The Option Investor Newsletter Sunday 06-29-2003 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: What Buyers? Futures Market: Two moves and chop Index Trader Wrap: Up into the expiration, down from there Editor's Plays: High Odds Bets Market Sentiment: Zooming out Ask the Analyst: Shorting stocks that have come too far and too fast 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 6-27 WE 6-13 WE 6-06 WE 5-30 DOW 8989.05 -211.70 9200.75 + 83.63 9117.12 + 54.33 +212.53 Nasdaq 1625.26 - 19.46 1644.72 + 18.23 1626.49 - 0.93 + 31.51 S&P-100 491.61 - 10.78 502.39 + 4.57 497.82 + 2.15 + 12.47 S&P-500 976.22 - 19.47 995.69 + 7.08 988.61 + 0.85 + 24.17 W5000 9358.49 -153.14 9511.63 + 57.47 9454.26 + 1.72 +233.65 RUT 448.75 - 0.81 449.56 - 0.15 449.71 - 4.23 + 12.94 TRAN 2417.03 - 25.25 2442.28 - 13.28 2455.56 - 25.98 - 4.81 VIX 21.71 + 0.62 21.09 - 1.79 22.88 - 0.55 + 1.73 VXN 30.93 - 1.41 32.34 - 2.12 34.46 - 1.67 + 4.47 TRIN 1.93 1.00 1.23 1.06 Put/Call 0.99 0.51 0.73 0.78 ****************************************************************** What Buyers? by Jim Brown A day that was supposed to be bullish turned into a rout as the Dow gave up 9000 once again. End of quarter buying was nonexistent along with volume as the indexes slipped into the red after lunch. The Russell-2000 was the best performer but it also slipped fractionally into the red just before the close. With the Fed behind us and a shortened holiday week ahead we are entering into a critical period for the markets. Dow Chart - Daily Nasdaq Chart - Daily Friday was light economically but after the week we have had I think traders welcomed the pause. Personal Income rose for the seventh month with a +0.3% gain. This was inline with estimates and April was revised to +0.2% from zero. Spending rose +0.1% and posted its 3rd monthly gain. Disposable income is slowing but the coming tax cut should boost that number slightly. One more shot in the arm for the economy. The Michigan Sentiment final for June rose slightly to 89.7 from the preliminary of 87.2. This is still well below the euphoric (just kidding) 92.1 post war number for May. The expectations component was 86.4, down from 91.4 in May. The present conditions component actually rose to 94.7 from May's 93.2. Evidently the public is still convinced the post war rebound is underway but are far less expectant that the golden promises of a roaring 4th quarter will come to pass. The discount sales at retailers still trying to get out from under a load of spring merchandise are helping consumers outlook. Buying cheap merchandise always makes consumers happy. This is carrying over to the current conditions component. The failure of the stock market to make any gains over the last three weeks is causing those same buyers to wonder if maybe we have over done it once again. That is helping increase worry for the next six months. The earnings warning from Nike on Thursday is one more example that consumers are not stepping up to the cash register to pay big bucks for premium merchandise. Wal-Mart however is doing fine and taking market share from a diverse list of competitors. Kroger, for instance, revised its earnings estimates downward based on increased competition from Wal-Mart and other discounters. Wal-Mart has over 1300 super centers open now with over 200,000 sq ft of space including not only a complete grocery store but a complete Kmart/Target mix of department store items as well. The current unemployed generation is learning to pinch those pennies and you can bet the discounters will see more of the coming tax cut than Neiman Marcus and Lord and Taylor. It is the economic ripple down effect all over again brought on by fewer jobs. Another change in the trend came this week when AMG Data reported that equity funds saw outflows of -$1.6 billion. This is the first week of outflows in several weeks. TrimTabs reported last week that $11 billion flowed into equity funds over the prior three weeks. Looks like the bloom is fading from the rosy outlook for retail traders. Of course this could be simply fear of the Fed and a dose of caution ahead of the Fed meeting this week. The S&P posted the best month since the 4Q-2001 despite giving up nearly -11 points for the week. Assuming the last day of the quarter on Monday does not produce a monster drop then this would be the 3rd biggest quarterly gain for the S&P in history. Think about that. For this quarterly earnings cycle, which will begin reporting in two weeks, 51% of the preannouncements have been warnings. Last year, when we were in a recession the level of warnings was only 37% for the same quarter. This anomaly could have a lot to do with the weakness this week. Too far too fast on too few facts. The euphoria over the Iraq war ending produced the bounce but in reality there are as many soldiers getting killed in post war Iraq as during the war and the numbers are growing. Another problem according to traders was the Fed decision and the wording of that decision. The statement for the latest 25 point cut was almost exactly the same wording as the prior cut. That was a 50-point cut in Nov-2002. Nov-2002 statement - The Committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. The Committee believes that today's additional monetary easing should prove helpful as the economy works its way through this current soft spot. June-2003 statement - The Committee continues to believe that an accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity. The Committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time. If the statement is the same then why the negative reaction? First that was a 50-point cut in November and only a 25-point cut in June. Ok, so maybe the Fed thinks things are better now than then. Hold that thought. In the June release the "risks are balanced" comment from November was replaced with "The Committee believes that the risk of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation and is likely to predominate for the foreseeable future." (edited for space and readability) The bottom line was an additional cause for concern and a less than aggressive response. After the minutes of the May meeting were released this week there appeared to be more fear and less ability to actually do anything about it among Fed members. The market read between the lines and started taking chips off the table. Ironically the bond market has sold off strongly since the meeting. The Fed cut 25 basis points to keep rates low and stimulate the economy but real rates as set by the bond market actually ROSE by 50 basis points as of Friday's close. Even more amazing, the cash coming out of the bond market did not flow into the stock market. This is really causing concern among equity traders. One of the reasons for the shift was a debt offering by GM. The company announced a $13 billion offering at the beginning of the week. The demand was so strong for the paper the deal was raised to $17 billion and dealers said they could have easily sold over $30 billion. With yields on the government 30-year closing Friday near 4.50% and the GM paper yielding 8.375% it was a no brainer deal for bond junkies. It is no surprise that the money was sidetracked on the way to the stock market. For those still holding bonds next week will be another chapter in the story. Do you continue to hold bonds as they free fall or was the free fall caused by the massive surge in corporate paper led by GM. Next week will be critical for the market direction of both bonds and equities. On Friday it was clear that some funds were locking in profits for the quarter with the recent leaders in drugs, biotech, semis and home builders giving up ground. Before you get the wrong idea it was not a washout. Far from it. There was not enough volume for a washout with only 3.2 billion across all markets. This was the lowest volume day since April 28th. It was not a case of a trend change more than just a case of simple profit taking and a buyer boycott. The $64 question is what happens now? I am not going to repeat the entire historical trend conversation from my Tuesday wrap but it is critical for understanding what is ahead of us. Read it here if you missed it.
The Option Investor Newsletter Sunday 06-29-2003 Sunday 2 of 5 In Section Two: Watch List: So Many To Choose From Put Play of the Day: ICOS Dropped Calls: LXK 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 ********** Harley Davidson - HDI - close: 40.06 change: -0.74 WHAT TO WATCH: It looks like HDI may need an overhaul. Shares have failed for weeks at the $45 level and its 200-dma overhead. This coincided with strong bearish resistance on its P&F chart. Now shares of HDI are hovering just above the $40 support level. A breakdown here could portend a move to the $35.00 level, near its March 2003 lows. Chart= --- IDEC Pharmaceuticals - IDPH - close: 35.20 change: -1.36 WHAT TO WATCH: Wall Street doesn't appear to approve of IDEC's merger/acquisition of BGEN. Shares dropped five percent on the news earlier this week. It doesn't help that the biotech sector has been under a lot of profit taking lately. The breakdown under the 50 & 200-dma's for IDEC don't look good. We'd consider a possible short on a move under $35.00 and target the $30.00 area. Chart= --- Automatic Data Processing - ADP - close: 33.66 change: -0.65 WHAT TO WATCH: Shares of ADP have not only broken down through the bottom of its three-month rising channel but have also collapsed below its rising 50-dma and support at $34.00. We also noted that it failed twice at $36.00 in the last month, which just happened to coincide with its bearish trend on ADP's weekly chart. Be careful choosing options as ADP tends to move somewhat slowly. Chart= --- Kronos Inc. - KRON - close: 49.19 change: +1.09 WHAT TO WATCH: Wow! Here's a software stock that was green on Friday. Shares rallied more than two percent but failed again at overhead resistance of $50.00. This is also resistance on KRON's P&F chart and a breakout would form a triple-top breakout (buy signal). Its MACD is about to create a bullish buy signal as well. Chart= --- Hershey Foods - HSY - close: 69.82 change: +0.08 WHAT TO WATCH: It's back. We just have a sweet tooth for HSY even as the stock tends to move somewhat slowly. The breakdown under the $70.00 level looks pretty ominous but its rising 50-dma could offer support. What's more distressing for the bulls is HSY's failed rally and rollover at bearish resistance on its ponit-and-figure chart. Chart= --- Johnson Controls Inc - JCI - close: 85.50 change: -1.20 WHAT TO WATCH: This last week shares of JCI have retraced from $89 to support at $85. A breakdown under $85 could forecast a move to its 200-dma near $80.00 but bears have to contend with a lot of congestion between here and there and its rising 50-dma near $84.00. Chart= =================================== RADAR SCREEN - more stocks to watch: =================================== EMC $10.30 - It's a bit cheap to play options on, but shares of EMC have been bouncing from their rising 50-dma. Its MACD is about to produce a bullish reversal soon. We'd consider a possible long plays on a move over $10.50. AVID $36.79 - This computer peripherals company has been forming a bullish wedge under resistance at $38.00. A breakout could herald its next leg higher. SLE $18.44 - This is another low dollar stock, so we'd be careful buying options on it but the breakdown under $18.50 looks pretty bearish. SLE does appear to have potential support at $18.00 but by the looks of its MACD it could see a sizeable retracement of its April-June gains. MYG $24.11 - Keep an eye on this one. The breakdown under its 200-dma is bearish but we suspect buyers might defend it near the 50-dma at $23.00. True support appears to be $22.00. ETN $78.50 - The high volume breakdown under $80.00 three days ago looks pretty bearish. The failed rally at $80.0 on Thursday and Friday seems to confirm the move. Bearish play? Maybe, but watch out for the previous low near $76 and its 200-dma. TIN $42.99 - Keep an eye on this one. Shares have been slipping and the close under $43.00 and its 200-dma are bearish. A retest of $40.00 looks like a good bet. NBP $41.97 - We'd keep an eye out for a breakout above Friday's high of $42.10. Shares of this natural gas stock have been relatively strong and a high volume breakout could put shorts on the run. ROH $31.06 - This chemicals manufacturer is hovering above support at $31.00 and we don't think it's going to hold. Thursday-Friday represents a failed rally at its 200-dma and the $32 level. While it could have support at $30.00 we wouldn't be surprised to see a deeper selloff. AMZN $36.30 - We're still watching AMZN for a breakout over $37.00. Its MACD is about to curl into a bullish buy signal. GLK $20.27 - This is another chemical company that's been in a terrible down trend for weeks (and months). Currently near new lows, a break under $20 might be playable. AIG $55.69 - It could be bad news for insurance stock AIG. Shares have been oscillating between support at $55 and resistance at its 50 & 200-dma's. A breakdown under $55 might be playable. ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* THE PLAY OF THE DAY ******************* ICOS Corp - ICOS - close: 37.62 change: -1.39 stop: 40.01 Company Description: ICOS is a product-driven company that has expertise in both protein-based and small molecule therapeutics. ICOS combines its capabilities in molecular, cellular and structural biology, high throughput drug screening, medicinal chemistry and gene expression profiling to develop highly innovative products expected to have significant commercial potential. ICOS applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis and inflammatory diseases. ICOS' strategy targets multiple therapeutic areas with drugs that act through distinct molecular mechanisms, increasing ICOS' opportunities to market breakthrough products. Why We Like It: You could say we're hedging our bets in the biotech sector. Many stocks in the group have been very strong and real leaders in this rally to new highs in the NASDAQ. OptionInvestor is playing some of them on our call list. However, from the looks of the BTK biotech index, gains in those stocks may have to come with a disconnect from the wider markets and the BTK itself. The biotech index, currently at 438, appears to be offering bears a failed rally at the 450 level as a signal of more weakness to come. We're not surprised. The group has rallied almost straight up from 320 to more than 500 in two months time and they're is still plenty of money on the table for profit taking. Now we don't expect all the gains to fade as the move has been fueled by plenty of very positive news in the sector. However, given the broader markets recent weakness and the upcoming Q2 earnings season, it could be a tough time for stocks again. Shares of ICOS have mirrored the move higher in the BTK except on a grander scale. ICOS went from $15.50 at its March lows to trade near $46.00 in mid-June. The failed rally at 450 for the BTK is showing up as a failed rally at 40.00 for ICOS. Jut as ICOS over exaggerated the BTK's move up, we suspect it will over exaggerate the BTK's move down. Part of the risk in choosing a bearish play on ICOS is the headline factor. The last couple of months have brought forth some very positive news regarding the ICOS-Eli Lilly drug Cialis, which is a competitor for Viagra, by Pfizer, and for Levitra, produced by GlaxoSmithKline and Bayer AG. Currently, Cialis is available in 30 countries outside the U.S. and within 90 days of marketing ICOS & Eli Lilly claim that their drug has gained a significant market share for erectile dysfunction. ICOS & Eli Lilly expect the U.S. FDA to approve the drug by the end of the year. So now that we know what the risks are what's our strategy? We like the failed rally at $40.00 for ICOS because it's the second one in two weeks for the stock. There is obviously minor support at $35.00 but there is also potential support at $34.40. We're going to aim for a move to the range between $34.40 and $30.75 as indicated on the retracement tool (on the chart below). Our initial stop loss will be $40.01. Earnings for ICOS are not until August and earnings for its partner LLY are not until late July. Bears can take some comfort in know that the daily Momentum, RSI and Stochastics (14,1,3) are all still negative while the weekly RSI and Stochastics are rolling over from overbought. ICOS' point-and-figure chart is currently on a sell- signal from overbought levels. Suggested Options: The July and October options appear to have the most open interest as the August options probably just became available this week. We're prefer July and August because our time frame is three to four weeks. BUY PUT JUL 40 IIQ-SH OI=1626 at $4.00 SL=2.00 BUY PUT JUL 35 IIQ-SG OI=2311 at $1.50 SL=0.75 BUY PUT AUG 40 IIQ-TH OI= 176 at $5.50 SL=3.25 BUY PUT AUG 35 IIQ-TG OI= 128 at $2.90 SL=1.45 BUY PUT OCT 35 IIQ-VG OI= 524 at $4.50 SL=2.25 Annotated Chart: Picked on June 29th at $37.62 Change since picked: -0.00 Earnings Date 08/05/03 (unconfirmed) Average Daily Volume = 2.63 million Chart link: ************************** 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 ^^^^^ Lexmark Intl - LXK - close: 70.67 change: -1.98 stop: 71.00 We hate it when that happens! LXK's point-and-figure chart when from building a pennant formation, to producing the upside breakout we were looking for (bullish triangle breakout), to reversing it into a double-bottom breakdown (today). Talk about indecisive. Shares broke down below their rising simple 50-dma on volume of 1.8 million shares (average). Our stop loss was $71.00. While we would expect the $70.00 level to act as new support we're not willing to buy the bounce. We couldn't find any news to act as a catalyst for today's selling so it looks like some big cap profit taking ahead of the weekend. Picked on June 16th at $74.51 Change since picked: -3.84 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 1.78 million Chart link: PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** 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 06-29-2003 Sunday 3 of 5 In Section Three: Current Calls: ABC, AGN, AMGN, EBAY, IGT, LH, MRK, PGR, STJ New Calls: None Current Put Plays: COF, KSS, RYL, SIVB, WFMI New Puts: ICOS ************************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 ****************** AmerisourceBergen - ABC - close: 69.69 change:-0.31 stop: 66.00 Company Description: AmerisourceBergen is a pharmaceutical services company dedicated solely to the pharmaceutical supply chain. The company markets its products and services to hospital systems (hospitals and acute care facilities), alternate care customers (mail order facilities, physicians' offices, long-term care institutions and clinics), independent community pharmacies, and regional drugstore and food merchandising chains. ABC also provides outsourced pharmacies