The Option Investor Newsletter Sunday 08-03-2003 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: Jobloss Recovery Futures Market: Less liquidity, lower prices Index Trader Wrap: INDECISION Editor's Plays: Not Over Till the Fat Lady Sings Market Sentiment: First Friday of the Month Ask the Analyst: China Depository Receipts for Hot and Sour trading 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 8-01 WE 7-25 WE 7-18 WE 7-11 DOW 9153.97 -130.60 9284.57 + 96.42 9188.15 + 68.56 + 49.38 Nasdaq 1715.62 - 15.08 1730.70 + 22.20 1708.50 - 25.43 + 70.48 S&P-100 493.64 - 9.30 502.94 + 1.44 501.50 - .98 + 6.40 S&P-500 980.15 - 18.53 998.68 + 5.36 993.32 - 4.82 + 12.44 W5000 9454.16 -145.20 9599.36 + 52.70 9546.66 - 64.23 +148.38 RUT 468.08 - 0.80 468.88 + 4.12 464.76 - 9.01 + 17.42 TRAN 2595.91 - 19.88 2615.79 + 39.50 2576.29 + 30.71 +130.27 VIX 22.78 + 2.84 19.94 - 1.42 21.36 + .64 - 0.89 VXN 32.48 + 2.44 30.04 - 3.37 33.41 + .61 + 0.33 TRIN 1.08 0.67 0.60 0.94 Put/Call 0.91 0.67 0.61 0.98 Avg Highs 462 365 522 791 Avg Lows 72 31 29 21 ****************************************************************** Jobloss Recovery by Jim Brown Traders are beginning to believe that the jobless recovery has turned into a jobloss recovery instead. The economic numbers on Friday did not help improve sentiment despite some positive signs under the hood. The markets closed the week with a loss despite a barrage of good numbers over the last several days. S&P Chart Dow chart Nasdaq Chart The Consumer Sentiment improved slightly to 90.9 from the preliminary 90.3 for July. The expectations index fell from 86.4 to 83.7 but the present conditions index jumped to 102.1. This surprised some traders as it was different to what the Consumer Confidence showed earlier in the week. What it did not show was a marked decrease in sentiment to confirm the confidence numbers. Instead the gain in the present conditions was the biggest in a decade. Analysts think this is related to the higher take home pay, tax credit checks and recent market gains. Clearly it was not due to higher interest rates and analysts think the next report could show a drastic drop. The Nonfarm Payroll report added to the frustration with a loss of -44,000 jobs when +18,000 were expected. The June number was also revised down to -72,000 and more than twice the -30,000 initially reported. The May number was also revised down and this makes the sixth consecutive month of job losses. The unemployment rate dropped unexpectedly to 6.2% from 6.4% simply due to 500,000 workers dropping out of the job market in disgust without finding jobs. Sounds like a summer vacation to me. 9.06 million workers are currently officially unemployed if you don't count the -556,000 dropouts. Had there been no dropouts the unemployment rate would have been 6.5%. March was the only other month this year with a drop in the workforce at -64,000. If those workers return in September after the summer vacation then the unemployment rate could be even higher. The average workweek for manufacturing fell to 40.1 hrs and 33.6 for nonmanufacturing. Conditions may be slowly improving but so slowly that employers cannot afford to hire more workers and are continuing to layoff workers to cut costs. Temporary hiring picked up as employers replaced full time employees with part time and added part time to replace workers on vacation. This too shall pass when the summer is over. I went back to the 8/2/2002 report to see what had changed in the last 12 months. In 2002 the report made these points. "The unemployment rate remained unchanged in July at 5.9%. However, part of this is the result of a contracting labor force and unemployed workers see few opportunities in the labor market and drop out." No change there. "Manufacturing losses continue to abate. Only 7,000 jobs were lost in July". Big change here with -67,000 manufacturing jobs lost in 2003. "The labor market added 6,000 in July, but the gains for the previous months were revised up to 66,000, nearly double." Big change here as well with six months of losses in 2003 instead of the four months of gains in August 2002. There were 8.1 million unemployed in Aug-2002 and 9.06 million in Aug-2003. Investors have to ask themselves, Are things really better now than they were in Aug-2002? The Dow traded in a 305 point range on the report Friday in 2002 with a high of 8508 and a low of 8203, closing at 8313. Interest rates on both the 10-year and 30-year were lower on the 2002 report date and dropping. Contrary to the negative picture above the ISM posted a number over 50 at 51.8 for the first time five months. This does indicate an expansion. It was yet another positive in a week of bullish economic reports. This was inline with expectations. New orders jumped to 56.6 from 52.2 and the third month for that component over 50. This report indicates that a recovery is in progress but at a snails pace. Personal Income rose by +0.3% in June despite falling hours and wage pressure from job competition. Personal Spending also rose +0.3%. Depending on which numbers you look at they were not buying cars with the increase in wages. Compared to last July the automakers reported drops in sales. GM -5.7%, Ford -11.5%, Daimler Chrysler -7.5%. Compared to last month sales rose to 17.3 million in annually adjusted terms. GM rose +5.3%, Ford +3.3%, DCX +2.0%, Honda +1.5%, Toyota +1.9%. Sales are limping in on the backs of incentives but the drop in mortgage refinancing is going to impact those numbers. Construction Spending came in flat for June compared to +0.5% estimates. Construction has either been flat or down since February. The market is still in turmoil with low mortgage rates a drag on new apartment construction. A high vacancy rate in commercial office buildings is depressing rents and convincing investors to wait for a change before building new office projects. Overall the reports were not bad other than the Jobs report so what happened to the markets? Friday was an ugly day and when combined with Thursday it was a two day bear market. While there was no really big drop on Friday there was almost zero interest in buying. There was a strong rumor buoyed by some truth that Saddam was cornered in a farm house in Tikrit. The truth, U.S. forces surrounded and raided two houses in Tikrit capturing two Saddam associates. The initial reports of the attack had Saddam in the house. The market barely budged with only a +30 point bounce at 1:15. Last week this would have been good for a +100 point spike. Considering it came on a Friday it is even more amazing that nobody rushed to cover with the potential for a weekend capture. The Dow ended with a close at 9153, only 15 points above the low for the day but the volume was very low. Bonds continue to press the issue and there was some buying after the ISM report but it was very light. The rumors continued that there is a big bond fund in trouble and that is keeping pressure on bonds. If somebody is in trouble then the sharks will eventually sniff them out. There is also a strong and persistent rumor that overseas investors, pension funds and other governments are selling bonds by the boatload. They are responsible for more than half of the U.S. Treasury debt and the spiraling deficits are scaring them. Japan holds more than $400 billion, China $125 billion. They see the 60% drop in refinancing applications in the last six weeks, rates making a two year move in six weeks and the prospect that the government could be forced to sell $1 trillion in bonds in the next 12 months to support the deficit and the war. High yield bond funds saw outflows of $1.06 billion in outflows last week and the single week record is $1.4 billion. The swap spreads soared +20 basis points in two days which is unheard of. The carry trade, where banks and hedge funds borrow Yen from Japan at 1% or less to leverage into dollar-linked bonds, is collapsing. The Yen is gaining on the dollar and dollar bonds are falling through the floor. As the trend continues the squeeze becomes painful and companies are racing to liquidate positions before huge losses pile up. Another problem is the pension shift. Whenever yields hit 4.5% and we hit 4.59% Friday, conservative pension funds shift out of risky stocks and into the safety of bonds. This could have been the problem on Friday. Stocks were being sold and bonds being bought by pension funds. Also, AMG data said that equity funds saw the first week of outflows in a month for the week ended on Wednesday. There are massive forces at work here that we do not see on the surface. Hedge funds and bond junkies always over leverage when bonds appear to be headed in one direction. With bonds hitting a 45 year high there had to be a large number of over margined, over leveraged funds. With the bond disaster there has got to be casualties and those casualties have not come to the surface yet. If you doubt the rumors of an impending failure look at the chart for FRE, which is only about $1 from a multiyear low. LEH and BSC, both big bonds firms are falling off the cliff as investors fear an imminent disclosure. Even if they are not in trouble financially they are probably going to take a hit. Don't forget gold. The same traders who leveraged bonds to the moon thinking the economy was going in the tank were doing the same with gold. It hit a two week low on Friday. Sometimes when it rains it pours. The GDP showed a +2.4% Q2 rate. Unfortunately 44% of that jump came in government spending for the war. As Art Cashin said several times on Friday, unless there is another war scheduled for the fourth quarter that burst in spending is not going to happen again. Another factor depressing the markets is the impending Fed meeting on Aug-12th. The fed funds futures are showing a zero chance of another rate cut. Zero! There is nothing for traders to speculate on or to get excited about. The Fed speak has been a constant, "slow recovery in progress" and "over accommodative stance" which means don't even think about another rate cut. The threats of other nontraditional stimulus have been taken off the table and the Fed has effectively neutered itself. It will have to start talking the talk and walking the walk to get investors attention because the walk softly and carry a big stick only works when your stick is bigger than 100 basis points. With a stick the size of a toothpick you won't get much respect. The interest rate pressure is killing the homebuilders and the related industries. The drop in mortgage applications and rise in rates has finally popped the building bubble. The soaring builder stocks, which trade at absurdly low PEs of 8-12 are getting cheaper by the day. Despite all the problems the selling for the week was not that bad. The S&P is on a streak of five winning months that it has not had since 1998. The -18 point drop for the week was hardly a drop in the bucket. The Dow closed at 9153 and is still well above support levels it has defended successfully since the beginning of June. The Nasdaq closed over 1700 despite the selling. The sell off only seems worse due to the 52-week highs hit on Thursday. When compared to those numbers and considering the bullish economic data the outlook becomes more cloudy. The most negative event was the failure of the 50 DMA on the S&P-500 at 985. This is the first close under the 50 since March 14th. If this holds on Monday it could setup some serious technical selling. As I mentioned on Thursday, August has been the worst month of the year for the markets for the last 15 years. That is during good times and bad times. The first week of August is typically the worst week. Considering we did not get the typical end of July decline for reasons including Udai, Qusai and Saddam, the market could just be tired. Add in the ticking bond bomb and traders are ready to take some profits. The bulls are worried. They got the great economic news in every report but the Nonfarm Payrolls but the market died. Saddam was thought to be trapped in a farmhouse in Tikrit and the market ignored it. The market rallied on every piece of bad news imaginable for months and failed miserably on the first really concrete evidence of a recovery. Now I am bullish. Confused? I am always early. I am still expecting a decline below 9000 but I think the time is growing short. July earnings are over and we are a third of the way through the 3Q. Man, does time fly. In about two weeks we will start seeing the mid quarter updates. In four weeks we will start hitting the earnings warnings. But, the pump is primed. There was a significant number of companies that said business was improving. They probably lied hoping the 3Q would rescue them but that is not the point. The reports are actually showing a jobless recovery and that was expected. It could be mid 2004 before the jobs picture really picks up. However the manufacturing picture is improving. We are showing a serious decline in inventories across the board. This will have to be replenished before the 4Q or the holiday season will flop. Intel said it best this week. CEO Barrett said "IT spending will probably remain flat for the rest of 2003." But, Intel cannot afford to wait for business to pick up and they will be buying 35,000 PCs to replace their outdated equipment. They are expecting others to wait but they cannot afford to wait for the rush. There are countless others in the same shape with Y2K computers slowly dying. Unfortunately he also said he only expected a growth rate of 15% over the next 5-10 years IF the economy cooperated. Probably being a little cautious there and talking down future analyst estimates. On Thursday Merrill Lynch went bullish on chips saying the demand was rising and orders were starting to stack up. On Tuesday Bear Stearns raised their projected computer sales for 2003 from 6% to 9% and said notebooks could grow to +22%. We will get the Semiconductor billings for June on Monday and that is expected to increase for the fourth consecutive month. Right or wrong traders will be buying the dips on techs expecting a positive surprise in October. Copper and aluminum prices have been rising and that is commonly seen as a leading indicator of economic growth. Almost every hard product made has those metals inside. Add the wire and cable for new construction and the metals touch almost every sector. Cyclical stocks have been rocking. Check out the charts on MMM, BCC, IP, IR and DOW just to mention a few. Now before everyone gets carried away I may be bullish on a long term basis but the next few weeks could be rocky. We are entering the three most volatile months of the year. They are volatile in good times and bad times. There are any number of reasons for this which I will not go into today. Just check some historic charts and take my word for it. That means the huge gains made on paper over the last several months are still at risk. Many funds will be adjusting their portfolios over the next three months. They will be selling the losers, picking more winners and positioning themselves for the fourth quarter run. The current external market factors like an impending bond disaster could accelerate those moves. If you thought there was another Long Term Capital about to explode over the front page and take a thousand points off the stock market would you be in a hurry to take profits? In July of 1998 with the Dow at a new high of 9350, Long Term Capital, a hedge fund with assets of $4.8 billion and liabilities many time in excess of that, imploded. Highly over leveraged in bonds and derivates and in hundreds of deals with other banks it was facing a $250 million a day loss due to rapidly declining bond markets stimulated by the Russian default initially and then by the smell of blood as the rumors began to fly. With dozens of deals over $500 million to other banks like JP Morgan, Salomon, Citigroup, Goldman Sachs, etc, a default by LTCM would cause massive liabilities to ripple through the investment community and endangered the current financial system. The Fed later organized a multimillion rescue to protect the system but the stock market fell to 7400 from the 9350 high when the problem came public. -2000 points on a bond default from a $4.8 billion hedge fund. How much would we get today if it was FRE, LEH or BSC? For a complete history of LTCM: In another bond collapse one trader working for Barings, a 200 year old English bank, leveraged into over $60 billion of bonds and futures using only $615 million in capital. The company failed and the assets were sold for $1. Is it possible there is a ticking bond bomb? Absolutely. Everybody with big money knows that October is planting time. August and September are harvest time. You reap the profits in Aug/Sep and reinvest them by planting in the October furrows. This year I fully expect that time table to be accelerated as eager fund managers try to beat the crowd to the punch. When? Who knows? We can only speculate that the next 90 days will be like a roller coaster in a hurricane. There will be peaks and valleys and dangerous cross currents but when we come out of October we should be in good shape if the recovery is still on track. Assuming the bond market gets back on track without a disaster the race to beat the crowd could begin quickly as long as economics continue to improve. Just like every roller coaster ride you have ever been on, they scare the hell out of you in the middle but the end of the ride is always smooth and level. We need to step up to the ticket counter and get ready to pay our money because the ride is about to start. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Less liquidity, lower prices Jonathan Levinson Friday saw the Fed let 4.5B in maturing repos go unrefunded, a trend that has been occurring with increasing regularity. Wednesday's report from the Mortgage Bankers' Association saw a huge decline in mortgage and refinancing activity. Overall, equities, treasuries and gold were lower for the day and for the week, while the US Dollar Index finished the week positive. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 999 989 983 973 967 YM03U 9301 9218 9168 9084 9033 NQ03U 1295 1280 1270 1256 1246 10 minute chart of the US Dollar Index The disappointing economic data on Friday at 8:30 took some of the bloom off the US Dollar Index rally for the week, but at 10AM the positive ISM report and the Fed’s drained 4.5B in reserves via its open market operations helped to pause the dollar's slide. The buying took the form of a bear wedge which broke down subsequently. On the week, the US Dollar Index printed a bullish engulfing candle, as liquidity from the mortgage market and from the Fed dried up simultaneously and reduced the supply of dollars overall. Daily chart of August gold The party in gold might have ended or is merely pausing, but either way Friday's close wasn't pretty for gold bulls. The closing print was 347.80, which was the site of the bullish breakouts in mid-July, just above the rising trendline completing the pennant off the low and Fibonacci support at 345. The oscillators are on preliminary sell signals right above support, and if it fails on Monday, we'll watch for support at 342, followed by 335 and 325 below. For the week, August gold went out on a bearish engulfing, corresponding to the US Dollar Index' bullish engulfing candle. Daily chart of the ten year note yield Treasuries finished in positive territory but off their intraday highs, with the ten year treasury yield (TNX) closing lower by 5.9 basis points at 4.415% in a wide ranging session. The uptrend in the TNX remains so far relentless, and I've been receiving an increasing number of emails asking my view on going long treasuries to play the reversal. My reply all week has been and continues to be that I prefer to wait for a trendline break to confirm the move. As can still be seen in the NQ future daily chart below, uptrends have a way of going longer than we expect, for whatever reason. Patience above the trendline will protect your accounts and your sanity at the cost of missing the very top of the move. Daily NQ candles I find that the market tends to deal in question marks, with the occasional foray into exclamation points that increase in frequency as the timeframe diminishes. The Nasdaq futures managed to leave us holding the former with a minimal number of the latter on Friday, spending most of the session going nowhere within a range, but nevertheless completing a lower low, lower high and lower close. The session and the week closed out right on the ascending support line, and it's now make-or-break time for Nasdaq bulls. The extent of the ambivalence is reflected on both the daily and the 30 minute candle chart below. The closing uptick left us with preliminary buy signals right above support. 