggest drop since November 2001 when factory orders fell 4.1%. LAST WEEK'S ECONOMIC/MARKET NEWS – Well, there was some news that the market took as encouraging - For instance, the Institute for Supply Management (ISM) said that the service sector expanded in May, with its services index rising to 54.5 from April's 50.7 reading, and above economists' forecast of 52.0. Economists had forecasted the ISM Services Index to come in at 52.0. The U.S. Department of Labor last week said workplace efficiency improved by more than first thought as non-farm productivity rose 1.9%, which was more than the 1.6% first reported. I suppose that the tone of the market last week might have been set by a minor revival of merger mania as "Merger Monday" as enterprise software maker PeopleSoft (PSFT) and J.D. Edwards (JDEC) said they would join forces. PeopleSoft indicated it would acquire rival J.D. Edward in a $1.7 billion stock deal to create the world's second largest enterprise application company. Of course, by week's end Oracle (ORCL) was trying to muscle in by an unsolicited bid for PeopleSoft, with their management issuing a press release saying that "Oracle's bid shows atrociously bad behavior, from an atrociously bad company." Hey, these guys seem to have some bad blood! PeopleSoft and Oracle have actually a pretty bitter rivalry, not only in product offerings but at the CEO level. I doubt that they play golf together. FRIDAY - It was reported that Nonfarm Payrolls for May fell 17,000 versus economists' forecast for a 30,000 drop. The May unemployment rate rose to 6.1%, a record going back 9 years I think, but in line with the consensus estimate. Average hourly earnings for May rose 0.3%, which was slighty higher than economists' forecast of a 0.2% rise. So, what happened on this "bad" news? - not only a rally but such a strong one that trading curbs kicked in as the Dow (INDU) went to 9,163, up 122-points at the time - but this was even down from ts session peak of 9,215. McDonalds (MCD) accounted for significant strength in the Dow 30 average as the stock was up substantially after the company said it had a 2.2% rise in global May (comparable) unit sales and a 6.3% rise for the U.S. And we thought the overseas nasties were doing nothing but trashing MAC's overseas restaurants and boycotting the made in America hamburger king! Just goes to show, it IS what you DON'T know that is the surprise. Anyway, the aforementioned news lit a fire under some Street of Dreams analysts as they talked up the bullish implications after expecting some negative global comparables. And its noteworthy that those Francs, D-Marks, etc. going into the tills, buy more dollars these days. The Dow was up 21.49 points on Friday on good volume, after touching its highest intraday peak sine December (2002). The Nasdaq Composite however ended down 18.6 points (-1.1%) to 1627.42 as traders took profits by selling into a sharp morning advance. The Standard & Poor's 500 Index (SPX) finished the week at 987, up 24 points for a 2.5% gain. SPX even traded above 1000, for the first time since June of last year. The Dow Industrials(INDU) finished at 9,062, up 212 points on the week for a 2.4% gain, from its week-ago close down at 8,850. In terms of the Dow, the market is up almost 9% on the year - the close above 9,000 was the first time since July of 2002. The Nasdaq Composite (COMPX) ended the week at 1,627, up 32 points, or 2% from its week-ago level of 1,595. The Nasdaq has gained a whooping 22% since Jan.1st. As I mentioned already, U.S. nonagricultural companies cut some 17,000 jobs in May versus holding steady in April. However, by way of explaining some of the bullish enthusiasm for stocks, the expectations were for a decline of 25,000 jobs. April's figure had originally been reported as a drop of 48,000 jobs. The report, particularly with the April revision, seemed to show a slowing of job cuts. The Street was less impressed with consumer credit, which grew about $10.7 billion to a seasonally adjusted $1.756 trillion according to the Federal Reserve - this versus a predicted credit rise of by about $1.9 billion in April. Households borrowed more on credit cards and also took on more non-revolving loans like car and boat loans, according to the Fed. AND, NEVER underestimate our collective addition to plastic! Intel, (see it's chart below) held firm its forecast for Q2, noting improvements in its core microprocessor business - but also continued weakness in communications chips. Sun Micro rallied on some merger speculation, gaining nearly 6% (to 5.20). The market loves mergers as can be seen from the PeopleSoft/JD Edwards story at the beginning of the week. The Friday gains ends a strong week, with more investors now talking about the market and actually putting some money back into stocks. The Journal quoted someone who said that "For the first time in months I am hearing people talk about stocks at cocktail parties" - ah oh! The quote went on to say that there is finally the feeling that the "the train is leaving the station without me." Must be correction time - sorry, can't help my contrarian nature! INDEX OUTLOOK – FIRST, SOME BELLWETHERS - With some key tech stocks having downside momentum confirmed by a sharp jump in their average daily volume, it tends to reinforce some things I'm seeing on the Index charts. Microsoft looks lower and if the software giant is behaving so poorly, it casts some doubt on how much higher the Nasdaq indices can go. Also, IBM is suffering on some troubles with the regulatory bodies, but technically watch for a close (or rebound from) its 200-day average at 78.75 currently. Intel (INTC) will bear watching per my notes on its chart above. It needs to close above 22 and find support in this area on subsequent pullbacks to it. Absent that - if there is a retreat from 22, it looks like at least a temporary top. AND - What's with gold stocks? Dollar strength is most likely what is pulling up the XAU index - it sure ain't an inflation push-pull. GE's price action and its solid breakout move, suggests that the S&P may start to gain or outpace the tech heavy Nasdaq. S&P 100 Index (OEX) – Daily & Hourly charts: My sentiment indicator has moderated from the week before, showing that option traders are not giving up on the put side - hey, I would want to lock in some gains on some stocks by taking out some put insurance especially with relatively low volatility. When I drew the likely trend channel on the daily chart (below, left) it suggests that OEX could be hitting some practical resistance - and in terms of those big round numbers (1000 in SPX and 500 in OEX), these price levels seem to draw some profit taking. Unless we get couple of OEX closes above 500 next week, this last leg up may be the best gains we'll see for a while. Am I willing to buy OEX puts on the prospect - one more spurt to around 510 would suggest a good risk to reward in puts, by exiting on a move to 515. Downside potential is back to technical support in the 485 area. Next lower support is around 475 - I would be a buyer of calls in this area if reached. A "typical" trading range for the S&P 100 or OEX relative to the (21-day) moving average envelope bands, also suggests that OEX has reached an extreme. The 14-day RSI is saying the same thing. Being at such "extremes" doesn't cause me to play the potential downside automatically. These kind of extremes will tend to keep me out of any new call purchases as the risk to reward ratio is not in my favor. As I said last week, if OEX went to 495 it would test 500. Its like the rule of thumb about a stock hitting $90 - it will usually go to a 100. Repeating one comment - the 500 area is my exit point for OEX calls and is where I want to look closely for put buying opportunities. Even though the current rally is taking on a life of its own, seeming ahead of the current fundamentals for stocks and the economy. Some bad news comes along and suddenly its wake up time on the Street of Dreams! Dow Industrials (INDU) Daily & Hourly (DJX.X) charts: The Dow hit my upside targets and then some, as I thought it would struggle to get above 90. Well, it came down pretty sharply from 92, so we'll see if 9000 becomes a new "line" of support. I peg DJX resistance - assuming is stays in its hourly channel- at around 91 and technical support at 88.5, then 86.5. Going by the way the trend channel looks on the DAILY chart, it looks like resistance comes in at 92-92.5, and support at 87.5 in DJX. If the Dow for the most part stays above 9000 this week, it brings into play my long-standing expectation that the Average would at least get back up to 10,000. What I look for is whether there is more than a 1-day close under 9000. Two consecutive days under this level suggests that an interim or temporary top is in place. My revised (maximum) expected range on the Dow is 8400-8450 on the downside and 10,000 on the upside. Nasdaq Composite Index (COMPX) – Daily & Hourly: I thought 1620 might be the maximum upside for COMPX for awhile - WRONG! Never underestimate the ability for the indices, especially tech, to overshoot any "reasonable" target, once the bulls (or bears) get the bit in their teeth and you get MO (mighty MOmentum). 1550 continues to look like key near technical support. The 14-day RSI has gotten to a reading that is about as extreme as it gets, without a correction developing - either a pullback or at least a sideways move. I noted on the daily chart below, at the peaks at the 6% envelope line, the tendency for 3 distinct upswings or rallies, followed usually by a 2-part corrective downside correction. Wouldn't be surprised to see this here next. Tech stocks have gotten probably as far extended as they're going to get without earnings follow through in the next reporting period. Hope can get em up, but earnings are needed to keep em up. I went back to the drawing board and redrew the hourly uptrend channel by going further back in the hourly price history. (One advantage I suppose of keep your own price history.) And, as the below channel outline on the hourly COMPX chart suggests, a "natural" peak on this last spurt may have been reached. The big volume that came on Friday in the Nasdaq (see the QQQ chart at bottom) suggests a volume "climax". It's hard to pick tops when (in the words of our Chairman) "irrational exuberance" kicks in, but the more extreme it gets the higher the probability of an opposite "reaction" setting in. Stay tuned! QQQ charts - Daily & Hourly: I suggest shorting QQQ now in the 32-32 price zone and looking to the buy side on a re-test of technical support in the $29 area. Last week, I thought that resistance would come in in the 30.3 - 30.5 area, which was a bit low from an intraday standpoint but look about right on a closing basis. Key near technical support looks like 28.75-29.00. The minor reversal on the sharp jump in Friday's volume looks like a minor top. Note the overbought 14-day stochastic, although this is the third time at an extreme reading - the third time being the one to short? Hard to see in the crystal ball, but the Nasdaq 100 does register as overbought/overextended on most technical indicators that I trust. Indicators don't offer as much to go on as the chart pattern however. The hourly channel offers the best suggestion that QQQ hit at least a short-term top on Friday. The 14-day RSI (not shown) did finally "confirm" the new high however. No sooner than it did then traders seemed to want to take some profits off the table. Good Trading Success! ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** So Many Choices Last week I issued a challenge to the readers to come up with a stock(s) to replace XMSR in my children's powerball account. I offered $1000 in options of your choice to go to the effort to find and write up the stocks you though best at this time. Here is the link to the original article where I invested $10,600 in the project: http://members.OptionInvestor.com/editorplays/edply_030203_1.asp As of Friday's close the portfolio looked like this. Personal Powerball List - June-6th. Obviously the rally has been kind to the portfolio. I sold XMSR for $4.40 on the initial May spike and was looking for a stock(s) to replace it. Many readers responded with suggestions. I cannot print them all but I will list a couple this week and a couple more next week. ****************** (MANU was $4.80 when he sent it in so the numbers and charts may look a little strange) Stock: MANU, $5.80, Jan $5 Call - By James Breeding Initially, I simply thought the chart pattern was intriguing. Let's look at weekly, daily & 60 (a brief look at the 30-min chart shows that it is above the magic 130 pma, but our time frame for this play is longer). MANU Chart - 30 min Weekly bar chart shows nothing in particular; stochastics (10,5,3 or 5,3,3) are topping, although I give this no significance due to its lack of correlation with respect to price action over the last year. Weekly MACD crossing into positive territory for the first time in a year (mark this one for later...); ADX moving upwards, after just crossing 20. Hmm, no real price trend has existed over the last year while ADX was over 20, both rising & falling, have to question the validity of this one. MANU Chart - Weekly Daily chart: pattern is a year-long bullish wedge, with the top at 4.25, noting there were 4 unsuccessful tests prior to finally breaking thru. Daily chart moving averages: (not shown) price is above the 21, 50, 100 & 200 dma's, both simple & exponential. Daily RSI & stochs topping out, ADX topped out & beginning downwards. A Fib retracement from 4/1/02 to 10/14/02 shows first apparent resistance area @ 5.52, with no other obvious resistance areas overhead nearby. MANU Chart - Daily MANU Chart - Daily with Fibs 60 min chart shows bullish trend going back to April 1st, (which is also easily seen on daily chart, although the angle on the daily chart shows it to be unsustainable). Also, there is what should be significant support at 4.25 (prior year-long resistance), also an interesting LINE of support at 4.10. (do not recall seeing bars actually draw a line quite that blatant, on a liquid stock) So, from a basic chart pattern, looks fairly decent - but what does the PnF chart say? With regard to PnF charting, keep in mind that I'm still working on an upgrade to "novice" status in this class, but this looks interesting! A double-top breakout, combined with price rising into a resistance line that is 34 columns long (and 12 months old, hmmm). Looks to me like a print @ 5.00 would break this resistance. MANU PNF Chart Ok, now let's throw some perspective into the mix, and see what's going on with the stock, with respect to its market. It is one of our old bull-run favorites with 4 letters, so let's check it against the COMPX. I won't embarrass myself by evaluating the Nasdaq charts, s/r lines, etc - the reader can review wraps for expert opinion. However, I do think it pertinent to look at the bullish % chart for the compx. My goodness - 69.91, w/ 10 dma down at 65.7, looks like we are still on a bull run on the short term, but are destined for consolidation, if not a healthy pull back. While we're here, let's look at relative strength versus the compx (on QCharts, it's index:compx /manu). This can be a bit confusing, since what this actually does is divide the compx value by that of this stock when entered in this order, so for a greater relative strength of the stock, you would want the trend to go down. If that doesn't make sense, think of it like this: the compx = 1 (and stays constant), while MANU incrementally goes from 1, 1.5, 2, 2.5, 3, etc. The resultant #'s you get are 1, 0.67, .5, .4, .33, etc, respectively - demonstrating that the relative strength of the stock is better than the index. So, if you enter the stated Qcharts entry, looking at a daily chart, one can see a trend dating back to May 6 '02, with a decided downward break of trend on 4/25/03. Looking at just the stock, this was the same day it broke thru its 200 dma. [Just FYI, I tried entering it in QCharts the other way, e.g. MANU /compx, but it needs to be scaled significantly to make sense, so it was easier this way] Nasdaq/MANU Chart - Daily So, just how should this be played? Since this is a lottery play for long-term, I would await an entry at 4.35 (just above significant support at 4.25), and place an initial stop at 3.8. The reason for entry at that location is that I believe consolidation is imminent - for the market, and the stock; I think it safer to enter just above support to make sure I get an entry, since sometimes they only get close before launching, plus this would take the price a bit farther OTM. The reason for the stop at the given location is 4-fold: price would have to break thru a) significant support at 4.25, b) 200 dma (exponential), c) upward trend line from late march, and d) the 21 sma. Four levels of support, max risk of 0.55 (13% loss) on the stock. Ahh, but if we chose the Jan '04 $5 call ZUQAA (currently 1.00/1.25 b/a, OI 490), we could fairly easily get it for 0.75, since we know others got it at that price on 5/20 & 5/22 when the stock was down there. Risk on the OTM option would be down to approximately 0.6 depending on VXN behavior, for loss of roughly 20%. Let's say your trading plan allows more (apparent) risk by reducing the # of contracts, and you jump in right now and use the indicated stop; you'd pay 1.25 @ bid, with risk down to 0.6 (>50% loss). Well, that is another way to play it, just not one I'd recommend. Looking forward, let's say we get the recommended entry at 4.35, how is the play managed going forward? Assuming the price actually does what I think for once (grin) and goes up, I would shift the stop to the higher of either the "current" value of 200 dma (exponential) or 200 sma, but only after one of them has crossed back above 4.25 support. *************** WOW! James went all out with this research project. About the only thing he left out were the fundamentals of the stock. What do they do? What is their earnings trend, etc. However just like SUNW I think we all know MANU or can quickly figure it out. I give James the gold star for thoroughness. I just wish he had given it to us a week earlier before that massive spike from $4.80 to $6.50 last week. I like MANU for the potential. As you can see on the longer term charts there is plenty of potential once it catches fire. If we can get the stock back down below $5.00 I will add it to the portfolio and buy James $1000 of his recommended calls. Good work! Jim ************** JNJ - Put Play $52.75 By Chris Meyer Despite all the euphoria (drug induced?) in recent weeks JNJ has not participated in the party. It has been in a downward trend since March with the current downtrend line in play since early May. This resistance held in mid May and again the first few days of this month. If volume precedes price we should get a follow through from Thursday's high volume drop below 52.00, which also resulted in a double bottom breakdown on an PnF chart. The 50 and 20 DMA's crossed below the 200 DMA at the end of last month and the 20 DMA coincides nicely with the downtrend currently in play. Friday's action saw a big gap up back towards resistance and a close back near the lows of the day. Money appears to be flowing out of this stock. An entry here would be fine but we would like to see a pop back near Friday's open at 53.25. A move under 50.00 is the initial target. A PnF target (still in the works on this recent move) currently has us aiming for the mid to low 40's. A closing stop, which would violate the downtrend in place can be placed at 54.00. Recommend JNJ-VL AUG 50 P 1.80 x 2.00 OI - 5751 ************** While I agree with the concept on the JNJ play from Chris I am not totally in agreement that it is a long term play for next January. I think we could hit the target in July and then be maxed out when the stock reverses in the fall. Good play, good write up. Just shorter term than I am looking for. Good job Chris! *************** Ten Year Bond Yield Calls - By Keene Little While I understand your initial approach to your lottery play, and that you don't want to add puts as a counter-balance, I believe you should use your remaining money to buy calls on bond yields. The EW pattern is pretty clear about what is likely to happen to bonds and equities (starting by the end of this month, the rest of the year won't be pretty for either). Interest rates are likely to start heading higher once rate cuts have essentially been priced into the market (slightly lower yields are ahead of us and then they'll start to rise). This play would also give you a slight hedge for your portfolio against all your equity call positions. Ten Year Notes $TNX.X I believe we have one more new high in bonds (EW pattern and it coincides with belief we'll have a run into FOMC). So, I recommend buying on Monday/Tuesday, 6/23-24, the March 2004 (no January 2004 available) 40 calls--.TNXCH--currently 2.50 x 3.40. Current volatility is right around the middle of it's 52-week historical range so they're reasonably priced, albeit a wide spread. This strike has the highest current O.I. (141) and I think presents the best opportunity with an OTM strike price but reasonably close since you only have 6-9 months you want to play this. Instead of waiting until 6/23-4 to buy these calls, and based on the current delta and the possible further drop in rates over the next 2 weeks, I would place a GTC order this Monday to buy at 2.80 and see if you can get it closer to the current bid price. As a side note, the reason I picked the 10-year yield is because not enough O.I. in the 5-year, and I think yield will change slower on the 30-year. **************** Keene, I agree we would be buying them at the lows. This would definitely be a long term play and I would not have any problems using the March calls. I think this is a solid play and something all the long term readers should consider. I did not pick it for the portfolio because I think the upside is limited. If the yields get back into the 40 area there is significant resistance and I do not think the Fed is going to move that fast. I think the top on those calls by January is around $6.00 to $6.50. It is a good conservative play but not aggressive enough for the lottery. Good Job! ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. EMC Call from Feb-2nd $10.97 ($7.70 when recommended) http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball Still moving up the portfolio is up +405 and growing. Without RFMD it would still look significantly better. 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 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Too Fast, Too Furious by James Brown No, I'm not talking about the new movie with Paul Walker and Tyrese Gibson that opens this weekend. I'm referring to the stock market and your favorite stock market indices. You know them; they're the usual suspects. The Industrials, the S&P 500, the NASDAQ Composite, the Russell 2000, the Wilshire 5000, the list could go on. The pattern is nearly the same across the board. The huge ramp up has culminated in a major blow off this Friday on big volume. In essence the markets have risen too fast and too furious and they can't keep this pace up. (gosh, where have we heard that before). I realize I've been waving the warning flag in this column for a while now. No, I'm not a bear. I'm just a bull that's been burned too many times by buying the top. It's a painful experience I don't want to repeat it and neither do you. Honestly, I'm extremely encouraged by the sheer breadth and depth that this rally has enjoyed. It warms my heart to see Wall Street welcome this new bull market into the world. Now we just need to nurture it along slowly before some angry bear swipes its legs out from underneath it. Where is investor sentiment? It would appear it's gone from joyful to nearly giddy. The major averages are approaching or exceeding 52-week highs on the hopes, yes the hopes that the economy really is recovery. That in and of itself is not wrong. The stock market never trades in the here and now. It's a calculating machine that always trades on investors' hopes and fears of the future. You're not buying that stock on what the company is worth today but on what an entire market thinks that company will be worth down the road. Oh sure, there are always fluctuations based on news and events and the overall economic climate but that's just part of the game. My concern is that investors are setting themselves up to have their hopes painfully popped if corporate profits don't improve the way we all want them to at July's Q2 earnings announcements. Thankfully, the Friday morning jobs report offered traders some really good news. Payrolls fell by 17,000 jobs last month. Many economists had been looking for a drop between 30,000 and 48,000 in May. While this is good news it was eclipsed by even better results from the government's revision of April's 48,000 drop in jobs to a flat month. This is a MASSIVE improvement over February and March labor numbers. Why then, if the jobs report was so good, did the markets fail to hold their early morning gains? Ah... that is the question. Frankly, I think it's the beginning of the profit taking we've been waiting on. The market needs to consolidate. If we can only get a few good down days it will provide a much better entry point for new highs later in the month. The trouble is investors are so fearful of missing the next bull market that they're liable to buy every dip, which will slow the consolidation we need to experience. That's not necessarily a bad thing but it can just slow the whole process down. One of the most discernible warnings that I continue to draw to your attention is the bullish percent numbers. They have spiked even higher from Thursday's readings. The numbers listed in the table below are approaching or exceeding FOUR-YEAR EXTREMES for the markets. I keep saying that they can go higher but we're quickly running out of room. These results are merely a reflection of the amplitude of the rally's strength, which is a strong positive for the bulls but their extremes forecast a storm ahead that short-term traders can not ignore. Best bring your umbrella. Summer storms can be as brief as they are thunderous. Thankfully there is usually a rainbow on the other side. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9803 52-week Low : 7197 Current : 9063 Moving Averages: (Simple) 10-dma: 8870 50-dma: 8507 200-dma: 8337 S&P 500 ($SPX) 52-week High: 1041 52-week Low : 768 Current : 988 Moving Averages: (Simple) 10-dma: 960 50-dma: 914 200-dma: 886 Nasdaq-100 ($NDX) 52-week High: 1266 52-week Low : 795 Current : 1213 Moving Averages: (Simple) 10-dma: 1191 50-dma: 1113 200-dma: 1021 ----------------------------------------------------------------- In spite of the market's strength all week the volatility indices have been inching upward. Friday's huge failed rally shot the VXN up dramatically and it closed above its simple 50-dma. The VIX, which moves a bit slower, is inching higher from its lows last month. This might indicate a growing demand for puts as traders expect market weakness ahead. CBOE Market Volatility Index (VIX) = 23.43 +0.31 Nasdaq-100 Volatility Index (VXN) = 36.11 +1.58 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.78 1,015,706 793,452 Equity Only 0.66 819,901 543,634 OEX 1.49 37,688 56,098 QQQ 3.27 58,804 192,301 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 69.2 + 2 Bull Confirmed NASDAQ-100 91.0 + 4 Bull Confirmed Dow Indust. 80.0 + 3 Bull Confirmed S&P 500 82.2 + 2 Bull Confirmed S&P 100 78.0 + 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 0.95 10-Day Arms Index 1.02 21-Day Arms Index 1.11 55-Day Arms Index 1.17 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 1382 1417 Decliners 1486 1693 New Highs 262 265 New Lows 12 3 Up Volume 950M 1111M Down Vol. 1286M 1771M Total Vol. 2250M 2908M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/03/03 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 Ah...now we're seeing some action in the big S&P futures contracts. After weeks of slowly creeping higher, the commercials have reached their most bullish reading of the year with a net long of 15,500 contracts. Small traders are also net long but this is reversing a small net short position from the previous week. Commercials Long Short Net % Of OI 05/16/03 429,028 419,553 9,475 1.1% 05/20/03 438,238 426,569 11,669 1.3% 05/27/03 435,195 423,474 11,721 1.4% 06/03/03 438,228 422,722 15,506 1.8% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 15,506 - 6/3/03 Small Traders Long Short Net % of OI 05/16/03 151,883 148,479 3,404 1.1% 05/20/03 157,034 154,980 2,054 0.7% 05/27/03 147,687 149,344 (1,657) (0.6%) 06/03/03 169,650 167,172 2,478 6.8 Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Continuing the contrary trend we've seen between the e-minis and the full S&P contracts above, the commercial traders have increased their long positions but they've also increased their short positions, which boosted their net short posture overall. Running true to form, the small trader's net position is opposite of the commercials. The small trader has significantly increased their long positions while simultaneously closing some shorts to give us the most bullish reading of the year. Commercials Long Short Net % Of OI 05/16/03 178,679 452,727 (274,048) (43.4%) 05/20/03 232,184 468,006 (235,822) (33.7%) 05/27/03 252,655 485,962 (233,307) (31.6%) 06/03/03 267,680 512,648 (244,968) (31.4%) 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 05/16/03 421,540 57,483 364,057 75.9% 05/20/03 422,555 62,580 359,975 74.2% 05/27/03 427,412 66,031 361,381 73.3% 06/03/03 470,655 58,420 412,235 77.9% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 412,235 - 06/03/03 NASDAQ-100 Big money (the commercials) remain completely undecided for the third week in a row with almost a dead heat between long and short positions. Small traders are also flip flopping around and have reversed a small net short to a small net long. Commercials Long Short Net % of OI 05/16/03 43,539 39,046 4,493 5.4% 05/20/03 42,864 42,040 824 1.0% 05/27/03 40,999 41,491 (492) (0.6%) 06/03/03 42,232 43,217 (985) (1.2%) 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 05/16/03 11,706 16,104 ( 4,398) (15.8%) 05/20/03 11,024 9,965 1,059 5.0% 05/27/03 12,194 13,339 ( 1,145) ( 4.5%) 06/03/03 11,407 9,092 2,315 11.3% 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 see little change in sentiment for either the smart money or the retail trader. Commercials are net long while small traders are net short. Commercials Long Short Net % of OI 05/16/03 18,265 14,396 3,869 11.8% 05/20/03 18,028 14,108 3,920 12.2% 05/27/03 18,660 15,537 3,123 9.1% 06/03/03 19,480 15,282 4,198 12.1% 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 05/16/03 7,873 9,058 (1,185) ( 6.9%) 05/20/03 8,378 9,922 (1,544) ( 8.4%) 05/27/03 8,225 9,316 (1,091) ( 6.2%) 06/03/03 7,948 9,353 (1,405) ( 8.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** *************** ASK THE ANALYST *************** Gaps... Breakaway, running then exhaustion I'm not familiar with the term "exhaustion gap", but a 70 year old floor trader and technician friend used the term in describing the nature of Friday morning's gap higher in some of the markets..... the thought being that that was the top for a while. Any thoughts about the issue or the term? Your 70-year old floor trader friend isn't making this up, and is something we've discussed, or pointed out as it relates to other bar charts in intra-day commentary. The "exhaustion gap" your friend is talking about is what many technicians consider a "final" or the "third stage" of a prolonged BULLISH or BEARISH trend. The three "stages" that a technician will look for has the first stage described as a "breakaway gap." The way we as traders and investors might think about this "first gap" is that there has been some REVALATION by the market that something meaningful is taking place. This first "gap" is thought to be the point where the "smartest money" in the market discovers something important and is FIRST to take action (bullish or bearish). The second stage, or second gap is called the "running gap." This is perhaps analogous to the broader MARKET beginning to figure things out. Often times the "breakaway gap" is triggered by some discriminate piece of news, which when a second tidbit of news begins to confirm the first, traders and investors begin to put the pieces together and once again take further aggressive action (creating another gap). The third and often final stage of the prolonged move, which first built with the "breakaway gap" then finds the "exhaustion gap" taking place. This "exhaustion gap" is often when "all the news" is released that then explains what the MARKET was really acting on to begin with. It is often thought that this "climax stage" is where the bulk of the SMART MONEY bails out (they got in at breakaway and running) and then DUMB MONEY, or LESS KNOWLEDGEABLE, which has been watching the move, but never took action, finally becomes convinces the last tidbit of information, which in essence "confirmed" what SMART MONEY knew all along. The "exhaustion gap" (final revelation) often comes at the end of the move as all the news is now known (good or bad) and SMART MONEY gets out of the trade with big profits and moves on. One indicator that can often be helpful in understanding the three stages of the breakaway, running and then exhaustion is volume. Especially as it relates to how the one explains the three "levels of consciousness" that the market tends be experiencing or has already experienced. One trade that I will never forget was Oxford Health (NYSE:OHP), which I had profiled as bullish on January 10, 2002 in a 03:00 PM EST update. Here's the chart I showed that day and how I thought a trader might have began to interpret the "breakaway gap" that looked to have taken place the day before. Oxford Health (OHP) Chart - 01/10/02 When I first learned of the "breakaway, or breakout" (different terms are used, but the "break" is often used) stage, I was taught and often found the more POWERFUL moves came after a LARGE base was formed. Why the large base? I think its because the stock then develops such a large ownership at roughly the same price level, that EVERYONE is on the same level and the playing field is equal. The break that comes to the upside (bullish) or (downside) then has the "breakaway" gap forming, as if a first REALIZATION takes place. Then... the "running gap" would be found after the stock had moved higher, or lower, consolidated, with the "running gap" taking the stock to a higher level of trade (for bullish) or lower (for bearish) level of trade. And then, the "final" gap where all the information is given to the market and the trade becomes "exhausted." I'm using OHP as an example, as it did develop the more classic stages of the running and exhaustion. Note some of the TOOLS used to interpret what might take place in OHP. We thought "breakout gap", but also used our "fitted retracement" technique to define some levels to test against in the future, along with the point and figure chart to assess a longer-term price objective for our bullish bias. Here is how a technician might have identified the "three stages" of gaps for OHP. I'll admit they aren't as pronounced as some we may find, but what traders will look for as it relates to the breakaway, running and exhaustion gap. Oxford Health (OHP) Chart - Daily Interval I've tried to show how I would interpret or look for the breakaway, running and exhaustion gaps in OHP's stock. I also went back to some news releases that came out at various times. One thing I find and found so remarkable in OHP was the number of broker downgrades on the stock during its rise, which came in the face of a falling market. It looks like two scenarios may have been in play during the rise. One could have been the "takeover candidate" scenario as there was some merger activity taking place in the sector. Strong earnings could also have been the catalyst for the move, with CIBC's analyst out of the loop, or CIBC as a firm short the stock and sideways in the trade (downgraded it to get investors to sell so firm can cover?). Now that we have a bit of an understanding where the term "exhaustion gap" comes from and can perhaps begin to identify these three stages with will sometimes present themselves in a bar chart, lets see what the subscriber's 70-year old floor trader and technician friend might be looking at. Are there any indicators that you know of that might have a technician on the alert for an "exhaustion gap?" How about the S&P 500 Bullish % ($BPSPX), which after reversing up to "bull confirmed" status in March from 28% to 34% is now at 82.2% bullish and the highest levels of bullish % this 40-year old technician has ever seen. How about the NASDAQ-100 Bullish % ($BPNDX), which in early March reverse up from 30% to 36% and "bull alert" status, to now read "bull confirmed" at 91%? At these high levels of BULLISH RISK, lets see if we can't identify the breakaway, running and exhaustion gaps. I'm going to use the QQQ as an index as I can use volume as an indicator here. I can't really do that with the NASDAQ-100 Index itself. The S&P Depository receipts (AMEX:SPY) affectionately called "spiders" or SPDRs, could also be used for volume, as could the Dow Diamonds (AMEX:DIA). However, I think the QQQ and SPY are best used when looking to tied in VOLUME as these two securities are most often used by institutional traders/investors as securities to either get immediate bullish exposure to the markets, or used to short in order to HEDGE their broader inventory of stocks. I'm going to use retracement as if Friday's gap higher was the "exhaustion gap" and attempt to define the full range of "revelation." Let's see if we can make any sense of this and figure out just what the MARKET has been thinking, but MORE IMPORTANTLY what the market will be thinking! One FACT I do know is this. MARKET RISK FOR BULLS IS HIGH! This FACT comes from the NASDAQ-100 Bullish % at 91%. NASDAQ-100 Tracking Stock (QQQ) - Daily Interval Trying to identify a breakaway, running and exhaustion gap in an index is difficult and will often times never obvious. The reason for this is that there are too many stocks that comprise the index and it takes one heck of a lot of buying/selling to culminate at ONCE to get the noticeable gap. The breakaway, running and exhaustion will be much more noticeable in a single stock. Now... as mentioned, I set retracement to mark a RANGE from the now obvious low to Friday's high. I find it fascinating how this retracement, at times shows the different levels of retracement coming into play. If Friday's gap higher was an "exhaustion gap," then the QQQ should NOT trade back above the $31.47 level and based on retracement shown, a normal and healthy cycle pullback would be for the QQQ to retrace 61.8% of its bullish move from the bottom. Do breakaway, running and exhaustion gaps present themselves in downside move? I certainly think so. In Tuesday evening's OptionInvestor.com Index Trader Wrap, I thought IBM might be a good short candidate at $83.82 or rebound back near $90 if stock recovered on broader market bullishness. Here's how I have my IBM chart set up. I'm showing "conventional" retracement (March low to recent high) in pink, but using a blue retracement to give me some other levels and reflect the building bearish vertical count, which might become the longer-term price objective. I think Tuesday's "gap" lower is indicative of a "breakaway" or "breakdown" gap. IBM Chart - Daily Intervals One might interpret the "first gap" lower in IBM's chart as the "breakdown" gap, but often times, the "breakdown" gap, just like the "breakaway" gap, comes on BIG volume and first revelation that something is going on and interest, or disinterest on a downward move is taking place. Fun questions to pose is.... "who in their right mind" would have bought the recent gap down after IBM said the SEC was investigating its accounting? Two possible answers. One is that every short from $83.81 to $90.40, and the other being, fundamental-based fund managers that had been sitting on a ton of shareholder cash that just couldn't see any fundamental reason in the economic data to buy stocks. It was a GIFT to then get IBM for their mutual fund shareholders on the pullback to $84. Or was it? If short/put and eventually see an "exhaustion gap" on BIG VOLUME in the low 70's, a bear at that level might be on the alert for a reversal. If the bullish % are low like they were in March, then so much BETTER for a new IBM bull move. Anyway... the "exhaustion gap" is what many technicians will look for to market the potential FINALLITY to a trend. The best time to try and use this 3-step approach to a stock/indexes bar chart, is when the exhaustion phase looks to be present at a bullish or bearish vertical count from your point and figure chart, or when the bullish % charts are at "overbought" or "oversold" levels. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of June 9th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ LEN Lennar Corporation Tue, Jun 10 After the Bell 1.69 UTIW UTI Worldwide Tue, Jun 10 -----N/A----- 0.23 ----------------------- WEDNESDAY ----------------------------- FCEa Forest City Entprise Wed, Jun 11 -----N/A----- N/A HRB H&R Block, Inc. Wed, Jun 11 After the Bell 2.84 ------------------------- THURSDAY ----------------------------- ADBE Adobe Systems Thu, Jun 12 -----N/A----- 0.26 HNZ H.J. Heinz Company Thu, Jun 12 Before the Bell 0.52 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable ECL Ecolab 2:1 Jun 6th Jun 9th ATVI Activision Inc 3:2 Jun 6th Jun 9th DF Dean Foods 3:2 Jun 9th Jun 10th RYN Fayonier Inc 3:2 Jun 12th Jun 13th CCBG Capital City Bank Group 5:4 Jun 13th Jun 16th ODFL Old Dominion Freight Line 3:2 Jun 16th Jun 17th JFBC Jeffersonville 3:1 Jun 17th Jun 18th UNH UnitedHealth 2:1 Jun 18th Jun 19th SLM SLM Corp 3:1 Jun 20th Jun 23rd -------------------------- Economic Reports This Week -------------------------- This week's economic reports have been loaded to the back end of the week on Thursday and Friday. Retail sales, Import/Export prices, PPI and Sentiment numbers could either fuel or derail the current rally. ============================================================== -For- Monday, 06/09/02 ---------------- Wholesale Inventories(DM)Apr Forecast: 0.2% Previous: 0.5% Tuesday, 06/10/02 ----------------- None Wednesday, 06/11/02 ------------------- Fed's Beige Book (AB) Thursday, 06/12/02 ------------------ Initial Claims (BB) 06/07 Forecast: N/A Previous: N/A Business Inventories(BB)Apr Forecast: 0.3% Previous: 0.4% Retail Sales (BB) May Forecast: 0.2% Previous: -0.1% Retail Sales ex-auto(BB)May Forecast: 0.3% Previous: -0.9% Export Prices ex-ag.(BB)May Forecast: N/A Previous: -0.1% Import Prices ex-oil(BB)May Forecast: N/A Previous: -0.9% Friday, 06/13/02 ---------------- Trade Balance (BB) Apr Forecast: -$41.5B Previous: -$43.5B PPI (BB) May Forecast: -0.1% Previous: -1.9% Core PPI (BB) May Forecast: 0.0% Previous: -0.9% Mich Sentiment-Prel.(BB)Jun Forecast: 94.0 Previous: 92.1 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? 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To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-08-2003 Sunday 2 of 5 In Section Two: Watch List: Daily Results Put Play of the Day: NOC Dropped Calls: AMGN, BBY, SPW Dropped Puts: None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** Take Your Pick Microstrategy - MSTR - close: 39.85 change: +1.45 WHAT TO WATCH: We know that the GSO software index was one of the few indices that managed to close in the green on Friday. MSTR did its part to help but the failed rally up through and back down below the $40 level looks ominous. MSTR could see some serious profit taking. Keep an eye on this one as bulls will be watching to buy the dip. Aggressive bears could try and ride the pull back. Chart= --- SanDisk Corp - SNDK - close: 35.92 change: -2.13 WHAT TO WATCH: Wow! Have you seen this stock's PnF chart? That's one long column of X's. The computer storage/hard disk sector has been a big winner for investors. It looks like profit taking could it this group hard. SNDK still has some minor support at $35.00 but Friday produced a bearish engulfing candlestick at the top of the trend. That spells a reversal. Consider a trigger under $35.00 to go short. Chart= --- Juniper Networks - JNPR - close: 13.82 change: -0.63 WHAT TO WATCH: Similar to the computer storage sector, the networking sector has been a huge winner for tech traders. They could all be subject to some fierce profit taking. JNPR produced a bearish engulfing candlestick and looks ripe for a fall. Chart= --- FLIR Systems - FLIR - close: 30.80 change: +1.60 WHAT TO WATCH: FLIR just recently completed a 2:1 stock split. The stock has continued to stay strong after the split and hit new highs going into Friday's close. We'd look for a pull back for possible long positions. Chart= --- Symantec - SYMC - close: 48.81 change: +1.20 WHAT TO WATCH: Shares of SYMC also out performed most of the market on Friday although it too gave up most of its gains. We watch this one for a bounce from the $48.00 level or a closing breakout over the $50.00 mark. Chart= ==================================== RADAR SCREEN - more stocks to watch ==================================== PCAR $68.82 - This one has been a huge winner for the bulls and all the negative press about the auto industry has not affected it. We'd be watching this one for a move to support to jump on the PCAR train. LFG $45.58 - The sell off for this insurance stock started a day early. Watch for a move under $45 and bears could target a retracement to the $40.00 level. AGN $77.24 - The breakout on Thursday looked very tempting and we almost added it as a call play. Now we'd watch it for a pull back and bounce at support. *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS LAST Mon Tue Wed Thu Week AMGN 63.38 -1.49 0.51 0.43 0.95 1.66 Drop, Matured BBY 41.87 1.19 -0.77 1.27 2.33 3.09 Drop, Profitable DISH 33.81 -0.03 0.18 0.94 0.41 0.91 Better judgment GENZ 46.61 -2.71 0.53 0.31 1.29 -1.19 New, strong OHP 38.66 -0.08 -0.10 0.40 0.12 0.86 No new calls RJR 36.19 0.86 1.09 0.36 0.78 1.65 Look for dip SPW 43.77 0.35 -0.15 3.14 1.78 4.97 Drop, Profitable PUTS ATH 74.15 -1.01 -0.09 0.41 1.27 0.67 Watch Carefully HCA 31.40 0.00 0.25 0.25 -1.30 -1.85 Still weak IBM 80.05 -1.58 -3.51 0.43 -2.35 -8.95 Profitable LLL 43.81 -0.44 -0.76 0.00 1.10 0.21 Still weak NOC 85.40 -0.39 -0.74 -0.70 -0.31 -2.70 Triggered RYL 69.74 -1.19 0.37 3.15 3.41 4.04 New, High Risk ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* THE PLAY OF THE DAY ******************* Put Play of the Day: ******************** Northrop Gruman - NOC - close: 85.40 change: -0.59 stop: 88.75 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 ^^^^^ Amgen, Inc. - AMGN - close: 63.38 change: -2.06 stop: 63.00 While it pains us to have to do it, pulling the plug on our AMGN play is the prudent course of action this weekend. The stock has been steadily working its way higher and actually tagged the $66 resistance level on Friday morning. But that was before the market-wide selloff got underway. AMGN fell nearly $3 from its intraday high by the closing bell and posted a huge bearish engulfing candle. While our $63 stop wasn't violated, that selloff looks like distribution and it is likely to continue next week. It would have been nice to close the play on a high note, but better a small gain, than no gain at all. Take advantage of any Monday morning bounce to exit open positions. Picked on May 11th at $61.24 Change since picked: +2.14 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.8 mln Chart link: --- Best Buy Company - BBY - close: 41.87 change: -0.93 stop: 42.00 That was quick! BBY gave us one heckuva ride last week, breaking out over the $40 level and then pushing as high as $43.95 on Thursday. With our target at $44, it was a no-brainer to tighten the stop to $42. Friday's early ramp gave us an early clue that the bulls were just about done with BBY, as the stock failed to set a new high, topping out at $43.90 before weakening for the remainder of the day. Market Monitor subscribers were advised intraday to tighten stops to $43, and so should have gotten an even better exit than those that were stopped out later in the day when the stock finally broke back under $42. No matter how you slice it, this was a nice winner and we're happy to book the gain and move on. Picked on June 1st at $38.70 Change since picked: +3.17 Earnings Date 07/01/03 (unconfirmed) Average Daily Volume = 4.27 mln Chart link: --- SPX Corp. - SPW - close: 43.77 change: -0.15 stop: 42.00 Time to book some gains! SPW has performed beyond our wildest dreams since we began coverage, vaulting from below $37 to an intraday high of $45.40 on Friday, before fading with the rest of the market. To its credit, SPW held its ground fairly well to end just slightly in the red. But remember that the bearish resistance line resides at $46. We're thinking that probably came into play on Friday and that could mean a more sizeable pullback in the near future. With nearly a $7 gain on the play, it seems more prudent to harvest those gains here, rather than hold out for one more push up near $46. Traders with the stomach to wait for another surge higher should at the very minimum keep a tight stop on the play. We'd recommend no lower than $42.75, just below Friday's intraday low. Picked on May 27th at $36.86 Change since picked: +6.91 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.13 mln Chart link: PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? 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The Option Investor Newsletter Sunday 06-08-2003 Sunday 3 of 5 In Section Three: Current Calls: DISH, OHP, RJR New Calls: GENZ Current Put Plays: ATH, HCA, IBM, LLL, NOC New Puts: RYL ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** EchoStar Comm. - DISH - cls: 33.81 chg: -0.59 stop: 32.00 Company Description: EchoStar Communications Corporation, through its DISH Network(TM), is a leading U.S. provider of satellite television entertainment services with 8.53 million customers. DISH Network provides advanced digital satellite television services to the home, including hundreds of video, audio and data channels, personal video recording, HDTV, sports and international programming, professional installation and 24-hour customer service. (source: company press release) Why We Like It: This is going against our better judgment but we're going to keep DISH on the active call play list. Initially, we really liked the bounce off the rising 50-dma and the $30.00 support level in mid-May. The sector had been performing well along with the markets and DISH looked primed for a short-term move to the top of its channel. We suggested that initial targets be set at $35.00. Well DISH traded to $35.55 Friday morning before falling back with the market selloff into the weekend. Why are we not dropping it? We believe it has yet to violate its two-week rising channel and our new target was $36.00 per Thursday's update. Here's the plan. We would not initiate new bullish plays in DISH at this time. We do think it will pull back. Hopefully, the $32.50 level will hold as support. Otherwise, our stop at $32.00 should take us out. If you're holding a winning position we'd highly recommend you take some profits off the table. If you're holding a losing position it's probably going to get worse so cut your losses based on your own judgment and risk profile. Suggested Options: We are not recommending new bullish positions in DISH at this time. Annotated Chart for DISH: Picked on May 21st at $31.10 Change since picked: +2.71 Earnings Date 05/06/03 (confirmed) Average Daily Volume = 3.3 million Chart link: --- Oxford Health - OHP - cls: 38.66 chg: +0.52 stop: 37.50 *new* Company Description: Founded in 1984, Oxford Health Plans provides health plans to employers in New York, New Jersey and Connecticut, through its direct sales force and through independent insurance agents and brokers. Oxford's services include traditional health maintenance organizations, point- of-service plans, third-party administration of employer-funded benefit plans and Medicare+Choice plans. (source: company press release) Why We We originally added OHP to the call list after its breakout, retest and rebound off its 200-dma. Since then the stock has been in a very narrow channel higher. The simple 10-dma has offered support during this time and we're raising our stop to just below the 10-dma now (new stop = 37.50). Our target has been the $40.00 level, but given the failed rally in the markets and in OHP on Friday, we may not make it. $39.50 was the high and we'd encourage traders to take profits if any are to be had. The stock remains very overbought and due for a pull back. Fundamentally we're very bullish on the sector and think it will be one that short-term bulls can play successfully again and again throughout 2003. However, right now doesn't appear to be the best time for new positions. Thus we're not listing any options for this play. Look for OHP's management to be speaking at the 24th annual Goldman Sach's Global Healthcare Conference on the 10th of June. Suggested Options: We are not suggesting new bullish positions in OHP at this time. Annotated Chart of OHP: (point-and-figure from stockcharts.com) Picked on May 20th at $36.51 Change since picked: +2.15 Earnings Date 05/05/03 (confirmed) Average Daily Volume = 857 thousand Chart link: --- RJ Reynolds Tobacco - RJR - cls: 36.19 chg: -0.49 stop: 34.95 Company Description: R.J. Reynolds Tobacco Holdings, Inc. is the parent company of R.J. Reynolds Tobacco Company and Santa Fe Natural Tobacco Company, Inc. R.J. Reynolds Tobacco Company is the second-largest tobacco company in the United States, manufacturing about one of every four cigarettes sold in the United States. Reynolds Tobacco's product line includes four of the nation's 10 best- selling cigarette brands: Camel, Winston, Salem and Doral. Santa Fe Natural Tobacco Company, Inc. manufactures Natural American Spirit cigarettes and other tobacco products, and markets them both nationally and internationally. (source: company press release) Why We Like It: The rebound in tobacco stocks since their May lows has been enormous. A positive court decision to repeal the $145 billion "Engle" judgment gave the entire industry a new lease on life. The President's signing of the tax bill into law brought high dividend stocks back into vogue and tobacco stocks are some of the highest yielding equities on the list. It is these two positive factors, combined with a bullish market environment (and RJR's 10% dividend) that really have investors snapping up shares. The stock has been trading in a very narrow rising channel so entry points have been tough to gauge. We suggest a dip towards the $35.00 level and its 10-dma as the next best entry point for new call positions. With our stop loss at $34.95, let's hope the profit taking we expect to occur early next week isn't too sharp and stops us out. Suggested Options: There are only two weeks left for June options so traders should take that into consideration, especially since the broader markets are in need of a pull back. We'd suggest July strikes. BUY CALL JUN 35.00 RJR-FG OI=1061 at $1.85 SL=0.90 *2 weeks left BUY CALL JUN 37.50 RJR-FU OI=1964 at $0.55 SL=0.00 *2 weeks left BUY CALL JUL 35.00 RJR-GG OI= 664 at $2.50 SL=1.25 BUY CALL JUL 37.50 RJR-GU OI= 705 at $1.15 SL=0.60 BUY CALL AUG 37.50 RJR-HU OI=1249 at $1.70 SL=0.85 Annotated Chart on RJR: Picked on June 3rd at $36.49 Change since picked: -0.30 Earnings Date 07/25/03 (unconfirmed) Average Daily Volume = 1.6 million Chart link: ************** NEW CALL PLAYS ************** Genzyme Corp. - GENZ - close: 46.61 change: -0.71 stop: 43.50 Company Description: Genzyme General, a division of Genzyme Corporation, is focused on developing innovative products and services to solve major unmet medical needs. GENZ has nearly 600 products and services on the market and a strong pipeline of therapeutic products for the treatment of rare genetic diseases. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. With a solid, profitable revenue base, this research is intended to maintain the company’s high rate of earnings growth. Why we like it: At the outset of trading on Friday, the Biotechnology index (BTK.X) really looked to be on fire, vaulting through the $500 level for the first time in over a year. But as proof that gravity does still exist, profit taking hit with a vengeance, knocking the index back down near the $480 level by the close. This round of profit taking could continue as far down as the $450-460 area, but there it should find strong support. As this bullish trend has unfolded in recent weeks, we've had our eye on shares of GENZ, which recently broke above the ascending channel that has encapsulated its price action since last July. After that breakout, the stock found support near the top of that channel (near $45) and pushed higher again for most of last week. What really caught our attention though, was the fact that the stock seems to have been building a new and steeper channel over the past 6 weeks, and we're looking for that channel to help guide GENZ up to the $52 resistance level over the next couple weeks. The chart below shows these two channels and the way support appears to be building near $45, which is also just above important gap support. We apologize for the business of the chart, but hopefully it conveys the message we're trying to communicate. The bottom of the newer channel and the top of the longer-term channel are currently crossing just above $45, and there is historical support building near the $44.50 level, which is the bottom of the gap from last March. A continued pullback early next week should provide a solid entry into the play on a rebound from that area. The next major chart resistance is up at $52, where GENZ topped out last March before beginning its long slide into the July lows. That will be our eventual upside target, and as you can see on the chart below, the newer channel intersects that price level within the next two weeks. The strong support shown on the chart gives us a good indication that the $44 level shouldn't be breached on any further sector weakness, so we're setting our stop initially at $43.50. Watch for renewed strength in the BTK index before playing. Suggested Options: Shorter Term: The June 45 Call will offer short-term traders the best return on an immediate move, as it is currently slightly in the money. Note that June contracts expire in 2 weeks. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 47 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. More conservative long-term traders should utilize the July 45 call. BUY CALL JUN-45 GZQ-FI OI=1350 at $2.90 SL=1.50 BUY CALL JUN-47 GZQ-FS OI= 478 at $1.45 SL=0.75 BUY CALL JUL-45 GZQ-GI OI=1976 at $4.10 SL=2.50 BUY CALL JUL-47 GZQ-GS OI= 693 at $2.75 SL=1.40 Annotated Chart of GENZ: Picked on June 8th at $46.61 Change since picked: +0.00 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 3.54 mln Chart link: ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ***************** CURRENT PUT PLAYS ***************** Anthem, Inc. - ATH - close: 74.15 change: +0.09 stop: 75.50 Company Description: Anthem is a health benefits company serving over 7 million members, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado and Nevada. The company owns the exclusive right to market its products and services using the Blue Cross Blue Shield (BCBS) names in these states under license agreements with the Blue Cross Blue Shield Association. ATH's product portfolio includes a diversified mix of managed care products, including health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans, as well as traditional indemnity products. The company's managed care plans and products are designed to encourage providers and members to select cost-effective healthcare by utilizing the full range of its medical management services. Why we like it: In light of all the rampant bullishness in the broad market, especially the Health Care Payor's index (HMO.X), when ATH broke below the bottom of its long-term ascending channel, it seemed logical to expect a rebound to confirm resistance back up near the $74 level. But Thursday's rebound to close back over that level had us feeling a bit nervous, especially with the HMO index hitting another all-time high. That level of apprehension increased on Friday, as ATH worked its way back over $75 on Friday in response to another bullish move by the HMO index. But after that first hour, things started to look a lot more constructive, as the stock gave back virtually all of its intraday gains to end back near the $74 level. The fact that ATH looked so weak through most of the day while the HMO index held the bulk of its gains confirms the relative weakness we thought we saw when we initiated coverage last Tuesday. Aggressive traders could have gotten a really attractive entry point on Friday as the stock fell back from the $75 level, while those with a slightly more conservative nature will want to see the stock now fall back under $73.75 (just below Friday's intraday low) before playing. The real proof of weakness will come when the stock falls back under the 20-dma (currently $73.09) and especially when it breaches the $71.70 level (just below last week's intraday lows. Maintain stops at $75.50. Suggested Options: Short-term traders will want to focus on the June 75 Put, as it will provide the best return for a short-term play. Those looking for a larger move down below the $70 level will want to utilize the July 70 Put, which provides greater insulation from the spectre of time decay. Note that June contracts expire in 2 weeks. BUY PUT JUN-75 ATH-RO OI=438 at $2.00 SL=1.00 BUY PUT JUN-70 ATH-RN OI=628 at $0.40 SL=0.20 BUY PUT JUL-70 ATH-SN OI=461 at $1.35 SL=0.75 Annotated Chart of ATH: Picked on June 3rd at $72.38 Change since picked: +1.77 Earnings Date 07/30/03 (unconfirmed) Average Daily Volume = 1.19 mln Chart link: --- HCA, Inc. - HCA - close: 31.40 change: -0.05 stop: 34.00 Company Description: HCA Inc. is a healthcare services company that, as of the end of 2002, operated 179 hospitals, comprised of 166 general, acute care hospitals, six psychiatric hospitals, one rehabilitation hospital and six hospitals included in joint ventures. In addition, the company operated 78 free-standing surgery centers. The company's facilities are located in 22 states, England and Switzerland. The general, acute care hospitals provide a full range of services to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Why we like it: While a quick look at the daily chart would seem to indicate that not a lot happened with shares of HCA on Friday, it is precisely that lack of action that we find so encouraging. While the broad market launched to new highs for the year, as did the Health Care index (HMO.X), shares of HCA barely budged. That's precisely what we want from a bearish play in this market environment - one that doesn't respond to bullish action from the rest of the market. Of course, given the meltdown in the broad market this afternoon, we would have liked to see more weakness in HCA, but we'll take what we can get. The action lay remains unchanged. We want to target new entries either on a failed rebound below the 20-dma ($32.73) or a breakdown below the $30.70 level. Monitor the HMO index for sector weakness. Should that group weaken, it should act like a hammer to drive HCA lower. Suggested Options: Short-term traders will want to focus on the June 32 Put, as it will provide the best return for a short-term play. Those looking for a larger move down below the $30 level will want to utilize the July 30 Put, which provides greater insulation from the spectre of time decay. Note that June contracts expire in 2 weeks. BUY PUT JUN-32 HCA-RO OI=1824 at $1.50 SL=0.75 BUY PUT JUN-30 HCA-RN OI=1360 at $0.35 SL=0.20 BUY PUT JUL-30 HCA-SN OI=3062 at $0.90 SL=0.40 Annotated Chart of HCA: Picked on June 3rd at $31.45 Change since picked: -0.05 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 5.38 mln --- Intl Business Machine - IBM - cls: 80.05 chg: -1.85 stop: 81.75*new* 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: Argh! This was a major dilemma for us this weekend. Our bearish play on IBM has worked out too well. For the last week we've been reminding everyone to protect profits and get ready to exit as IBM hits our initial target of $80.00. Shares did hit our target. Actually, IBM traded to 79.84 late Friday afternoon before bouncing back above the $80 mark. The trader inside of us is calmly saying, "Follow your plan and exit at $80. That's more than a $7.00 gain on the play just imagine what the options did." Therein lies the problem. Imagining. The human side to every trader gets greedy. It says, "oh, look IBM fell again and closed near its lows for the day. Look here... the volume has been huge since that SEC probe news came out. Imagine what could happen if the probe widens and IBM breaks support at $78.00?" The problem is that scenario could very well play out. Another article on Friday suggested strongly that the SEC probe could easily widen. This would spook investors even more and IBM would be under stronger selling pressure. Imagine the technical damage if it breaks under its simple 200-dma and the point-and-figure support at $78.00. Yup... just imagine. Here's the plan. I highly suggest that traders take some profit off the table if they have not done so already. Whatever you're willing to risk, we'll lower the stop down to $81.75, which is just above the midday consolidation for IBM. We would not recommend new positions until IBM does break the 200-dma. Suggested Options: Typically, stocks tend to move down faster than they move up so we're going to focus on the short-term June and July options. *warning, only 2 weeks left for June options.* BUY PUT JUN 85 IBM-RQ OI=31778 at $5.40 SL=3.00 BUY PUT JUN 80 IBM-RP OI=23382 at $1.90 SL=1.00 BUY PUT JUL 85 IBM-SQ OI=33288 at $6.50 SL=3.25 BUY PUT JUL 80 IBM-SP OI=27029 at $3.40 SL=1.60 BUY PUT OCT 80 IBM-VP OI= 5882 at $5.80 SL=3.00 Annotated Chart for IBM: Picked on May 29th at $87.36 Change since picked: -7.31 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million Chart link: --- L-3 Comms -LLL - close: 43.81 change: +0.31 stop: 44.70*new* Company Description: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why we like it: Have you ever been faked out by a move in the market? Well, that's what happened to us last Tuesday, when LLL sold off to the $42 level. That looked like the selloff we had been waiting for, so we were clearly surprised to see the solid rebound over the past couple days. In our expectation that the rollover was underway, we prematurely lowered our stop to $44.10 and Friday's action proved how premature that action was. Fortunately, LLL didn't hold its intraday gains and fell back under $44 at the close on Friday, giving us the opportunity to regroup. The stock still looks like a good short/put candidate, with a consistent series of lower highs - note that Friday's intraday high was just slightly below Monday's intraday high, and it is all below the 200-dma. So we're going to do something unusual and actually RAISE OUR STOP ever so slightly to $44.70, which is just above the 200-dma ($44.58). Failed rally attempts (like that on Friday) continue to look like the best entry opportunity until the stock firmly loses the $42 support level. We're still targeting a move to $40, but now we're going to be very closely monitoring the 50-dma (currently $42.11). As you can see on the chart below, that average provided support for the last two rebounds and this play is now a battle confined between the 50- dma and 200-dma. Obviously we think the 200-dma will win this battle, but note that we wouldn't advocate taking momentum-based entries until LLL drops below $42 on solid volume. 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 level (or below) will want to utilize the July 45 Put, which provides greater insulation from the spectre of time decay. Note that June contracts expire in 2 weeks. BUY PUT JUN-45 LLL-RI OI= 516 at $1.95 SL=1.00 BUY PUT JUL-45 LLL-SI OI= 242 at $2.70 SL=1.25 BUY PUT JUL-40 LLL-SH OI= 689 at $0.70 SL=0.35 Annotated Chart of LLL: Picked on May 20th at $41.94 Change since picked: +1.87 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.37 mln Chart link: --- Northrop Gruman - NOC - close: 85.40 change: -0.59 stop: 88.75 Company Description: Northrop Grumman Corporation is a $25 billion global defense company, headquartered in Los Angeles, Calif. Northrop Grumman provides technologically advanced, innovative products, services and solutions in systems integration, defense electronics, information technology, advanced aircraft, shipbuilding and space technology. With approximately 120,000 employees and operations in all 50 states and 25 countries, Northrop Grumman serves U.S. and international military, government and commercial customers. (source: company press release) Why We Like It: We just added NOC on Thursday so there's been no change to our play strategy except that shares of NOC traded through our trigger to go short at $85.74 late Friday afternoon. (Thursday's write up) We think the market is trying to tell us something. The DFI defense index has just closed over its simple 200-dma since its inception. After weeks of consolidating in the 500-505 range it closed at 508 today. Yet at the same time shares of NOC, the country's second biggest defense contractor, has been slowly sliding. Today is the second day in a row that NOC has closed under its simple 50-dma. NOC has been a complete laggard compared to the overall strength in the markets. What makes this perplexing is that NOC has confirmed it would turn in double- digit revenue and earnings growth for the next two years as defense budgets rise. What does Wall Street see that we don't? The long-term down trend, which has been reversed in so many sectors and stocks across the markets, is still very much intact for NOC. We suspect that NOC could retest support at the $80.00 mark and recent action offers us an entry point for a put play. However, because the broader markets have been so strong, we are going to use a TRIGGER at 85.74 to leg us into this NOC play. The last couple of weeks have shown a trend of lower highs for NOC but we'd feel more comfortable opening a position as the stock takes out today's low. One word of CAUTION, NOC's point-and-figure chart does show the stock currently testing bullish support at $84.00-85.00. PnF aficionados may want to wait for that support to break. Suggested Options: We're going to list June, July and August puts for NOC but with two weeks left before June expiration our preference would be for July strikes. *warning, only 2 weeks left for June options.* BUY PUT JUN 85 NOC-RQ OI=3068 at $1.90 SL=0.90 BUY PUT JUN 80 NOC-RP OI=2259 at $0.55 SL=0.00 *more risky* BUY PUT JUL 85 NOC-SQ OI= 659 at $3.20 SL=1.60 BUY PUT JUL 80 NOC-SP OI= 310 at $1.45 SL=0.75 BUY PUT AUG 80 NOC-TP OI= 492 at $2.30 SL=1.15 Annotated Chart of NOC Chart link: Picked on June 6th at $85.74 Change since picked: -0.34 Earnings Date 07/29/03 (unconfirmed) Average Daily Volume = 1.6 million Chart link: ************* NEW PUT PLAYS ************* The Ryland Group - RYL - close: 69.74 change: -1.82 stop: 73.50 Company Description: The Ryland Group is a homebuilder and mortgage-finance company that has built more than 175,000 homes. Additionally, the Ryland Mortgage Company (RMC) has provided mortgage financing and related services for more than 155,000 homebuyers. Currently, Ryland homes are available in more than 260 communities in 21 markets across the United States. Why we like it: On prospects of continued low interest rates and another round of refinancing and new purchases driving demand for housing, investors have bid the Dow Jones Home Builders index ($DJUSHB) higher to the tune of more than 50% in just the past 3 months. Friday saw that group vault higher to the $460 level, only to sharply reverse and close near $442 for a complete reversal of Thursday's gains as well. All of the major home building stocks saw sharp reversals, but RYL's was one of the most impressive. Along with the $DJUSHB, RYL touched a new all-time high of $72.90 before slipping back to close below $70 with a 2.5% loss on the day. Even after that sharp pullback, the stock is still nearly $5 above its 10-dma (currently $65.26) and given the heavy volume on Friday's pullback, we think there's more bearish price action in store. But to be perfectly clear, we aren't expecting a waterfall decline here. This is an aggressive play, where we're looking to take advantage of a bout of much needed profit taking. There's no point in even looking at the PnF chart, as it still says full bull ahead. Remember, this is a gravity play, and when the stock finds support, we'll want to exit stage left in a hurry. A continuation down to the $65 level seems pretty certain as things appear this weekend, but we'd really like to see the daily Stochastics turn down from overbought (where they've been pinned for the past 2 weeks) to give some confirmation of the downside potential. While aggressive traders can try to enter on a failed intraday bounce below Friday's intraday high, the more prudent strategy might be to wait for some downside continuation below Friday's low. So momentum traders will want to key off the $69.50 level, entering on a volume-backed move below that level. While our initial target is the mild consolidation (also the site of the 10-dma) near $65, we'll keep the possibility in mind that RYL could really get moving and test major support in the $59-60 area. Initial stops are set at $73.50, just a bit over Friday's intraday high. Suggested Options: Short-term traders will want to focus on the June 70 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $65 level will want to utilize the July contracts, which provides greater insulation from the spectre of time decay. Note that June contracts expire in 2 weeks. BUY PUT JUN-70 RYL-RN OI= 90 at $2.50 SL=1.25 BUY PUT JUL-70 RYL-RN OI=104 at $4.10 SL=2.50 BUY PUT JUL-65 RYL-SN OI=544 at $2.30 SL=1.25 Annotated Chart of RYL: Picked on June 8th at $69.74 Change since picked: +0.00 Earnings Date 07/23/03 (unconfirmed) Average Daily Volume = 763 K Chart link: ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-08-2003 Sunday 4 of 5 In Section Four: Leaps: Breakout! Traders Corner: A Swing And A Missed Opportunity Traders Corner: Elliott Wave Plays Traders Corner: Where is the Dow Going? ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ***** LEAPS ***** Breakout! By Mark Phillips mphillips@OptionInvestor.com No matter how many different ways you look at it, last week's action was decidedly bullish! All the major indices blasted through their August highs, and despite Friday's sharp intraday reversal, they held onto those breakouts going into the weekend. While I still hold a very bearish view for the intermediate to long term, I really don't think we're at a major top right now. I know that flies in the face of Friday's intraday action, with it appearing to be a key reversal day on very heavy volume, especially on the NASDAQ, which traded just shy of 3 billion shares! The problem is that there hasn't been one little bit of internal weakness yet. Fundamentally, this market should drop and drop hard, but it is floating upwards on a sea of liquidity, as Ben Bernanke and friends work to see just how fast they can print out those dollars. Huge levels of debt from the federal government down to individual consumers is eventually going to smack investors with a serious day of reckoning -- but not today. Add in the huge trade imbalance, large and growing levels of unemployment and negligible signs of economic improvement, and I believe we're heading for another train wreck on the way to new multi-year lows for all of the major indices. But that isn't relevant to where we are today. The equity markets want to go up, and with a dearth of selling pressure, that's precisely where they are going. Turning to the bullish percent readings, we have a stark reminder that overbought can always become more overbought and then become even more overbought. I've been listing a table showing the progress of these readings for the past couple weeks and it seems worthwhile to continue doing so as long as they continue to grind higher. NASDAQ-100 - 91% (11/99 high of 92%) NASDAQ Composite - 69.91% (new all-time high) DOW - 80% (Same level as 3/00 and 5/01 -- highs in 1998 = 92%) S&P 500 - 82% (New all-time high) S&P 100 - 78% (Matches the 3/02 high, 11/98 all-time high = 84%) In all cases, the major indices' BP is deep in overbought territory. The COMPX at 69.91% doesn't really qualify as overbought, except in the sense that it is so far beyond where it has ever been before. But look at the others. NDX is just 1% below its all-time high, the DOW is at the same level as March 2000 and May 2001 and the SPX is at a new all time high. The new high/new low ratios are just about off the charts and showing no signs of weakness. According to Lowry's, selling pressure is simply collapsing. If you want to see a graphical representation of how strong the buying is and how weak the selling has been, pull up a weekly chart of the Diamonds (DIA) or S&P Depository Receipts (SPY) with On Balance Volume displayed. It is simply astounding how far it has moved to the upside. In the case of the DIA, it is at new all-time highs (by a wide margin) and the SPY has OBV testing its all-time highs. No matter how you slice it, this is a STRONG market. I can't fit enough data on the SPY chart to show it here, but look at the chart of the DIA below. Weekly Chart of the DIA with On Balance Volume I will keep mentioning this until we get a reversal. I invite you to go over to Stockcharts and look at the SharpChart for each of these bullish percent readings. In every case, the bullish percent is continuing to push strongly higher, and we have yet to see any of them break below their respective 10-dmas. As I've said before, overextended, but not yet showing anything that can be termed weakness. Here's the link I use, for your convenience. Here are the pertinent Bullish Percent symbols. DOW - $BPINDU SPX - $BPSPX OEX - $BPOEX NDX - $BPNDX COMPX - $BPCOMPQ Last week I commented that the bulls had pushed the bears right to the point of capitulation. Either Friday's reversal was the top (which I don't believe), or the bears truly have given up, at least for the time being. It makes no sense in light of the economic picture and the outlook for corporate earnings, but nobody promised that the markets would be logical. The markets are more extended than they were last week, but still we see no sign of any internal weakening. For weeks now, shorts have been getting their heads handed to them (myself included) and I think it is time to pause, breathe and re-evaluate. For that reason, I've taken another week off from writing plays. No new