to long-term care and workers' compensation programs. ABC perates in two segments: Pharmaceutical Distribution and PharMerica. The Pharmaceutical Distribution division is primarily the company's wholesale and specialty drug distribution business, and PharMerica is the company's institutional pharmacy business. Why we like it: Considering the across-the-board declines in the broad market, we're actually pretty impressed with how well our ABC play held up on Friday, only giving back 31 cents and still very much on the cusp of a breakout. Support remains quite strong near the $67.50 level, and with the 20-dma rising to reinforce that support, a dip and rebound from above that level early next week looks like a gift of an entry point ahead of the expected breakout. Just to reiterate, we're not looking for any stellar gains from the stock, just a quick pop through resistance and then rally to the $74-75 area. That will provide a nice, quick gain during the first 10 days of July and we'll be happy to then move to the sidelines. Given the strength of the support near $67.50, any dip below $67 will clearly be cause for concern and force us to re-evaluate the play. Traders that would prefer to enter on strength will want to wait for a trade above $70.25 (just above Friday's intraday high) before initiating momentum- based positions. Suggested Options: Shorter Term: The July 70 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 75 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 70 call. BUY CALL JUL-65 ABC-GM OI=2364 at $5.60 SL=3.50 BUY CALL JUL-70 ABC-GN OI=2649 at $1.75 SL=0.75 BUY CALL AUG-70 ABC-HN OI= 350 at $3.10 SL=1.50 BUY CALL AUG-75 ABC-HO OI= 177 at $1.25 SL=0.60 Annotated Chart of ABC: Picked on June 26th at $70.00 Change since picked: -0.31 Earnings Date 07/24/03 (unconfirmed) Average Daily Volume = 1.50 mln -- Allergan, Inc. - AGN - close: 77.73 change: -1.01 stop: 75.25 Company Description: Allergan is a technology-driven, global healthcare company that develops and commercializes specialty pharmaceutical products for the ophthalmic neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its revenues are principally generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intra-ocular lenses and contact lens care products. The company's are sold to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, commercial optical chains, food stores, hospitals and individual medical practitioners. Why we like it: Reversing course on Friday, AGN gave back all of its gains from Thursday to end once again right at what is becoming significant support just over $77. After the mid-June surge to the $81-82 area, the stock has been gradually drifting lower on ever- decreasing volume. Friday's tally came in at a mere 591K shares, less than half the ADV. The pattern over the past week is looking more and more like consolidation ahead of a resumption of the 9-month uptrend, and we're expecting it to break to the upside, quite possibly as early as Monday or Tuesday. Intraday dips near the $77 level look good for new entry points, as risk is easy to control with our stop set at $75.25. There is a descending trendline that connects the highs of 6/18, 6/23 and 6/26, and that trendline currently rests at $78.60. Aggressive traders could consider entering on strength with a break above that trendline, while slightly more conservative traders would want to wait for a move above $78.90 (Thursday's intraday high) before playing. As a point of confirmation, look for a solid rebound from the DRG index, ideally rebounding from the $328 area before playing. Suggested Options: Shorter Term: The July 75 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 August 80 Call or even 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 August 75 call. Note that open interest is still very thin in the August contracts. BUY CALL JUL-75 AGN-GO OI=1747 at $4.30 SL=2.75 BUY CALL JUL-80 AGN-GP OI=1233 at $1.40 SL=0.75 BUY CALL AUG-75 AGN-HO OI= 12 at $5.40 SL=3.50 BUY CALL AUG-80 AGN-HP OI= 6 at $2.70 SL=1.25 Annotated Chart of AGN: Picked on June 26th at $78.74 Change since picked: -1.01 Earnings Date 07/28/03 (unconfirmed) Average Daily Volume = 1.19 mln --- Amgen, Inc. - AMGN - close: 65.18 change: -1.14 stop: 62.95*new* Company Description: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why we like it: It wasn't a particularly impressive week for the Biotechnology index (BTK.X), but it wasn't a disaster either, as the bulls managed to keep the loss to only about 11 points. The rebound from the $430 level was encouraging, but unfortunately had little follow-through. In light of that sector action, AMGN actually did pretty well. Sure the stock only tacked on a measly 21 cents, but at least it was a gain! AMGN is once again riding higher along its ascending 20-dma ($64.83) and as long as it continues to do so, intraday dips to that average can be used for new entry points. Periodically over the past several months, AMGN will dip to its 50-dma ($63.04) before catching a stronger rebound. While we don't expect to see a dip that low over the near term, such a move would provide a solid entry point, at least based on the trading pattern of the past 7 months. We're still looking for a breakout over the recent highs to extend up to the $70 level, at which point there is likely to be another bout of profit taking before the stock manages to reach the $72 level, which is both the PnF bullish price target and our eventual target for this play. Recall that we are avoiding buying breakout moves, due to AMGN's propensity to follow each new high with a profit taking pullback to a higher low. The high-odds entries are found on the bounce from that higher low, and right now we have our eye on the $64.50 or possibly $63 levels. Note that we've gotten just a bit more aggressive with our stop this weekend, raising it to $62.95. Suggested Options: Shorter Term: The July 65 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 70 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 65 call. BUY CALL JUL-60 YAA-GL OI=40843 at $5.70 SL=3.50 BUY CALL JUL-65 YAA-GM OI=31698 at $1.75 SL=1.00 BUY CALL AUG-65 YAA-HM OI= 3066 at $3.00 SL=1.50 BUY CALL AUG-70 YAA-HN OI= 4054 at $0.95 SL=0.50 Annotated Chart of AMGN: Picked on June 24th at $65.05 Change since picked: +0.13 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.3 mln --- eBay Inc - EBAY - close: 102.36 change: -0.76 stop: 99.99 Company Description: eBay is the world's online marketplace(TM). Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. (source: company press release) Why We Like It: As we just added EBAY on Thursday evening, there is little to change from our original write up. It follows with a few comments regarding Friday's session below. Investors have been hopping on the EBAY train for months now. Shares of this Internet auction giant have more than doubled from its October 2002 low of $50.00 and there appears to be no end in sight. Today heralded the company's annual shareholder's meeting. While nothing too exciting or surprising came as a result of the meeting, investor did not seem to mind that shareholders approved the bigger employee stock options plan. Shares have been consolidating under overhead resistance at $104 for nearly a month. We think EBAY is getting ready to break out above this level and begin its next leg higher. The company is expected to announce earnings on July 18th and J.P.Morgan just raised their earnings estimates for the company two days ago. Plus, there are rumors that EBAY might announce a stock split with their earnings report. However, let us repeat that's just a rumor and a weak one at that. Our Thursday write up outlined our strategy to go long EBAY when shares traded at or above $104.05. That occurred early Friday morning when the bullish session from Thursday saw some follow through at the open. Shares popped up over $104 and traded to $104.18 before selling pressure brought it back down. This created a new triple-top breakout on EBAY's point-and-figure chart. Our stop loss is now $99.99. Our short-term target is $110 and buying bounces from the $101 level looks like a decent, relatively low risk endeavor. Suggested Options: Given that there could be a pre-earnings run, our suggestion would be to play the July options but the August strikes are not a bad play either. BUY CALL JUL-100 QXB-GT OI= 8663 at $4.20 SL=2.10 BUY CALL JUL-105 QXB-GA OI=14507 at $1.60 SL=0.80 BUY CALL JUL-110 QXB-GB OI= 8250 at $0.50 SL= -- BUY CALL AUG-105 QXB-HA OI= 992 at $3.40 SL=1.40 BUY CALL AUG-110 QXB-HB OI= 332 at $1.70 SL=0.85 Annotated Chart: Picked on June 27th at $104.05 Change since picked: -1.69 Earnings Date 07/18/03 (unconfirmed) Average Daily Volume = 6.76 million Chart link: ---- Intl Game Technology - IGT - cls: 101.53 chg: +0.30 stop: 99.99*new* 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: The relative strength in shares of IGT is amazing. The stock resisted steep profit taking the week of June 16-20th. Only to be follow by this last week that has been almost non-stop skyward. Granted today's gains were a little muted but the markets ended the day in the red. IGT's ability to maintain its position above the $100 mark has us raising our stop to $99.99. There are only two days left before IGT's 4-for-1 stock split. Traditionally, stocks that have a strong ramp up before their split tend to see some post-split depression as momentum traders exit the stock and seek their next trade. It's quite possible that those investors who would like to own IGT but don't want to pay $100 per share might decide to move into it at $25.00. Now we know that's foolish because a split does nothing to the company's underlying fundamentals but it's just human nature to want to buy more when it appears "cheaper". We've always said the stock market is not based on reality but investor perception. Something else to keep in mind is that investors have been attracted to stocks with dividends now that the U.S. government has passed the recent tax bill. IGT is set to pay a cash dividend of $0.075 a share on July 28th to shareholder on record as of July 14. We're certainly encouraged by the relatively strong volume this last week to accompany its gains. However, with just two trading days left we would not recommend new bullish positions at this time. Instead we are encouraging investors to consider taking profits and raising their stop losses to protect gains. Suggested Options: We are not suggesting new long positions at this time. Annotated Chart of IGT: Picked on June 10th at $91.87 Change since picked: +9.66 Earnings Date 07/17/03 (confirmed) Average Daily Volume = 1.22 million Chart link: --- Laboratory Corp - LH - close: 30.55 change: +0.32 stop: 29.00*new* 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: Wow! We almost got excited there for LH today. Shares popped up at the open on news that Deutsche Bank had initiated coverage of LH with a "buy" and a price target of $38.00. Unfortunately, the enthusiasm couldn't get the stock to break above the $31.00 level. Shares and their oscillators are still inching higher, it's a painful process for anyone holding options that decay with time. We're still subscribing to the view that during any market downturn investors will flee to the general safety of select healthcare stocks and we might begin to see that soon now that the DJIA is back under 9000. Fortunately, shares don't seem to be reacted to the number of class action lawsuits sprouting up over its gap down from last October. Traders can take them time waiting for the right entry point on LH. It's been vacillating for two weeks between $29.50 and $31.00. So whether you prefer to buy the dips near $29.50 or wait for the breakout over $31.00 you have an option. Personally, we're growing a bit impatient. To reduce our risk we're going to raise our stop loss to $29.00 as suggested in Thursday's update. 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=2805 at $1.45 SL=0.70 BUY CALL JUL 32.50 LH-GZ OI=1264 at $0.50 SL= -- BUY CALL AUG 30.00 LH-HF OI=3587 at $2.05 SL=1.00 BUY CALL AUG 32.50 LH-HZ OI=9132 at $0.90 SL=0.45 BUY CALL AUG 35.00 LH-HG OI= 484 at $0.40 SL= -- Annotated Chart of LH: Picked on June 17th at $30.10 Change since picked: +0.45 Earnings Date 07/28/03 (unconfirmed) Average Daily Volume = 1.49 million Chart link: --- Merck & Company - MRK - close: 61.02 change: -0.98 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: After finally cracking below the $62 short-term support, shares of MRK have been gently drifting lower for the past week. Looking at the daily chart, an argument can be made that the stock is building a bull flag consolidation pattern before resuming its march up the chart. Declining volume has been accompanying the drift lower in price and the pullback has brought the stock back very close to an important support test. Recall that the $60.50 level was strong resistance until MRK broke through it a couple weeks. As we know, broken resistance often becomes new support. Now all we need to see is confirmation of that with MRK, and the rising 20-dma ($60.07) should provide a nice little backstop for the bulls. A rebound from above $60 can be used for new entries into the play, but make sure to keep your stops in place at $59.50, just in case support fails to hold. Traders looking to enter on renewed strength will want to target a rise through $62.25, which would represent an early bullish resolution to the flag pattern. Our initial target is still $64, with an outside chance for a continued rally near $68. 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 August 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. BUY CALL JUL-60 MRK-GL OI=39431 at $2.00 SL=1.00 BUY CALL JUL-65 MRK-GM OI=17609 at $0.30 SL=0.00 BUY CALL AUG-60 MRK-HL OI= 1132 at $2.85 SL=1.50 BUY CALL AUG-65 MRK-HM OI= 870 at $0.75 SL=0.30 Annotated Chart of MRK: Picked on June 17th at $62.37 Change since picked: -1.35 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 6.23 mln --- Progressive Corp. - PGR - cls: 73.70 chng: -0.56 stop: 71.75*new* 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: Once again, Insurance stocks appear to be losing their luster with investors, with the IUX index dropping back to significant support near $265 late last week. Despite that sector weakness, shares of PGR are still holding their own rather well, as the stock continues to drift towards the bottom of its ascending channel. We've noted that channel again on the chart below, and you can see how both the bottom of the channel and the 20-dma are lined up near the $73 level. Isn't it interesting how $73 also happens to be the site of the stock's local peak in early June. After much waiting, it looks like we're going to get that test of old resistance to confirm that it is new support. While we are a bit disappointed with the fact that PGR couldn't buck the broad market trend last week, we're encouraged with the slow rate of decline on light volume, which seems to indicate it is nothing more than regular profit taking before the next up leg. We need to exercise caution in opening new positions, but a rebound from the vicinity of that $73 support zone should be a good point to initiate new positions, especially with our new, tighter stop set at $71.75. This is just below the 30-dma ($72.19), which provided the support for the latest rebound from the $70 level. More conservative traders will want to wait for a rally back over $75.30, which provided intraday resistance on Wednesday. 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=206 at $4.40 SL=2.75 BUY CALL JUL-75 PGR-GO OI=402 at $1.20 SL=0.50 BUY CALL AUG-75 PGR-HO OI=265 at $2.05 SL=1.00 BUY CALL AUG-80 PGR-HP OI= 37 at $0.55 SL=0.25 Annotated Chart of PGR: Picked on June 15th a $73.27 Change since picked: +0.43 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 951 K --- St. Jude Medical - STJ - close: 58.57 change: -0.08 stop: 54.95 Company Description: St. Jude Medical, Inc. (www.sjm.com) is dedicated to the design, manufacture and distribution of innovative medical devices of the highest quality, offering physicians, patients and payers unmatched clinical performance and demonstrated economic value. (source: company press release) Why We Like It: So far so good. We added STJ to the call list on the 24th because we liked its relative strength, strong trend and bounce from rising support near its simple 50-dma. Add to that general strength in the medical equipment/supplies sector and we're good to go. Since then shares have picked up a bit on news that STJ will be highlighting several of its products at the Society of Heart Valve Disease (SHVD) international meeting in Paris. The show begins June 28th and last through July 1st. Any positive announcements or positive brokerage comments emanating from the show could boost the stock price even further. Shares have now bounced from $55 towards the $60 level and are due for a pull back. The eight-cent loss on Friday was extremely mild given the general profit taking across the markets. Traders looking for new entries might want to look for a bounce near the $57.00 or $58.00 levels. Once share breach short-term resistance at $60.00 it should be a quick rally to $64-65 (our target). Suggested Options: Given the entry point that STJ is offering we like the July options. The July 60 looks very tempting. August options are brand new and don't have much volume or open interest yet. BUY CALL JUL-55 STJ-GK OI=1797 at $4.40 SL=2.20 BUY CALL JUL-60 STJ-GL OI=2783 at $1.50 SL=0.75 BUY CALL AUG-55 STJ-HK OI= 1 at $5.40 SL=2.70 BUY CALL AUG-60 STJ-HL OI= 65 at $2.50 SL=1.25 BUY CALL OCT-60 STJ-JL OI= 496 at $3.90 SL=1.80 Annotated Chart: Picked on June 24th at $57.62 Change since picked: +0.87 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 1.56 million Chart link: ************** NEW CALL PLAYS ************** *No new calls* Check out this weekend's watch list for a ton of new trade candidates and stocks to watch! ************************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 ***************** Capital One Financial - COF - close: 48.88 chg: -1.07 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: Thus far it's been a week of churning sideways for shares of COF. The credit card lender has consolidated between $48.00 and $50.00 the last five days. We're a bit surprised though. The bearish breakdown last Friday-Monday looked pretty good but there's been no follow through. We suspect it could have been from traders waiting to see what the Fed would do. Now that the Fed has cut its interest rates by 25 bps, this is actually a good thing for COF. Yet surprisingly, shares have failed to react to it - at least very strongly. The lower rate should increase the spread between what they charge consumers and what COF pays on the money they lend out, thus giving them a little extra cushion. The major financial indices (BIX, BKX, XBD) continue to hover just above support and act like they are about to break down. Meanwhile, COF's consolidation has been under resistance at the $50 level. More conservative traders can reduce their risk in COF by lowering their stop to $52.00, $51.00 or even $50.11. We would grow concerned should COF actually close above $50 again. If you prefer to enter on momentum then look for COF to trade below the $48.00 level. As expressed earlier we had suspected COF would encounter some support near $47.50. Maybe this support we're seeing at $48.00 will suffice. At any rate, the rising 50- dma, currently at 46.47, could pose a hazard to bears. Our short-term target of $45.00 remains but we won't be surprised to see steeper losses. COF's point-and-figure chart is still showing a fresh sell signal but last month (May) COF produced the same signal only to have it reverse shortly thereafter. 