The Option Investor Newsletter Wednesday 08-06-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Below the Trendlines Futures Wrap: At the Brink Index Trader Wrap: See Note Weekly Fund Family Profile: AXA Rosenberg Mutual Funds Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 08-06-2003 High Low Volume Advance/Decline DJIA 9061.74 + 25.42 9134.57 8997.11 1.75 bln 1212/1995 NASDAQ 1652.68 - 20.82 1675.46 1648.42 1.84 bln 1610/1607 S&P 100 488.13 + 1.47 492.70 484.68 Totals 2822/3602 S&P 500 967.08 + 1.62 975.74 960.84 RUS 2000 453.91 - 3.54 458.24 452.79 DJ TRANS 2533.81 - 10.05 2556.31 2526.38 VIX 23.30 - 0.81 25.88 23.11 VXN 34.42 + 0.19 35.98 33.84 Total Volume 3,875M Total UpVol 2,372M Total DnVol 1,442M 52wk Highs 157 52wk Lows 92 TRIN 0.80 PUT/CALL 0.88 ******************************************************************* Below the Trendlines Jonathan Levinson In a tale of two markets, the Dow added 25 points today and the Nasdaq lost nearly 21. Both results were surprising, as it appeared possible this morning that we might see a full-fledged meltdown following John Chambers' less-than-stellar attempt to talk up CSCO's most recent results, and the selling frenzy in the futures following the cash close yesterday. 20 day 30 minute INDU The Dow's 30 minute candlechart is open to interpretation, to say the least. However, the strong bounce off the morning low violated the downtrend off Thursday's high, and the close left us right on that trendline for a retest with the oscillators lagging the closing drop. 20 day 30 minute COMPX The equivalent chart of the COMPX avails itself of no such bullish interpretation, although the descending channel from Thursday could be construed as a bull flag. The CSCO-show effectively prevented the breakout we saw today in the INDU, and note the strong stochastic divergence on the closing sell candle. The up-phase in progress from this morning's opening low aborted early on both indices, a bearish development on the COMPX and the INDU. 6 month daily chart of the INDU Zooming out to the 6 month chart of the Dow, we see that today's 25 point gain did nothing to correct the damage done by yesterday's trendline break. The oscillators are in downphases, and it will take a strong push from the bulls to regain the trendline and reverse the sell signals on the stochastics and macd. 6 month daily chart of the COMPX We have the same setup on the 6 month Nasdaq chart, except that today took the index lower still, and paints a pretty unequivocal picture. While the optimistic bull flag drawn on the 30 minute chart above is not technically incorrect, I find it difficult to think bullish thoughts about the index when looking at the daily chart. A bounce and even possible trendline retest is possible from here, but the onus has clearly shifted from the bears to the bulls. The Mortgage Bankers Association (MBA) announced this morning that seasonally-adjusted demand for mortgage refinancings, the MBA refinancing index, declined 2.4% for the week ended July 31 following the previous week's 32.9% drop. Demand for loans with which to buy homes, the Purchase index, rose 6.9% following the previous week's 3.5% loss. The Application index rose 1.1% following the prior week's 24.9% decline, posting its second lowest reading for the year. The average interest rate for a 30- year fixed rate mortgage rose to 6.37% from 5.87%, a 50 basis point increase in one week. Given the continued rise in yields and the fact that most home equity borrowers probably aren't watching the stochastics, Macd and ADX on the Ten and Thirty year yield charts, I'm thinking that the uptick is simply stragglers and latecomers to the market who had been procrastinating. I do not expect to see home borrowing and refinancing activity continue to advance side-by-side a climb in yields. On that basis, so long as bonds continue along their downtrend, I expect to see mortgage activity and overall borrowing contract. Whether this is the cause or the effect of an overall contraction in liquidity, or rather in the availability of money to the financial system, is a chicken-or-egg question worthy of bounteous discussion. But the result is the same, which is good enough for us traders. With a contraction in liquidity comes what the Fed has been calling "dis-inflation," and for an idea of the effects of dis-inflation on the markets, take your charts of Jan-June and turn them upside down. You'll see the US Dollar Index rising, mortgage and refi activity falling, yields rising/bonds dropping, stocks dropping, gold falling. I believe that the efforts to avoid or at least ease the effects of the former will cause the latter, gold, to outperform, but I do not believe that commodities will be exempt from price declines in an overall deflationary. If dollars come to be worth more, then assets valued in those dollars will sell for fewer of them. It's worth recalling a quote from Vice president JP Morgan Chase, Peter Smith: "Gold is nobody else's paper." This applies to commodities and "hard assets" in general. The fear of deflation derives from its potential to cause a descending spiral in a high-debt economic environment such as we have currently. If liquidity contracts and bond prices drop, yields will increase, requiring higher payments from debtors. At the same time, as money is increasing in value/becoming harder to come by, business investment softens, and unemployment persists. This causes debtors to default on their debt, which ultimately pressures creditors holding that paper, and so on. This is the trend that the Fed has been fighting. In such an environment, hard assets are not vulnerable to default. While their return on investment might be poor, their return OF investment is far more certain than in the case of paper assets. Updated chart of Total Consumer Credit Outstanding Total Loans and Leases at Commercial Banks Bank Prime Loan Rate 1949-2003 The above discussion is intended to put some context behind the current market action we've been seeing and the recent releases from the Fed. One would think that equities would be far weaker than they have in fact been, and I'm not suggesting that we grit our teeth and go short, awaiting a certain crash. We've been seeing the beginning of an uptick in economic activity in some of the reports of the past few weeks, and as even Doug Noland has speculated, the aggressive inflation of the money supply by the Fed and aggressive consumer spending even on foreign goods, must have at least some stimulative effect on the economy. For example, discount air carrier JBLU reported today that its July load factor rose 2.8% over July 2002's level to 90.6%, with a 79% increase in traffic and a 74% increase in capacity. We've also seen declines in the initial