The Option Investor Newsletter Sunday 06-22-2003 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: Fear of the Fed? Futures Market: Gravestone Dojis Index Trader Wrap: IMAGINE THAT! Editor's Plays: Russell Shuffle Market Sentiment: Expiring options Ask the Analyst: A new security to grab a gold bugs attention 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 6-20 WE 6-13 WE 6-06 WE 5-30 DOW 9200.75 + 83.63 9117.12 + 54.33 9062.79 +212.53 +248.88 Nasdaq 1644.72 + 18.23 1626.49 - 0.93 1627.42 + 31.51 + 85.82 S&P-100 502.39 + 4.57 497.82 + 2.15 495.67 + 12.47 + 13.45 S&P-500 995.69 + 7.08 988.61 + 0.85 987.76 + 24.17 + 30.37 W5000 9511.63 + 57.47 9454.26 + 1.72 9452.54 +233.65 +302.66 RUT 449.56 - 0.15 449.71 - 4.23 453.94 + 12.94 + 22.60 TRAN 2442.28 - 13.28 2455.56 - 25.98 2481.54 - 4.81 +102.99 VIX 21.09 - 1.79 22.88 - 0.55 23.43 + 1.73 + .32 VXN 32.34 - 2.12 34.46 - 1.67 36.13 + 4.47 + 1.93 TRIN 1.00 1.23 1.06 0.92 Put/Call 0.51 0.73 0.78 0.67 ****************************************************************** Fear of the Fed? by Jim Brown The lack of material economic reports on Friday left traders wondering which way to jump. Some decided to take profits as news of potential terrorist attacks jumped back into the news. KB Homes added to the negative sentiment with a new look at the future in the home builder segment. The Dow reversed roles with the Nasdaq and with the help of GM traded in the positive all day. Dw Chart - Daily Nasdaq Chart - Daily The ECRI Weekly Leading Index was the only economic report and most traders would have a tough time finding the results without a roadmap. It rose slightly to 123.4 for an insignificant +0.2 gain. However, the six month growth rate, which is probably the most watched portion of this lightly regarded index, jumped to 6.1% from last weeks 5.5%. This is a vast improvement from the 0.2% growth rate from the April-25th report. If the economy comes even remotely close to that 6.1% growth rate by year end the Fed will be raising rates by 50 points a shot. GM jumped +1.50 at the open after saying they were going to sell $13 billion in bonds to shore up its massive pension deficit. In the world of magic numbers GM derived about 50% of its 2002 net profit from its pension plan despite the plan being $25 billion underwater. How they can do that is anybody's guess. Actually 63 of the S&P companies reported net pension income as part of their earnings in 2002 despite their funds being in the a deficit. Let's see, if my pension fund liability is increasing $10 billion a year but assets are only increasing $100 million a year, is it right for me to claim a profit of that $100M? Other deficit winners include Ford -$16 billion and BA -$7 billion. Lipper said fund flows for last week were +$4.3 billion and twice the +$2.0 billion from the week before. Considering the Dow had gained over +200 points for the prior two weeks I am not surprised. If you noticed the graphic at the top of the page the Dows gains for the last two weeks were only +54 and +83 points. That could indicate the money flow is weakening. Funds may be finding it a little harder to attract money this close to a top or at least this close to the Fed meeting and earnings. The quadruple witching is history and the market was torn by opposing forces most of the day. The indexes gapped open Friday morning on S&P imbalances related to the expiration and the GM news. After drifting sideways most of the morning at just over 9250 the market was looking for an excuse to move. That excuse came from a terrorist threat in Kenya that closed the embassy there. The State Dept said there was a very real and credible threat that the new embassy was going to be attacked with an Al Queda truck bomb. The Dow dropped about -70 points in just a few minutes and failed to recover for the rest of the day. There was concentrated selling at the close but it is unknown if it was traders worried about a weekend attack or simply expiration volatility. After the close the U.S. said they had picked up Saddam's trail and could have him in custody by next week. Sure, and I assume they have a trail on the Easter bunny and tooth fairy as well. The report actually said that if they did not capture him next week they probably would not get him at all. And what is the reasoning behind that? Helping the bounce this morning was an S&P rebalancing of sorts. IBM increased its shares outstanding by 2.2% by donating them to its pension fund. This increase in outstanding shares means every index fund must increase its outstanding position in IBM by +2.2%. Over the last week this has pushed IBM up to strong resistance at $85. Going the opposite direction CMCSA has bought back 60 million shares and fund managers have to reduce their stake. This rebalancing at the end of the half added to the quadruple witching confusion. GE also helped keep the Dow positive after affirming their range of estimates for the quarter and the year despite the warning about their plastics business on Thursday. They said business gains in other areas had offset the plastic losses. They did say they would narrow the range of estimates when they announce earnings on July-11th. Most analysts think they will narrow the $1.55 to $1.70 range to the bottom of the range. Seven analysts lowered their estimates on GE on Thursday. Weighing on the market was news that home foreclosures had soared to a record high of 1.20% in the first quarter. The previous record was 1.18%. Homes that started into foreclosure in the first quarter also increased. The rise in joblessness is being blamed for the high rates. This weighed on the market sentiment causing beliefs that the recovery may not come soon enough to stave off an even larger problem over the summer. Unemployment was also given as the reason KB Homes failed to please investors on Friday. KBH beat the street by 30 cents and raised future estimates by 20 cents. Everything appears rosy on the surface but traders were expecting even better news from the home sector. The KBH CEO said they saw the market weakening due to unemployment and lack of job growth in some of their biggest markets. Despite the low interest rates they are having trouble selling homes in some areas and they see the problem growing. The CEO said, "it was a much more challenging market now than in the last couple years". This is not what investors wanted to hear. After months and months of worries about the real estate bubble it appears it may finally be coming to pass. KBH lost -5.70 after beating the street by 30 cents and raising estimates. Ok, but that is past tense, what are you going to do for us this quarter? CTX, PHM RYL and HOV all had similar drops. NVR dropped -$16 but then they are a $400 stock. (no options) The biggest weight on the stock market was simply the market itself. After a +26% gain over the last 14 weeks in the S&P there is plenty of profit on the table. Next week is going to be a monster week in terms of news drivers. The FOMC meeting is a serious threat to the status quo. Next week is also the heaviest earnings warning week of the cycle. Add in the new terrorist threat and the urge to take profits was strong. The Fed is still floating balloons about the amount of any potential rate cut. On Wednesday the Washington Post, claiming input from an unnamed Fed source said the Fed would cut 50 points. This was after several economic reports and analysts comments were seen reducing that possibility. Did the Fed want to telegraph to the market to hold on, help was coming? On Thursday night the WSJ ran a story, also reportedly using a Fed source for info, that leaned more to the 25 point cut scenario. Was the Fed again floating a balloon to see how the markets would react to the smaller cut? We may never know but the odds of the 50 point cut settled near 50% by Friday's close. They have been all over the board from 65% to 30% in just one week. It is not surprising that traders are taking profits with all the confusion. 50 points was priced into the market and now it is very unsure that we will have a cut at all much less 50 points. Personally I would be very surprised if the Fed did not cut at least 25 points since they have been saying they were going to cut for over a month. A complete retraction of those comments would be very negative to the market. Plus, there has not been any Fedspeak about a reduction in need for more stimulus. Again, this means that about a 37 point cut has been priced in (half way between 25-50) and a 25 cut will be disappointing and a 50 will be barely acceptable. Either way I see a sell the news event in our future. The second threat comes from an expected flurry of earnings warnings next week. This is the heaviest week of the cycle and with some of the big confessors this week it makes you wonder who will don the scarlet E next week. With tech exports down to $166 billion in 2002 from $223 billion in 2000, a -26% drop and still falling, it is likely we will eventually see another wave of tech earnings problems. The key is whether the economic recovery will fill the gap first. Since the recovery has not yet appeared the odds are some more techs will confess next week. I would not be surprised to see more big caps warn as well. Remember, the beginning of this quarter was not exciting. Offsetting the potential negatives is the end of the quarter and half window dressing. It is not over yet despite Friday's swoon. There is still a good chance the funds with cash to spend will buy Friday's dip or a post FOMC dip in hopes of getting some bargains and appeasing investors with a broad range of winners in their portfolio when statements come out. I attended a conference last week where quite a bit of time was spent predicting the economic future. I have to say it was not bright. We are talking long term here, in years not months. The overall consensus of opinion was that 2003 would end well and the recovery would carry over into 2004. It is an election year and we know how politicians like to paint a rosy picture in their campaign speeches. Typically the 3rd year of a presidents term is the best year of the term. The problems come in year 2005. The tax cut just approved was said to be $350 billion. There are things in it that sunset in 2004. Get serious, are politicians going to raise taxes again in an election year? The consensus was a total cut before it could be rescinded of about $850 billion. The deficit for 2003 is already $292 billion as we saw this week. It is expected to be $400 billion by the end of September. Add another $450 billion in 2004 and the numbers start to be really ugly. What most people don't realize is this is in funded items like defense, security, etc. Unfunded items like social security, Medicare and military pensions are not accounted for in these totals. The estimates I am hearing are for a $1.5 trillion deficit by 2005. Assuming Bush is reelected he will tackle this problem head on in order to clean up his legacy and prepare for the transition to the next republican president. He cannot get elected again so he has nothing to lose. He will take the first two years 2005-06 and force stringent changes in the economy including the tax code. He has to. He cannot let the deficit continue to climb. The current capital gains tax is the lowest it has been since the depression. This is the first place he is likely to act as it is the least painful to most taxpayers. Regardless of where he acts it will not be pleasant and the market is not going to like it. The next president is going to have it even tougher. In 2008 37 million baby boomers will begin hitting the social security/Medicare rolls. This massive influx of retirees will decimate the workforce and swamp the already overburdened social security system. This massive cash drain will have to be compensated for in some form. That means taxes on the rest of us in some fashion. Lots of taxes. The drain of 18% of workers from the workforce will be good for employment but that will raise wages significantly. Obviously all 37 million are not workers and not all are going to instantly quit working and move to Florida. Still the trend is there and 2008 is not that far away. The number one field for investment to profit from this boom was healthcare and drugs. With that many people moving into the geriatric category there is going to be a huge demand for health services. Real estate in retirement locales was also mentioned as potential targets. Oddly enough the beef industry was mentioned as something likely to suffer as retirees ate less beef due to income and health reasons. I am bringing this up as something to think about as you position your portfolios for the future. We get so preoccupied about the next day or the next week when the big money is really made over time in those retirement accounts. Next week is going to be tumultuous with opposing forces wielding large volume as each event transpires. The key is to balance your attack. Don't get so caught up that everything you have is riding on the outcome of the Fed meeting. They will cut, the market will spike up and down and life will go on. We are very overbought and I suspect earnings will not be exciting. There is no such thing as a summer rally although we hear the term every summer. Odds are good we will move sideways to down until we get some more positive signs of economic improvement. Since this is the summer doldrums it could take a couple months before we really start to see some strong positive signs. Capacity utilization is at a ten year low (75%) which means there is no incentive for companies to spend money to buy more equipment. Until demand picks up and the excess capacity is absorbed there is not going to be a broad based recovery. This is not likely to happen over the summer. Until those numbers begin to pickup there is a 26% S&P gain at risk. Only one time in the last 50 years has the S&P gained more than 26% off a bottom. Can you say over bought? The first week of July is the best week of the month as the retirement contributions for those 37 million baby boomers hits the market. After July 8th it begins to get grim for cash flow and that is when earnings ramp up to a fever pitch. For short term traders I would be cautious about being long around July 15th. I could only find one July in the last seven or so that actually went up after the 15th. The historical down trend for the second half of the month is very clear. For shorter term traders there is a lot of scuttlebutt about institutions loading up on shorts beginning on June-30th. Seems there are a lot of skeptics out there that also feel we have come a long way for the lack of visible earnings. Nobody knows what will happen in the market but the external short term stimulus is very strong regardless of what the Fed does. This will keep a floor under the market while we wait for the future. That floor could be significantly lower than we are now, maybe as far as 8500, but it is there. The most likely initial level is Dow 9000. 10-Year Treasury Index - Daily The upside should be limited from here regardless of the Fed. Dow 9375-9500 is strong resistance and at this overextended level it may be tough to break. 50% of the S&P has warned for this quarter. That could also mean we have some upside surprises ahead. The wild card is still the bonds. They have started to sell off as worries over the Fed increase. If the Fed only cuts 25 points and then says the deflation threat was over stated then the bonds should sell off more and that money find its way into the stock market. We have hit a plateau on the ten year yield at about 3.4% and until that breaks the big sell off may not occur. At this point it all depends on the Fed not only in what they do but in what they say on Wednesday. The guidance will be the key as the cut is already baked into the cake. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Gravestone Dojis Jonathan Levinson That's what printed on the weekly candles for the major equity indices. This candlestick formation indicates a "blowoff" spike, in which a push to new highs is rejected, with the price rapidly to return to or near its starting level. Of course, we saw numerous gravestone dojis on the daily candles all the way up throughout the current rally, but it seems more dramatic on a weekly basis. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 1005 998 995 988 984 YM03U 9292 9222 9185 9115 9078 NQ03U 1226 1224 1222 1220 1218 10 minute chart of the US Dollar Index The US Dollar Index got lifted Friday on a huge move, blowing through multiple resistance levels and then finding support near 94. Speculation of a shallower than anticipated rate cut by the Fed likely sparked the move, and the Fed's third consecutive reverse repo (the new term for the old matched sale-purchase agreement) at 10AM seemed to feed it. As noted in the Market Monitor, I have never seen three consecutive reverse repos. It's significant because it marks a change of bias in the Fed's open market operations, with the Fed now actively draining reserves instead of supplementing them. Tighter money means more valuable money, and the US Dollar Index benefited. Daily chart of August gold What's good for the buck is bad for gold, and unfortunately, Friday's trading did not diverge from that rule. August gold was whacked for 4.80, closing at 357, with the HUI dropping 2.75 to 153.72 and the XAU –1.22 to close at 80.65. Surprisingly, the commodity futures index was lightly positive, the CRB closing up .40 to 235.15. Daily chart of the ten year note yield Also predictably, treasuries got sold off. There were different forces at work here. Buying in the dollar should see buying in US treasuries as a place in which to park those dollars. However, the Fed drained 2.25B in reverse repos, which no doubt caused some selling in bonds. But more significantly, the "rate cut trade", which saw vertical moves past resistance in the ten year t-bill in particular, got further reversed on Friday as traders backed away from a gamble on a 50 basis point cut at the next Fed meeting commencing June 24. The ten year t-bill yield closed higher by 5.5 basis points to close at 3.396%. 