The Option Investor Newsletter Sunday 08-10-2003 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: Bond, Treasury Bond Futures Market: Weekly treasuries and metals gain, equities mixed Index Trader Wrap: BORING Editor's Plays: Follow the Trend Market Sentiment: Breaking Ranks Ask the Analyst: Observe it, test it, then predict it (Pivot Analysis) 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 8-08 WE 8-01 WE 7-25 WE 7-18 DOW 9191.09 + 37.12 9153.97 -130.60 9284.57 + 96.42 + 68.56 Nasdaq 1644.03 - 71.59 1715.62 - 15.08 1730.70 + 22.20 - 25.43 S&P-100 493.80 + 0.16 493.64 - 9.30 502.94 + 1.44 - .98 S&P-500 977.59 - 2.56 980.15 - 18.53 998.68 + 5.36 - 4.82 W5000 9392.73 - 61.43 9454.16 -145.20 9599.36 + 52.70 - 64.23 RUT 453.94 - 14.14 468.08 - 0.80 468.88 + 4.12 - 9.01 TRAN 2579.03 - 16.88 2595.91 - 19.88 2615.79 + 39.50 + 30.71 VIX 21.29 - 1.49 22.78 + 2.84 19.94 - 1.42 + .64 VXN 32.03 - 0.45 32.48 + 2.44 30.04 - 3.37 + .61 TRIN 0.87 1.08 0.67 0.60 Put/Call 0.81 0.91 0.67 0.61 Avg Highs 189 462 365 522 Avg Lows 86 72 31 29 ****************************************************************** Bond, Treasury Bond by Jim Brown Not quite the catchy moniker that James Bond uses and attractive double agents don't swoon when they hear it but it still controls our fate. As much as I hate to keep writing about it I hate more watching the markets tick up or down in lock step with changes in the bond market. That was exactly what happened this week with the closing rebound on Friday only coming after the bond market closed. Dow Chart - Daily Nasdaq Chart - Daily S&P Chart - Daily Wilshire 5000 Chart - Daily It has been a pattern all week with the market making major moves after the bond market closed and the perceived danger passed. I am going to try and explain the problem with pictures and I promise I will be brief. The yields on bonds have gone from abnormally low levels to abnormally high levels and it caught the stock market off guard just like it caught bond traders off guard. While everyone was pleased to see yields fall this week after the three day bond auction they did not drop far. They also did not drop below support at 4.20%. The stock market watched the yields with a nervous twitch all day Friday to see if the panic selling in bonds was over. The yield rise into the close was disturbing but the Dow managed to close with a +30 point spurt on short covering and possible Saddam speculation. 10-year Treasury Yields - 60 min While the markets were pleased to see the drop from the 4.95% high on August 1st the drop to 4.28% on Friday was really just an oversold correction and not meaningful in the long term scheme. The chart below shows how minor the drop was this week. 10-year Treasury Yields - Daily Why do we care what is happening in the bond market? Because the bond market yields impact the economy and stocks and they are permanently linked. I will get to the details in a minute but suffice to say if yields go down (bonds up) the economy benefits and the market rises. Conversely if yields go up the economy suffers and the market falls. This chart shows the relationship between the S&P (red) and 10-year yield (black). Note the basic divergence in March and April and then the extreme divergence in June. In June the extremes in yield lows and market highs were abnormal. Now that yields have risen and do not appear to be falling the natural tendency would be for the S&P to revert back to the historical divergence and move to a lower level. 10-year Treasury Yields/S&P - Daily Now that I have totally bored you I will try and wrap this up quickly. The market direction is locked to the bond yields because the cost of borrowing affects everything we do. Costs for new equipment, inventory, office buildings, computers and home mortgages all depend on rates. Every quarter point has an impact as we have seen from Fed rate changes over the years. We have had the equivalent of four 25-point rate hikes over the last six weeks. This is far faster than the Fed has acted in recent memory. Image the carnage in the market if the Fed had announced a surprise 25 point rate hike four times in the last six weeks. The Dow would be trading at 8000 instead of 9000. Now I ask you, what is the difference? The rates still changed and the market has not yet reacted. It is as if the market is hoping to wake up on Monday and find out it was just a nightmare. Don't hold your breath. According to bond junkies this has been the worst quarter for bonds since 1987 and we all know what happened then. While the conditions are considerably different in 2003 the damage may take some time to work out of the system. Traders simply do not know what to expect. Everyone is looking at everyone else for direction. While indecision is running rampant there is a stealth bear market in techs hiding behind the major indexes. The Nasdaq has traded down five of the last six days and lost -71 points for the week. Why you ask? First because the techs were up as much as 50% since the lows and funds eager to show gains and unsure of the future are locking in profits. In any bull move and especially one as strong as we have had there is normally a 10% correction or better when the move runs out of steam. It appears the Nasdaq is feeling this pain especially after Cisco failed to encourage investors. Secondly there may still be some potholes in the recovery road. Taiwan Semiconductor reported a revenue decline due to seasonal inventory adjustments by its customers. Not a big deal but any decline in revenue is cause for concern by investors today. NVDA warned that sales for the next quarter would be less than expected and gross margins were shrinking. NVDA is a big customer of TSM and that drove TSM even lower. UMC reported a 40% drop in earnings for the 2Q and said it expects 3Q shipments to drop 10%. These concerns drove the SOX to an -11.84 loss for the day and a four-week low. The SOX is still very extended from its 260 low in February and a +57% gain to the July high of 408. It is already -10% off its high with support in the 360 range. SOX Chart - Daily Also discouraging is the Russell-2000, which has dropped -28 points from its July highs and is still some distance from support at 440. The Russell is the best indicator of fund direction. When conditions are seen to be improving funds venture away from large cap safety and into the small cap market where the really large gains can be made if they pick a winner. If they see weakness ahead they abandon the small caps and run back to big cap liquidity and perceived safety. This week we saw small caps and techs drop and the Dow rise as money flowed back into the safety of cyclical big caps. Russell-2000 Chart - Daily Cluttering the field of vision is the global outlook. Italy announced it was in recession for the first time in eleven years on Friday. Not that Italy is a huge world economy but it is another domino in the economic chain. According to the chip companies Asia has not recovered completely from SARS yet. Oil prices continue to hover at $32 a barrel with no relief in sight. No earthshaking problems but still smoke on the horizon. Next week we have to deal with a Fed meeting on Tuesday. We are expecting nothing out of the Fed meeting except a rewording of the last policy statement which was a rewording of the last statement before that. The Fed funds futures are showing a zero chance of a rate cut. There is a good possibility retail traders will still buy the rumor in hopes of a surprise. The Fed has repeatedly said they are very accommodative and do not think another cut is needed. The wild card here is the bond yields. Greenspan has got to be wringing his hands over the spike in rates just when he was promising to keep rates low for the duration of his term. He has to weigh the potential risk to the stock market with the need to do/say something to scare the bond market. Should they decide to say something deflationary (sorry, unwelcome disinflation) they could knock bond yields back into June but it could create a stock market panic. Now, do they want to risk the market falling under the weight of rising yields along with the economy OR give bonds a swift kick and then prop up the market with some fedspeak the following week? The multitude of possibilities is dizzying. Next week starts out slow economically with nothing on Monday and only the FOMC meeting on Tuesday. The rest of the week is packed full of reports but after the Fed statement they may not matter. You do not want to hear this but with earnings over gentlemen prefer bonds. I know, it is a corny line but it is the truth. They will watch the bonds more than the economics next week. Conservative pension funds typically switch from stocks to bonds when the yields reach 4.50%. We saw some of those asset allocation programs early this week. We closed on Friday at 4.28% and not very far away from the magic number. We also have $60 billion in new supply on bond dealers books and they will be trying to dump that off to the end buyers. This will also depress cash flow available for stocks. Last Sunday I mentioned the potential for a roller coaster ride and this week certainly followed through on that prediction. The high for the week was 9209 and the low 8997 with plenty of spikes and dips in the middle. The coming week should not change. I expect more of the same as we continue to test the highs and the lows of our trading range. We have been locked in the 9000-9300 range since July 1st and have resisted all attempts to trade lower despite historical precedent. The longer we stay in this range the better the chance of a very strong and lasting move when we break out. Unfortunately that break could go either way. If the economics continue to line up positively then the longer we stay in this area the better chance of an upside break. The Dow closed right in the middle of the range on Friday and is in neutral territory. The Nasdaq, Russell and SOX are not so safe and could test their support levels early next week. With INTC, MSFT, ORCL, DELL, QCOM and SUNW all threatening to break support I would say it was a safe bet but Fed meetings have a funny way of impacting the market. Check out the declining new highs and increasing new lows in the statistics header of this commentary. Keep those seatbelts fastened, this roller coaster has plenty of ride left. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Weekly treasuries and metals gain, equities mixed Jonathan Levinson Friday saw treasuries initially trading strong, adding to Thursday's gains until sellers aggressively returned toward the end of the session. Equities were again mixed with the Nasdaq futures leading to the downside. Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index The US Dollar Index continued its rise from Thursday, breaking 96.30 resistance. Surprisingly, the action failed to faze gold or the commodity index, with gold having a very bullish day, the CRB losing 23 cents, and precious metals stocks in particular posting huge gains on Friday. For the week, the US Dollar Index printed a bearish harami cross, with a lower high and higher low closing lower than the previous week. Daily chart of December gold December gold broke above the 354 resistance level in another strong day countertrend to its ongoing oscillator downphase, adding 4.10 to close at 358.20. This impressive gain was eclipsed by large upside moves in the mining stocks, with the AMEX Goldbugs Index, the HUI, adding 8.49 to close at a new multiyear high of 177.12. The XAU added 3.81 to 86.44. For the week, gold printed a bullish harami, and the HUI a bullish engulfing candle. Daily chart of the ten year note yield The daily chart of the ten year note yield closed on a bullish dragonfly doji in a sharp, sudden rally as ten year notes, which had seen moderate buying all through the session, got sold off aggressively in the last hour of trading. The ten year treasury auction was on Thursday, and I had wondered whether the bullishness of the day would survive Friday's trading. Like the five year notes auctioned the previous day, ten year notes got sold off Friday, the ten year note yield closing higher by 6 basis points to 4.289%. The FVX was down -.6 bps, and the TYX +2 bps. Notwithstanding the move higher in the ten year yield, the rising trendline that broke down in Wednesday's trading was not touched by today's move. Combined with the oscillators on strong sell signals, the outlook remains bullish for treasury bond next week, with the TNX printing a bearish harami for the week. Daily NQ candles The NQ closed lower by 9.50 points in a narrow session on Friday, printing a bearish engulfing candle and going out 6 points above its session low. As we saw yesterday, the close remains uncertain, with the NQ resting on key support within a potentially bullish chart pattern. Nevertheless, the oscillators remain on clear sell signals, and the price is below its 21 and 50 day EMAs. 30 minute 20 day chart of the NQ The 30 minute candles provide more insight. The weakness on Friday left the NQ above the steeply declining upper trendline of the dubious bull wedge I observed on Thursday, but failing to break to the upside as implied by the pattern. The parallel trendline to the lower support line forms a bull flag, which fits price action and illustrates the riskiness implied by the NQ's proximity to the lower support line on the daily chart above. The oscillators on the 30 minute chart are suggesting a bounce on Monday, barring any bad news over the weekend. Daily ES candles The ES, on the other hand, added 3.50 today, closing 2 points below its session high, and leaving the ES closer to its upper bull flag resistance line. A bounce from the Nasdaq on Monday could help propel a bull flag breakout on the ES, but note that the NQ printed a "2 black crows" candle pattern on this very negative week, and on that timeframe, I'd be surprised by anything more than a merely technical bounce on these shorter ones. 20 day 30 minute chart of the ES The 30 minute ES failed one point below the upper resistance line, and looked clear for a failure within its cycle downphase until the end-of-session buying spree that reversed the oscillators in mid-run. The short cycle oscillators on the 150- tick chart below illustrate the action, and suggest a mild-bounce and retest of 981 resistance on Monday. The R2 value of 984.50 coincides with a resistance zone stretching to 987, and it will take a great deal of commitment from the bulls to get us past it. Daily YM candles The YM was the most bullish of the equity futures, and also suggests a test of resistance on Monday. 20 day 30 minute chart of the YM The picture painted by equities is mixed because of the bullish Dow and the bear Nasdaq, with the SPX trapped in the middle. Friday's session muddied the picture considerably on what would otherwise have been a down-week for the indices, led by the NQ. That said, Friday was a light-volume session following the quarterly treasury auction, and I'm tempted to shrug it off and wait to see what Monday brings. That said, the reversal in bonds and the strong rally in gold and the precious metals indices puts the weak equity gains into perspective. It's difficult to be bullish on tech stocks or even blue chips when bonds, gold and gold miners are rallying together. However, if we are seeing a renewal of the liquidity surge that drove all in the Spring Rally, then equities may simply be taking their time. We'll have to see Monday. ******************** INDEX TRADER SUMMARY ******************** BORING By Leigh Stevens lstevens@OptionInvestor.com Market Analysts and pundits try to find something interesting to say about the market even when its not doing much - but the plain simple truth of it is that it's a bit boring right now as the market has been in a relatively tight (trading) range. It then requires significant patience for the active trader types to wait for a move to the upper or lower end of the range, such as was the case last week. Predictably enough a rally developed after the S&P & Dow indices found support or buying interest at the low end of their ranges. The big cap blue chip Dow closed up on Friday along with the S&P Indices, helped by McDonald's (MCD), a recent strong performing Dow 30 stock. However, the Nasdaq Composite was down for the 6th day running, as the important bellwether semiconductor group got hit - a sharp drop in Nvidia pulled the semis lower, making it the worst performing tech sector. Optimism about consumer spending fueled a continued rise in retail stocks, as well as airlines. Gold stocks continued higher per the technical breakout seen on the charts with the Philly Gold and Silver Index (XAU). THE BOTTOM LINE - Last week the S&P 100 (OEX) fell again to 485, the lower lower end of its broad price range and equal to the late-June low, presenting another buying opportunity for long calls. Those selling premium - a good idea in a trading range market - could have sold the puts. The S&P 500 (SPX) dipped to the 960 area, approximately equal to its 7/1 low and in the area of the August TOP of last year - resistance "becomes" support. The Dow Index (DJX) fell to 90 which makes now 3 "touches" to this area since early-July. The Composite fell to around 1641, almost filling in the upside gap from early-July that I mentioned last week as possibly marking a low. The jury is out on that as the tech heavy Nasdaq did not show the same propensity to rebound as the S&P. It went up more, now its correcting more and is consistent in that. Looking the most bullish in the summer doldrums is the Dow, then the S&P. QQQ may hold the 30 area, a 50% retracement of the last up move, but I'm not stepping up to the buyer's plate yet as the Q's could still slip to 29 where I would be more willing to buy the stock. What will it take to propel stocks into another up leg? - probably a bond market rally at some point and some further signs of job creation, as I've been saying in my commentaries and of course as suggested by many others. The recent run up in bond yields and mortgage rates had raised some fear with market participants that the less than robust U.S. economic recovery would falter, causing consumers to spend less and businesses to cut back on the limited new capital spending they've been doing so far in 2003. However, a rebound in bond prices and resulting drop in yields, somewhat calmed these concerns. A view of the continuous benchmark weekly bond chart versus equities - Note: A "continuous" contract price series strings together the nearest futures contract until shortly before it expires, then uses the next most-active contract and so on. This is the only way to get a longer-term price perspective of the benchmark bond by using the futures contracts. A further background note - since the Federal government stopped borrowing so much a few years ago, the 10-year Treasury note sometimes now called a bond even though that used to be for maturities beyond 10 years), has become the benchmark for longer- term debt securities. The "benchmark" may of course change back to the 30-year bond if the government goes back to running big deficits again; i.e., its favorable to sell more 30-year paper if the borrowing needs are major and this is especially true in a low interest rate environment such as we have currently. LAST WEEK - We had mostly positive economic news coming into Friday and some earning's bright spots. June factory orders were up by 1.7% and better than expected (+1.5%). I said "mostly" and this report showed that businesses were not building much in the way of inventories. However, low inventories also mean that an increase in demand will lead to more production right away, with little lag time. The July ISM index of manufacturing activity had shown a rise above 50 (to 51.8) - as reported prior to last week - the index above 50 is defined as showing economic expansion. There's still little sign of more jobs being created however. There was also a much talked about report from a big outplacement firm that companies had stepped up their pace of planned layoffs in July - however, for the year, layoffs are down some 12% for the first 7 months relative to 2002. Weekly jobless claims fell some and stayed under 400,000 again. The important 4-week average also dropped below 400,000 to 397,000. And U.S. productivity took a big jump, unlike what had been seen in Europe - Italy "officially" slipped into recession - with a sizable 5.7% gain. Of course workers groups will also point out that producing more with LESS employees is not great for putting the unemployed back to work. Equity funds continued to see net inflows of money for the week ending midweek - August 6th. FRIDAY'S TRADING - The S&P 500 Index (SPX) was up 0.4% on Friday to 977.6, with the narrowly based Dow (30) higher by .7% or +64 points to 9191. The tech-heavy Nasdaq Composite Index fell 8 points (-0.5%) to 1644. (For the week the Dow was up 0.4%, but the (Nasdaq) Composite fell by 4%.) The retail sector made some further gains following upbeat same- store sales results from most retailers on Thursday. Rating agency Fitch issued a report of caution on the retail group however: ".....retailers are being hurt by merchandise deflation and a lack of new products to spur shopper interest,". Deflation - there's that word again! We could just call it the "D" word instead. By the way, here's the "J" (Jobs) word again - Fitch's report said that a sustained turnaround should depend on faster job creation, which will require a further pickup in economic growth. There was somma good, somma bad news - ok, a bad attempt at ethic humor - relating to individual companies. Helping the old economy big cap indices like the Dow, was McDonalds (MCD), which was up some 7% to $23.65 after the company that invented the Big MAC, said that July US same store sales were well above expectations. In fact, a nearly 10% jump in sales was reported and tied to its Big Mac promotion. Hmmmm - that would also be the big cholesterol hamburger, so guess it's not for me. Bank of America raised its EPS estimates for MCD for Q3 also, which suggests that its analyst anticipates the company making gains in same store sales comparable to August/September. B of A said its report that it believes there may be further upside to come. Their Q3 EPS estimate went up to 39 cents, from 38. Oh, for every penny that MacDonald's takes in a week! Graphics chipmaker Nvidia (NVDA) was off sharply after the company reported Q2 earnings on Thursday night that beat Street estimates - but, the company also warned that Q3 gross profit margins would remain flat to slightly down and that operating expenses were expected to rise 5%-10%, putting pressure on earnings. NVDA said it expected revenues to increase 5%-6%, but this was under their Q3 consensus numbers. Tech can still be a heck of a wreck! INDEX OUTLOOKS – Readers of my prior columns may remember this chart below of the Semiconductor Index (SOX), with its Price/RSI divergence and sell signal highlighted that shaped up at the top. This bellwether component sector to Nasdaq is so important that we can't really expect the Composite to do much with the drag of the all- important semiconductor/chip maker group. SOX reflects the very anemic flow of business capital spending coming in - not enough yet to continue to boost these stocks when they get "ahead" of themselves or overvalued. You can see this technically when the advance took the Index so far about the dominant up trendline. For more on the use of the RSI Indicator and its very important use in seeing occasional reversal tops (or bottoms) forming, you can go back to a Trader's Corner article on the following page - http://www.OptionInvestor.com/traderscorner/080102_1.asp S&P 500 (SPX) - Daily chart: I said