jobless claims data in recent weeks. Furthermore, more directly related to the markets themselves, the aggressive inflation of the money supply, lowering of rates and expansion of debt serve to inflate the price of all financial assets. This effect was, in my view, the cause of the rally in stocks and bonds this spring. While the value of stocks and bonds may not be increasing or even diminishing, their price rises as increasing amounts of money seek different investments. For this reason, and given the huge stakes, traders, particular options and futures traders, must remain nimble. The equity and commodity markets are very small relative to the treasury and currency markets, and each ripple in those larger markets is a potentially huge wave in equities and commodities. The Energy Department reported that U.S. crude oil inventories rose by 2.9 million barrels to 280.2 million in the week ended August 1. Yet again, analysts got it wrong, predicting a drop for the week. The American Petroleum Institute (API) reported a 1.6 million barrel gain for the same period. Gasoline inventories dropped by 2.7 million barrels to 201.8 million barrels according to the Energy Department, with the API reporting a 4.5 million barrel drop. Distillate supplies gained 1.7 million barrels to 119.1 million barrels, with the API reporting a lower 400,000 barrel increase to 116.1 million barrels. The second day of this quarter's record 60B treasury auction saw 18B in five year treasury notes sold at a 3.30% yield, compared with last quarter's 2.68% yield. The notes were well-received at that rate, generating a bid-to-cover ratio of was 2.48 vs. the average over the previous four quarters of 1.86. The demand was unexpected after the softness in seen yesterday, with three year notes generating a mere 1.32 bid-to-cover. The strength in treasuries throughout the day, with no apparent assistance from the Fed via its open market operations, bodes well for tomorrow's 18B ten year note auction. We have the following economic data due tomorrow: Report Briefing Market Prior Expects Expects Aug 07 8:30 AM Initial Claims 08/02 - 400K 395K 388K Aug 07 8:30 AM Productivity-Prel Q2 - 3.5% 4.0% 1.9% Aug 07 10:00 AM Wholesale Inventories Jun -0.2% 0.0% -0.3% Aug 07 3:00 PM Consumer Credit Jun - $5.5B $6.0B $7.3B Today's session left us with more questions than it answered. Was the decline in the Nasdaq merely CSCO-related, or does it represent the confirmation of the trendline break yesterday? I believe that the failure of the Dow to put together more than a 25 point gain following its trendline break yesterday points to something beyond CSCO. More puzzling, however, was the strong bid in treasuries and the positive reception of the 5 year treasury auction. The Fed did not add reserves via its open market operations this morning, and if treasuries were being bought by "value" players looking for bargains at current yields, then we have perhaps witnessed the bottom in treasuries. I'm at a loss to explain it, as the 18B of new 5 year paper should have drained liquidity from stocks and bonds, compounding yesterday's losses. We'll watch the ten year auction tomorrow for clues, but for the moment, it remains puzzling. As Jeff Bailey noted in a comment from a reader, the Fed is meeting tomorrow, and while the Fed Funds futures are predicting zero possibility of a rate cut, perhaps some of the bid in bonds today was frontrunning the possibility. I do not know. The economic data tomorrow before the cash open should go a long way toward determining market direction. Initial claims are expected to come in relatively low, and an upside surprise could move economic concerns back to the forefront of the market's attention. See you at the bell! ************ FUTURES WRAP ************ At the Brink Jonathan Levinson The S&P futures managed a positive close, while the Nasdaq was weaker, managing a round trip in today's session. Treasuries were up strongly, and gold managed a 2 point gain on the day with the metals indices sharply higher. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 983 974 966 957 950 YM03U 9183 9109 9042 8968 8901 NQ03U 1248 1231 1221 1204 1194 10 minute chart of the US Dollar Index The US Dollar Index spend the night and today moving off its lows just above 95.60, touching a high just below 96.40. Whether it was foreign demand for dollars with which to purchase some of the 18B in 5 year treasury notes auctioned today at 3.3%, or other forces at work, a great deal of technical damage was undone by the move. Surprisingly, gold and the CRB were both higher on the day. Strength in the commodities index came from cotton, wheat, lean hogs and natural gas. Daily chart of December gold December gold traded higher against its ongoing cycle downphase for the second day in a row, printing a bullish hammer and approaching the former 354 support/resistance level from below. The precious metals equity indices were particularly strong, with HUI adding 4.27 to 169.53 and XAU higher by 1.71 to 82.62. Daily chart of the ten year note yield Tomorrow is the final day of this quarter's record 60B treasury auction, with 18B worth of 10 year debt for sale. Ten year notes had a very bullish day today, despite the Fed's 250M net drain via overnight repo in the amount of 5.25B versus 5.5B expiring. The five year note auction went well, with the higher 3.3% yield generating a bid-to-cover ratio of 2.48 compared with the 1.86 average over the previous four quarters. The oscillators on the ten year note yield (TNX) appear primed for a downphase, and another day like today will finally take out the ascending trendline under the yield that cautious bond bulls have been watching for a break. The TNX closed lower by 15.3 basis points at 4.288%, the five year note yield down 13 bps, and the thirty lower by 13.4 bps. Daily NQ candles The strength in treasuries didn't find its way to equities, which all went out with bearish gravestone dojis. They opened near their lows, moved up to set lower highs, and closed back in varying proximities to their lows. The NQ was particularly weak, and yesterday's break below the 50 day EMA (purple line) was confirmed by today's print. The oscillators are on sell signals, and the broken trendline grew more distant today. Note that the closing candle body is below the lower Bollinger band, and so once again, a technical bounce remains a possibility. 