30 minute 20 day chart of the NQ The Nasdaq futures are trading on a sell signal from a lower oscillator high, but managed to close right on support at 1223. Nevertheless, it has closed near the bottom of the week's range, printing that bearish gravestone doji for the weekly candle as mentioned above. The MacD lags the stochastic, and it is bottomy but showing no signs of crossing up on the 30 minute candle chart. 5 day 10 minute NQ candles Zooming in on the 10 minute candles, we see the NQ starting a leg down within what could be a bull flag. The test will come on the bounce from just above 1200, always assuming that 1220 support fails. The stochastic fits well with the price action within the channel, and I'm expecting to see a lower open on Monday. 20 day 30 minute chart of the ES There's a clear trendline break on the 20 day S&P futures chart, with the oscillators on sell signals. As discussed yesterday, there's plenty of support to be tested, but this was clearly not a bullish week for the ES. 5 day 10 minute ES candles I've left the channel undrawn here, but the 5 day chart shows the ES very close to the airball zone above 984 support. 2 day 5 minute ES candles Thursday's lows were violated by the ES only after the cash close, with all of the short cycle oscillators on sell signals following Friday's gap and crap open. 20 day 30 minute chart of the YM 5 day 10 minute YM candles This week gave us a potential doji top in equities, a bullish engulfing tweezer bottom in treasury yields and in the US Dollar Index. While the trend has been difficult to discern on a daily basis, on the weekly charts it's so far clear: treasuries and equities continue to trade in tandem (so far, no asset reallocation rally), and the dollar continues to trade against both of them. Note further that the Fed's tightening up of its open market operations liquidity fiesta has hurt both bonds and stocks, and benefited the dollar. I have discussing the ocean of liquidity added by the Fed over the past months, and it appears that the draining of that ocean has behaved exactly as we might expect. Unfortunately, gold has also suffered, also printing a gravestone doji for the week. For next week, we have the Fed's decision on interest rates. My view is that an unexpected 50 bp cut should benefit treasuries, equities and gold, and hurt the US Dollar Index. Unexpected tightening, such as if no cut occurs, would accomplish the reverse. The big question is what will happen if the expected 25 bp cut is confirmed. In that case, look at the charts above- I expect the trends they depict this week to continue, which should be bearish for equities, bearish for treasuries, bullish for the US Dollar Index, and bearish for gold. ******************** INDEX TRADER SUMMARY ******************** IMAGINE THAT! By Leigh Stevens The OEX finished above 500 and QQQ above 30 on Friday, causing the puts at those strikes and below to expire worthless - imagine that! Duh, who could have guessed it?! It's the bears turn to NOT have things go their way as market participants wear only rose colored glasses and not just their dark shades. With competing bond yields so low, money managers are following each other into the market, not wanting their April-June (Q2) report cards to reflect underperformance. THE BOTTOM LINE - At least a modest pullback to around 980 in SPX, to between 490- 495 in OEX, 1600 in COMPX and to the 1180 area in the Nasdaq 100 (NDX) seems likely - especially once Q2 stock portfolio buying is done, which is coming up this week. Also, the Fed meeting is on Wednesday and with the rally partly based on the anticipated rate cut, it's doubtful that we see further upside based on that. Buy the rumor (anticipation) and sell the fact as they say. Actual earnings will be coming out for the current quarter in July and there will likely then be a period of sideways to lower price action that is longer than 1-2 days. Of course the market is anticipating a better second half, but the over-optimism going on here may get a dose of sobriety with the bound to be overall current slow recovery of corporate profits. LAST WEEK and FRIDAY'S TRADING - There was a jump in the equities call to put daily volume ratio on Friday to a bearish 2.8 on triple (now being called quadruple) expiration day. While this jump is in significant measure related to expiration-related unwinding, I usually find these extremes to be nevertheless meaningful. Stay tuned. The Dow Jones rose 21 points (0.2%) on Friday to 9200.75 after spending most of the day about 60 points above its Thursday close. The Nasdaq Composite Index (COMPX) fell 3.92, or 0.2%, to close at 1644.72, as heavyweight Nasdaq stocks like Cisco, Oracle and Nortel fell. For the week, the Industrials gained 83.6 points, while the Nasdaq was up 18 points. General Motors (GM) was up some 2.5% and led gains in the big cap blue chips after the company announced plans to beef up its balance sheet with new debt offerings and Prudential upgraded the stock. The amount involved is $10 billion in debt and convertible securities, which doubles its original balance sheet strengthening target for 2003. GM stated that it intends to use "substantially all" of the proceeds to partially fund its pension fund and other benefit obligations. The move by GM caused Prudential to upgrade the stock to "buy" from "sell" on the belief that an eventual economic recovery will overcome any short-term negative news. Imagine that - an actual sell on the stock! Not just some wimpy "under-perform" rating or the like. That's the effect of not having an investment banking arm. And, why, when Pru speaks the market often takes more notice these days. It used to be that heavy borrowing was NOT a great bullish plus. But rates are low and GM has heavy unfunded pension liabilities - better to deal with it now than have the past come bite you when it might be more difficult to deal with. Or at least that's what my dear ol pappy used to say - well, at least the "bite" part, said a little differently. Fellow Dow stock General Electric (GE) climbed a half percent after the company reaffirming its Q2 earnings outlook at an analyst meeting. On Thursday, several Street analysts cut their full-year earnings forecasts on GE, noting the softness in the global economy and weak performance in the plastics division. An article in the business-influential Wall Street Journal speculated on the Fed being undecided on how deep this week's rate cut should be. On Thursday, there was a Washington Post article suggested the Fed was ready to drop its (Fed funds) rate a full half, which currently stands at 1.25%. Hey, how low can you go!? And, the Street of Dreams influential Goldman Sachs indicated a "more optimistic" attitude about the U.S. economic outlook due to improving financial conditions over recent months. Goldman raised its growth projection for '04 gross domestic product to 3.3% from 2.5%. "What's important here is the shift in the Fed's regime -- to focus on keeping short-term rates low for a sustained period in order to prevent deflation," according to their economist. They're expectation was for a 1/2 point cut this week, and then to be on "hold" through 2004. Well, again, how low can they go - this ain't Japan you know! By the way, Goldman also forecasted a "slightly firmer" corporate profit growth this year and predicted the yield on the 10-year bond will rise further, to 3.8% by year end. (I usually no longer call the 10-year a "Note", as its more the bellwether bond than the diminishing supply of 30-year paper.) OTHER MARKETS - The 10-year Treasury note fell about one quarter point to yield 3.374%. The 30-year bond dropped a half point and at its closing price, yielded 4.44%. The dollar gained against the Yen slightly, trading at 118.35, up from 118.28 on Thursday, while the euro eased against the dollar to $1.159 from $1.172. INDEX OUTLOOKS – GOLD - In updating the XAU (Philly Gold & Silver Index) chart below, you'll see that the Index did achieve a bullish break out above the triangle pattern I highlighted last week. What's it all mean in the bigger scheme of things? - I can't say with authority, but there is still a lot of unrest and threats out there and gold is the traditional go-to asset for times of uncertainty and war. The metal itself and shares of the gold mining companies usually move inversely or opposite of financial assets like stocks in general, at least over the long haul. Either gold stops going up and stocks go down, or vice versa. Maybe they both go up. I find it worthwhile to keep an eye on the gold market as representing a possible different view of how things are - S&P 500 (SPX) - Hourly chart: Technical support implied by the lower boundary of the uptrend channel is up to around 965-967. Resistance and selling developed in the 1015 area last week rather than in a move all the way back up to the upper channel boundary. My best guess is that a minor rally develops next, but that falls short of the prior (1015) peak. This should be a put buying opportunity - certainly a stop out point will be close at hand (assuming another rally) at just above 1015. Reward potential from there should be decent. Moderate to good rallies have developed when the 21-hour stochastic has gotten to a fully oversold reading, which it has done here. This tendency suggests buying calls into a dip on Monday morning, such as to the 985 area. S&P 100 Index (OEX) – Daily & Hourly charts: The extreme reading in my "sentiment" indicator of course has to be viewed in the context of the expiration as equities call volume ran 2.8 times puts. However, now the 5-day average is at the kind of extreme that tends to mark points where bullishness is extreme enough to suggest that the S&P is overbought and due for a countertrend move. Stay tuned! As with my analysis of SPX, I think there could be another rally that would set up a put buy, such as back up to the 505-507 area. If so and in puts at that point, I would exit if OEX trades back above 510. Support implied by the lower end of the daily and hourly channels comes in in the 485-490 area. Resistance at the "line" of prior hourly highs is at 512. More major resistance looks to be in the 515-517 area. When tracking support and resistance implied by steeply rising or falling trendlines it does change significantly over a few days so my view here is also a "snapshot" in time and looking ahead only 2 or at most 3 trading sessions usually. Like a "moving" average, trendline support and resistance needs to be checked periodically by applying a trendline that is up to date so to speak. I note with interest the price/RSI divergence that has shaped up here. Does such a divergence always signal a top, no. But the reliability of such divergences is as high as any patterns and indicators in common use. Dow Industrials (INDU) Daily & Hourly (DJX.X) charts: 93.5 - 94 is the key technical resistance I would peg. The 14- day stochastic has rolled over to the downside - sell (buy puts) rallies. And, there should be another rally attempt to sell into, such as back up the 93 area. If DJX were to get all the way back down to the lower end of its trend channel, 88 looks like a downside target. I think support being 92 and 88 is the midpoint 90. Look for the bulls to support (buy stock) in this area of the Dow. A close above 94 would be enough for me to exit puts. Picking a top is like choosing Miss America - tough to find the right one. However, the move to a new high followed by a fairly immediate pullback after one further move up the upper channel line is suggesting that the market is due for a pause, pullback and "rest". Nasdaq Composite Index (COMPX) – Hourly: The Composite has made a potential double top. This is "confirmed" (as long as there is not a higher high) when the prior downswing low is pierced - in this case, by a move below 1625. Key support looks to be down in the 1600 area. When I see a double top I tend to believe it, as it's a pretty reliable signal for a reversal - in a market with upside momentum (MO), there is usually another rally attempt. And there has been plenty of MO in this rally. We've been starting the weeks lately with rallies such as last week, in the pick up in New York State manufacturing activity. Of course New York is not a powerhouse in this sector, but never mind. Hard work there is commonly doing such things as using your brains and instincts on the Street of Dreams, but there are industrial sectors so I don't want to make the garment workers mad at me. Nasdaq 100 Tracking Stock (QQQ) - Daily & Hourly: So the bulls kept the Q's above 30 and rained on the bears parade. Too bad for them, but they should get a trade in the July options and by shorting further rallies, looking for a move back to the 29-29.50 area at a minimum. I would love to short QQQ around 31, taking a short risk to 31.5, with downside potential to 29.50 - a worthwhile trade from a risk to reward standpoint. With earnings season ahead there is bound to be some selling pressure pockets. The spike top on a big upward spike in volume suggests at least an interim top. After a decent pullback, if the bulls give a chance to buy much of a correction, upside is still pretty good into the end of Q3 and earnings to see if the bulls can prove their case on this optimistic view that techs can make money this year. 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 ************** Russell Shuffle It is that time of year again when the Russell Indexes are shuffled to reconstitute the top 3000 companies. Those that have dropped in market cap are kicked out and new leaders are added. The dates are June 13th, 20th and 27th. The initial list of candidates was published on the 13th and an updated list on Friday the 20th. The final list will be posted on the 27th and become effective on July 1st. http://www.russell.com/us/Indexes/US/membership/reconstitution.asp In 2002 486 companies were added to the Russell-2000 and 371 companies dropped. That produces significant volume in the process as funds update their portfolios. Over $250 billion is invested in funds based on the Russell indexes. It was interesting going through the list as it read more like an obituary than a list of up and coming companies. Many of the giants of the past are coming back from the dead. These companies are going back into the Russell after being in penny stock hell. BVSN, MKTW, TSCM, CMGI, KANA, KOMG, ASKJ, ABTL, CNQR, EELN, INSP, ISPH, MCLD and my favorite MSTR (grin). There were some new kids on the block as well like IPMT but by far the majority of the candidates looked like penny stock refugees. Here is the list if you want to spend your weekend doing research. http://www.russell.com/us/indexes/us/membership/recon_additions.asp Ironically the one I liked the best for some reason was CME but they have no options. Think about it. An options and futures exchange with no options. Duh! Actually out of the top 12 charts I picked as possibles only two companies had options. I am sure there were more potential plays but I did not waste the time pulling up charts on all the several hundred additions. The two that I did like and did have options were ASKJ and MSTR. Both pulled back on Friday for different reasons and gave us potential entry points. ASKJ has been on a roll with the market and spurted about +1.50 on the announcement on the 17th but fell back to pre announcement levels around $13 on the two days of Nasdaq weakness. MSTR has been trying to break $42 for two weeks with no success. A court ruling on Thursday gave traders an excuse to take profits and knocked it back to $38. I read the news on it and it did not appear to be earth shaking. MSTR was suing two former employees for stealing trade secrets. The judge said there was no evidence and ruled against MSTR. No big deal in my opinion. I will take the entry point, thank you. The new MSTR has a market cap of about $600 million and a float of about 8 million shares. The ADV is only 450,000. It traded twice that on the Friday drop. Stock price is $38. ASKJ has a market cap of about $600 million and a float of about 37 million shares and ADV of 2.44 million. The stock price is about $13.00. Since both companies are about the same market cap but ASKJ has 4.5 times more shares trading than MSTR that makes MSTR the most likely candidate on the surface. However with MSTR trading at $38 compared to $13 for ASKJ that 3:1 price ratio brings it back to almost an even proposition. MSTR still gets the nod by a nose. The lower volume should make it more volatile as funds try to take a position. MSTR - 120 min MSTR has dropped back to support at $38 and is set to either rebound or crash to next level support at $34. I would not buy calls on MSTR until it starts moving up again. The July $45 put is $8.10 and a naked seller could do well if the stock bounces back to $42. I would not recommend that. I was naked 20 contracts at $220 when MSTR was cut in half before the open on accounting concerns a couple years ago. It was not a pretty picture. Fortunately it bounced enough for me to trade out of it before finally dying completely. You could also buy the stock and sell the $40 covered calls but that has a worst risk ratio than just selling the $45 naked put. The bottom line is to buy a July $40 call for $2.60 in expectation of MSTR seeing $42 again next week. ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. The three Powerball plays submitted from two weeks ago by readers were MANU calls, JNJ puts and TNX bond yield calls. MANU drifted down to $5.04 from its highs over $6.00 but did not hit the execute trigger of $4.92. We may get another chance next week. JNJ bounced back to resistance at $55 and appears stuck there for the immediate future. The bond yield calls on the TNX.x submitted by Keene Little are moving in the right direction. Yields are up slightly from two weeks ago and the calls are up slightly from the article price. Once that 3.40% level breaks these should do well. http://members.OptionInvestor.com/editorplays/edply_060803_1.asp EMC Call from Feb-2nd $10.25 ($7.70 when recommended) http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball Still holding up the portfolio is up +305 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 **************** Expiring options This week was options expiration week, and we've grown accustomed to otherwise unexpected moves (or the lack thereof) as we approach opex Friday. The largest writers of options have sufficient resources to at least temporarily move the underlying security to levels favorable for their open expiring positions. We see this with stocks and even indices becoming "pinned" at or near strike prices on opex Friday. We also see divergent activity in options-related indices, most notably the volatility indices (VIX, VXN and QQV) and the put to call ratios. Friday showed us substantial drops in the volatility indices accompanied by very low put to call readings throughout the session. In particular, I saw the equity component of the put to call ratio at an eye-popping .29 in the morning. Trying to gestalt these data, we see that the put to call ratio drops as call volume outpaces put volume. The VIX, VXN and QQV drop as the premium on option contracts drops. Premium drops when sellers accept lower prices for their contracts, which occurs when they're selling aggressively. Friday's activity looks to me as if option sellers were selling calls as fast as the buyers could pick them up, settling for lower prices. We can draw upon other information to help tweak this up a bit- consider the lofty bullish percents and the Investors Intelligence data discussed in the Market Monitor this week, showing a new low in bearish sentiment and a new high in the number of bullish advisors. These price and sentiment indicators tell us that we should be closer to a relative top than to a bottom. While no participant can predict the future, one interpretation of the options activity on Friday is that some large bets were being made on impending downside for equities. Of course, opex Friday muddies the water for us, so we'll keep this in mind for next after Monday's squaring of positions from this week has cleared up. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9410 52-week Low : 7197 Current : 9201 Moving Averages: (Simple) 10-dma: 9184 50-dma: 8704 200-dma: 8360 S&P 500 ($SPX) 52-week High: 1005 52-week Low : 768 Current : 996 Moving Averages: (Simple) 10-dma: 997 50-dma: 942 200-dma: 890 Nasdaq-100 ($NDX) 52-week High: 1266 52-week Low : 795 Current : 1223 Moving Averages: (Simple) 10-dma: 1225 50-dma: 1149 200-dma: 1034 ----------------------------------------------------------------- The VIX is very near to a new 52-week low while the VXN continued its weeklong slide back toward previous lows. The VIX remains a big flashing "warning" sign for bullish traders and this could be the week we see why. CBOE Market Volatility Index (VIX) = 21.09 -0.92 Nasdaq-100 Volatility Index (VXN) = 32.34 -1.52 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.51 987,497 505,887 Equity Only 0.35 824,846 294,278 OEX 1.31 41,690 54,664 QQQ 0.82 49,828 40,634 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 71.7 + 0 Bull Confirmed NASDAQ-100 82.0 + 1 Bull Confirmed Dow Indust. 83.3 + 0 Bull Confirmed S&P 500 81.0 + 0 Bull Confirmed S&P 100 82.0 + 1 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 0.93 10-Day Arms Index 1.16 21-Day Arms Index 1.06 55-Day Arms Index 1.10 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 1418 1521 Decliners 1390 1550 New Highs 73 96 New Lows 4 4 Up Volume 913M 644M Down Vol. 1085M 1080M Total Vol. 2016M 1741M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/17/03 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 The large S&P contracts continue to see more buying as Commercials' long positions have hit highs not seen in a while. Short positions took a significant jump higher as well but big money is expecting strength. Commercials Long Short Net % Of OI 05/27/03 435,195 423,474 11,721 1.4% 06/03/03 438,228 422,722 15,506 1.8% 06/10/03 456,967 455,024 1,943 0.2% 06/17/03 519,887 501,401 18,486 1.8% Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 05/27/03 147,687 149,344 (1,657) (0.6%) 06/03/03 169,650 167,172 2,478 0.7% 06/10/03 199,356 185,403 13,953 3.6% 06/17/03 202,040 184,028 18,012 4.6% 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 In contrast to the full S&P contract data above, the S&P e-mini contracts are showing the most bearish reading in a long time, at least from the Commercial traders. We saw significant jumps in both long and short positions but Commercials or "smart money" are exceptionally bearish on the e-minis. Commercials Long Short Net % Of OI 05/27/03 252,655 485,962 (233,307) (31.6%) 06/03/03 267,680 512,648 (244,968) (31.4%) 06/10/03 270,359 543,221 (272,862) (33.5%) 06/17/03 306,279 661,114 (354,835) (36.6%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 05/27/03 427,412 66,031 361,381 73.3% 06/03/03 470,655 58,420 412,235 77.9% 06/10/03 498,999 49,689 449,310 81.9% 06/17/03 466,837 70,609 396,228 73.7% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Again, we're seeing large increases in the number of contracts outstanding for both commercials and small trades but there is no discernable change in investor sentiment here. Commercials Long Short Net % of OI 05/27/03 40,999 41,491 (492) (0.6%) 06/03/03 42,232 43,217 (985) (1.2%) 06/10/03 42,877 45,793 (2,916) (3.3%) 06/17/03 60,964 65,561 (4,597) (3.6%) 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 05/27/03 12,194 13,339 ( 1,145) ( 4.5%) 06/03/03 11,407 9,092 2,315 11.3% 06/10/03 14,759 7,761 6,998 31.1% 06/17/03 29,400 23,232 6,168 11.7% 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 No change in investor sentiment here either, despite increases in the number of contracts outstanding. Commercials Long Short Net % of OI 05/27/03 18,660 15,537 3,123 9.1% 06/03/03 19,480 15,282 4,198 12.1% 06/10/03 17,368 15,263 2,105 6.5% 06/17/03 20,625 18,593 2,032 5.1% 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 05/27/03 8,225 9,316 (1,091) ( 6.2%) 06/03/03 7,948 9,353 (1,405) ( 8.1%) 06/10/03 7,968 8,316 ( 348) ( 2.1%) 06/17/03 9,092 9,398 ( 306) ( 1.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** A new security to grab a gold bugs attention I really enjoyed and learned from your discussion last week on ETFs. I never knew there were so many. This week I saw a program on TV that talked about the potential launch of a gold ETF that could rival futures and gold stocks. My question is, if launched, what impact might it have on gold stocks themselves? I think I saw the same spot this trader is talking about, and boy does it sound like a security that will really attract a gold bug's attention, and most likely his/her money if launched. Yes, the World Gold Council has filed with the SEC to launch its Equity Gold Trust, which may be listed on the New York Stock Exchange under the symbol (NYSE:GST). Have you've ever sat in your car and thought of a neat invention that would really serve the publics needs, but never did anything about it, and then years later see that somebody is now making millions with a product "just like yours," that they did invent? This type of security, if approved by the SEC, is one that I think will rival the QQQ, SPY and DIA for trade volume in the not too distant future. I don't think it will surpass daily volume levels of the QQQ, SPY and DIA, but it will be one of the more actively traded ETFs. A brief background on the new Gold ETF would actually have the World Gold Council, establishing a trust with the underlying asset being gold! From what I've seen/read, they're actually going to set aside gold bullion and the trust will be "valued" by that store of gold bullion. From that point on, the Gold ETFs price would then be tied directly to the price of gold bullion. What a great idea I thought years ago. Why not set up a security where I could store a head of lettuce in the refrigerator, or a basket of apples, then try and list a security with the NASDAQ that trades as a perceived value of the vegetables and fruits in my refrigerator! I'd be rich with the revenue generated from exchange and clearing fees! Hmmmm.... I should have thought about gold, lumber, oil, etc. What impact might this cleverly design ETF have on gold equities themselves? This is a good question, and a difficult one to answer isn't it? My initial thoughts that it would have a more negative than positive impact. One thing I've said before as it relates to gold equities, is that while companies do explore and produce gold, it is a false assumption to think that if I truly wanted ultimate exposure to the gold commodity, where the underlying commodity of gold might provide a hedge, I'm not really able to get a true hedge with a gold stock. Am I? Take Newmont Mining (NYSE:NEM) $33.89 as a random example. If I'm looking for exposure to gold as a hedge against inflation, is Newmont's stock a real hedge on the thought that gold prices will rise? Not necessarily. It is possible that gold prices could surge from $300 to $800 per ounce, but Newmont's price just sit at $33.89 or even decline. What if Newmont suddenly doesn't find any more gold reserves and has been selling their gold production on a daily basis. The bottom of the mine could be $0.00. What moves a stock's price higher? More buying than selling. What moves a stock's price lower? More selling than buying. It is feasible that the creation of a Gold ETF, like the World Gold Council is proposing may become a more popular security and take some demand (in the form of buying) away from gold equities like a Newmont Mining, Barrick Gold (NYSE:ABX), or Anglogold (NYSE:AU). If anything, we might expect trade volumes in gold equities to decline. The proposed Gold ETF may very well take business from the futures markets, as RISK for traders could be mitigated. For those of you that have delved into futures trading, you know very well the amount of leverage (up and down) you can have exposure to in that market. While its great when the trade works in your favor, when it goes against you, that leverage can create an "ouch" for the account. The proposed GOLD ETF, which will trade based on the underlying commodity itself, will have downside to zero. The details haven't been ironed out, but I would think these ETF's will be sold in increments of 100 shares, and talk is that they will be priced at the daily value of gold bullion per ounce. Options traders will also get "excited" if options are listed on the Gold ETF. The trader asked about the potential impact on gold equities. I would also wonder about impact on the collectible coin industry. Many "gold bugs" find that gold bullion itself is a difficult item to store in our homes, and we can't just go down to the 7- eleven and exchange some shavings for a gallon of milk and loaf of bread. Many "gold bugs" have turned to the collectible coin market and gold coins as a way to hold a "gold hedge," but here too, the coin itself doesn't always accurately depict the fluctuating price of gold itself. Gold coin prices are just like any other fixed asset, where price is determined by the MARKET. While a collectible coin is obviously limited in supply, part of its price component is tied to the collectibles market. One potential benefit of a rare gold coin is that its price can actually increase above any price increase in gold. The problem? Who wants to sell one of their rare treasures to capture a price gain? Heck! I've always wanted to start my own rare gun collection, but I'm the kind of person that once I have a beautiful shotgun with serial number 00001 on it, I'd never be able to part with it! While my initial intention was to hold the asset for price gain, I could never part with such a treasure. You should have seen the look on the guys face that stopped by the house the other day, asking me if I was interested in a casket for my eventual eternal rest in peace. I chuckled and told him I already had a gun vault picked out for such a day as I take my sacred treasures with me! I'm much more unemotional with my stock/option/ETF trading. Those are only pieces of paper to me and I love'em when they are treating me right, and hate'em when they're treating me wrong. If I held a gold bar, I'd probably get superstitious with it and want to rub it every night before going to sleep, or have a collectible coin frame mounted so I could enjoy its beauty and think about where it had journeyed all those years ago. The Gold ETF may also help reduce a trader's frustration. One question I get quite often about gold equities is.... "why is this stock gold stock down, when gold futures have been rising?" It's harsh to reply with the answer... "there's just more sellers than buyers in the stock today." But it is so true! If this newly proposed Gold ETF does get approval from the SEC, then many "gold bugs" that tend to trade/invest in gold stocks will have one less thing to worry about, and the actual security they hold long/short or call/put will most likely be a much more accurate representation of the commodity they wish to trade to begin with, as the ETF isn't represented by a group of stocks, but a group of gold bars! The Gold ETF. Why didn't I think of that? Jeff Bailey ************* COMING EVENTS ************* ====================================== Market Watch for the week of June 23rd ====================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- APOL Apollo Group Mon, Jun 23 Before the Bell 0.35 SCS Steelcase Inc. Mon, Jun 23 After the Bell -0.04 UOPX Un of Phoenix Online Mon, Jun 23 Before the Bell 0.25 WAG Walgreen Mon, Jun 23 Before the Bell 0.29 ------------------------- TUESDAY ------------------------------ AM American Greetings Tue, Jun 24 Before the Bell 0.26 FDX FedEx Tue, Jun 24 Before the Bell 0.90 PAYX Paychex Tue, Jun 24 After the Bell 0.19 RAD Rite Aid Corporation Tue, Jun 24 -----N/A----- -0.01 KR The Kroger Co. Tue, Jun 24 Before the Bell 0.45 ----------------------- WEDNESDAY ----------------------------- COMS 3Com Wed, Jun 25 After the Bell -0.12 ATYT ATI Technologies Wed, Jun 25 -----N/A----- 0.04 CCL Carnival Corp & Crnvl Wed, Jun 25 Before the Bell 0.22 FDO Family Dollar Wed, Jun 25 Before the Bell 0.40 GIS General Mills, Inc. Wed, Jun 25 Before the Bell 0.63 GS Goldman Sachs Wed, Jun 25 Before the Bell 1.19 MLHR Herman Miller Wed, Jun 25 After the Bell 0.03 RIMM Res In Motion Lmtd Wed, Jun 25 After the Bell -0.09 ------------------------- THURSDAY ----------------------------- CAG ConAgra Foods, Inc. Thu, Jun 26 Before the Bell 0.41 DLM Del Monte Foods Thu, Jun 26 Before the Bell 0.21 LNR LNR Property Thu, Jun 26 -----N/A----- 0.60 NKE Nike Thu, Jun 26 After the Bell 0.92 TEK Tektronix Inc. Thu, Jun 26 -----N/A----- 0.09 ------------------------- FRIDAY ------------------------------- MKC McCormick & Company Fri, Jun 27 Before the Bell 0.26 SJR Shaw Communications Fri, Jun 27 Before the Bell N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable SLM SLM Corp 3:1 Jun 20th Jun 23rd FLO Flowers Company 3:2 Jun 27th Jun 30th UBMT United Financial 3:2 Jun 30th Jul 2nd FRED Fred's 3:2 Jul 1st Jul 2nd IGT Intl Game Technology 4:1 Jul 2nd Jul 3rd MTLG Metrologic Instruments 3:2 Jul 3rd Jul 7th -------------------------- Economic Reports This Week -------------------------- The big event this week is the FOMC meeting on Tuesday. Their decision will stall the markets before the meeting and set the tone for the markets afterwards. However, we have a full schedule of economic reports on top of what could be a heavy week of earnings warnings. Hang on to your hats. ============================================================== -For- Monday, 06/23/02 ---------------- None Tuesday, 06/24/02 ----------------- Consumer Confidence(DM) Jun Forecast: 85.0 Previous: 83.8 FOMC Meeting (Day 1 of 2) (DM) Wednesday, 06/25/02 ------------------- Durable Orders (BB) May Forecast: 1.00% Previous: -2.30% Existing Home Sales(DM) May Forecast: 5.80M Previous: 5.84M New Home Sales (DM) May Forecast: 1030K Previous: 1028K FOMC Meeting (Day 2 of 2) (DM) Thursday, 06/26/02 ------------------ Initial Claims (BB) 06/21 Forecast: N/A Previous: 421K GDP-Final (BB) Q1 Forecast: 1.90% Previous: 1.90% Chain Deflator-Final(BB) Q1 Forecast: 2.50% Previous: 2.50% Help-Wanted Index (DM) May Forecast: 35 Previous: 35 FOMC Minutes (DM) Friday, 06/27/02 ---------------- Personal Income (BB) May Forecast: 0.30% Previous: 0.00% Personal Spending (BB) May Forecast: 0.20% Previous: -0.10% Mich Sentiment-Rev.