before that the chart pattern would stay bullish overall as long as there was no decisive downside penetration of the 970 area. I could have said 960 if I thought that SPX would test its absolute low since the summer correction began. Note that this "line" of support around 960 that has developed so far is equal to the Sept. 2002 low to the far left of the chart (and is not far above the following rally spike peak in Nov.) - a case, to date anyway, where prior resistance is now showing up as support. While its possible that a deeper correction will be seen, even back down to the 200-day moving average over time - SPX is already trading under its 50-day - I see nothing just ahead that would suggest it from the current more optimistic economic outlook. Of course in this new millennium, there are also other threats that are wild cards after 9/11, which took the then downturn substantially lower. A deeper correction, such as to the 940 area, can't be ruled out if 960 if pierced. However, the risk to reward of buying in the 960 area was very favorable; i.e., risk to 955, upside back up to 980 at least, probably higher, given the oversold reading registering on the 14-day stochastic model. S&P 100 Index (OEX) – Hourly chart: The range on the downside in the OEX got extended back to the prior low at 485 - I though it might hold the 490 area, but it went to the next lower support implied by that earlier downswing low, which was a possibility also noted last week. For those who bought OEX calls on the dip per my suggestion, it was tempting to take the profit that developed. However, as the alternate chart (pattern) interpretation is that of a downtrend channel, a reasonable expectation is to anticipate a move sometime ahead to at least the 500 area and this would then become a place to exit. The hourly down trendline intersects in the 503 area currently, but the slope of the line will take it closer to 500 by midweek. The prior upswing high at 506 should be an area of selling interest and next resistance. The broader interpretation of the still-lateral sideways trading range, suggests that major resistance would develop around 510-511. I continue to like buying puts on further rallies toward the upper end of the projected ranges: specifically, buying puts in the 506 to 511 zone if OEX gets into this area this week - my downside objective would then be to 485 again. Or, alternatively, take the rest of August off - be like the Italians - opps! maybe not, given that their country has slipped into recession. Things are bad enough with a slow-growth economy here in the U.S. of A. Dow Industrials Hourly (DJX.X) chart: Picture perfect - the Dow comes down to 9000 support and wham-o, back up it goes! Wish all the markets and stocks were as "easy" as the Dow Industrials were sometimes when they trade so "technically" perfect. Well, when the average of those 30 stocks get into a range, they have institutional buying support at certain levels - and, then the same buyers tend to back off when the key stocks get back up to their recent upper range. Especially in the summer doldrums and especially when higher valuation (multiples) are not seen as warranted without the economy going into second or third gear. As suggested, I bought DJX Index calls in the 90 area and will look to take profits on a move to 93. I will also exit at a breakeven or better stop at 90.5 currently. Puts still look attractive to me in the 93-93.5 area. In between the aforementioned "extremes" I don't find an attractive risk to reward outlook in being long options. I also suggested selling puts at the low end of the range as I think that the Dow will hold 9000, absent some extreme event. A daily close over 93.5 would then suggest a further upside objective to the 95 area which is where I peg the next technical resistance. Conversely, a break of 90, would set up a next target to 89. Nasdaq 100 Index (NDX) – Hourly: 1190-1195 looks to be support, as implied by both the cluster of prior hourly closing lows and the area of a 38% retracement. I calculate that even better support in the NDX will be found if there should be an eventual move to the 1160 area, representing a 50% retracement. A daily close under 1200 or better, two consecutive close below 1200, would suggest this kind of further downside potential. On the bullish side, I would rather trade the QQQ's as I like the risk to reward better in owning the stock if it gets to 29. However, I may also take a small trade in NDX calls in the 1190 area if reached, but not hold them past 1185. I would trade out of calls at 1240 and consider puts in this area. Nasdaq 100 Tracking Stock (QQQ) - Hourly: I suggested shorting the Q's in the 32 to 32.75 zone and would stay with this position and look to buy back the stock in the 29 area rather than at 30 as suggested previously. If 29 gives way, next lower support looks like down around 27.50. For that reason, will only risk to 28.50 on any stock purchases if an entry at 29-29.25 becomes available this week. Alternatively, just wait for a next dip and then see where "basing" action develops. 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 ************** Follow the Trend I hate to constantly be the one recommending put plays but I honestly could not find any calls. I was going to break the cycle and find a bullish play but my bias keeps getting in the way. We are closer to the top of the range than the bottom except in the case of the Nasdaq. The QQQ (NDX) is made up of 100 companies each market cap weighted. The top ten companies make up 42% of the weighting of the index. The top five companies make up 27%. It does not take a rocket scientist to realize that those top five companies control the destiny of the other 95. If all ten line up on the same side of the boat it is going under. I was doing some research for another project today and the more Nasdaq stocks I looked at the worse it looked. Now I am going to be the first to tell you that the Nasdaq is oversold on a short term basis. It may have a long way to go on a long term basis as August profit taking continues but we could see a relief bounce next week. We could also see a total washout and retest of 1600 on Monday. I would not count on that with a Fed meeting on Tuesday. Still, I think the Nasdaq has further to fall and all the kings economic reports may not put the Nasdaq back together again before it happens. How do we play this? I had a reader on Friday ask me about an August straddle at $30 on the QQQ and in the heat of battle I told him I did not think the risk reward was worth it. The $30 call/puts were trading for 45 cents each. I did a quick check of the max-pain number and saw it was $31, the number where the most options expire worthless. On the surface it did not appear worth it. After looking at the charts of the top ten NDX stocks I still think it is risky. They are very oversold but most are threatening to break support and begin a new leg down. We may break any day or we could wait until after expiration. Still the potential for profit intrigued me. I pencil whipped it every way I could and the best alternative to me was the September $30 put for $1.15 and not the straddle. August and September are the two worst months of the year for the markets and we are barely into August. Using the September puts gives us six weeks of time for the earnings warnings to begin and the economics to worsen if they are going to do it. They could also get better but that is what makes a market. For those that think we are due for a relief bounce you can protect yourself with an August $31 call for 15 cents. Yes, 15 cents. Before you back up the truck you need to realize the QQQ would have to go to $31.50 to make it worthwhile before next Thursday. That is not likely to happen. Buy the Sept-$30 PUT QAV-UD $1.15, maybe less at the open. Set a profit target of 50% and a stop at $31 and let it ride. QQQ Chart Weighting of the top ten NDX/QQQ stocks. MSFT 9.52 INTC 5.81 CSCO 4.87 AMGN 4.16 QCOM 3.53 DELL 3.20 CMCSA 2.92 ORCL 2.63 EBAY 2.52 IACI 2.48 MSFT Chart INTC Chart DELL Chart CSCO Chart ORCL Chart SUNW Chart (not in top ten anymore) EBAY Chart QCOM Chart IACI Chart CMCSA Chart ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. DJX Puts Is that the fat lady I hear singing. Baring a sudden reversal of fortune the Dow does not appear headed for 8600 over the next four days. It is totally possible but not likely. The rebound at the close on Friday sealed our fate and without a -200 point day in our near future the curtain is about closed. The initial play back in July had a cost basis of 44 cents and the options traded in a range of 30-50 cents this week. If you wanted out for a breakeven the opportunity was offered. Powerball The Nasdaq decline let the air out of the tech portfolio and we dropped about -200 from last week. Still six months to go and if the recovery is for real this should turn out ok. 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 **************** Breaking Ranks Jonathan Levinson Given the exciting intermarket action this past week, I've been looking forward to reviewing the weekly closing candle charts to see how our recent trends have progressed. There are some surprises on the weekly charts. For most of 2003, we have seen treasuries and equities trading together on what I have interpreted to be a generalized rising tide of liquidity. This "hot money" was chasing stocks, bonds, gold and other currencies, and the US Dollar Index was the most bearish chart of the bunch. Last week, we observed that treasuries had been sinking for several weeks, and equities were weakening but relatively stronger. We saw that trend reverse this week, as treasuries began rallying on Wednesday with the 5-year note auction, and continued through to Friday. On the ten-year note yield, we had a bearish harami, printing an inside week within last week's bullish candle and breaking the rising bullish trendline on the TNX daily chart. This is bullish for bonds. Meanwhile, the Nasdaq was the weakest of the equity indices, printing the second of two black crows on a break below its ascending trendline for the first time since the spring rally began. The Dow and S&P came close to printing the second of two black crows, but the declines were less extended and the end-of-Friday buying pushed the candle formation closer to a more bullish dragonfly doji star. The US Dollar Index printed a bearish harami cross, and conversely gold gave us a bullish harami, with a positive inside week following last week's bearish engulfing candle on the December gold contract. This is not as decisive a pattern as the two black crows on the Nasdaq, and the US Dollar Index could well resume its uptrend next week. Nevertheless, this week was negative for the US Dollar Index. We are therefore left with the US Dollar Index bearish for the week, gold bullish, equities bearish, led by the Nasdaq to the downside, and bonds bullish. The picture is one of liquidity beginning to contract, with traders moving to the "quality" of bonds and gold. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9361 52-week Low : 7197 Current : 9191 Moving Averages: (Simple) 10-dma: 9166 50-dma: 9121 200-dma: 8547 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 977 Moving Averages: (Simple) 10-dma: 981 50-dma: 987 200-dma: 912 Nasdaq-100 ($NDX) 52-week High: 1316 52-week Low : 795 Current : 1207 Moving Averages: (Simple) 10-dma: 1249 50-dma: 1240 200-dma: 1095 ----------------------------------------------------------------- We're still seeing some odd action in the volatility indices. Normally, as the markets slip the VIX and VXN rise. The S&P 100, which the VIX is based on (actually on the option premiums for the OEX), did bounce the last couple of sessions. So the drop in the VIX is no surprise. However, the NDX has been slipping lower so why is the VXN moving in concert with it? CBOE Market Volatility Index (VIX) = 21.29 -0.60 Nasdaq-100 Volatility Index (VXN) = 32.02 -2.00 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.81 522,821 422,526 Equity Only 0.63 386,796 243,811 OEX 1.01 23,861 24,096 QQQ 0.83 36,418 30,237 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 67.9 + 0 Bull Confirmed NASDAQ-100 64.0 - 2 BEAR CONFIRMED Dow Indust. 