30 minute 20 day chart of the NQ The lower high on the 30 minute chart generated new sell signals, with the stochastic and macd rolling over before reaching overbought territory. The daily Bollinger bands may imply a bounce, but the shorter cycles look very bearish on the heels of the burst of selling into the close. Daily ES candles ES had a better finish than the COMPX, but all the technicals are unpleasantly similar to the NQ, with the 50 day EMA decisively broken and serving as resistance on today's failed upside retest. The oscillators on both the daily and 30 minute charts are in gear to the downside, and other than the possible Bollinger band support, the ES daily chart provides little for bulls to celebrate. 20 day 30 minute chart of the ES If the nascent downphase plays out, we should see lower lows tomorrow. Today's session was actually an inside day on the ES, but with the higher closing low, it could be the beginning of a rising triangle, although it's far too early to do more than guess at this point. I'll be watching resistance at R1 of 974, which coincides with the upper trendline on the descending channel from Thursday's high. Daily YM candles Same bearish picture on the Dow futures. 20 day 30 minute chart of the YM As noted in the Market Wrap, the bullishness in treasuries, while a welcome relief, was puzzling. Short of frontrunning a surprise move from the Fed, I can think of nothing to explain it. The strength in the US Dollar Index does not suggest that it was inflationary activity from the Fed or the Working Group, but rather suggests a genuine demand for bonds at current rates. If so, then there's more liquidity in the markets than yesterday's selloff implied, and in that case the fundamentals could support more than a mere technical bounce in the indices. While the charts don't suggest it, this possibility should keep bears alert to their stops. Don't forget those vertical flagpole rallies from the spring. We'll get more clues following tomorrow's treasury auction, and hopefully some clarification as to the divergence between gold and commodities, and the rallying US Dollar Index. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_080603_1.asp ************************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 ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** AXA Rosenberg Mutual Funds This week's fund family profile takes a look at the AXA Rosenberg Mutual Funds, a family of 11 no-load equity funds managed by AXA Rosenberg Investment Management, a California-based money manager that uses quantitative techniques to identify "misvalued" stocks, to construct sector and style neutral portfolios, and to immunize portfolio exposure to systematic equity market factors, which can contribute excess risk. Systematic factors include size, yield, growth and beta, things that contribute too much risk per unit of return. If this sounds like a lot of investment rocket science it should. Rosen Institutional Equity Management, now known as AXA Rosenberg Investment Management, was started in 1985 to provide specialized investment management services to institutional investors across the world. Barr Rosenberg, the firm's founder and former global chief investment officer, also started another firm called BARRA that specializes in risk analytics and management technology and is used by leading financial institutions to manage their equity risk and to optimize their portfolios. Nobel-Prize winner, Bill Sharpe, Economic Sciences 1990, is an independent trustee of the AXA Rosenberg Series Trust (each of the funds is a series of the AXA Rosenberg Series Trust). According to the fund family website (www.axarosenbergfunds.com), Barr Rosenberg is responsible today for the securities valuation and portfolio optimization systems used to manage the various AXA Rosenberg fund portfolios. However, Dr. Rosenberg began a 1-year sabbatical in April 2002 (not clear if he is back yet). Tom Mead is fulfilling Rosenberg's regular functions during his sabbatical focusing on modeling. Kenneth Reid is AXA Rosenberg global chief investment officer. He's responsible for analyzing the empirical evidence that validates and supports the daily recommendations of the securities valuation models. Bill Ricks, a fourth executive officer of the firm, is responsible for the implementation of the investment strategies designed by Barr Rosenberg Research Center. The AXA Rosenberg Funds got their start in October 1996 with the launch of the Barr Rosenberg U.S. Small Cap Fund, now called AXA Rosenberg U.S. Small Cap Fund. The fund's investor class shares (BRSCX) still reflect the original Barr Rosenberg name. As time passed, more AXA Rosenberg mutual funds were introduced and fund distribution channels were expanded. Today, AXA Rosenberg Funds are sold/marketed to institutional investors, through financial advisors (load fund series), and directly to investors (no-load fund series). Our primary focus will be on the Investor shares, which have no loads and require a $2,500 minimum fund investment. For more information or to download a fund prospectus, go to the AXA Rosenberg Funds website at www.axarosenbergfunds.com. Mutual Fund Overview The Barr Rosenberg Series Trust is an open-end management company offering ten diversified funds with different fund objectives and strategies. Management of each fund's portfolio is overseen by a committee made up of the company's executive officers (Rosenberg, Mead, Reid and Ricks). The AXA Rosenberg executive committee has responsibility for researching and monitoring each fund's results against benchmarks, monitoring cash balances, and other fiduciary duties of the Trust. The AXA Rosenberg Mutual Funds are divided into three categories: domestic funds, international funds, and alternative funds. Doug Burton, Stephen Dean and Floyd Coleman are portfolio managers for the four domestic funds, while Kevin Chen is portfolio manager of the three international equity funds. Kathryn Mohan McDonald and James Kan are portfolio managers of the alternative funds. Below is a summary of the AXA Rosenberg Funds and their respective fund portfolio managers. Domestic Funds: AXA Rosenberg Enhanced 500 Fund (Doug Burton) AXA Rosenberg U.S. Discovery Fund (Stephen Dean) AXA Rosenberg Large Capitalization Fund (Stephen Dean) AXA Rosenberg U.S. Small Capitalization Fund (Floyd Coleman) International Funds: AXA Rosenberg European Fund (Kevin Chen) AXA Rosenberg International Equity Fund (Kevin Chen) AXA Rosenberg International Small Capitalization (Kevin Chen) Alternative Funds: AXA Rosenberg Global Long/Short Equity Fund (Kathryn McDonald) AXA Rosenberg U.S. Large/Mid Cap. Long/Short Equity (James Kan) AXA Rosenberg Value Long/Short Equity Fund (Kathryn McDonald) AXA Rosenberg U.S. Small Capitalization Fund (BRSCX), started in 1996, seeks a total return greater than that of the Russell 2000 Index through investment primarily in equity securities of small size U.S. companies that are misvalued at the time of investment. In selecting securities, the fund seeks to match the "market cap" profile of the Russell 