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= 8868 at $2.85 SL=1.50 BUY PUT JUL 47.50 COF-SW OI=10049 at $1.60 SL=0.80 BUY PUT JUL 45.00 COF-SI OI= 3813 at $0.95 SL=0.50 BUY PUT SEP 47.50 COF-UW OI= 1047 at $4.00 SL=2.00 BUY PUT SEP 45.00 COF-UI OI= 802 at $3.00 SL=1.50 Annotated Chart of COF Picked on June 22 at $49.64 Change since picked: -0.76 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume: 4.3 million Chart = ---- Kohl's Corp. - KSS - close: 50.91 change: +0.49 stop: 51.75 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: One look at the daily chart of KSS and one is immediately struck with a sense that the $51 resistance level is truly significant. Each time the stock manages an intraday foray above that broken support level, the bears knock it back. That, along with the anemic (and apparently failing) rebound in the Retail index (RLX.X) gives the impression of a bearish resolution to the current consolidation. But the concern comes in when we look at the hourly chart, as it shows a pattern of higher lows and higher highs over the past week. Either the apparent weakness in the RLX (due in large part to a weakening consumer) is going to drag KSS below important support near $48, or the stock is going to reverse its recent pattern of relative weakness and start outperforming the RLX to the upside. We're still leaning to the downside (otherwise we wouldn't still be updating this play), and we'll continue to use the $51 level as our metric. Adding weight to this resistance level is the 20-dma ($51.18), which is helping to keep any bullish moves in check. Failed rallies below the $51.50 level continue to look good for new entries, and risk is quite easy to manage now with our closing stop only up at $51.75. Traders with a more conservative trading style will want to wait for a decisive move back under $49.50 before playing, preferably in concert with a rise in selling volume and the RLX cracking back under $320. 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 August contract, which provides greater insulation from the spectre of time decay. Note that there has been heavy volume in the July 45 Puts over the past couple days, as open interest has surged sharply higher. BUY PUT JUL-50 KSS-SJ OI=11305 at $1.65 SL=0.75 BUY PUT JUL-45 KSS-SI OI= 8639 at $0.50 SL=0.25 BUY PUT AUG-45 KSS-TI OI= 140 at $1.05 SL=0.50 Annotated Chart of KSS: Picked on June 15th at $49.45 Change since picked: +1.46 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.45 mln --- The Ryland Group - RYL - close: 70.68 change: -1.27 stop: 74.50 Company Description: The Ryland Group is a homebuilder and mortgage-finance company that has built more than 175,000 homes. Additionally, the Ryland Mortgage Company (RMC) has provided mortgage financing and related services for more than 155,000 homebuyers. Currently, Ryland homes are available in more than 260 communities in 21 markets across the United States. Why we like it: It certainly hasn't been an easy road for traders trying to establish a winning short trade on the Homebuilders. Last week's FOMC meeting just adding more volatility to the mix as investors had to contend with the issue of where interest rates are headed in addition to the issue of whether the stocks are actually overextended. Based on the price action in the Dow Jones Home Construction index ($DJUSHB) over the past few days, we're left with the distinct impression that investors were really expecting a 50 basis point cut, rather than the 25 that was delivered. The resultant rise in bond yields raises the specter of rising mortgage rates and that isn't going to be a bullish factor. RYL has been all over the map over the past week, plunging below $70 on two separate occasions, only to pop right back up to resistance in the $72.00-72.50 area. Fortunately, each of these rebounds has met fresh selling and RYL ended the week right in the middle of its range. That leaves us in between potential entry points. Failed rallies below the $73 level look good for aggressive entries, while those traders looking for confirmation before playing will want to wait for a break below $68.50 along with the $DJUSHB cracking its own support near $436. Maintain stops at $74.50. 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 August strike, the latter of which provides greater insulation from the spectre of time decay. BUY PUT JUL-70 RYL-SN OI= 912 at $2.70 SL=1.25 BUY PUT JUL-65 RYL-SM OI=1537 at $1.20 SL=0.50 BUY PUT AUG-65 RYL-TM OI= 61 at $2.65 SL=1.25 Annotated Chart of RYL: Picked on June 22nd at $69.95 Change since picked: +0.73 Earnings Date 07/23/03 (unconfirmed) Average Daily Volume = 904 K --- Silicon Valley Bancshares - SIVB - close: 24.10 change: +0.83 stop: 25.25 Company Description: Silicon Valley Bancshares is a bank holding company and a financial holding company. The company's principal subsidiary is Silicon Valley Bank. SIVB serves more than 9500 clients across the country through 27 regional offices. The company has 11 offices throughout California and operates regional offices in Arizona, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia and Washington. The company serves emerging-growth and mature companies in the technology and life sciences markets, as well as wineries. The company is organized along five lines of banking and financial services: commercial banking, investment banking, private banking, merchant banking and other business services. Why we like it: Be careful what you wish for, you just might get it! That's certainly the case with our SIVB play, as we were looking for a rebound near the $24 area to give us a solid entry on a rollover from resistance (broken support). Well, we got that rebound over the past couple days, with the stock rising as high as $24.25 and miraculously holding near the high of the day at the close, in defiance of the weakness found in the rest of the market. What's going on? In a perverse way, SIVB seems to be benefiting from the Fed's smaller-than-expected interest rate cut. Speculation that the company would have problems with sharply falling interest rates may have had investors dumping the stock ahead of the FOMC meeting. Then when the cut was smaller than expected, investors are buying the "less bad" news. Be that as it may, we're still looking at a rollover from near current levels as a viable entry point, as the 10-dma and 50-dma converging overhead near $24.60 should present some formidable resistance. Should the bears once again flex their muscles next week, look for our $20 target to be reached in due time. But before that can happen, a breakdown under $22 will be necessary. Traders that don't want to buy puts into strength may want to wait for that breakdown before playing. Maintain stops at $25.25 Suggested Options: Short-term traders will want to focus on the July 25 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $20 level will want to utilize the July 20 contract or even the August strike, the latter of which provides greater insulation from the spectre of time decay. Note that Open Interest is highest for the August strike, so entry and exit will likely be the easiest with these contracts. BUY PUT JUL-25 SQU-SE OI= 25 at $1.55 SL=0.75 BUY PUT JUL-22 SQU-SX OI= 5 at $0.55 SL=0.25 BUY PUT AUG-22 SQU-TX OI= 70 at $1.00 SL=0.50 Annotated Chart of SIVB: Picked on June 24th at $22.82 Change since picked: +1.28 Earnings Date N/A Average Daily Volume = 676 K --- Whole Foods Market - WFMI - cls: 48.01 chg: -0.05 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: Recent brokerage downgrades? check. Increasing competition? check. Lowered earnings outlook? check. Point-and-figure chart sell signal? check. What else do we need? How about fresh relative low? Shares of WFMI have been consolidating its losses for the last two weeks in a sideways churn. We'd like to see some new weakness. If we squint our eyes at the chart it almost looks like a flat bearish flag. We're not complaining as resistance at $49.00 has held. Unfortunately, the pause in the selling has given the oversold MACD a chance to curve up into a bullish crossover. We're going to leave our stop loss at $50.00 for now but it would be perfectly acceptable to lower it just above $49.00. Trader's looking for new positions may want to wait for a break under $47.00 but given our short-term target of $45.00 that doesn't leave a lot of room to move. Although entries here with a stop at $49.00 doesn't sound too bad. 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= 711 at $3.10 SL=1.55 BUY PUT JUL 45 FMQ-SI OI=1967 at $0.80 SL=0.40 BUY PUT AUG 50 FMQ-TJ OI=1285 at $4.00 SL=2.00 BUY PUT AUG 45 FMQ-TI OI= 692 at $1.75 SL=1.00 Annotated Chart for WFMI: Picked on June 13 at $49.44 Change since picked: -1.43 Earnings Date 07/30/03 (unconfirmed) Average Daily Volume: 1.6 million Chart = ************* NEW PUT PLAYS ************* ICOS Corp - ICOS - close: 37.62 change: -1.39 stop: 40.01 Company Description: ICOS is a product-driven company that has expertise in both protein-based and small molecule therapeutics. ICOS combines its capabilities in molecular, cellular and structural biology, high throughput drug screening, medicinal chemistry and gene expression profiling to develop highly innovative products expected to have significant commercial potential. ICOS applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis and inflammatory diseases. ICOS' strategy targets multiple therapeutic areas with drugs that act through distinct molecular mechanisms, increasing ICOS' opportunities to market breakthrough products. Why We Like It: You could say we're hedging our bets in the biotech sector. Many stocks in the group have been very strong and real leaders in this rally to new highs in the NASDAQ. OptionInvestor is playing some of them on our call list. However, from the looks of the BTK biotech index, gains in those stocks may have to come with a disconnect from the wider markets and the BTK itself. The biotech index, currently at 438, appears to be offering bears a failed rally at the 450 level as a signal of more weakness to come. We're not surprised. The group has rallied almost straight up from 320 to more than 500 in two months time and they're is still plenty of money on the table for profit taking. Now we don't expect all the gains to fade as the move has been fueled by plenty of very positive news in the sector. However, given the broader markets recent weakness and the upcoming Q2 earnings season, it could be a tough time for stocks again. Shares of ICOS have mirrored the move higher in the BTK except on a grander scale. ICOS went from $15.50 at its March lows to trade near $46.00 in mid-June. The failed rally at 450 for the BTK is showing up as a failed rally at 40.00 for ICOS. Jut as ICOS over exaggerated the BTK's move up, we suspect it will over exaggerate the BTK's move down. Part of the risk in choosing a bearish play on ICOS is the headline factor. The last couple of months have brought forth some very positive news regarding the ICOS-Eli Lilly drug Cialis, which is a competitor for Viagra, by Pfizer, and for Levitra, produced by GlaxoSmithKline and Bayer AG. Currently, Cialis is available in 30 countries outside the U.S. and within 90 days of marketing ICOS & Eli Lilly claim that their drug has gained a significant market share for erectile dysfunction. ICOS & Eli Lilly expect the U.S. FDA to approve the drug by the end of the year. So now that we know what the risks are what's our strategy? We like the failed rally at $40.00 for ICOS because it's the second one in two weeks for the stock. There is obviously minor support at $35.00 but there is also potential support at $34.40. We're going to aim for a move to the range between $34.40 and $30.75 as indicated on the retracement tool (on the chart below). Our initial stop loss will be $40.01. Earnings for ICOS are not until August and earnings for its partner LLY are not until late July. Bears can take some comfort in know that the daily Momentum, RSI and Stochastics (14,1,3) are all still negative while the weekly RSI and Stochastics are rolling over from overbought. ICOS' point-and-figure chart is currently on a sell- signal from overbought levels. Suggested Options: The July and October options appear to have the most open interest as the August options probably just became available this week. We're prefer July and August because our time frame is three to four weeks. BUY PUT JUL 40 IIQ-SH OI=1626 at $4.00 SL=2.00 BUY PUT JUL 35 IIQ-SG OI=2311 at $1.50 SL=0.75 BUY PUT AUG 40 IIQ-TH OI= 176 at $5.50 SL=3.25 BUY PUT AUG 35 IIQ-TG OI= 128 at $2.90 SL=1.45 BUY PUT OCT 35 IIQ-VG OI= 524 at $4.50 SL=2.25 Annotated Chart: Picked on June 29th at $37.62 Change since picked: -0.00 Earnings Date 08/05/03 (unconfirmed) Average Daily Volume = 2.63 million Chart link: ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** 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 06-29-2003 Sunday 4 of 5 In Section Four: Leaps: One More Bounce? Traders Corner: The Bare Necessities Of Uncovered Trading Traders Corner: Fibonacci Trading Days Traders Corner: Elliott Wave Play Updates Traders Corner: Where is the Dow Going? Futures Corner: Steps to developing a Trading System ************************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 ************************************************************** ***** LEAPS ***** One More Bounce? By Mark Phillips As expected, last week was all about the action of the Fed and how much further they would reduce interest rates. Recall last week I made the case that enough stimulus had already been injected into the system through other means, that Uncle Alan would not feel compelled to cut by more than a quarter point. Sure enough, that's what we got and bond traders have been busy selling the news ever since. Last Friday, the Ten Year Note ended at 3.396% after a strong week-long rebound in yields. After a bit of weakness early in the week, the Ten Year yield blasted higher into the end of the week, ending at 3.581% and above the 50-dma for the first time since early May. By my read of the Fed Funds futures, there is currently only a slight chance of another cut in September, as investors and traders are confronted by the very real possibility that the Fed is done on the interest rate front. Other means (such as buying Treasuries) will now move to the fore as this band of central bankers works to reinflate the economy. Whether they will succeed is anyone's guess, but based on what I see, an economy recovery is NOT waiting just around the bend. Certainly there will be pockets of strength, notably in natural resources (particularly Natural Gas), dividend payers like Utilities and Tobacco producers and of course Health Care, which seems to be one of the few areas of the economy with a strong growth trend. But on the whole, the domestic economy really doesn't appear to have an engine for growth. The Fed has made obscene amounts of money available for business growth, but that's not where it is going. Jonathan Levinson provided a great graphical picture of the evidence of this lack of business stimulus in his Thursday Market Wrap. The consistent growth of the MZM over the past 15 months is in direct opposition to the steady decline in Commercial and Industrial loan activity over the same period of time. Simply put, that additional cash is NOT being used to fuel business growth and the proof of that is in the still abysmal unemployment picture, which at best can be called flat at 6.1%. But looking at estimates for the unemployment rate set to be released next week, the consensus sees it climbing to 6.2%. Until we start to see some marked improvement in the Weekly Jobless Claims (a string of sub-400K weeks) AND Unemployment dropping back under 5.8%. Until that happens, we'll still be operating in an environment of hype and hope, as the pundits try to convince us that there is a strong second-half recovery in store. I'm not saying it won't or can't happen, but right now I see ZERO evidence of it. In a different environment, I might be willing to believe the analysts -- at least a little. But the track record over the past 3 years has been so abysmal, that I reminded of the story of "The Little Boy Who Cried Wolf". I'll stick with what I can see and measure until such time as that fails to work, or there is some evidence of recovery. Turning to the market, even if we were in an economic recovery scenario right now, I think there is very little to justify further upside action right now. The valuation in the S&P 500 really hasn't improved in 3 years of a bear market. Certainly prices have come down, but at the same time, earnings have fallen precipitously as well. The net result is that the aggregate P/E ratio for the index is still north of 30 and that is not a level from which new bull markets are launched. The other measure is dividend yield, and as long as the yield for the S&P 500 remains in the 1.6-1.7% area, I will continue to view this as a frothy market. Can it go higher? Absolutely, but it would not be a healthy rise. The price charts of the major indices finally gave us some meaningful weakness last week, and they all finished on Friday near their lows for the week. That's actually a bit of a divergence from what we expected as there is now only one day left in the first half of the year -- apparently the fund managers didn't have enough conviction to paint the tape bullish heading into the weekend. But I have strong doubts that this is the beginning of a long slide through the remainder of the summer. As Jim Brown has pointed out recently, there is still a bullish historical tendency for the first 8-10 days of July and I have a sneaking suspicion that this trend will hold this year as well. So how does that jibe with the primary technical indicators we've been looking at here in recent weeks? We've finally started to see some weakening in the market internals, as demonstrated by both the New High/New Low ratio that Jeff Bailey has been tracking, as well as the Bullish Percents in the major markets that we talk about each week. While there is some