80.0 + 0 Bull Correction S&P 500 73.4 + 0 Bull Correction S&P 100 80.0 + 0 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 1.13 10-Day Arms Index 1.09 21-Day Arms Index 1.01 55-Day Arms Index 1.09 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 1742 1437 Decliners 1056 1540 New Highs 68 92 New Lows 28 11 Up Volume 817M 516M Down Vol. 429M 786M Total Vol. 1288M 1327M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 08/05/03 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 Commercial traders appear to be pruning some long positions and moving that money to the short side. As expected we see just the opposite from the small trader. Commercials Long Short Net % Of OI 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%) 08/05/03 395,633 450,988 (55,353) (6.5%) 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 07/15/03 148,716 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% 08/05/03 159,971 72,951 87,020 37.4% 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 The bulls in the commercial group continue to add to their positions here but we did see an increase in short positions as well. This is the most bullish the commercials have been in quite some time. Meanwhile the large spread between longs and shorts for the small traders narrowed a bit. Commercials Long Short Net % Of OI 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% 08/05/03 310,662 249,004 61,658 11.0% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 61,658 - 08/05/03 Small Traders Long Short Net % of OI 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%) 08/05/03 56,663 95,919 (39,256) (25.7%) Most bearish reading of the year: (48,707) - 07/29/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 "Smart" money didn't do much last week as positions remain relatively the same but we saw some small traders eliminate a few long positions in the NDX. Commercials Long Short Net % of OI 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%) 08/05/03 32,813 52,383 (19,570) (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 07/15/03 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% 08/05/03 22,188 7,783 14,405 48.1% 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 More shades of limbo here as well with the commercials not making any new commitments and the small traders holding steady going on a month now. Commercials Long Short Net % of OI 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% 08/05/03 23,981 9,264 14,717 44.3% 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 07/15/03 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%) 08/05/03 5,716 10,422 (4,706) (29.2%) 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 *************** Observe it, test it, then predict it (Pivot Analysis) I have been using a extended version of your pivot matrix for quite some time now and would like to point something out that I think could possibly come into play and tie in with what you have been talking about in relation to the 10 Yr note and the SPX or equities in general. ..... (I work another job full time) I tend to focus on longer time frames than you do. I use weekly, monthly, QUARTERLY, and ANNUAL. Wow! I got a rather long, but very interesting e-mail from this trader and while I have never used a time frame longer than 1 month, the trader's question really got my juices flowing. While I didn't start on this column until after Friday's close and have a deadline of 02:00 AM EST that I've got to meet, I couldn't cover many of the observations and question in this trader's e-mail. Now I'm laughing at myself. Actually, the trader didn't really have that many question, but I sure did after reading his e-mail. Here are some of his observations he made in an e-mail dated August 5, 2003. The current QUARTERLY pivot for the SPX is 945.89 and the ANNUAL pivot is 941.81. These levels also show some historical price significance by my read. Also in the TNX the ANNUAL pivot is 4.278%, the very place where today's bounce occurred. If you could find the time to look at these price areas and let me know what you think as to whether or not they may be of significance in your opinion, I would appreciate it very much. My initial response back to the trader was that I would put more weight in the quarterly analysis than the yearly analysis. The reason for my thinking is based on my original thoughts of why the major indexes tend to show significant levels of trade around the various levels. And here's where my juices got flowing, where much of my thinking comes from risk management at the institutional level, and managing that risk with either index futures or index options. Most institutions manage risk in their stock inventory on a quarter-to-quarter basis. I should probably say... most institution's COMPUTERS manage risk on a quarter-to-quarter basis. And the emphasis on COMPUTERS is where I believe the pivot analysis matrix come into play. How does one manage risk on a quarter-to-quarter basis? Do you only manage risk at the end of each quarter? I think not. And if you or I were to try and begin dissecting a quarter (3 months) we'd probably start fine tuning things on a MONTHLY basis, then dissect that on a WEEKLY basis, with further fine-tuning taking place occasionally on a DAILY basis. Now, in the OptionInvestor.com nightly Index Trader Wraps, I post the MONTHLY, WEEKLY and DAILY pivot analysis levels. I will say that while I may focus attention on shorter-term time frames of 1-month, I'm always taking in a much larger time frame with my point and figure chart analysis and bullish % data, which often times encompasses the past three years. I also feel/believe a longer-term trend/level has more significance/meaning/influence that a short-term trend/level has significance/meaning/influence. Now I don't have enough time tonight to try and tie in Treasury YIELD analysis, but hopefully after I do cover the SPX chart with quarterly pivot analysis, traders may pursue similar analysis with bonds. As I read the trader's e-mail, I also wanted to test something. Are option traders thinking what I'm thinking? One question I get most often and especially about a week before option expiration is... "where do you think the expiration level will be?" Here's a data set I put together using recent quarterly date, where a quarter was measured in terms of January 1 to March 31. Given time, I would also like to take a data set that runs from quarter-to-quarter option expiration and back test some levels as we're going to do in a moment. S&P 500 Index (SPX.X) - Quarterly pivot levels The data set above covers the past six quarters for SPX Q3 (2003) I'm using last quarter's (April 1 to June 30) high, low and close where I hope to back test some levels from the recent three quarters to see if there is anything notable from this type of longer-term pivot analysis. I've placed little pink vertical bars within each quarterly matrix, to mark an approximate level where quarterly option expiration actually took place to see if there might be any pattern as to expiration. I've also tried to color code the recent three quarter's pivot levels in blue, brown and red, in order to be able to better separate these quarterly retracement levels for back testing efforts. Now, I'm doing all this on the fly, so I don't know what the answer to the trader's question really is, and when I'm done, you and I can judge for ourselves if there is any significance to be found. First, lets state two different hypothesis and then test them. Hypothesis number 1 By using quarterly pivot analysis and retracement, it is evident that the S&P 500 Index (SPX.X) does show technical significance within quarterly pivot analysis. Hypothesis number 2 By using quarterly pivot analysis and retracement, it is possible to predict quarterly option expiration. Test number 1 I would have loved to perform multiple period back testing, but with limited time I'm going to start with the SPX Q4 (02) and SPX Q1 (03) pivot levels, to see if they may have had any influence as to how the SPX traded in the second quarter of this year. Since we would consider this intermediate to longer-term analysis, I'm going to show the bar charts on weekly interval time frame. A time frame a trader "with a job" that can't check in on things but once a week might use. I'm also going to place my cursor on the weekly interval bar that marked the most recent quarterly option expiration of June 20, 2003. (Seriously... check this out!) S&P 500 Index (SPX.X) - 2002 Q4 and 2003 Q1 pivot analysis The above chart was designed to test if there was any technical significance given to prior two quarters pivot analysis levels, for the recently completed 2003 second quarter (April 1 to June 30), while ONLY using quarterly pivot analysis from Q4 2002 and Q1 2003. While open to interpretation, I do think some of the "zones" colored in yellow and levels present did come into play on a weekly CLOSING basis, and at times, even on an intra-week basis. One question a trader/investor might ask is. While there does seem to be some significance to the levels, how could I have used this to make money? One way, and we're going to test this, is to use the If, then, else method of trading levels. For example. Let's say a trader just rolled out of his/her March expiration options at 895, perhaps having picked up some calls in the 811-824 zone of support when the Bullish % charts neared "oversold" levels and lower levels of risk. Once the trader placed the above levels on his weekly bar chart, on April 1, he might have seen that the S&P 500 Bullish % ($BPSPX) had reversed up into "bull alert" status. IF SPX closes above "blue 50%" retracement of 863, then trade long the SPX, else, do nothing, as bullish % ($BPSPX) is "bull confirmed." IF long on continued WEEKLY bar chart close above 863, then target current quarter R1 (967), or upper zone of resistance 983-998. As trader went long, a couple of weeks pass. IF SPX closes above prior quarter (blue) R1 (948), which the SPX has NOT been able to do, then look for further strength, check bullish %, but look to average up into position, target current quarter R1 (967), or upper zone of resistance (983-998). You get the feel for this don't you? Now, if you trade stops in option, put together an exit plan with just the opposite approach in mind. In mid-April, I think we all predicted an SPX settlement in the 983-998 area and made oodles of money. Are any premierinvestor.net subscribers perhaps getting a feel for how they might trade the DIA, SPY, QQQ, or from time to time get a sense of potential market direction? Like I said, I'd need much more than the above back test to ever have the confidence to predict an outcome, or place a large bet on future quarterly expiration. So let's do this. I'm going to add the SPX Q2 (03) "red" quarterly pivot retracement to the SPX chart. As I do this, I'm going to stagger the retracement brackets a little, shift the older blue retracement to the left. Let's pretend that institutions had taken care of (02) Q4 quarterly inventory risk and they're working more closely, fine tuning things if you will, with the "brown" and "red" levels. S&P 500 Index (SPX.X) - (02) Q4, (03) Q1, (03) Q2 We're not through yet as I'm still going to add the current quarter's pivots, but note the additional level of resistance that has suddenly become present with Q2 (2003) pivot retracement and its Q2 (03) R2 of 1,004. Now, the "zone of support" I've colored yellow from Q2 (03) R1 of 926 to 948, would have actually been a "zone of resistance" into