(DM) Jun Forecast: 88.0 Previous: 87.2 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Sunday 06-22-2003 Sunday 2 of 5 In Section Two: Watch List: Entry Point? Maybe... Put Play of the Day: RYL Dropped Calls: None Dropped Puts: None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** Watch List ********** Centex Corp - CTX - close: 79.50 change: -2.49 WHAT TO WATCH: The homebuilders are finally starting to crack under their own weight. The group has been bullet proof for months but some recent concerns over the ongoing growth for the housing market has investors taking profits off the table. The close under $80.00 sounds like the starting gun for hungry bears looking for an easy meal. We'd target the 50-dma nearing $72. Chart= --- Verizon Communications - VZ - close: 41.21 change: +1.10 WHAT TO WATCH: Shares of this telecom provider have continued to rally despite market indecision. The recent breakout above the $40 level has also produced a bullish breakout on VZ's P&F chart. Shares traded a huge 16.7 million on Friday, closing up 2.74%. We're not sure what's driving it but that kind of volume could produce some follow through next week. Chart= --- Wellpoint Health Network - WLP - close: 85.90 change: -0.09 WHAT TO WATCH: Shares of WLP were hammered on Thursday as the stock moved down from $90.46 to $86. We knew profit taking would hit sooner or later but we didn't expect it all in one day. Of course who's to say the selling is over? So far shares of WLP have stopped at the $85.00 level, which was expected as support. The question now is will it hold here and bounce or will it break and test the $80 level? Chart= --- FLIR Systems - FLIR - close: 30.65 change: -0.78 WHAT TO WATCH: Shares of FLIR were pretty strong heading into its 2:1 split more than three weeks ago. They impressed us again by climbing above the $30.00 level (pre-split would have been $60) and holding here for a couple of weeks. It looked like the bulls had built a big enough base to support more upside when shares inched higher Wednesday-Thursday. Alas, Friday profit taking brought it back down but the $30 level held. Aggressive traders can evaluate longs above $30 with a tight stop to limit their risk. Chart= --- Saint Jude Medical - STJ - close: 56.29 change: -0.41 WHAT TO WATCH: It definitely looks like an entry point. The problem is we can't tell whether to go long here at support of its rising channel or look for a breakdown below the $55 mark and its rising 50-dma. Gosh, shares have already fallen from the $63 level. Of course they've also risen from the $35 level last December. Looks like one to watch. Chart= =================================== RADAR SCREEN - more stocks to watch =================================== BLL $46.66 - This is the FOURTH test of support near $46.50 in four weeks. A breakdown here and the $45 level may not hold for BLL. The weekly chart looks open to more consolidation. QCOM $36.45 - Shares really surprised us this week with a strong breakout above its 200-dma and above the $35-36 levels. The stock still has strong resistance at $38.00 but a breakout there and it might be worth playing. SPY $99.46 - You guessed it; these are the S&P Deposit Receipts or the SPDRs (spiders). If you want to trade the "market" this is a good way to do it. The close under $99 looks ominous and a retest of previous resistance (as support) at $95 and its rising 50-dma sound like a good bet. ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Put Play of the Day: ******************** RYL – The Ryland Group close: 69.95 change: -4.03 stop: 75.25 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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The Option Investor Newsletter Sunday 06-22-2003 Sunday 3 of 5 In Section Three: Current Calls: ADI, IGT, LH, LXK, MRK, MERQ, PGR, New Calls: AZO Current Put Plays: KSS, WFMI New Puts: COF, 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 ****************** Analog Devices - ADI - close: 33.99 change: -1.18 stop: 33.00 Company Description: Analog Devices is a leading maker of analog (linear and mixed- signal) and digital integrated circuits (ICs), including digital signal processors. The company's broad line of ICS incorporate analog, mixed-signal and digital signal processing technologies that translate real-world phenomena such as pressure, temperature, and sound into digital signals. ADI's products are used in communications equipment (40% of sales), computers and peripherals, and medical and scientific instruments. Among ADI's more notable customers are Motorola, Dell, Lucent, and Sony. Why we like it: When we initiated coverage of ADI on Thursday, another pullback to the bottom of the ascending channel seemed like the perfect setup for a new entry point. The catch is that we wanted to see a rebound from that level to confirm our bullish view on the stock. Well, we got half of that setup on Friday -- the drop, but not the pop, as ADI fell under its 50-dma ($34.20) to close at $33.99, arguably right on the bottom of the channel. So what now? Unfortunately, we need to see what transpires early next week, but we need that rebound in order to consider an entry into the play. a breakdown from the channel is a possibility that we considered before initiating coverage and that's a big part of why we started out with such a tight stop at $33. If the channel breaks, we want to be gone from the scene quickly. Aggressive traders can enter on that rebound, but should confirm strength in the overall sector by monitoring the SOX index before playing. More conservative players will want to wait for a rebound back over the $36 level on solid volume before initiating new positions. Suggested Options: Shorter Term: The July 30 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to either the July 35 Call or the September 40 Call. These options are currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders should utilize the September 35 call. BUY CALL JUL-30 ADI-GF OI= 184 at $4.70 SL=2.75 BUY CALL JUL-35 ADI-GG OI=1353 at $1.35 SL=0.75 BUY CALL SEP-35 ADI-IG OI=2846 at $2.90 SL=1.50 BUY CALL SEP-40 ADI-IH OI=3814 at $1.10 SL=0.50 Annotated Chart of ADI: Picked on June 19th at $35.17 Change since picked: -1.18 Earnings Date 08/13/03 (unconfirmed) Average Daily Volume = 4.00 mln --- Intl Game Technology - IGT - cls: 95.47 chg: -0.14 stop: 92.00 Company Description: IGT is a world leader in the design, development and manufacture of microprocessor-based gaming and lottery products and software systems in all jurisdictions where gaming and lotteries are legal. (source: company press release) Why We Like It: We're down to the last seven trading days before IGT splits 4- for-1 on July 2nd, 2003. Shares have held up admirably during this recent market volatility and profit taking in certain sectors. Dip buyers have been defending the stock at $95.25 and above but a quick look at the intraday chart does show some selling near $96.00. So someone is taking profits here but there's been enough buying interest to keep shares propped up. Honestly, the stock looks tired and the rally appears to be running out of steam but with just seven days left before the split there may be a home stretch ramp up by the momentum traders. Oscillators are still overbought and looking ready to roll over (actually some have already turned bearish). Conservative traders can try and protect some profits with a tighter stop loss. The $95.00 and the $94.00 levels look like prime candidates for a tighter stop. We're going to leave our stop at $92.00 because we expect some volatility next week and don't want to be stopped out prematurely. Our short-term target is still $100 and if IGT gets close to it start planning your exits. Something to consider is what will happen to shares after the split. Normally, stocks tend to go through a post-split depression as the momentum traders move on to other plays. However, every once in a while there is so much interest in a stock that new investors are drawn to it due to its "cheaper" price. Considering that IGT still has a dividend payment on July 28 for shareholders on record as of July 14th there may be plenty of interest left for bulls to hold shares a couple of weeks longer. Suggested Options: Our strategy is to play IGT for any potential split run. With the split on July 2nd, it doesn't make sense to buy options longer than July's but we're going to list an October for those who are interested. BUY CALL JUL-90 IGT-GR OI=2031 at $7.70 SL=4.50*on a dip* BUY CALL JUL-95 IGT-GS OI=3010 at $4.50 SL=2.25 BUY CALL JUL-100 IGT-GT OI=2944 at $2.15 SL=1.00*looking risky* BUY CALL OCT-95 IGT-JS OI= 745 at $7.70 SL=4.50 Annotated Chart of IGT: Picked on June 10th at $91.87 Change since picked: +3.60 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.22 million Chart link: --- Laboratory Corp - LH - close: 30.37 change: +0.61 stop: 28.00 Company Description: The first national clinical laboratory to fully embrace genomic testing, Laboratory Corporation of America® Holdings (LabCorp®) has been a pioneer in commercializing new diagnostic technologies. As a national laboratory with annual revenues of $2.5 billion in 2002 and approximately 24,000 employees, the Company offers more than 4,000 clinical tests ranging from routine blood analyses to sophisticated molecular diagnostics. Serving over 200,000 clients nationwide, LabCorp combines its expertise in innovative clinical testing technology with its Centers of Excellence. The Center for Molecular Biology and Pathology, in Research Triangle Park, North Carolina, offers state-of-the- art molecular gene-based testing in infectious disease, oncology and genetics. DIANON Systems, Inc., its Anatomic Pathology Center of Excellence, is a leader in oncology and genetic testing, and National Genetics Institute in Los Angeles is an industry leader in developing novel, highly sensitive polymerase chain reaction (PCR) methods for testing hepatitis C and other blood borne infectious agents. LabCorp's Minneapolis-based ViroMed offers molecular microbial testing using real time PCR platforms, while its Center for Esoteric Testing in Burlington, North Carolina, performs the largest volume of specialty testing in the network. LabCorp's clients include physicians, state and federal government, managed care organizations, hospitals, clinics, pharmaceutical and Fortune 1000 companies, and other clinical laboratories. (source: company press release) Why We Like It: The slow roll higher for shares of LH continue. The stock has been gaining ground in a wide ascending channel since its disastrous gap down in October. The intraday give and take between buyers and sellers has fought its battles around the 100- dma and the 50-dma for the last few months. A couple of weeks ago, LH was bouncing along the bottom of its rising channel and the 100-dma, which held as support. This last trading week the stock has rebounded higher and buyers have supported the stock at the 50-dma for the last three sessions. We're encouraged by Friday's move of more than two percent and its close back above $30.00. The stock's MACD is about to curve higher back into a bullish crossover while its Stochastics, RSI and momentum have already crossed. LH's point-and-figure chart supports the rising channel we see and the stock is currently above its bearish resistance. If the markets see additional volatility this week due to uncertainty regarding the Fed's interest rate decision or end of the quarter shuffling, stocks like LH may see some additional buying interest as many investors view healthcare as a "safety" play. We're going to keep our stop loss at $28.00 for now and new entries above $30.00 look okay. Suggested Options: We like the July 30's and the August 32.50s as they're not too expensive and have decent open interest. BUY CALL JUL 30.00 LH-GF OI= 929 at $1.60 SL=0.80 BUY CALL JUL 32.50 LH-GZ OI=1248 at $0.55 SL=0.00 BUY CALL AUG 30.00 LH-HF OI=3640 at $2.20 SL=1.10 BUY CALL AUG 32.50 LH-HZ OI=9101 at $1.10 SL=0.55 BUY CALL AUG 35.00 LH-HG OI= 434 at $0.50 SL=0.00 Annotated Chart of LH: Picked on June 17th at $30.10 Change since picked: +0.27 Earnings Date 07/28/03 (unconfirmed) Average Daily Volume = 1.49 million Chart link: --- Lexmark Intl - LXK - close: 74.78 change: -0.86 stop: 71.00 Company Description: Lexmark International, Inc. is a leading developer, manufacturer and supplier of printing solutions -- including laser and inkjet printers, multifunction products, associated supplies and services -- for offices and homes in more than 150 countries. Founded in 1991, Lexmark reported approximately $4.4 billion in revenue in 2002. (source: company press release) Why We Like It: Ta-da! We suspected that shares of LXK would pull back to the $74.00 level (see Thursday's update) and sure enough some traders took a little money off the table heading into the weekend. We like LXK as it has been one of the leaders in the hardware sector while not shooting up so high and fast that it would be foolish to play it. There have been a lot of expectations for hardware companies to show signs of a recovery but with business spending still lagging behind consumers it's been a tough road for many. Except for LXK. Printer cartridges and other printing solutions have been a high margin business despite competition from the likes of HPQ, Canon, Epson and a host of small Internet discounters spamming your inboxes with ads for cheap refillable ink cartridges. What really turned us on to LXK was its weekly chart. Shares have been battling with the $70 level as resistance for years. A few weeks ago LXK broke out above this level and has since pulled back to retest it now as support. We could easily see the stock trade up to the $80 mark or beyond. Supporting our bullish outlook is LXK's point-and-figure chart. The P&F chart has been building a triangular-shaped (pennant) pattern and we were expecting an upside breakout. Sure enough, the rally on Wednesday produced the technical breakout we were looking for and LXK is now showing what P&F chartists call a "bullish triangle breakout", which is one of the most successful bullish patterns traders can play. Now nothing is infallible and technical patterns get broken all the time. That's why we have to play with a stop loss. Currently ours is at $71.00. More aggressive traders should probably consider dropping theirs below the 70 mark, which is natural psychological support. More conservative traders can consider upping theirs near the $72 range so that it's just below LXK's rising 50-dma, which has been support the last few weeks. The daily oscillators are mixed and frankly a couple of them are looking bearish as they turn down from overbought. While we suspect shares will bounce from here ($74) the stock might see further profit taking to the 50-dma ($72). Suggested Options: We don't have a preference over July or October strike prices as the trend on LXK looks rather strong. Still, it's a lot cheaper to play the July options. The July 75s don't look too bad. BUY CALL JUL 70 LXK-GN OI=2421 at $6.50 SL=4.00 BUY CALL JUL 75 LXK-GO OI=6068 at $3.20 SL=1.60 BUY CALL JUL 80 LXK-GP OI=1362 at $1.10 SL=0.55 *riskier* BUY CALL OCT 75 LXK-JO OI=1641 at $6.30 SL=4.00 BUY CALL OCT 80 LXK-JP OI=3492 at $4.00 SL=2.00 Annotated Chart of LXK: Picked on June 16th at $74.51 Change since picked: +0.27 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 1.78 million Chart link: --- Merck & Company - MRK - close: 62.89 change: +0.59 stop: 59.50 Company Description: MRK is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures. Additionally, the company provides pharmaceutical benefit services through Merck-Medco Managed Care, LLC. The company's operations are managed principally on a products and services basis and are comprised of two business segments. Merck Pharmaceutical is involved in marketing products, while Merck Pharmaceuticals is focused on therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. The pharmaceutical benefit services provided by Merck-Medco include sales of prescription drugs through managed prescription drug programs as well as services through programs to manage patient health and drug utilization. Why we like it: Considering the weakness in the rest of the market on Friday, the Pharmaceutical index (DRG.X) actually held up rather well, holding support at $340 and actually advancing by 0.50%. The DRG index is certainly acting healthy after last week's impressive breakout. The same can be said about our MRK play, as the stock has been consolidating nicely above the $62 level after last week's breakout over the $60 resistance level. So can it last? We think so, but probably not without a slightly deeper pullback first. The resistance at $60 was a major threshold to overcome, and we're thinking an intraday dip to confirm that level as new- found support may be in order, especially if market weakness prevails ahead of next week's FOMC meeting. More aggressive traders can look to enter the play on another rebound from the $62 area, but must be willing to accept the risk of a potential drop to our stop at $59.50. Waiting for the dip to support is the more conservative strategy. The other advantage of waiting for a drop back to the $60 area for entry is that we can also see how the DRG index behaves. If the current bullishness is to continue, then the DRG should find strong buying interest above the $330 level, which was the site of its own breakout. Suggested Options: Shorter Term: The July 60 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders should utilize the October 65 call. BUY CALL JUL-60 MRK-GL OI=41053 at $3.90 SL=2.50 BUY CALL JUL-65 MRK-GM OI=17333 at $0.95 SL=0.50 BUY CALL OCT-60 MRK-JL OI=13149 at $5.30 SL=3.25 BUY CALL OCT-65 MRK-JM OI=14638 at $2.40 SL=1.25 Annotated Chart of MRK: Picked on June 17th at $62.37 Change since picked: +0.52 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 6.27 mln --- Mercury Int - MERQ - close: 41.44 change: -0.67 stop: 38.95 Company Description: As a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications, MERQ is looking for growing e-commerce demand to continue to fuel its business. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks and automating quality assurance testing. MERQ's client base spans a wide range of industries including Internet companies such as Amazon.com and America Online, infrastructure companies Ariba and Oracle, as well as Apple Computer, Cisco Systems and Ford Motor Company. Why we like it: There's been no shortage of volatility in our MERQ play over the past 2 weeks, as the stock has been bouncing between the $40 and $44 levels like a ping-pong ball. The net result is that that stock has essentially gone sideways since clearing the $40 level on June 4th. During this process, the ascending channel has almost caught up with the price of the stock and the bottom of the channel (now at $39.90) in conjunction with the 20-dma ($40.82) should provide strong support for the next upward leg, market permitting. the $40 level has been successfully defended as support on two other occasions since the initial breakout, and based on the action of the past couple days, another test seems to be likely early next week. With solid support to back it up, we like new entries near the $40 level. The initial target should be for a return to the $44 level, the site of the recent highs. Conservative traders may want to harvest some gains near there. But if the bulls can manage a breakout over that level, a run to our $48 target still seems achievable. If support fails, we'll know it with price closing below the bottom of the channel and likely violating our stop. Despite the fact the bottom of the channel is now just below $40, we're going to play it cautious and keep our stop at $38.95, which is just below the 30- dma ($39.34), which provided support back in late May, the last time the channel was briefly violated. Suggested Options: Shorter Term: The July 40 Call will offer short-term traders the best return on an immediate move, as it is currently slightly in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 42 Call. This option is currently slightly 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 can utilize the October 42 call. BUY CALL JUL-40 RQB-GH OI=7464 at $3.60 SL=1.75 BUY CALL JUL-42 RQB-GS OI=5440 at $2.20 SL=1.00 BUY CALL OCT-42 RQB-JS OI=1362 at $4.40 SL=2.75 BUY CALL OCT-45 RQB-JI OI=1401 at $3.30 SL=1.75 Annotated Chart of MERQ: Picked on June 10th at $42.62 Change since picked: -1.18 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 4.35 mln --- Progressive Corp. - PGR - close: 74.95 change: +0.14 stop: 71.00 Company Description: Traditionally a leader in non-standard, high-risk personal auto insurance, PGR has moved into standard-risk and preferred auto insurance, as well as other personal use vehicle coverage, such as motorcycles and recreational vehicles. The company's property-casualty insurance products protect its customers against collision and physical damage to their vehicles and liability to others for personal injury or property damage. Why we like it: After a healthy-looking breakout last Monday, the Insurance index (IUX.X) got clocked on Thursday, falling back to the $269 level and now needed to take another run at resistance. In light of that weakness, PGR's performance has been nothing short of astounding. After breaking out with a bang a week ago, the stock has resisted the urge to pull back with the IUX, instead consolidating near the $75 level. Oh sure, that is still more than a dollar below last week's intraday high, but compared to the IUX, this stock is showing some impressive resilience. Another look at the PnF chart certainly tells the picture though, with the week's action generating another Buy signal and hinting that while the $118 bullish price target may be a bit far- fetched, the bulls definitely still seem to have the ball. Remember that ascending channel (shown on the chart below)? Well, PGR is now getting close to the center-line of that channel and a rebound from there might make for a decent, albeit aggressive entry point. Those more timid souls will want to wait for the more conservative entry point, which would still be for a dip and bounce from the bottom of the channel near $72.50. In either case, we're maintaining our stop at $71 -- it's a bit wider than we'd like, but we want to give the stock enough room to breathe without stopping us out prematurely. Suggested Options: Shorter Term: The July 75 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the August 80 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 August 75 call. BUY CALL JUL-70 PGR-GN OI=174 at $5.70 SL=3.75 BUY CALL JUL-75 PGR-GO OI=192 at $2.05 SL=1.00 BUY CALL AUG-75 PGR-HO OI=239 at $2.90 SL=1.50 BUY CALL AUG-80 PGR-HP OI= 17 at $1.00 SL=0.50 Annotated Chart of PGR: Picked on June 15th a $73.27 Change since picked: +1.68 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 960 K ************** NEW CALL PLAYS ************** AutoZone, Inc. - AZO - close: 76.65 change: -0.18 stop: 74.95 Company Description: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why we like it: After a really impressive rally off its January lows, AZO somehow lost its way in late May and quit rising with the rest of the market. After putting in a double top near the $87.50 level, the stock has been consistently pushed lower over the past month, building a consistent pattern of lower highs. With a lead-in like that, you're probably wondering why we're listing it as a call play. The key is the way the stock has been finding support over the past few days, right at the 200-dma ($75.73), which is also the level of the 38% retracement of the January-June rally. Healthy pullbacks in strong rallies should normally retrace about 38% of the initial advance, so this is clearly the point where bulls ought to be stepping up to support the stock, and it appears we're starting to see some early signs of that. Daily Stochastics are bottoming in oversold, MACD is trying to flatten out, and it does in fact seem that the bulls are trying to defend the $75 level based on the increasing volume over the past few days. This is clearly an aggressive play, where we're attempting to pick a bottom in a stock that has been headed south for the past month. Please make sure that fits your risk profile before playing. The PnF chart is still on a Sell signal and it is possible that the selling could continue right through that support next week. But if the stock does rebound as we expect, then it should be good for a fairly rapid rise back to the $80 level and possibly as high as the 50-dma (currently $81.36). Since the stock is right at strong support, we can set a really tight stop at $74.95. That produces a favorable risk-return ratio for the play. Target entries either at current levels or on another rebound from the 200-dma. Traders that want to see a bit of life in AZO before playing could wait for a rally through the $77.50 level (just above Friday's intraday high) before playing, with the understanding that they must then assume greater risk to the stop. Suggested Options: Shorter Term: The July 55 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 80 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 September 80 call. BUY CALL JUL-75 AZO-GO OI=1002 at $4.10 SL=2.50 BUY CALL JUL-80 AZO-GP OI= 598 at $1.50 SL=0.75 BUY CALL SEP-75 AZO-IO OI=1108 at $6.40 SL=4.50 BUY CALL SEP-80 AZO-IP OI= 983 at $3.80 SL=2.25 Annotated Chart of AZO: Picked on June 22nd at $76.65 Change since picked: +0.00 Earnings Date 08/26/03 (unconfirmed) Average Daily Volume = 1.31 mln ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** Kohl's Corp. - KSS - close: 49.44 change: -0.56 stop: 52.25*new* Company Description: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why we like it: A perfect picture of weakness, our KSS play has already shrugged off the dubious Bernstein upgrade from Thursday and is back under $50. Of course, it didn't hurt that the Retail index (RLX.X) did nothing but head south after Monday's breakout to new highs. In fact, another down day could have the RLX breaking its last reaction low near $323 and that would call into question whether more substantial support near $305 might be tested. In a bearish picture for the RLX, KSS seems destined to bear (all puns intended) the brunt of the selling due to the stock's dismal performance over the past couple months. While the RLX was charging to new highs for the year, KSS is threatening to break below the March lows. The past two days have seen the stock attempt to rally and fail, both times below $52 and below the 20- dma (currently $51.64). That $51 level is proving to be a formidable obstacle for the bulls, as broken support is now acting as resistance. As mentioned earlier in the week, failed rallies below $51 should make for solid entries into the play ahead of an expected break down to the $47 level and possibly all the way to our $45 target. That ought to still work next week as well. In light of the price action of the past week, it should be safe to lower our stop to $52.25. Traders that want to enter on weakness can use a break below the $48 level as their trigger, but need to be on guard for a possible rebound from the vicinity of $47. Suggested Options: Short-term traders will want to focus on the July 50 Put, as it will provide the best return for a short-term play. Conservative traders looking for a larger move down towards the $45 level or below may want to utilize the October contract, which provides greater insulation from the spectre of time decay. BUY PUT JUL-50 KSS-SJ OI=7997 at $2.80 SL=1.50 BUY PUT JUL-45 KSS-SI OI=4344 at $0.95 SL=0.50 BUY PUT OCT-45 KSS-VI OI=2326 at $2.70 SL=1.25 Annotated Chart of KSS: Picked on June 15th at $49.45 Change since picked: -0.01 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.45 mln --- Whole Foods Market - WFMI - cls: 47.94 chg: +0.46 stop: 50.00 Company Description: Founded in 1980 in Austin, Texas, Whole Foods Market is the world's largest natural and organic foods supermarket with $2.7 billion in sales in fiscal year 2002. The company currently has 143 stores and employs more than 27,000 Team Members in the United States and Canada. The motto, "Whole Foods, Whole People, Whole Planet"(TM) captures the company's mission to find success in customer satisfaction and wellness, Team Member excellence and happiness, enhanced shareholder value, community support, and environmental improvement. For six consecutive years, Whole Foods Market has ranked on Fortune's annual list as one of the "100 Best Companies to Work For." Whole Foods Market, Bread & Circus® and Harry's Farmers Market® are all registered trademarks owned by Whole Foods Market IP, LP. (Source: company press release) Why We Like It: We expected a rally in WFMI, and we got one today: a 0.97 percent rally. The rally nevertheless preserved the series of lower highs we've seen on the WFMI chart since its precipitous descent. The rise was accompanied by less than two-thirds the average daily volume. However, that increase came on a day when competitors Safeway (SWY), Kroger (KR), Albertson's (ABS), and the retail sector ($RLX.X) all declined, so perhaps it's time for WFMI to try a bigger bounce. Today's rise produced a bullish kiss on the stochastics and hinged the RSI up, but didn't change the downward slant of the MACD. Prices have been settling into a neutral wedge, with lower highs but also with higher lows. While we still believe that an upside breakout will stop short of our $50.00 stop, conservative traders might set an alternative stop just above the 10-dma. As we mentioned earlier in the week, that average has been stopping WFMI's advances since early June. A downside break out of the wedge will confirm the bearish sentiment. Those seeking new entries could wait for a downside break of that neutral wedge and a move below last week's low of $46.54, but those entries would have less reward offered due to support at $45.00, our first target, and would be high risk. A failed rally that rolls over anywhere beneath 50 would also provide a new entry, and that may be the first one that's offered, as it looks as if a bounce might be imminent. Suggested Options: We have plenty of options to choose from. WFMI has Julys, August and November options already available. We're going to suggest July 50 and 45 puts but the August 45s don't look bad either. BUY PUT JUL 50 FMQ-SJ OI= 660 at $3.50 SL=1.75 BUY PUT JUL 45 FMQ-SI OI=1885 at $1.15 SL=0.50 BUY PUT AUG 50 FMQ-TJ OI=1264 at $4.30 SL=2.00 BUY PUT AUG 45 FMQ-TI OI= 633 at $2.00 SL=1.00 Annotated Chart for WFMI: Picked on June 13 at $49.44 Change since picked: -1.50 Earnings Date 07/30/03 (unconfirmed) Average Daily Volume: 1.6 million Chart = ************* NEW PUT PLAYS ************* Capital One Financial - COF - close: 49.64 chg: -1.13 stop: 52.51 Company Description: Headquartered in McLean, Virginia, Capital One Financial Corporation (www.capitalone.com) is a holding company whose principal subsidiaries, Capital One Bank and Capital One, F.S.B., offering consumer lending products. Capital One's subsidiaries collectively had 46.4 million managed accounts and $59.2 billion in managed loans outstanding as of March 31, 2003. Capital One, a Fortune 500 company, is one of the largest providers of MasterCard and Visa credit cards in the world. Why We Like It: Here we go getting aggressive again. A week (five days) ago we offered an aggressive put play on GS with a tight stop to really limit any losses. While we were right about shares falling several points to profit taking this week, we were too conservative with our stop and our timing was off a day or two. We plan to avoid that with a significantly overbought stock that has already begun to breakdown. Our new bearish candidate is COF. Shares have rallied from $25.00 in early March to almost $55 a couple of weeks ago. The last week saw shares slowly sink towards minor support at $50.00 and Friday saw that level fall to profit taking on slightly better than average volume. Overall the banking sectors have been areas of strength and the BKX and the BIX have been leading the markets higher. Well now both of them look tired and ready for some consolidation. Shares of COF, which have out performed these two banking sectors to the upside should also out perform them to the downside. We like the close under $50.00 and the breakdown below the rising 21-dma. There is potential support near $47.50 but our short-term target is $45.00 near the 50-dma. COF's MACD has already produced a bearish crossover and additional oscillators are significantly negative. We're going to initiate the play with a stop loss at $52.51. COF's earnings are in less than 3.5 weeks and while we don't necessarily expect bad news from them, the strong unemployment could be putting press on their loan defaults and speculation might grow if there are any warnings in the next couple of weeks. Suggested Options: The options available to us are July's and September's. We're going to list both but our preference will be for July 50s and 47.50s. BUY PUT JUL 50.00 COF-SJ OI=7023 at $3.50 SL=1.75 BUY PUT JUL 47.50 COF-SW OI=8132 at $2.50 SL=1.25 BUY PUT JUL 45.00 COF-SI OI=2979 at $1.65 SL=0.85 BUY PUT SEP 47.50 COF-UW OI=1092 at $4.50 SL=2.25 BUY PUT SEP 45.00 COF-UI OI= 724 at $3.40 SL=1.70 Annotated Chart of COF Picked on June 22 at $49.64 Change since picked: -0.00 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume: 4.3 million Chart = --- The Ryland Group - RYL - close: 69.95 change: -4.03 stop: 75.25 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: If you're thinking we just played RYL in this space, you're right. We tried gaming a bearish play (picking a top) less than two weeks ago after the stock's sharp reversal from the $73 area. As you'll recall, that didn't go so well and we ended up closing the play early for a small loss. This time things look a bit different though. Investors seem to be taking their leave of interest-rate sensitive stocks ahead of next week's FOMC meeting, either due to normal profit taking or fears that the Fed won't deliver the hoped for 50-basis point cut. The Dow Jones Home Construction index ($DJUSHB) got pummeled on Friday to the tune of 4.5% and if the 20-dma ($444) is broken then it could have a ways to fall, possibly all the way to the 50-dma below $400. we see a similar picture with shares of RYL, as the stock plunged more than 5% on Friday and is just above its own 20-dma ($69.40). Either this was a whopper of a profit-taking session, or the sellers are just getting started. Obviously, we think it is the latter. The picture looks a bit different this time around than 2 weeks ago, as Friday's decline produced a solid breakdown from overbought for the daily Stochastics and volume appears to be on the rise. The nice thing is that the PnF chart also generated a Sell signal with the drop under $72, and the current vertical count gives a price target of $61. Looking at the chart below, you can see that looks entirely reasonable if we get a decent decline, as $59-60 is strong support and is further reinforced by the 50-dma just below $60. But at the same time, there isn't a lot between here and there to serve as support. Once below the 20-dma, RYL has mild support at $67 and then again at $65 before then heading towards our $60 target. Two weeks ago, the initial drop was aggressively bought near $67, so we must contend with the possibility that could happen again, but it does seem less likely. Aggressive traders can look to enter on a break below $69, while a more conservative approach would be to look for a failed rebound near $71.50, or possibly as high as $73.50. Owing to the aggressive nature of the play, we're starting with a wide stop at $75.15, which is just above the last two intraday highs. Should the stock break down early next week, we'll look to lower that stop significantly from there. Note, it is entirely possible that RYL could see a brief rebound ahead of the FOMC meeting and the real play might occur after the Fed delivers the verdict on interest rates. Suggested Options: Short-term traders will want to focus on the July 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 65 contract or even the October strike, the latter of which provides greater insulation from the spectre of time decay. BUY PUT JUL-70 RYL-SN OI= 453 at $4.30 SL=2.75 BUY PUT JUL-65 RYL-SM OI=1289 at $2.40 SL=1.25 BUY PUT OCT-65 RYL-VM OI= 192 at $5.60 SL=3.50 Annotated Chart of RYL: Picked on June 22nd at $69.95 Change since picked: +0.00 Earnings Date 07/23/03 (unconfirmed) Average Daily Volume = 851 K ************************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 06-22-2003 Sunday 4 of 5 In Section Four: Leaps: Bullish Facade Starting To Crack? Traders Corner: A Pound Of Flesh Is Gone, But There's Plenty Adipose