30 minute 20 day chart of the NQ The 30 minute chart looks like a bear flag to me, particularly in light of the lower weekly closes on the NQ and its ES and YM peers. The 22 period EMA has crossed the 50 to the downside, generating a sell signal, and the bounce in the oscillators is unconvincing, particularly considering the softness in price all Friday afternoon on the up-phase. This lack of buyers following Thursday's vertiginous plunge sets up a bear flag with Friday afternoon's range, and if it doesn’t bounce on Monday, the bulls and the daily ascending trendline in place since March will be in trouble. Daily ES candles There are no two ways about Friday's bearish engulfing candle print, capping a bearish engulfing week. The 78.6% Fibonacci support line and the 50 day EMA just below it (purple line) have yet to fail but are close within striking range. Again, it's make-or-break time for the bulls. 20 day 30 minute chart of the ES That last statement is clearer still on the 30 minute candle chart. Bulkowski describes expanding wedges or "megaphone" patterns, which I term "bulloney bullhorns," as somewhat chaotic patterns to trade. They are, as Thursday's climactic runup and selloff proved. The pivot calculator generated 973 as first support, and it coincides with my calculations based on the head and shoulders formation described in Thursday's Futures Wrap and in the intraday Futures Monitor. Note the divergence on the oscillators, however. While I'm bearish on it, it does constitute a divergence. Whether it's bullish or bearish is in the eye of the beholder: I would say, "If this is the upphase, I can't wait to see the down." A bullish trader would counter that the move is building energy and exhausting the sellers, who were unable to push the ES below the rising support line today. Monday should resolve it one way or the other. Daily YM candles Like the NQ, the Dow Futures closed right on the trendline, but with its oscillators just starting sell signals from lower highs. 20 day 30 minute chart of the YM As with the ES and NQ, the Dow is either going higher or lower on Monday. Don't all thank me at once for that incisive analysis, but the close left us on a cycle divergence. Note that the oscillators reversed from lower lows on the 30 minute candles, which is not bullish. It was a bearish engulfing day to complete a bearish engulfing week, and for this reason, I personally see more downside. Until support breaks, however, I will be wrong. Overall, they threw multiple Saddam rumors at the tape, spectacular economic data on Thursday and all the usual garnishes, but still the equity bulls couldn't post new highs, or even avoid a negative close for the week. The liquidity drought implied by the mortgage data this week and the ongoing collapse in treasuries has, to my mind, barely touched equities. Bears remain too scared to short aggressively, bulls continue to generate +1000 ticks and intraday put to call readings below .50. P/E ratios remain high, CNBC remains on-air, and the equity market continues to buy analyst upgrades of chip stocks while the treasury market sets new year lows day after day. The 7 week closing high in crude oil futures and new lows in treasury bonds do not look good for corporate profitability, and unlike many, I do not see the yield rally to be a sign of economic recovery or impending strength in equities. I believe that we are witnessing a reversal of the macro trend that drove the Spring rally, which is liquidity. A rising tide of liquidity buoyed all US financial assets except the US Dollar. This week brought us a decline in all US financial assets, and a rise in the dollar. Unless it reverses course, we can expect more of the same next week. ******************** INDEX TRADER SUMMARY ******************** INDECISION By Leigh Stevens lstevens@OptionInvestor.com The sideways consolidation continued for yet another week as I thought it would. There is, as of yet, nothing major unfolding to cause the bulls to do still more buying or the Bears to press the short side. The S&P 500 (SPX) Index fell to 980.15 on Friday, off about 1 percent - as a comparison, the RUT (Russell 2000 Index) was down by 1.7%. The Dow Jones Average was down by 79.8 points (0.9%), to 9,153.9. (Down was J.P. Morgan Chase, Alcoa, Citigroup and Johnson & Johnson following an analyst downgrade. Disney was one of the Dow's best performers, reaching a new 52-week high, following improved earnings.) The Nasdaq Composite (COMPX) gave up 19.40 points (1.1%) to 1,715.62 and the Nasdaq 100 Index (NDX) was off by nearly 13 points to 1,264.34. THE BOTTOM LINE - If you did anything but take that road trip I suggested or to sell (time) premium (e.g., short calls and puts), which is eroding at a predictable clip in a trend-less market, you might have had a difficult trading week. As noted on OIN last week, NYSE 52-week lows on the big board begin to creep up relative to new (52-week) highs. This reality is also very much reflected in the sideways Index chart patterns. A sideways move - I consider this a lateral trend (rather than being "trendless") - has also been called an "indecision" pattern. This raises the question of what would it take to cause a breakout above or below the price range and for investors to make their next portfolio decisions? -i.e., add or lighten up on stocks. Answer: In a word, JOBS. LAST WEEK - Tuesday (last) saw the release of the Conference Board's July Consumer Confidence Index, which fell to 76.6, well below expectations forecasted around 85.0 and well under June's 83.5 reading. Why do consumers remain skeptical? - a big part of it is that is NO perceived improvement in the jobs market. The Director of The Conference Board's Research Center, stated that: "The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers' spirits this month," ... "expectations are likely to remain weak until the job market becomes more favorable." Look at the some of the underlying confidence numbers - Consumers claiming jobs are "hard to get" rose to 33.1% from 31.9%, while those claiming jobs are "plentiful" declined to 10.5% from 11.2%. Those surveyed that were anticipating more jobs to become available over the next 6 months declined to 16.8% from 18.9%, while those expecting fewer jobs increased to 19.8% from 16.9%. The proportion of consumers anticipating an increase in their incomes, declined to 15.7% from 17.1%. This later statement regarding an increase in income is part of the problem of lack of confidence in the future - Time Magazine recently did a cover story on "Hey, where's my raise!" Merit and cost of living increases in salaries seem to have gone the way of the Dodo bird. Factory workers are often in the same boat, especially non-unionized factories of which the trend has seen these numbers increasing. Wednesday did not bring the bulls much help in the form of the Fed Beige book as the word they used the most was "mixed" in terms of the levels of current activity and things that would suggest an economic pick up. Some earnings over the week came in ahead of expectations - Dow 30 component DuPont (DD) reported Q2 earnings of $0.62 per share, 5 cents above consensus. Aetna (AET) reported its Q2 income at $1.28 per share, which was well ahead of Street forecast of $1.02. (Excluding a 1-time benefit of realized capital gains, net income would have been $0.87 per share, a 24% increase.) Verizon (VZ) indicated its Q2 numbers at a penny over the 68 cent forecast. Earnings season is winding down and the next big focus is going to be continued economic reports and Q3 earnings. Oh, Thursday brought some tidings to gladden the bulls as the Advance GDP was released at 2.4%, well ahead of expectations of 1.5% and the prior period's (Q1) 1.4%. Q2 growth increased mainly due to defense spending, some business investment in plant and equipment and by consumer spending. Defense spending shot up by 44% and is not going to be an ongoing thing - nor, will it help boost consumer confidence, except maybe for those who work in this sector. There was some recovery in business spending which is slightly encouraging. "Nonresidential spending", a broad category of investment, rose at a 6.9% annual rate in the second quarter after decreasing 4.4% in the first 3 months and the strongest advance in investment spending in 3 years. No doubt that some of this money was being put to work in the market. On balance, just enough bullishness to prevent a sell off, not enough to cause a round of new buying that would lead to a second up "leg". FRIDAY'S TRADING - The ISM (Institute for Supply Management) Index was released at 51.8 in July, up from 49.8 in June. Over 50 is defined as showing expansionary numbers. Some highlights - new orders rose to 56.6 from 52.2 in June, the highest reading since January (59.7). The July employment reading of 46.1 was little changed from June's 46.2 and still indicates contraction in the jobs numbers, but it was holding above April's 41.4 reading. As you've heard elsewhere no doubt, we can anticipate market participants to focus even more on what is happening in the labor market. If this component does not begin to improve along with the economic data (e.g., GDP, etc.), its not a good sign. As the existing consumer base is maybe getting a bit tapped out, especially as interest rates creep back up, the pent up demand of those going BACK to work is the one factor that could really put the economy on a solid growth track. By the way, the jobs numbers are one of last component indicators that will tend to also improve. Other economic data released showed construction spending in June unchanged and under the consensus of economists' forecast for a gain of 0.4% - there was a 1.7% drop in May. Personal income and spending for June were in-line with forecasts, but non-farm payrolls, which fell by 44,000 in July (after losing a revised 72,000 jobs in June) got MOST attention from traders as it was the SIXTH straight month of job losses and tallies the U.S. economy as losing 486,000 jobs since February. That's a lot of jobs - and potential spending power. There was a drop in the unemployment rate from 6.4 to 6.2% but this is deemed to have hardly any significance relative to the lack of jobs growth. OTHER MARKETS - The 10-year Treasury fell sharply yet again this past week, losing 1 and 23/32 points - this makes the 6th. decline in the last 7 weeks since the 10-year benchmark topped in mid-June. The yield is now 4.4%. The U.S. dollar was lower against major trading rivals, falling 0.4% percent to 120.10 yen while the euro gained 0.3% to $1.1264. INDEX OUTLOOKS – S&P 500 (SPX) - Daily chart: The chart pattern remains bullish overall as long as there is no decisive downside penetration of the 970 area. With a big leg up, then a sideways consolidation, benefit of the doubt goes to the bull case. A breakout above 1017 is needed to suggest that another up leg was underway. SPX may just continue to trade in this same 973-1017 range. The only predictor in this situation is a breakout above/below the range. Until then trade the "range". One deeper correction to the 940 area can't be ruled out if 970- 973 gives way. Such a move would complete a "typical" a-b-c type correction. Stay tuned! Sentiment and the RSI indicator are both in neutral areas, and reflect what we're seeing in the chart pattern. S&P 100 Index (OEX) – Hourly chart: The range in the OEX continues to be bound by 492 on the downside and 510 on the upside. Next lower support, implied by an earlier downswing low is 485. I still am inclined to buy calls in the 492 area, with tight stops just below 490, with a buy-back strategy at 485. Conversely, buying puts in the 505 area and above - such as a move back up to retest the 510 area resistance - is favored on rallies. If you don't get prices right at the lower or upper end of the range in terms of buying calls and puts, it will be hard to make money in such a meandering market - so, stay on "vacation" or take advantage of strategies that achieve some profits in a range bound market. Dow Industrials Hourly (DJX.X) chart: I wish I had "new" charts to show you - but its sameO-sameO as the Dow and other indices drift sideways. Hey, when we get a big new move, I will have more exciting lines and notations! Well there is actually something a bit different shown below as DJX starts finally to slip below its long-standing uptrend line. This may suggest that the Index will come back down again to what I've thought would be the low end of its trading range at 9000- 9050 in the Dow. In line with an unchanged outlook and strategy, I'm looking to buy the Index calls in the 90 area and puts back up at 93. In between these "extremes" I don't find an attractive risk to reward outlook, at least in long options. Nasdaq Composite Index (COMPX) – Daily: The Composite may take out or pierce its daily chart uptrend channel - although the lows again last week held the lower channel line. 1700 continue to look like near support, then around 1650 and finally at 1600. My favored Nasdaq buying area is in the 1650 to 1600 zone. A move to 1650 would "fill in" the upside gap there. Resistance is apparent at 1750, then at 1800-1825 based on the projected upper channel line. Nasdaq 100 Tracking Stock (QQQ) - Hourly: The Q's continue to look like a short in the 32 to 32.75 area and a potential buy on a dip to the $30 area. I could see a 50% retracement occurring, which would take QQQ to around 30. A break of 30, especially on a daily closing basis, would turn the chart picture more bearish, although I would not give up on the bullish case unless 29 was pierced. In fact, would like to have a buying opportunity in the 29-30 price zone - risking to 28.70 would then look pretty good relative to upside potential for an eventual new high above 33. Good Trading Success! ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ************** Editor's Plays ************** Not Over Till the Fat Lady Sings While I do not hold out much hope for the Aug-DJX-88 puts we are holding there is still a possibility they will recover. Instead of the fat lady the saying should be "not over till Aug-15th" which of course is expiration Friday. Given two full weeks and the very negative tone of the market it is possible we could still reach 8600. It is also possible to draw to an inside straight but not a good idea to bet heavy on it. However, I am wishing now I had doubled down on Thursday for 10 cents. Heck, maybe even tripled down. That brings us back to a play for today. You may think I am crazy but I can think of no better play than the Aug-DJX-88 puts for 35 cents. Think about it. If you read my wrap you know that the first week of August is the worst week of the month and August has been the worst month of the year for the last 15 years. We have a potential ticking bond bomb killing the bond market. Yields have risen to the point where bonds look attractive to investors wanting to ride out the three most volatile months of the year in relative safety and the Jobs report showed that all is not rosy in the economy. Any other potential play this weekend would probably cost more than 35 cents and have far less going for it than a potential DJX implosion. I will be the first to acknowledge that this play has not gone as scripted. We have had drop after drop tantalize us with impending doom only to have one miraculous recovery after another push us back to the recent highs. Had we been swing trading these options we could have made a killing. Hindsight is always 20:20. My outlook is simple. If the S&P breaks below 975 we are toast. That is the line in the sand and the next line could be 950 or even 920. It could also move fast. Once a cascade-selling event starts they tend to feed on themselves. Just look at the Jan-15th sell off. The Dow dropped nearly -1000 points in eight days. I am not saying it will happen but at the current prices even a -300 point move could easily double the premiums. The ATM DJX put option today is $1.15 (DJX-91) Using a very precise mathematical modeling tool call the SWAG method it predicts the ATM DJX-88 put to be worth $1.00 if the Dow drops to near 8800. That would be a 200% return. Can we get to 8800 by the end of next week? Odds are very good if S&P-975 breaks. So here are the plan(s). Plan A: Buy the puts at the open Monday or better yet on any bounce after the open and possibly get them for 20-25 cents. Your risk is that the Dow continues to go up. Plan B: Buy the puts ONLY when the S&P touches 973.00. This insures a break of the 975 critical resistance and a better than 50/50 chance the market is going to tank hard. You will pay more than the risk takers who buy the options at Monday's open but your risk is less. I would estimate 40-45 cents is what you would pay using the SWAG method. The sell target would be $1.00 for the conservative trader. Dow 8600 for the high risk, all or nothing trader. This is a high-risk play as August options will turn to dust instantly if the market rebounds again. Please consider your options before entering this play. Dow/DJX Chart S&P Chart ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. EBAY Calls A quick death. No lingering questions over when to sell or what would happen post split. The $110 stop was hit on Tuesday and the play died. It appears the frustration over the earnings was much stronger than previously thought. Play closed. Powerball New life on the powerball portfolio. RFMD is improving, CMVT is accelerating and GLW is on fire. If TLAB and RFMD can just get back to zero things would really start to look up. Remember these are January-2004 options and the entire concept was to capture the 3Q/4Q recovery. With signs of a recovery in progress we only have a couple or rocky months left and we should see some real gains. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** First Friday of the Month Jonathan Levinson We have a shortened trading month for August expiration due to the one day week just finished. What have the past five sessions left us with? This week was tumultuous in a number of different markets, but the pattern appears to be a clear reversal of the trends at work during the spring rally. I won't harp on what is becoming a recurrent concept in my understanding of the markets, but liquidity drove us up, and appears to be letting us down. We finished the week with bearish engulfing candles on the Dow futures, S&P futures, INDU and SPX. On the Nasdaq futures and the COMPX, we got imperfect bearish haramis, but in any event, negative closes. On the ten year note yield, a bullish three white soldiers pattern, as bonds continue to make new yearly lows. Lastly, the US Dollar Index rallied higher, printing a bullish engulfing candle, while the August gold contract, bludgeoned in Friday's trading, printed a bearish engulfing for the week. Just as we saw a tidal wave of liquidity caused by the home mortgage boom and the fed's "anti-disinflation" operations during the spring rally, floating bonds, stocks and commodities, this week brought us exactly the reverse. We saw mortgage and refi activity reverse, a huge "bearish engulfing" decline as reported in Wednesday's market wrap, and the Fed was busy draining in its open market operations as well. If it continues, as the weekly candles suggest, we should see rates continue higher, equities continue lower, along with gold and a rising US dollar. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9361 52-week Low : 7197 Current : 9153 Moving Averages: (Simple) 10-dma: 9190 50-dma: 9078 200-dma: 8527 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 980 Moving Averages: (Simple) 10-dma: 987 50-dma: 984 200-dma: 910 Nasdaq-100 ($NDX) 52-week High: 1316 52-week Low : 795 Current : 1264 Moving Averages: (Simple) 10-dma: 1265 50-dma: 1233 200-dma: 1088 ----------------------------------------------------------------- Both the VIX and VXN are bouncing from recent lows but it will take the creation of a new relative high to convince us that a change in sentiment is at hand. CBOE Market Volatility Index (VIX) = 22.78 +1.54 Nasdaq-100 Volatility Index (VXN) = 32.48 +1.26 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.91 480,735 436,251 Equity Only 0.74 334,416 246,327 OEX 0.71 35,395 25,000 QQQ 1.54 21,840 33,550 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 69.2 + 0 Bull Confirmed NASDAQ-100 75.0 + 0 Bull Confirmed Dow Indust. 