the June 20 quarterly expiration. A trader might begin building a direction bias at this point, to the downside, with the S&P 500 Bullish % ($BPSPX) having recently reversed into "bull correction" status. My bias might be... IF the SPX closes below 967 on WEEKLY close, then WEAKNESS, as SPX appears to be having trouble with a WEEKLY close above 1,004. Let's remove the "blue" retracement at now, as it is three quarter old, and add our "black" retracement for current quarter. S&P 500 Index (SPX.X) - (03) Q1, (03) Q2 and (03) Q3 Well... here's the final chart of the SPX with the current quarter's retracement (black) overlaid. A new "sliver" from 982 to 985 is currently in play. And, since the S&P 500 Bullish % ($BPSPX) reversed into "bull correction status three weeks ago, the SPX has had some trouble closing back above this sliver of support, but holding the 967 level on a closing basis. Hmmmm.... this week I profiled a bullish trade for the SPX in OptionInvestor.com's Index Trader Wrap (based on WEEKLY and MONTHLY pivot retracement) at 965 with a bullish target back near 989, which would be back up in a wider zone of resistance. I should probably use the WEEKLY/MONTHLY levels to guide that trade and snug a stop, as main thinking was we might look for a bounce in a rather range-bound market trade. In the above chart, the data box in the lower right corner was placed right in the middle of the yellow highlighted zone of 926 to 957, which might be on projection of the rising 200-day SMA. With the S&P 500 Bullish % ($BPSPX) in "bull correction" status I might look for an SPX trade back lower to 906-911 zone, and perhaps a quarterly expiration settlement at 936, maybe 935 for a nice round number. Anyway. What do you think? Do these quarterly levels seem to have significance? I think so. Could a trader using the quarterly build a "longer-term" picture of levels to then get a better feel for the MONTHLY, WEEKLY and DAILY levels to narrow down potential entry and exit points or identify more powerful levels of support and resistance by which institutional computers might be set to trade? Here's the DAILY, WEEKLY and MONTHLY Pivot analysis retracement. Pivot Analysis Matrix - (Monday's DAILY), WEEKLY and MONTHLY Starting in the DAILY levels, I could see how DAILY R2 comes into the mix on Monday as an important DAILY level within the quarterly chart of the SPX. A short-term trader that may be long the SPX at 985 might set that as a test on Monday, where he/she wants a DAILY CLOSE above that level in order to have a shot at a target near 989. 989 is correlative resistance at the MONTHLY Pivot and our newly established WEEKLY R1 of 988.61. This would tie in with my bullish bounce target from SPX 965 entry. Correlative support in the matrix presents itself at MONTHLY S1 and WEEKLY S1. In the MONTHLY matrix, I've highlighted in "pink" the MONTHLY S2. I doubt it has much significance, but I swear, I only noticed this level AFTER I placed my cursor in the prior SPX between the wider range of the potential zone of support from 926-945. Besides, the MONTHLY levels shown above are for August, not September. Still... to get a SPX settlement near 936 or round number 935, the SPX has to break lower. Right? Then at MONTHLY R2 of 1,042, that might tie in with the current quarterly R2 of 1,044. Something to follow for a longer-term trader/investor to say the least. I'll have to present this in the Index Trader Wrap. Excellent question from the trader. I'm not sure I really know the true answer, but this exercise has been eye opening indeed! Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of August 11th ========================================== ----------------- Earnings Calendar ----------------- Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- CFFN Capitol Federal Finl Mon, Aug 11 -----N/A---- 0.16 CPG Chelsea Property Grp Mon, Aug 11 After the Bell 0.81 DADE Dade Behring Mon, Aug 11 After the Bell 0.26 DQE DQE Mon, Aug 11 After the Bell 0.23 JHX James Hardie Ind Mon, Aug 11 -----N/A---- N/A OSIP OSI Pharmaceuticals Mon, Aug 11 After the Bell -0.98 PSUN Pac Sunwear CaliforniaMon, Aug 11 After the Bell 0.24 PRGO Perrigo Mon, Aug 11 Before the Bell 0.05 PBR Petrobras Mon, Aug 11 -----N/A---- 1.34 PUB PUBLICIS Groupe SA Mon, Aug 11 Before the Bell N/A LQU Quilmes Industrial Mon, Aug 11 After the Bell N/A SYY SYSCO Corporation Mon, Aug 11 Before the Bell 0.35 VAL Valspar Mon, Aug 11 -----N/A---- 0.76 WRI Weingarten Rlty Inv Mon, Aug 11 -----N/A---- 0.85 ------------------------- TUESDAY ------------------------------ ANF Abercrombie & Fitch Tue, Aug 12 After the Bell 0.33 ANPI Angiotech Pharm Tue, Aug 12 After the Bell -0.20 AMAT Applied Materials Tue, Aug 12 After the Bell 0.04 AXA AXA Tue, Aug 12 01:30 am ET N/A BSY Brit Sky Broadcasting Tue, Aug 12 05:00 am ET N/A CLX Clorox Tue, Aug 12 Before the Bell 0.68 CSC Computer Sciences CorpTue, Aug 12 -----N/A---- 0.51 DE Deere & Company Tue, Aug 12 Before the Bell 0.83 ESPD eSpeed, Inc. Tue, Aug 12 After the Bell 0.14 FOSL Fossil, Inc. Tue, Aug 12 Before the Bell 0.20 JCP JC Penney Tue, Aug 12 Before the Bell -0.05 LZB La-Z-Boy Inc. Tue, Aug 12 Before the Bell 0.18 MVL Marvel Enterprises Tue, Aug 12 Before the Bell 0.31 MXIM Maxim Integrated Prod Tue, Aug 12 After the Bell 0.24 MDT Medtronic Inc. Tue, Aug 12 -----N/A---- 0.37 OMX Officemax Tue, Aug 12 Before the Bell -0.13 PTP Plat Underwriters HoldTue, Aug 12 After the Bell 0.33 REG REGENCY CTRS CORP Tue, Aug 12 Before the Bell 0.69 RRI Reliant Resources Tue, Aug 12 -----N/A---- 0.19 TECH Techne Tue, Aug 12 Before the Bell 0.30 IPG The Interpublic Grp CoTue, Aug 12 After the Bell 0.15 MAY May Department Stores Tue, Aug 12 -----N/A---- 0.27 TJX The TJX Companies Inc Tue, Aug 12 Before the Bell 0.23 WGR Western Gas Resources Tue, Aug 12 Before the Bell 0.53 WMB Williams Companies Tue, Aug 12 -----N/A---- -0.03 ----------------------- WEDNESDAY ----------------------------- ANN AnnTaylor Stores Wed, Aug 13 After the Bell 0.40 ATO Atmos Energy Corp Wed, Aug 13 After the Bell 0.00 BRCD Brocade Comm Sys Inc. Wed, Aug 13 After the Bell 0.01 CAI CACI International Wed, Aug 13 After the Bell 0.41 RIO Comp Vale Rio Doce Wed, Aug 13 -----N/A---- 1.45 DISH EchoStar Comm Corp. Wed, Aug 13 Before the Bell 0.19 EP El Paso Corp. Wed, Aug 13 Before the Bell 0.13 EQR Equity Residential Wed, Aug 13 -----N/A---- 0.56 FD Federated Department Wed, Aug 13 -----N/A---- 0.54 FOX Fox Entertainment Grp Wed, Aug 13 Before the Bell 0.24 HMY Harmony Gold Mining Wed, Aug 13 02:00 am ET 0.09 MLS Mills Corporation Wed, Aug 13 Before the Bell 0.82 NTLI NTL INC Wed, Aug 13 Before the Bell N/A QTRN Quintiles Transnatl Wed, Aug 13 -----N/A---- 0.14 NWS The News Corporation Wed, Aug 13 Before the Bell 0.16 TIF Tiffany & Co. Wed, Aug 13 Before the Bell 0.24 UBS UBS Wed, Aug 13 01:00 am ET N/A WMT Wal-Mart Stores Inc. Wed, Aug 13 Before the Bell 0.50 ------------------------- THURSDAY ----------------------------- AZ Allianz AG Thu, Aug 14 -----N/A---- N/A AEOS American Eagle Outfit Thu, Aug 14 Before the Bell 0.11 AMLN Amylin PharmaceuticalsThu, Aug 14 Before the Bell -0.36 ADI Analog Devices Inc. Thu, Aug 14 After the Bell 0.21 BEAS BEA Systems Thu, Aug 14 After the Bell 0.07 BE BearingPoint, Inc. Thu, Aug 14 Before the Bell 0.15 BRP Brasil Telecom Partic Thu, Aug 14 -----N/A---- 0.49 CXR COX RADIO INC Thu, Aug 14 Before the Bell 0.17 DELL Dell, Inc. Thu, Aug 14 After the Bell 0.24 DT Deutsche Telekom Thu, Aug 14 02:00 am ET N/A EON E.ON AG Thu, Aug 14 Before the Bell N/A GMST Gemstar-TV Guide Int Thu, Aug 14 After the Bell -0.05 ING ING Groupe NV Thu, Aug 14 06:00 am ET N/A KSS Kohl's Thu, Aug 14 4:00 pm ET 0.31 L Liberty Media Group Thu, Aug 14 After the Bell N/A MTA Matav Thu, Aug 14 -----N/A---- N/A TGT Target Corporation Thu, Aug 14 Before the Bell 0.40 EL The Estée Lauder Co Thu, Aug 14 Before the Bell 0.26 TKC Turkcell Iletsim Thu, Aug 14 -----N/A---- N/A UBB Unibanco - S.A. Thu, Aug 14 -----N/A---- 0.62 UCOMA UnitedGlobalCom, Inc. Thu, Aug 14 -----N/A---- N/A ------------------------- FRIDAY ------------------------------- CEP Centerpulse AG Fri, Aug 15 Before the Bell N/A NAV Navistar Intl Fri, Aug 15 Before the Bell 0.25 ---------------------------------------------- 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 GPT GreenPoint Financial Corp 3:2 Aug 20th Aug 21st TSCO Tractor Supply Company 2:1 Aug 21st Aug 22nd TTI Tetra Technologies Inc 3:2 Aug 21st Aug 22nd CECO Career Education Corp 2:1 Aug 22nd Aug 25th -------------------------- Economic Reports This Week -------------------------- Earnings continue to dwindle, and most of the major market movers have already announced. Economic reports will likely overshadow earnings this week as we have a full house of economic reports with Retail Sales, CPI, PPI, Production and Utilization, and Michigan Sentiment. However, the major meeting this week will be the FOMC meeting on Tuesday. ============================================================== -For- ---------------- Monday, 08/11/03 ---------------- None ---------------- Tuesday, 08/12/03 ---------------- FOMC Meeting (DM) ------------------- Wednesday, 08/13/03 ------------------- Business Inventories(BB)Jun Forecast: -0.10% Previous: -0.20% Retail Sales (BB) Jul Forecast: 0.80% Previous: 0.50% Retail Sales ex-auto(BB)Jul Forecast: 0.50% Previous: 0.70% Export Prices ex-ag.(BB)Jul Forecast: N/A Previous: -0.10% Import Prices ex-oil(BB)Jul Forecast: N/A Previous: 0.50% ------------------ Thursday, 08/14/03 ------------------ Initial Claims (BB) 08/09 Forecast: 395K Previous: 390K Trade Balance (BB) Jun Forecast: -$41.5B Previous: -$41.8B PPI (BB) Jul Forecast: 0.20% Previous: 0.50% Core PPI (BB) Jul Forecast: 0.00% Previous: -0.10% FOMC Minutes (DM) ---------------- Friday, 08/15/03 ---------------- NY Emp State Index (BB) Aug Forecast: 20.5 Previous: 22.6 CPI (BB) Jul Forecast: 0.20% Previous: 0.20% Core CPI (BB) Jul Forecast: 0.10% Previous: 0.00% Indl Production (BB) Jul Forecast: 0.20% Previous: 0.10% Capacity Utilization(BB)Jul Forecast: 74.40% Previous: 74.30% Mich Sentiment-Prel.(DM)Aug Forecast: 91.0 Previous: 90.9 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: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 08-10-2003 Sunday 2 of 5 In Section Two: Watch List: Breaks, Bumps and Bounces Put Play of the Day: KLAC Dropped Calls: None Dropped Puts: None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** Breaks, Bumps and Bounces Netease.com - NTES - close: 44.79 change: +2.48 WHAT TO WATCH: The Internet bubble is back but this time it's in Chinese Internet stocks. NTES is one of these high flyers. After gapping higher in late July profit taking brought it all the way back down to support near $40. That's where over-eager bulls and dip buyers shot the stock back up from its lows (and its rising 50-dma). This would be a very high-risk play but it looks like NTES could retest $50.00. Chart= --- XL Capital - XL - close: 79.70 change: +1.35 WHAT TO WATCH: XL is another insurance stock on the list. After failing hard last week at the $80 level shares have spent the last several days recouping those losses. Now the stock is back above its 200-dma and aiming to break out back above the $80 mark. There is probably some resistance near $82.50 but bulls might aim for a test of $85 (after a breakout of course). Chart= --- ManuLife Financial - MFC - close: 29.60 change: +0.14 WHAT TO WATCH: The gains appear rather slowly but the bullish trend is hard to argue with on MFC. The stock is building up steam for a breakout over major resistance of $30. This could fuel a quick move to all times highs near $32.50. One to watch. Chart= --- Amgen Inc - AMGN - close: 66.82 change: -0.20 WHAT TO WATCH: The biotech giant AMGN is a favorite on the watch list. The stock recently broke down through its rising 50-dma but bounce from the $65.00 level. Friday's move looks like a failed rally