The Option Investor Newsletter Sunday 06-22-2003 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Success With Covered-Calls Naked Puts: Option Trading 101: Staying The Course Spreads/Straddles/Combos: The Consolidation Begins! Updated In The Site Tonight: Market Posture: Mostly Sideways ************************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: Success With Covered-Calls By Mark Wnetrzak One of our readers asked about the correct timing for entering covered-call positions. Attn: Covered-Calls Editor Subject: Buying Stocks For Covered-Calls Hello Mark, I've been doing pretty well with your picks (and some of my own) over the last few weeks but the rally may be slowing a bit and I want to be sure about the stocks I choose for covered calls. My plan has been to look for $7-$12 stocks that are breaking through old resistance levels on heavy volume. Then I check the in the money options for good premiums that will lower my cost basis below a 15 or 18 day moving average. I try to sell the call when the stock hits an overbought area, and usually end up with a fairly decent play -- so far. Anyway, I wanted your thoughts on how important it is to time the entry (when to buy the stock and sell the call) with the current market. KI Regarding Covered-call entry strategies and timing techniques: The technique you have for buying stocks seems to be working fine in a bullish environment but the type of chart pattern to look for really depends on what strategy you are using. A "single entity" approach, where an investor is not interested so much in stock ownership or bullish movement, but rather in obtaining a consistent return on investment, is not really dependent on timing the trade with a "break-out" in the underlying issue. Remember, the primary goal of this technique is to achieve acceptable returns while still receiving an above-average amount of downside protection. With the in-the-money covered-call, an investor is more interested in the overall technical outlook of the underlying issue for the duration of the option series chosen. Is there a high probability the stock will remain above the cost basis (break-even point) until expiration and does the overall position meet my risk-reward tolerance? Those are the questions you must answer. Regardless of whether the ITM covered-write strategy is applied short-term or even in the longer term, it requires a neutral to bullish outlook on the underlying issue and its industry, as well as the overall market. If you think the underlying equity will fall below the cost basis of the position, or the overall market is due for a correction, then searching for a different candidate or waiting for a more optimum entry point may be the best course of action. However, if you desire stock ownership or are writing calls on stocks in your long-term portfolio that you don't want to sell, short-term timing becomes much more important. Essentially, an investor begins trading calls against the stocks in his portfolio as they cycle through the first three stages of price activity (basing, breakout/rally, consolidation) and with the use of advanced chart indicators such as oscillators or other timing signals, he can often improve the profit potential of a covered call play. Obviously, there are lots of ways to enhance the strategy; it simply depends on your personal preference and the manner in which you choose to initiate covered-call positions. Lawrence McMillan adeptly outlines the full range of covered-write strategies in his brand new book, "New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock Investing." The OIN bookstore should have copies of the book available and if not, we will let you know where it is available at the best price. Regards, Mark OIN SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield SUPG 5.04 5.86 JUN 5.00 0.65 0.61* 20.1% ARIA 3.37 3.61 JUN 2.50 1.05 0.18* 11.2% LGTO 7.60 7.63 JUN 7.50 0.45 0.35* 7.1% IPXL 7.86 11.37 JUN 7.50 0.80 0.44* 7.0% PLUG 5.08 5.08 JUN 5.00 0.35 0.27* 6.4% MOSY 7.50 9.05 JUN 7.50 0.60 0.60* 6.3% IDNX 5.60 6.99 JUN 5.00 0.90 0.30* 5.5% CBST 10.79 10.76 JUN 10.00 1.15 0.36* 5.4% TER 13.06 17.91 JUN 12.50 1.40 0.84* 5.2% FCS 12.55 13.35 JUN 12.50 0.60 0.55* 5.2% OVER 14.55 17.18 JUN 12.50 2.75 0.70* 5.2% OVER 17.80 17.18 JUN 15.00 3.30 0.50* 5.0% MDR 5.08 5.53 JUN 5.00 0.40 0.32* 5.0% AWE 7.64 7.93 JUN 7.50 0.45 0.31* 4.9% PLUG 5.39 5.08 JUN 5.00 0.65 0.26* 4.8% FEIC 17.65 18.62 JUN 17.50 0.85 0.70* 4.7% FFIV 15.45 17.12 JUN 15.00 1.30 0.85* 4.4% GNTA 8.78 12.65 JUN 7.50 1.70 0.42* 4.3% MRVL 26.72 32.90 JUN 25.00 3.10 1.38* 4.2% MLNM 15.55 15.05 JUN 12.50 3.40 0.35* 4.2% CELG 31.48 32.05 JUN 30.00 2.80 1.32* 4.0% GP 17.99 17.85 JUN 17.50 1.40 0.91* 4.0% BRCM 21.40 25.86 JUN 20.00 2.25 0.85* 3.9% PEGS 13.00 16.76 JUN 12.50 0.85 0.35* 3.2% NOR 2.67 2.34 JUN 2.50 0.40 0.07 2.7% MIR 2.78 2.77 JUL 2.50 0.65 0.37* 15.1% BEAV 2.69 3.76 JUL 2.50 0.35 0.16* 5.9% SEBL 10.98 10.44 JUL 10.00 1.65 0.67* 5.2% QSFT 12.58 12.41 JUL 12.50 1.00 0.83 5.2% WEBX 13.90 14.45 JUL 12.50 2.10 0.70* 5.2% SEBL 10.85 10.44 JUL 10.00 1.40 0.55* 5.1% DNDN 7.66 6.97 JUL 7.50 1.05 0.36 4.7% MTON 5.60 5.96 JUL 5.00 0.90 0.30* 4.6% ASIA 5.75 6.27 JUL 5.00 1.00 0.25* 4.6% MHR 8.11 7.90 JUL 7.50 0.95 0.34* 4.1% RHAT 8.27 7.45 JUL 7.50 1.20 0.38 3.9% EDS 21.99 23.27 JUL 20.00 3.00 1.01* 3.9% IMMU 6.91 6.49 JUL 5.00 2.15 0.24* 3.7% ASIA 5.97 6.27 JUL 5.00 1.15 0.18* 2.7% * Stock price is above the sold striking price. Comments: After Monday's bounce, the markets drifted slowly lower as the June expiration approached, making for a rather boring week. Is a dreaded/desired correction near or will the end-of-month fund- games continue to float the indices higher? As always, time will tell as we continue to focus on conservative in-the-money covered-calls. The model portfolio did quite well for the June expiration though Alkermes (NASDAQ:ALKS), an early-exit candidate, was the lone loser and is shown closed - Monday's rally offered a nice, painless exit. Even FreeMarkets (NASDAQ:FMKT) and Abgenix (NASDAQ:ABGX), previously closed positions listed below, rallied into profitable territory - go figure. As for the July positions, some of the red-hot movers are acting a bit worrisome and should be monitored closely. Possible early-exit candidates include: DNDN, MHR, RHAT and QSFT. Positions Previously Closed: Alkermes (NASDAQ:ALKS), FreeMarkets (NASDAQ:FMKT) - now profitable, and Abgenix (NASDAQ:ABGX) - also profitable. 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 SUPG 5.86 JUL 5.00 UQG GA 1.20 1341 4.66 28 7.9% SGR 12.62 JUL 12.50 SGR GV 0.90 844 11.72 28 7.2% Q 5.23 JUL 5.00 Q GA 0.50 25425 4.73 28 6.2% RSYS 13.00 JUL 12.50 MKU GV 1.05 0 11.95 28 5.0% BLUD 22.02 JUL 20.00 QMQ GD 2.85 424 19.17 28 4.7% OVRL 20.68 JUL 20.00 QOJ GD 1.50 13 19.18 28 4.6% WEBX 14.45 JUL 12.50 UWB GV 2.45 670 12.00 28 4.5% 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). ***** SUPG - SuperGen $5.86 *** Drug Stock Speculation *** SuperGen (NASDAQ:SUPG) is a pharmaceutical company dedicated to the acquisition, development and commercialization of oncology therapies for solid tumors, hematological malignancies and blood disorders. The company has 3 key compounds: Nipent, Orathecin and decitabine. Nipent is approved by the United States FDA and marketed by SuperGen for the treatment of hairy cell leukemia. Orathecin, its lead drug candidate, is close to completing three randomized Phase III studies and has been submitted for two New Drug Applications. Decitabine is also in Phase III clinical studies. SuperGen's portfolio of products also includes generic daunorubicin (leukemias), Mitozytrex (mitomycin for injection), cancer vaccine Avicine, Partaject-delivered busulfan and inhaled versions of Orathecin and paclitaxel. SuperGen broke through a resistance area near $4.50 on increasing volume, and the current consolidation phase could be offering a second-chance entry point. Investors who have researched the company's drug-pipeline and retain a bullish outlook can use this position to obtain a favorable cost basis in the issue. JUL-5.00 UQG GA LB=1.20 OI=1341 CB=4.66 DE=28 TY=7.9% ***** SGR - Shaw $12.62 *** Bottom-Fishing *** The Shaw Group (NYSE:SGR) is a global provider of comprehensive services to the power, process, environmental and infrastructure industries. The company operates 3 business segments: Integrated Engineering, Procurement and Construction (EPC) Services; the Environmental and Infrastructure segment; and the Manufacturing and Distribution segment. The EPC Services segment provides a range services including design, engineering, construction, procurement, maintenance, piping system fabrication as well as consulting services - mainly to the power generation and process industries. The Environmental and Infrastructure segment includes the identification of contaminants in soil, air and water and the subsequent design and execution of remedial solutions. Through the Manufacturing and Distribution segment, Shaw manufactures specialty stainless, alloy and carbon steel pipe fittings for use in pipe fabrication. Shaw rallied sharply on Friday after the company announced that its subsidiary, Shaw Infrastructure was awarded a $150 million residential development contract by the U.S. Air Force. We simply favor the bullish change-of-character and this position offers a reasonable cost basis in the issue. JUL-12.50 SGR GV LB=0.90 OI=844 CB=11.72 DE=28 TY=7.2% ***** Q - Qwest $5.23 *** On The Mend! *** Qwest Communications (NYSE:Q) provides local telecommunications and related services, wireless services and directory services in the 14-state local service area of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. The company broadband data, voice and image communications globally and serves business and government customers, as well as residential and small business customers. The company has 4 segments: retail services, wholesale services, network services and directory services, but intends to add a business services segment this year. Qwest has been in rally mode since the March low and appears ready to test the JAN'03 high. Investors who believe the rally will continue can profit from that outcome with this position. JUL-5.00 Q GA LB=0.50 OI=25425 CB=4.73 DE=28 TY=6.2% ***** RSYS - RadiSys $13.00 *** Stage II - Rally Mode! *** RadiSys Corporation (NASDAQ:RSYS) provides embedded systems for compute, data processing and network-intensive applications to OEMs within the commercial systems, service provider systems and enterprise systems markets. The company provides technology solutions to its customers while improving their time-to-market advantage and reducing total life-cycle costs. RadiSys provides system architecture, design, sourcing, configuration, delivery and full product life-cycle management to systems providers. The company designs and delivers a broad range of products at different levels of integration: complete turnkey systems; embedded subsystems and functional platforms; compute, I/O and packet processing blades; software, middleware and microcode, and semiconductors. A nice break-out above the resistance area around $10 (NOV and DEC highs) on heavy volume suggests further upside potential, and this position simply offers a method to participate in the future movement of the issue. JUL-12.50 MKU GV LB=1.05 OI=0 CB=11.95 DE=28 TY=5.0% ***** BLUD - Immucor $22.02 *** What's Up Doc? *** Immucor (NASDAQ:BLUD) develops, manufactures and sells a complete line of reagents and automated systems used mainly by hospitals, clinical labs, and blood banks for a number of tests performed to detect and identify certain properties of the cell and serum components of human blood prior to blood transfusion. Immucor has been forming a Stage III top on a long-term chart but appears ready to challenge the APR and JAN'03 high in the near-term. No news on Friday's rally? Option-expiration related or the start of a new leg higher? This position offers a reasonable cost basis from which to speculate on the current lateral trend. JUL-20.00 QMQ GD LB=2.85 OI=424 CB=19.17 DE=28 TY=4.7% ***** OVRL - Overland $20.68 *** New High Territory *** Overland Storage (NASDAQ:OVRL) designs, develops, manufactures, markets and supports magnetic tape data automation solutions. Businesses use these solutions for backup, archival and data interchange functions in high-availability network computing environments. The company's primary products are automated tape libraries, minilibraries and loaders that combine electro- mechanical robotics, electronic hardware and firmware. Overland also distributes products manufactured by other OEMs and markets various other products, including spare parts and tape media. The company licenses a proprietary tape encoding technology that it developed and patented under the name Variable Rate Randomizer (VR2). With Overland's solid fundamental outlook, the stock has rallied into Blue Sky Territory and made a new all-time high. Investors who wouldn't mind owning the issue near a cost basis of $19 can profit from future upside activity with this position. JUL-20.00 QOJ GD LB=1.50 OI=13 CB=19.18 DE=28 TY=4.6% ***** WEBX - WebEx Communications $14.45 *** Stage I Speculation *** WebEx (NASDAQ:WEBX) develops and markets services that allow users to conduct meetings and share software applications, documents, presentations and other content on the Internet using a standard Web browser. Integrated telephony and Web-based audio and video services are also available using telephones, computer Web-cameras and microphones. The company's activities have been focused on continuing to enhance and market its WebEx Interactive Services and its WebEx Multimedia Switching Platform, developing and deploying new services, expanding its sales and marketing organizations and deploying its global WebEx Media Tone Network. The company sells WebEx Meeting Center, WebEx Meeting Center Pro, WebEx Training Center, WebEx Support Center, WebEx OnStage and WebEx Enterprise Edition. It also provides a service called WebEx Business Exchange to existing customers. The company recently announced a new deal with Yahoo (NASDAQ:YHOO) to integrate instant messaging into business applications and allow them to be shared. WebEx continues to forge a Stage I base and the recent move back above its 150-day MA bodes well for the future. Investors can speculate on the company's share value with this conservative position. JUL-12.50 UWB GV LB=2.45 OI=670 CB=12.00 DE=28 TY=4.5% ***** ***************** 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 VVUS 5.08 JUL 5.00 QJS GA 0.45 30 4.63 28 8.7% TELK 15.06 JUL 15.00 ZUL GC 1.05 230 14.01 28 7.7% AZPN 5.02 JUL 5.00 ZQP GA 0.35 10 4.67 28 7.7% EXTR 5.51 JUL 5.00 EXJ GA 0.80 529 4.71 28 6.7% ABI 20.23 JUL 20.00 ABI GD 1.35 735 18.88 28 6.4% JCOM 44.35 JUL 40.00 JQF GH 6.20 564 38.15 28 5.3% OIIM 15.67 JUL 15.00 XQQ GC 1.35 306 14.32 28 5.2% GNTA 12.65 JUL 10.00 GJU GB 3.10 371 9.55 28 5.1% AMR 9.24 JUL 7.50 AMR GU 2.05 8538 7.19 28 4.7% BCGI 17.61 JUL 15.00 QGB GC 3.20 537 14.41 28 4.4% THQI 18.52 JUL 17.50 QHI GW 1.70 2055 16.82 28 4.4% RIMM 22.95 JUL 20.00 RUL GD 3.70 860 19.25 28 4.2% CAL 14.60 JUL 12.50 CAL GV 2.55 2739 12.05 28 4.1% ***************** NAKED PUT SECTION ***************** Option Trading 101: Staying The Course By Ray Cummins With the ever-increasing deluge of chatter from so-called market "gurus," it's important to focus on the traits that make traders successful in the long run. If you study the methods of the most well-known financial experts, you will encounter a number of common characteristics. The first attribute is a fundamental knowledge of market economics and the basic concept of supply and demand. The second important trait is the use of a specific trading system or methodology. Another worthwhile quality is patience, and the discipline to execute the plan without regard to emotion and other outside