weakening, as yet, we're not seeing any sharp falloff from the very bullish levels hit earlier this month. Here's the update on the Bullish Percent table, and as you can see, we're still deep into traditional overbought territory. NASDAQ-100 - 76% Now in Bull Correction, down from the 91% high NASDAQ Composite - 69.92% (just off the 71.75% all-time high) DOW - 83.33% (Highest reading since 1/99 -- highs in 1998 = 92%) S&P 500 - 78.80% (Cycle high of 82.80% - Still Bull Confirmed) S&P 100 - 81% (Just below cycle high, 11/98 all-time high = 84%) With the notable exception of the NDX, which has now reversed far enough to go into Bull Correction, all the rest of the major indices are holding very near their cycle highs and showing very little indication of internal weakening. That alone keeps me thinking that this recent price weakness is just a bout of normal profit taking and I'm looking for another bullish push, perhaps to new recent highs over the next couple weeks. But I will view that rally as a higher odds setup for new longer-term bearish trade entries into what I expect will be a rather weak remainder of the summer. Whether it turns out to be mild weakness or a real monster slide depends on what type of news comes out of the July earnings period. Last week we took another look at the SharpChart for the NDX Bullish Percent, and while I'm not going to duplicate it again this week, the pattern of weakness is still intact, with the CCI oscillator breaking below the -100 level for the first time since the middle of March. But we all know how the NDX tends to move much more quickly then the rest of the market and a quick scan of the other major Bullish Percent SharpCharts shows no other index with this level of weakness. The SPX has its CCI falling below zero this week and challenging the -100 level and the COMPX CCI is threatening to crack the zero level. These three are the only ones to have shown their Bullish Percent lines fall below the 10- dma, but in every case, it looks to me like there will be another test of the 10-dma before the decline begins in earnest. Take a look using the link below, which you should all be getting quite familiar with by now. I think you'll see the same thing I'm seeing, with the distinct possibility/likelihood for another bounce before the bears really get serious. link Here are the pertinent Bullish Percent symbols. DOW - $BPINDU SPX - $BPSPX OEX - $BPOEX NDX - $BPNDX COMPX - $BPCOMPQ The VIX is certainly not telegraphing any significant fear in the market as its mid-week foray near 24 was quickly reversed and it ended the week down at 21.71. This is still in the complacency zone, but not yet excessively so. What I find interesting about the action of the VIX last week is that it fell -0.06 from Monday's open to Friday's close, while at the same time the SPX declined from the 995 area to 976, nearly a 20 point slide. The lack of upside in the VIX keeps alive the complacent behavior we've been noticing, indicating to me that the recent trend of the market will end badly for the bulls, but the time of their comeuppance is not yet at hand. Judging by the still very bullish tilt to the Investors Intelligence readings though. While I couldn't access the latest readings this week, I did find an interesting comment on Briefing.com that I think nicely dovetails with my perception that they are currently tilted much too far into the bullish camp to be sustainable without a significant correction. "Floor Talk: Speaking to an analyst who believes recent spike in American Association of Individual Investors survey is a reason for caution. This individual notes that the last two times bullishness reached similar levels was one week before the all time high on the DOW and two trading days before the high that preceded the 1987 downturn." Certainly it is only one anecdotal piece of data, but I think bulls would be well-served to heed the warning contained in that quote. The rally that took the market to new highs for the year has been largely fueled on hopes for an improving economy into the end of the year and if corporate leaders are unable to provide some evidence that this scenario might come to pass during the July confessional period, then I really have a hard time seeing from where the fuel for additional upside is going to come. Despite my bearish prognostications for the past two months now, the broad markets have persistently chugged higher and the string of higher lows and higher highs has yet to be broken. Technically the SPX would need to trade below 972 to give a lower high, but I think we really need to see a break below 965 to call it a break in the trend. Sure the standard scale PnF chart issued a double bottom Sell signal last week, but with the still elevated levels of bullish percent, I think all that tells us is that it is now just a bit safer to sell into rallies near resistance. A return to the SPX 1010 level looks like a good high-odds short for a position trade, especially if we can get the VIX to cooperate and finally dip under 20. For all intents and purposes, the correction of the past couple weeks remains just that. A correction in a cyclical bull market, that I believe is very near its zenith, at precisely the same time when bearish sentiment is at its nadir. Now is the time to start picking off some weak stocks for position trades to the downside. While there is the outside chance of a bullish continuation above the recent highs, the risk reward ratio is shifting ever more heavily in the bears favor. So let's take a quick look at our current plays and then see what we can stir up for new candidates. Portfolio: AIG - Well, this play certainly caused us a fair bit of consternation earlier in the month, but if finally looks like things may be going in our direction. After topping out just below our $61 stop, AIG has now punctured both its 200-dma and 50- dma on the way back down. A break below $54.50 would accomplish a couple of important things, as it would take out what has been strong support since late April, but would also probably give enough of a downward tug on the 50-dma to have it rolling over below the 200-dma again, one of the bearish developments I was hoping would come to pass. Remember that despite the fact the PnF chart is in a column of O, it is still operating on the most recent Buy signal. We need a print at $54 to give a Sell signal and really get things moving in our favor. Maintain stops at $61 until we get that Sell signal. GM - I know we dropped it last weekend due to the absolutely irrational spike in price, but looking at the price chart on GM this weekend is really irritating. Almost to a "T" this is what happened to us the last time we played GM to the downside. We got what I thought was a good entry, followed by an early drop. Then a news-related spike to just take out our stop and then the decline begins in earnest. For traders that held through the recent volatility, I like the sharp drop off in the past several days on strong volume. If still holding on, I would consider setting a stop at $39.75, just above last Friday's intraday high. While old GM likely won't drop straight through the $30 level on the first try, failed rallies in this stock continue to look attractive to me. AMGN - To be sure, AMGN is giving us a volatile ride, but amazingly the stock just continues its relentless trek up the chart. Even with a fairly sharp pullback in the BTK index last week, AMGN continues to find support at its 30-dma ($63.94) backed up by strong support at the 50-dma ($63.04). I have doubts as to how much further the BTK index can push up the chart, but right now, AMGN has a solid bullish trend and I'm willing to ride that trend until it fails. The slow and deliberate nature of AMGN's advance makes the stock a perfect candidate for LEAPS players. Maintain stop just below the 50-dma, and for this week, that means our stop inches up to $63. QQQ - We've certainly gone through our share of antacid tablets with the QQQ over the past few weeks, as I clearly jumped the gun on new entries. I'm encouraged by the bears' ability to prevent a close over $31 and with further deterioration in price last week, things appear to be going our way. However, I'm not overjoyed by the picture on the weekly Stochastics -- they've dropped out of overbought, but the shallow rate of descent hints to me that there may be one more assault on the highs before the bulls finally give in. The bullish percent is looking bearish as well (as mentioned above), but I don't expect an immediate and sharp decline. I do think failed rallies in the QQQ now make for more compelling entry points, and target shooting in the $30.50 area would be my choice. I'm still going to err on the side of caution with our stop though, keeping it up at $32.25 until we see a close back under $29. Watch List: DJX - I don't think it is any coincidence that the DOW ended the week just above 8975, as that level looks like decent near-term support. Add in the fact that the daily chart of the past couple weeks looks to me like a bullish descending wedge, and my expectation is for another attempt on the highs. But I think a failed rally near those highs is likely to be about the best entry point we're likely to see, ideally coinciding with the VIX dropping under that magical 20 level sometime in the second week of July. I'm lowering the entry target to $93.50-94.00 this weekend and if filled, we'll use a stop at 96.25, which is just above the descending trendline that connects the highs of May 2001 and March 2002. Radar Screen: GS - Wow, that was quite a decline off the recent highs. I should have made this one a live play when it looked so bullish up there above $90. At this point, I don't think a decline much below $80 is in the cards, so I'm content to just watch. But if we can get a rally back into the $88-90 area, then look for GS to make its transition onto the Watch List. WMT - Continuing to look rather weak, WMT looks like it could be a viable bearish play, but I want to see another failure up near $56-57 first. There's no need to get aggressive here just yet, but I think an early July bounce could set things up nicely. ADBE - Well, would you look at that! ADBE actually showed us some bullish action to round out the week and my thinking now is that the bulls just might try to fill that gap. My trigger to put it on the Watch List will be when we get a close within that mid-June gap and then we can look for an entry near the top of the gap at $36. For now, we continue to wait and watch. LEN - With bond yields on the rise over the past couple weeks, it is no great surprise that we're starting to finally see a bit of weakness in the Housing stocks. But we're still quite premature to be jumping into new bearish long-term trades in the sector. LEN is one of the few stocks in the sector that has LEAPS available, so our choices are rather limited. I'm going to be watching the next attempt on new highs in LEN for an indication as to whether the bullish enthusiasm is truly waning or if there's another bullish leg in store. When it does weaken, it could be abrupt and sharp, but hopefully we'll get a favorable opportunity to enter up near the recent highs. Stay tuned. BBH - As strong as the temptation is to short into the recent rally in the Biotech sector, I can't justify it, especially when we're already leaning bullish with our AMGN play. I'm going to keep BBH here though, because if the uptrend in AMGN fails, then I think that will be a strong indication that it is time to shift BBH to the Watch List. Eager and aggressive traders might consider an early play on another failure below the $135 level, looking for a return back to the $100-110 area. RIMM - With the strength in the Wireless and Internet space, RIMM has had quite a run off of its March lows, consistently working higher in a neat little ascending channel. But that channel is fast approaching some formidable resistance near $24. I don't yet see any signs of weakness on the chart, but the first indication of such will be a break below the bottom of the channel. The strategy will be to wait for the breakdown and then look to enter bearish positions on a failure to then get back into the channel. This will still take a few weeks (I expect) to set up, but once it does, RIMM could give us a very nice ride back to the $16-17 area, which the most recent breakout took place. GM - I just can't help myself, as the fundamentals on GM are too ugly to ignore. That insane rally that stopped us out just over a week ago has now faded, and hard. The one thing that kept me from putting the stock right back on the Watch List this weekend was the PnF chart, which is now on a new Buy signal. I'm willing to be patient, but not excessively so and I'll be looking for another failure near the $39-40 level to indicate that it's time to shift GM back over to the Watch List. Closing Thoughts: It seems that it has been months now (actually it has) that I've been expecting this market to cave in and for the bears to have another BBQ. But so far, my expectations and $2 have only gotten me my daily cup of coffee. The decline off the recent highs has been expected, healthy and I think a trap for over-eager bears. I don't expect to see much more downside until we get another push back near the recent highs. I expect that rally attempt to fail, and that's where we'll be looking to put on some favorable bearish plays. By every metric I use, bulls are still skating on some incredibly thin ice, and for that reason I suspect it will be some time before I feel comfortable advocating new long-term bullish trades. But it's a screwy world and there's no telling what Mr. Market has in store for us. I'll continue to play cautiously bearish until the market gives me some indication of which direction it wants to have its next directional push. Contrary to the usual pattern, I think we could actually be setting up for an exciting summer. Make sure to take your Dramamine and fasten your seatbelts. It is likely to get a bit bumpy once those July earnings reports start to flow. Have a great weekend! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: AMGN 05/21/03 '04 $ 60 YAA-AL $ 7.00 $ 9.20 +31.43% $63.00 '05 $ 60 ZAM-AL $10.90 $13.50 +23.85% $63.00 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 4.80 -14.29% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 7.80 - 8.24% $61.00 QQQ 05/27/03 '04 $ 27 KLF-MA $ 1.70 $ 1.35 -20.59% $32.25 '05 $ 27 ZWQ-MA $ 3.10 $ 2.50 -19.35% $32.25 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: DJX 05/04/03 $94-95 DEC-2003 $ 92 DJV-XN DEC-2004 $ 92 YDK-XN HD 06/29/03 $34 JAN-2004 $ 32 HD -MZ JAN-2005 $ 30 ZHD-MF SMH 06/29/03 $30-31 JAN-2004 $ 30 SMH-MF JAN-2005 $ 30 ZTO-MF New Portfolio Plays None New Watchlist Plays HD - Home Depot $32.47 **Put Play** I've had my eye on shares of HD for the past couple months, as the stock has consistently been working higher in an ascending channel. Waiting for the first sign of weakness proved to be a prudent strategy, as I had initially thought a rollover near $30 would be a favorable spot to stake a bearish claim, and as you can see, that was not the right action point, as the stock continued up to a mid-June high just below $35. It is no secret that I've had a bearish outlook on the entire housing sector for quite some time, but the factor that swamped such a bias was the incredible flood of money that has continued to appear from wave after wave of refinancing, as well as multi-decade lows in mortgage rates. That has helped to fuel both home construction and home improvement spending. But judging by the recent action in the bond market, I think that gravy train is coming to an end. If there was some economic growth in the form of improvements to the employment picture, then perhaps the strength in the Housing sector could continue. But we've seen no signs of that, and I think HD makes for a favorable and less risky way to dip our toe into the water, looking for some significant downside heading into the fall. HD gave us the first real sign of weakness a week ago, which the stock finally broke and closed below its ascending channel on 6/23, when the bottom of the channel was at $32.75. That wasn't the beginning of a waterfall decline though, as the 30-dma (currently $32.15) has been providing support, and HD has been slowly rising along the bottom of its broken channel. I suspect a retest of the recent highs is just around the corner (sometime in the next couple weeks) and then it should be party time for the bears. The note of caution comes from the PnF chart though, as it is still on a strong Buy signal and the recent drop may have just been a reaction to the first test of the bearish resistance line at $35. In favor of a bearish position though is the weekly Stochastics which is just starting to roll over from overbought territory, while at the same time weekly MACD is flattening out and looking weak just over the zero line. The next upward surge that fails below $35 looks like a favorable entry point for new bearish positions, and while we'll initially just look for a drop back near $30, I think we could reasonably see a fall back near the 200-dma, which is currently at $26.61. I'm setting the entry target at $34, and after entry, we'll set a fairly liberal stop at $36.50, which is just above the 50% retracement of the decline from 2/02 to 1/03. BUY LEAP JAN-2004 $32 HD-MZ BUY LEAP JAN-2005 $30 ZHD-MF SMH - Semiconductor HOLDR $28.35 **Put Play** I've been itching to find a viable bearish play in the Semiconductor sector (SOX.X) for a few weeks now, and that search has intensified since the rejection from the $400 resistance level in early June. The problem is that the SOX has yet to break down out of its ascending channel, which began in early February. From everything I can find, there is really no sign of improving fundamentals in this sector, as overcapacity continues to be widespread and there is little indication of meaningful improvement in the Book to Bill numbers. The problem is in finding the right stock in which to play and then determine a favorable entry point in what is always a very volatile sector. So I've chosen the easy way out, electing to use a broad-based security to represent the sector, the SMH HOLDR. The price pattern in the SMH is very similar to the SOX, as it has been pushing higher in its own ascending channel, the bottom of which is currently $27.75. While there was a mild rebound off the bottom of the channel last week, I think there will be more strength over the next week or so, leading up to the beginning of July earnings. Ideally a rebound should extend into the $30-31 area, and the exhibition of weakness near that known resistance would make for a favorable bearish entry. We have to keep in mind that the bullish trend is still intact though, so more conservative traders may want to wait for a close under the bottom of the channel before considering entries into what I consider