80.0 - 7 Bull Correction S&P 500 76.2 - 1 Bull Correction S&P 100 82.0 - 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.05 10-Day Arms Index 1.00 21-Day Arms Index 1.03 55-Day Arms Index 1.12 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 785 1001 Decliners 2039 2028 New Highs 93 159 New Lows 63 9 Up Volume 411M 591M Down Vol. 1146M 872M Total Vol. 1590M 1475M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 07/29/03 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Still looking at a lack of major change in the large S&P futures contracts. Commercial traders and small traders have yet to make any big moves lately. Commercials Long Short Net % Of OI 07/08/03 415,053 453,720 (38,667) (4.5%) 07/15/03 414,020 453,033 (39,013) (4.5%) 07/22/03 411,206 442,131 (30,925) (3.6%) 07/29/03 405,429 445,114 (39,685) (4.7%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 07/08/03 152,239 74,749 77,490 34.2% 07/15/03 148,716 70,279 78,437 35.8% 07/22/03 155,891 76,466 79,425 34.2% 07/29/03 155,216 73,030 82,186 36.0% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Quite the opposite of the large S&P futures above, we're seeing some big differences in the e-mini positions. Commercial traders have turned very bullish while the small traders is increasing their net bearish positions. These are new milestones for both. Commercials Long Short Net % Of OI 07/08/03 192,815 224,124 (31,309) ( 7.5%) 07/15/03 214,274 218,765 ( 4,491) ( 1.0%) 07/22/03 249,392 249,386 6 0.0% 07/29/03 272,659 216,166 56,493 11.6% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 56,493 - 07/29/03 Small Traders Long Short Net % of OI 07/08/03 56,394 72,090 (15,696) (12.2%) 07/15/03 45,372 54,654 (9,282) (9.3%) 07/22/03 45,945 76,071 (30,126) (24.7%) 07/29/03 44,437 93,144 (48,707) (35.4%) Most bearish reading of the year: (48,707) - 07/29/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 There is very little change in positions for either the small trader or the commercials. Commercials Long Short Net % of OI 07/08/03 30,489 48,311 (17,822) (22.6%) 07/15/03 28,467 49,154 (20,687) (26.7%) 07/22/03 32,502 48,139 (15,637) (19.4%) 07/29/03 31,456 50,294 (18,838) (23.0%) Most bearish reading of the year: (20,687) - 07/15/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 07/08/03 26,136 9,035 17,101 48.6% 07/15/03 26,489 8,004 18,485 53.6% 07/22/03 27,321 8,844 18,477 51.1% 07/29/03 25,691 7,810 17,881 53.4% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL It's the same story here. Maybe it's the summer doldrums that's leaving the size of futures positions in a very sideways trend. Commercials Long Short Net % of OI 07/08/03 20,752 11,860 8,892 27.3% 07/15/03 21,607 7,855 13,752 46.7% 07/22/03 22,198 8,176 14,022 46.2% 07/29/03 23,696 9,572 14,124 42.5% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 07/08/03 5,005 8,093 (3,088) (23.6%) 07/15/03 5,475 9,717 (4,242) (27.9%) 07/22/03 6,110 10,898 (4,788) (28.2%) 07/29/03 5,744 11,601 (5,857) (33.8%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** China Depository Receipts for Hot and Sour trading Could you please tell me how to find a list of the Chinese telecom and technology stocks---or other growth industries peculiar to China? Yes! Whether you're a bull or a bear and get a hankering for some Chinese food, the Bank of New York has a wonderful search engine and information on various Depository Receipts, where a trader can build a menu of stocks that'll add some volatility to your account. Traders/investors that have been trading the technology, telecommunications and Internet stocks the past couple of years may comprehend or associate some of these stocks with a bowl of hot and sour soup! That's right. At times these stocks are hot and their share prices will rocket, but when the fire drill takes place, they can sour just as quickly. Of late, many of these stocks have been running wild. Kind of like a bull in a China closet! Here's a link to the Bank of New York's depository receipts page http://adrbny.com/dr_directory.jsp where a trader/investor can scan the Pacific Rim in a matter of minutes. I can't believe the amount of information the Bank of New York's Depository Receipt web page contains and if you plink around long enough you'll find what you're looking for. In the left hand column of the front page, if you place your mouse cursor over the "DR Profiles, News & Quotes" button, you should see a pull down menu for searching the various Depository Receipts and I clicked the "Search DRs by Country," and then selected China. Now, you have to do some looking, but I see Netease.com (NASDAQ:NTES) $48.13 -4.61%, which has made a nice little move from $10.00 the past couple of months listed as belonging to the "publishing" industry. I also found China Telecom (NYSE:CHA) $26.57 -1.81%, which is categorized as "fixed line communications." Hmmm... What's this China Unicom (NYSE:CHU) $6.86 (unchanged) categorized as "wireless communications?" Cha, Chu! Bless you! A bull that held China Unicom (NYSE:CHU) from the $20's may not have felt so blessed as the stock fell to $5.00 this past April, and while this DR doesn't trade options, some option traders have been known to buy an option or two at $7.00 per contract. If that list of DRs under the "Search DRs by Country" isn't enough, then take some good advice and expand your horizons! Instead of clicking on the "Search by Country," how about "Search by Region" and select Asia? Here you'll expand your geographic search to Australia, China, Hong Kong, India, Japan, Malaysia, Taiwan, Thailand, Singapore and more! I tried performing some searches by "category" to get a more simplified list of "telecom," stocks, but the list seemed much more limited that simply browsing down through the list of stocks with an eye on the category column. If I found something that looked telecom/Internet related, I could quickly type in the DR's symbol on my q-chart, or whatever charting service you prefer to use, to see if it looked like a stock that traded enough volume or had a pattern that you find compelling. If you find one of interest, then there's a neat little feature where you can add the stock to a watch list. If these two types of scans are not sufficient, then you might also try this. I like this one the best! In the far left column, click on the "DR Performance Analytics" button. At the top of that page, there is a set of six search criteria you can perform. One search criteria that I performed was.... Give me... The top 50 Exchange-Listed DR sorted by Quarter-to-date Price Performance (% Change) for Asia Boom! Internet Initiative Japan Inc. (NASDAQ:IIJI) $8.30 -1.89%. Must be a misprint as it has supposedly gained 403% in the latest quarter. No stock could ever gain that much in 3-months. Oh my! Nope that looks right and it's just off its recent highs of $14.00 from July 8th. Now, if we are going to trade some of these stock, long or short, and would want to WISELY try and measure the stock's relative strength versus a similar category/index or market, the I'd strongly suggest we use some of the information from the June 15, 2003 Ask the Analyst column regarding HOLDRs and iShares http://www.OptionInvestor.com/ask/ask_061503_1.asp, where we could find an appropriate sector or like market to measure a stock's relative strength against. For instance, the iShare MSCI Taiwan (AMEX:EWT) $10.28 -0.19%, which has risen from $7.50 to current levels since May might be a market-like security to quickly check a Taiwan-based stock against. If there's little analysis that can be gleaned from a relative strength chart, but you have a directional bias, then perhaps it bets to simply trade the iShare and spread your risk among a basket of stocks from that particular region. For a quick review of how to try and interpret relative strength of a stock versus a like sector or index, I tried to cover this topic in a December 12, 2002 Ask the Analyst column titled "Relative Strength, but with X's and O's" http://www.OptionInvestor.com/ask/ask_122902_1.asp Anyway... I'm glad the trader asked this question, as it has been an educational experience for me. Hot and sour soup! Bull in a china closet! Remember. When you sit down at a Chinese food restaurant and order a main entree, they usually offer you a choice of soups as an appetizer. I like the hot and sour soup and that's what I usually order. A bull can run ramped in a china closet, but when the china hits the floor.... As it would relate to trading/investing in some of these stocks/Drs, think about how small that bowl of soup is in relation to the main course. With many of these Asian telecom/Internet stocks, I'd suggest a small portion to start out with. Maybe my stomach is weak, but if I were to eat a big bowl of hot and sour soup, I'd have indigestion for weeks. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of August 4th ========================================== ----------------- Earnings Calendar ----------------- Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- AAA Altana AG Mon, Aug 04 Before the Bell N/A CEPH Cephalon, Inc. Mon, Aug 04 After the Bell 0.31 CHD Church & Dwight Co. Mon, Aug 04 Before the Bell 0.42 CIG Co Ener de Minas Ger Mon, Aug 04 -----N/A----- 0.29 CUZ Cousins Prop Incorp Mon, Aug 04 After the Bell 0.52 HNT Health Net, Inc. Mon, Aug 04 After the Bell 0.61 HTG Heritage Prop Invest Mon, Aug 04 After the Bell 0.64 HBC HSBC Holdings plc Mon, Aug 04 04:00 am ET N/A MET MetLife Inc. Mon, Aug 04 After the Bell 0.70 PRE PartnerRe Ltd. Mon, Aug 04 After the Bell 1.45 PPS Post Properties, Inc Mon, Aug 04 After the Bell 0.49 QGENF Qiagen N.V. Mon, Aug 04 After the Bell 0.07 STO Statoil ASA Mon, Aug 04 Before the Bell 0.20 SGY Stone Energy Mon, Aug 04 After the Bell 1.33 PFG Principal Finl Group Mon, Aug 04 After the Bell 0.61 TP TPG NV Mon, Aug 04 Before the Bell 0.37 X United States Steel Mon, Aug 04 -----N/A----- -0.06 WWCA Western Wireless Mon, Aug 04 After the Bell -0.11 WRC Westport Res Corp Mon, Aug 04 -----N/A----- 0.18 ------------------------- TUESDAY ------------------------------ AGI Alliance Gaming Corp. Tue, Aug 05 -----N/A----- 0.27 ACAS Am Capital Strategies Tue, Aug 05 After the Bell 0.66 AMH AmerUs Group Co. Tue, Aug 05 After the Bell 0.93 BOX BOC Group PLC Tue, Aug 05 -----N/A----- N/A VNT C. A. Nacl Tele de VenTue, Aug 05 After the Bell -0.14 CVC Cablevision Systems Tue, Aug 05 Before the Bell -0.28 CDX Catellus Development Tue, Aug 05 After the Bell 0.37 FUN Cedar Fair LP Tue, Aug 05 -----N/A----- 0.43 CKFR CheckFree Tue, Aug 05 After the Bell 0.23 CSCO Cisco Systems Tue, Aug 05 After the Bell 0.15 CSR Credit Suisse Group Tue, Aug 05 Before the Bell N/A CEI Crescent Rl Est Eq Tue, Aug 05 Before the Bell 0.41 CMLS Cumulus Media Inc. Tue, Aug 05 After the Bell 0.07 DTC Domtar Inc. Tue, Aug 05 -----N/A----- N/A EIX Edison International Tue, Aug 05 Before the Bell 0.42 EDMC Education Management Tue, Aug 05 Before the Bell 0.25 EMR Emerson Electric Tue, Aug 05 -----N/A----- 0.74 EXPE Expedia, Inc Tue, Aug 05 Before the Bell 0.31 EXPD Expeditors Intl Tue, Aug 05 Before the Bell 0.26 FE FirstEnergy Tue, Aug 05 -----N/A----- 0.53 FMS Fresenius Med Care Tue, Aug 05 Before the Bell N/A GLG Glamis Gold Ltd Tue, Aug 05 Before the Bell 0.04 GRP Grant Prideco Inc Tue, Aug 05 Before the Bell 0.05 GTM GULFTERRA ENERGY PART Tue, Aug 05 After the Bell 0.36 HSIC Henry Schein Tue, Aug 05 Before the Bell 0.72 HPC Hercules Tue, Aug 05 Before the Bell 0.21 HPT Hospitality Prop TrustTue, Aug 05 -----N/A----- 0.91 ICN ICN Pharmaceuticals Tue, Aug 05 Before the Bell 0.27 ICOS ICOS Corporation Tue, Aug 05 After the Bell -0.42 IACI INTERACTIVECORP Tue, Aug 05 Before the Bell 0.17 MBI MBIA Inc. Tue, Aug 05 Before the Bell 1.12 MDP Meredith Corporation Tue, Aug 05 Before the Bell 0.58 OHP Oxford Health Plans Tue, Aug 05 Before the Bell 0.81 TLK P.T. Telkom Tue, Aug 05 -----N/A----- N/A PRU Prudential Financial Tue, Aug 05 After the Bell 0.60 PSA Public Storage Tue, Aug 05 -----N/A----- 0.68 RA Reckson Ass Rlty Tue, Aug 05 After the Bell 0.54 RMD ResMed Tue, Aug 05 After the Bell 0.36 RYAAY Ryanair Holdings Tue, Aug 05 Before the Bell 0.33 TRK Speedway Motorsports Tue, Aug 05 Before the Bell 0.87 TLD TDC A/S Tue, Aug 05 Before the Bell N/A TLTOB Tele2 AB Tue, Aug 05 Before the Bell N/A G The Gillette Company Tue, Aug 05 Before the Bell 0.29 MNY The MONY Group Inc. Tue, Aug 05 Before the Bell 0.07 SVM The ServiceMaster Co Tue, Aug 05 Before the Bell 0.23 TM Toyota Motor Corp Tue, Aug 05 -----N/A----- N/A TRZ Trizec Properties Tue, Aug 05 Before the Bell 0.41 UNM UnumProvident Corp Tue, Aug 05 After the Bell 0.40 WMI Waste Management Tue, Aug 05 -----N/A----- 0.34 WPI Watson PharmaceuticalsTue, Aug 05 Before the Bell 0.44 HLTH WebMD Tue, Aug 05 After the Bell 0.10 WTW Weight Watchers Intl Tue, Aug 05 After the Bell 0.51 WON Westwood One Tue, Aug 05 Before the Bell 0.24 ----------------------- WEDNESDAY ----------------------------- AAP Advance Auto Parts Wed, Aug 06 After the Bell 1.05 ASX Adv Semi Engineering Wed, Aug 06 -----N/A----- 0.04 ACF AmeriCredit Corp. Wed, Aug 06 After the Bell 0.21 AOC Aon Corporation Wed, Aug 06 Before the Bell 0.45 AIV Apartment Inv & Man Wed, Aug 06 After the Bell 0.90 RMK Aramark Corporation Wed, Aug 06 Before the Bell 0.30 ADP Automatic Data Proc Wed, Aug 06 -----N/A----- N/A AVT Avnet Wed, Aug 06 -----N/A----- 0.10 AXS Axis Capital Hold LmtdWed, Aug 06 After the Bell N/A BAY Bayer Wed, Aug 06 -----N/A----- N/A EAT Brinker International Wed, Aug 06 Before the Bell 0.56 CPN Calpine Corporation Wed, Aug 06 -----N/A----- 0.03 CNQ Canadian Nat Res Lmtd Wed, Aug 06 -----N/A----- 1.13 CHINA chinadotcom corp Wed, Aug 06 Before the Bell 0.02 DVN Devon Energy Corp Wed, Aug 06 Before the Bell 1.52 EOG EOG Resources Wed, Aug 06 -----N/A----- 0.84 FST Forest Oil Corp Wed, Aug 06 After the Bell 0.57 GALN Galen Holdings PLC Wed, Aug 06 Before the Bell 0.45 HIG Hartford Finl Serv Wed, Aug 06 After the Bell 1.18 KSE KeySpan Wed, Aug 06 Before the Bell 0.14 LAMR LAMAR ADVERTISING CO Wed, Aug 06 Before the Bell 0.02 MGA Magna International Wed, Aug 06 -----N/A----- 1.68 MAS Masco Wed, Aug 06 Before the Bell 0.46 MCCC Mediacom Comm Corp Wed, Aug 06 Before the Bell -0.22 MME Mid Atlantic Med Serv Wed, Aug 06 After the Bell 0.76 NVO Novo-Nordisk Wed, Aug 06 -----N/A----- N/A OGE OGE Energy Wed, Aug 06 Before the Bell 0.30 PSC Philadelphia Suburban Wed, Aug 06 Before the Bell 0.23 RL Polo Ralph Lauren CorpWed, Aug 06 Before the Bell 0.04 PL Protective Life Corp Wed, Aug 06 Before the Bell 0.67 DNY RR Donnelley Wed, Aug 06 Before the Bell 0.21 SRV Service Corp Intl Wed, Aug 06 After the Bell 0.07 SHU Shurgard St Centers Wed, Aug 06 After the Bell 0.65 SIRI Sirius Satellite RadioWed, Aug 06 Before the Bell -0.11 TOT Total Wed, Aug 06 During the Market 1.54 TRN Trinity Industries Wed, Aug 06 After the Bell -0.17 ------------------------- THURSDAY ----------------------------- ABN ABN Amro Holdings Thu, Aug 07 Before the Bell N/A AEG AEGON N.V. Thu, Aug 07 -----N/A----- 0.25 ATK Alliant Techsystems Thu, Aug 07 Before the Bell 0.82 BCS Barclays Bank PLC Thu, Aug 07 Before the Bell N/A BRL Barr Laboratories Thu, Aug 07 Before the Bell 0.71 BF BASF Thu, Aug 07 -----N/A----- N/A BNN BRASCAN CORP Thu, Aug 07 -----N/A----- 0.36 BGG Briggs & Stratton CorpThu, Aug 07 Before the Bell 1.20 CZN Citizens Comm Thu, Aug 07 Before the Bell 0.11 CNA CNA Financial Corp Thu, Aug 07 Before the Bell 0.35 DF Dean Foods Thu, Aug 07 Before the Bell 0.57 ELX Emulex Thu, Aug 07 -----N/A----- 0.22 EVC Entravision Comm Corp Thu, Aug 07 Before the Bell -0.01 HCC HCC Insurance HoldingsThu, Aug 07 After the Bell 0.51 IDA Idacorp Holding Thu, Aug 07 Before the Bell 0.32 KGC Kinross Gold Thu, Aug 07 After the Bell 0.01 LNC Lincoln National Thu, Aug 07 Before the Bell 0.86 LTR Loews Corp. Thu, Aug 07 Before the Bell 1.36 MAC Macerich Co Thu, Aug 07 -----N/A----- 0.83 CLI Mack-Cali Realty Corp Thu, Aug 07 Before the Bell 0.90 NXL New Plan Excel Rlty Thu, Aug 07 -----N/A----- 0.47 NVDA NVIDIA Corporation Thu, Aug 07 After the Bell 0.12 PNRA Panera Bread Thu, Aug 07 Before the Bell 0.18 PIXR Pixar Animat Studios Thu, Aug 07 After the Bell 0.22 ROIAK Radio One Thu, Aug 07 Before the Bell 0.10 RUK Reed Elsevier NV/Plc. Thu, Aug 07 -----N/A----- N/A SRE Sempra Energy Thu, Aug 07 Before the Bell 0.60 SPIL SILICONWARE PRECISION Thu, Aug 07 -----N/A----- 0.02 TS TENARIS S A Thu, Aug 07 -----N/A----- 0.61 UVV Universal Corporation Thu, Aug 07 After the Bell N/A UVN Univision Comm Thu, Aug 07 After the Bell 0.13 WIN Winn-Dixie Stores Thu, Aug 07 After the Bell 0.28 XMSR XM Satellite Radio Thu, Aug 07 Before the Bell -1.28 ------------------------- FRIDAY ------------------------------- HME Home Properties Fri, Aug 08 Before the Bell 0.76 KNBWY Kirin Brewery Company Fri, Aug 08 -----N/A----- N/A VNO Vornado Realty Trust Fri, Aug 08 -----N/A----- 1.05 WR Westar Energy, Inc. Fri, Aug 08 Before the Bell N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable RARE Rare Hospitality 3:2 Aug 11th Aug 12th ODSY Odyssey Healthcare 3:2 Aug 12th Aug 13th OSK Oshkosh Truck 2:1 Aug 13th Aug 14th REBC Redwood Empire 3:2 Aug 13th Aug 14th SCHN Schnitzer Steel 2:1 Aug 14th Aug 15th RNT Aaron Rents 3:2 Aug 15th Aug 18th ARRO Arrow Intl 2:1 Aug 15th Aug 18th JEF Jeffries Group 2:1 Aug 15th Aug 18th -------------------------- Economic Reports This Week -------------------------- Wall Street still has plenty of earnings announcements to process but it's the economic news that is making headlines and moving the market. This week most of the economic reports are on Thursday. ============================================================== -For- ---------------- Monday, 08/04/03 ---------------- Factory Orders (DM) Jun Forecast: 1.5% Previous: 0.4% ---------------- Tuesday, 08/05/03 ---------------- ISM Services (DM) Jul Forecast: 58.0 Previous: 60.6 ------------------- Wednesday, 08/06/03 ------------------- None ------------------ Thursday, 08/07/03 ------------------ Initial Claims (BB) 08/02 Forecast: 393K Previous: 388K Productivity-Prel (BB) Q2 Forecast: 2.2% Previous: 1.9% Wholesale Invntories(DM)Jun Forecast: 0.0% Previous: -0.3% Consumer Credit (DM) Jun Forecast: $6.9B Previous: $7.3B ---------------- Friday, 08/08/03 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** 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 08-03-2003 Sunday 2 of 5 In Section Two: Watch List: Approaching, At or Under Support Put Play of the Day: ATH Dropped Calls: LOW Dropped Puts: LEN ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** Approaching, At or Under Support Intl Business Machine - IBM - close: 81.27 change: +0.02 WHAT TO WATCH: We've been watching Bib Blue for days now. The stock has slowly been melting toward support at the $80 mark. Shares broke through their 200-dma a couple of days ago but from the looks of the bounce off $80 on Friday, bulls might try and drive it higher. IBM did have some news on Friday when a judge ruled against the company's pension program that is alleged to be unfair to older workers. Bulls could try and buy support with a stop under $80. Bears can look for a breakdown under $80 and target $75.00. Chart= --- eBay Inc - EBAY - close: 105.28 change: -2.02 WHAT TO WATCH: Strong earnings and a 2-for-1 stock split announcement were not enough to keep the Internet darling EBAY at yearly highs. The stock has sunk on long-overdue profit taking. Friday's session saw shares actually close below their simple 50- dma. Apparently some analysts are hyping a potential rivalry between EBAY and Google. Follow through on the technical breakdown could be interesting but we suspect bulls will defend it near the $100 level. Chart= --- Rent-A-Center - RCII - close: 70.11 change: -2.81 WHAT TO WATCH: RCII came really close to making it to the OI put list. The huge technical breakdown and failed rally at the broken 50-dma looks like bad news. The drop back to $70 looks even worse. The company beat by a penny and announced a stock split but that didn't keep investors from selling the news. Look for a move under Friday's low and target support at $65.00. Chart= --- Amgen Inc - AMGN - close: 68.25 change: -1.18 WHAT TO WATCH: One of our favorite stocks to trade, shares of AMGN have rolled over after peeking back above the $70 mark. We suspect it will retest its simple 50-dma as support or the $65 level. A breakdown at either could be bad news for the biotech sector, as AMGN is the most heavily weighted component. Chart= --- Goldman Sachs - GS - close: 85.10 change: -2.04 WHAT TO WATCH: The XBD broker/dealer index took a dive on Friday and closed under what should have been support at the 550 level. Shares of GS are following suit with their own rollover from Thursday's failed rally. The stock closed under its simple 50- dma and should it break the $85 mark we believe it could quickly retest support at $80. Chart= =================================== RADAR SCREEN - more stocks to watch =================================== BSX $63.84 - Strong earnings and split announcement have this stock poised near new highs. A breakout above the $65.00 mark could be an entry point for bulls. MBG $35.25 - This casino stock is at new relative highs and is approaching all-time highs. Technical indicators look positive and volume was climbing late last week. BRCM $21.22 - Will this chip stock bounce at support of $20.00 or rollover and start a new leg lower. Shares have already lost 1/3 their value since mid-July. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************* THE PLAY OF THE DAY ******************* Put Play of the Day: ******************** Anthem Inc. - ATH - close: 74.49 chg: -1.02 stop: 77.01 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Lowe's Companies - LOW - cls: 47.00 chng: -0.56 stop: 46.50 It's time to throw in the towel on our LOW play. After more than two weeks, the stock has been unable to sustain a breakout over the $48. With the Housing sector continuing to weaken, the Retail index looking like it is breaking down and flat price action in LOW, we're going to err on the side of caution and drop the play near our picked price. Aggressive traders might try to hold on and exit on another push up near the $48 level, but it appears to be time to move on to more promising plays. Picked on July 13th at $46.87 Change since picked: +0.13 Earnings Date 08/18/03 (unconfirmed) Average Daily Volume = 4.89 mln Chart = PUTS ^^^^ Lennar Corp. - LEN - close: 63.20 change: -1.98 stop: 67.30 Wow! What a ride! We thought we might be able to finally grab a good downside move from the Housing sector, and we scored this time, as continued selling in the bond market finally broke the $DJUSHB index under the critical $414 support level. Our eventual profit target for our LEN play was $62-63 (the site of the July 2002 highs) and the stock nailed that on Friday with an intraday low of $62.30 and a close just over $63. Aggressive traders might hold on in anticipation of a continued decline down towards stronger support near $60, we're going to harvest gains ($8.36 from our picked price) and chalk this up as a solid win. Traders opting to keep open positions should ratchet their stops down to no higher than $65.50, just above Friday's intraday high. Picked on July 15th at $71.12 Change since picked: -8.36 Earnings Date 09/09/03 (unconfirmed) Average Daily Volume = 1.72 mln Chart = *********** 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************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ********** 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 08-03-2003 Sunday 3 of 5 In Section Three: Current Calls: AZO, FDX, GDW, GENZ, KSS, PCAR New Calls: LLL Current Put Plays: BDK, FITB, FRE, HD, MRK, PGR New Puts: ATH ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ****************** CURRENT CALL PLAYS ****************** AutoZone, Inc. - AZO - close: 82.65 change: -0.61 stop: 80.50 Company Description: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why we like it: After charging higher early last week, our AZO play has been rather disappointing, as it twice failed to touch our initial profit target at $85 and appears to be rolling over. As mentioned throughout the week, those forays near the $85 level would have made a solid point to harvest some gains and those that took advantage of the opportunity can now watch for a new entry point. Due to the strong volume with which it took place, we still think the breakout over $80 was technically significant and with the volume on the pullback so far being light, we're still inclined to try to buy the dip. But the realistic support level where that will make sense now appears to be in the $81.00- 81.50 area, which should coincide with the 10-dma (currently $80.94) early next week. Wait for the rebound from support before playing. Note that our stop is currently $80.50, as a break of both the 10-dma and last Monday's low would force us to concede that the breakout has failed. Suggested Options: Shorter Term: The August 80 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 September 85 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders can use the September 80 Call. *August Options Expire in Two Weeks! BUY CALL AUG-80 AZO-HP OI=2161 at $3.70 SL=2.25 BUY CALL AUG-85 AZO-HQ OI=1534 at $1.00 SL=0.50 BUY CALL SEP-80 AZO-IP OI=1336 at $5.30 SL=3.25 BUY CALL SEP-85 AZO-IQ OI=1515 at $2.50 SL=1.25 Annotated Chart of AZO: Picked on July 27th at $80.17 Change since picked: +2.48 Earnings Date 09/26/03 (unconfirmed) Average Daily Volume = 1.31 mln Chart = --- Fedex Corp - FDX - close: 64.66 change: +0.27 stop: 62.99 Company Description: With annual revenues of $22 billion, FedEx Corp. is the premier global provider of transportation, e-commerce and supply chain management services. The company offers integrated business solutions through a network of subsidiaries operating independently, including: FedEx Express, the world's largest express transportation company; FedEx Ground, North America's second largest provider of small-package ground delivery service; FedEx Freight, the largest U.S. provider of regional less-than- truckload freight services; FedEx Custom Critical, North America's largest provider of expedited time-critical shipments; and FedEx Trade Networks, North America's largest customs broker and a provider of international freight forwarding and trade facilitation services. FedEx ranked highest in the J. D. Power and Associates 2002 Small Package Delivery Service Business Customer Satisfaction Study(SM) in the categories of air, ground and international delivery services. (source: company press release) Why We Like It: We have mentioned before how traditional Dow Theory suggests that a sustained rally in the broader markets cannot occur unless there is a rally in the Transports. The month of July was an interesting month as the markets traveled mostly sideways while the Transports did their job by making a steady climb higher. With no participation or follow through by bulls in the rest of the market sectors, the weakness in the Transports on Friday is somewhat foreboding. It would appear the $TRAN is looking tired and it closed back under the 2600 level. FDX also ended the month with a positive gain but has been consolidating some of those gains since the 21st. The rising 50- dma for the stock has held up as support the last three sessions and we're pleased to see the bounce on Friday despite market weakness. Strong earnings results from rivals UPS and ABF in the last two weeks have not given any lift to the group or FDX. There have been several headlines recently about a lawsuit involving FDX, UPS and Astar Air. FDX and UPS claim Astar is a German owned carrier and Federal law prohibits or limits ownership of ground cargo companies by Foreign entities. A recent ruling was a set back from FDX's argument. Meanwhile the stock action in FDX makes us cautious. We're still witnessing a triple-top breakout on its P&F chart but the daily is giving mixed signals. As mentioned earlier the 50-dma is holding up as support but its oscillators have rolled over into bearish signals. We could be seeing a bull flag consolidation pattern form and if that were the case then a move over $65.00 would be a good entry point. Otherwise we are now suggesting traders wait for a move above $66.00. Suggested Options: We're going to list the August, September and October 65 and 70 calls but the recent dips have probably offered opportunities to jump on the 60 strikes as well. *August Options Expire in Two Weeks! BUY CALL AUG 60 FDX-HL OI= 712 at $5.00 SL=3.00 BUY CALL AUG 65 FDX-HM OI=2255 at $0.90 SL= -- BUY CALL SEP 65 FDX-IM OI= 630 at $2.10 SL=1.25 BUY CALL SEP 70 FDX-IN OI= 416 at $0.55 SL= -- BUY CALL OCT 65 FDX-JM OI=3855 at $2.80 SL=1.50 BUY CALL OCT 70 FDX-JN OI=1712 at $0.95 SL=0.50 Annotated chart of FDX: Picked on July 20 at $65.32 Change since picked: -0.66 Earnings Date 09/23/03 (unconfirmed) Average Daily Volume: 1.70 million Chart = --- Golden West Fincl. - GDW - cls: 83.13 chg: +0.53 stop: 81.60 *new* Company Description: Headquartered in Oakland, California, Golden West is the nation's third largest savings institution with assets of $72 billion as of June 30, 2003. Currently operating 476 savings and lending offices in 38 states under the World name, the Company has one of the most extensive thrift branch systems in the country. (source: company press release) Why We Like It: Uh-oh. Friday was not a good day for the markets. The declines may not have been that threatening but the technical damage done to the banking indices is bad news. After weeks of churning sideways the BKX and BIX had pulled back to the simple 50-dma(s) on Thursday. All we needed to see was a bounce. Instead we witnessed a breakdown on Friday. This could spark a whole new round of profit taking in the financial sector. As if GDW didn't already know that. We added the stock to the bullish play list on the 27th of July when it broke to new highs. It's spent the last five days slowing digesting gains. We're not against mild dips because they can offer new traders entry points for the next leg higher. However, GDW is now at a crucial turning point. It bounced off the $82.00 level on Friday morning. We need to see some follow through by the bulls or GDW could see its own breakdown through its 50-dma. Speaking of which we're going to raise our stop loss to 81.60 - just below the simple 50-dma. Volume was pretty strong on Friday for GDW so maybe that was buyers stepping in at the dip. The company did announce a cash dividend of 8.5 cents a share yesterday (payable in September). This actually looks like an entry point for new positions but given the breakdown in the banking indices on Friday we are not suggesting anyone initiate new longs in GDW. Suggested Options: Despite the apparent entry point at the bottom of its rising trend we're not suggesting new positions due to the weakness in the banking indices. We'll re-evaluate on Tuesday. Annotated chart: Picked on July 27 at $85.66 Change since picked: -2.53 Earnings Date 07/21/03 (confirmed) Average Daily Volume: 581 thousand Chart = --- Genzyme Corp - GENZ - close: 49.28 change: -1.20 stop: 47.49 Company Description: Genzyme Corporation is a global biotechnology company dedicated to making a major positive impact on the lives of people with serious diseases and medical conditions. This commitment has driven innovation in treating both widespread diseases and rare genetic conditions, in providing leading diagnostic products and services, in bringing the benefits of biotechnology to the practice of surgery, and in developing novel approaches to cancer. Genzyme's 5,300 employees worldwide serve patients in more than 80 countries. (source: company press release) Why We Like It: This is when you want to hear that robot on Lost in Space shout out "warning, warning!" Friday's performance in GENZ is not good news. The strong month-long channel higher has been broken and oscillators like the MACD, Stochastics, RSI and Momentum all look or are about to turn bearish. Even GENZ's bullish P&F chart has rolled over into a column of O's. The close below the $50 level and its simple 10-dma could just be short-term profit taking. However, the BTK biotech index dropped below its 50-dma and the DRG drug index fell strongly towards its 200-dma. Further breakdowns in either could weigh strongly on GENZ. The stock did have (previous) strong resistance in the $48.00 region so this should come back into play as support. A bounce from $48.00 might be a tempting entry point for more nimble traders and a lower risk one with a stop at $47.49. Unfortunately, given the weakness in GENZ and the relevant sector indices we're really not suggesting new bullish positions at this time. Suggested Options: GENZ has August, September and October options available. However, we're not going to list any as Friday's breakdown doesn't look encouraging. Annotated chart of GENZ Picked on July 22 at $49.76 Change since picked: -0.48 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 3.52 million Chart = --- Kohl's Corporation - KSS - close: 59.35 change: +0.00 stop: 56.50 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: We set a trigger on our KSS play for a reason and that reason should be clear after Friday's failure to rally through it. While the stock looks like it wants to break out and run higher, we need to see it clear that key $60.60 resistance level before playing. Once that breakout occurs, momentum traders can jump in on the breakout, while more conservative players may want to look for a subsequent pullback into the $59-60 area. For now we wait for confirmation of the compelling technical setup. One potential fly in the ointment is the action in the overall Retail index (RLX.X), which finally broke below the bottom of its ascending channel. If KSS is going to break out, it is likely going to need the support of the RLX, which will need to get back over the $338 level that defines the bottom of the channel. Suggested Options: Shorter Term: The August 60 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 September 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders can use the September 60 Call. *August Options Expire in Two Weeks! BUY CALL AUG-60 KSS-HL OI=5655 at $1.45 SL=0.75 BUY CALL SEP-60 KSS-IL OI=1476 at $2.90 SL=1.50 BUY CALL SEP-65 KSS-IM OI=1235 at $1.15 SL=0.50 Annotated Chart of KSS: Picked on July 31st at $59.35 Change since picked: +0.00 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.56 mln Chart = --- PACCAR - PCAR - close: 76.92 change: -0.32 stop: 72.99 Company Description: PACCAR is a global technology leader in the design, manufacture and customer support of high-quality light-, medium- and heavy- duty trucks under the Kenworth, Peterbilt, DAF and Foden nameplates. It also provides financial services and distributes truck parts related to its principal business. In addition, the Bellevue, Washington-based company manufactures winches under the Braden, Gearmatic and Carco nameplates. (source: company press release) Why We Like It: PCAR is a new addition to the call list from Thursday. There has been little change to the stock price and no new news. The original play write up is below. We are a little hesitant to be adding new bullish plays in the current sideways/overbought market but it is hard to ignore PCAR's incredible relative strength. The company announced earnings on July 24th and the numbers were positive. Analyst had been expecting 98-cents a share. The company turned in $1.06 (per diluted share). Revenues were 12 percent higher than the same period last year at $2.0 billion. Net income jumped by 68 percent to $124.1 million. Management said things were improving and the industry saw heavy-duty truck orders jump almost 10 percent in North America. We're actually surprised that management didn't announce another stock split. The breakout over the $75 level of resistance is not only a new yearly high but it's a new all-time high. The burst higher was on stronger than average volume and the stock's MACD has now rolled back up into a buy signal. Stochastics, momentum and RSI are also creeping higher. PCAR's P&F chart is also impressive. The move today produced a fresh triple-top buy signal. We realize that shares look over-extended and due for a major pull back, especially on the weekly chart. However, as a short-term options trader we think there is an opportunity to catch a move to the $82.50 maybe the $85.00 level. We're going to try and reduce our risk with a stop loss at 72.99. We're not opposed to new positions at current levels but the best entry point would be on a dip towards the $75.00-75.50 area (previous resistance). Suggested Options: PCAR currently has August, September, November and January options available. We're going to list August and September strikes with a preference for September 75s and 80s. *August Options Expire in Two Weeks! BUY CALL AUG 75 PAQ-HO OI= 450 at $3.10 SL=1.60 BUY CALL AUG 80 PAQ-HP OI= 66 at $0.70 SL= -- BUY CALL SEP 75 PAQ-IO OI= 39 at $4.70 SL=2.75 BUY CALL SEP 80 PAQ-IP OI= 50 at $2.15 SL=1.10 Annotated Chart: Picked on July 31 at $77.24 Change since picked: -0.32 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.15 million Chart = ************** NEW CALL PLAYS ************** L-3 Communications -LLL - close: 49.90 change: +0.82 stop: 46.50 Company Description: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why we like it: It wasn't all that long ago that Defense stocks were out of favor in the wake of the expected quick victory in Iraq. Since that is old news, this group of stocks is back to trading on its own merits and we can see the bullish trend in the Defense index (DFI.X), which hasn't deviated from its ascending channel since it began in early March. Last week saw the index charge up to test the $580 level and probably the only thing that held it back was the top of that channel. Well that, and the 61% retracement of the 5/02-3/03 decline. But the group looks strong and it appears that it is only a matter of time until that resistance is cleared and that will have the $600 level in play. LLL hasn't been rising at the same rate as the overall DFI index, but it has been chugging along with a series of higher lows and higher highs. Blasting higher last Monday, the stock cleared the $48 resistance on a breakaway gap move and it is currently threatening a breakout over $50. The PnF chart is looking extremely bullish with another Buy signal with the breakout over $46. The current vertical count is $64, so there's definitely some room to run. Any pullback into the $48-49 area looks like a gift of an entry point right here, as the top of last week's gap and the 10-dma ($47.89) should provide solid support for the eventual breakout. More conservative traders may want to wait for the break above $50.50 before playing though, as that will get the stock over last week's intraday highs, setting the stage for a run towards next resistance at $52. Look for renewed strength (preferably a move over $580) from the DFI index before entering on a breakout move. There's also some solid resistance near $54, but we're looking at a more extended target up at $58, which is the site of the September-02 highs. Setting our stop initially at $46.50, should leave plenty of room for a modest pullback without risk of being stopped out prematurely. Suggested Options: Shorter Term: The August 50 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 September 55 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 will want to use the September 50 Call. *August Options Expire in Two Weeks! BUY CALL AUG-50 LLL-HJ OI=1960 at $1.00 SL=0.50 BUY CALL SEP-50 LLL-IJ OI= 926 at $2.05 SL=1.00 BUY CALL SEP-55 LLL-IK OI= 44 at $0.50 SL=0.25 Annotated Chart of LLL: Picked on August 3rd at $49.90 Change since picked: +0.00 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 962 K Chart = ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Black & Decker Corp - BDK - cls: 40.20 chg: -0.66 stop: 42.01 Company Description: Black & Decker is a leading global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. (source: company press release) Why We Like It: The post-earnings depression in BDK continues albeit slowly. Investors were unhappy with the quality of earnings and the 5% decline in sales. Shares of the fabled toolmaker have been slowly deteriorating above support of $40.00 but we expect this level to give soon. Currently, OptionInvestor.com is still untriggered as we wait for shares of BDK to trade or below our entry price of $39.99. We're certainly encouraged by the new failed rally at $41.00 on Thursday, especially since we suggested more aggressive traders consider new bearish positions on just such an occurrence. If our stop at $42.01 is too wide for you consider a stop above Thursday's high or the simple 10-dma. As mentioned in earlier updates the weekly chart shows significant support near the $35.00 level while the daily chart suggests some support near $38.00. We're going to aim for $35.00 and see how it plays out. Suggested Options: We're going to list the September & November strikes but BDK also has August and Februarys available. The August strikes expire in two weeks and BDK may move too slowly to make those worthwhile. We're shifting our preference to September/Novembers. BUY PUT SEP 40 BDK-UH OI=351 at $1.65 SL=0.85 BUY PUT SEP 35 BDK-UG OI= 30 at $0.35 SL= -- BUY PUT NOV 40 BDK-WH OI=166 at $2.45 SL=1.20 BUY PUT NOV 35 BDK-WG OI=281 at $0.80 SL= -- Annotated Charts: Picked on July 29 at $xx.xx Change since picked: +0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 731 thousand Chart = --- Fifth Third Bancorp - FITB - cls: 54.20 chg: -0.81 stop: 56.51 *new* Company Description: Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $88 billion in assets, operates 17 affiliates with 943 full-service Banking Centers, including 132 Bank Mart. locations open seven days a week inside select grocery stores and 1,883 Jeanie. ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee and West Virginia. The financial strength of Fifth Third's affiliate banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa1 from Standard & Poor's and Moody's, respectively. Additionally, Fifth Third Bancorp continues to maintain the highest short-term ratings available at A-1+ and Prime-1 and is recognized by Moody's with one of the highest senior debt ratings for any U.S. bank holding company of Aa2. Fifth Third operates four main businesses: Retail, Commercial, Investment Advisors and Fifth Third Processing Solutions. (source: company press release) Why We Like It: Finally! As expected FITB's series of lower highs and failed rallies at its 200-dma and the $56.50 level have paid off with a more significant drop. Friday's move was a continuation of the Thursday afternoon selling and shares paused near their 100-dma. The weakness in the financial sector with the BIX and BKX both closing below their respective 50-dma(s) on Friday is not good news for the bullish investor. FITB was already an under- performer of the markets and the sector and now that we might see more accelerated profit taking we expect this stock to out perform to the downside. For days we've been suggesting that more aggressive traders target entries on failed rallies under $57.00. They've had ample opportunities. Now that we have a strong close under $55.00 we have an entry point for the rest of us. We've lowered our stop loss to $56.51 to reduce our risk. There is potential support at $52.50 and $51.00. Suggested Options: We're going to list the September and November options. Our preference would be for the $55 strikes but we'll list the 50's as well. *August Options Expire in Two Weeks! BUY PUT SEP 55 FTQ-UK OI= 338 at $2.60 SL=1.30 BUY PUT SEP 50 FTQ-UJ OI= 420 at $0.80 SL= -- BUY PUT NOV 55 FTQ-WK OI= 444 at $3.90 SL=2.00 BUY PUT NOV 50 FTQ-WJ OI=7898 at $1.75 SL=0.90 Annotated Chart: Picked on July 17th at $55.26 Change since picked: -1.06 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 2.4 million Chart link: --- Freddie Mac - FRE - close: 48.10 change: -0.75 stop: 50.25*new* Company Description: Freddie Mac (Federal Home Loan Mortgage Corporation) is a stockholder-owned corporation tht was established by Congress in 1970 to support home ownership and rental housing. FRE purchases single-family and multi-family residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets. The company 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. Why we like it: It took a couple tries to get the job done, but our FRE play looks to have solidified its breakdown under $50, with Thursday's failed rebound at that level and Friday's follow through with another 1.5% loss to end just above $48. This is the lowest close for the stock since early June, and it looks encouraging for a break of that level to continue down towards our $45 target in the near future. The opening spike below $48 looks like a bad tick, as the rest of the day's action was just above there, so we don't yet have the PnF Sell signal working in our favor, but odds favor that occurring early next week. Successive failed rebounds below $50 (preferably below $49) look good for new entries into the play, while momentum traders can jump onto the break below $48. The past few weeks have shown the 10-dma ($50.14) to be acting as solid resistance, so our new stop at $50.25 should be safe. There is the possibility of support appearing near $47, which defined the lows in June, but given the consistent weakness in the bond market, that level should prove to be only a speed bump on the way to our $45 target. Suggested Options: Short-term traders will want to focus on the August 50 Put, as it will provide the best return for a short-term play. Conservative traders will want to utilize the September 50 Put, while aggressive traders looking for a longer-term move down towards $45 or below will want to utilize the September $45 contract, due to its greater insulation against time decay. *August Options Expire in Two Weeks! BUY PUT AUG-50 FRE-TJ OI= 5598 at $2.60 SL=1.25 BUY PUT SEP-50 FRE-TU OI= 1768 at $4.00 SL=2.50 BUY PUT SEP-45 FRE-UU OI= 3201 at $1.65 SL=0.75 Annotated Chart of FRE: Picked on July 22nd at $50.33 Change since picked: -2.23 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 7.35 mln Chart = --- The Home Depot - HD - close: 30.80 change: -0.40 stop: 32.00*new* Company Description: A home improvement retailer, The Home Depot operates more than 1500 stores throughout the United States. The do-it-yourself warehouse retail stores offer building materials, home improvement products and related furnishings. Additionally, the company provides lawn and garden products and an assortment of services to both individual home-owners and independent contractors. Why we like it: It has taken a lot longer than we originally expected, but our HD play is making consistent progress towards our initial target of $30. Shedding another 1.28% on Friday, shares of the home improvement retailer finally gave us the close under $31. The 10-dma ($31.61) appears to be providing resistance on an intraday basis, as the stock continues to ride the lower Bollinger band towards a confrontation with $30 support and the exponential 200- dma ($29.85). Failed rebounds below $31.50 can still be used for aggressive entries, but we must keep in mind that after losing ground every day last week, an oversold rebound may be just around the corner. We're managing our risk against such an event by lowering our stop to $32 this weekend, which is just below breakeven and above last week's best closing levels. Conservative traders will want to harvest gains on a test of the $30 level, while those willing to hold on through a bit of volatility may want to hold on for the expected decline towards our final target of $28. Keep an eye on the action in both the bond market and the Housing sector ($DJUSHB). Strength in either area of the market will likely produce a bounce in HD and we'll want to see price action remain below the 10-dma to give us confidence to hold open positions in anticipation of lower levels. Suggested Options: Aggressive short-term traders will want to focus on the August 32 Put, as it will provide the best return for a short-term play. Longer-term traders will want to utilize the September 30 contract due to its greater insulation against time decay. *August Options Expire in Two Weeks! BUY PUT AUG-32 HD-TZ OI=11174 at $1.95 SL=1.00 BUY PUT SEP-32 HD-UZ OI= 6054 at $2.60 SL=1.25 BUY PUT SEP-30 HD-UF OI= 1752 at $1.25 SL=0.60 Annotated Chart of HD: Picked on July 10th at $32.43 Change since picked: -1.63 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 9.78 mln Chart = --- Merck & Co. - MRK - close: 54.22 change: -1.06 stop: 56.75*new* 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: Providing entries for all tastes, MRK couldn't have performed better for us last week if it had tried. First up was a rebound on Thursday that failed just below the 200-dma and that rollover gave the first potential entry point. Confirming the weakness that was advertised by that rollover, the stock then proceeded to break the $55 level at the open and then trade below $54. The remainder of the day consisted of tight-range trade around the $54 level, with a close fractionally above that level. But by then, the damage was done, as the PnF bullish support line had been violated and the trade at $54 gave a new Sell signal. This looks like the early stages of a solid breakdown and the Pharmaceutical index (DRG.X) breaking below $315 support only confirms that bearish outlook. Successive failed rebounds below $56 (preferably below $55) can be used for fresh entries, while momentum traders coming to the party late can use a trade below $53.50 (Friday's intraday low) as their entry trigger. If entering on further weakness, look for the DRG index to break its 200-dma ($308) as well. Lower stops to $56.75 this weekend, which is just above Thursday's intraday high and the 200-dma. Suggested Options: Short-term traders will want to focus on the August 55 Put, as it will provide the best return for a short-term play. Aggressive traders looking for a sustained move down towards our $50 target will want to utilize the September 50 contract, while more conservative long-term traders will want to focus on the September $55 strike. *August Options Expire in Two Weeks! BUY PUT AUG-55 MRK-TK OI= 5058 at $1.60 SL=0.75 BUY PUT SEP-55 MRK-UK OI= 1935 at $2.70 SL=1.25 BUY PUT SEP-50 MRK-UJ OI= 1737 at $0.80 SL=0.40 Annotated Chart of MRK: Picked on July 29th at $55.39 Change since picked: -1.17 Earnings Date 10/20/03 (unconfirmed) Average Daily Volume = 6.35 mln Chart = --- Progressive Corp - PGR - close: 65.40 chg: -0.59 stop: 67.26 Company Description: The Progressive group of insurance companies ranks third in the nation for auto insurance based on premiums written, offering its products by phone at 1- 800-PROGRESSIVE, online at progressive.com and through more than 30,000 independent insurance agencies. (source: company press release) Why We Like It: We're still stuck in limbo with our put play on PGR. The stock's perilous plummet from north of $72.50 has halted at the $65 mark and it won't budge. Shares have been vacillating above this support level but there is a definite trend of lower highs. Thus, we believe that eventually sellers will overwhelm current demand and send the stock lower. However, given the stock's stubborn opposition to another leg down we have been suggesting that most traders wait for a strong move below the $65.00 mark before initiating any new positions. Suggested Options: PGR has plenty of options to choose from. Currently there are August, September, November and Februarys to choose from. Our preference will be for the September-November strikes with an emphasis on August 65's. *August Options Expire in Two Weeks! BUY PUT SEP 70.00 PGR-UN OI= 14 at $5.70 SL=3.25 BUY PUT SEP 65.00 PGR-UM OI=111 at $2.55 SL=1.30 BUY PUT SEP 60.00 PGR-UL OI=176 at $0.95 SL= -- BUY PUT NOV 65.00 PGR-WM OI=292 at $3.70 SL=1.75 BUY PUT NOV 60.00 PGR-WL OI=200 at $1.90 SL=1.00 Annotated Chart for PGR: Picked on July 23 at $65.22 Change since picked: +0.18 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 941 thousand Chart = ************* NEW PUT PLAYS ************* Anthem Inc. - ATH - close: 74.49 chg: -1.02 stop: 77.01 Company Description: Anthem, Inc. is an Indiana-domiciled publicly traded company that, through its subsidiary companies, provides health care benefits to more than 11.7 million people. Anthem is the fifth largest publicly traded health benefits company in the United States and an independent licensee of the Blue Cross Blue Shield Association. Anthem is the Blue Cross and Blue Shield licensee for Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado, Nevada, Maine and Virginia, excluding the immediate suburbs of Washington, D.C. Anthem had assets of $12.9 billion as of June 30, 2003 and full year 2002 revenue of $13.3 billion. (source: company press release) Why We Like It: Day in and day out investors seem to be looking for the stocks with good news and good fundamentals. So along comes a company like ATH who delivers both with strong earnings and a positive outlook going forward and what do traders do? They sell it! Of course that's not so surprising. The stock is up strongly from its $55 lows in February. What we're witnessing is a simple "sell the news" effect but we believe it could turn into some sharper profit taking now that it looks like the broader markets could dip lower. ATH released its earnings numbers on the 31st of July and the results were indeed positive. The company beat estimates by 6- cents. Unfortunately for ATH and rivals like AET there appears to be some disbelief that the HMO sector can continue to keep up the breakneck pace of profits and new enrollments. Looking at the stock it's easy to see why technicians might be bearish. ATH is showing a strong double-top and shares just recent broke through their rising 50-dma. Not only that but they've broken down though its rising channel and closed under support of $75.00. Volume has been strong the last three days due to earnings but strong volume on big moves is what momentum traders are looking for. Weekly and daily oscillators are all rolling over or are already pointing downward and its has a very ominous looking bearish sell signal on its P&F chart. We're going to suggest new positions at current price levels but another failed rally at $76 wouldn't hurt either. Our first target is the $70 area but it's been suggested that ATH could retest its 200-dma near $67.50. Our initial stop will be $77.01, near the 50-dma. ! Editor's note. It is possible that the double top (with the lower right top) and the recent lows could all be part of a big bull flag consolidation pattern. Traders who feel hesitant might want to wait for a little more conviction and a push through Friday's low. Suggested Options: ATH currently has August, September and December options available but our preference is for the Septembers. *August Options Expire in Two Weeks! BUY PUT SEP 75 ATH-UO OI=2188 at $3.40 SL=1.70 BUY PUT SEP 70 ATH-UN OI= 448 at $1.60 SL=0.90 BUY PUT DEC 75 ATH-XO OI= 273 at $5.30 SL=3.25 BUY PUT DEC 70 ATH-XN OI= 462 at $3.30 SL=1.65 Annotated chart: Picked on August 3rd at $74.49 Change since picked: -0.00 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 1.1 million Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. 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The Option Investor Newsletter Sunday 08-03-2003 Sunday 4 of 5 In Section Four: Leaps: Key Reversal? Traders Corner: Madam Butterfly's Beauty Spreads More Than Profits ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ***** LEAPS ***** Key Reversal? By Mark Phillips mphillips@OptionInvestor.com Thursday's session was not a pretty one for the bulls, and I think it could be argued that it was a key reversal. Positive economic news sent the shorts running for cover at the open, but after churning along near the highs for most of the day it all came tumbling down. That left an awful big "gravestone doji" on the daily chart and a look at the weekly chart shows critical support being threatened and slow Stochastics (10,5,3 setting) finally cracking below the overbought threshold for the first time since entering that region in late April. Could the much-anticipated summer swoon finally be here? I got rather carried away with my commentary last week and after all the changes relative to plays this week, find myself running a bit behind. So I'll be brief, as I think there is one chart that really tells the whole story. It isn't much different than the one we looked at last weekend, as I think the big picture is being painted on the S&P 500. It seems everyone is talking about the 50-dma of this stock or that index lately. The reason why is that a cross of that moving average can often signal an important inflection point in the market. In the chart below, I've put on the standard 50-dma ($983) and 200-dma ($910) and as you can see, the 50-dma was broken on Friday. But the SPX is still trading within the bearish descending wedge that has been building (with a few intraday violations) since the middle of June. So the big question is whether the break of the 50-dma on Friday was really significant. I don't think it was. Oh, it wasn't irrelevant. But I don't think it is the "key" breakdown the market is waiting for. Daily Chart of the S&P 500 In addition to the simple 50/200 moving averages, I've added 50/200 exponential moving averages, which apply a greater weighting to the more recent data. The important point is that the 50-ema is currently $976.82, which is just above the bottom of that bearish wedge. I think that $975 level will be the key test and I expect the bulls to try at least one more time next week to defend it. I think the different use of the 200-dma is critical as well. Looking back over the past several months, I can see a decent case for the 911 area being solid support (along with it being a significant psychological level), but I think the exponential 200-dma ($939.50) may be more critical to the debate on the longevity of this "bull market" we've been 'enjoying' these past few months. Note how the 940 level was a strong resistance zone to push through on the way up and I suspect it may be again on the way down. But the battle right now has shifted to the wedge and the 50-dmas. Rather than a slow and boring August, we may have our fireworks showing up a month late! I've been saying for weeks that I can't see where the fuel for further upside in the market was going to come from, but with market internals consistently strong, it has been hard for the bears to make any progress either. Turning to the internals, I certainly don't see a dramatic weakening yet. How many times have I said that in the past several weeks? Too many, that's for sure! But turn to the bullish percent readings and I think you'll agree. Here's the updated table for the week. NASDAQ-100 - 75% Still Bull Confirmed, down from the 91% high NASDAQ Composite - 71.84% (just off the 73.50 all-time high) DOW - 80% (Still in Bull Correction) S&P 500 - 76.20% (Cycle high of 82.80% - Now Bull Correction) S&P 100 - 82% (Just below cycle high, 11/98 all-time high = 84%) It almost seems as though nothing really happened last week, doesn't it? We can turn to the Sharpcharts of bullish percent and while we don't see any real renewal of strength, neither do I see any significant weakness. The DOW and COMPX are joining the frustratingly slow declines in the SPX and NDX, but as you can see, Mr. Market is still playing his hand very close to his chest. Feel free to take a look for yourself at the following link. http://stockcharts.com/def/servlet/SC.web?c=$bpspx,uu[w,a]dacaynay[dd][pb10][iLd20]&pref=G Here are the pertinent Bullish Percent symbols. DOW - $BPINDU SPX - $BPSPX OEX - $BPOEX NDX - $BPNDX COMPX - $BPCOMPQ Aside from the setup that continues to taunt us in the SPX chart above, I think the key development last week was the action in the VIX. Monday's session ended with the VIX below 20 for the second day in a row, and it has shot significantly higher in the past few days, ending at 22.78 on Friday. While that is still historically low, Friday's rise amounted to 7.25% and the VIX ended the week with a gain of 14.2%. I won't say that the VIX is heading straight up from here, but I think we've seen the VIX low for this cycle. While we haven't seen a strong show of market weakness just yet, I'm going to go out on a limb and say the top is in for this market and say that it needs to come in and at least drop back to a 38% retracement of its rally off the March lows. I personally think much lower levels are in order, but there is still far too much bullishness among market participants for a strong downdraft to materialize right now. Faith in the fabled 2nd half recovery will still keep this pig propped up for a while longer, but it is only a matter of time until it comes crashing down to new lows. For now, our task is to play the rather moderate downside between now and October, as I suspect we'll see another bout of irrational bullishness to round out the year. Since I'm already running late on my deadline, we better get right to the plays and update them accordingly. Once again, it was a busy week here. Portfolio: HD - Still moving in our favor, HD is being pressured by the continued rise in bond yields, which is in turn impacting both the Housing sector and the Retail sector. The $DJUSHB index broke key support on Friday and the Retail index (RLX.X) slipped below the bottom of its rising channel. At the same time, HD closed below the $31 level for the first time since late May and a test of the $30 level looks like it could arrive early next week. Conservative traders may want to harvest some gains there, but we're going to try to hold on for a decline down to the $28 level. Note that the 200-dma is at $27.11 and the 50% retracement of the January-June rally is at $27.41. Our stop is now set at $32.50, which is the site of the 20-dma and just over what should be strong resistance at $32. Once the stock breaks below $30, that stop should be trailed to $32. SMH - The Semiconductor index (SOX.X) is holding up better than just about any other area of the Technology market and once again last week, the SOX rebounded from just above the bottom of its ascending channel. Correspondingly, the SMH is looking a lot stronger than we'd like to see, as it continues to hold in the upper half of its own channel, finding support just above the 20- dma ($31.77). We need to see a close below that moving average and preferably $31.50 before we'll be able to breathe on this play again. Thursday's early surge had the SMH trading over our $33 stop, so I recognize that some of you may have been stopped out of the play. I wouldn't be in a hurry to re-enter the play until we see some definite signs of weakness. Once they emerge, even if we've already been stopped out officially, I'll be looking to get right back in due to my bearish expectations for the sector through the end of the year. ADBE - I guess we'll have to call that a false breakdown for now, as ADBE's drop below $32 on Wednesday met with an immediate rebound and the stock is now hugging the bottom of its broken trendline. I still feel bears have control here, but only by the narrowest of margins. The next key test on the downside will be the 200-dma near the pivotal $30 support level. With the PnF chart now clearly on a Sell signal (target $21) there's certainly plenty of bang for the buck in this bearish play. But first the bears are going to need to accomplish that trade at $30, which will accomplish 2 important goals -- it will generate another PnF Sell signal and break below the bullish support line. For now, we need to remain cautious, keeping our stop in place and waiting for selling pressure to pick up again. Maintain stops at $36.50. DJX - Hey, we