influences. The final trait centers on the ability to view the investment world in counterintuitive or contrarian ways. This capacity involves the need to be creative and oppose the current of popular opinion. In many ways, that is the essence of any successful strategy in today's financial markets. One of the first concepts that inexperienced traders must learn is to separate the company from its stock. Companies do not change much from a fundamental viewpoint in the short term, and yet their share value moves substantially. The primary point to remember is that today's price of the stock is not the company’s true value. Price is simply a reflection of the current state of the public’s attitudes about a specific company. It is common knowledge that perceptions and expectations are often completely out of line with absolute valuations. Understanding the differences between value and the market price is one of the initial steps to becoming an independent thinker and a successful trader. Another difficult influence to overcome is the vast amount of information that we are faced with in today’s technologically advanced society. Investors have access to a wide selection of inexpensive market data; economic news, company announcements, real-time quotes and professional quality charting services. With the current revolution in communications, it is possible for a trader to receive this information at almost any location on the planet, with little or no delay. Financial news services featuring every conceivable expert and their opinions on the latest developments are also available around the clock. While the value of such immediate (and hardly intellectual) analysis is suspect, they continue to flood the airwaves with perpetual appraisals of every event. To maintain an appearance of wisdom, market "gurus" try to justify each individual price movement with logical reasoning. Unfortunately, these experts can be motivated by self-promotion and ego enhancement and thus the analysis often exceeds common rationale. In addition, the media is constantly searching for stories or angles that will increase their exposure and improve advertising ratings. This leads to a sophisticated and widely disseminated form of gossip that is not particularly helpful from an informational point of view. In simple terms, the investing public has extremely easy access to news and analyses that tend to arouse emotions and overcome one’s intellect. Regrettably, this appetite for real-time data and market information becomes a kind of addiction on which our emotional subconscious thrives. As with any dependency, it takes a greater amount of participation to maintain the same level of excitement. The overdose may be in the form of new services or software and often, more expensive equipment. Regardless of the path to "information overload," the end result is generally the same; a tendency to indulge in excess trading with a minimum of actual research and planning. The outcome is similar to a drug addict’s withdrawal symptoms but in this case, poor decisions simply lead to financial ruin as the market brutally assaults every hastily conceived position that you have initiated. The best way to avoid the effects of outside influences is to deliberately structure your trade selection process so that the critical decisions are made only when the markets are closed. The key is to set aside time for examination and analysis when external events will have less influence on your judgment. You should also use proven strategies and sound money management techniques to avoid situations that can be affected by external elements. A popular theory suggests that the average investor may very well try to be rational but his rationality tends to be hampered by emotional instincts and social influences. That’s not something that you want working against you when it is time to make an important trading decision. 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 30.85 JUN 22.50 0.50 0.50* 3.3% 11.7% USG 11.85 13.05 JUN 7.50 0.35 0.35* 4.3% 11.2% OVTI 35.89 32.24 JUN 30.00 0.70 0.70* 3.5% 11.1% CTIC 11.96 10.01 JUN 10.00 0.30 0.30* 3.5% 10.8% ANPI 28.27 39.39 JUN 22.50 0.80 0.80* 3.2% 10.8% IMCLE 38.39 30.85 JUN 30.00 0.40 0.40* 2.9% 10.8% CTIC 10.21 10.01 JUN 7.50 0.25 0.25* 3.0% 9.5% ANPI 25.20 39.39 JUN 17.50 0.75 0.75* 3.2% 9.4% FLEX 10.50 10.67 JUN 10.00 0.25 0.25* 3.7% 9.2% IMCLE 21.20 30.85 JUN 15.00 0.50 0.50* 3.0% 9.2% CELG 34.76 32.05 JUN 30.00 0.40 0.40* 2.9% 9.1% BRCM 26.01 25.86 JUN 22.50 0.30 0.30* 2.9% 9.1% OVTI 28.64 32.24 JUN 22.50 0.80 0.80* 2.7% 8.9% APPX 27.77 34.87 JUN 22.50 0.65 0.65* 2.6% 8.7% SOHU 28.04 27.83 JUN 22.50 0.35 0.35* 2.3% 8.4% CYMI 34.51 31.61 JUN 30.00 0.35 0.35* 2.6% 7.9% NVDA 21.37 23.68 JUN 17.50 0.55 0.55* 2.3% 7.6% CELG 27.42 32.05 JUN 22.50 0.70 0.70* 2.3% 7.5% BSX 56.06 60.00 JUN 45.00 0.40 0.40* 1.9% 7.4% OVTI 30.92 32.24 JUN 25.00 0.45 0.45* 2.1% 7.3% ICOS 40.25 39.48 JUN 30.00 0.25 0.25* 1.8% 6.5% OSIP 26.08 30.91 JUN 22.50 0.40 0.40* 2.0% 6.2% SOHU 22.83 27.83 JUN 17.50 0.35 0.35* 1.8% 6.2% ICST 26.05 28.91 JUN 22.50 0.30 0.30* 2.0% 6.1% NVLS 34.67 36.57 JUN 30.00 0.40 0.40* 2.0% 6.0% CELG 31.10 32.05 JUN 25.00 0.35 0.35* 1.6% 5.9% ANPI 28.45 39.39 JUN 22.50 0.30 0.30* 1.5% 5.6% SFA 20.29 24.43 JUN 17.50 0.35 0.35* 1.8% 5.4% MERQ 42.26 41.44 JUN 37.50 0.30 0.30* 1.8% 5.2% NVDA 21.26 23.68 JUN 17.50 0.30 0.30* 1.5% 5.2% APPX 23.40 34.87 JUN 15.00 0.35 0.35* 1.7% 5.0% APPX 32.20 34.87 JUN 25.00 0.30 0.30* 1.4% 5.0% GNTA 14.21 12.65 JUL 10.00 0.50 0.50* 4.6% 13.0% CBST 12.95 10.76 JUL 10.00 0.40 0.40* 3.6% 11.6% AMLN 25.45 21.72 JUL 20.00 0.45 0.45* 2.0% 7.1% MEDI 37.71 36.52 JUL 30.00 0.60 0.60* 1.8% 6.4% SOHU 32.45 27.83 JUL 22.50 0.50 0.50* 2.0% 6.2% CTSH 24.25 23.74 JUL 20.00 0.40 0.40* 1.8% 5.9% NTES 33.70 31.45 JUL 25.00 0.45 0.45* 1.6% 5.4% CVTX 34.43 30.00 JUL 25.00 0.45 0.45* 1.6% 5.3% * Stock price is above the sold striking price. Comments: The "quadruple-witching" expiration of options turned out to be a rather humdrum affair with the broader equity markets ending the day almost unchanged. That's great news for the Naked-Puts portfolio as the recent consolidation was beginning to take its toll on a number of previously bullish issues. Looking forward, the biotechnology segment appears to be at a "key" moment and any further downside activity in the volatile group would signal an early exit in Cubist (NASDAQ:CBST), Amylin (NASDAQ:AMLN), and Genta (NASDAQ:GNTA). Other stocks to watch include the China Internet firms: Sohu.com (NASDAQ:SOHU) and Netease (NASDAQ:NTSE). Previously Closed Positions: Artisan (NASDAQ:ARTI) and Cyberonics (NASDAQ:CYBX), which are profitable, and Intermune (NASDAQ:ITMN), and Genesis Microchip (NASDAQ:GNSS). 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 FWHT 19.14 JUL 15.00 HFQ SC 0.40 292 14.60 28 3.0% 10.3% ADVS 17.74 JUL 15.00 UIV SC 0.45 195 14.55 28 3.4% 10.2% KMRT 25.20 JUL 20.00 KTQ SD 0.50 25 19.50 28 2.8% 9.8% AVCT 31.21 JUL 27.50 QVX SY 0.70 40 26.80 28 2.8% 8.0% CHKP 19.94 JUL 17.50 KEQ SW 0.40 2682 17.10 28 2.5% 7.3% PLMD 42.59 JUL 35.00 PM SG 0.50 262 34.50 28 1.6% 5.5% YHOO 32.14 JUL 27.50 YHQ SY 0.40 3756 27.10 28 1.6% 5.0% 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). ***** FWHT - FindWhat.com $19.14 *** Rally Mode! *** FindWhat.com (NASDAQ:FWHT) operates online marketplaces that connect the consumers and businesses that are most likely to purchase specific goods and services with the advertisers that provide those goods and services. Online advertisers determine the per-click fee they will pay for their advertisements, which FindWhat.com and its private-label partners such as Terra Lycos's Lycos.com and HotBot distribute to millions of Internet users. Their network includes hundreds of distribution partners, such as CNET's Search.com, Excite, Webcrawler, NBCi, MetaCrawler, Dogpile, Go2Net and Microsoft Internet Explorer Autosearch. Shares of FWHT soared this week after agreeing to merge with Espotting Media of Europe to create an international group in the paid listings sector, which the company said is the fastest growing segment of Internet advertising. FWHT also raised its earnings and revenue guidance for the second quarter and full-year, and said it may further increase its revenue forecast for the second half of 2003. Traders who like the outlook for this unique company can profit from future upside activity in the issue with this position. JUL-15.00 HFQ SC LB=0.40 OI=292 CB=14.60 DE=28 TY=3.0% MY=10.3% ***** ADVS - Advent Software $17.74 *** Strong Sector! *** Advent Software (NASDAQ:ADVS) has been providing trusted solutions to the world's leading financial professionals since 1983. Firms in over 50 countries use Advent technology to manage investments totaling more than $8 trillion. Advent's quality software, data, services and tools enable financial professionals to provide better service and communication for their clients, allowing them to grow their business while controlling costs. Stocks in the application software group have been "in the news" recently with the attempted hostile takeover of Peoplesoft (NASDAQ:PSFT) by Oracle (NASDAQ:ORCL). The activity has drawn investor's attention to other stocks in the industry and Advent is receiving a better-than-average share of the renewed buying pressure. Traders who like the outlook for the firm can speculate on its future share value in a conservative manner with this position. JUL-15.00 UIV SC LB=0.45 OI=195 CB=14.55 DE=28 TY=3.4% MY=10.2% ***** KMRT - Kmart Corporation $25.20 *** Born Again Retailer! *** Kmart (NASDAQ:KMRT) is a discount retailer and general merchandise retailer. The firm operates in the general merchandise retailing industry through over 1,800 Kmart discount stores with locations in all 50 states, Puerto Rico, the United States Virgin Islands and Guam, and through its e-commerce shopping site, www.kmart.com. In January 2002, Kmart and 37 of its United States subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the federal bankruptcy laws, and, subsequently, obtained an exit financing facility. In May 2003, the company emerged from Chapter 11 protection and its new stock is trading with a sharply bullish character. Investors who wouldn't mind owning this "reborn" firm can establish cost basis near $20 in the issue with this position. JUL-20.00 KTQ SD LB=0.50 OI=25 CB=19.50 DE=28 TY=2.8% MY=9.8% ***** AVCT - Avocent $31.21 *** Entry Point? *** Avocent Corporation (NASDAQ:AVCT), together with its wholly owned subsidiaries, designs, manufactures and sells analog and digital KVM (keyboard, video and mouse) switching systems, as well as serial connectivity devices, extension and remote access products and also display products for the computer industry. The firm's switching and connectivity solutions provide information technology managers with access and control of multiple servers and network data centers from any location. Avocent traded at a multi-year high this week and some traders believe it is due to the firm's upcoming earnings report, due in mid-July. Others say it's because of the company's relatively low forward-looking P/E, a great management team, and new product line. Regardless of the reason, a cost basis near $27 seems a reasonable price for this unique issue. JUL-27.50 QVX SY LB=0.70 OI=40 CB=26.80 DE=28 TY=2.8% MY=8.0% ***** CHKP - Check Point Software $19.94 *** Lehman Upgrade! *** Check Point Software Technologies (NASDAQ:CHKP) develops, markets and supports Internet security solutions for enterprise networks and service providers, such as Telcos, Internet service providers, application service providers as well as managed service providers including virtual private networks (VPNs), firewalls, intranet and extranet security. Check Point has solutions that enable secure, reliable and manageable business-to-business communications over Internet protocol networks, including the Internet, intranets and extranets. Check Point product offerings also include traffic control and quality of service and IP address management. The company's products are fully integrated as a part of its secure virtual network architecture, and provide centralized management, distributed deployment and comprehensive policy administration. Shares of CKHP have moved higher in recent sessions after Lehman Brothers raised its rating on the firm to "overweight" and upped its price target to $25. Lehman said an investigation of Check Point's distribution channel suggests the company will be able to beat estimates in the second quarter. Traders can speculate on that outcome with this position. JUL-17.50 KEQ SW LB=0.40 OI=2682 CB=17.10 DE=28 TY=2.5% MY=7.3% ***** PLMD - PolyMedica $42.59 *** Favorable Earnings! *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer medical products and services, conducting business through its Chronic Care, Professional Products and Consumer Healthcare segments. The company sells diabetes supplies and products, and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. Through its Professional Products segment, it provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease. It also markets, manufactures and distributes a broad line of prescription urological and suppository products and sells prescription oral medications not covered by Medicare to its existing customers through its Professional Products segment. Shares of PLMD have been "too hot to handle" for short-sellers and the recent rally in the stock has been exacerbated by bearish traders covering their positions. With a higher fourth-quarter profit on strong sales of their diabetes and respiratory care products, Polymedica has found favor among drug sector investors and this play offers a favorable method to profit from future upside activity. JUL-35.00 PM SG LB=0.50 OI=262 CB=34.50 DE=28 TY=1.6% MY=5.5% ***** YHOO - Yahoo! $32.14 *** New 2-Year High! *** Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 200 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the firm also provides many business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. Shares of YHOO reached a 2-year high this week and analysts say the company is the best positioned Internet portal to benefit from the future growth of online advertising. Investors who agree with a bullish outlook for the all-time Internet giant can establish a cost basis near $27 in the issue with this position. JUL-27.50 YHQ SY LB=0.40 OI=3756 CB=27.10 DE=28 TY=1.6% MY=5.0% ***** ***************** 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 OXGN 9.59 JUL 7.50 QYO SU 0.85 11 6.65 28 13.9% 33.4% IPXL 11.37 JUL 10.00 UPR SB 0.45 116 9.55 28 5.1% 13.5% USG 13.05 JUL 7.50 USG SU 0.30 1470 7.20 28 4.5% 11.2% NEOF 11.00 JUL 10.00 QZX SB 0.35 45 9.65 28 3.9% 10.1% JCOM 44.35 JUL 35.00 JQF SG 0.90 203 34.10 28 2.9% 10.0% PALM 16.72 JUL 15.00 UPY SC 0.45 577 14.55 28 3.4% 9.0% CVTX 30.00 JUL 22.50 UXC SX 0.50 509 22.00 28 2.5% 8.4% IMCLE 30.85 JUL 22.50 QCI SX 0.45 2218 22.05 28 2.2% 7.4% PRWK 17.87 JUL 15.00 QRZ SC 0.30 10 14.70 28 2.2% 7.1% ICOS 39.48 JUL 30.00 IIQ SF 0.50 1814 29.50 28 1.8% 6.5% GILD 53.75 JUL 45.00 GDQ SI 0.80 2114 44.20 28 2.0% 6.4% NVLS 36.57 JUL 30.00 NLQ SF 0.35 1987 29.65 28 1.3% 4.5% ************************ SPREADS/STRADDLES/COMBOS ************************ The Consolidation Begins! By Ray Cummins Stocks ended mixed Friday with the major equity averages trading in a relatively small range ahead of next week's key meeting of the Federal Reserve. The Dow Jones industrial average finished up 21 points at 9,200 on strength in McDonald's (NYSE:MCD), Honeywell (NYSE:HON), and SBC Communications (NYSE:SBC). The tech-laden NASDAQ Composite index slumped 3 points to 1,644 as communications equipment and electronic manufacturing issues retreated. The broader S&P 500 index ended almost unchanged at 995 with homebuilders, oil & gas equipment, and utilities among the worst performers. Trading was active due to the quadruple-witching expiration of futures and options. Almost 1.8 billion shares traded on the NASDAQ, while about 1.7 billion shares changed hands on the Big Board. Losers roughly equaled winners on both the technology exchange and the NYSE. Bond prices moved lower, with the benchmark 10-year note down 7/32, taking its yield to 3.37%. The 30-year bond slid a full point for a yield of 4.43%. ***************** 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 87.00 JUN 60 65 0.55 64.45 $0.55 Closed CECO 60.52 66.63 JUN 50 55 0.50 54.50 $0.50 Closed FDC 40.22 43.11 JUN 35 37 0.30 37.20 $0.30 Closed RCII 65.35 74.17 JUN 55 60 0.50 59.50 $0.50 Closed ADTN 45.05 53.28 JUN 35 40 0.45 39.55 $0.45 Closed KLAC 42.49 47.15 JUN 35 37 0.30 37.20 $0.30 Closed LLTC 36.34 33.04 JUN 30 32 0.30 32.20 $0.30 Closed ROST 40.09 42.36 JUN 35 37 0.40 37.10 $0.40 Closed BSX 48.70 60.00 JUN 37 40 0.25 39.75 $0.25 Closed UNH 47.70 50.59 JUN 42 45 0.55 44.45 $0.55 Closed WLP 81.05 85.95 JUN 70 75 0.40 74.60 $0.40 Closed BSX 50.51 60.00 JUN 40 42 0.25 42.25 $0.25 Closed PHM 63.71 65.52 JUN 55 60 0.40 59.60 $0.40 Closed BSX 50.51 60.00 JUN 40 42 0.25 42.25 $0.25 Closed CYMI 33.31 31.61 JUN 25 30 0.50 29.50 $0.50 Closed GILD 52.50 53.75 JUN 45 47 0.25 47.25 $0.25 Closed KLAC 46.23 47.15 JUN 40 42 0.30 42.20 $0.30 Closed AGN 77.24 79.39 JUL 65 70 0.50 69.50 $0.50 Open ERTS 72.35 74.75 JUL 60 65 0.55 64.45 $0.55 Open MEDI 39.04 36.52 JUN 32 35 0.35 34.65 $0.35 Open UNH 48.93 50.59 JUL 42 45 0.60 44.40 $0.60 Open BGEN 46.25 43.80 JUL 37 40 0.30 39.70 $0.30 Open PRX 49.16 48.75 JUL 40 45 0.60 44.40 $0.60 Open WLP 86.87 85.95 JUL 75 80 0.60 79.40 $0.60 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss The position in Pixar (NASDAQ:PIXR), although profitable, did not offer a viable opening credit. Medimmune (NASDAQ:MEDI) is on the "early exit" watch-list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status PG 90.15 91.23 JUN 100 95 0.40 95.40 $0.40 Closed MMM 122.81 130.78 JUN 135 130 0.50 130.50 ($0.28) Closed ANF 27.25 26.53 JUN 32 30 0.20 30.20 $0.20 Closed GM 34.41 38.59 JUN 40 37 0.25 37.75 ($0.84) Closed JCI 81.61 88.27 JUN 90 85 0.55 85.55 ($2.72) Closed * KSS 51.22 49.44 JUN 60 55 0.55 55.55 $0.55 Closed LLL 43.35 45.51 JUN 50 45 0.55 45.55 $0.04 Closed IBM 80.05 84.92 JUN 90 85 0.40 85.40 $0.40 Closed APC 44.46 45.69 JUL 50 47 0.40 47.90 $0.40 Open FNM 68.55 69.85 JUL 80 75 0.60 75.60 $0.60 Open GDT 39.95 40.01 JUL 50 45 0.60 45.60 $0.60 Open KSS 49.45 49.44 JUL 60 55 0.60 55.60 $0.60 Open LOW 44.15 44.20 JUL 50 47 0.30 47.80 $0.30 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The Johnson Controls (NYSE:JCI) spread should have been exited during Monday's broad rally, for a smaller than published loss. Positions in Nabors Industries (NYSE:NBR), which is positive, Barr Labs (NYSE:BRL), Cabot Micro (NASDAQ:CCMP), and Goldman Sachs (NYSE:GS) have previously been closed to limit losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AXP 38.46 42.93 JUN 32 35 2.20 34.70 0.30 Closed GENZ 41.47 44.14 JUN 35 37 2.20 37.20 0.30 Closed BSX 46.91 60.00 JUN 37 40 2.25 39.75 0.25 Closed MERQ 35.75 41.44 JUN 30 32 2.25 32.25 0.25 Closed PNC 49.25 48.50 JUN 45 47 2.25 47.25 0.25 Closed NBIX 56.84 50.65 JUL 45 50 4.25 49.25 0.75 Open? GILD 53.81 53.75 JUL 45 47 2.20 47.20 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Neurocrine Biosciences (NASDAQ:NBIX) is at a "key" moment and a close below Thursday's low (near $48.80) would signal our exit in the position. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status WMT 52.92 54.26 JUN 60 55 4.50 55.50 0.50 Closed HDI 40.81 41.90 JUN 45 42 2.10 42.90 0.40 Closed LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss Harley Davidson (NYSE:HDI), although now positive, was previously closed to limit losses. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SMH 26.43 28.90 AUG 30 22 0.10 3.10 Closed MRVL 26.72 32.90 JUN 30 22 (0.20) 3.60 Closed ICOS 29.85 39.48 JUL 35 25 (0.40) 12.00+ Closed QCOM 33.55 36.45 JUL 37 30 0.10 0.90 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 29.26 JUL-30C JUN-30C (0.70) 0.80 Closed ESI 29.11 27.80 OCT-30C JUN-30C 1.35 1.80 Closed CHKP 18.05 19.94 OCT-20C JUN-20C 0.70 2.10 Open GDT 39.98 40.01 OCT-45C JUN-45C 1.45 1.70 Open NSM 21.80 21.50 JAN-25C JUN-25C 2.10 2.50 Open BRCM 21.40 25.86 JAN-25C JUN-25C 2.15 4.30 Open SRNA 19.71 20.73 AUG-22C JUN-22C 0.70 0.90 Open VRTY 18.85 18.10 SEP-20C JUN-20C 1.00 1.40 Open VIA 44.95 45.10 AUG-47C JUN-47C 1.10 1.40 Open SEAC 11.26 9.53 OCT-12C JUN-12C 0.85 0.65 Closed MCDT 13.47 12.83 OCT-15C JUN-15C 0.95 0.90 Open EDS 21.99 23.27 SEP-25C JUN-25C 1.00 1.25 Open BEAS 11.08 11.30 SEP-12C JUN-12C 0.95 0.95 Open A profitable calendar spread in International Business Machines (NYSE:IBM), as well as the Filenet (NASDAQ:FILE) position, have previously been closed. CREDIT STRANGLES **************** Symbol Pick Last Month SC SP Credit C/V G/L Status NXTL 13.60 17.78 JUN 15 12 0.75 2.80 (2.05) Closed * MGAM 24.53 24.25 JUN 25 22 1.90 0.90 1.00 Closed SC = Short Call SP = Short Put C/V = Current value G/L = Gain/Loss Traders who did not take profits in these volatility positions (as suggested last week) were forced to exit the Nextel (NASDAQ:NXTL) play during Monday's rally for a small loss. The summary does not reflect the previous profits, or the relatively low cost ($1.05) of exiting the NXTL play at the market close on 6/16/03. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status TYC 17.27 19.33 JUL 17.5 17.5 1.80 2.70 Open? RJR 36.19 37.00 AUG 37.5 35.0 3.15 3.70 Open DG 18.64 18.60 AUG 20 17.5 1.20 1.30 Open EXPE 70.63 72.51 JUN 70 70 3.25 6.25 Closed The speculative straddle in Expedia (NASDAQ:EXPE) was a profitable position in only one session. Tyco (NYSE:TYC) and R.J. Reynolds (NYSE:RJR) have also achieved profitability in a very short time. Questions & comments on spreads/combos to Contact Support ************************* OPTION-TRADING STRATEGIES ************************* One of the most useful tools that professional traders use when initiating spreads, naked positions or even covered positions is an option probability calculator. This tool can help develop a sound game plan based upon market expectations because a trader can determine the probability or "odds" of an option (or spread) ending in- or out-of-the-money at expiration. If an option has a 15% chance of being in the money at expiration, this would be an excellent option to sell to collect premium. When the option is sold for a credit, this credit can be added or subtracted to the strike price to determine the "break-even" point for the position. Example: If a trader sells the QQQ JUL-29 puts for 40 cents, the true break-even point would be 29 minus the credit of 40 cents or 28.60. The probability calculator would tell us that the option has a 20% chance of being in-the-money and a 14% chance of ending the expiration period below our break-even of 28.60. As you can see, this tool drastically increases one's ability to analyze a position and thus helps quantify the risk of selling options. Of course, if the volatility increases after we sold the options, the odds of being in-the-money and/or the below break-even point will also increase. Fortunately, we can also use the probability calculator to help adjust the position. Most traders are not aware of the tools available to option traders that can help define and improve the risk/reward outlook of spreads and selling or buying options. At www.onestopoption.com, we are dedicated to helping Stock and Futures traders develop a sound game plan for trading the derivatives markets. This is one of the most important steps to becoming a successful trader. Please feel free to contact me (Aaronson@OptionInvestor.com) so that I may show you ways to become a successful options trader. Andrew Aronson OneStopOption 141 W. Jackson Blvd Ste 1800-A Chicago, IL 60604 (888) 281-9569 (312) 528-3334 Andrew Aronson and Alan Knuckman have rejoined the OIN team with a great service for option traders. Andrew and Alan are experienced option principles, as well as long-time OIN associates, and they recently started a specialty brokerage for derivatives traders. Their personal service will enable traders to be more confident, comfortable and successful with options. They will also help novice market players learn the "right" way to trade options with education and coaching for maximum portfolio performance. Alan and Andrew's expertise is a resource that will easily pay for itself thorough timely executions and the piece of mind that comes from someone watching your trades throughout the day. The commission rates are comparable to discount brokers but you get to speak directly with option professionals, not customer service clerks. Clients can call them directly to review positions and update orders and they also offer "auto-trading" for many of the plays in the newsletter. OneStopOption Strengths: * Dedicated option brokerage with "live" option principals/brokers * Order routing to "best-priced" exchange and timely executions * All types of orders (stop/limit/OCO) to encourage disciplined trading and proper money management * Advanced option trading level approval for inexperienced traders * Foreign accounts including Canada -- Futures trading available * Direct electronic trading and personalized customer services * Ability to filter recommendations and provide strategy advice * Free OIN subscription for those who qualify (based on account size and portfolio activity) Get Execution, Education, and Option Experience at OneStopOption Visit their new site -- www.onestopoption.com ************* 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. ***** GILD - Gilead Sciences $53.75 *** AIDS Fighter! *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. The company has five products that are marketed in the United States and in other countries worldwide. These are Viread, a drug for treating HIV infection; AmBisome, a drug for treating and preventing life-threatening fungal infections; Tamiflu, a drug for treating and preventing influenza; Vistide, a drug for treating cytomegalovirus (or CMV) retinitis in AIDS patients, and DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma. GILD - Gilead Sciences $53.75 PLAY (less conservative - bullish/credit spread): BUY PUT JUL-45.00 GDQ-SI OI=2114 ASK=$0.95 SELL PUT JUL-47.50 GDQ-ST OI=1181 BID=$1.25 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$47.20 ***** JCOM - j2 Global Communications $44.35 *** All-Time High! *** j2 Global Communications (NASDAQ:JCOM) provides outsourced value added messaging and communications services to individuals and businesses throughout the world. The company offers faxing and voicemail solutions, Web initiated conference calling, document management solutions and unified messaging services. j2 Global markets its services principally under the brand names eFax and jConnect. The company delivers its services through its global telephony/Internet protocol network, which spans more than 600 cities in 18 countries across five continents, including four capital cities in Latin America where j2 Global is in the process of launching its unique service. JCOM - j2 Global Communications $44.35 PLAY (less conservative - bullish/credit spread): BUY PUT JUL-30.00 JQF-SF OI=222 ASK=$0.30 SELL PUT JUL-35.00 JQF-SG OI=203 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.60-$0.75 POTENTIAL PROFIT(max)=14% B/E=$34.40 ***** MRK - Merck & Co. $62.59 *** Next Leg Up? *** Merck & Co. (NYSE:MRK) is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. (Merck-Medco). The firm's operations are managed principally on a products and services basis and are comprised of two business segments: Merck Pharmaceutical, which includes products marketed either directly or through joint ventures; and Merck-Medco. Merck Pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. Pharmaceutical benefit services provided by Merck-Medco include sales of prescription drugs through managed prescription drug programs as well as services provided through programs to manage patient health and drug utilization. MRK - Merck & Co. $62.59 PLAY (less conservative - bullish/credit spread): BUY PUT JUL-55.00 MRK-SK OI=18508 ASK=$0.25 SELL PUT JUL-60.00 MRK-SL OI=10598 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$59.50 ***** BZH - Beazer Homes $87.00 *** Profit-Taking Underway! *** Beazer Homes USA (NYSE:BZH) designs, builds and markets single family homes in the following locations within the United States: Florida, Georgia, North Carolina, South Carolina, Tennessee, Arizona, California, Colorado, Nevada, Texas, Maryland, Virginia, New Jersey, and Pennsylvania. The company designs its homes to appeal primarily to entry-level and first time move-up homebuyers. The company's objective is to provide its customers with homes that incorporate quality and value while seeking to maximize its return on invested capital. Beazer's homebuilding and sales activities are conducted under the name of Beazer Homes in each of its markets except in Colorado (Sanford Homes) and Tennessee (Phillips Builders). BZH - Beazer Homes $87.00 PLAY (moderately aggressive - bearish/credit spread): BUY CALL JUL-100.00 BZH-GT OI=337 ASK=$0.80 SELL CALL JUL-95.00 BZH-GS OI=513 BID=$1.65 INITIAL NET-CREDIT TARGET=$0.85-$0.95 POTENTIAL PROFIT(max)=20% B/E=$95.85 ***** HOV - Hovnanian Enterprises $62.12 *** Too Fast, Too Furious? *** Hovnanian Enterprises (NYSE:HOV) constructs and sells single-family detached homes and attached condominium apartments and townhouses in more than 196 new home communities in New Jersey, Pennsylvania, New York, Virginia, Maryland, North Carolina, Texas and California. The firm offers a wide variety of homes that are designed to appeal to first-time buyers; first- and second-time, move-up buyers; luxury buyers; active adult buyers, and empty nesters. In addition, the company provides financial services, including mortgage banking and title services to the homebuilding operations' customers. The firm does not retain or service the mortgages that it originates, but rather sells the mortgages and servicing rights to investors. HOV - Hovnanian Enterprises $62.12 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-75.00 HOV-GO OI=422 ASK=$0.45 SELL CALL JUL-70.00 HOV-GN OI=728 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$70.60 ***** IBM - International Business Machines $84.92 *** Triple-Top? *** 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 $84.92 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-95.00 IBM-GS OI=21837 ASK=$0.25 SELL CALL JUL-90.00 IBM-GR OI=44853 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$90.60 ************* 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. ***** INTU - Intuit $46.13 *** Head-N-Shoulders Top? *** Intuit (NYSE:INTU) is a provider of business tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. INTU - Intuit $46.13 PLAY (conservative - bearish/debit spread): BUY PUT JUL-55.00 IQU-SK OI=86 A=$9.10 SELL PUT JUL-50.00 IQU-SJ OI=1357 B=$4.60 INITIAL NET-DEBIT TARGET=$4.40-$4.45 POTENTIAL PROFIT(max)=12% B/E=$50.55 **************** 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. ***** IR - Ingersoll-Rand $47.95 *** Trading Range? *** Ingersoll-Rand (NYSE:IR) is a leading innovation and solutions provider for the major global markets of Security and Safety, Climate Control, Industrial Solutions and Infrastructure. The company's diverse product portfolio encompasses such leading industrial and commercial brands as Schlage locks and security solutions; Thermo King transport temperature control equipment; Hussmann commercial and retail refrigeration equipment; Bobcat compact equipment; Club Car golf cars and utility vehicles; PowerWorks microturbines; and Ingersoll-Rand industrial and construction equipment. In addition, IR offers products and services under many more premium brands for customers in both industrial and commercial markets. IR - Ingersoll-Rand $47.95 PLAY (conservative - bullish/calendar spread): BUY CALL SEP-50.00 IR-IJ OI=221 ASK=$1.95 SELL CALL JUL-50.00 IR-GJ OI=64 BID=$0.65 INITIAL NET DEBIT TARGET=$1.15-$1.25 INITIAL TARGET PROFIT=$0.60-$0.85 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** SGR - The Shaw Group $12.62 *** Break-Out? *** The Shaw Group (NYSE:SGR) offers a broad range of services to clients in the environmental and infrastructure, and the power and process industries worldwide. The company is a leading provider of consulting, engineering, construction, remediation and facilities management services to the environmental, infrastructure and homeland security markets. Shaw is also a vertically-integrated provider of comprehensive engineering, consulting, procurement, pipe fabrication, construction and maintenance services to the power and process industries. The company is headquartered in Baton Rouge, Louisiana with offices and operations in North America, South America, Europe, the Middle East and the Asia-Pacific region and employs over 17,000 people. SGR - The Shaw Group $12.62 PLAY (speculative - bullish/synthetic position): BUY CALL OCT-15.00 SGR-JC OI=640 ASK=$0.95 SELL PUT OCT-10.00 SGR-VB OI=420 BID=$0.70 INITIAL NET DEBIT TARGET=$0.05-$0.15 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 $330 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($10). *********************** 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. ***** BSX - Boston Scientific $60.00 *** Reader's Request! *** Boston Scientific (NYSE:BSX) is a global developer, manufacturer and marketer of less-invasive medical devices. The firm's unique products are offered by two major business groups, Cardiovascular and Endosurgery. The Cardiovascular segment focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. BSX - Boston Scientific $60.00 PLAY (speculative - neutral/debit straddle): BUY CALL AUG-60.00 BSX-HL OI=3297 ASK=$3.60 BUY PUT AUG-60.00 BSX-TL OI=5730 ASK=$3.60 INITIAL NET-DEBIT TARGET=$6.80-$7.00 INITIAL TARGET PROFIT=$1.75-$3.00 ***** MBI - MBIA Incorporated $50.24 *** Probability Play! *** MBIA Incorporated (NYSE:MBI) is engaged in providing financial guarantee insurance, investment management services and municipal services to public finance clients and financial institutions on a global basis. Financial guarantee insurance provides customers an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The firm conducts its financial guarantee business through its wholly owned subsidiary, MBIA Insurance, which is the successor to the business of the Municipal Bond Insurance Association that began writing financial guarantees for municipal bonds in 1974. MBIA is the parent of MBIA Insurance of Illinois and Capital Markets Assurance Corporation, both financial guarantee companies that were acquired by MBIA Corp. MBIA also owns MBIA Assurance S.A., a French insurance company, which writes financial guarantee insurance in the countries of the European Community. MBI - MBIA Incorporated $50.24 PLAY (speculative - neutral/debit straddle): BUY CALL AUG-50.00 MBI-HJ OI=1130 ASK=$2.70 BUY PUT AUG-50.00 MBI-TJ OI=552 ASK=$2.65 INITIAL NET-DEBIT TARGET=$5.15-$5.25 INITIAL TARGET PROFIT=$1.60-$2.50 ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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