to be a rather aggressive play on expectations that the second half recovery will fail to appear. After entry, we'll set our stop at $33, which is just above the June 6th spike high of $32.47. After entry, we'll need to carefully monitor the SOX index, as a close over $400 would indicate that perhaps our bearish stance is premature. BUY LEAP JAN-2004 $30 SMH-MF BUY LEAP JAN-2005 $30 ZTO-MF Drops None ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** The Bare Necessities Of Uncovered Trading By Mike Parnos, Investing With Attitude We, at the CPTI, have been leading a pretty conservative existence. I know that everyone gets the urge, now and then, to shed that which binds us and go skinny-dipping into the market. It's Time To Get Nekked! Let's stimulate your imagination a bit. Picture an Iron Condor without its wings. If that image doesn't conjure up a few of your playful demons, maybe the thought of Venus with arms will jiggle your Jell-O. The Nekked Strangle The concept is pretty simple. We're going to sell a naked put and a naked call on the same stock. The expiration will be the same but the strike prices will be different. The combination of these two naked options creates our "Nekked Strangle." Since we're just being a little aggressive and don't have a financial death wish, we're going to write out-of-the-money puts and calls. Also, in order to make this position worthwhile, we're going to have to go out at least a few months. At this writing, MMM is trading at $129.41. We'll use this for our example. Let's: Sell 1 MMM October $135 call @ $3.35 Sell 1 MMM October $115 put @ $2.65 We've generated $600 in premium ($6.00 x 100 shares) Calculating Our Profit If, at October expiration, MMM finishes anywhere between $120 and $135, we will keep the entire $600. The $600 we took in as credit gives us some additional cushion. We will make "some" profit if MMM finishes between $114.00 and $141.00. Covering Our Assets We have to establish exit points at which we bid farewell to our "Nekked Strangle." We have to ADHERE STRICTLY to these exit points to protect ourselves. No hoping. No praying. No begging. Just getting out when you're supposed to. Our exit points should be the short strike plus/minus the total premium taken in. In our example: a) upside exit point = $141 ($135 strike plus $6 premium) b) downside exit point = $114 ($120 strike less $6 premium) If one of the outside parameters (exit points) is hit, you must close out BOTH sides of the strangle. If MMM should go astray later in the life of the strangle, the loss will be relatively small because the option will already be $6 in the money and will have less time value. Picking Your Victims I'm sure it's easier to pick people you'd like to strangle, but that's a topic for another column. Here, we're trying to find stocks that have overpriced options. At the same time, we would like to use a stock with limited volatility – hence limited movement. We want to create Nekked Strangles with a wide enough range to have a good chance of success. Measure how large of a range the stock has. If MMM has moved less than 10-15% over a typical 3-4 month period, it would be an excellent candidate for the Nekked Strangle. Margin Requirements You're not the only people worried when you trade uncovered options. Your broker is sweating it out right along with you. For their own peace of mind, and for your own protection (we're our own worst enemy), your broker will hold some money in your account – just in case we're wrong (us? wrong? they must be kidding!). How do we calculate the margin requirement for our straddle? According to the CBOE Margin Manual (which is commonly used among brokers), the formula is: a) 20% of the underlying, plus b) the total amount of premium taken in, less c) the amount the option is out of the money Let's apply our position to this formula -- the $135 call: a) 20% of $130 = $26 x 100 shares = $2,600, plus b) $6.00 x 100 shares = $600 c) less $5.00 out of the money x 100 shares = $500 Total maintenance for the $135 call is $2,700 per contract The $120 put: a) 20% of $130 = $26 x 100 shares = $2,600, plus b) $6.00 x 100 shares = $600 c) less $10.00 out of the money x 100 shares = $1,000 Total maintenance for the $120 call is $2,200 per contract Remember, in the Iron Condor strategy, the requirement is applied to both spreads. If the bull put and bear call spreads are 5- point spreads, the maintenance requirement is the total of BOTH spreads – or 10 points. One of the benefits of trading uncovered strangle positions is that the margin requirement is only the greater requirement of the two sides – NOT both sides. Therefore, the maintenance for our Nekked Strangle is $2,700 per contract – but, we're not done yet. The $2,700 represents the initial maintenance figure. As MMM fluctuates up and down, so does the maintenance figure. If MMM trades at $126 or $138 or $121, the figures change. Each day after the market closes, your broker recalculates the maintenance. If you do not have sufficient money (or marginable securities) in your account, you will get a dreaded margin call and you'll have to bring in enough money to cover the deficit. The Return Of The Return It's tough to figure our return on uncovered positions, because the risks are virtually unlimited. Many accepted calculations base their percentage figure on the margin requirement – which, I suppose, is as good as any. In our MMM example above, we're taking in $600 for our one contract. The margin, per contract, is $2,700. Therefore, when we subtract the $600 from the $2,700 our adjusted exposure is $2,100. For our CPTI percentage junkies, our $600 represents a 28.6% return. Do You Have The Approval? In order to trade Nekked Strangles, you will need a high approval level from your broker. Only experienced option traders with substantial account sizes are normally permitted to trade naked options. Requirements vary according to the brokerage firm. UPDATE OF JULY CPTI PORTFOLIO POSITIONS July Position #1 – LLTC Baby Condor – Closed at $32.17 Sell 10 contracts of LLTC July $35 calls @ $1.05 Buy 10 contracts of LLTC July $37.50 calls @ $.45 Net credit is $.60 Sell 10 contracts of LLTC July $30 puts @ $.75 Buy 10 contracts of LLTC July $27.50 puts @ $.40 Net credit is $.35 Total credit of $.95. Risk is $1.55 ($2.50 - $.95) Linear Technology (LLTC) was one of our profitable quickies. We now want to try to establish a slightly longer relationship. We've created a maximum profit range of $30 to $35 and a safety range of $29.05 to $35.95. Maximum profit is $950. So far, so good. _____________________________________________________________ July Position #2 – SPX Iron Condor – Closed at $976.22 Sell 4 contracts of SPX July 940 puts Buy 4 contracts of SPX July 925 puts Net credit: $1.50 Sell 4 contracts of SPX July 1025 calls Buy 4 contracts of SPX July 1040 calls Net credit: $2.55 Total credit: $4.05. Risk is $10.95 ($15 - $4.05) Here we go again. The range is 940 to 1025. I'm still anticipating (what do I know?) that pullback we never really got in June. I've reduced the number of contracts to four to reduce our exposure. This still may be a bit aggressive for some of you. Be careful and stay within your risk tolerance. Maximum profit is $1,620. Also, so far, so good. ______________________________________________________________ July Position #3 – DJX – Bear Call Spread – Plus - $89.89 We're due to experience the summer doldrums – and why shouldn't the DOW participate? We're going to establish a bear call spread and use that money to buy some puts. Here we go. Sell 15 contracts of DJX July $90 calls @ $1.90 Buy 15 contracts of DJX July $92 calls @ $1.00 Net credit of $.90 X 15 contracts = $1,350 Now, you can just leave that position alone and, if the DOW finishes below 9000 at July expiration, you keep the $1,350. Your exposure would be $1.20 (9200 – 9000) X $1,800. Your maximum profit would be $1,350. DOW moved down. It's a start. _____________________________________________________________ Position #4 – Ongoing QQQ ITM Baby Strangle – Currently at $29.83 In May we bought 10 contracts of the July QQQ $30 puts @ $2.05 and bought 10 contracts of the July QQQ $28 calls @ $1.80 Total debit of $3.85. The QQQs have made a big move up. It's either going to break through resistance or bounce off and head back down. Our objective is for a $3-4 move in the next month. One of our long options will hopefully pay for almost the entire position. That will leave our other long option, which is now practically free, poised for the bounce back as the QQQs reverse. Our exposure is only $1.85 because we have $2.00 of intrinsic value. ______________________________________________________________ July Position #3 – RUT Iron Condor – Aborted. We were going to put on an Iron Condor with a 420/480 range. Either I was drunk when I came up with the numbers, or the premiums changed dramatically on Monday morning. Regardless, with premium gone, the proposed position was aborted. ______________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since last July. To find past CPTI (Mike Parnos) articles, look under "Education" and click on "Traders Corner." They're waiting for you 24/7 ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP ************** TRADERS CORNER ************** Fibonacci Trading Days Steve Gould I like to gamble. Let me rephrase that. I like to gamble and win. That is why I never gamble at a casino. Gambling at a casino is a losing proposition. Long term, you can not win. It is mathematically impossible. The odds are against you. They may not be against you much, but in the long run, you will have to lose. Some games have better odds than others. For example, some slot machines pay out 97% of the intake. In other words, for every $100 you deposit in a slot machine, over time, you will win back $97. Roulette, on the other hand, has much worse odds. In fact, I believe it is one of the worst games (for the gambler) along with Keno. If you could somehow manipulate the odds such that they were in your favor, then over time, you, not the casino, would be the winner. Unfortunately, very few games allow you to have these favorable odds. Blackjack is one of them. You have to count cards and wait patiently for those exquisite moments. Knowing the number of tens in the deck gives you an advantage over the casino. If you have ever taken an abacus into a casino, you will soon find that the friendly staff is not so friendly anymore. You had best be able to do it all in you head. The stock market is not so unfriendly. If you could somehow find an advantage and increase the odds of a profitable play in your favor, there is no friendly staff telling you can not use every advantage to your favor. When finding entry points for stocks, you can do just that. Lots of tools are available to help you decide when to enter a trade. I would like to discuss one of the many tools available to you that will help you find pivot points on a stock. A pivot point is a bar that prints out a reversal in a trend. The reversal can be long term or short term. At that point, the trend changes from either up to down, or down to up. Chart: Pivot points This is a daily chart of Microsoft for the last 6 months or so. Every bar labeled with either a P or J is a pivot point. Ps are major pivot points, while the Js are minor pivot points. Wouldn't it be nice to know when to anticipate these points so that strategic trades can be initiated? Every trader uses various tools to help determine the movement of a stock. These tools can be indicators such as MACD or stochastics, or they can be moving averages, or they can be studies such as Bollinger Bands. Personally, I do not think they should be called tools. I think they should be called ducks. Indicators such as MACD, stochastics, etc. are useful but are really meaningless unless confirmed by other ducks. When several of your ducks line up in a row, then the probability of an event occurring increases substantially. (OK, so I have a propensity to be bizarre.) The duck I would like to discuss is Fibonacci trading days. A trading day is just that. A day the market is open. For the US markets, that would be Monday through Friday excluding financial holidays. As an example, if today is Monday, then Tuesday is one trading day away. Wednesday is two trading days away. Friday is four trading days away. The next Monday, although seven calendar days away, is five trading days away. Fibonacci was a 12th century Italian mathematician who is most remembered for his Fibonacci sequence. The sequence is a mathematical series starting with 0, 1. The last two digits are added together to obtain the next digit. This continues on to infinity. If we continue with the sequence, we would get 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, etc. (The next digit would be 144 + 233 = 377) These are good numbers to know as they can be used in all sorts of studies. I find them a hair more accurate. Try using a 55 and 233 day moving average instead of the "industry standard" 50 and 200 day moving averages. See if support and resistance lines don't match up better. Instead of the standard (12, 26, 9) MACD try experimenting with (13, 21, 8). Pivot points have a proclivity to occur on Fibonacci trading days from previous pivot points. Sometimes they are early, sometimes they are late but not by much. If there is to be a pivotal day, it will typically happen around a Fibonacci trading day plus or minus 2 days. (Of course, this works in all time frames, so when I refer to trading days, I actually mean trading periods. If we were looking at a weekly chart, then we would be talking about trading weeks. On an hourly chart we would be discussing trading hours. For the sake of simplicity, we will confine our discussion to daily charts.) Let's look at some examples. Chart: Pivot points bottom Here is a daily chart of Microsoft from July 2002 until February 2003. My charting program will count out trading days from a selected point and display any desired values. I chose the Fibonacci numbers. Note how on precisely the 21st trading day Microsoft printed a top. At 34 days, it printed a minor top. Two days after the 89th trading day Microsoft printed another top. At 55 days, Microsoft began its ascent up. Although this was not a pivot point, it did come 8 days (another Fibonacci number) after the pivot point. Generally I find that bottom pivot points beget bottom pivot points at Fibonacci numbers. Top pivot points beget top pivot points at Fibonacci numbers although as the above chart shows that is not always the case. Pivot points at Fibonacci numbers are not restricted to the first few numbers in the sequence. They extend out as far as you would like to take them. What generally happens is that a trading day at 377 will overlap with one or more other Fibonacci numbers from other pivot points. When this happens, it just reinforces the probability that a pivot point will occur around that day. Chart: Pivot points All Here is a daily chart of Boeing (BA) from August of 2001 to September of 2002. At each pivot point P, I inserted the Fibonacci trading day count. Each red arrow points to a peak (+/- 2 days) and each blue arrow points to a valley (+/- 2 days). In general the peak pivot points begot peak pivot points at Fibonacci numbers and the valley pivot points begot valley pivot points at Fibonacci numbers although a few exceptions crept in. Just eyeballing this chart, it looks like there is a greater than 50% hit rate that a Fibonacci trading day will represent some type of a pivot point. Confluence of Fibonacci numbers represent a higher degree of confidence that a pivot point will occur but it is no guarantee. The black lines represent a confluence where no pivot occurred. As a final thought take a look at how pivot points can be used to find the end of a wave. Chart: Pivots and Waves This is a daily chart of T for the last 7 months and it shows how wave counts tend to end around a pivot point. You can see from count 1 that wave 1 ended on the 13th trading day +1. Wave 2 ended on the 21st trading day + 2 from count 1 and the 8th trading day + 1 from count 2. Wave 3 looked like it could have completed on the 55th trading day from count 2 but the oscillator did not confirm it. It actually did not fall on any Fibonacci day. Wave 4 looks to have ended on the 34th trading day from count 4. Use this technique with your other favorite indicators. If you are expecting a turning point, use the Fibonacci trading days and see if a pivotal day is approaching, or better yet, if a confluence of pivotal days is approaching. ************** TRADERS CORNER ************** Elliott Wave Play Updates Steve Gould DJX Chart: DJX update 6/27/2003 The Dow has been moving down and I think we have finally seen the top of this correction. We will be taking partial profits along the ride down to keep this a delta neutral trade. As with the QQQs, the first week of July may prove interesting as all the mid year retirement money flows into the market. We may see a surge that could drive the Dow higher before coming back down. If that is the case, we will probably sell a few calls and take partial profits. Option The original option values on 6/6/2003 were DJX – 90.62 Pos Qty Sym Strike Type Bid Ask Delta IV Buy DJVIN SEP 92 Call 2.80 3.00 0.51 15 Buy DJVUJ SEP 88 Put 2.70 2.90 -0.33 23 ---- ---- ----- 5.50 5.90 0.18 Current values on 6/27/2003 are DJX – 89.89 Pos Qty Sym Strike Type Bid Ask Delta IV Buy DJVIN SEP 92 Call 1.90 2.10 0.41 16 Buy DJVUJ SEP 88 Put 2.45 2.70 -0.39 22 ---- ---- ------ 4.35 4.80 0.02 QQQ Chart: QQQ update 6/272003 There has been no real net movement of the QQQs. The first week of July may prove interesting as all the mid year retirement money flows into the market. We may see a surge that could drive the QQQs higher before coming back down. Aggressive traders may wish to buy back the July 37 puts if the QQQs surge much higher in response to this influx of money. Option The original option values on 6/13/2003 were QQQ – 29.96 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 KLFME Jan 04 31 Put 3.00 3.20 -0.44 32 Sell 1 QQQSK Jul 03 37 Put 6.90 7.10 0.99 41 Credit: .50 Current values on 6/272003 are QQQ – 29.83 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 KLFME Jan 04 31 Put 2.95 3.10 -0.52 28 Sell 1 QQQSK Jul 03 37 Put 7.10 7.20 1.00 44 Liquidation: -1.30 + .50 = -0.80 BA Chart: BA update 6/272003 BA is continuing its wave 4 correction. It is way too early to know anything yet about the form of this correction but we will be watching it to try and discern its type (zigzag, flat, etc). The oscillator is rapidly approaching zero but the retracement is far from over. Stochastics indicate we are due for an upward bounce. This is normal and should not affect the wave count. Option The original option values on 6/17/2003 were BA – 36.15 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 BAGF Jul 03 30 Call 6.10 6.40 -99.5 29 Buy 2 BAAU Jan 04 37.5 Call 2.70 2.85 52.6 25 Credit: 0.40 Current values on 6/20/2003 are BA – 34.22 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 BAGF Jul 03 30 Call 4.30 4.40 -91 41 Buy 2 BAAU Jan 04 37.5 Call 1.60 1.70 37 29 Liquidation value: -1.20 + .40 = -0.80 T Chart: T update 6/27/2003 T has not retraced as I had expected, but I think that was because the 5 wave basic pattern was not yet complete. Chart: T update hourly 6/27/2003 The hourly chart of T shows that the 5 (circle blue) wave to be complete based on the following criteria. 