finally got our entry! Patient traders should be thrilled. Details below. Watch List: LEH - This is looking like another missed opportunity to me, with the Brokerage index (XBD.X) cratering under $550 support on Friday and LEH finally losing the $63 support near its 50% retracement of the March-June rally. Friday's decline dropped LEH all the way to the $61 and the stock is nearing what should be strong support at both the 62% retracement ($60.40) and the 200-dma ($60.46). We'll need to watch for the oversold rebound and see how high it carries before deciding whether there is still a future in the downside on LEH or if we ought to just remove it from consideration. For now, I'm leaving the entry target set at $66-67. RIMM - Wow! That's a big move and clearly we're removing the stock from consideration this weekend. See below for details. Radar Screen: LEN - Too much time waiting for a better entry point and I missed this play. It would have worked out nicely, but I arrived at the party a bit too late. Now that the stock is nearing major support and is nearly $20 below its June high, I think it is best to remove it from consideration. GM - We're starting to see some weakness in the DOW (hence our new Portfolio play), but something about GM just doesn't feel right. Even in the wake of lackluster earnings and disappointing sales numbers last week, the stock continues to meander aimlessly between $35-38. I am of the view that next quarter will actually see the company lose money on its automotive manufacturing business and with the sharp rise in interest rates, I think the GMAC financing arm is going to get pinched hard as well. With profits getting squeezed on both ends, it will be interesting to see how the company handles the continuing problem of its pension underfunding. But we need a more favorable price point in order to play. In actuality, I would have put GM on the Watch List this weekend, but simply ran out of time. So long as price continues to meander in this range, look for GM on the Watch List next weekend. We'll still be targeting a failed rebound in the $39-40 area. XL - Another missed opportunity, as XL cratered in response to its earnings report. My target for the play would have been in the $70-72 area, and with the stock ending the week at $75, there just isn't a favorable risk/reward ratio for us. Hopefully next time I can be quicker on the draw. Closing Thoughts: The Radar Screen is a bit anemic this weekend as I ran out of time with all the new play writeups. But we'll look to fill it up again next weekend. In retrospect, I should have put both LEN and XL on the Watch List last weekend, as we'd be sitting on some nice paper gains tonight. Fortunately there's always another opportunity lurking just around the corner! Even though we really haven't seen it confirmed either by price action or internal weakening yet, reading between the lines, I think the market is getting ready to tip over and there are likely to be some modest profits to be had between now and the seasonal October bottom. I've been leaning to the downside for so long I feel like I have a permanent crick in my back, but I want to make sure that I'm clear on my expectation that this is not going to be a major slide. I view this impending downward move as a correction in the overall bullish move, which may very well continue through early 2004. We'll take what the market gives us on the way down and then start looking for some bullish plays once we've seen that 38% retracement we've been expecting. Have a great weekend! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: HD 07/09/03 '04 $ 32 HD -MZ $ 2.45 $ 3.60 +46.94% $32.50 '05 $ 30 ZHD-MF $ 3.20 $ 4.20 +31.25% $32.50 SMH 07/09/03 '04 $ 30 SMH-MF $ 2.70 $ 2.30 -14.81% $33.00 '05 $ 30 ZTO-MF $ 5.00 $ 4.50 -10.00% $33.00 ADBE 07/17/03 '04 $ 35 AEQ-MG $ 4.20 $ 5.10 +21.43% $36.50 '05 $ 35 ZAE-MG $ 7.20 $ 7.90 + 9.72% $36.50 '06 $ 35 WAE-MG $ 9.00 $ 9.50 + 5.56% $36.50 DJX 07/31/03 '03 $ 92 DJV-XN $ 3.80 $ 4.80 +26.32% $95.50 '04 $ 92 YDK-XN $ 8.20 $ 9.00 + 9.76% $95.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: LEH 07/20/03 $66-67 JAN-2004 $ 65 LEH-MM JAN-2005 $ 65 ZHE-MM JAN-2006 $ 60 WHE-ML BBH 08/03/03 $135-137 JAN-2004 $130 BBH-MF JAN-2005 $125 XBB-ME JAN-2006 $120 YEE-MD WMT 08/03/03 $57-58 JAN-2004 $ 55 WMT-MK JAN-2005 $ 55 ZWT-MK JAN-2006 $ 55 WWT-MK New Portfolio Plays DJX - Dow Jones Industrials $92.34 **Put Play** We certainly had to exercise the patience of Job to finally get a decent entry in this play, as it has been lurking on the Watch List since early May. But I think we finally got enough stars to align in our favor on Thursday and if this play doesn't work, it will certainly go against a lot of what I understand about Technical Analysis. We had to wait nearly two months for the retest of the $93.50 level, but it finally arrived on Thursday, with the DJX tagging $93.61, just slightly exceeding the top on June 17th. But the market internals are definitely more in our favor than they were in mid-June. The insane levels of new highs vs. new lows has abated significantly, the DOW Bullish Percent has finally reversed to Bull Correction at 80%, we've seen the VIX edge just below the 20 level and it rose sharply on Friday, giving a bit more conviction to the bears. On top of all that, it looks like we have the setup for a double top on the DJX and some downside follow-through next week will give us some bearish divergence on the weekly Stochastics (5,3,3 setting). It has certainly been an irrational market these past couple months and the possibility exists for the weakness we saw late last week turn on a dime. But this is probably as good as the technical setup for a bearish position trade on the DOW is going to get. Another failed bounce below Thursday's intraday high can be used for entries and we're starting with our stop set at $95.50, just above the 50% retracement of the entire bear market decline. We really shouldn't see that level broken, especially given Thursday's DOW Theory non-confirmation, with the DOW once again failing to confirm the Transports break of the June highs. The first significant milestone for the play will be a break below the 50- dma (currently $90.67), then a close under $90. There may be some mild support found near $87, but once the $90 level is broken, the DJX ought to seek out strong support at $85 before being able to stage more than a weak rebound. BUY LEAP DEC-2003 $92 DJV-XN $3.80 BUY LEAP DEC-2004 $92 YDK-XN $8.20 New Watchlist Plays BBH - Biotechnology HOLDR $132.50 **Put Play** A few words of caution before we even dive in here. This is a very aggressive play, where we're looking to pick a top in what has been a very strong sector that is not as susceptible to the downward tug of economic weakness. That said, the continued inability of the Biotechs (as measured by BBH) to push measurably higher than the $135 resistance level we've been monitoring deserves attention. The slower (10,5,3) weekly Stochastics have been buried in overbought for since the middle of April, and there is very strong resistance looming at the $140 level. In fact, connecting the weekly closing highs from June and November of 2001 produces a slightly descending trendline that exactly nailed last week's high of $137. While there are a lot of factors that indicate IMPENDING weakness, we haven't seen it yet, and that is what makes this a more risky play. While the original PnF bullish price target was only $114 and BBH has gone well beyond that, we will need to see a trade at $120 just to give the first sign of weakness with a Sell signal on the PnF chart. I want to get in ahead of that event, so I'm targeting another failure to penetrate the $135-137 area. In keeping with the aggressive nature of the play, we're going to have to work with a liberal stop as well, and I'm starting coverage with a stop at $145, just above the June 2001 high. I think the aggressiveness in the play is warranted, as a trade at $120 would give a bearish price target of $102. If achieved, that would make the risk eminently worthwhile. Note that the strikes I've listed proceed progressively further out of the money as we go forward in time. This is one way of mitigating risk in the play, as with more time in the '05 and '06 LEAPS and with them being further out of the money, an adverse move will do less damage to our position value. By the same token, it means we'll need a larger move in our favor to start seeing the position pay off, but I think there is more than enough time available for that to occur. BUY LEAP JAN-2004 $130 BBH-MF BUY LEAP JAN-2005 $125 XBB-ME BUY LEAP JAN-2006 $120 YEE-MD WMT - Wal Mart Stores $55.27 **Put Play** I know I've been making cautionary statements about playing the downside in shares of WMT in recent weeks due to my expectation of a run at the descending trendline on the weekly chart at $60. But based on last week's price action, I no longer have faith in such a move unfolding. One key to my change in perception was the price action late last week in both WMT and the Retail index (RLX.X). The RLX has been working higher in an ascending channel that began in early April, and for the first time on Friday, it closed below the bottom of that channel. Rising bond yields are going to have a very negative impact on the refi boom (I think it already is) and that is going to put the pinch on consumers' discretionary spending, despite the tax cut. The intraday reversal on Thursday looked particularly bearish, for both WMT and the RLX, with both showing a trend of lower highs for the past few weeks. But it should be perfectly clear that we have yet to see anything that could be called a significant breakdown. The first thing along those lines that is likely to materialize is for WMT to break and close below its 50-dma (currently $54.84). Before that happens though, I hope we get served up a favorable entry point in the form of a failed rally below the $57-58 area. Weekly Stochastics (10,5,3) are just starting to roll at a lower low than the last upward cycle and should that rollover complete, we'll have a nice bearish divergence setup with higher price highs and lower Stochastics highs. Once support decisively breaks, the first objective will be a drop to the 200-dma just under $53. But our real goal for the play will be for a drop to the $48 area to test the ascending trendline connecting the July 2002 and March 2003 lows. I want to leave plenty of room for the play to gyrate before really picking up steam to the downside, so initial stops will be set at $61, just above that dominant descending trendline. BUY LEAP JAN-2004 $55 WMT-MK BUY LEAP JAN-2005 $55 ZWT-MK BUY LEAP JAN-2006 $55 WWT-MK Drops RIMM - $27.28 Wow! That was amazing AND unexpected! We were looking for a bearish play in shares of RIMM just a week ago, and that plan got blown totally out of the water on Thursday and Friday as the stock exploded upwards on very heavy volume. The only "news" to which the move can be attributed is a rumor that HPQ is considering a takeover bid. Talk about dodging a bullet! For those of you wondering why we didn't take an entry into the play on the rollover early in the week from the prescribed $23 area, it goes back to the old volume rule. RIMM had rallied strongly on robust volume the prior week, bringing it right up to resistance. The rollover from that resistance came on anemic volume, indicating that there was no conviction to the drop. Once again, paying attention to volume kept us out of trouble. Needless to say, it's better to retire this play candidate from consideration with the volatility that is likely to surround the stock until the takeover rumor is either confirmed or refuted. ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Madam Butterfly's Beauty Spreads More Than Profits By Mike Parnos, Investing With Attitude While living in NYC, I heard about a woman known to the informed public as "Madam Butterfly." Curiously enough, the mention of her name did not inspire thoughts of the "butterfly" options trading strategy. She was reputed to have a unique skillset that generated substantial profits along with an equal amount of pleasure. Hers was more of a "hands on" strategy than our typical CPTI "hands off" strategies. Both, however, can yield an appealing "end" product. I can't elaborate upon Madam Butterfly's successful methods (trade secrets, you know). We'll have to leave her skills to your imagination. I can, however, go into some depth on our "butterfly" options strategy. ______________________________________________________________ The market has been churning lately. It wants to go higher. It's made a real nice move, but it seems to have stopped. Maybe it's taking a breather before resuming its climb. Maybe it simply went too far too fast and will move back down a bit. While the market is banging its head against resistance, regrouping and trying again, not much progress is being made. As we've seen in the past, when the market goes into consolidation mode, it doesn't kid around. It may stay in the range for months. The Butterfly This is a passive-aggressive method to make money in a directionless market. It’s a safe way to take advantage of premium decay. The risk reward is very attractive. It’s a great strategy for CPTI students to add to their trading arsenals. They probably call it a "butterfly" because it's a beautiful thing with it works. Butterfly spreads can use either puts or calls and can be long or short. It doesn’t really matter which. The risk/reward profiles are the same. So, you should price it out both ways and, obviously, use the method that provides you with the higher credit (short butterfly) or the lowest debit (long butterfly). To simplify things, we’ll use call options in our first butterfly example. We'll address other types of butterfly spreads in future columns. A “Call Butterfly” consists of: 1. The purchase of 1 in-the-money (ITM) call option 2. The sale of 2 at-the-money (ATM) call options. 3. The purchase of 1 out-of-the-money (OTM) call option All options will have the same expiration. The object is to take advantage of the higher premiums in the ATM calls, and use those to pay for the other long calls. If it works out, the risk will be minimal and the potential rewards worthwhile. Don’t be too early to the party. No need to be there before the bar opens. Butterflies work best when the time exposure is limited. The less time with your assets exposed, the fewer bad things can happen. Today’s Example: Surprise, surprise. We’re going to use our favorite trading vehicle – the QQQs as our hypothetical example. Friday they traded at about $31.50. We can expect the QQQs to bounce around a bit, but we’re only going to be in this position for two weeks. Okay, let’s make a butterfly that would make Madam Butterfly proud. Prepare for take-off. A "butterfly" spread consists of a “body” and two “wings.” Do we have any volunteers to be the body? The wings? We’re going to: a) Buy 1 contract – QQQ Aug. 29 calls @ $2.60 = ($2.60) – a “wing” b) Sell 2 contracts – QQQ Aug. 31 calls @ $1.00 = $2.00 – the “body” c) Buy 1 contract – QQQ Aug. 33 calls @ $.20 = ($.20) – a “wing” Our cost, and maximum risk, is $.80 – or $80 per contract. The maximum profit is the difference between the body strike $31 and either wing less the initial debit. That’s is $2.00 less $.80 = $1.20. Maximum profit is achieved if the QQQs finish at exactly $31. You profit if the QQQs finish anywhere between $29.80 and $32.20. The “What If” Analysis . . . As CPTI students know, the only way to understand a strategy is to examine all possible scenarios. So let’s analyze this puppy. What if the QQQs finish at $27? a) Aug. $29 call expires worthless; b) Both Aug. $31 calls expire worthless; and c) Aug. $33 call expires worthless. You experience the maximum loss of $.80. What if the QQQs finish at $30.25? a) Aug. $30 call is worth $1.25; b) Both Aug. $31 calls expire worthless; and c) Aug. $33 call expires worthless. You make a profit of $.45 ($1.25 less initial $.80 debit). Now $.45 doesn’t sound like much, but what was the risk? $.80. That’s a 56.25% return on risk. What if the QQQs finish at $32.00? a) Aug. $29 call and one Nov. $31 call are exercised – Yielding $2.00; b) The other short Aug. $31 call must be bought back for $1.00 (leaving $1); and c) Aug. $33 call expires worthless. You make a profit of $.20 ($2.00 less $1.00 buyback less $.80 initial debit). Again, it may not seem like a lot, but it’s still a 25% return on risk for only two weeks of exposure. What if the QQQs finish at $33.75? a) Aug. $29 call and one Aug. $31 call are exercised – yielding $2.00: b) The other Aug. $31 call and the Aug. $33 call are exercised – costing $2.00. The $2.00 profit and $2.00 debit cancel each other out and you experience the loss of the initial $.80 debit. The butterfly, as you can see, is a commission intensive spread. So, if you’re still using a full service broker who charges $5 a contract, you need to figure these commissions into your calculations. A butterfly spread may also yield a seemingly small profit. If you decide to partake, it may be wise to do a large number of contracts to minimize the effect of commissions. You won’t make a killing, but, if you’re right, the percentage return is very healthy – and it's a very "hands off" strategy. Watch for stocks trending sideways, or consolidating in a range – possibly in the handle of a cup-and-handle formation. Try to use, for the body of your butterfly spread, option strikes that have the largest open interest. As we’ve discussed, market makers like to move their stocks towards the high open interest strikes. You'll find that the longer you're exposed to the market, your initial cost is a little less. The same butterfly spread for September would cost only about $.60. The maximum potential profit thereby becomes $1.40. The problem is that the exposure has increased from two weeks to seven weeks. ____________________________________________________________ AUGUST CPTI PORTFOLIO TRADES August Position #1 – BBH Iron Condor – Closed at $132.56 We sold 10 contracts of BBH August $125 puts @ $1.45 and bought 10 contracts of BBH August $120 puts @ $.80 for a net credit of $.60. We also sold 10 contracts of BBH August $140 calls @ $1.75 and bought 10 contracts of BBH August $145 calls @ $.85. We have a maximum profit range of $125 to $140 with a total credit of $1,550. Our risk is $3,450. At $132.56, we're comfortably positioned – smack dab in the middle of our range. August Position #2 – LLTC Sell Straddle – Closed at $37.15 We sold 10 contracts of LLTC August $35 call @ $1.45 and sold 10 contracts of LLTC August $35 put @ $2.40 for a total credit of $3.45. Our maximum profit can be about $3,450 if LLTC finishes at $35. Our profit range is from $31.55 to $38.45. Our bailout points are at the parameters of the profit range. At $37.15, we're still in pretty good shape, but there's still a long way to go. August Position #3 – SPX Iron Condor – Closed at 980.15 This is a slightly more aggressive position than usual. Why? The range is smaller. Also, note the different number of contracts we use for the calls and the puts. We sold 3 contracts of the SPX August 1025 calls and bought 3 contracts of the August 1050 calls for a net credit of $3.70 ($1,110). Then, we'll sold 6 contracts of the August SPX 960 puts and bought 6 contracts of the August SPX 950 puts for a net credit of $2.00 ($1,200). The total credit was $2,310 – and that's our maximum profit. I reduced the number of contracts on the bear call spread because there's a $25 exposure. As of Friday's close, SPX did not have call strike prices between 1025 and 1050. Monday, no additional strikes were opened, so we went with the original plan. Thus far, no additional strikes, between 1025 and 1050 have been opened. The SPX closed at 980.15 – comfortably within our range. ______________________________________________________________ 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 ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Sunday 08-03-2003 Sunday 5 of 5 In Section Five: Covered Calls: Q&A With The Covered-Calls Editor Naked Puts: Fundamentals Of Success Spreads/Straddles/Combos: Stocks Retreat As Employment Data Stalls Recovery Hopes Updated In The Site Tonight: Market Posture: Simon Says, "Sideways! Seek profits while you still can!" ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************* COVERED CALLS ************* Trading Basics: Q&A With The Covered-Calls Editor By Mark Wnetrzak One of our new readers wants to know how much he can expect to earn on a consistent basis with the covered-calls strategy. Attn: Covered-Calls Editor Subject: Strategy Selection Mark, Just one question: Is it realistic thinking [that] someone could generate a 3% or more monthly return on average doing covered calls with say $100,000 or $1,000,000? Thanks for all you do. KR Hello KR, The success of any trading strategy, whether it is aggressive or conservative, will always depend on money-management discipline. In-the-money covered calls simply offer a higher probability of profit that requires no movement in the underlying equity. The fact that it is really difficult to predict stock movement (look at some of the wild moves the last few days) reinforces our reasoning for choosing to hedge stock ownership with ITM covered writes. The key to this strategy is the "magic" of compound interest and Lawrence McMillan, the "guru" of option trading strategies, suggests looking for a minimum return of 1% (2% with margin) per month, with downside protection of at least 10%, because it will force one to choose ITM covered-calls. The answer, then, is "Yes, it is a viable strategy but it requires a very disciplined approach." The ITM covered-write strategy is best for conservative traders who prefer to target the higher probability of obtaining an acceptable return, which correlates with a low risk-reward tolerance. It doesn't guarantee success, as there is risk of loss in all trading. Some of the candidates we profile will experience catastrophic losses and, as the professionals say, "Trading, whether buying stock, shorting, writing covered-calls, etc., is hard work and can be quite difficult when the markets change character." The key is to know intimately all aspects of any strategy you intend to use so that you can react when things don't go as planned. Larry McMillan's popular book "Options: As A Strategic Investment", is very informative on the subject of covered-calls and is highly recommended by experienced traders. Good Luck, Mark W. 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 SLNK 15.40 18.38 AUG 15.00 1.15 0.75* 7.6% IMCL 39.86 39.00 AUG 35.00 6.40 1.54* 6.7% BEAS 12.79 13.07 AUG 12.50 1.00 0.71* 6.5% CYBX 23.38 29.31 AUG 20.00 4.40 1.02* 5.8% BONZ 15.28 16.26 AUG 15.00 0.85 0.57* 5.7% SSTI 5.47 6.12 AUG 5.00 0.75 0.28* 5.2% CHINA 13.48 11.99 AUG 10.00 4.00 0.52* 4.8% DRIV 21.98 21.00 AUG 20.00 2.80 0.82* 4.6% MOGN 31.97 38.85 AUG 30.00 2.90 0.93* 4.6% EXTR 5.75 6.16 AUG 5.00 0.95 0.20* 4.5% CY 13.84 14.30 AUG 12.50 1.95 0.61* 4.5% INSP 15.52 15.97 AUG 15.00 1.20 0.68* 4.1% RFMD 5.89 7.59 AUG 5.00 1.15 0.26* 4.0% ANEN 10.75 11.05 AUG 10.00 1.10 0.35* 3.9% ABGX 13.05 12.22 AUG 12.50 1.15 0.32 3.9% STEL 8.25 7.17 AUG 7.50 1.10 0.02 0.2% INET 5.08 4.61 AUG 5.00 0.45 -0.02 0.0% THOR 16.35 14.32 AUG 15.00 1.95 -0.08 0.0% ROXI 7.99 6.98 AUG 7.50 0.90 -0.11 0.0% AW 12.55 10.83 AUG 12.50 0.60 -1.12 0.0% OIIM 17.90 14.48 AUG 17.50 1.20 -2.22 0.0% * Stock price is above the sold striking price. Comments: Is the beast we call the "Market" having an identity crisis? Good news appears no longer to be the catalyst it was a few months ago. Maybe it is time to be a bit more defensive? In the model covered- call portfolio, a few issues have suffered from a "sell-the-news" post-earnings drop: Allied Waste (NYSE:AW), O2Micro (NASDAQ:OIIM) and Roxio (NASDAQ:ROXI). OIIM will be shown closed next week. AW and ROXI are also strong candidates for an early exit and will be shown closed on further weakness, as both stocks are testing their 50-day EMAs. Of course, adjusting the position by rolling forward and/or down could also be a viable choice for those investors with a longer-term neutral-to-bullish outlook. Other candidates on our early-exit watch list include: Abgenix (NASDAQ:ABGX), Stellent (NASDAQ:STEL), Instinet (NASDAQ:INET) and Thoratec (NASDAQ:THOR). Positions Previously Closed: Boston Communications (NASDAQ:BCGI) 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 IMGN 5.05 AUG 5.00 GMU HA 0.50 184 4.55 14 21.5% ISPH 12.75 AUG 12.50 JPU HV 0.80 155 11.95 14 10.0% CHIC 12.51 AUG 12.50 UYC HV 0.55 206 11.96 14 9.8% DPMI 20.43 AUG 20.00 DUD HD 1.10 25 19.33 14 7.5% DIGE 32.50 AUG 30.00 QDG HF 3.40 280 29.10 14 6.7% AFFX 23.30 AUG 22.50 FIQ HX 1.45 3351 21.85 14 6.5% NAV 40.59 AUG 40.00 NAV HH 1.75 1714 38.84 14 6.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** IMGN - ImmunoGen $5.05 *** Aventis Deal! *** ImmunoGen (NASDAQ:IMGN) is a developer of antibody-based cancer therapeutics. Its proprietary, tumor-activated prodrug (TAP) technology combines extremely potent, small-molecule drugs with monoclonal antibodies that recognize and bind specifically to tumor cells. The company licenses its TAP technology to other companies for use with their antibodies. IMGN also uses its proprietary TAP technology in conjunction with its in-house antibody expertise to develop its own anti-cancer products. ImmunoGen has technology out-license agreements with Genentech, Millennium Pharmaceuticals, Abgenix, and Boehringer Ingelheim, which permit these companies to use its TAP technology with their antibodies to develop their own TAP products. Shares of ImmunoGen soared on Thursday after the company said that the drug maker Aventis will pay as much as $99 million in research funding for rights to develop and commercialize its experimental cancer drugs. We simply favor the bullish break-out on heavy volume and investors who wouldn't mind owning ImmunoGen can use this position to speculate on the company's future. The company will report earnings on August 7. AUG-5.00 GMU HA LB=0.50 OI=184 CB=4.55 DE=14 TY=21.5% ***** ISPH - Inspire Pharma $12.75 *** FDA Priority Review! *** Inspire Pharmaceuticals (NASDAQ:ISPH) is a development-stage company engaged in the discovery and development of novel pharmaceutical products that treat diseases characterized by deficiencies in the body's innate defense mechanisms of mucosal hydration and mucociliary clearance, as well as other non-mucosal disorders. The company's technologies are based, in part, on exclusive license agreements with The University of N.C. at Chapel Hill. The company has five product candidates, all of which are P2Y2 receptor agonists, in clinical development. These include diquafosol tetrasodium (INS365) for the treatment of dry eye disease; INS37217 Intranasal for upper respiratory disorders; INS316 Diagnostic to aid in the diagnosis of lung cancer and lung infection; INS37217 Respiratory for the treatment of cystic fibrosis, and INS37217 Ophthalmic for the treatment of retinal disease. Inspire jumped higher on Thursday after the company said the FDA granted a priority review of the drug company's treatment for dry eye, a painful condition that affects about 10 million Americans. Traders can use this position to speculate on the near-term performance of the issue. AUG-12.50 JPU HV LB=0.80 OI=155 CB=11.95 DE=14 TY=10.0% ***** CHIC - Charlotte Russe $12.51 *** Bracing For A Rally *** Charlotte Russe Holding (NASDAQ:CHIC) is a mall-based specialty retailer of fashionable, value-priced apparel and accessories targeting young women between the ages of 15 and 35. The company has two distinct, established store concepts, Charlotte Russe and Rampage. The company's Charlotte Russe stores offer fashionable, affordable apparel and accessories that have been tested and accepted by the marketplace, thus appealing to women who prefer established fashion trends. The company's Rampage stores feature emerging fashion trends and thus appeal to women who have a flair for making fashion statements and who want to create a cutting-edge look. As of September 28, 2002, the company operated 197 Charlotte Russe stores, 44 Rampage stores and 10 Charlotte's Room stores throughout 34 states and Puerto Rico. CHIC rallied in the middle of July after Banc of America raised its rating on the company from "neutral" to a "buy." Our outlook is also bullish, due to the recent technical strength and this position offers a short- term, low-risk cost basis in the issue. AUG-12.50 UYC HV LB=0.55 OI=206 CB=11.96 DE=14 TY=9.8% ***** DPMI - Dupont Photomasks $20.43 *** Bottom Fishing! *** Dupont Photomasks (NASDAQ:DPMI) is a world-wide provider of microimaging solutions, developing and producing advanced photomasks, a key enabling technology used in the manufacture of semiconductor and other microelectronic devices; pellicles, the protective covers for photomasks, and electronic design automation (EDA) software. Photomasks, also called masks, are high-purity quartz or glass plates containing precise, microscopic images of integrated circuits that are used as masters, similar to negatives in a photographic process, to optically transfer the image of circuit patterns onto semiconductor wafers during the fabrication process. DPMI is developing a suite of software tools that ensures manufacturability of deep subwavelength designs during the design phase, and these products will significantly reduce the design cycle time of ICs. DPMI has been in a Stage I base for over a year with strong support around $19. Investors who retain a bullish long-term outlook on the company can use this position to establish a relatively low-risk cost basis in the issue. AUG-20.00 DUD HD LB=1.10 OI=25 CB=19.33 DE=14 TY=7.5% ***** DIGE - Digene $32.50 *** ACOG Recommended! *** Digene (NASDAQ:DIGE) develops, manufactures and markets proprietary gene-based testing systems for screening, monitoring and diagnosis of human diseases. Its primary focus is in women's cancers and infectious diseases. The firm has applied its proprietary Hybrid Capture technology to develop a unique diagnostic test for human papillomavirus, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. In addition to its HPV Test, the company's product portfolio includes gene-based tests for detecting chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus. Digene exploded higher on Thursday after the American College of Obstetricians and Gynecologists (ACOG) recommended using Digene's HPV test, which was recently approved by the FDA, to screen for cervical cancer. The rally on heavy volume suggest further upside potential and investors can use this position to speculate on that outcome. AUG-30.00 QDG HF LB=3.40 OI=280 CB=29.10 DE=14 TY=6.7% ***** AFFX - Affymetrix $23.30 *** Genomic Research Giant! *** Affymetrix (NASDAQ:AFFX) is a company engaged in the development, manufacture, sale and service of systems for genetic analysis in the life sciences. The company has developed and intends to establish its GeneChip system and related microarray technology as the platform of choice for acquiring, analyzing and managing complex genetic information. The company's integrated GeneChip platform consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays, as well as software to analyze and manage information from the probe arrays. AFFX's related microarray technology includes instrumentation, software and licenses for fabricating, scanning and collecting and analyzing results from low-density microarrays. Affymetrix reported a 2nd-quarter profit on July 23 due to lower expenses and higher sales of its gene chips and instruments. The company also projected 3rd-quarter revenue of $68 million to $73 million and net income of 7 cents to 9 cents per share. Investors who want to own a popular issue in the genomic group should consider this position. AUG-22.50 FIQ HX LB=1.45 OI=3351 CB=21.85 DE=14 TY=6.5% ***** NAV - Navistar $40.59 *** Hot Sector! *** Navistar International (NYSE:NAV) is a holding company whose principal operating subsidiary is International Truck and Engine Corporation. The company operates in three principal industry segments: truck, engine and financial services. The truck segment is engaged in the manufacture and marketing of class five through eight trucks, including school buses, and operates primarily in the U.S. and Canada, as well as in Mexico and other selected export markets. The engine segment is engaged in the design and manufacture of mid-range diesel engines and operates in the U.S., Brazil and Argentina. The financial services operations provide wholesale, retail and lease financing for new and used trucks sold by the NAV's subsidiary and its dealers. The financial services operations consist of Navistar Financial Corporation and the company's foreign finance and insurance subsidiaries. While analysts are seeing increased demand for trucks, investors have been driving Navistar's share price to new 52-week highs. The recent price history of NAV reveals one of the better charts (Jinx?) we've seen in the broader-market groups and investors who want to diversify their portfolio should consider this position. AUG-40.00 NAV HH LB=1.75 OI=1714 CB=38.84 DE=14 TY=6.5% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield GTW 4.98 AUG 5.00 GTX HA 0.25 598 4.73 14 11.5% MVIS 7.50 AUG 7.50 QMV HU 0.35 111 7.15 14 10.6% RTEC 20.65 AUG 20.00 UXH HD 1.45 831 19.20 14 9.1% MU 15.11 AUG 15.00 MU HC 0.65 88512 14.46 14 8.1% MERX 10.55 AUG 10.00 KXQ HB 0.90 205 9.65 14 7.9% BOBJ 25.43 AUG 25.00 BBQ HE 1.30 1939 24.13 14 7.8% RMBS 18.07 AUG 17.50 BNQ HW 1.15 5208 16.92 14 7.5% MOVI 20.29 AUG 20.00 QLV HD 0.95 710 19.34 14 7.4% SNIC 12.89 AUG 12.50 QNI HV 0.80 272 12.09 14 7.4% ECLP 12.85 AUG 12.50 IQV HV 0.75 207 12.10 14 7.2% ISRG 15.29 AUG 15.00 AXQ HC 0.70 95 14.59 14 6.1% IPXL 12.83 AUG 12.50 UPR HV 0.65 700 12.18 14 5.7% ***************** NAKED PUT SECTION ***************** Options 101: Fundamentals Of Success By Ray Cummins New readers are always asking for suggestions to help them become successful traders. Some Guidelines For Profitable Option Trading 1. Before opening any position, it is important to completely understand the strategy you are using and clearly identify the goals for that particular trade. You can't make good decisions without knowing the mechanics of a specific technique and you should not use complex or advanced methods simply because they are intriguing. The best strategy is usually the simplest one that accomplishes your goals. Prior to initiating any position, you should know exactly what the break-even point (or cost basis) is and be prepared to take action if the underlying issue reaches that price range. Once you have selected a strategy and have a specific candidate in mind, do your homework! Find out about the company and its (near-term) calendar of events such as earnings dates and scheduled reports. When you have a superior knowledge of a stock and its industry, you are way ahead of the investor that trades on intuition or outside advice. 2. Portfolio management is critical to the success of any trading strategy. After you take a position in a particular issue, stay informed by monitoring all the news and announcements affecting that company. Observe the daily progress of the your plays and realize that you have the ability and control to adjust or close a position at any time. Obviously, you do not need to check the stock prices on an hourly basis, but we recommend that you review each day's closing quotes. News and public opinion can have a significant impact on a stock's price and though it is impossible to research "future" events before you buy an issue, you should be able to react in a timely manner when something unforeseen occurs. 3. The concepts of most exit (or adjustment) techniques are fairly simple but there is no way to develop a specific guide for proper position management. For investors who utilize option-selling strategies such as naked puts, the key to success is to evaluate the overall risk-reward outlook of each potential position and initiate only those plays that fit your trading plan and technical outlook for the underlying issue. Remember, there is one primary objective with this type of approach; a consistent flow of income with limited portfolio risk. The focus of position selection and management should be to continually generate an acceptable level of option premium while protecting against the potential for downside losses. Positions that become unfavorable due to changes in the fundamental or technical characteristics of the underlying issue must be removed from the portfolio before they can generate large deficits. While each individual situation will require a slightly different solution, we suggest limiting individual position losses to 20% of the initial investment. For inexperienced traders, this can be very difficult but one of the most crucial accomplishments in this brutal game is learning how to close a losing play in a timely manner. 4. While even the most catastrophic events can usually be managed to reduce the effects of the shortfall, there are occasions when issues plunge without warning, leaving no opportunity for exit or adjustment. Unexpected things simply occur; earnings warnings, shareholder lawsuits, negative news in the industry or sector and changes in public sentiment. All of these activities can affect the success of an individual position but with a well diversified portfolio, the long-term effects are minimal. Experienced traders know that losses are inevitable with any strategy. Instead of being surprised, you should anticipate them. Statistics dictate that a percentage of the positions you select will be unprofitable thus, when the situation arises, it should not be regarded as a failure but rather an integral part of investing activity. Your portfolio should be evaluated based on the sum of its positions, rather than each specific transaction. In this manner, success is gauged by growth in portfolio value and individual losses become less significant. That is the primary reason for maintaining a balanced portfolio with several positions; it becomes easier to identify and act on a potentially negative play when it doesn't have a significant effect on your overall success. 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 AMLN 22.97 23.48 AUG 20.00 0.55 0.55* 4.1% 11.8% LEXR 12.76 13.31 AUG 10.00 0.30 0.30* 3.4% 11.4% SOHU 40.90 37.18 AUG 35.00 1.20 1.20* 3.9% 11.2% ALGN 13.38 12.46 AUG 10.00 0.35 0.35* 3.2% 10.1% BLUD 23.10 21.21 AUG 20.00 0.65 0.65* 2.9% 8.3% BOBJ 25.00 25.43 AUG 22.50 0.45 0.45* 3.0% 8.2% CYBX 23.72 29.31 AUG 20.00 0.60 0.60* 2.7% 8.2% KOSP 28.29 36.23 AUG 25.00 0.45 0.45* 2.7% 7.7% UNTD 29.39 33.64 AUG 25.00 0.40 0.40* 2.4% 7.5% MSTR 43.68 42.63 AUG 35.00 0.75 0.75* 1.9% 6.8% SIE 25.36 25.07 AUG 22.50 0.35 0.35* 2.3% 6.6% SNDK 54.98 56.32 AUG 42.50 0.70 0.70* 1.8% 6.5% MNST 26.15 26.10 AUG 22.50 0.30 0.30* 2.0% 6.1% AMAT 19.30 19.56 AUG 17.50 0.25 0.25* 2.1% 5.9% NFLX 26.49 24.95 AUG 20.00 0.35 0.35* 1.5% 5.4% SHPGY 22.05 22.80 AUG 20.00 0.35 0.35* 1.9% 5.3% DRIV 23.05 21.00 AUG 17.50 0.30 0.30* 1.5% 5.3% TRN 21.93 22.34 AUG 20.00 0.35 0.35* 1.9% 5.3% SNDK 48.18 56.32 AUG 37.50 0.60 0.60* 1.4% 5.1% MRVL 38.10 35.32 AUG 32.50 0.60 0.60* 1.6% 5.1% CELG 32.18 35.88 AUG 25.00 0.30 0.30* 1.3% 4.8% * Stock price is above the sold striking price. Comments: Stocks ended lower Friday, despite hopeful signs about the U.S. economy, and analysts are now suggesting that the recovery in the labor market make take much longer than expected. If that is the case, share values may be in for another downward leg and that means timely position management will become essential to maintaining a profitable portfolio. With that idea in mind, traders should closely monitor suspect issues such as: Sohu.com (NASDAQ:SOHU), Immucor (NASDAQ:BLUD) and Align Tech (NASDAQ:ALGN). Previously Closed Positions: Rowan Companies (NYSE:RDC), but currently positive, and BJ Services (NYSE:BJS). 