Watch List or Portfolio plays on the docket. Next week, I'll be looking for some sort of indication of either market weakness to justify my bearish bias or else I'll have to come to terms that this cyclical bull wants to run a bit further. A continuation of the recent rally just may be able to give us the DOW at 9500, the NASDAQ Composite as high as 2000 and the S&P 500 may be setting up to challenge the 1100 level before this cyclical bull has run its course. I know it sounds ridiculous, but so did current levels a month ago. We'll just have to trade what the market gives us and try not to fight it. In the meantime, let's review what's happening with the plays currently being covered. Portfolio: AIG - It was another bullish week for our AIG play, much to my chagrin. Fortunately, Friday's foray above the $60 level didn't hold and we may have seen a reversal top, given the strong volume. the problem is that the stock still ended the week in the green and back above the 200-dma. I suspect next week will be make or break time for this play -- either breaking down as we've been expecting, or breaking out above our stop. While aggressive traders certainly could have gotten a great entry on Friday, I am having a hard time advocating new entries after the bullish price action of the past 2 weeks. Making matters worse for us, the PnF chart displays a new PnF Buy signal based on Friday's price action. Conservative traders may just want to cut their losses here and use a dip back into the $56-57 area to close the play and wait for a clearer bearish setup to develop. Note that we won't really have any confirmation of weakness until AIG closes below the $54.50 level, and right now that looks miles away. GM - This play is certainly putting our nerves to the test, now isn't it? All the fundamentals are ugly negative, but still investors buy the stock when the market rises. Last Monday's intraday surge to $36.90 was particularly disconcerting, so it was nice to see a pullback into the end of the week. But until GM once again loses the $35 level and falls back near $33, we'll be stuck in limbo. I'm still expecting the descending trendline from the December high and the 200-dma (currently $36.98) to continue to pressure GM lower, but I suspect it is going to require some significant weakness in the broad market to get the ball rolling downhill. The PnF chart is still bearish with a price target of $18, but all that would change if the stock were to trade $38 and generate a new PnF Buy signal. I still favor new entries on failed rallies below the $37 level, as GM is one of the only 6 Dow components that is not on a PnF Buy signal. But prudence demands that we maintain a tight stop. KO - ARRRGGGHHH! It is starting to look like we should have just pulled the plug on our KO play when the stock closed above its 200-dma. Apparently investors believe that the weakness in the US Dollar is going to have a beneficial impact on shares of KO due to the favorable exchange rate, as the uptrend seems to be getting stronger. Although it closed slightly below our $47 stop on Friday, the intraday foray above that level and the lack of weakness going into the close tells me that we'll likely be stopped out next week. Traders unwilling to take any further risk in the stock may just want to take the loss early next week and move on. And if we get a more significant pullback near the $44- 45 area, I will probably look at just closing the play. Obviously, I don't recommend new entries at this point. AMGN - Wow! Well, you can't say I didn't warn you. Last week I mentioned that if AMGN encountered its next resistance in the $66- 68 area, it was likely to experience a bout of profit taking. Friday's intraday high was $66 exactly, from which it proceeded to fall nearly $3 before settling out just above the $63 level. This is simply the way AMGN tends to trade. Look at the selloffs on May 5-7 and on May 19th. Those looked awfully bearish too, but the bulls stepped up to support the stock again above the 50-dma. We're guessing they'll do the same thing again, so long as the BTK index doesn't lose the $450 support level. With the BTK closing at $482 on Friday, that still means we may have to take some more heat in this play, but we're counting on the 50-dma to once again provide support for another higher low and another push back up the chart. New entries look favorable on a rebound from above the 50-dma, and we'll continue to target an eventual move to the $72 level. Just keep in mind that it is likely to be a bumpy ride, with each new high met by a bout of profit taking. Maintain stops at $60, just to be on the safe side. QQQ - Well, my concerns last week were certainly well-founded, as the NASDAQ-100 broke convincingly through the 1200 level, driving the QQQ as high as $31.47 on Friday morning. While I don't know if I'd go so far as to call the reversal from that level THE TOP, it certainly has the looks of one, doesn't it. Volume on the QQQ more than doubled the ADV and it was the heaviest volume seen since last July. The next step will be to see if the bears can press the QQQ back under the $30 level and keep it there, or if this was just another one-day selloff like we saw on 5/19. Certainly there are a lot of factors that indicate the top should be near (like the elevated BP readings), but we've thought that before. I'm still very cautious on this play until we see a decisive move back under $30 and preferably under $29. Successive failed rallies below Friday's intraday high should make for solid entry points, but until we see some sort of reversal in the BP readings, this remains a very aggressive play. Watch List: NEM - Enough is enough! I can't stand the pain of watching NEM anymore. As I said last week, a decisive close over $32 would be the trigger to get me to finally pull the plug on NEM and we got that and more, with Friday's close over $32! The intraday high of $32.85 was a new 5-year high and the stock (and sector) are looking very strong. I blew it on the entry point, and it is now past time to fold up shop and list NEM as a missed opportunity. Just in case any of you had the foresight to ignore me and enter the play anyways, I would recommend placing stops at $29.50. that is currently just below the 20-dma and below the recent breakout over $30. Expect to see a pullback from the recent highs, but the $30 level should hold as new and strong support. DJX - Oh yes, Friday's intraday reversal was quite tempting in terms of taking an entry in this play. Heck, we were looking for an entry point in the $90-91 area, and Friday's intraday high was $92.16! The problem I have is with the bullish percent readings, with the DOW reaching 80%. Not to mention the chart of the DIA I posted up above. The DJX looks extremely overextended up here and Friday's intraday reversal confirms that. But until we see some sign of internal weakening (and so far there have been none), I'm going to be stubbornly patient about entering this play. Another point that is worth noting is that despite the sharp pullback from the highs, Friday's session ended at $90.63, and that is above the August 2002 high. In looking at the charts, I think we now have to accept the possibility of a continued rally up into the $94-95 area, with the $94.73 level defining the 50% retracement from the January 2000 high to the October 2002 low. I've modified the entry point and selected strikes in the playlist below to reflect that possibility. Closing Thoughts: I expected to see some bullish action from the broad market this spring, followed by the normal weakness beginning in May. Obviously, I was far too pessimistic, as all of the major averages have now exceeded what I thought would be their maximum upside objectives. Is it a new bull market? A cyclical one, perhaps. But the long-term secular bear market will be with us for awhile. So what to do here? I think the market is far too extended to the upside to chase it with bullish trades, but I've thought that for close to a month now. In that time, we've had some failed bearish plays and those currently in the Portfolio aren't looking too hot. But until we see some definite signs of weakness (and it's going to take a lot more than Friday's intraday reversal), trying to pick a top in the market is a dangerous game. I had to really rein myself in this week. I so badly want to list some new plays, but I just can't bring myself to do it. I see the market as being grossly overdone to the upside, and that has me leaning bearish. By the same token, the market's broke MAJOR resistance last week and held those breakouts into Friday's close. At the same time, the VIX refuses to drop, and that tells me there is just enough fear in this market to allow it to continue climbing that wall of worry. As much as I personally detest not listing new plays every week, I feel it is the responsible thing to do by way of example. I am having a very hard time discerning the likely trend for the next few months and until I have some conviction, I feel it would be irresponsible to recommend new plays that I don't have strong confidence in. Hopefully next week will provide enough clarity to allow us to fattening up the play list again. Over the past couple weeks, I've been mentioning the introduction of the 2006 LEAPS, promising to give some sort of roadmap to the process of their introduction. Rather than reinvent the wheel, I'll just point you at the article that I put together last year. Out With The Old, In With The New http://members.OptionInvestor.com/options101/opt_052202_1.asp In talking with the CBOE, I've been informed that the process is just the same as it was last year, with the Cycle 1 2006 LEAPS coming out after May expiration, Cycle 2 after June expiration and Cycle 3 after July expiration. It isn't very exciting reading, but for those of you that have questions, it should provide you with the answers you need. Just ratchet the year forward by one, and it should all make sense. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: AMGN 05/21/03 '04 $ 60 YAA-AL $ 7.00 $ 8.60 +32.86% $60.00 '05 $ 60 ZAM-AL $10.90 $13.00 +26.61% $60.00 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 3.90 -30.36% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 7.00 -17.65% $61.00 GM 05/13/03 '04 $ 35 LGM-MG $ 4.10 $ 3.80 - 7.31% $37.50 '05 $ 30 ZGM-MF $ 4.60 $ 4.40 - 4.35% $37.50 KO 05/15/03 '04 $ 40 LKO-MH $ 1.70 $ 1.10 -35.29% $47.00 '05 $ 40 ZKO-MH $ 3.85 $ 3.00 -22.08% $47.00 QQQ 05/27/03 '04 $ 27 KLF-MA $ 1.70 $ 1.55 - 8.82% $32.25 '05 $ 27 ZWQ-MA $ 3.10 $ 2.85 - 8.06% $32.25 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: DJX 05/04/03 $94-95 DEC-2003 $ 92 DJV-XN DEC-2004 $ 92 YDK-XN New Portfolio Plays None New Watchlist Plays None Drops NEM - $32.29 I simply missed the ideal entry point on our NEM play and throughout its steady rise in the past 2 months refused to chase the stock higher. Gold prices are looking strong and NEM finally broke out to new multi-year highs on Friday. The stock and sector are looking incredibly strong, yet overextended as well. I just can't see the merit in keeping this play on the Watch List any longer. We missed the move and I'm chalking it up as a missed opportunity. Correct on direction, but a flubbed entry. For those that may have entered the play, I would recommend following with a stop at the $29.50 level. ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** A Swing And A Missed Opportunity By Mike Parnos, Investing With Attitude A reversal thingy! That's right. Hey, I can get technical, too! That's what we had on Friday. It might mean the market is going back down. It might mean the market is resting before continuing up. Then again, it might mean there's going to be an eclipse a week from Tuesday. Swings In The Market No, I don't mean two couples frolicking in Kroger's produce section. I'm talking about the, sometimes wild, movements of the stock market. We've just experienced a huge upside run – for no apparent reason. Sooner or later (and we hope sooner) the market will realize the error of its ways and pull back. As we know, rarely does the market do anything in moderation, so we have some volatility swings to look forward to. How can we take advantage of these swings – without a corked bat, of course? Today let's explore a non-directional low risk strategy that can provide an opportunity for some nice profits. _________________________________________________________________ The QQQ ITM Baby Strangle Two weeks ago we put on a position that would take advantage of market swings. We've done this quite successfully in the past. We're using the QQQs – one of my favorite trading vehicles. Why? Because of the $1.00 strike price increments and very narrow bid/ask spreads. Those factors offer greater flexibility in putting on new and smaller spreads that, in turn, result in larger profits (or smaller losses). CPTI students learn to be penny pinchers. The QQQs have, along with the rest of the market, been working their way up over the last month. Some believe it will continue to the sky. Other people, including me, believe the QQQs will have a substantial pullback. In either case, it’s not unreasonable to anticipate a substantial move. We’re basing this strategy on the fact that there has seldom been a two month period when the QQQs have not moved at least three points in one direction or the other. Our risk will be about $250-300 per month for a year – or a total of about $3,000 (based on a 10 contract position). Don’t worry. It’s likely we’ll make it back 10 times over. On May 19th, the QQQs were trading at $28.50 1. We bought 10 of the QQQ July 28 calls for $2.05 2. We bought 10 of the QQQ July 30 puts for $1.80 Total invested: $3.85 There is $2.00 of intrinsic value in this position. So, the actual risk is only $1.85. We’re waiting for the QQQs to move three to four points. It normally takes less than a month, and we're now well on the way. If the market continues upward, and the QQQs hit $32, the $28 calls will be worth approximately $4.25 ($4.00 intrinsic value + 25 time value). Time to liquidate the calls and put the $4.25 back in your pocket – for the moment. Where do we stand? Since our cost of the entire position was only $3.85, we would have a profit of $.40 in our pocket. Now, for the best part. We still have the July $30 put absolutely free for over a month. If the damn QQQs pull back to $28 in the subsequent 30 days, the $40 put (that you own at NO COST) would have a value of at least $2.00. Nice return. The ideal time to put on the QQQ ITM Baby Strangle is when the QQQs are at a support or resistance level. It seems likely that the QQQs would either plow through the support or resistance level, or bounce in the other direction – hopefully for the 3-4 point move we're looking for. Friday Opportunity Friday morning, when the market spiked up, the QQQs traded as high as $31.47 and stayed at that level for a while. Alert traders could have sold the $28 call for $3.70. That would have left them with the $30 put for a cost of only $.15. Another Exit Alternative After the QQQs have made a substantial move, you may not want to sell the long option. There's no absolute that says you have to sell the long option when it has covered the cost of the entire position. Perhaps there are a few more points left in the move. In this case, you could certainly hang onto the option. Its value, being well in-the-money, would increase almost dollar for dollar. However, you would have to monitor it closely. And that doesn't mean put in an order and go to work. You don't want to give back what you've already earned. See the pattern? What we’re trying to accomplish is to have long puts (or calls) at little or no cost. Whenever we liquidate a long position on one side, we are left with a long position on the opposite with virtually no cost. This is complicated stuff, but, for the most part, requires only minimal monitoring – maybe once a day. _________________________________________________________________ CPTI JUNE POSITION UPDATE June Position #1 – SPX Iron Condor – Currently at 987.76 We sold 5 contracts of SPX June 995 calls and 5 contracts of SPX June 895 puts. For protection we bought 5 contracts of SPX June 1010 calls and 5 contracts of SPX June 880 puts. 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. _____________________________________________________________ June Position #2 – BBH Iron Condor – Aborted _____________________________________________________________ June Position #3 – TOL – Bear Call Spread Plus – Currently at $30.25 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. The market has gone against us. We have two weeks for TOL to move back down to $25 or up to $35. Maximum potential profit is $1,100. ______________________________________________________________ June Position #4 – COF Iron Condor – Currently at $52.65 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 $1.50 ($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 $30.13 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 has worked quite well in the past for us. It will take some time to play out so be a little patient. With the move up, we find ourselves in a profitable position. ____________________________________________________________ Unofficial CPTI Replacement PositionQQQ Strangle - $30.13 We bought 10 contracts of the QQQ June $31 calls @ $.10 and 10 contracts of the QQQ June $25 calls @ $.10. Total debit: $200. We're playing for a big move in the QQQs. If the QQQs move $3-4, our long put or call could easily be worth $.75 - $1.25. We're only risking $.20. Greater risk takers (speculators) can buy closer strikes. The $26 put and the $30 call would cost $.20 each or a total of $.40 ($400 for 10 contracts. The benefit is that the delta is slightly higher and a smaller move would be necessary to get into the profit zone. Friday morning was a great opportunity, if you were awake. The QQQs traded up to $31.47. Our $200 bet was worth $1,000. A $400 bet was worth $1,700. _____________________________________________________________ New To The CPTI? 