at $68.00 indicating it will retest $65 again. Will $65 hold or will the stock break, potentially bringing with it a host of new bearish interest? Chart= =================================== RADER SCREEN - more stocks to watch =================================== LMT $50.59 - Can shares of Lockheed hold steady above the $50 mark? Will it bounce higher from is 200-dma? Or will bears pull it down. Thursday's decline saw strong volume but so did Friday's bounce. WHR $67.44 - Not the most alluring stock in the world but WHR has been slowly climbing higher and has set new relative highs. Will it break $70.00? MET $29.28 - This insurance stock has been consolidating under major resistance of $30 for a long time. A break out could be an entry point for a quick move to $32.50 and on to $35.00. TMK $40.62 - Yet another insurance stock on the list tonight. This one has a very bullish trend from July 1st and the breakout and consolidation above $40 looks very tempting. However, there is a lot of congestion between $40 and $42.50. Tight stops are suggested. URBN $43.44 - Up, up and away! Strong July sales numbers have pushed URBN to new highs. We'd keep an eye on it for a pull back to $40. ************************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: ******************** KLA-Tencor - KLAC - close: 48.04 change: -1.72 stop: 50.05 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* 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: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 08-10-2003 Sunday 3 of 5 In Section Three: Current Calls: KSS, LLL, PCAR New Calls: STJ Current Put Plays: BDK, FITB, FRE, IBM, PGR, YHOO New Puts: KLAC ************************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 ****************** Kohl's Corporation - KSS - close: 60.55 change: +0.60 stop: 58.00 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: It took long enough to get the job done, but KSS finally broke out above our $60.60 trigger on Wednesday, as traders were apparently looking for a positive same store sales comparison on Thursday morning. KSS delivered on those expectations, with a 6.7% increase in July comps vs. the First Call consensus of +1.6%. That shot the stock up to just below $62.50 just after the open, but there was a flood of sell orders waiting up there and the stock crumbled all the way back to $59.95 by the closing bell. The bulls managed to pick themselves up on Friday, gradually pushing up for a close at $60.55, which exactly matches the intraday high from April 7th. Dips into the $59.50-60.00 area still look good for new entries, although it might be better to wait for a move above Friday's intraday high ($60.79) before entry. Based on the quick reversal on Thursday, we can expect that there will be resistance found near $62.50, but once through that level, KSS should be good to run towards our $66 target. Note that our stop is now set at $58, as if this breakout is the real deal, the stock shouldn't break below either the 20-dma or the bottom of the 7/31 gap again. Suggested Options: Shorter Term: The September 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 October 60 Call. BUY CALL SEP-60 KSS-IL OI=1762 at $3.40 SL=1.75 BUY CALL SEP-65 KSS-IM OI=1571 at $1.20 SL=0.60 BUY CALL OCT-60 KSS-JL OI=2673 at $4.20 SL=2.50 BUY CALL OCT-65 KSS-JM OI=3811 at $1.95 SL=1.00 Annotated Chart of KSS: Picked on July 31st at $59.35 Change since picked: +1.20 Earnings Date 08/14/03 (confirmed) Average Daily Volume = 4.58 mln Chart = --- L-3 Communications -LLL - close: 47.80 change: -0.36 stop: 47.25 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: Our LLL play just hasn't been going our way over the past week, and the series of lower highs certainly doesn't look encouraging. Even the top of the 7/28 gap at $48 failed to hold the stock up on Friday and it closed below that level for the first time this month. Despite that disappointing action, the stock has managed to not trip over our stop at $47.25, which is just below the bottom of that gap. The 20-dma ($47.16) is rising to meet price and by Monday should be above our stop. We're going to give the bulls one more chance to buy this dip before pulling the plug. Only aggressive traders ought to consider trying to pick the bottom on this decline. We need to see some evidence of price strength before charging into the breech, and at a minimum that would be a rally back over the $48.75 level that has been providing intraday resistance over the past few days. More conservative traders will still want to hold out for the breakout over $50.50 before playing. Suggested Options: Shorter Term: The September 45 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 50 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 October 50 Call. BUY CALL SEP-45 LLL-II OI= 265 at $3.90 SL=2.50 BUY CALL SEP-50 LLL-IJ OI=1056 at $1.10 SL=0.50 BUY CALL OCT-50 LLL-JJ OI=2270 at $1.65 SL=0.75 BUY CALL OCT-55 LLL-JK OI= 208 at $0.40 SL=0.20 Annotated Chart of LLL: Picked on August 3rd at $49.90 Change since picked: -2.10 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 963 K Chart = --- PACCAR - PCAR - close: 77.65 change: +0.02 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: Thus far our call play in PCAR has been another exercise in patience. For some short-term traders that may mean exiting the play and looking for something that's actually moving. Overall, given the market's sideways action we can't be too disappointed with the sideways consolidation in PCAR. As long as the stock remains above new support between $74 and $75 we should be fine. As a matter of fact traders looking for new entries can keep an eye open for a dip to the $75.00 level, although we'll be surprised if shares of PCAR actually trade under $76. Momentum traders may want to wait for a breakout over $80. We do realize that the stock looks overbought and its condition is making many of its technical oscillators somewhat hard to read (or worthless). Yet we can't argue with PCAR's relative strength and should the markets hold up then the prevailing trend in PCAR should work in our favor. Speaking of relative strength PCAR's point-and-figure chart is very bullish and it's still showing a triple-top breakout buy signal. We did see a little news earlier in the week when Prudential raised its price targets for several stocks in this industry based on rising fundamentals. Prudential raised PCAR's price target from $72 to $87. Suggested Options: PCAR currently has August, September, November and January options available. We're going to list September and November strikes with a preference for September 75s and 80s. BUY CALL SEP 75 PAQ-IO OI= 66 at $5.00 SL=2.75 BUY CALL SEP 80 PAQ-IP OI= 133 at $2.20 SL=1.20 BUY CALL NOV 75 PAQ-KO OI= 351 at $7.10 SL=5.00 BUY CALL NOV 80 PAQ-KP OI= 67 at $4.40 SL=2.25 Annotated Chart: Picked on July 31 at $77.24 Change since picked: +0.41 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.15 million Chart = ************** NEW CALL PLAYS ************** St. Jude Medical - STJ - close: 54.23 change: +0.64 stop: 52.50 Company Description: St. Jude Medical is engaged in the development, manufacturing and distribution of medical technology products for the cardiac rhythm management, cardiology and vascular access and cardiac surgery markets. The company has two principal business segments, Cardiac Rhythm Management (CRM) and Cardiac Surgery (CS). The CRM division is focused on bradycardia pulse generator and tachycardia implantable cardioverter defibrillator systems, interventional cardiology catheters and vascular closure devices. The CS group provides mechanical and tissue heart valves and valve repair products as well as suture-free devices to facilitate coronary artery bypass operations. Why we like it: After peaking near $64 in the middle of June, shares of STJ were overdue for a bout of profit taking, but investors weren't quite prepared for the staggering 24% slide that took place over the next month. After reaching bottom near the $48 level, the stock rebounded and has been consolidating in the $53-55 area for the past 2 weeks. This sideways consolidation looks like a continuation pattern, and when it breaks to the upside, it should have room to run to the $60 area. Of course, it won't be a cake walk, as there is potential resistance layered at $57 and then again at $59. But before we can start looking for upside objectives, the stock will need to break from its current consolidation pattern. The 50-dma ($55.73) provided solid resistance on Friday, as the stock was quickly turned back from an attempted rally through that level. Looking at the PnF chart, it becomes clear that $56.00 is a formidable obstacle and the stock will need to trade $57.00 to generate a new Buy signal and give us the 'green light' for a bullish play. We're going to sneak our entry trigger a bit below that level though, looking for a break above $56.05 before considering the play live. Momentum traders will want to enter on the initial breakout, looking for a quick move upward. More conservative traders will want to look for a pullback after the initial breakout, looking to buy a dip and rebound in the $54.50-55.00 area. Because of the tight consolidation over the past couple weeks, we can set at tight stop at $52.50, just below the 20-dma, which appears to be bottoming at $52.73. Suggested Options: Shorter Term: The September 55 Call will offer short-term traders the best return on an immediate move, as it will be in the money when the play is triggered. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the September 60 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 October 60 Call. BUY CALL SEP-55 STJ-IK OI= 266 at $2.05 SL=1.00 BUY CALL SEP-60 STJ-IL OI= 446 at $0.55 SL=0.25 BUY CALL OCT-60 STJ-JL OI= 785 at $0.95 SL=0.50 Annotated Chart of STJ: Picked on August 10th at $54.23 Change since picked: +0.00 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume = 2.19 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 ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Black & Decker - BDK - cls: 40.20 chg: +0.96 stop: 41.01 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: You hear it preached all the time. Emotion has no place in a successful trader's plan of action (unless they're playing off the other guy's emotion). Yet when we see a successful play turn against us it does get irritating. We first added BDK because the stock has been falling as investors reacted negatively to their earnings report. The break under its 200-dma and new relative low several days ago looked very appealing. Yet we weren't quite convinced and set a trigger to open bearish plays as BDK traded under $40.00. We listed an alternative entry for more aggressive traders to consider going short at a failed rally under $41.00. Both opportunities occurred and the stock fell as expected. When BDK approached the $38.00 level we expected a bounced and suggested traders prepare for it. Unfortunately, the stock has now bounced much higher than we anticipated. The move back over $40, what should now be resistance, is a concern. Shares still have overhead resistance at their 200-dma and our stop loss is about 25 cents beyond that level. Friday's performance could just be an overreaction, possibly by shorts covering previous positions. However, we are not going to suggest new positions until we see if BDK can roll over back under the $40 mark. Suggested Options: We are not suggesting new positions at this time. Annotated Chart: Picked on August 4 at $39.99 Change since picked: +0.21 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 731 thousand Chart = --- Fifth Third Bancorp - FITB - cls: 54.11 chg: +0.24 stop: 55.01 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: It has been somewhat of an interesting last several days for FITB and the banking sectors. The BIX, BKX and FITB all broke down below significant