2000 small-cap index (about $500 million), while also maintaining sector neutrality versus the Russell 2000 index weights. If AXA Rosenberg has a flagship product, this is it, with a good chunk of the firm's institutional assets managed in the small-cap strategy. AXA Rosenberg U.S. Large Capitalization Fund (AXLVX) was started a little over a year ago on July 31, 2002. It seeks to generate a total return that's higher than that of the Russell 1000 Index through investment primarily in the common stocks of the largest 1000 U.S. companies that are misvalued (undervalued) at the time of investment. AXLVX is similar to BRSCX except that it chooses investments from the largest 1000 U.S. companies, while its fund sibling selects investments from the next 2000 U.S. firms, based on market capitalization. Together, the two funds invest in the total U.S. equity market (as measured by the Russell 3000 index). The firm's international small-cap equity product, AXA Rosenberg International Small Capitalization Fund (RISIX), also dates back to October 1996 when the U.S. small-cap mutual fund was launched. The fund seeks a total return greater than that of a proprietary global small-company stock index (Cazenove Rosenberg index) that comprises small companies that trade mainly in principal markets outside of the United States. An international large-cap equity product, AXA Rosenberg International Equity Fund (RIEIX) came in 2000. It seeks a total return that's greater than the MSCI EAFE Index of developed foreign markets (over 1,000 securities listed on the stock exchanges of 20 developed market nations in Europe, Australia and Asia/Far East). Together, these two international funds invest in the total international equity market (excluding emerging markets). There are other equity funds to choose from at AXA Rosenberg but we'll let you explore them further at your leisure. In the next section, we take a look at how well the Investor Class Shares of the AXA Rosenberg Funds have performed in relation to their fund benchmarks and category peers, using Morningstar and Lipper data. Mutual Fund Performance Because AXA Rosenberg Funds maintain industry and sector weights near those of their respective benchmarks and invest in equities that are misvalued at time of investment, most funds have blend (core) style characteristics, with a "value" tilt. Accordingly, you may find one or more of the AXA Rosenberg funds in the value style box from time to time. Over the long run, they tend to be industry, sector and style neutral, so comparing them to "blend" fund averages and index benchmarks seems to be the most suitable basis for comparison. Below is a summary of fund returns and rankings through August 5, using Morningstar data. No data was found for the AXA Rosenberg Enhanced 500 Fund and the AXA Rosenberg European Fund so they're excluded. YTD Return %/Category Rank (Aug-05) + 9.7% AXA Rosenberg U.S. Large Cap (AXLVX), 56th Percentile +14.1% AXA Rosenberg U.S. Small Cap (BRSCX), 78th Percentile +16.4% AXA Rosenberg U.S. Discovery (RDIVX), 52nd Percentile +12.4% AXA Rosenberg Int'l Equity (RIEIX), 35th Percentile +25.5% AXA Rosenberg Int'l Small Cap (RISIX), 4th Percentile - 7.5% AXA Rosenberg Value Long/Short (BRMIX), 100th Percentile - 5.3% AXA Rosenberg U.S. Large-Mid L/S (RMNIX), 100th Percent. - 4.3% AXA Rosenberg Global Long/Short (RMSIX), 99th Percentile You can see from the YTD performance summary that the alternative funds (i.e. long-short funds) have produced negative returns this year, ranking near the bottom of their respective category groups per Morningstar. Meanwhile, with this year's market advance, the AXA Rosenberg domestic and international funds have generated YTD returns ranging from 10.0% to 25.0%. AXA Rosenberg International Small Cap Fund leads the pack with a 25.5% YTD total return as of August 5. That is good enough to rank the fund in its respective category's 4th percentile and to beat most U.S. and foreign index benchmarks. Meanwhile, the U.S. Small Cap Fund's YTD return of 14.1% was only good enough to rank in the 78th percentile of the small-cap blend fund group per Morningstar. Here, the fund's "value" tilt may be causing it to lag its small-blend peers this year. Over the past five years, it has produced a positive annualized total return of 7.7% (42nd percentile). While that doesn't appear all that great on the surface, consider that the S&P 500 large-cap index fell by about 0.85% a year on average for the same trailing 5-year period through August 5, 2003. Where the AXA Rosenberg style/strategy has worked best relatively speaking has been on the international small-cap front. Over the past five years, the fund has generated a positive average annual return of 5.3%, less than that of its U.S. small-cap fund sibling but strong enough relatively to rank in the top 8% of the foreign stock fund category, per Morningstar. We would have expected the international small-cap fund to lag in 2003 as the U.S. small cap product has because they both lean to the left, to value but that has not been the case this year. So currency risk management may be making a positive contribution to relative performance. Conclusion Morningstar gives the AXA Rosenberg U.S. Small Cap Fund "4" stars for risk-adjusted returns relative to its small-blend peers. AXA Rosenberg International Small Cap Fund receives their highest "5" star overall rating in the foreign stock fund category. So, over longer time periods (5 years or more), the domestic small-cap and international small-cap funds have held their own, generating top quartile or second quartile returns versus their category groups. Long-term investors that appreciate quantitative techniques/tools and want to maintain a slight "value" bias overall should look at the AXA Rosenberg domestic and international funds. When you immunize fund portfolios against systematic stock market factors (such as size, yield, growth and beta) and maintain tight risk controls, fund performance can lag other types of funds when stocks advance. Such is the case in 2003, with the AXA Rosenberg U.S. Small Cap Fund. Its year-to-date and trailing 1-year total returns rank in the bottom quartile of the Morningstar small cap blend category, but its trailing 3-year return ranks in the 24th percentile (top quartile) and its trailing 5-year return puts it in the category's second quartile. If your long-term portfolio is dominated by large-cap stocks and funds and you seek exposure to the extended market of midcap and smallcap stocks, you may want to consider the AXA Rosenberg U.S. Discovery Fund (RDIVX), which seeks to outpace the Russell 2500 index while maintaining similar risk characteristics as the mid- and small-cap index. It is doing a little better than