1. The 5 wave oscillator peak is smaller than the 3 wave oscillator peak. 2. The 5 wave is at the aqua/purple resistance bar 3. The 5 wave basic pattern shows a classic look. The 5 wave could trace out to 18.85 and still not be longer than the 3 wave, but the oscillator does not support this. In any case, wait for the retracement back to around 20.75 before initiating this play. Update the July call to the August call otherwise we are at too high a risk of assignment. The new play thus becomes Option T: $19.37 Pos Num Sym Strike Type Bid Ask Delta Vol OI Sell 1 TGC Aug 15 Call 4.50 4.70 99.6 0 60 Buy 2 TJX Oct 22.5 Call 0.70 0.90 36.0 328 9774 Credit: $270 ************** TRADERS CORNER ************** Where is the Dow Going? Steve Gould Last week I declared (under my breath, with my fingers crossed and a bible no where near me) that the bear was dead. Bull markets typically do not end until the very last bear gives up the ghost and capitulates. Since I was one of the last remaining bears left, I figured if I capitulated (or at least said I did) the market would honor my intentions and head down. Lo and behold, the market headed down. In fact during this last week the Dow (and the other indices, too) may have headed down in such a way that we may indeed be seeing evidence that the bear has been resurrected. If I had only known it was that easy, I would have done that months ago. Chart: Dow Daily Big Picture 6/27/2003 First the bear case. Last week I showed this chart and said there was no significant change as all the Dow did was move up a bit more. This week, the Dow has taken a definite move down and it could be a significant milestone. It appears that the C wave of the 2 wave may be finally complete. Last week's chart showed the Dow with a peak on 6/17 and a few days of downward movement. I showed that the Dow was at the 61.8% retracement level of wave 1 and that the A wave and C wave were almost identical in size thus satisfying a flat correction criteria. Nothing has changed since then to invalidate those measurements. As of right now, it appears that the A-B-C correction of the 2 wave is going to end up as a flat. What is it about this recent movement that leads me to believe that the Dow is finally headed down? A close up view of the above daily chart really doesn't show the wave count very well. However the hourly is very instructive. Chart: Dow Hourly 6/27/2003 The hourly chart shows a clear 5 wave basic pattern down since the peak on 6/17. The 5 wave basic pattern down is significant because all impulse waves, i.e. waves 1, 3 and 5, are 5 wave basic patterns. Right now, there is really no good way to count this as an A-B-C 3 wave pattern. This could very well mean that the 3 wave has finally started its descent. Or not... The (temporary) bull case The possibility still exists, mind you, for the Dow to turn the 2 wave corrective pattern into an expanded flat. Expanded flats have the same structure as flats except the C wave continues up. The C wave could extend up to 1.6 x wave A. Should this be the case, the Dow could conceivably trace out a path to 10400 before reversing course. Why would this happen given all the bad economic data coming in? I have been reading ubiquitous articles about all the mid year retirement money that is going to be flowing into the market come July 1. Jim presented historical July charts for the last 5 or so years. Just about every one of them showed a beginning July bounce before heading down. Why would this year be different? Hard to say, so I am going to keep open the possibility that a July retirement money bounce could send the Dow to higher levels. Technically if it did happen, it would look something like this. Chart: Dow Retirement Money Bounce The dark green arrows are not to scale. It just shows the movement possible for a final thrust up. Currently the Dow is heading down, but if the 5 wave basic pattern traced out on the hourly chart is part of a larger corrective pattern, it could be the A wave of a zigzag instead of the 1 wave of the next leg down. Ultimately what I think is going to happen is the Dow is going to indeed bounce, but as a correction to the i (circled) wave just now complete. A bounce to 9200 would represent 61.8% retracement and would fit nicely with the current wave pattern. Bottom line, I am still bearish and still hedging. The Dow is still at a juncture. Arguments could be made for both directions. The first week or so in July will be telling. Should the Dow head down significantly, then I would be more confident that the bear is still alive and kicking. Should the Dow move up significantly but stay below 10400, the bear is still my first choice. If the Dow goes higher than that, as Rickie Ricardo would say, "I have a lot of 'splaining to do." ************** TRADERS CORNER ************** Steps to developing a Trading System Jane Fox Have you ever had a hard time pulling the trigger on a trade after 3 or 4 losing trades? Have you ever held on to a losing trade too long until you just couldn't take it anymore? If you answered yes to any of the questions above then you may be trading with emotion and letting fear and greed rule your decisions. Mechanical trading can stop this kind of trading. What is mechanical trading? It is a trading with a system that gives you triggers according to criteria that will skew the probability of a profitable trade in your favor. And the purpose of this article is to walk you through what goes into system development and in future articles show you how to optimize them. But before I get to that I would like to take a minute and talk about the difference between a systematic trader and a discretionary trader. A discretionary trader uses a lot of "gut feel" and will takes trades because he/she feels like it is a good trade. This is perfectly OK if you have this feel for the market and what every trader ultimately tries to attain. But if you have not developed this talent then you should probably think about a system. One trait often found in successful traders is that they concentrate on what the market is doing this minute not what they think the market will do or might do. This is where system trading comes in, it is a way to objectively look at the market and know how you will react if the market takes a certain course. You have probably tested all sorts of combinations and permutations of indicators and have found the ones that work best for you. But you need a way of making the interpretation of them automatic and not subject to your current emotion state. Why is this you ask? Let's build a scenario. Your favorite indicator just gave you a trigger to go long in the S&P e-minis. Then someone in the Market Monitor makes a bearish comment about the price formation and the doubts start. Then another indicator you watch gives a short signal. You get confused and decide to pass and you don't take the trigger. It doesn't matter if the trade worked out or not, what you have done is reinforced your mistrust of the indicator and if you mistrust your indicator why are you using it? So you go looking for another silver bullet only to have the process start all over again. It has nothing to do with the indicator or how well it works but everything to do with what is going on between your ears. We are all subject to outside influences and it would take a monumental effort to deflect them all. What do you do? You build a system, a strategy based on indicators in which you have faith, on the indicators you trust. Once you have done this, you should have transferred the trust and faith of your indicators to your complete trading system. Trust and faith in your system is vital and is one of the cornerstones to good trading. Why is it vital? Because if you don't have trust in your system you won't take each and every trigger. This is called cherry picking and your system then ceases to be a system and you are back to discretionary trading. Consistency is what is important when choosing a system, nobody is good enough to know in advance which day is ideal, and which day will result in losses so you trade each trigger mechanically. A system is nothing more than a set of rules that determines when to enter long or short and another set of rules as to when you exit, at a loss or at a profit. These rules are based on your own trading ideas or observations (or borrowed from others) that fit your type of trading and knowledge base. Some may not like the ADX system I am profiling because they are not comfortable with the ADX so they will develop a set of rules based on his/her particular own indicator (or group of indicators) with which they are comfortable. You may ask isn't using technical analysis to trade a system? The answer to this question is; no it is not. Technical analysis is not a system because it can leave so much up to your own interpretation and when money is on the table and fear and greed enter the equation objective judgement will fly out the window. A system will leave nothing to your interpretation during market hours; interpretation is only done during after hours when you can look at the indicators with total objectivity. A successful trading system has five basic components: 1. Market Action - this is where you identify which market to trade. You probably want a market that is liquid for quick fills and low slippage. I have chosen the S&P500 and Nasdaq 100 e-mini futures for my ADX system. If anyone wonders why I don't include the DOW e-minis just read my article on "a/c/e's Dirty Little Secret" and you will know why. http://www.OptionInvestor.com/futurescorner/fc_052703_01.asp 2. TimeFrame to Trade - this is the trading interval you will use, 1 min, 5 min or maybe daily charts. The timeframe component needs you to answer the question; "What kind of trader am I"? If you don't know then you can't define the time interval. This is a very important question and needs some soul searching before answering. I have a system that uses the daily charts for swing trades but I need one that trades more often for daytrading so I use the 5- minute charts. 3. Entering a position - This is where you set out the rules for entering the market you identified in one. Typically you would use a setup, filter and a trigger. For example, in my ADX system, my setup is a bar trading above or below the 4MA, the filter is the ADX >= 30 and the trigger is a trade one tick above the setup bar on longs and one tick below the setup bar on shorts. 4. Exiting a Position - this component is a single condition or a group of conditions you will apply to close out a position. These conditions can be as varied as a change in the market, reaching a established profit target, an "uncle" level where your money management plan says you can no longer stick around or as simple as elapsed time. The exit conditions I use for my ADX system are actually very simple. My stop is set above or below the setup bar, profits are taken at two predetermined levels or a time elapsed condition, the end of day. 5. Trade management is the component where money management comes into play. It is an evaluation of the stop loss size and determining how many shares/contracts to risk. Let's see how a system can develop. You are a discretionary trader and have not been having a lot of winning trades lately and you know you need to do something before all your trading capital is gone. You have very good ideas about technical indicators and usually can read the market quite well but the losses lately have been coloring your outlook and you find yourself making impulsive decisions. You then read Mark Douglas' book Trading in the Zone and decide you need a system. Where do you start? I think you have most of the work already done. You probably already trade markets that are liquid because you would naturally gravitate to them for the quick and good fills. Number one is taken care of. Number two may be a little more difficult. I found with myself if I didn't have enough trades in the day I would get bored and you know the story about idle hands. The 1-minute for me was too quick but the hourly was very boring. I found the 5 min to fit my style nicely. Number three I think is the easiest. I have noticed in the Market Monitor how each of the contributors talk about his/her favorite indicators and how comfortable they are with them. Ask anyone of them about his/her favorite and I bet it would be a long conversation. Number four is where the stops and profit targets are determined. Your system testing can help you a lot here. My system takes profits in two increments P1 and P2. It does not matter how many contracts you trade because 1/2 is taken at P1 and the other 1/2 is taken at P2. I did this because I am comfortable with taking profits in two increments. Any more than that and I start to get confused. It doesn't take much to confuse me so I keep things simple. Number five is based on your money management plan and the stop loss generated from your system. For example if we entered an ES long at 900 and the stop loss was way down at 896 your stop loss is 4 points or $200/contract. That is a lot of risk for me so I would probably only put on a 1/2 size but still trade enough to make it divisible by 2 to take profits at P1 and P2. Well that is enough for now. The next article will be addressing the actual testing and what to look for in the Strategy Performance reports generated by Tradestation. Remember plan your trade and trade your pan. ************************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: ************************************************************** 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 06-29-2003 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: "Roll-Out" For Consistent Returns Naked Puts: Options 101: Position Management Basics With Naked Puts Spreads/Straddles/Combos: No "Window-Dressing" Rally Here! Updated In The Site Tonight: Market Posture: Window Undressing? ************************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: "Roll-Out" For Consistent Returns By Mark Wnetrzak With the recent recovery in the stock market, many investors are starting to use the covered-call strategy for long-term portfolio issues. Anyone who buys and sells stocks knows the market is unpredictable and when it comes to selling covered-calls, a trader must always be ready to make adjustments to keep a position profitable. When you use this strategy to generate income from the stocks in your portfolio, a bullish issue can be just as bad as a bearish issue if you don't know how to "roll" your options correctly, and in a timely manner. Rolling; buying back the current short calls and selling new calls with a future expiration date and in many cases, a different strike price, is a technique that experienced traders utilize on a regular basis. Those of you who are not familiar with the basics of this method of position adjustment should review the covered-call chapter in "Options As A Strategic Investment," by Larry McMillan. The most common time to roll-out to new options is just before the current options expire, but that doesn't prevent you from taking advantage of favorable moves in the stock or beneficial changes in the option premiums. The primary goal of any trade is to earn a profit and by the same reasoning, any adjustment to a portfolio position should attempt to improve its overall risk/reward outlook. Some traders roll their positions when the new cycle begins (when options two months out are posted) while others use the ratio of time-value between the bought and sold options to determine the timing of the transaction. Another popular method is based solely on the premium remaining in the short call, which is an excellent indicator as it relates directly to the price of the underlying and the time remaining until the option expires. When this component reaches a level near parity (most of the time value has dissipated from the option's price) the position can generally be rolled to a future expiration date for a substantial credit. However, if you wait too long to roll-out (when the option bid reaches parity or a discount), there is considerable probability of early exercise by arbitrageurs; exchange specialists and floor traders who don't pay commissions trading. In addition to understanding the different methods for timing the trade, it is also important for an investor to establish realistic goals in this strategy. Experienced traders usually focus on the annualized target return or a specific percentage gain in order to determine the minimum profit required (in a given time period) for a particular position. Using this approach, a reasonable target for adept covered-call writers might be as high as 4-6% (8-12% on margin) monthly return on investment. Even with this meager yield, the long-term capital appreciation is excellent due to the unique mathematics of compounding. Obviously, some retail option traders would regard this target as far too low however earning only 3% per month, without the effects of compounding, equates to a 36% yearly return. That's really the key to success with this strategy -- it allows investors to compound their returns on stock ownership each month of the year. The problem is, while most people begin selling covered calls with the goal of growing their account on a regular basis, many lose focus of the fundamental outlook of the strategy (consistent, low risk profits) and begin to concentrate on higher, single-transaction returns. This is a common mistake and it can substantially increase losses, even with proper money management in a diverse portfolio. One thing traders must always be aware of is "slippage" and in the case of roll-out trades, the best way to avoid this problem is to place the order as a spread. To do this correctly, you should first calculate the difference between the option you are buying and the option you are selling. Then you would place an order to "buy-to-close" the short calls and "sell to open" the new options for a specific price. Once you have established this "net" credit for the roll-out transaction, the composite order can be placed with a "good-until-cancelled" contingency that allows it to remain in effect until it is filled or modified due to changing conditions. Another popular variation of this technique is used when closing a losing covered-call play. Similar to a "buy-write," an order is placed to repurchase the sold option and sell the stock for a net credit. Again, the "net" amount is determined by the bid price of the stock and the ask price of the short call. Using this method in conjunction with a discretionary order, allows the floor broker added flexibility to fill the order and it often results in a better outcome than if you tried to make the trades independently. Next week, we will explore popular timing techniques for roll-out strategies. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield MIR 2.78 2.50 JUL 2.50 0.65 0.37 15.1% SUPG 5.86 5.32 JUL 5.00 1.20 0.34* 7.9% BEAV 2.69 3.30 JUL 2.50 0.35 0.16* 5.9% WEBX 13.90 13.96 JUL 12.50 2.10 0.70* 5.2% RSYS 13.00 13.36 JUL 12.50 1.05 0.55* 5.0% BLUD 22.02 21.70 JUL 20.00 2.85 0.83* 4.7% MTON 5.60 5.33 JUL 5.00 0.90 0.30* 4.6% ASIA 5.75 8.15 JUL 5.00 1.00 0.25* 4.6% WEBX 14.45 13.96 JUL 12.50 2.45 0.50* 4.5% RHAT 8.27 7.85 JUL 7.50 1.20 0.43* 4.4% MHR 8.11 8.05 JUL 7.50 0.95 0.34* 4.1% EDS 21.99 21.45 JUL 20.00 3.00 1.01* 3.9% IMMU 6.91 6.25 JUL 5.00 2.15 0.24* 3.7% SEBL 10.98 9.78 JUL 10.00 1.65 0.45 3.5% SGR 12.62 12.09 JUL 12.50 0.90 0.37 3.4% QSFT 12.58 12.12 JUL 12.50 1.00 0.54 3.4% SEBL 10.85 9.78 JUL 10.00 1.40 0.33 3.0% ASIA 5.97 8.15 JUL 5.00 1.15 0.18* 2.7% OVRL 20.68 19.53 JUL 20.00 1.50 0.35 2.0% Q 5.23 4.73 JUL 5.00 0.50 0.00 0.0% DNDN 7.66 6.53 JUL 7.50 1.05 -0.08 0.0% * Stock price is above the sold striking price. Comments: The major averages dropped this week for a friendly (so far) test of their 30-day MAs. Will the market bounce and start a new leg higher (like it did in May), or is it the final (third) leg of the rally off the March lows? Yes indeed, we are at a key moment. The covered-call model portfolio has (so far) weathered the recent consolidation as issues pulled back to test their support areas. Monitor closely any stocks that act weaker than expected (fail to hold support) and you do not wish to own. Our early exit watch list includes: MIR, RHAT, SEBL, OVRL, Q, DNDN. Positions Previously Closed: None NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield IBIS 7.95 JUL 7.50 UIB GU 0.85 96 7.10 21 8.2% AMR 11.32 JUL 10.00 AMR GB 1.70 11859 9.62 21 5.7% CNET 5.71 JUL 5.00 QKW GA 0.90 263 4.81 21 5.7% GP 18.96 JUL 17.50 GP GW 2.05 7277 16.91 21 5.1% USG 19.95 JUL 15.00 USG GC 5.40 8536 14.55 21 4.5% OI 13.91 JUL 12.50 OI GV 1.75 4604 12.16 21 4.0% BCGI 17.70 JUL 15.00 QGB GC 3.10 1286 14.60 21 4.0% 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). ***** IBIS - Ibis Technology $7.95 *** On The Move! *** Ibis Technology (NASDAQ:IBIS) develops, manufactures and markets SIMOX-SOI implantation equipment and wafers for the worldwide semiconductor industry. SIMOX, or Separation by IMplantation of Oxygen, is a form of silicon-on-insulator (SOI) technology that creates an insulating barrier below the top surface of a silicon wafer. SIMOX-SOI products are well suited for many commercial applications, including servers and workstations, portable and desktop computers, wireless communications and battery-powered devices such as laptop computers, personal digital assistants (PDAs) and mobile telephones, integrated optical components and harsh-environment electronics. Sales of 300-millimeter wafers accounted for approximately 44% of the company's total wafer product sales in 2002. Shares of Ibis Technology have rallied above their December high on heavy volume, which suggests further upside potential. Investors with a bullish outlook can use this position to establish a favorable cost basis in the issue. Earnings are due July 23. JUL-7.50 UIB GU LB=0.85 OI=96 CB=7.10 DE=21 TY=8.2% ***** AMR - American Airlines $11.32 *** Cleared For Take-off! *** AMR Corporation's (NYSE:AMR) operations fall almost entirely in the airline industry. American Airlines, Inc. is AMR's principal subsidiary. In April 2001, American Airlines, Inc. purchased substantially all of the assets and assumed certain liabilities of Trans World Airlines, Inc. (TWA). At the end of 2001, AMR provided scheduled jet service to more than 161 destinations throughout North America, the Caribbean, Latin America, Europe and the Pacific. AMR is also a scheduled air freight carrier, providing a full range of freight and mail services to shippers throughout its system. AMR popped higher this week after the company reported a positive operating cash flow in May and June, due to cost reductions and stronger revenue. The company also benefited from CSFB analyst James Higgins' upgrade on Thursday to "outperform." AMR appears to have averted bankruptcy in the near-term and this speculative position offers a reasonable reward for those who believe the airline stocks can fly higher. JUL-10.00 AMR GB LB=1.70 OI=11859 CB=9.62 DE=21 TY=5.7% ***** CNET - CNET Networks $5.71 *** Rally Mode! *** CNET Networks (NASDAQ:CNET), a global media company informing and connecting buyers, users, and sellers of technology, produces a branded, global Internet network, print publications and a technology product database for both businesses and individuals. Using unbiased content as its platform, the company has built marketplaces for technology and consumer products, and, through its CNET Channel division, is a provider of standardized product information. CNET, which has been in rally mode since March, faltered after the company planned on a private placement of $100 million in convertible notes, but quickly dropped the deal. CNET's stock jumped this week after Smith Barney raised its investment rating to "outperform" because of potential growth in advertising. Our outlook is also bullish, due to the recent technical strength and this position offers a reasonable cost basis in the issue. Target shooting a lower "net-debit" will increase the potential yield and downside protection in the position. JUL-5.00 QKW GA LB=0.90 OI=263 CB=4.81 DE=21 TY=5.7% ***** GP - Georgia-Pacific $18.96 *** Asbestos Speculation! *** Georgia-Pacific (NYSE:GP) is engaged in four principal business operations: the manufacture of tissue products (including bath tissue, paper towels and napkins) and disposable tabletop products (including disposable cups, plates and cutlery); the manufacture of containerboard and packaging (including linerboard, medium and corrugated packaging); the manufacture of bleached pulp and paper (including paper, market and fluff pulp, craft and bleached board), and the manufacture and distribution of building products (including plywood, oriented strand board, various industrial wood products and softwood and hardwood lumber, as well as certain non-wood products, including gypsum board, chemicals and other products). GP's four principal businesses are broken down into six operating segments: North America consumer products, international consumer products, packaging, bleached pulp and paper, building products manufacturing and building products distribution. Shares of companies with asbestos liabilities have rallied sharply recently after legislative progress raised the probability of a national fund to pay asbestos injury claims. Traders can use this position to speculate on the outcome with a cost basis closer to near-term technical support. JUL-17.50 GP GW LB=2.05 OI=7277 CB=16.91 DE=21 TY=5.1% ***** USG - USG Corp. $19.95 *** Asbestos Speculation: Part II *** USG Corporation (NYSE;USG) produces a range of products for use in new residential, new non-residential and repair and remodel construction, as well as products used in certain industrial processes. Its operations are organized into three operating segments: North American Gypsum, which manufactures Sheetrock brand gypsum wallboard and related products in the United States, Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region, and Building Products Distribution, which distributes gypsum wallboard, drywall metal, ceiling products, joint compound and other building products throughout the United States. Shares of companies with asbestos liabilities have rallied sharply recently after legislative progress raised the probability of a national fund to pay asbestos injury claims. Traders can use this position to speculate on the outcome with a cost basis closer to near-term technical support. JUL-15.00 USG GC LB=5.40 OI=8536 CB=14.55 DE=21 TY=4.5% ***** OI - Owens-Illinois $13.91 *** Asbestos Speculation: Part III *** Owens-Illinois (NYSE:OI) is a manufacturer of packaging products. The company manufactures glass containers in North America, South America, Australia and New Zealand and Europe, and is a worldwide manufacturer of plastics packaging. Plastics packaging products manufactured by Owens-IL include consumer products (blow molded containers, injection molded closures and dispensing systems) and prescription containers. Owens-IL has acquired 18 glass container businesses in 18 countries since 1991, including businesses in North and South America, Central and Eastern Europe and the Asia Pacific region, and seven plastics packaging businesses operating in 12 countries. Shares of companies with asbestos liabilities have rallied sharply recently after legislative progress raised the probability of a national fund to pay asbestos injury claims. Traders can use this position to speculate on the outcome with a cost basis closer to near-term technical support. JUL-12.50 OI GV LB=1.75 OI=4604 CB=12.16 DE=21 TY=4.0% ***** BCGI - Boston Communications $17.70 *** Bracing For A Rally? *** Boston Communications Group (NASDAQ:BCGI) provides real-time subscriber management services to the wireless industry. The company's real-time subscriber management products include the following: proprietary software applications, which include extensive software suite to manage subscribers; hosting environment, which is a real-time, large scale, micro-payment transaction processing platform; Intelligent Voice Services Network, which includes edge-of-network voice services and Signaling System 7 call control; and Distribution Technology Partnership Program, which is a national payment network for cash collection. Boston Communications shares rallied in April after the firm reported it earned a profit in the first quarter as legal costs fell and its customers added new subscribers. The stock has been volatile recently as investors appear to be moving into the stock and expecting "good" news when the company reports earnings on July 16. This position offers traders a method to profit from the recent activity and "inflated" options with a cost basis closer to support. JUL-15.00 QGB GC LB=3.10 OI=1286 CB=14.60 DE=21 TY=4.0% ***** ***************** 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 MERX 7.60 JUL 7.50 KXQ GU 0.60 10 7.00 21 10.3% NFLD 8.10 JUL 7.50 DHQ GU 1.00 615 7.10 21 8.2% BONZ 12.82 JUL 12.50 QBN GV 0.95 423 11.87 21 7.7% CHPC 7.53 JUL 7.50 AKQ GU 0.40 112 7.13 21 7.5% AKSY 12.69 JUL 12.50 KQK GV 0.75 32 11.94 21 6.8% PMRY 10.76 JUL 10.00 PBQ GB 1.15 87 9.61 21 5.9% NSIT 10.16 JUL 10.00 QNT GB 0.50 61 9.66 21 5.1% AMKR 13.19 JUL 12.50 QEL GV 1.10 751 12.09 21 4.9% SNDK 41.20 JUL 37.50 SWQ GT 4.90 3074 36.30 21 4.8% GIVN 8.41 JUL 7.50 QPG GU 1.15 77 7.26 21 4.8% NXTL 18.49 JUL 17.50 FQC GS 1.55 20308 16.94 21 4.8% IMMU 6.25 JUL 5.00 QUI GA 1.40 379 4.85 21 4.5% PWAV 6.15 JUL 5.00 VFQ GA 1.30 1654 4.85 21 4.5% ***************** NAKED PUT SECTION ***************** Options 101: Position Management Basics With Naked Puts By Ray Cummins One of our new readers asked about the most common adjustment strategies for a "naked" put when the underlying issue has experienced a severe decline. There are two basic strategies that traders use to profit from the sale of naked puts. The first technique involves writing "at-the-money" puts to take advantage of a bullish movement in the underlying stock for large, short-term profits. The less aggressive method involves writing "out-of-the-money" puts, hoping that the sold position will expire worthless. Either technique can be used to take a position in a specific issue but in most cases, our approach to naked put writing is applied as a "deep-out-of-the-money" strategy in which the trader uses the collateral value of his portfolio to return a consistent, limited profit. The strategy of selling out-of-the-money naked puts on bullish issues is a relatively conservative technique but occasionally, you will be faced with a position that is in-the-money as the expiration date approaches. One of the most common methods for preventing a potential loss in this situation is the "roll-out" and it is used when the underlying issue falls to (or below) the strike price of the sold option. Remember, selling a put obligates the writer to purchase the underlying issue at the sold strike price. If the stock remains above the sold strike, the writer retains the premium for the sold option. However, if the stock price falls, the writer may need to roll out and forward in his position, to avoid potential assignment of the stock. He can repurchase the puts that were sold initially and sell new longer-term options. Generally, the new options are written at the next lower strike price, or in greater quantity so as to generate a credit. In this simple recovery method, no debits are incurred but a realized loss is taken in the short term. If the stock price continues to decline, the process is repeated. Eventually, the issue should stop falling and the last set of written options will expire worthless. At that time, the traders' overall profit will consist of the sum of all the previous credits. There are two requirements for success in this strategy. The first prerequisite is that the underlying stock must eventually rebound and the second condition is that the trader have enough portfolio collateral to stay with the strategy even if the issue falls significantly. A large stock portfolio is best for this type of trading because the collateral required for naked option writing may be in the form of cash or securities. There are no margin interest charges and the positions in the portfolio are unaffected unless there is a need for additional funds to close the play prematurely. This simple exit strategy offers a high degree of (eventual) success although in some cases, there may be an accumulation of losses before a profit is achieved. One rule of thumb with any adjustment technique is that you can't wait until the stock is well below the sold option's strike price before initiating the roll-out. The longer you wait the further you will need to move into the future to achieve a lower cost basis. Experienced traders try to make the transition when they can roll to next month out, where they can sell the highest relative premium for a small credit and not commit to a long-term position. Occasionally, you will need to sell additional time to offset the decline in the stock price, however investors should be cautious when using this technique on all but the most high quality (portfolio) issues as you can quickly run out of downside margin if the stock falls further. When the stock has moved well below the sold strike price, this technique is not viable (you have waited too long to act) and another form of loss control is necessary. Most importantly, you must understand that the success of a limited profit strategy such as selling naked puts is based primarily on limiting losses to a minimum. There are never any big winners to offset the big losers, so there can't be any big losers. Occasionally, a gapping issue will wipe out a sizable portion of your gains and there is nothing you can do about it. But, at the same time, you must attempt to manage every other play in your portfolio effectively or there will be no profits to offset the rare (catastrophic) losers. 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 GNTA 14.21 13.13 JUL 10.00 0.50 0.50* 4.6% 13.0% CBST 12.95 10.57 JUL 10.00 0.40 0.40* 3.6% 11.6% FWHT 19.14 20.33 JUL 15.00 0.40 0.40* 3.0% 10.3% ADVS 17.74 17.37 JUL 15.00 0.45 0.45* 3.4% 10.2% KMRT 25.20 25.64 JUL 20.00 0.50 0.50* 2.8% 9.8% AVCT 31.21 31.81 JUL 27.50 0.70 0.70* 2.8% 8.0% CHKP 19.94 19.91 JUL 17.50 0.40 0.40* 2.5% 7.3% AMLN 25.45 22.31 JUL 20.00 0.45 0.45* 2.0% 7.1% MEDI 37.71 35.84 JUL 30.00 0.60 0.60* 1.8% 6.4% SOHU 32.45 31.40 JUL 22.50 0.50 0.50* 2.0% 6.2% CTSH 24.25 24.99 JUL 20.00 0.40 0.40* 1.8% 5.9% PLMD 42.59 46.51 JUL 35.00 0.50 0.50* 1.6% 5.5% NTES 33.70 34.00 JUL 25.00 0.45 0.45* 1.6% 5.4% CVTX 34.43 30.12 JUL 25.00 0.45 0.45* 1.6% 5.3% YHOO 32.14 32.22 JUL 27.50 0.40 0.40* 1.6% 5.0% * Stock price is above the sold striking price. Comments: The stock market lost some of its luster this week as investors began to focus on the outlook for second-quarter earnings. The "all clear" bell has yet to sound and with very little accurate guidance for the coming quarter, the recent bullish trend is tenuous at best. With that idea in mind, traders should check their portfolio positions on a regular basis and close or adjust any plays that have less than outstanding technical indications. The candidates in that group are: Cubist (NASDAQ:CBST), Amylin Pharmaceuticals (NASDAQ:AMLN), Core Therapeutics (NASDAQ:CVTX) and Genta (NASDAQ:GNTA). Previously Closed Positions: None WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield FWHT 20.33 JUL 17.50 HFQ SW 0.45 141 17.05 21 3.8% 11.3% OIIM 16.49 JUL 15.00 XQQ SC 0.30 8 14.70 21 3.0% 8.0% ISIL 26.48 JUL 22.50 UFH SX 0.35 876 22.15 21 2.3% 7.3% SNDK 41.20 JUL 32.50 SWQ SZ 0.40 1135 32.10 21 1.8% 6.7% AAII 20.10 JUL 17.50 IUQ SW 0.25 104 17.25 21 2.1% 6.4% MCHP 24.86 JUL 22.50 QMT SX 0.35 1627 22.15 21 2.3% 6.4% JCOM 45.95 JUL 37.50 JQF SU 0.35 0 37.15 21 1.4% 4.9% 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 $20.33 *** The Rally Continues! *** 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. FWHT shares rallied recently 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-17.50 HFQ SW LB=0.45 OI=141 CB=17.05 DE=21 TY=3.8% MY=11.3% ***** OIIM - O2Micro $16.49 *** Technicals Only! *** O2Micro (NASDAQ:OIIM) designs, develops and markets innovative power management and security components for mobile telecom, communication, computer, information appliance, and LCD products. Its unique products include AudioDJ, SmartCardBus for secure on line e-commerce, Intelligent Lighting and Battery Management IC's. O2Micro International also maintains an extensive portfolio of intellectual property with 1079 patent claims granted, and over 3800 more pending. O2Micro shares traded at a new 14-month high this week and the technical indications suggest additional upside activity in the near-term. Traders can speculate conservatively on that forecast with this position. JUL-15.00 XQQ SC LB=0.30 OI=8 CB=14.70 DE=21 TY=3.0% MY=8.0% ***** ISIL - Intersil $26.48 *** Wireless Sector Rally! *** Intersil Corporation (NASDAQ:ISIL), a world leader in the design and manufacture of high performance analog and wireless networking solutions. Intersil's product portfolios address fast growing markets such as flat panel displays, optical storage (CD and DVD recordable), power management and wireless