support in the first couple of days of August. This was a foreboding development for the markets and the financial sector and good news for our bearish play in FITB. Unfortunately for the bears all three have found support and stalled their descent. The BKX has found support above 850 and is trying to bounce back above its 50-dma. The BIX made a new relative low but found support just south of the 300 mark. It too is trying to bounce but appears to have minor resistance at 305. Following suit but exaggerating its losses is FITB. Shares of this banking stock dropped strongly at the beginning of the month but have bounced with the banking sectors. Yet it remains below resistance near $55 (and our stop loss at 55.01). Volume has been pretty light on the bounce we doesn't suggest a lot of new buying interest. FITB's daily chart almost appears to be descending in a channel pattern. If this is the case we could see another small bump higher and then a rollover or it could just churn sideways before slipping lower again (see chart). We're not suggesting new plays but traders can watch for a failed rally under $55 as possible entries. Suggested Options: We're not suggesting new plays but will list the September and November puts as a reference for aggressive traders. BUY PUT SEP 55 FTQ-UK OI= 686 at $2.50 SL=1.25 BUY PUT SEP 50 FTQ-UJ OI= 559 at $0.70 SL= -- BUY PUT NOV 55 FTQ-WK OI= 450 at $3.80 SL=2.00 BUY PUT NOV 50 FTQ-WJ OI=8016 at $1.70 SL=0.85 Annotated Chart: Picked on July 17th at $55.26 Change since picked: -1.15 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 2.4 million Chart link: --- Freddie Mac - FRE - close: 49.35 change: -0.05 stop: 50.25 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: Talk about indecision! FRE gave us that nice breakdown under $50, found solid support at $48 and has been wiggling around between those two levels for most of the past week. On 2 of the past 3 days, FRE has made an intraday push over $50, but in each case has fallen short of our $50.25 stop, falling back to end the day near the $49.50 level. That looks bearish. But on the other side of the coin, the past two days have resulted in closes above the 10-dma (currently $49.13) and that is a shift from the behavior over the past several weeks, which seems bullish. The bottom line is that the stock looks too strong to recommend opening new positions, but not quite strong enough to give up on the downside. the only way we'd consider new positions now is on a break below $48, which we could take as a sign that things were weakening again, bringing our $45 target back into play. More conservative traders may want to just take advantage of intraday weakness to exit the play for a minor gain. Maintain stops at $50.25. Suggested Options: Short-term traders will want to focus on the September 50 Put, as it will provide the best return for a short-term play. Aggressive traders looking for a longer-term move down towards $45 or below will want to utilize the October 45 contract, due to its greater insulation against time decay. BUY PUT SEP-50 FRE-UJ OI= 2057 at $2.75 SL=2.50 BUY PUT SEP-45 FRE-UI OI= 4208 at $1.00 SL=0.75 BUY PUT OCT-45 FRE-VI OI= 8304 at $1.65 SL=0.75 Annotated Chart of FRE: Picked on July 22nd at $50.33 Change since picked: -0.98 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 7.49 mln Chart = --- Intl Business Mach - IBM - cls: 80.88 chg: +0.19 stop: 82.51 Company Description: Big Blue is being heralded as the world's largest technology company. Considering their massive hardware and software business across the globe it's not surprising. However, IBM's services and consulting business is growing by leaps and bounds and is a major source of revenues. Why We Like It: Friday's performance was actually a relief. We were a bit concerned to see shares bounce back above the $80 level on Thursday, of course the Industrials rallied on Thursday so IBM was just playing "follow the index". We suspected that the rebound may have scared some of the bears out of the stock and into covering some positions. Thankfully, Friday's 19-cent gain was rather lackluster. If the Dow Industrials continue to trade sideways it could undermine our expectations for a drop in IBM. However, if the stock can roll over again at the simple 200-dma then we should get another chance to play the breakdown. We're also keeping an eye on the GHA hardware index, which is perched precariously on the 200 level and looks ready to drop any day now. Big Blue's P&F chart looks pretty ominous as well so bears playing the breakdown in support still look good. We'd suggest new entries on failed rallies under $82 or on moves back under $80. Our short-term target remains $75. Suggested Options: Our preference will be for the September and October puts. The 80 and 75 strikes look like a good bet. BUY PUT SEP 80 IBM-UP OI= 9661 at $2.35 SL=1.15 BUY PUT SEP 75 IBM-UO OI= 7617 at $0.90 SL=0.45 BUY PUT OCT 80 IBM-VP OI=28466 at $3.60 SL=1.80 BUY PUT OCT 75 IBM-VO OI=15983 at $1.70 SL=0.90 Annotated Chart of IBM Picked on August 5 at $79.85 Change since picked: +1.03 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 8.2 million Chart = --- Progressive Corp - PGR - close: 65.13 chg: +0.52 stop: 67.01 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: Patience is becoming our motto on this PGR play. Normally, if we don't get a favorable move after this long we tend to just close the play for lack of interest. Yet PGR continues to slip lower just very slowly. The lack of any new follow through on the mid- July drop has most of the stock's oscillators all suggesting bullish reversal even though shares are still setting lower lows and lower highs. We have been watching the IUX insurance index to see how PGR is trading in relation to the sector. Thus far the IUX has bounced up off its rising simple 50-dma - a stunt it has done numerous times over the past few weeks. The close at 275 for the IUX also looks, dare we say it, bullish. This actually highlights the relative weakness in shares of PGR so bears shouldn't be too worried just yet. We did consider adjusting our stop loss but $67.01 still looks like a good bet. More conservative traders may be interested to know that PGR has not traded above $66.10 in six days. That might be a good warning trigger for bearish investors. New entries are probably best considered on failed rallies under $66 or moves below $64.50. 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 September 65's. BUY PUT SEP 70.00 PGR-UN OI= 15 at $5.60 SL=3.25 BUY PUT SEP 65.00 PGR-UM OI=133 at $2.15 SL=1.15 BUY PUT SEP 60.00 PGR-UL OI=445 at $0.65 SL= -- BUY PUT NOV 65.00 PGR-WM OI=300 at $3.60 SL=1.75 BUY PUT NOV 60.00 PGR-WL OI=200 at $1.75 SL=0.90 Annotated Chart for PGR: Picked on July 23 at $65.22 Change since picked: -0.09 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 941 thousand Chart = --- Yahoo! Inc. - YHOO - close: 29.00 change: +0.13 stop: 31.50 Company Description: Yahoo! Inc. is a global Internet company that offers a comprehensive branded network of properties and services to consumers and businesses worldwide. The company's properties and services for consumers and businesses reside in five vertical areas: Search and Marketplace, Information and Content, Network and Platform Services, Enterprise Solutions and Consumer Services. YHOO's basic products and service offerings are available without charge to its consumers. The company also offers a variety of fee-based premium services that provide its consumers access to value-added content or services. Why we like it: A perfect day of indecision is what shares of YHOO 'enjoyed' on Friday, as investors tried to decide if this breakdown has further to run. In reality, the probable cause for the stock's bifurcated action (a small range doji candlestick) is the bifurcated markets, with the DOW and the S&Ps moving up and the NASDAQ moving down. Of course there's also the matter of the lower Bollinger band, which the stock has been tapping for the past 3 sessions. But that band is starting to tip over again, making room for further downside. Failed rallies in the $30-31 area look like solid entries into this play, especially now that the PnF chart has generated a Sell signal with a downside price target of $24. Momentum entries can be considered on a break of $28.60, with the understanding that at least a short-term rebound is likely from the $27.50 support level enroute to our exit target at $26. Maintain stops at $31.50. Look for weakness in the other two major Internet stocks (EBAY and AMZN) to confirm weakness in YHOO. Suggested Options: Aggressive short-term traders will want to focus on the September 30 Put, as it will provide the best return for a short-term play. More conservative traders will want to utilize the October 27 contract, which even though it is currently out of the money, should provide sufficient time for to move in the money before time decay becomes a significant factor. BUY PUT SEP-30 YHQ-UF OI= 3930 at $2.40 SL=1.25 BUY PUT SEP-27 YHQ-UY OI= 1439 at $1.20 SL=0.60 BUY PUT OCT-27 YHQ-VY OI= 7641 at $1.85 SL=0.90 Annotated Chart of YHOO: Picked on August 7th at $28.87 Change since picked: +0.13 Earnings Date 10/08/03 (unconfirmed) Average Daily Volume = 13.4 mln Chart = ************* NEW PUT PLAYS ************* KLA-Tencor - KLAC - close: 48.04 change: -1.72 stop: 50.05 Company Description: KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. Headquartered in San Jose, Calif., the company has sales and service offices around the world. An S&P 500 company, KLA-Tencor is traded on the Nasdaq National Market under the symbol KLAC. (source: company press release) Why We Like It: It's about time! We're surprised it's taken investors this long to take profits in certain tech stocks. KLAC only met investor expectations for earnings in July and that was a major decline form a year ago period. Net income came in at $29 million or 15- cents compared with $47 million or 23 cents a year ago. Estimates for July's announcement were 15-cents. What's worse is KLAC lowered their guidance for the next quarter to 16-17 cents a share compared to current estimates of 18 cents. KLAC's CEO said they were "cautious about the timing of a sustained recovery" in the company's conference call. Really impacting shares of KLAC was a bearish move in the SOX semiconductor index. The SOX dropped more than three percent on Friday and closed below its 50-dma. The next move for the SOX appears to be a retest of support near 350. We suspect that such a move will coincide with a retest of support for KLAC near the $45 level. KLAC's P&F chart is still in a bullish pattern but its daily chart has broken its simple 50-dma like the SOX. Our first target will be $45 although some suggest targeting $42.50 or even the 200-dma. We'll initiate the play with a stop loss at $50.05. Suggested Options: We're going to suggest using September and December options for KLAC with a preference for the September 50s, 47.50s, and 45s as we don't expect to be in the play that long. BUY PUT SEP 50.00 KCQ-UJ OI=3823 at $4.00 SL=2.25 BUY PUT SEP 47.50 KCQ-UT OI=4495 at $2.60 SL=1.30 BUY PUT SEP 45.00 KCQ-UI OI=6141 at $1.65 SL=0.85 Annotated Chart: Picked on August 10 at $48.04 Change since picked: -0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 9.6 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 08-10-2003 Sunday 4 of 5 In Section Four: Leaps: Stuck In Limbo Traders Corner: It's Time For A Quickie – Or Two – Or Three ************************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 ***** Stuck In Limbo By Mark Phillips mphillips@OptionInvestor.com Just when it looked like the market was finally going to give up the ghost in the middle of last week and break down from the incessant trading range in which it has been mired since early June, the dipsters came back in to push us back into the middle of that