its small- cap fund sibling this year, generating a YTD return of 16.4% for shareholders. For more information or to download a fund prospectus, go to the www.axarosenbergfunds.com website. Steve Wagner Editor, Mutual Investor email@example.com ************************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 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Wednesday 08-06-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: ATH, HD Play of the Day: Call - KSS Spreads, Combinations & Premium-Selling Plays: Stocks End Mixed As Investors Appraise Economic Outlook Watch List: Defense, Media and Drugs Updated on the site tonight: Market Posture: Can Support Hold? ************************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 *********************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ Anthem Inc. - ATH - close: 68.40 chg: -3.86 stop: 75.50 Wow! That didn't take very long. Our new put play (from Sunday) on ATH has quickly reached our target. We were looking for a move to $70 with a potential drop to the 200-dma near $67.00. General profit taking in the HMO sector and a "disappointing" court decision flushed shares of ATH lower. The stock hit $66.00 midday. The sector wide profit taking is getting sharp with AET, OHP and more all falling to huge selling pressures. ATH's move was exaggerated even more by a decision from the Kansas Supreme Court to prevent ATH from acquiring the state's blue cross and blue shield businesses. ATH said the court decision was disappointing but would not impact long-term growth. It looks like investors sold first and asked questions later. There was a sharp rebound from the $66 mark intraday but the rally failed under $70.00. More aggressive traders not willing to call it quits might want to consider using the $70 mark as a guide to place their stop. Picked on August 3rd at $74.49 Change since picked: -6.09 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 1.1 million Chart = --- The Home Depot - HD - close: 31.32 change: +0.96 stop: 31.35 We knew it was coming. The last couple of updates we've been suggesting that conservative traders take profits as HD approaches potential support at $30.00, especially since we expected a bounce. That bounce came today when UBS Warburg said the sell-off in shares of HD was overdone. Traditionally, the market has looked at big home improvement retailers like HD and LOW and felt that these two did better when interest rates were low. The refi-boom helped fuel plenty of home improvement projects. UBS felt that HD is no longer that sensitive to interest rates and still offered investors a "turnaround" play. We lowered the stop loss to $31.35 on Tuesday, which was pierced intraday today. Picked on July 10th at $32.43 Change since picked: -1.11 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 9.67 mln 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 ******************************************************************** ********************** PLAY OF THE DAY - CALL ********************** Kohl's Corporation - KSS - close: 60.64 change: +1.84 stop: 57.25 - 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. (source: company press release) - Most Recent Update (Tuesday, July 29, 2003)- After 3 failed attempts to break through resistance, KSS finally succumbed to the bears' assault on Tuesday, sliding back under $59. Price weakness continued down to just above $58 before the stock caught a rebound from the 10-dma ($58.32). Unfortunately, KSS couldn't make much headway after that rebound with both the broad market and the Retail index (RLX.X) breaking down. The action in the RLX was particularly bearish, as it continued its breakdown from the rising channel and closed under the 50-dma ($329.77) for the first time since March 13th. This is precisely why we initiated coverage of KSS with a trigger just over the recent highs. We're still waiting for that trigger ($60.60) to be hit, so if the stock succumbs to the weakness all around it then there's no harm done. But if it can break out despite all the bearish influences, then it will confirm the relative strength we've been focused on. If our $57.25 stop is hit, then we'll be dropping the play anyways. Wait for the breakout! - Play of the Day Comments - We've finally seen shares of KSS trade up and through our trigger point of $60.60. Volume was almost average but not bad for a late summer session. This is a major break in overhead resistance so we could see some follow through. Suggested Options: We're going to suggest the September and October calls with a preference for the 60 and 65 strikes. If you can afford it the $55 are probably a decent play as well. BUY CALL SEP-60 KSS-IL OI=1686 at $3.70 SL=1.85 BUY CALL SEP-65 KSS-IM OI=1471 at $1.60 SL=0.85 BUY CALL OCT-60 KSS-JL OI=2677 at $4.30 SL=2.25 BUY CALL OCT-65 KSS-JM OI=3751 at $2.10 SL=1.10 Annotated chart: Picked on August 6th at $60.60 Change since picked: +0.04 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.56 mln Chart link: ************************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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Stocks End Mixed As Investors Appraise Economic Outlook By Ray Cummins A cautious quarterly report from Cisco Systems sent technology stocks lower while bargain-hunting buyers buoyed the blue-chip group in today's volatile session. The NASDAQ Composite fell 20 points to 1,652 as communications equipment stocks retreated on the heels of comments from Cisco (NASDAQ:CSCO), the world's largest manufacturer of networking gear, which said it sees only modest near-term growth. The Dow Jones industrial benchmark finished up 25 points at 9,061, with American Express (NYSE:AXP) and Home Depot (NYSE:HD) among the best performing components. The broad S&P 500-stock index added 1 point to end at 967 as buying pressure in homebuilders, brokerages, oil & gas services, consumer finance, insurance, and auto manufacturers overcame selling activity in healthcare, electronic manufacturing, and steel shares. Breadth was mixed with decliners outnumbering advancers 3 to 2 on the technology exchange while on the Big Board, winners roughly equaled losers. Trading volume was average at 1.45 billion shares on the NYSE and 1.65 billion shares on the NASDAQ. Bond prices rebounded after the U.S. Treasury sold $18 billion in 5-year notes. The sale follows Tuesday's auction of $24 billion in 3-year notes at a yield of 2.42%. The 10-year bond finished up 28/32 to yield 4.27%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 8/5/03 *************** 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. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) 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 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 trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AMLN AUG 20 19.30 21.80 $0.70 8.47% 3.63% ELBO AUG 22 22.10 25.15 $0.40 4.23% 1.81% IVGN AUG 40 39.40 48.67 $0.60 3.97% 1.52% JCOM AUG 40 39.30 52.55 $0.70 5.19% 1.78% NFLX AUG 20 19.65 24.31 $0.35 4.91% 1.78% POWI AUG 22 22.20 28.62 $0.30 4.15% 1.35% ELBO AUG 22 22.20 25.15 $0.30 3.99% 1.35% FWHT AUG 17 17.00 18.91 $0.50 9.85% 2.94% GENZ AUG 42 41.85 45.38 $0.65 5.42% 1.55% MATK AUG 40 39.45 46.51 $0.55 4.50% 1.39% MEDI AUG 35 34.45 36.73 $0.55 4.76% 1.60% MOGN AUG 22 21.90 34.80 $0.60 9.51% 2.74% NFLX AUG 20 19.55 24.31 $0.45 8.23% 2.30% OVTI AUG 30 29.50 39.91 $0.50 6.01% 1.69% POWI AUG 22 22.15 28.62 $0.35 5.32% 1.58% SNDK AUG 40 39.45 56.90 $0.55 4.92% 1.39% UTSI AUG 30 29.50 41.99 $0.50 5.97% 1.69% ACDO AUG 22 21.50 23.41 $0.50 8.82% 2.33% CECO AUG 75 74.40 82.73 $0.60 3.01% 0.81% CYMI AUG 35 34.55 38.75 $0.45 5.27% 1.30% ICOS AUG 35 34.55 39.49 $0.45 5.26% 1.30% MEDI AUG 37 36.80 36.73 ($0.07) 0.00% 1.90% MOGN AUG 22 21.75 34.80 $0.75 13.72% 3.45% MNST AUG 20 19.65 21.94 $0.35 7.11% 1.78% OSIP AUG 25 24.60 30.09 $0.40 7.63% 1.63% UNTD AUG 25 24.40 33.37 $0.60 9.79% 2.46% UTSI AUG 35 34.65 41.99 $0.35 4.89% 1.01% ZRAN AUG 20 19.60 25.17 $0.40 8.71% 2.04% CCMP AUG 55 54.45 61.30 $0.55 5.54% 1.01% CYMI AUG 35 34.60 38.75 $0.40 6.58% 1.16% IMCL AUG 35 34.35 38.25 $0.65 12.05% 1.89% IVGN AUG 47 46.95 48.67 $0.55 6.16% 1.17% MATK AUG 45 44.50 46.51 $0.50 6.08% 1.12% MNST AUG 20 19.65 21.94 $0.35 10.64% 1.78% MSTR AUG 35 34.60 39.35 $0.40 7.54% 1.16% OVTI AUG 35 34.50 39.91 $0.50 8.91% 1.45% SNDK AUG 50 49.50 56.90 $0.50 5.78% 1.01% UNTD AUG 25 24.70 33.37 $0.30 7.94% 1.21% A number of issues are on the "exit" list including: Monster Worldwide (NASDAQ:MNST), MedImmune (NASDAQ:MEDI); $37.50 Put, Invitrogen (NASDAQ:IVGN); $47.50 Put, Martek Biosciences (NASDAQ:MATK); $45 Put, Accredo Health (NASDAQ:ACDO) and ICOS (NASDAQ:ICOS) which plunged lower in "after hours" trading Tuesday in the wake of a poor earnings outlook. Interdigital Communications (NASDAQ:IDCC) has previously been closed to limit potential losses. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield PPD AUG 27 28.10 21.81 $0.60 6.82% 2.14% INTU AUG 45 46.05 42.70 $1.05 6.80% 2.28% PHTN AUG 32 32.85 25.75 $0.35 6.22% 1.07% PPD AUG 27 27.85 21.81 $0.35 5.69% 1.26% BRCM AUG 27 27.80 20.28 $0.30 6.91% 1.08% QCOM AUG 40 40.40 36.02 $0.40 4.74% 0.99% QLGC AUG 50 50.70 42.06 $0.70 6.32% 1.38% FRX AUG 52 52.95 45.28 $0.45 5.91% 0.85% NVLS AUG 37 37.85 35.20 $0.35 5.79% 0.92% QLGC AUG 47 47.85 42.06 $0.35 5.00% 0.73% Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status AGN 80.83 76.94 AUG 70 75 0.60 74.40 $0.60 Open CDWC 50.04 47.35 AUG 40 45 0.60 44.40 $0.60 Open ICST 34.20 29.06 AUG 25 30 0.55 29.45 ($0.39) Closed IACI 41.28 36.48 AUG 35 38 0.35 37.15 ($0.67) Closed IVGN 49.48 48.67 AUG 40 45 0.65 44.35 $0.65 Open? MSTR 42.05 39.35 AUG 30 35 0.60 34.40 $0.60 Open EBAY 114.14 102.22 AUG 100 105 0.60 104.40 ($2.18) Closed * EXPE 77.18 70.48 AUG 65 70 0.55 69.45 $0.55 Closed GENZ 50.71 45.38 AUG 45 48 0.30 47.20 ($1.82) Closed CB 61.90 64.85 AUG 55 60 0.25 59.75 $0.25 No Play CEPH 48.70 45.05 AUG 40 45 0.55 44.45 $0.55 Open? EXPE 76.67 70.48 AUG 65 70 0.60 69.40 $0.60 Closed Among the "watch" list victims were Integrated Circuit Systems (NASDAQ:ICST) and eBay (NASDAQ:EBAY), which was closed Monday for a smaller than published loss. Other issues with early exit potential are InterActive (NASDAQ:IACI) and Expedia (NASDAQ:EXPE), both of which slumped in conjunction with the Internet-related retreat. Genzyme (NASDAQ:GENZ) fell Monday after announcing it would buy SangStat Medical (NASDAQ:SANG) for about $600 million in cash. The position was closed during Monday's session for a smaller than published loss. Cephalon (NASDAQ:CEPH) was pounded by investors after reporting that third-quarter earnings will be $0.02 below the average forecast of analysts. The activity seems excessive but it may be prudent to exit the play on any technical bounce. With the "bearish" conditions in the market, all of the remaining stocks in the portfolio should be monitored for signs of additional downside activity. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status ATK 51.37 53.20 AUG 60 55 0.50 55.50 $0.50 Open AVE 52.20 49.74 AUG 60 55 0.65 55.65 $0.65 Open ATH 75.35 72.26 AUG 85 80 0.60 80.60 $0.60 Open JNJ 52.60 49.78 AUG 60 55 0.40 55.40 $0.40 Open CTX 74.29 71.90 AUG 85 80 0.55 80.55 $0.55 Open OEX 497.54 486.66 AUG 520 515 0.60 515.60 $0.60 Open APC 42.70 40.49 AUG 48 45 0.30 45.30 $0.30 Open CHIR 45.50 43.39 AUG 50 48 0.25 47.75 $0.25 Open PG 87.75 87.53 AUG 95 90 0.40 90.40 $0.40 Open Positions in Igen (NASDAQ:IGEN) and Lockheed Martin (NYSE:LMT), which is currently profitable, have previously been closed to limit potential losses. Synthetic Positions ******************* No Open Positions Debit Straddles *************** 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 new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED 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. ************** ADI - Analog Devices $38.25 *** 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 $38.25 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 35 ADI TG 884 0.25 34.75 6.9% 0.7% * SELL PUT SEP 35 ADI UG 2,294 1.00 34.00 5.2% 2.9% ************** DIGE - Digene $33.47 *** New Cancer Screening Product! *** 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. DIGE - Digene $33.47 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 30 QDG TF 60 0.25 29.75 8.3% 0.8% * SELL PUT SEP 30 QDG UF 535 1.10 28.90 6.7% 3.8% ************** DRIV - Digital River $22.50 *** Next Leg Up? *** Digital River (NASDAQ:DRIV) is a provider of electronic commerce outsourcing solutions. As an application service provider, the company enables its clients to access its proprietary electronic commerce system over the Internet. The company's technology plat- form allows it to provide a suite of electronic commerce services, including Web commerce development and hosting, transaction processing, fraud screening, digital delivery, integration to physical fulfillment and customer service. Digital River also provides analytical marketing and merchandising services to assist clients in increasing Web page view traffic to, and sales through, their Web commerce systems. DRIV - Digital River $22.50 Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 22.5 DQI TX 566 0.80 21.70 27.6% 3.7% SELL PUT SEP 17.5 DQI UW 340 0.35 17.15 4.9% 2.0% * SELL PUT SEP 20 DQI UD 296 0.85 19.15 7.8% 4.4% ************** IMCL - ImClone $38.00 *** Consolidation Underway! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL - ImClone $38.00 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 35 QCI TG 5,355 0.70 34.30 18.3% 2.0% SELL PUT SEP 25 QCI UE 245 0.35 24.65 3.0% 1.4% TS SELL PUT SEP 30 QCI UF 748 1.15 28.85 8.9% 4.0% * ************** LLTC - Linear Technology $36.23 *** Range-bound? *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. LLTC - Linear Technology $36.23 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 35 LLQ TG 3,515 0.45 34.55 11.1% 1.3% SELL PUT SEP 32.5 LLQ UZ 166 0.75 31.75 4.4% 2.4% * SELL PUT SEP 35 LLQ UG 821 1.50 33.50 6.9% 4.5% ************** MRVL - Marvell Technology $35.02 *** 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 - Marvell Technology $35.02 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 32.5 UVM TZ 1,130 0.25 32.25 7.2% 0.8% * SELL PUT SEP 30 UVM UF 294 0.90 29.10 6.2% 3.1% SELL PUT SEP 32.5 UVM UZ 63 1.60 30.90 8.3% 5.2% ************** OSIP - OSI Pharmaceuticals $30.86 *** 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 - OSI Pharmaceuticals $30.86 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 25 GHU TE 1,758 0.40 24.60 19.6% 1.6% * SELL PUT AUG 30 GHU TF 1,342 1.80 28.20 45.8% 6.4% SELL PUT SEP 25 GHU UE 195 1.40 23.60 12.0% 5.9% ************** OVTI - OmniVision $42.21 *** New All-Time High! *** 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. OVTI - OmniVision $42.21 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 40 UCM TH 1,877 0.80 39.20 17.5% 2.0% SELL PUT SEP 25 UCM UE 1,005 0.35 24.65 2.7% 1.4% TS SELL PUT SEP 30 UCM UF 1,943 0.85 29.15 6.2% 2.9% * ************** SINA - SINA Corporation $31.98 *** Premium Selling Only! *** SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an online media company and value-added information service provider for China and the global Chinese communities. With a branded network of localized Websites targeting China and overseas Chinese, the company provides an array of services to its users including region-focused online portals, search, directory, interest-based and community-building channels, free and premium e-mail, wireless short messaging, online games, virtual Internet service provider, classified listings, e-commerce, e-learning, and enterprise e-solutions. In turn, SINA generates revenue through advertising, fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $31.98 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 30 NOQ TF 4,538 0.85 29.15 24.6% 2.9% SELL PUT SEP 22.5 NOQ UX 398 0.60 21.90 5.8% 2.7% * SELL PUT SEP 25 NOQ UE 738 1.05 23.95 9.5% 4.4% ************** ZRAN - Zoran $25.46 *** Solid Profit Outlook! *** Zoran Corporation (NASDAQ:ZRAN) develops and markets integrated circuits, integrated circuit cores and embedded software used by original equipment manufacturers (OEMs) of digital video and audio products for commercial and consumer markets. The firm's multimedia product line consists of four major product families: DVD, comprised of video and audio decompression products based on MPEG, Dolby Digital and DTS; filmless digital cameras, comprised of video compression/decompression products; PC Video, comprised of video compression/decompression products for JPEG technology and universal serial bus multimedia controllers, and Digital Audio, comprised of audio decompression products. Quarterly earnings are due on 7/24/03. ZRAN - Zoran $25.46 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT AUG 25 ZUO TE 253 0.70 24.30 22.7% 2.9% SELL PUT SEP 20 ZUO UD 312 0.40 19.60 4.9% 2.0% * SELL PUT SEP 22.5 ZUO UX 249 0.90 21.60 7.5% 4.2% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** KSS - Kohl's $60.64 *** On The Rebound! *** Kohl's (NYSE:KSS) operates family-oriented, specialty department stores. 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 traditional, full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Since 1992, the company has increased square footage an average of 22% per year, expanding from 79 stores located in the Midwest to a total of 420 stores with a presence in six regions. Of the 420 stores it operates, 116 are take-over locations, which 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. KSS - Kohl's $60.64 PLAY (conservative - bullish/credit spread): BUY PUT SEP-50.00 KSS-UJ OI=324 ASK=$0.45 SELL PUT SEP-55.00 KSS-UK OI=1797 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$54.40 ************** WHR - Whirlpool $66.05 *** Safe-Haven Stock! *** Whirlpool (NYSE:WHR) manufactures and markets a full line of major appliances and related products, primarily for home use. The company's principal products are home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, room air-conditioning equipment and mixers and other small household appliances. Approximately 10% of the company's unit sales volume is derived from purchases from other manufacturers for resale by the firm. It also produces hermetic compressors and plastic components, primarily for the home appliance and electronics industries. WHR - Whirlpool $66.05 PLAY (conservative - bullish/credit spread): BUY PUT SEP-55.00 WHR-UK OI=147 ASK=$0.40 SELL PUT SEP-60.00 WHR-UL OI=79 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$59.35 ************** XAU - PHLX Gold & Silver Index $82.67 *** Market Hedge! *** The PHLX Gold & Silver Sector (XAU) is a capitalization-weighted index composed of the common stocks of 9 companies involved in the gold and silver mining industry. The XAU was set to an initial value of 100 in January 1979; options commenced trading on December 19, 1983. For more information on the XAU, go to www.phlx.com. XAU - PHLX Gold & Silver Index $82.67 PLAY (conservative - bullish/credit spread): BUY PUT SEP-70.00 XAU-UN OI=808 ASK=$0.45 SELL PUT SEP-75.00 XAU-UO OI=1747 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$74.45 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option 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 options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very 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 price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond 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. *************** APC - Anadarko Petroleum $40.70 *** New Trading Range? *** Anadarko Petroleum (NYSE:APC), through RME Petroleum Company, RME Holding Company, Anadarko Canada Energy, Anadarko Canada Corporation, RME Land and Anadarko Algeria Company, is a global independent oil and gas exploration and production company. The The company's major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent region and the western states, Alaska and in the shallow and deep waters of the Gulf of Mexico, as well as in Canada and Algeria. APC is also active in Venezuela, Qatar, Oman, Egypt, Australia, Tunisia, Congo and Gabon. APC - Anadarko Petroleum $40.70 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 45 APC HI 14,063 0.25 45.25 6.9% 0.6% * SELL CALL AUG 42.5 APC HV 3,089 0.60 43.10 13.4% 1.4% ************** CVTX - CV Therapeutics $23.49 *** A Big Down Day! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on the discovery, development and commercialization of new small molecule drugs for the treatment of cardiovascular diseases. The company's New Drug Application (NDA) for Ranexa (ranolazine) for the treatment of chronic angina has been filed at the U.S. FDA. Tecadenoson (CVT-510), an A1-adenosine receptor agonist, is being developed for the potential reduction of rapid heart rate during atrial arrhythmias. CVT-3146, an A2A-adenosine receptor agonist, is being developed for the potential use as a pharmacologic agent in cardiac perfusion imaging studies. Adentri, an A1-adenosine receptor antagonist, is being developed by the company's partner, Biogen, for the potential treatment of acute and chronic congestive heart failure. CVTX also has several research and preclinical development programs designed to bring additional drug candidates into human clinical testing. CVTX - CV Therapeutics $23.49 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 27.5 UXC HY 926 0.25 27.75 15.0% 0.9% * SELL CALL AUG 25 UXC HE 217 0.60 25.60 23.9% 2.3% ************** ELX - Emulex $20.45 *** Earnings Speculation Only! *** Emulex (NYSE:ELX) is a designer, developer and supplier of a line of storage networking host bus adapters and application specific computer chips that provide connectivity solutions for storage area networks, network-attached storage and redundant array of independent disks storage. HBAs are the basic data communication products that enable servers to connect to storage networks by offloading processing tasks as information is delivered and sent to the network. The company's products are based on internally developed ASIC and embedded firmware and software technology, and offer support for a wide variety of SAN protocols, configurations, system interfaces and operating systems. Earnings are due 8/7/03. ELX - Emulex $20.45 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 22.5 ELX HX 8,709 0.30 22.80 15.8% 1.3% * SELL CALL AUG 20 ELX HD 4,489 1.25 21.25 42.8% 5.9% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** UNH - UnitedHealth Group $48.79 *** Sector Slump! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The firm's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes the UnitedHealthcare and Ovations businesses; Specialized Care Services, and Ingenix. UNH - UnitedHealth Group $48.79 PLAY (conservative - bearish/credit spread): BUY CALL SEP-57.50 UHB-IY OI=2721 ASK=$0.20 SELL CALL SEP-55.00 UHB-IK OI=4186 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$55.25 ************** WLP - WellPoint Health Networks $76.49 *** Sell-Off Underway! *** WellPoint Health Networks (NYSE:WLP) serves the health care needs of more than 13 million medical members and over 49 million specialty members nationwide through Blue Cross of California, Blue Cross Blue Shield of Georgia, Blue Cross Blue Shield of Missouri, HealthLink and UNICARE. WellPoint offers a broad spectrum of quality network-based health products, including open access PPO, POS and hybrid products, HMO and specialty products. Specialty products include pharmacy benefit management, dental, medical management, vision, behavioral health, life and disability insurance, long term care insurance, flexible spending accounts, COBRA administration and Medicare supplements. WLP - WellPoint Health Networks $76.49 PLAY (conservative - bearish/credit spread): BUY CALL SEP-90.00 WLP-IR OI=246 ASK=$0.30 SELL CALL SEP-85.00 WLP-IQ OI=173 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$85.50 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** Defense, Media and Drugs Northrop Gruman - NOC - close: 91.01 change: +0.01 WHAT TO WATCH: The defense sector (DFI) has been doing pretty well and the index has been able to maintain its bullish trajectory (for now). One of its lead components is NOC. NOC popped out its sideways trading range on strong earnings in late July but that rally has failed against a consolidating market environment. Old resistance at $90 has become new support. The question is whether that support is going to hold. NOC is one to watch. Chart= --- Viacom Inc - VIA (& VIA.B) - close: $42.60 change: +0.55 WHAT TO WATCH: We've been eying shares of VIA for a breakdown below the 200-dma. Unfortunately for the bears, the stock has been bouncing off this level all month (July). During Tuesday's session the stock actually closed below the 200-dma but paused at the $42.00 mark. VIA rebounded today but appears to have failed at $43 late afternoon. Will VIA finally break the 200-dma and support at $42 or will it retest overhead resistance near $46 again? It's P&F chart suggest support in the $37.00 range. Chart= --- AmerisourceBergen - ABC - close: $58.20 change: -1.78 WHAT TO WATCH: Seems like we may have mentioned this one before and shares just keep falling. The stock is cascading lower and currently down five sessions in a row. While normally one might look for a bounce today's close below support at $60.00 and its simple 200-dma is very negative. Shares closed at their low for the day. We're not suggesting plays on the stock right now because it feels like a chase. The daily chart suggests there is support in the $57.50 area but its P&F chart displays support at $55. It will be interesting to see where it bounces. Chart= --- Taro Pharmaceuticals - TARO - close: 49.58 change: -1.12 WHAT TO WATCH: It's hard to believe but TARO's P&F chart looks uglier than its daily. The stock is showing a big sell-signal from being very overbought, especially on the Point & Figure chart. However, the daily chart is hinting at a potential reversal. Today's candlestick looks like a thin "hammer", which can be a clue pointing towards a change in trend. Bears will argue that TARO is still under support of $50 and we agree. However, nimble traders who can monitor the stock during the day might want to watch for a bounce back towards its 50-dma or the $54.00 level. Whether it rolls back over from there is anyone's guess. Chart= --- Lexmark Intl - LXK - close: 61.30 change: -0.21 WHAT TO WATCH: Shares of LXK were hammered on its earnings announcement in July. since then the bounce has failed at its 200-dma, which has coincided with the $65.00-65.50 level. We're going to be watching to see if LXK can bounce from $60 and trade back to $65 again or will it break $60 and start a new leg down. Chart= ************** MARKET POSTURE ************** Can Support Hold? To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_080603.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. 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