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 click on "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 ************** TRADERS CORNER ************** 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 Please see "Where is the Dow Going?" for 6/8/2003 for the basic analysis of the Dow. Trade Setup Based on the analysis in "Where is the Dow Going?" for 6/8/2003 we want to hedge our bets. Most likely the Dow is going to move either up or down, versus remain flat, so we need some type of play that will make money whether the Dow moves up or moves down. We have two possibilities. One is a ratio back spread, the other is a straddle. Straddle A straddle is buying a call and a put at the same strike price and same expiration. Since we don't know which way the Dow will move, although we know it will move one way or the other, we hedge our bets and play both ways. One of the advantages is that regardless of which way the Dow moves, we make money. Some of the disadvantages are we would not make as much money had we played one direction or the other and we need a larger move to make money Note: We are technically going to be buying a strangle. Strangles are similar to straddles except the strike prices are out of the money. If we go out of the money just a bit on the DJX straddle, we can lower the cost significantly and have the exact same risk. This is a slightly better play. Since the Dow is at about 9000, we will play the "90" strike. Since we expect the move to happen over the next 45 days, we will play the September option. Option Sym Strike Type Bid Ask Vol OI DJVIL SEP 90 Call 3.9 4.1 11 1478 <-- Straddle DJVUL SEP 90 Put 3.5 3.7 849 1068 DJVIN SEP 92 Call 2.8 3.0 37 14836 <-- Strangle DJVUJ SEP 88 Put 2.7 2.9 348 5070 What If We Are Right (Note: All calculations are based on the strangle play.) Let's say the Dow moves 750 points by July expiration. It may move more or less, but we are using this as a reference. Just move the price cursor to adjust for a greater move. Chart: Position Analysis For The First Target If the DJX moves to 97.50 by July expiration, the value of the combined options will show a profit of $109. Chart: Position Analysis For The Second Target On the other hand if the DJX moves to 82.50 by July expiration, the value of the combined options will show a profit of $89. Obviously, in both cases, if the Dow moves more, the profits are going to be greater. What If We Are Wrong Chart: Wrong Scenario If the Dow has not moved significantly by August 8 (45 days to expiration) the combined value of the options will show a loss of $270. Exit the trade on August 8 regardless of the value of the Dow. Alternately, you can exit the trade on July 18 for a loss of $170. Ratio Back spread A ratio back spread is more of a directional play but it allows us to risk much less in case we are wrong. In fact, in this case, you actually make money if you are completely wrong. In this scenario, we are going to play the Dow to go down, but hedge our bets in case it goes up to 9750. We will be buying two September OTM puts and paying for it by selling one ATM put Option Pos Qty Sym Strike Type Bid Ask Vol OI Sell 1 DJVUV SEP 100 Put 9.9 10.4 415 12 Buy 2 DJVUL SEP 90 Put 3.5 3.7 849 1068 Depending on the price you get, you will have a credit of about $250. What If We Are Right Chart: Position Analysis For The First Target If the DJX moves to 82.50 by July expiration, the value of the combined options will show a profit of $119. Again, if the Dow continues down, the profits just increase. What If We Are Wrong Scenario 1 Chart: Wrong Scenario 1 If the DJX moves to 97.50 by July expiration, the value of the combined options will show a loss of $10. As you can see, the higher the Dow moves, the more of the $250 credit we get to keep. We would buy just back the put we sold at a much reduced price. Scenario 2 Chart: Wrong Scenario 2 If the Dow has not moved significantly by August 8 (45 days to expiration) the combined value of the options will show a loss of $240. Exit the trade on August 8 regardless of the value of the Dow. Alternately, you can exit the trade on July 18 for a loss of about $90. The choice of which play to pick is yours. It will depend on your risk/reward tolerance. For me, based on what I think the Dow is going to do, I feel the ratio back spread could be the more profitable choice. ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould Every newsletter that I have ever followed has reiterated the same party line about calling a top. They all say that the way to call a top is to wait for all the bears to capitulate. When the very last bear resigns, when he relents and goes long, when that last bear finally gives up the ghost, then and only then will the market come tumbling down. Well, I am that last bear. Not really, but I now believe that I am in the very small minority of investors that is bearish. When I resign myself to the bullish trend, when I finally relent, when I sell all my puts and buy calls, then the market will crash. But I ain't ready just yet. Oh, I know, I cannot buck this trend for much longer and I am not going to. But I am far from ready to capitulate. I am just hedging my bets just in case. If I said we hit a top this week, I do not think too many people out there are going to believe me. I have been crying bear for so long as the market keeps going up that I do believe the market is doing it just to be ornery. Sort of like my teenage son. Regardless of what I say, he will do just the opposite out of spite. I think the Dow is treating me the same way. But a day of reckoning is coming. Not sure exactly when. (Oh yeah, I remember now, for the last two months.) But when it comes, let it be known that I was a lone voice crying in the wilderness. Let's look at some charts. Chart: Dow Daily 6/6/2003 Here is a daily chart of the Dow since January 2000 with the wave counts updated. Based on this current wave count, the Dow is undergoing a wave (2) correction. The question I would like to address is how much higher can the Dow go before it continues down? Let's take a closer look at the A-B-C correction that the Dow is currently in the midst of. Chart: Dow A-B-C Wave 1 Retracement First let's examine the wave 1 retracement levels. Typically, the A-B-C correction will retrace a wave 1 somewhere between 38-62%. Currently, the C wave is around the 60% level. That doesn't mean that the C wave cannot go higher, but there is strong resistance at around the 9360 level. The Dow is almost at that level. In fact, even though Friday was an up day, the Dow printed out a bearish reversal, possibly indicating that it has already gone as high as it is going to go. The next thing we want to look at is the type of A-B-C correction the Dow is undergoing. In my article Corrections Part I, I described several different types of A-B-C corrections. One of them was called a flat. Let's do a quick review of flats Figure 1: Flat chart On the left in figure 1 is a typical flat. Flats have several defining features. 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: Dow A-B-C as a Flat Looking again at the Dow, we can see that the B wave retraced the A wave at about 85%, well within the flat retracement territory. The A wave is a 3 wave corrective pattern and the B wave is a 3 wave corrective pattern. This is looking more and more like a flat. If we do have a flat, the C wave should extend about the length (in price) of the A wave. On the right side of the chart is a label "Percentage of Wave A". This functions prints out the levels where wave C will equal wave A. At (about) 9265, wave C will equal wave A. We are close enough to that value right now that the flat could be considered complete. The C wave could be a 5 wave basic pattern. It would have to be a leading diagonal and it very well could be. If this is indeed the case, the Dow will reverse course tracing out a 5 wave basic pattern of the 3 wave. The above analysis does not mean that wave C has topped. This A- B-C pattern could easily morph into an expanded flat. An expanded flat is similar to a flat except that the C wave extends past the A wave. In this case, we are looking at a Dow of 9970 (1.38 x A) to 10406 (1.62 x A). If the C wave is not that leading diagonal then expect a move down (wave 4) and then back up (wave 5) to complete the 5 wave basic pattern. Could the Dow go up another 800 points? Yes. Could the Dow slide 2000 points by October? Yes. Do we know which way it is going to go? Sorry, my crystal ball is in the shop for repairs. Although based on the other technical indicators (does the word overbought mean anything to you) and the bad economic news (does the word deflation mean anything to you) waiting to be digested, I would say we should be headed down. Bottom line, I am ultimately bearish the Dow longer term. Shorter term, I am undecided. Either scenario is likely. Best to hedge your bets. ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. 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The Option Investor Newsletter Sunday 06-08-2003 Sunday 5 of 5 In Section Five: Covered Calls: What is a Covered Call? Naked Puts: Q&A On Strategies Spreads/Straddles/Combos: Bulls Rule For Another Week! Updated In The Site Tonight: Market Posture: Not Uncalled For ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading Basics: What is a Covered Call? By Mark Wnetrzak Many of our new readers are comfortable with investing in stocks but are hesitant to trade options. Selling "covered" calls is a strategy that may be more appropriate for their experience level. Buying stocks is one of the most popular investing techniques in today's financial markets. Derivatives are a natural companion to stock ownership and yet most people never benefit from the advantages of options because they believe they are too "risky." It is true that an option buyer can lose the entire value of their investment, however the same situation exists when buying stocks. One way to limit the potential downside of stock ownership is to transfer some of the risk to another trader by writing "covered" calls on the issue. A covered call is like placing a limit order to sell the shares to someone else at a specific price (the strike price) after it is purchased. For this obligation, you receive a premium, which lowers the overall cost basis of the issue. In return, you forego a certain amount of upside potential in the stock. Investors who use this strategy are interested in earning consistent (moderate) profits while maintaining an above-average downside margin during periods of bearish market activity. The characteristics of the covered-call position are fairly simple and the first requirement is stock ownership. When you sell (write) a call option against that stock (one contract for every 100 shares owned), you agree to sell your stock at a specific price -- the strike price of the option -- for a specific amount of time, until the option expires. In the transaction, you receive a premium ($$$) from the option buyer for their right to buy your stock, and you get to keep this premium regardless of what happens to the stock in the future. If the stock price rises above the strike price of the sold option at expiration, the stock will "called" away (assigned) by the owner of the option. When this event occurs, you realize a profit, providing that your cost basis in the issue is less than the strike price of the option that you sold. If, at expiration, the stock price is below the strike price of the sold option, it will not be assigned and you keep the stock for future trades -- such as selling additional options for more cash income. One thing to remember is the stock can be assigned at any time prior to the option expiration date, regardless of its price, so don't write calls against a stock that you are not willing to sell. Despite the apparent simplicity of this popular strategy, writing covered calls involves a number of crucial decisions, the most important of which is whether you want to be conservative or aggressive in your approach. An investor with an aggressive attitude and a bullish outlook on the market would probably sell options at strike prices that are higher (out-of-the-money) than the current price of the stock, thus his potential profit would include both the premium received from the sold option plus any capital appreciation (up to the option's strike price) of the issue. A more conservative investor might sell options with strike prices that are near (at-the-money) the current price of the stock, thus establishing a relatively balanced outlook with regard to risk and reward. The most risk-adverse investor would construct positions using options with strike prices that are below (in-the-money) the current price of the stock, creating a stock-option combination with a high probability of a limited, but acceptable, profit. The key to success with this approach is to carefully calculate the potential gains in the position based on the adjusted cost basis in the issue. Don't agree to sell the stock for less money than you have invested in it! Regardless of what method you favor, there are a few guidelines that apply to writing covered calls in general. First, the expiration date of the sold calls should be no more than a few months in the future because option premium (on a relative basis) is greatest in near-term options. Second, options that are at-the-money provide the greatest amount of theoretical time-value premium, due to the normal distribution (bell curve) of option pricing. Third, lower priced stocks will produce better yields in covered-call positions, especially when the stock is purchased on margin. Obviously, selling an at-the-money call for $1 on a $10 stock is more effective than receiving the same premium for a similar option on a $20 stock. Finally, commissions do play a significant part in the calculations of potential profits as there can be up to three trades in a successful play; the purchase of the stock, the sale of the call(s), and the sale of the stock upon assignment. Experienced investors offset this effect by purchasing a minimum of 500 to 1000 shares in each position. One trading strategy worth noting involves the entry of covered call positions. The method I am referring to is the "Buy-Write" order, which can be very a useful means to establish the overall profit/loss outlook in a position. In simple terms, a buy-write order involves buying stock and selling its option simultaneously. When placing an order for a buy-write, you are requesting to purchase the shares and sell the (call) options for a specific "net" price, with both transactions occurring at the same time. The exact phraseology is not important but a specific "net-debit" must be given when the trade instructions are delivered to the agent. The floor broker or clearing-house will fill the order if the specified net-debit can be achieved through any combination of stock and call-option prices. One of the advantages of this technique is that it prevents the possibility of "slippage" during the position entry process when the premium in the call option declines. This problem happens frequently in the plays we list as many are opened in the first hour of trading on the Monday after the newsletter is published. If too many calls are sold without any buying pressure, the bid premium drops towards intrinsic value and the (ITM) play becomes unfavorable. Traders who attempt to "leg-in" to these positions (buying the stock with plans to sell the call at a later time) are often surprised to see the previously overvalued premiums disappear before they can write the options that complete the play. Next week, we'll discuss position management and the most common adjustment techniques with covered calls. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield SUPG 5.04 5.51 JUN 5.00 0.65 0.61* 20.1% ARIA 3.37 3.71 JUN 2.50 1.05 0.18* 11.2% NOR 2.67 2.61 JUN 2.50 0.40 0.23* 8.8% LGTO 7.60 8.37 JUN 7.50 0.45 0.35* 7.1% IPXL 7.86 9.96 JUN 7.50 0.80 0.44* 7.0% PLUG 5.08 5.54 JUN 5.00 0.35 0.27* 6.4% MOSY 7.50 8.46 JUN 7.50 0.60 0.60* 6.3% ALKS 12.84 13.22 JUN 12.50 0.95 0.61* 5.8% IDNX 5.60 6.43 JUN 5.00 0.90 0.30* 5.5% CBST 10.79 11.96 JUN 10.00 1.15 0.36* 5.4% TER 13.06 17.62 JUN 12.50 1.40 0.84* 5.2% FCS 12.55 14.00 JUN 12.50 0.60 0.55* 5.2% OVER 14.55 17.35 JUN 12.50 2.75 0.70* 5.2% OVER 17.80 17.35 JUN 15.00 3.30 0.50* 5.0% MDR 5.08 6.16 JUN 5.00 0.40 0.32* 5.0% AWE 7.64 7.57 JUN 7.50 0.45 0.31* 4.9% PLUG 5.39 5.54 JUN 5.00 0.65 0.26* 4.8% FEIC 17.65 21.01 JUN 17.50 0.85 0.70* 4.7% FFIV 15.45 17.38 JUN 15.00 1.30 0.85* 4.4% GNTA 8.78 13.73 JUN 7.50 1.70 0.42* 4.3% MRVL 26.72 32.65 JUN 25.00 3.10 1.38* 4.2% MLNM 15.55 16.86 JUN 12.50 3.40 0.35* 4.2% CELG 31.48 34.76 JUN 30.00 2.80 1.32* 4.0% GP 17.99 17.83 JUN 17.50 1.40 0.91* 4.0% BRCM 21.40 26.01 JUN 20.00 2.25 0.85* 3.9% PEGS 13.00 14.88 JUN 12.50 0.85 0.35* 3.2% FMKT 7.51 6.97 JUN 7.50 0.35 -0.19 0.0% * Stock price is above the sold striking price. Comments: The wildly bullish market environment continues for another week, though Friday's move could be signaling a consolidation phase. As for the covered-call portfolio, Abgenix (NASDAQ:ABGX) is listed "closed" below after Monday's gap lower on disappointing news at the American Society of Clinical Oncology's annual convention. On Monday, SuperGen (NASDAQ:SUPG) acted rather worrisome though it has since rebounded and moved to a new 11-month high. One issue to monitor closely next week is Freemarkets (NASDAQ:FMKT) as the issue could test support near $6.00 - an early exit candidate? As always, monitor closely any issues you do not want to own and those that are acting weaker than expected. Always be prepared because the "Bulls" may finally relent and "allow" a consolidation phase as they harvest their profits. Positions Previously Closed: Abgenix (NASDAQ:ABGX), though it did rebound (second chance exit?). 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 QSFT 12.58 JUL 12.50 QUD GV 1.00 530 11.58 42 5.8% SEBL 10.98 JUL 10.00 SGQ GB 1.65 4550 9.33 42 5.2% MTON 5.60 JUL 5.00 KQM GA 0.90 49 4.70 42 4.6% RHAT 8.27 JUL 7.50 RCV GU 1.20 340 7.07 42 4.4% EDS 21.99 JUL 20.00 EDS GD 3.00 3610 18.99 42 3.9% IMMU 6.91 JUL 5.00 QUI GA 2.15 87 4.76 42 3.7% ASIA 5.97 JUL 5.00 EUJ GA 1.15 418 4.82 42 2.7% 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). ***** QSFT - Quest Software $12.58 *** Merger Mania: Part I *** Quest (NASDAQ:QSFT) is a developer and vendor of application and database management software products. The company also provides support and maintenance services for its products, as well as post-sale consulting services. Quest's products improve the quality of service provided by its customers' key software applications. Many of the company's products also significantly reduce its customers' capital and operating expenses associated with these systems by minimizing hardware, software and/or personnel costs. The company's application management products support the packaged applications from many of vendors, including SAP, Siebel, PeopleSoft and Oracle. Many enterprises also continue to run and deploy internally developed applications. These applications require a database system, such as Oracle, Microsoft SQL Server or IBM's DB2, to store, access and organize the applications' data. Quest's products support all three databases. Let's see, Oracle is buying PeopleSoft, and PeopleSoft is buying J.D. Edwards. Yes, it's merger/buyout mania in software-land and investors are speculating on future targets. Quest has solid support around $11.50 and this position offers a way to participate in the near-term performance of the issue with a reasonable cost basis. JUL-12.50 QUD GV LB=1.00 OI=530 CB=11.58 DE=42 TY=5.8% ***** SEBL - Siebel Systems $10.98 *** Merger Mania: Part II *** Siebel (NASDAQ:SEBL) is a provider of e-business applications software and is principally engaged in the design, development, marketing and support of Siebel eBusiness Applications. This family of enterprise applications software enables a company to better manage its customer, partner and employee relationships. Siebel eBusiness Applications are designed to meet the information system requirements needed to manage these relationships for organizations of all sizes, from small businesses to the largest multinational organizations and government agencies. As stated above in the Quest write-up, the attempted buyouts this week by PeopleSoft (buying J.D. Edwards) and Oracle (a hostile attempt to buy Peoplesoft -- who is buying J.D. Edwards) has ignited some bullish activity in the sector. This position simply offers a way to speculate on future merger/buyout targets with a cost basis near buying support. JUL-10.00 SGQ GB LB=1.65 OI=4550 CB=9.33 DE=42 TY=5.2% ***** MTON - Metro One $5.60 *** Bottom Fishing: Part I *** Metro One Telecommunications (NASDAQ:MTON) is a developer and provider of Enhanced Directory Assistance and information services for the telecommunications industry. The company primarily contracts with wireless carriers to provide its services to their subscribers. The company's customers include wireless telecommunications carriers such as Sprint PCS, AT&T Wireless Services, Nextel Communications, Cingular Wireless and ALLTEL Communications. In addition, the company has expanded into the landline telecommunications market and provides its services to regional competitive local exchange carriers. The company offers its services to a carrier's subscribers under a brand name selected by the carrier, such as "AT&T Connect" or "Sprint PCS Directory Assistance." Metro One appears to have once again successfully tested support near $5.00 as the stock