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 AMLN 23.48 AUG 20.00 AQM TD 0.35 708 19.65 14 3.9% 12.1% RIMM 27.28 AUG 22.50 RUL TX 0.35 658 22.15 14 3.4% 11.7% CLZR 17.05 AUG 15.00 UKZ TC 0.25 20 14.75 14 3.7% 10.8% OSIP 32.70 AUG 25.00 GHU TE 0.30 1229 24.70 14 2.6% 9.5% OVTI 40.03 AUG 35.00 UCM TG 0.45 2456 34.55 14 2.8% 8.6% MRVL 35.32 AUG 32.50 UVM TZ 0.40 1025 32.10 14 2.7% 7.4% UNTD 33.64 AUG 30.00 QAB TF 0.30 862 29.70 14 2.2% 6.4% 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). ***** AMLN - Amylin Pharmaceuticals $23.48 *** Bullish Biotech! *** Amylin Pharmaceuticals (NASDAQ:AMLN) is a biopharmaceutical firm engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes and other metabolic diseases. The company has two lead drug candidates in late-stage development for the treatment of diabetes, SYMLIN (pramlintide acetate) and exenatide, formerly referred to as AC2993 (synthetic exendin-4). Amylin has received a letter from the FDA indicating that SYMLIN is approvable for marketing in the United States as an adjunctive therapy with insulin, subject to satisfactory results from additional clinical trials. The company's second candidate, exenatide, is in pivotal Phase III clinical trials. AMLN shares have been in a steady uptrend over the past few weeks, despite the volatility in the market, and on Wednesday the company posted encouraging results from a Phase II study of a new drug candidate. AC2592 uses continuous subcutaneous infusion of a glucagons-like peptide for the treatment of congestive heart failure in patients ineligible for transplant. The study shows that AMLN has viable products outside the realm of diabetes treatment and investors who like the outlook for the issue should consider this position. AUG-20.00 AQM TD LB=0.35 OI=708 CB=19.65 DE=14 TY=3.9% MY=12.1% ***** RIMM - Research In Motion $27.28 *** A Big Day! *** Research In Motion Limited (NASDAQ:RIMM) is a designer, builder, and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, the firm provides solutions for seamless access to time-sensitive information and communications, including e-mail, telephone, messaging and Internet- and intranet-based applications. The company's technology also enables a broad array of third-party developers and manufacturers around the world to enhance their own products and services with wireless connectivity. RIM's portfolio of products includes a family of wireless handhelds, the BlackBerry wireless e-mail solution, embedded radio modems and a suite of software development tools. Shares of RIMM soared Friday on rumors that the maker of the BlackBerry wireless e-mail device could be the target of a takeover bid by Hewlett-Packard. Regardless of the reason for the activity, the stock is in "rally mode" and traders who believe it will continue can profit from future upside activity with this position. AUG-22.50 RUL TX LB=0.35 OI=658 CB=22.15 DE=14 TY=3.4% MY=11.7% ***** CLZR - Candela $17.05 *** Multi-Year High! *** Candela (NASDAQ:CLZR) develops, manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies. Founded near Boston in 1970, the company markets and services its products in over 60 countries from offices in the United States, Europe, Japan and other Asian locations. Candela established the aesthetic laser market 14 years ago, and currently has an installed base of over 6,000 lasers worldwide. CLZR has been in "rally mode" since April when the firm reported that revenue for the nine months ending in March rose 34% to $54.4 million. The company also posted net income of $3.8 million, compared to a loss of $2.7 million in the year-ago period, and investors are hoping for similar results in mid-August when quarterly earnings are reported. AUG-15.00 UKZ TC LB=0.25 OI=20 CB=14.75 DE=14 TY=3.7% MY=10.8% ***** OSIP - OSI Pharmaceuticals $32.70 *** Entry Point? *** OSI Pharmaceuticals (NASDAQ:OSIP) is a biotechnology firm focused on the discovery, development and commercialization of oncology products that both extend life and improve the quality of life for cancer patients worldwide. The company has established a balanced pipeline of oncology drug candidates that includes both next-generation cytotoxic chemotherapy agents and novel mechanism based, gene-targeted therapies. The company's most advanced drug candidate, Tarceva (erlotinib HC1), is a small-molecule inhibitor of the epidermal growth factor receptor (HER1/EGFR). The protein product of the HER1/EGFR gene is a receptor tyrosine kinase that is over-expressed or mutated in many major solid tumors. OSIP has moved in a lateral pattern since mid-June and the share price appears to be stabilizing near $32. Investors who wouldn't mind owning the issue at a basis near $25 should consider this position. AUG-25.00 GHU TE LB=0.30 OI=1229 CB=24.70 DE=14 TY=2.6% MY=9.5% ***** OVTI - OmniVision $40.03 *** Up-trend Intact! *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. Shares of OVTI traded near "all-time" highs last week and after a necessary consolidation, the bullish trend should continue. Investors with a positive outlook for the stock can speculate conservatively on its near-term performance with this position. AUG-35.00 UCM TG LB=0.45 OI=2456 CB=34.55 DE=14 TY=2.8% MY=8.6% ***** MRVL - Marvell Technology $35.32 *** Consolidation Complete? *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. MRVL has consolidated after reaching the top of a historic resistance area near $40 and the stock appears poised to move higher (market permitting) in the near future. Investors who believe the firm's share value is destined for a rally can profit from additional upside activity in the issue with this position. AUG-32.50 UVM TZ LB=0.40 OI=1025 CB=32.10 DE=14 TY=2.7% MY=7.4% ***** UNTD - United Online $33.64 *** New "All-Time" High! *** United Online (NASDAQ:UNTD) is an Internet service provider offering consumers free and value-priced Internet access and e-mail. Its Internet access services are offered through its NetZero and Juno subsidiaries under their brands, and are available in more than 5,000 cities across the United States and Canada. In addition, the company offers marketers numerous online advertising products, as well as online market research and measurement services. As of June 30, 2002, the company had approximately 1.7 million subscribers to its pay Internet access services and approximately 4.8 million active users, including pay users. Active users include all pay users and those free users that have logged onto its services during the preceding 31-day period. UNTD shares have performed very well in recent after the company reported favorable earnings and traders who believe the rally "has legs" can profit from that outcome with this position. AUG-30.00 QAB TF LB=0.30 OI=862 CB=29.70 DE=14 TY=2.2% MY=6.4% ***** ***************** 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 11.20 AUG 10.00 QYO TB 0.40 748 9.60 14 9.1% 23.6% PCLN 31.76 AUG 30.00 PUZ TF 1.05 352 28.95 14 7.9% 19.0% PWER 10.83 AUG 10.00 OGU TB 0.25 214 9.75 14 5.6% 14.5% AEG 12.64 AUG 12.50 AEG TV 0.35 117 12.15 14 6.3% 14.4% SANG 15.48 AUG 15.00 QDY TC 0.40 60 14.60 14 6.0% 14.2% HEPH 19.03 AUG 17.50 QGQ TW 0.40 63 17.10 14 5.1% 13.4% ATYT 12.80 AUG 12.50 QFY TV 0.30 198 12.20 14 5.3% 12.7% SLNK 18.38 AUG 17.50 SXU TW 0.40 4 17.10 14 5.1% 12.6% IRF 30.85 AUG 30.00 IRF TF 0.70 1120 29.30 14 5.2% 12.5% WWCA 15.48 AUG 15.00 WRQ TC 0.35 10 14.65 14 5.2% 12.5% FWHT 21.00 AUG 17.50 HFQ TW 0.25 241 17.25 14 3.1% 10.5% COHU 20.51 AUG 20.00 QCH TD 0.30 41 19.70 14 3.3% 8.2% MNST 26.10 AUG 22.50 BSQ TX 0.25 1026 22.25 14 2.4% 7.7% TRI 31.70 AUG 30.00 TRI TF 0.25 272 29.75 14 1.8% 4.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Retreat As Employment Data Stalls Recovery Hopes By Ray Cummins The major equity averages slumped Friday after a government report showed that employers continued to slash payrolls during the month of July. The Dow Jones Industrial average fell 79 points to close at 9,153 with financial stocks such as J.P. Morgan (NYSE:JPM) and Citigroup (NYSE:C) leading the retreat in blue-chip shares. Hi-tech stocks also slid lower with the NASDAQ Composite down 19 points to 1,715 amid across-the-board weakness. The broader Standard & Poor's 500 Index dropped 10 points to 980 with selling pressure emerging in airlines, aluminum, pharmaceuticals, managed healthcare, insurance, homebuilders, and gold companies. Breadth was negative with losers ousting losers 2 to 1 on the NASDAQ as 1.5 billion shares changed hands. The Big Board saw declining issues outpace winners by almost 3 to 1 on volume of 1.35 billion shares. The yield on the benchmark 10-year U.S. Treasury note reached a one-year high of 4.59% during the session but at the close, it was up 5/32 at 93-31/32, while its yield fell to 4.39%. ***************** 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 IRF 28.00 30.85 AUG 22 25 0.25 24.75 $0.25 Open MER 49.25 53.45 AUG 42 45 0.25 44.75 $0.25 Open EBAY 113.07 105.28 AUG 95 100 0.50 99.50 $0.50 Open GENZ 44.02 49.28 AUG 35 37 0.20 37.30 $0.20 Open MEDI 39.01 38.73 AUG 32 35 0.25 34.75 $0.25 Open SYMC 45.65 46.59 AUG 35 40 0.55 39.45 $0.55 Open CCMP 57.61 62.24 AUG 45 50 0.55 49.45 $0.55 Open GILD 66.52 64.55 AUG 55 60 0.55 59.45 $0.55 Open SII 37.87 35.75 AUG 32 35 0.25 34.75 $0.25 Open AMZN 41.60 40.03 AUG 35 37 0.25 37.25 $0.25 Open NTES 42.07 48.13 AUG 30 35 0.50 34.50 $0.50 Open GRMN 45.23 38.23 AUG 35 40 0.35 39.65 ($1.42) Closed IMCL 39.86 39.00 AUG 30 32 0.00 32.50 $0.00 No Play LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Garmin (NASDAQ:GRMN) shares plunged after the company said third quarter results would be below consensus estimates. Although the spread did not achieve our entry target, the summary will reflect the loss for continuity. The position in ImClone (NASDAQ:IMCL) was not available as the AUG-$32.50 series was apparently listed in error by the ISE/OCC. The position in Yahoo! (NASDAQ:YHOO), which is currently positive, has been closed to limit potential losses. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ACS 45.06 48.20 AUG 55 50 0.65 50.65 $0.65 Open BBBY 38.59 38.28 AUG 45 42 0.35 42.85 $0.35 Open ICUI 27.90 24.25 AUG 35 30 0.60 30.60 $0.60 Open PG 88.56 86.70 AUG 95 90 1.25 91.25 $1.25 Open BGEN 40.05 37.74 AUG 47 45 0.30 45.30 $0.30 Open NVLS 35.70 35.70 AUG 42 40 0.30 40.30 $0.30 Open BSTE 46.06 42.04 AUG 55 50 0.60 50.60 $0.60 Open BVF 41.60 38.31 AUG 50 45 0.50 45.50 $0.50 Open CI 44.49 45.55 AUG 55 50 0.30 50.30 $0.30 No Play BRL 59.25 67.48 AUG 70 65 0.00 65.00 $0.00 No Play LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Bearish spreads in Barr Labs (NYSE:BRL) and Cigna (NYSE:CI) were not initiated as both issues "gapped" at the open on the day after the plays were offered. The position in 3M Corporation (NYSE:MMM) has previously been closed to limit potential losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status TECD 31.03 32.37 AUG 25 30 4.20 29.20 0.08 Open EBAY 110.02 105.28 AUG 95 100 4.60 99.60 0.40 Open RGLD 23.94 21.63 AUG 20 22 2.20 22.20 (0.57) Open? LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss eBay (NASDAQ:EBAY) is on the "watch" list and conservative traders should consider closing the position on further downside movement. Royal Gold (NASDAQ:RGLD) is a speculative spread for gold "bulls" and a move below the current price range would signal a reversal in the current trend. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status LXK 73.50 64.79 AUG 85 80 4.80 80.20 0.20 No Play BRCM 22.76 21.22 AUG 27 25 2.30 25.20 0.20 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss There was no position initiated in Lexmark (NYSE:LXK) as the issue "gapped" lower prior to the open on the first trading day after the play was offered. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status ESI 29.63 40.20 OCT 35 25 0.15 5.00 Closed SHPGY 22.77 22.80 JAN 30 17 0.00 0.00 Open ITT Educational Services (NYSE:ESI) was one of the best plays this the month with a potential gain of $5 (or more) for speculative 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 NSCN 24.18 21.00 SEP-25C AUG-25C 0.40 0.25 Closed GP 19.25 21.75 OCT-20C AUG-20C 0.90 1.00 Open MSFT 27.31 26.17 JAN-27C AUG-27C 1.40 1.50 Open NE 34.86 33.00 DEC-37C AUG-37C 1.40 0.90 Open ING 19.07 20.03 JAN-20C AUG-20C 0.90 0.90 Open Georgia-Pacific (NYSE:GP) moved above the sold strike at $20 this week and traders who are bullish on the issue should consider a transition to a diagonal spread (OCT-20C/SEP-22C) for a small debit. The speculative position in Netscreen Technologies (NASDAQ:NSCN) has been closed to limit losses. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status AIG 55.69 64.65 AUG 55 55 4.90 10.00 Closed American International Group (NYSE:AIG) was the big winner this month, offering up to $5.10 profit on $4.90 invested in less than three weeks. Straddles on R.J. Reynolds (NYSE:RJR) and Freddie Mac (NYSE:FRE) have previously achieved favorable "early-exit" profits. Positions in MBIA Inc. (NYSE:MBI), Dollar General (NYSE:DG), and Boston Scientific (NYSE:BSX) have been closed to limit losses. CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** ADI - Analog Devices $39.51 *** Chip Sector Speculation! *** Analog Devices (NYSE:ADI) is engaged in the design, manufacture and sales of high-performance analog, mixed-signal and digital signal processing (DSP) integrated circuits. The firm's products play a fundamental role in converting real-world phenomena, such as temperature, motion, pressure, light and sound, into electrical signals to be used in an array of electronic equipment, ranging from industrial process control, factory automation systems, smart munitions, base stations, office equipment, wireless telephones, computers, automobiles, computer-aided tomography scanners, DVDs, and digital cameras. The company's quarterly earnings report is due 8/14/03. ADI - Analog Devices $39.51 PLAY (conservative - bullish/credit spread): BUY PUT SEP-30.00 ADI-UF OI=1405 ASK=$0.30 SELL PUT SEP-35.00 ADI-UG OI=1896 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$34.40 ***** BOW - Bowater $38.57 *** A Broad-Market Hedge *** Bowater (NYSE:BOW) is a leading producer of newsprint and coated groundwood papers. In addition, Bowater makes uncoated groundwood papers, bleached kraft pulp and lumber products. The company has 12 pulp and paper mills in the United States, Canada and South Korea and 13 North American sawmills that produce softwood lumber. Bowater also operates two facilities that convert a groundwood base sheet to coated products. Bowater's operations are supported by over 1 million acres of timberlands owned or leased in the United States and Canada and 32 million acres of timber cutting rights in Canada. Bowater is also one of the world's largest consumers of recycled newspapers and magazines. BOW - Bowater $38.57 PLAY (conservative - bullish/credit spread): BUY PUT SEP-30.00 BOW-UF OI=686 ASK=$0.30 SELL PUT SEP-35.00 BOW-UG OI=595 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$34.35 ***** MXIM - Maxim Integrated Products $39.11 *** Merrill Upgrade! *** Maxim Integrated Products (NASDAQ:MXIM) designs, develops, makes and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The firm also provides a broad range of high-frequency design processes and capabilities that can be used in custom design. Maxim's products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, radio frequency circuits, fiber-optic transceivers, sensors and voltage references. Their products are sold to customers in numerous markets, including automotive, communications, consumer, industrial control, instrumentation and data processing. MXIM - Maxim Integrated Products $39.11 PLAY (conservative - bullish/credit spread): BUY PUT SEP-30.00 XIQ-UF OI=417 ASK=$0.30 SELL PUT SEP-35.00 XIQ-UG OI=529 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$34.40 ***** FNM - Fannie Mae $62.45 *** Bond Market Blow-Out! *** Federal National Mortgage Association (NYSE:FNM), commonly known as Fannie Mae, is a company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to ensure that there is no shortage of funds available for mortgage loans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions that make up the primary mortgage market. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions and state and local housing finance agencies. These are the businesses where the mortgages are originated and the funds are loaned directly to the borrower. Fannie Mae then purchases the mortgage, thus allowing the primary market lender to replenish their funds and lend more money to homebuyers. FNM - Fannie Mae $62.45 PLAY (speculative - bearish/credit spread): BUY CALL AUG-70.00 FNM-HN OI=8455 ASK=$0.10 SELL CALL AUG-65.00 FNM-HM OI=8892 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.70 POTENTIAL PROFIT(max)=12% B/E=$65.55 ***** INTU - Intuit $42.86 *** Stuck In A Trading Range? *** Intuit (NYSE:INTU) is a provider of business tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. INTU - Intuit $42.86 PLAY (very conservative - bearish/credit spread): BUY CALL SEP-50.00 IQU-IJ OI=279 ASK=$0.45 SELL CALL SEP-47.50 IQU-IW OI=938 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$47.80 ***** JPM - J.P. Morgan Chase $33.36 *** A Big Down Day! *** J.P. Morgan Chase & Co. (NYSE:JPM) is a financial holding company incorporated in 1968, with over $750 billion in assets and $42 billion in stockholders' equity. The company's activities are internally organized into five business segments: Investment Bank, Treasury & Securities Services, Investment Management & Private Banking, JPMorgan Partners and Chase Financial Services. JPM - J.P. Morgan Chase $33.36 PLAY (speculative - bearish/credit spread): BUY CALL AUG-37.50 JPM-HU OI=7958 ASK=$0.10 SELL CALL AUG-35.00 JPM-HG OI=30615 BID=$0.35 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$35.25 ************* 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. ***** KBH - KB Home $55.84 *** Sector Slump! *** KB Home (NYSE:KBH) is a diversified homebuilder with operations in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas. KB Home builds homes that cater primarily to first-time and "move-up" homebuyers, generally in medium-sized developments close to major metropolitan areas. The company, through its main subsidiary Kaufman & Broad S.A., also has operations in France. KBSA constructs single-family homes and high-density residential properties such as condominium complexes and commercial projects. During the fiscal year ended November 30, 2002, the firm delivered 25,452 units and operated an average of 330 active communities. The company also provides mortgage banking services through its subsidiary, KB Home Mortgage Company. KBH - KB Home $55.84 PLAY (speculative - bearish/debit spread): BUY PUT AUG-65.00 KBH-TM OI=965 ASK=$9.30 SELL PUT AUG-60.00 KBH-TL OI=1865 BID=$4.70 INITIAL NET-DEBIT TARGET=$4.50-$4.60 POTENTIAL PROFIT(max)=8% B/E=$60.40 **************** 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. ***** NSM - National Semi $22.77 *** Chip Sector Speculation! *** National Semiconductor (NYSE:NSM) designs, develops, manufactures and markets a wide array of semiconductor products, including a broad line of analog, mixed-signal and other integrated circuits. Its unique analog and mixed-signal devices include amplifiers and regulators, image sensors, power monitors and line drivers, radio frequency, audio amplifiers, display drivers and signal processors. NSM's other products with digital-to-analog or analog-to-digital capability include products for local area and wireless networking and wireless communications, as well as products for personal systems and communications. It uses the brand name Super I/O to describe its ICs that handle system peripheral and input/output functions on the personal computer motherboard. Its operations are organized in five groups: the Analog Group, Information Appliance and Wireless Group, Displays Group, Wired Communications Group and the Custom Solutions Group. NSM - National Semiconductor $22.77 PLAY (speculative - bullish/diagonal spread): BUY CALL JAN-20.00 NSM-AD OI=1966 ASK=$4.70 SELL CALL SEP-25.00 NSM-IE OI=460 BID=$0.70 INITIAL NET DEBIT TARGET=$3.80-$3.95 INITIAL TARGET PROFIT=$1.05-$1.25 ******************* 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. ***** AVCT - Avocent $27.83 *** A Reader's Request! *** Avocent Corporation (NASDAQ:AVCT), together with its wholly owned subsidiaries, designs, manufactures and sells analog and digital KVM (keyboard, video and mouse) switching systems, as well as serial connectivity devices, extension and remote access products and also display products for the computer industry. The firm's switching and connectivity solutions provide information technology managers with access and control of multiple servers and network data centers from any location. AVCT - Avocent $27.83 PLAY (very speculative - bullish/synthetic position): BUY CALL SEP-30.00 QVX-IF OI=50 ASK=$1.30 SELL PUT SEP-25.00 QVX-UE OI=100 BID=$1.00 INITIAL NET DEBIT TARGET=$0.10-$0.15 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 $950 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25.00). *********************** 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. ***** OVER - Overture Services $23.68 *** Volatility Speculation *** 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 $23.68 PLAY (very speculative - neutral/debit strangle): BUY CALL SEP-25.00 GUO-IE OI=158 ASK=$0.80 BUY PUT SEP-22.50 GUO-UX OI=269 ASK=$0.85 INITIAL NET-DEBIT TARGET=$1.50-$1.55 INITIAL TARGET PROFIT=$0.50-$0.70 ***** SNE - Sony $30.74 *** Probability Play *** Sony Corporation (NYSE:SNE) and its consolidated subsidiaries develop, design, manufacture and sell electronic equipment, instruments and devices for consumer and industrial markets. It also develops, produces, manufactures and markets home-use game consoles and software, and develops, produces, manufactures and distributes recorded music in all commercial formats and musical genres. Sony is also engaged in the development, manufacture, distribution and broadcasting of image-based software, including film, video and television, and in various financial service businesses, including insurance operations through a Japanese life insurance subsidiary and non-life insurance subsidiaries, banking operations through a Japanese Internet-based banking subsidiary and leasing and credit financing operations in Japan. Sony also has Internet-related businesses, an advertising agency business in Japan and location-based entertainment businesses in Japan and the United States. SNE - Sony $30.74 PLAY (speculative - neutral/debit straddle): BUY CALL OCT-30.00 SNE-JF OI=8390 ASK=$2.30 BUY PUT OCT-30.00 SNE-VF OI=2857 ASK=$1.60 INITIAL NET-DEBIT TARGET=$3.75-$3.80 INITIAL TARGET PROFIT=$1.45-$1.70 ***** ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ************** MARKET POSTURE ************** Simon Says, "Sideways! Seek profits while you still can!" 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