networking. Intersil brings added customer value in providing silicon, software and reference design solutions to unique products that enhance the computing experience for people wherever they live, work or travel. The wireless sector is performing well and this company produces some of the major components for the industry. Traders who believe the bullish trend in the segment will continue can speculate on that outcome with this position. JUL-22.50 UFH SX LB=0.35 OI=876 CB=22.15 DE=21 TY=2.3% MY=7.3% ***** SNDK - SanDisk $41.20 *** "Short-Covering" Continues! *** SanDisk (NASDAQ:SNDK) designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. The company has designed its flash memory storage solutions for applications in the consumer electronics and industrial/communications markets. The company's products are used in a number of rapidly growing consumer electronics applications, such as digital cameras, PDAs, portable digital music players, digital video recorders and smart phones, as well as in industrial and communications applications. The company's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets with storage capacities ranging from eight megabytes to 1.2 gigabytes. Sandisk shares moved to a multi-year high Friday amid a new round of "short-covering" and traders are speculating on the reason for the renewed buying pressure. Some are suggesting the patent-infringement case with Infineon is the culprit but regardless of the reason, the stock is in a strong uptrend and the option premiums offer a reasonable risk/reward outlook for aggressive put-writers. JUL-32.50 SWQ SZ LB=0.40 OI=1135 CB=32.10 DE=21 TY=1.8% MY=6.7% ***** AAII - AaiPharma $20.10 *** Up, Up And Away! *** AaiPharma (NASDAQ:AAII) is a science-based specialty pharmaceutical company that focuses on targeted therapeutic areas, to which the company markets a growing portfolio of established branded products and applies its technologies to increase the commercial potential of these products. At the same time, AaiPharma's R&D organization is developing a pipeline of products to position the company for near-term and long-term growth in its targeted therapeutic areas. In addition to developing and marketing its own line of proprietary pharmaceutical products, AaiPharma continues to provide contract pharmaceutical development services through its AAI International division. AaiPharma rallied higher this week after the company announced it has filed a supplemental new drug application for Brethine Ampuls with the U.S. FDA. The news comes on the heels of an announcement that the firm is launching Darvon Compound 32, a lower dose alternative providing physicians with more options to aid in the management of headache pain. Investors who like the outlook for AAII can establish a conservative cost basis in the issue with this position. JUL-17.50 IUQ SW LB=0.25 OI=104 CB=17.25 DE=21 TY=2.1% MY=6.4% ***** MCHP - Microchip Technology $24.86 *** Recovery Mode! *** Microchip Technology (NASDAQ:MCHP) develops and manufactures specialized semiconductor products used by its customers for a wide variety of embedded control applications. The company's product portfolio comprises field-programmable RISC-based microcontrollers that serve 8- and 16-bit embedded control applications, and a broad spectrum of high-performance linear and mixed-signal, power and thermal management devices. The company also offers complementary microperipheral products, including interface devices, serial EEPROMS, and its patented KEELOQ security devices. The firm markets its products to the automotive, communications, computing, consumer and industrial control markets. Shares of MCHP have been in "recovery mode" since late May and Soundview Technology finally recognized the trend this week with an upgrade and a new price target of $29 for the company. The brokerage firm said the semiconductor maker has a reasonable valuation and a defensible long-term business model and $22 seems like a reasonable cost basis for the issue. JUL-22.50 QMT SX LB=0.35 OI=1627 CB=22.15 DE=21 TY=2.3% MY=6.4% ***** JCOM - j2 Global Comm. $45.95 *** Rate Hike = Rally! *** 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. Shares of j2 Global soared this week amid the company's plans to raise rates on new customers. Pacific Growth Equities analyst Joe Noel said the e-mail provider would raise its price for all new customers by $3 a month, thus boosting the company's bottom line revenue. Investors who favor the technical strength of JCOM should target-shoot a favorable, low risk premium in this position to take advantage of the recent volatility in the issue. JUL-37.50 JQF SU LB=0.35 OI=0 CB=37.15 DE=21 TY=1.4% MY=4.9% ***** ***************** 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 10.16 JUL 7.50 QYO SU 0.20 614 7.30 21 4.0% 13.0% AMKR 13.19 JUL 12.50 QEL SV 0.40 168 12.10 21 4.8% 11.6% KMRT 25.64 JUL 22.50 KTQ SX 0.60 40 21.90 21 4.0% 11.3% NAUT 12.90 JUL 12.50 NQT SV 0.40 339 12.10 21 4.8% 11.2% PRWK 19.25 JUL 17.50 QRZ SW 0.40 10 17.10 21 3.4% 9.1% UNTD 25.31 JUL 22.50 QAB SX 0.40 382 22.10 21 2.6% 7.5% GM 36.11 JUL 35.00 GM SG 0.65 5812 34.35 21 2.7% 6.7% TRDO 16.13 JUL 15.00 UNC SC 0.25 0 14.75 21 2.5% 6.5% ICOS 37.62 JUL 30.00 IIQ SF 0.35 2097 29.65 21 1.7% 6.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ No "Window-Dressing" Rally Here! By Ray Cummins Stocks moved lower Friday despite the much-anticipated quarterly portfolio adjustments by fund managers and an unexpectedly strong report on consumer sentiment. The Dow Jones industrial average fell 89 points to 8,989 amid a slump in Hewlett-Packard (NYSE:HPQ), Honeywell (NYSE:HON), SBC Communications (NYSE:SBC) and International Paper (NYSE:IP). The tech-laden NASDAQ Composite lost 8 points to 1,625 with strength in wireless stocks keeping the index from a larger decline. The broader Standard & Poor's 500 index finished down 9 points at 976 with biotechnology, drug, retail, and financial shares among the worst performers. Declining issues narrowly outnumbered advancers on the major equity exchanges and volume was light at 1.22 billion on the Big Board and 1.55 billion on the NASDAQ. In the U.S bond market, treasuries were mixed with benchmark 10-year notes closing 1/32 higher, yielding 3.54%, while 30-year bonds fell 9/32, with a yield of 4.58%. ***************** 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 AGN 77.24 77.73 JUL 65 70 0.50 69.50 $0.50 Open ERTS 72.35 76.02 JUL 60 65 0.55 64.45 $0.55 Open UNH 48.93 50.22 JUL 42 45 0.60 44.40 $0.60 Open BGEN 46.25 39.53 JUL 37 40 0.30 39.70 ($0.17) Open PRX 49.16 48.28 JUL 40 45 0.60 44.40 $0.60 Open WLP 86.87 84.79 JUL 75 80 0.60 79.40 $0.60 Open GILD 53.75 56.31 JUL 45 47 0.30 47.20 $0.30 Open JCOM 44.35 45.95 JUL 30 35 0.60 34.40 $0.60 Open MRK 62.59 61.02 JUL 55 60 0.50 59.50 $0.50 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss The position in Biogen (NASDAQ:BGEN) should be closed on further downside activity. Watch-list issues include Merck (NYSE:MRK) and Pharmaceutical Resources (NYSE:PRX). CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status APC 44.46 44.80 JUL 50 47 0.40 47.90 $0.40 Open FNM 68.55 66.48 JUL 80 75 0.60 75.60 $0.60 Open GDT 39.95 44.51 JUL 50 45 0.60 45.60 $0.60 Open KSS 49.45 50.91 JUL 60 55 0.60 55.60 $0.60 Open LOW 44.15 43.12 JUL 50 47 0.30 47.80 $0.30 Open BZH 87.00 85.70 JUL 100 95 0.75 95.75 $0.75 Open HOV 62.12 61.69 JUL 75 70 0.65 70.65 $0.65 Open IBM 84.92 83.42 JUL 95 90 0.45 90.45 $0.45 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Guidant (NYSE:GDT) shares soared Thursday after the company said it expects to meet or exceed the upper end of its previous outlook for second quarter sales and earnings. The issue was also raised to a "Buy" at AG Edwards and with the up-trend resuming, traders should consider closing the position to limit potential losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status NBIX 56.84 51.31 JUL 45 50 4.25 49.25 0.75 Open? GILD 53.81 56.31 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 "hanging by a thread" and a close below the recent 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 INTU 46.13 44.40 JUL 55 50 4.50 50.50 0.50 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status QCOM 33.55 36.01 JUL 37 30 0.10 0.90 Open SGR 12.62 12.09 OCT 15 10 (0.10) 0.00 Open Qualcomm (NASDAQ:QCOM) has already offered a favorable profit for short-term traders. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status NSM 21.80 21.50 JAN-25C JUN-25C 2.10 2.50 Closed VRTY 18.85 13.03 SEP-20C JUL-20C 0.50 0.90 Closed EDS 21.99 21.45 SEP-25C JUL-25C 0.75 0.50 Closed CHKP 18.05 19.91 OCT-20C JUL-20C 0.10 1.30 Open GDT 39.98 44.51 OCT-45C JUL-45C 0.80 1.75 Open BRCM 21.40 24.45 JAN-25C JUL-25C 1.70 2.75 Open SRNA 19.71 21.20 AUG-22C JUL-22C 0.45 0.90 Open VIA 44.95 43.58 AUG-47C JUL-47C 0.70 0.40 Open MCDT 13.47 14.00 OCT-15C JUL-15C 0.70 0.90 Open BEAS 11.08 11.30 SEP-12C JUL-12C 0.65 0.55 Open IR 47.95 46.97 SEP-50C JUL-50C 1.20 1.10 Open Positions in Electronic Data (NYSE:EDS), National Semiconductor (NYSE:NSM), and Verity (NASDAQ:VRTY) have previously achieved profitability. CREDIT STRANGLES **************** No Open Positions DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status TYC 17.27 19.20 JUL 17.5 17.5 1.80 2.70 Open? RJR 36.19 37.25 AUG 37.5 35.0 3.15 3.70 Open DG 18.64 18.00 AUG 20 17.5 1.20 1.30 Open BSX 60.00 62.46 AUG 60 60 7.00 7.10 Open MBI 50.24 49.10 AUG 50 50 5.20 5.00 Open Tyco (NYSE:TYC) has achieved a favorable "early-exit" profit. Questions & comments on spreads/combos to Contact Support *********************** OPTION-TRADING SERVICES *********************** 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. ***** EBAY - eBay Inc. $102.36 *** Online Auction Giant! *** eBay (NASDAQ:EBAY) is a web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and miscellaneous items. The eBay trading platform is a fully automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. EBAY - eBay Inc. $102.36 PLAY (very conservative - bullish/credit spread): BUY PUT JUL-90.00 QXB-SR OI=14459 ASK=$0.25 SELL PUT JUL-95.00 QXB-SS OI=13968 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.35-$0.45 POTENTIAL PROFIT(max)=7% B/E=$94.65 ***** UNH - UnitedHealth Group $50.22 *** Safety Stock? *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The firm's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes the UnitedHealthcare and Ovations businesses; Specialized Care Services, and Ingenix. UNH - UnitedHealth Group $50.22 PLAY (conservative - bullish/credit spread): BUY PUT JUL-45.00 UHB-SI OI=2765 ASK=$0.45 SELL PUT JUL-47.50 UHB-SW OI=4854 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$47.25 ***** IGEN - IGEN International $31.60 *** Premium-Selling Only! *** IGEN Internationla (NASDAQ:IGEN) develops and sells products based on its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of various biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. The product is incorporated into instrument systems and other related consumable reagents, and IGEN also offers assay development and services used to perform analytical testing. Products based on ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. IGEN - IGEN International $31.60 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-37.50 GQ-GU OI=2067 ASK=$0.55 SELL CALL JUL-35.00 GQ-GG OI=2375 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$35.30 ***** MHK - Mohawk Industries $56.56 *** Trading Range? *** Mohawk Industries (NYSE:MHK) is a broadloom carpet, rug and ceramic tile manufacturer and sells carpet, rugs, ceramic tile and other floor-covering materials throughout the United States, principally for residential and commercial use. The company's primary operating subsidiaries are Mohawk Carpet Corporation, Aladdin Manufacturing Corporation and Dal-Tile International Inc. Through the Mohawk segment, MHK designs, manufactures and markets carpet and rugs in a broad range of colors, textures and patterns, and is a producer of woven and tufted broadloom carpet and rugs for principally residential applications. The company also markets and distributes hardwood, laminate, vinyl and ceramic tile under its hardsurface line. Through the Dal- Tile segment, MHK designs, manufactures and markets a broad line of wall, floor, quarry and mosaic tile products used in the residential and commercial markets for both new construction and remodeling. MHK - Mohawk Industries $56.56 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-65.00 MKH-GM OI=530 ASK=$0.20 SELL CALL JUL-60.00 MHK-GL OI=195 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$60.40 ***** OEX - S&P 100 Index $491.61 *** For "Bears" Only! *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Traders who favor low risk credit-spreads often utilize S&P 100 options because they generally contain more premium than options on individual stocks and also provide an underlying instrument less prone to "gapping" moves. OEX - S&P 100 Index $491.61 PLAY (conservative - bearish/credit spread): BUY CALL JUL-520 OEB-GD OI=5695 A=$0.85 SELL CALL JUL-515 OEB-GC OI=4005 B=$1.20 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$515.40 ************* 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. ***** BSTE - Biosite $48.96 *** Next Leg Up? *** A leader in the drive to advance diagnosis, Biosite (NASDAQ:BSTE) is a unique research-based company dedicated to the discovery and development of novel protein-based diagnostic tests that improve a doctor's ability to diagnose debilitating and life-threatening diseases. The firm combines integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes. Biosite's "Triage" rapid diagnostic tests are used in approximately 50 percent of U.S. hospitals and in approximately 40 international markets. BSTE - Biosite $48.96 PLAY (conservative - bullish/debit spread): BUY CALL JUL-40.00 BQS-GH OI=409 A=$9.50 SELL CALL JUL-45.00 BQS-GI OI=1551 B=$4.90 INITIAL NET-DEBIT TARGET=$4.45-$4.50 POTENTIAL PROFIT(max)=11% B/E=$44.50 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** OVER - Overture Services $18.34 *** Road To Recovery! *** Overture (NASDAQ:OVER) is engaged in the Pay-For-Performance search on the Internet. The company's search service is comprised of advertiser's listings, which are screened for relevance and accessed by consumers and businesses through Overture's affiliates, a network of Web properties that have integrated its search service into their sites or that direct user traffic to Overture's own site. In some cases, consumers and businesses access the company's search listings directly at its site. The search listings are ranked by the advertisers' bid; the higher the bid, the higher the ranking. Advertisers pay Overture the bid price for clicks on the advertisers' search listing, click-through or a paid click. As of December 31, 2002, Overture and its wholly owned subsidiaries operated the search service in the United States, United Kingdom, Germany, France and Japan. OVER - Overture Services $18.34 PLAY (speculative - bullish/calendar spread): BUY CALL NOV-20.00 GUO-KD OI=974 ASK=$2.50 SELL CALL JUL-20.00 GUO-GD OI=7075 BID=$0.55 INITIAL NET DEBIT TARGET=$1.85-$1.90 INITIAL TARGET PROFIT=$0.50-$0.75 ******************* 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. ***** ESI - ITT Educational Services $29.63 *** Strong Sector! *** ITT Educational Services (NASDAQ:ESI) is a provider of technology oriented postsecondary degree programs in the United States. The company offers associate, bachelor and master degree programs and non-degree diploma programs to more than 33,000 students. The company has 74 institutes located in 28 states and each of its institutes is authorized by the applicable education authorities of the states in which they operate and recruit, and accredited by an accrediting commission recognized by the United States DOE. The company currently offers a variety of degree programs as well as several diploma programs in various fields of study. All of its institutes offer degree or diploma programs for information technology and electronics, and the majority of institutes offer a degree or diploma program involving design. ESI - ITT Educational Services $29.63 PLAY (speculative - bullish/synthetic position): BUY CALL OCT-35.00 ESI-JG OI=26 ASK=$0.90 SELL PUT OCT-25.00 ESI-VE OI=256 BID=$1.00 INITIAL NET CREDIT TARGET=$0.15-$0.25 INITIAL TARGET PROFIT=$0.65-$0.90 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $825 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25). *********************** 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. ***** AIG - American Intl. Group $55.69 *** Probability Play! *** American International Group (NYSE:AIG) is a holding company that, through its subsidiaries, is engaged in insurance and insurance-related activities, principally general insurance and life insurance, in the United States and abroad. The principal general insurance company subsidiaries are American Home Assurance Company; National Union Fire Insurance Company of Pittsburgh, Pennsylvania; New Hampshire Insurance Company Lexington Insurance Co.; The Hartford Steam Boiler Inspection and Insurance Company (HSB); Transatlantic Reinsurance Company; American International Underwriters Overseas, Ltd., and United Guaranty Residential Insurance Company. AIG's operations are conducted principally through four business segments: general insurance, life insurance, financial services and retirement savings and asset management. AIG - American Intl. Group $55.69 PLAY (speculative - neutral/debit straddle): BUY CALL AUG-55.00 AIG-HK OI=10606 ASK=$2.90 BUY PUT AUG-55.00 AIG-TK OI=7821 ASK=$2.15 INITIAL NET-DEBIT TARGET=$4.90-$4.95 INITIAL TARGET PROFIT=$1.40-$1.85 ***** FRE - Freddie Mac $50.00 *** Reader's Request! *** Federal Home Loan Mortgage Corporation (NYSE:FRE) or Freddie Mac, is a stockholder-owned corporation that was established by Congress in 1970 to support home ownership and rental housing. Freddie Mac purchases single-family and multi-family residential mortgages and mortgage-related securities, which it finances mainly by issuing mortgage pass-through securities and debt instruments in the capital markets. FRE guarantees these securities and mortgage lenders sell their loans to the company and use the proceeds to fund new mortgages, which in turn increases the money supply to homebuyers. FRE does not make loans directly to homebuyers, but puts private investor capital to work for homebuyers in general. FRE - Freddie Mac $50.00 PLAY (speculative - neutral/debit straddle): BUY CALL AUG-50.00 FRE-HJ OI=515 ASK=$2.65 BUY PUT AUG-50.00 FRE-TJ OI=434 ASK=$2.55 INITIAL NET-DEBIT TARGET=$5.00-$5.10 INITIAL TARGET PROFIT=$1.55-$2.10 ***** ************************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 ************************************************************** ************** MARKET POSTURE ************** Window Undressing? 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