forges a Stage I base. We simply favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. Target-shooting a lower "net debit" will increase the potential yield and lower the cost basis in the position. JUL-5.00 KQM GA LB=0.90 OI=49 CB=4.70 DE=42 TY=4.6% ***** RHAT - Red Hat $8.27 *** Microsoft's Bane? *** Red Hat (NASDAQ:RHAT) provides open source solutions for the IT infrastructure of Global 2000 companies. RHAT delivers a single open source operating platform from the mainframe to the server to the embedded device. The company applies its technology leadership to create its open source operating platform, Red Hat Advanced Server and related open source solutions that meet the functionality requirements and performance demands of the large enterprise and those 3rd party software applications or products that are critical to the large enterprise, such as the Oracle Database. In addition, the company has developed a complete set of engineering, consulting and managed services offerings to enable large enterprise customers to capture the significant cost, performance and scalability benefits of its open source enterprise solutions. MSFT's CEO Steve Ballmer recently said that Linux and free software products, "present a competitive challenge for us (Microsoft) and our entire industry, and they require our concentrated focus and attention." And that is exactly what investors appear to be doing; focusing their attention on Linux and open-source related stocks. The news generated a sharp rally in Red Hat and traders who believe the upside activity will continue can speculate on that outcome with this position. JUL-7.50 RCV GU LB=1.20 OI=340 CB=7.07 DE=42 TY=4.4% ***** EDS - Electronic Data Syms $21.99 *** Bottom Fishing: Part II *** Electronic Data Systems (NYSE:EDS) is a professional services firm that offers its clients a portfolio of related services worldwide within the broad categories of traditional information technology outsourcing, business process outsourcing, consulting, and product lifecycle management software and services. Services include the design, construction and/or management of networks, information systems, information processing facilities and business processes. The company's end-to-end portfolio of services integrates its four lines of business: operations solutions, solutions consulting, product lifecycle management (PLM) solutions and A.T. Kearney. EDS has moved up sharply recently as the stock recovers from last September's crash. Investors appear to be anticipating good news when the company talks to analysts on June 18. We simply favor the recent move above EDS' 150-day MA on heavy volume and the technical support area near our cost basis. Investors who believe that EDS has turned the corner can use this position to speculate on the company's future. JUL-20.00 EDS GD LB=3.00 OI=3610 CB=18.99 DE=42 TY=3.9% ***** IMMU - Immunomedics $6.91 *** Cheap Speculation! *** Immunomedics (NASDAQ:IMMU) is a biopharmaceutical company focused on the development, manufacture and marketing of monoclonal antibody-based products for the detection and treatment of cancer and other serious diseases. The company has developed a number of advanced proprietary technologies that allow it to create humanized antibodies that can be used either alone in unlabeled form or conjugated with radioactive isotopes, chemotherapeutics or toxins to create highly targeted agents. Using these technologies, IMMU has built a broad pipeline of diagnostic and therapeutic product candidates that utilize several different mechanisms of action. Its technologies are supported by an extensive portfolio of intellectual property that includes approximately 80 issued patents in the United States and 233 other issued patents worldwide. Immunomedics rallied on heavy volume back in May on "no news". Maybe it was the brief descriptions of two preclinical trials that had been circulated prior to a planned meeting? In any case, this position offers favorable speculation in a rebounding stock with a cost basis near technical support. Target-shooting a lower "net debit" will enhance the yield and downside protection in this position. JUL-5.00 QUI GA LB=2.15 OI=87 CB=4.76 DE=42 TY=3.7% ***** ASIA - AsiaInfo $5.97 *** Rally Mode = Cheap Speculation! *** AsiaInfo Holdings (NASDAQ:ASIA) is a provider of telecommunications network integration services and software solutions in China. The company's operations are organized as two strategic business units, Communications Solutions and Operation Support System Solutions (OSS). The Communications Solutions business unit offers network, service application, security and monitoring solutions. The OSS Solutions unit includes the AsiaInfo's highly scalable software, which can automate a telecom carrier's key business processes such as customer care and billing, order fulfillment and customer relationship management. ASIA conducts most of its operations through two wholly owned subsidiaries, AsiaInfo Technologies (China) and AsiaInfo Management Software. AsiaInfo rallied strongly this week on no news and moved significantly above a resistance area near $5.00 (and now a support area). This position offers a method to conservatively speculate on the reason for the huge move with a cost basis near support. Targeting a lower price in the stock or a higher price in the option (legging-in) should offer a favorable cost basis -- much better than the one listed below. JUL-5.00 EUJ GA LB=1.15 OI=418 CB=4.82 DE=42 TY=2.7% ***** ***************** 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 COB 8.09 JUN 7.50 COB FU 1.10 1421 6.99 14 15.9% RTIX 12.75 JUN 12.50 RQK FV 0.75 3 12.00 14 9.1% RMBS 18.58 JUN 17.50 BNQ FW 1.75 3986 16.83 14 8.6% FWHT 13.94 JUN 12.50 HFQ FV 1.85 94 12.09 14 7.4% CCRT 13.00 JUN 12.50 CUE FV 0.85 0 12.15 14 6.3% BPUR 6.11 JUL 5.00 QPU GA 1.50 2324 4.61 42 6.1% DMRC 15.27 JUN 15.00 DQT FC 0.65 23 14.62 14 5.7% HEPH 13.71 JUN 12.50 QGQ FV 1.50 10 12.21 14 5.2% OIIM 15.98 JUL 15.00 XQQ GC 1.80 303 14.18 42 4.2% PSTI 10.50 JUL 10.00 MQA GB 1.05 50 9.45 42 4.2% OPWV 2.77 JUL 2.50 UGE GZ 0.40 3811 2.37 42 4.0% EPNY 5.51 JUL 5.00 UEP GA 0.70 86 4.81 42 2.8% ***************** NAKED PUT SECTION ***************** Option Trading 101: Q&A On Strategies By Ray Cummins One of our readers asked about a strategy that involves "naked" puts but has substantial upside potential on bullish issues. Attn: Naked-Puts Editor Subject: Buying Calls With Puts? Hello Ray, I just started reading about spreads and combination strategies and I have been following the picks in your other sections. I came across a play (ICOS) that included buying a call and selling a put on the same stock. This "synthetic" play seemed strange at the time - a bit too bullish? - even though the stock is now up about $10. I know you would have made a ton just buying calls so why sell the puts? Are you trying to pay for the calls with the put premiums? If so, it sounds like a neat way to speculate on bullish stocks without spending any cash. Anyway, a great pick it was! I just wish you had put it in with the naked puts plays. GR Editor's Note -- Here is the position, from 5/25/03, referred to in the E-mail: ICOS - ICOS Corporation $29.85 PLAY (very speculative - bullish/synthetic position): BUY CALL JUL-35.00 IIQ-GG OI=812 ASK=$0.85 SELL PUT JUL-25.00 IIQ-SE OI=1796 BID=$0.85 INITIAL NET CREDIT TARGET=$0.10-$0.20 INITIAL TARGET PROFIT=$0.55-$0.80 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $800 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25). Hello GR, Indeed, one of the best methods for speculating on directional issues with options is the synthetic position. The simplest way to explain synthetic positions in the financial world is to say that they are simply alternate ways of constructing the same risk-reward outlook with different issues or instruments. The term "synthetic" is an appropriate description because a unit of the underlying issue is simply being synthesized. Futures traders often use combinations of various derivatives to produce similar profit/loss characteristics with commodities and fund managers utilize many of the same techniques to reduce the risk of adverse market movements in large equity portfolios. Retail traders can also benefit from those strategies by creating positions that mirror the activity of specific stocks and indexes. With the purchase of a call and the sale of a put of the same strike and duration, traders can capitalize on anticipated stock movement without investing as much capital as they would when buying the underlying issue on the open market. Recall that when you buy stock, you are considered "long", as you own it outright and will participate fully in any price appreciation of the stock. With a synthetic position, the leverage of options magnifies any gain in the underlying issue, thus providing exponential returns on any upside activity. The advantages to this unique strategy are numerous but the major incentive for this type of approach is that its payoff structure is very similar to holding a long stock position and yet traders are not required to take physical delivery of the issue to benefit from its activity. Second, the initial capital requirements for a synthetic position are much lower than being long on the stock, even when using maximum margin in the purchase. Finally, since the synthetic delivers the same performance as a long position in the underlying issue, there is no additional risk in using derivatives to duplicate the basic stock ownership strategy. Of course, there are some basic requirements for participating in this strategy, such as having a margin account and the ability to sell cash-secured or "naked" options. Another aspect that traders should be aware of is the ongoing collateral requirement for the sold (short) options due to the possibility of assignment. That expense must be factored into the final analysis of the strategy when comparing it to other techniques, such as buying the issue outright or using a combination of stocks and options to produce a similar position. A Speculative, Low-Risk Approach For most traders, the ability to profit from a stock's movement at a fraction of the cost of owning the issue is the primary reason for utilizing options. The bullish, limited-risk approach falls into two primary categories: option buying and (covered) option selling, and the most common method of option trading among retail participants has always been the purchase of calls. That technique can be very profitable but it requires an initial capital outlay and in the case of in- or at-the-money options, leaves the trader exposed to a large amount of downside risk. In addition, traders who purchase options during a strong directional movement in the underlying will be forced to pay higher premiums, greatly reducing the probability of profit. Those who realize the unique difficulty associated with this type of approach are forced to remain on the sidelines until they discover an alternative method. Fortunately, there are numerous combination strategies that can help limit the overall cost of the trade and simultaneously benefit from inflated premiums. One of these techniques is a variation of the synthetic position using "out-of-the-money" options to construct a more speculative outlook play with lower probability of profit and reduced risk. In this case, you buy an out-of-the-money call to take advantage of any extreme or rapid upward movement in the underlying issue, and you sell an out-of-the-money put to pay for the call. Buying an OTM call costs less, at the expense of position Delta, but the drawback is offset by the sale of an OTM put, which provides a greater margin of downside risk. As with any naked-put position, you must be willing to own the underlying stock in the event of an unexpected downturn but, by using OTM options, you will have a larger cushion to absorb additional volatility in the issue. At first glance, this strategy may appear far too speculative to be viable for conservative traders, but in truth, it works very well with trending issues that have large upside potential and the risk is little more than if you sold the identical cash-secured put to collect premium on a bullish stock. The great feature of options is they can be used in a number of ingenious ways to create the most appropriate position for the current market outlook and your personal risk/reward attitude. The right combination of puts and calls can produce an effective position with results that are similar to being long on the stock, with less expense, and portfolio collateral can be used to finance the entire transaction. This approach also has the potential for unlimited gain, thus providing an opportunity (one you don't have with naked-puts alone) to overcome a number of losing plays. As with any speculative strategy, be sure to thoroughly explore the various outcomes and potential risk, so you can comfortably execute the technique to its fullest potential. 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 28.50 38.39 JUN 22.50 0.50 0.50* 3.3% 11.7% USG 11.85 11.81 JUN 7.50 0.35 0.35* 4.3% 11.2% OVTI 35.89 34.74 JUN 30.00 0.70 0.70* 3.5% 11.1% CTIC 11.96 12.40 JUN 10.00 0.30 0.30* 3.5% 10.8% ANPI 28.27 32.77 JUN 22.50 0.80 0.80* 3.2% 10.8% CTIC 10.21 12.40 JUN 7.50 0.25 0.25* 3.0% 9.5% ANPI 25.20 32.77 JUN 17.50 0.75 0.75* 3.2% 9.4% FLEX 10.50 10.73 JUN 10.00 0.25 0.25* 3.7% 9.2% IMCLE 21.20 38.39 JUN 15.00 0.50 0.50* 3.0% 9.2% OVTI 28.64 34.74 JUN 22.50 0.80 0.80* 2.7% 8.9% APPX 27.77 37.00 JUN 22.50 0.65 0.65* 2.6% 8.7% SOHU 28.04 28.57 JUN 22.50 0.35 0.35* 2.3% 8.4% NVDA 21.37 25.76 JUN 17.50 0.55 0.55* 2.3% 7.6% CELG 27.42 34.76 JUN 22.50 0.70 0.70* 2.3% 7.5% OVTI 30.92 34.74 JUN 25.00 0.45 0.45* 2.1% 7.3% ITMN 23.89 26.34 JUN 20.00 0.60 0.60* 2.2% 6.9% ITMN 25.76 26.34 JUN 22.50 0.60 0.60* 2.4% 6.8% OSIP 26.08 34.83 JUN 22.50 0.40 0.40* 2.0% 6.2% SOHU 22.83 28.57 JUN 17.50 0.35 0.35* 1.8% 6.2% ICST 26.05 29.02 JUN 22.50 0.30 0.30* 2.0% 6.1% NVLS 34.67 38.70 JUN 30.00 0.40 0.40* 2.0% 6.0% CELG 31.10 34.76 JUN 25.00 0.35 0.35* 1.6% 5.9% ANPI 28.45 32.77 JUN 22.50 0.30 0.30* 1.5% 5.6% SFA 20.29 20.77 JUN 17.50 0.35 0.35* 1.8% 5.4% NVDA 21.26 25.76 JUN 17.50 0.30 0.30* 1.5% 5.2% APPX 23.40 37.00 JUN 15.00 0.35 0.35* 1.7% 5.0% APPX 32.20 37.00 JUN 25.00 0.30 0.30* 1.4% 5.0% GNSS 19.02 16.62 JUN 17.50 0.40 -0.48 0.0% 0.0% * Stock price is above the sold striking price. Comments: Another week of (irrational?) exuberance among investors has helped our portfolio maintain a near-perfect record. Genesis Microchip (NASDAQ:GNSS) is the only "fly in the ointment" as the stock tanked after posting a mediocre mid-quarter update. Friday morning's rally offered a near break-even exit and that was all we needed to move this play to the "previously closed" list. Previously Closed Positions: Artisan (NASDAQ:ARTI), which is currently profitable, and Cyberonics (NASDAQ:CYBX). WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield IMCLE 38.39 JUN 30.00 QCI RF 0.40 3009 29.60 14 2.9% 10.8% BRCM 26.01 JUN 22.50 RCQ RX 0.30 5905 22.20 14 2.9% 9.1% CELG 34.76 JUN 30.00 LQH RF 0.40 7752 29.60 14 2.9% 9.1% CYMI 34.51 JUN 30.00 CQG RF 0.35 5662 29.65 14 2.6% 7.9% BSX 56.06 JUN 45.00 BSX RI 0.40 29084 44.60 14 1.9% 7.4% ICOS 40.25 JUN 30.00 IIQ RF 0.25 6638 29.75 14 1.8% 6.5% MERQ 42.26 JUN 37.50 RQB RT 0.30 1523 37.20 14 1.8% 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). ***** IMCLE - ImClone $38.39 *** More Drug 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 this week after ImClone and Bristol-Myers Squibb, its pharmaceutical partner, said they would resubmit a marketing application for Erbitux in the second half of this year. Analysts are optimistic about the drug's prospects for approval and traders who wouldn't mind owning IMCLE at a cost basis near $30 should consider this position. JUN-30.00 QCI RF LB=0.40 OI=3009 CB=29.60 DE=14 TY=2.9% MY=10.8% ***** BRCM - Broadcom $26.01 *** Entry Point? *** 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 was one of the few issues that held on to Friday morning's gains and the recent technical indications suggest long-term upside potential for this popular company in the semiconductor sector. JUN-22.50 RCQ RX LB=0.30 OI=5905 CB=22.20 DE=14 TY=2.9% MY=9.1% ***** CELG - Celgene $34.76 *** Biotech Boom! *** 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. Last week, the CEO of Celgene affirmed that his company expects to be profitable this year, and he expressed hopes about an experimental cancer treatment now in development. The new drug, Revimid, appears to have strong potential as a cancer treatment and the drug could win FDA clearance in 2004 as a treatment for MDS, a blood disease that leads to leukemia. Investors who like the outlook for Celgene can establish a cost basis near $30 in the issue with this position. JUN-30.00 LQH RF LB=0.40 OI=7752 CB=29.60 DE=14 TY=2.9% MY=9.1% ***** CYMI - Cymer $34.51 *** Chip-Equipment Rally! *** Cymer (NASADQ:CYMI) is a supplier of excimer light sources, the essential light source for deep ultraviolet photolithography systems. DUV lithography is a key technology that has allowed the semiconductor industry to meet the exact specifications and manufacturing requirements for volume production of advanced semiconductor chips. The firm's light sources are incorporated into step-and-repeat (steppers) and step-and-scan (scanners) photolithography systems for use in the manufacture of various semiconductors with critical feature sizes below 0.35 microns. Cymer's products consist of photolithography light sources, replacement parts and service. The firm maintains a worldwide service organization that supports its installed base of light sources. Cymer has been one of the better performers in the semiconductor-equipment sector over the past two weeks and traders who believe the recent momentum will keep the shares above $30 in the near-term can profit from that outcome with this position. JUN-30.00 CQG RF LB=0.35 OI=5662 CB=29.65 DE=14 TY=2.6% MY=7.9% ***** BSX - Boston Scientific $56.06 *** Bullish Stent-Maker *** 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. Boston Scientific has soared to incredible heights on speculation over the company's expected filing with the Food and Drug Administration for its drug-eluting stent. Aggressive traders can use the inflated option premiums to profit from further upside activity in the issue. JUN-45.00 BSX RI LB=0.40 OI=29084 CB=44.60 DE=14 TY=1.9% MY=7.4% ***** ICOS - ICOS Corporation $40.25 *** Speculation Only! *** ICOS Corporation (NASDAQ:ICOS) develops pharmaceutical products with significant commercial potential by combining its unique capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. The firm applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis, pulmonary arterial hypertension and cardiovascular diseases, as well as inflammatory diseases. The company has established collaborations with pharmaceutical and biotechnology companies to enhance its internal development capabilities and to offset a substantial portion of the financial risk of developing its product candidates. ICOS shares rocketed higher last week in the wake of bullish research data on Cialis, an investigational oral treatment for erectile dysfunction being developed by Lilly and ICOS. The rally continued after ICOS announced that it and Biogen (NASDAQ:BGEN) will conclude their program collaboration on LFA-1, a molecule found in certain immune cells, with ICOS to acquire sole rights to the program. ICOS intends to pursue small molecule treatments based on antagonism of LFA-1 and apparently, investors are happy with the news. JUN-30.00 IIQ RF LB=0.25 OI=6638 CB=29.75 DE=14 TY=1.8% MY=6.5% ***** MERQ - Mercury Interactive $42.26 *** Multi-Year High! *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help Global 2000 companies enhance the user experience by improving the performance, availability, reliability and scalability of their Web-based applications. Its many hosted services provide its customers with a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Its integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. The company also provides outsourced load testing and Web performance monitoring services that complement its software products. Shares of MERQ traded at a new multi-year high Friday and the stock finished with a small gain, despite the late-session sell-off. The activity suggests technical strength in the near-term and investors who are bullish on the issue can speculate on its future performance with this position. JUN-37.50 RQB RT LB=0.30 OI=1523 CB=37.20 DE=14 TY=1.8% 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 RMBS 18.58 JUN 17.50 BNQ RW 0.65 1624 16.85 14 8.4% 20.2% PDLI 18.86 JUN 17.50 PQI RW 0.60 246 16.90 14 7.7% 19.2% HEPH 13.71 JUN 12.50 QGQ RV 0.40 20 12.10 14 7.2% 18.6% ENTG 13.60 JUN 12.50 UFN RV 0.40 44 12.10 14 7.2% 18.3% SEPR 25.35 JUN 22.50 ERQ RX 0.50 1821 22.00 14 4.9% 13.9% APPX 37.00 JUN 30.00 AQO RF 0.45 2713 29.55 14 3.3% 11.9% SRNA 21.00 JUN 20.00 NHU RD 0.35 152 19.65 14 3.9% 9.8% CREE 25.00 JUN 22.50 CVO RX 0.30 2636 22.20 14 2.9% 8.4% JCOM 34.30 JUN 30.00 JQF RF 0.35 1823 29.65 14 2.6% 7.8% CVTX 34.97 JUN 27.50 UXC RY 0.25 275 27.25 14 2.0% 7.5% BBY 41.87 JUN 37.50 BBY RU 0.30 3629 37.20 14 1.8% 5.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Bulls Rule For Another Week! By Ray Cummins Stocks consolidated Friday after a second straight week of gains, driven by optimism over a recovery in the U.S. economy. Blue-chip shares were among the few winners during the volatile session with the Dow industrial average closing 21 points higher at 9,062. The tech-laden NASDAQ index slid 18 points to 1,627 amid record volume as traders locked-in profits from the recent rally. The Standard & Poor's 500 index drifted 2 points lower to 987, after rising above 1,000 for the first time in over a year. Advancing issues were on pace with declining issues on the NYSE but technology winners lagged behind hi-tech losers by a 6 to 5 ratio. Trading volume was heavy, with more than 1.83 billion shares traded on the Big Board while a near-record 2.95 billion shares were swapped on the NASDAQ. In the U.S. Treasury market, the 30-year bond bucked the overall trend, climbing 5/32 with its yield down to 4.40%. The benchmark 10-year note fell 2/32, with its yield rising to 3.35% from Thursday's 40-year low of 3.24%. ***************** 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 BZH 71.80 88.80 JUN 60 65 0.55 64.45 $0.55 Open CECO 60.52 62.80 JUN 50 55 0.50 54.50 $0.50 Open FDC 40.22 43.60 JUN 35 37 0.30 37.20 $0.30 Open RCII 65.35 71.31 JUN 55 60 0.50 59.50 $0.50 Open ADTN 45.05 54.11 JUN 35 40 0.45 39.55 $0.45 Open KLAC 42.49 49.11 JUN 35 37 0.30 37.20 $0.30 Open LLTC 36.34 35.13 JUN 30 32 0.30 32.20 $0.30 Open ROST 40.09 42.75 JUN 35 37 0.40 37.10 $0.40 Open BSX 48.70 56.06 JUN 37 40 0.25 39.75 $0.25 Open UNH 95.41 97.86 JUN 85 90 0.55 89.45 $0.55 Open WLP 81.05 85.35 JUN 70 75 0.40 74.60 $0.40 Open BSX 50.51 56.06 JUN 40 42 0.25 42.25 $0.25 Open PHM 63.71 66.15 JUN 55 60 0.40 59.60 $0.40 Open BSX 50.51 56.06 JUN 40 42 0.25 42.25 $0.25 Open CYMI 33.31 34.51 JUN 25 30 0.50 29.50 $0.50 Open GILD 52.50 52.20 JUN 45 47 0.25 47.25 $0.25 Open KLAC 46.23 49.11 JUN 40 42 0.30 42.20 $0.30 Open PIXR 56.55 60.54 JUN 45 50 0.25 49.75 $0.25 No Play 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 PG 90.15 90.80 JUN 100 95 0.40 95.40 $0.40 Open MMM 122.81 126.40 JUN 135 130 0.50 130.50 $0.50 Open ANF 27.25 27.92 JUN 32 30 0.20 30.20 $0.20 Open GM 34.41 35.74 JUN 40 37 0.25 37.75 $0.25 Open JCI 81.61 85.99 JUN 90 85 0.55 85.55 ($0.44) Open? BRL 52.56 57.81 JUN 60 55 0.70 55.70 ($2.11) Closed BRL 52.75 57.81 JUN 60 55 0.50 55.50 ($2.31) Closed KSS 51.22 53.39 JUN 60 55 0.55 55.55 $0.55 Open LLL 43.35 43.81 JUN 50 45 0.55 45.55 $0.55 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Traders in the Barr Laboratories (NYSE:BRL) position should have exited the spread Thursday (for a smaller than published loss) when the stock rallied above the sold (call) strike at $55. The Johnson Controls (NYSE:JCI) play is also suspect and should be closed on any further upside activity. Kohl's (NYSE:KSS) and L-3 Communications (NYSE:LLL) are on the "watch" list. Positions in Cabot Micro (NASDAQ:CCMP), Goldman Sachs (NYSE:GS) and Nabors Industries (NYSE:NBR) has previously been closed to limit losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AXP 38.46 43.18 JUN 32 35 2.20 34.70 0.30 Open GENZ 41.47 46.68 JUN 35 37 2.20 37.20 0.30 Open BSX 46.91 56.06 JUN 37 40 2.25 39.75 0.25 Open MERQ 35.75 42.26 JUN 30 32 2.25 32.25 0.25 Open PNC 49.25 48.85 JUN 45 47 2.25 47.25 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 52.92 53.82 JUN 60 55 4.50 55.50 0.50 Open HDI 40.81 44.53 JUN 45 42 2.10 42.90 (1.63) Closed LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss Harley Davidson (NYSE:HDI) was previously on the "watch" list and the position should have been closed (or adjusted) when the issue moved above the sold strike at $42.50. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SMH 26.43 30.50 AUG 30 22 0.10 2.50 Open MRVL 26.72 32.65 JUN 30 22 (0.20) 3.60 Open ICOS 29.85 40.25 JUL 35 25 (0.40) 10.00+ Open? QCOM 33.55 33.55 JUL 37 30 0.10 0.40 Open? The position in Icos Corporation (NASDAQ:ICOS) did not offer the target entry price, but the play was incredibly profitable for traders who paid a small debit to open the speculative synthetic position. Qualcomm (NASDAQ:QCOM) has offered a favorable profit for short-term traders. The Silicon Laboratories (NASDAQ:SLAB) position, although profitable, has previously been closed. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status BMET 28.52 28.79 JUL-30C JUN-30C (0.70) 0.45 Open ESI 29.11 27.15 OCT-30C JUN-30C 1.35 1.60 Open IBM 87.57 80.05 JUL-90C JUN-90C 0.25 1.30 Closed CHKP 18.05 20.18 OCT-20C JUN-20C 0.70 1.60 Open GDT 39.98 43.29 OCT-45C JUN-45C 1.45 1.70 Open NSM 21.80 23.14 JAN-25C JUN-25C 2.10 2.50 Open BRCM 21.40 26.01 JAN-25C JUN-25C 2.15 3.25 Open SRNA 19.71 21.00 AUG-22C JUN-22C 0.70 0.90 Open VRTY 18.85 19.52 SEP-20C JUN-20C 1.00 1.25 Open VIA 44.95 46.68 AUG-47C JUN-47C 1.10 1.40 Open SEAC 11.26 10.19 OCT-12C JUN-12C 0.85 0.65 Open MCDT 13.47 13.47 OCT-15C JUN-15C 0.95 0.80 Open The position in Filenet (NASDAQ:FILE) has previously been closed. CREDIT STRANGLES **************** Symbol Pick Last Month SC SP Credit C/V G/L Status NXTL 13.60 14.26 JUN 15 12 0.75 0.40 0.30 Open MGAM 24.53 24.46 JUN 25 22 1.90 1.50 0.40 Open SC = Short Call SP = Short Put C/V = Current value G/L = Gain/Loss DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status TYC 17.27 17.94 JUL 17.5 17.5 1.80 2.10 Open Questions & comments on spreads/combos to Contact Support ************** E-MAIL REPLIES ************** Attn: Spreads/Combos Editor Subject: Strategy Selection Dear Ray, In your spread column, you suggest some stocks for debit spreads and some for credit spreads. As far as I understand, a call credit spread is the same as a put debit spread of the same strike prices. Right? What makes you decide to list the stock as a call credit instead of the put debit? Am I correct that there needs to be just two categories? First is a bull spread that can be either a put credit or call debit. And second is a bear spread that can be either a call credit or put debit? Also, how you decide which stock to select for debit and which for credit? Thanks AA Hello AA, Your comments are correct: There are two types of vertical (price) spreads -- credit and debit. Credit Spreads: The bear-call (bearish) and the bull-put (bullish) Debit Spreads: The bull-call (bullish) and the bear-put (bearish) Both debit and credit spreads have the same risk-reward outlook. One advantage of credit spreads is they can be funded with portfolio collateral (stocks on margin) while debit spreads need an investment of actual cash. In addition, credit spreads have lower commission costs because both options (in a successful position) are simply allowed to expire. However, some traders favor positions that have no margin requirement and that's why I try to list at least one debit spread each week. The primary disadvantage to in-the-money debit spreads (which are equivalent to out-of-the-money credit spreads) is the potential profits are slightly lower at the same cost basis, due to the characteristics of option pricing. For example, it is rare to find an in-the-money put debit spread that will provide the same risk to profit ratio as the equivalent out-of-the-money call credit spread. The same situation exists with in-the-money call debit spreads and out-of-the-money" put credit spreads. The reason is that in-the-money options have very little extrinsic value (premium), when compared to out-of-the-money options, which are generally all premium, and also because the bid/ask spreads are larger, which means you pay more money for long options and sell short options for less money. The easiest way to choose between one strategy or the other is to determine which approach has a better risk versus reward ratio. If a credit spread offers $0.25 premium on $2.25 collateral, it is a better (theoretical, with all things equal) choice than a debit spread that offers $0.20 profit on $2.30 invested. Example (using 6/02/03 prices -- 12:30 EST): KLA-Tencor (NASDAQ:KLAC) $46.95 Credit Spread BUY PUT KCQ RH BID=0.25 ASK=0.30 SELL PUT KCQ RV BID=0.55 ASK=0.65 CREDIT = $0.25 PROFIT POTENTIAL = 11% (.25/2.25) Debit Spread BUY CALL KCQ FH BID=7.2 ASK=7.3 SELL CALL KCQ FV BID=5.0 ASK=5.1 DEBIT = $2.30 PROFIT POTENTIAL = 8% (.20/2.30) In this case, the credit spread offers a better risk/reward outlook (and fewer commissions). The moral of the story? Traders who favor low risk/high probability (vertical) spread strategies will almost always find better profit potential in OTM credit spreads than in the equivalent debit spreads. Here is a link for more (vertical/price) spreads information: http://options2.registeredrep.com/strategy_trading_vertical_spreads/ And a good book on the subject of spreads and combinations is "Options As A Strategic Investment" by Lawrence G. McMillan. Hope that helps! Ray ************* 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. ***** AGN - Allergan $77.24 *** New 8-Month High! *** Allergan (NYSE:AGN) is a technology-driven, global healthcare firm that develops and commercializes specialty pharmaceutical products for the ophthalmic, neurological, dermatological and other specialty markets. The company is engaged in specialty pharmaceutical research, targeting products and technologies related to specific disease areas, such as glaucoma, retinal disease, dry eye, psoriasis, photodamage, movement disorders, metabolic disease and various types of cancer. Within these areas, Allergan provides therapeutic and other prescription products, and, to a limited degree, over-the-counter products that are sold in more than 100 countries worldwide. AGN - Allergan $77.24 PLAY (conservative - bullish/credit spread): BUY PUT JUL-65.00 AGN-SM OI=1840 ASK=$0.35 SELL PUT JUL-70.00 AGN-SN OI=517 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$69.50 ***** ERTS - Electronic Arts $72.35 *** Break-Out! *** Electronic Arts (NASDAQ:ERTS) is a global software company that operates in two principal business segments. The company's core business segment comprises the creation, sales and distribution of entertainment software, while the EA.com business segment is composed of the creation, sales and distribution of entertainment software that can be played or sold online, ongoing management of subscriptions of online games and Website advertising. Electronic Arts publishes products in a number of categories such as sports, action, strategy, simulations, role-playing and adventure. The company develops or publishes products for eight different hardware platforms and distributes its products and those of its affiliated labels primarily by direct sales to retail chains and outlets in the United States and Europe. ERTS - Electronic Arts $72.35 PLAY (conservative - bullish/credit spread): BUY PUT JUL-60.00 EZQ-SL OI=1543 ASK=$0.35 SELL PUT JUL-65.00 EZQ-SM OI=394 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$64.50 ***** MEDI - MedImmune $39.04 *** FluMist Speculation! *** MedImmune (NASDAQ:MEDI) is a biotechnology company with a range of unique products on the market and a diverse product pipeline. The firm is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease, immune regulation and cancer. MedImmune actively markets three products, Synagis, Ethyol and CytoGam and seeks to launch a potential blockbuster product, FluMist, later this year. MEDI - MedImmune $39.04 PLAY (speculative - bullish/credit spread): BUY PUT JUN-32.50 MEQ-RZ OI=5052 ASK=$0.35 SELL PUT JUN-35.00 MEQ-RG OI=2292 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$34.70 ***** UNH - UnitedHealth Group $97.86 *** 2-For-1 Split Coming! *** 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 $97.86 PLAY (conservative - bullish/credit spread): BUY PUT JUL-85.00 UHB-SQ OI=302 ASK=$0.75 SELL PUT JUL-90.00 UHB-SR OI=273 BID=$1.25 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$89.45 ***** APC - Anadarko Petroleum $44.46 *** Revenge Play! *** Anadarko Petroleum (NYSE:APC), through RME Petroleum Company, RME Holding Company, Anadarko Canada Energy, Anadarko Canada Corporation, RME Land and Anadarko Algeria Company, is a global independent oil and gas exploration and production company. The The company's major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent region and the western states, Alaska and in the shallow and deep waters of the Gulf of Mexico, as well as in Canada and Algeria. APC is also active in Venezuela, Qatar, Oman, Egypt, Australia, Tunisia, Congo and Gabon. APC - Anadarko Petroleum $44.46 PLAY (less conservative - bearish/credit spread): BUY CALL JUN-50.00 APC-GJ OI=1291 ASK=$0.45 SELL CALL JUN-47.50 APC-GW OI=273 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=19% B/E=$47.90 ***** IBM - International Business Machines $80.05 *** Rolling Over? *** International Business Machines Corporation (NYSE:IBM) manufactures and sells computer services, hardware and software. The firm also provides financing services in support of its computer business. The company's major operations comprise a Global Services segment; three hardware product segments (Enterprise Systems, Personal and Printing Systems, and Technology); a Software segment; a Global Financing segment; and an Enterprise Investments segment. IBM offers its products through its global sales and distribution organizations. The Company operates in more than 150 countries worldwide and derives more than half of its revenues from sales outside the United States. IBM - International Business Machines $80.05 PLAY (conservative - bearish/credit spread): BUY CALL JUN-90.00 IBM-FR OI=32545 ASK=$0.15 SELL CALL JUN-85.00 IBM-FQ OI=21580 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.35-$0.45 POTENTIAL PROFIT(max)=7% B/E=$85.35 ************* 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. ***** NBIX - Neurocrine Biosciences $56.84 *** Rally Mode! *** Neurocrine Biosciences (NASDAQ:NBIX) is a unique, product-based biopharmaceutical company focused on neurological and endocrine diseases and disorders. Their product candidates address some of the largest pharmaceutical markets in the world including insomnia, anxiety, depression, diabetes, multiple sclerosis, irritable bowel syndrome, eating disorders, pain, autoimmunity and certain female and male health disorders. The company has a large number of programs in various stages of research and clinical development. Its lead clinical development program is indiplon, a drug for the treatment of insomnia that is being evaluated in Phase III clinical trials. The company's other products under clinical development are altered peptide ligand, gonadotropin-releasing hormone antagonist, interleukin 4 fusion toxin and corticotropin-releasing factor. NBIX - Neurocrine Biosciences $56.84 PLAY (less conservative - bullish/debit spread): BUY CALL JUL-45.00 UOT-GI OI=10 A=$12.10 SELL CALL JUL-50.00 UOT-GJ OI=69 B=$7.70 INITIAL NET-DEBIT TARGET=$4.25-$4.35 POTENTIAL PROFIT(max)=15% B/E=$49.35 **************** 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. ***** BEAS - BEA Systems $11.08 *** Bullish Sector! *** BEA Systems (NASDAQ:BEAS) is the world's leading application infrastructure software company, providing the enterprise software foundation for more than 13,500 customers around the world, including the majority of the Fortune Global 500. BEA and its popular WebLogic brand are among the most trusted names in business. BEA's WebLogic Services are based on a unified, simplified and extensible application infrastructure platform designed to enable organizations to evolve their application infrastructure software on a project-by-project basis. As a result, the WebLogic platform provides greater responsiveness to line-of-business needs, lowers overall IT costs, and also increases the return on IT assets. BEAS - BEA Systems $11.08 PLAY (speculative - bullish/calendar spread): BUY CALL SEP-12.50 BUC-IV OI=7607 ASK=$1.25 SELL CALL JUN-12.50 BUC-FV OI=13386 BID=$0.25 INITIAL NET DEBIT TARGET=$0.85-$0.95 INITIAL TARGET PROFIT=$0.40-$0.65 ***** EDS - Electronic Data Systems $21.99 *** Recovery Underway! *** Electronic Data Systems (NYSE:EDS) is a professional services firm that offers its clients a portfolio of related services worldwide within the broad categories of traditional information technology outsourcing, business process outsourcing, consulting, and product lifecycle management software and services. Services include the design, construction and/or management of networks, information systems, information processing facilities and business processes. The company's end-to-end portfolio of services integrates its four lines of business: operations solutions, solutions consulting, product lifecycle management (PLM) solutions and A.T. Kearney. EDS - Electronic Data Systems $21.99 PLAY (speculative - bullish/calendar spread): BUY CALL SEP-25.00 EDS-IE OI=124 ASK=$1.50 SELL CALL JUN-25.00 EDS-FE OI=93 BID=$0.30 INITIAL NET DEBIT TARGET=$1.05-$1.15 INITIAL TARGET PROFIT=$0.45-$0.75 *********************** 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. ***** RJR - R.J. Reynolds $36.19 *** Reader's Request! *** R.J. Reynolds Tobacco Holdings (NYSE:RJR) is the parent company of R.J. Reynolds Tobacco Company and Santa Fe Natural Tobacco Company. R.J. Reynolds Tobacco Company is the second-largest tobacco company in the United States, manufacturing about one of every four cigarettes sold in the United States. Their product line includes four of the nation's 10 best-selling cigarette brands: Camel, Winston, Salem and Doral. Santa Fe Natural Tobacco Company manufactures Natural American Spirit cigarettes and other tobacco products, and markets them both nationally and on an international basis. RJR - R.J. Reynolds $36.19 PLAY (very speculative - neutral/debit strangle): BUY CALL AUG-37.50 RJR-HU OI=1249 ASK=$1.65 BUY PUT AUG-35.00 RJR-TG OI=300 ASK=$1.65 INITIAL NET-DEBIT TARGET=$3.00-$3.20 INITIAL TARGET PROFIT=$0.80-$1.50 Editor's note: This position, which was suggested by one of our readers, is a bit too aggressive for our portfolio. However, it does offer a favorable risk versus reward outlook for volatility traders who like speculative plays. ***** ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** MARKET POSTURE ************** Not Uncalled For To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/MP_060803.asp ********** 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
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