range to close out the week in the same state of limbo that we have endured these past two months. With August options expiration this week, I don't hold any great hopes of the range decisively breaking this week either. Last week, I included a chart showing both the simple and exponential 50-dmas for the SPX, on the thought that even a break of the simple average wouldn't be the key, as it was still within the trading range. Well the exponential average was broken at the close on Tuesday and it certainly appeared the jig was up. But the bulls bought the apparent breakdown and the SPX managed to close back over that average (currently $976), but just barely. In perusing the other major averages, it seems I was focused on the wrong 50-dma, as it was the exponential 50-dma (then at 9036) that seemed to provide the critical support for the mid-week rebound. The action in the SPX really seemed interesting, especially as the week drew to a close, with Friday's trading range being centered right on the pivotal 975 level. Neither the bulls or the bears were able to sustain much of a move off of that price magnet, ending just above the 50-ema (976), but well below the simple 50- dma (now up at 987). Once again, the bullish percent readings seem to be telling us something important, as the reading for the DOW is showing the most resilience of those BP readings that we follow. As we've been doing these many past weeks, let's take a look at our Bullish Percent table and we can see where the relative weakness and strength lies. NASDAQ-100 - 64% Now Bear Confirmed NASDAQ Composite - 67.88% (well off the 73.50 all-time high) DOW - 80% (Still in Bull Correction) S&P 500 - 73.40% (Cycle high of 82.80% - Still Bull Correction) S&P 100 - 80% (Just below cycle high, still Bull Confirmed) It doesn't take a rocket scientist to see that the most significant relative weakness is being found in the NASDAQ markets, and not surprisingly followed up by the rather broad S&P 500. But the OEX and the DOW are holding up remarkably well, with the former still in Bull Confirmed and the latter in Bull Correction. Taking a look at the Bullish Percent SharpCharts, we have very clear Sell signals for both the NDX and the COMPX, a weak and meandering Sell signal on the SPX, with the OEX and DOW hinting at Sell signals but not yet showing any real conviction. One very encouraging development though is that in all cases, the bullish percent line is below the 10-dma and all of the CCI oscillators are buried below -100. That's the most conclusively bearish situation we've seen in many moons. I haven't included any charts this week, but I encourage you to click on over using the following link and see for yourself. This is what we've been waiting for, and along with the deterioration in the New High vs. New Low picture, I feel the tide is definitely shifting in favor of the bears. 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 - $BPCOMPQ This week's excitement wasn't just confined to significant moves in price and bullish percent though, as the CBOE Volatility index ($VIX) went on a wild ride of its own. Remember a couple weeks ago when the VIX dipped below 20? Well apparently a bit of fear crept into the market last week and the VIX shot up to a high of 25.88 on Wednesday before plunging right back to "Complacency Central" just above 21 by the end of the week. I looked at my long-term VIX chart towards the end of the week and noticed something rather interesting. Remember that descending trendline we drew last year connecting the July and October VIX highs? Well, I still have that trendline in place, and as of Wednesday it had fallen to 26.15. Once again, it looks like Linda's habit of keeping old trendlines in place is sage advice! Wednesday's sharp ramp in the VIX was promptly turned back just below that trendline, resulting in a close below 23.50. We'll eventually break decisively from this descending wedge pattern that has been building for over a year, but that event hasn't occurred just yet. The 19-20 area is still an important area to watch, and I feel that stepping into long-term index puts on rally failures in price with the VIX in that area is a prudent and potentially quite profitable strategy. Where do we go in the week ahead? Quite honestly, I haven't a clue. It's expiration week and we could retest the top of the range, break down from the range or remain mired in the middle. Sure there's the outside chance of a bullish breakout from the current range, but I place the odds of that just slightly below Gray Davis managing to remain California's governor through the end of the year. If I had to stick my neck out with a prediction, it would be for the range to hold for one more week and that means SPX = 960-1015 and DOW = 8985-9360. The NASDAQ is a different kettle of fish altogether, as it has already clearly broken down. As has been the case over the past few weeks, we had a lot of action on the playlist this week and we have 2 new Watch List candidates to boot. So without further ado, let's jump right in. Portfolio: HD - Well, I hope you took advantage of that dip to the $30 level to close out your HD position for a nice gain, because it came right back in our faces by the end of the week. Fortunately our stop had been tightened sufficiently to allow us to get out with a small gain. Details on the drop below. SMH - I love it when a plan comes together like that. Well, to be entirely honest, I wasn't thrilled with the 3 weeks of the SMH flirting with our $33 stop, but in the end it looks like we nabbed a favorable entry point and picked the right stop as well. The Semiconductor index (SOX.X) finally broke down out of its ascending channel late last week, violating its 50-dma ($381) in the process. Not only that, but the SOX finally generated a PnF Sell signal (confirming the $340 bearish price target) and smashing through the bullish support line that had held up in the face of so many tests since February. But I'm not yet willing to either declare victory or lower the stop because of the slightly different picture provided by the SMH. Not only has the SMH not yet given a Sell signal on the PnF chart, but it is still within its ascending channel (albeit just above the $30.00 bottom) and managed to close right on the $30.50 50-dma. Put simply, the SMH has not yet broken down, but it will likely do so in the not-too- distant future. A rebound from here ought to find resistance near $32 and I still favor new entries there. We'll maintain our stop at $33 until we get that decisive breakdown, with the SMH closing under $29.50. Keep in mind that the SMH will need to trade $27 in order to give a PnF Sell signal, so we're still in aggressive territory for now. ADBE - No breakdown yet, but I certainly wouldn't call shares of ADBE strong, as the stock continues to meander ever so slightly downwards. The $30-31 support area is going to be staunchly defended by the bulls (as expected), but once that support fails (as I expect), then we'll be targeting a decline to the $26-27 area, with a possible short-term bounce from the bottom of the mid-March gap near $28.50. Note that while the PnF chart is currently on a Sell signal (bearish price target of $21), the bullish support line at $31 seems to be providing support. ADBE will need to trade $30 to decisively break that line and generate another Sell signal, so that level remains critical. Even though the 50-dma ($33.50) appears to be providing solid resistance, I'm still keeping a rather wide stop at $36. Note that it would require at trade of $36 to produce a new Buy signal and negate our current bearish vertical count. DJX - By mid-week last week, I was actually contemplating the possibility of lowering our stop on our bearish DJX play, with the index threatening to break the critical $90 level. But it wasn't to be, as the bulls once again stepped in at critical support, pushing back over the violated 50-dma and keeping the trading range alive. Last week, I mentioned the exponential 50-dma with respect to the SPX and we can see that the exponential 50-dma on the DJX came into play on Wednesday, as the index rebounded from its intraday violation of that MA to close just above it. The DJX is still very much in the trading range that has held on a closing basis since early June and we won't have any resolution to the debate over Top vs. Consolidation until we see either a close over $93.23 or under $89.85. Dow Theory is still working on a bearish non-confirmation, with the Industrials failing to close above their June high, even though the Transports have managed to do so. That keeps the scales tilted in favor of the bears, but only slightly so until the range decisively breaks. Watch List: LEH - As you can see by the rebound in LEH and the Broker/Dealer index (XBD.X) regaining the $550 support/resistance level, it is still a bit early to be getting aggressive with bearish plays in this arena. LEH still exhibits the best relative weakness of the stocks in this sector, but with the XBD refusing to really fall apart, it is targeting failed rallies that will provide the best position trades. LEH is already on a PnF Sell, but has reversed into a column of O's. Major resistance now looms just above our targeted $67-68 entry zone and if we can get an entry there, it should provide for a very nice risk reward. We can place our stop at $70, as a trade at that level would generate a new Buy signal, negating the current bearish vertical count of $52. Patience is the watch word here, as we should have plenty of time to enter the trade and have it work in our favor ahead of the company's earnings report in mid-September. It is at that point that we'll get to see if there really was any damage inflicted to the company's bottom line from the recent gyrations in the bond market. BBH - It looks like we may have been just a bit too late in adding BBH to the Watch List, as last week saw some pretty significant weakness, slamming the BBH below $125 before a tepid end-of-week rebound. I still like our prospects for nabbing a solid entry on the next failed rally, but there's no need to chase. Even with last week's violation of the 50-dma, I wouldn't be at all surprised to see one more trip up near the $135 resistance area. Let's lower our entry target just a bit to $132-135, where we can look for entry on the next rollover. That will have us working with a somewhat lower stop as well, initially at $138, just over the recent highs. Using the PnF charts for our guide presents a bit of a mixed picture, as the BTK index is clearly on a Sell signal, but nearing the bullish support line at $408, while at the same time the BBH has yet to give a corresponding Sell signal (requiring a trade at $120). That bifurcation should keep us on the conservative side with respect to initiating a position. WMT - That's exactly why I've been so cautious about adding WMT to the Watch List! It was almost as though the market was waiting for me to add the play in order to generate a decent round of buying. The catalyst for WMT's strength last week seems to have been the positive round of July comps, which not only propelled the stock right up to resistance near $58, but sparked a real turnaround in the Retail sector, with the RLX vaulting back inside its violated channel. Along with better than expected July comps along with WMT boosting its profit outlook for the second quarter look to have the bulls eyeing a breakout leading up to the company's earnings report on Wednesday. We obviously don't want to step into the fray ahead of that earnings report and will likely be focused on a failed rally near the $60 long-term descending trendline for an entry. If that trendline is broken, then clearly, we'll need to reevaluate the play. We don't want to be aggressive here until we see some solid price weakness after earnings are announced. One final note on the Watch List. You'll notice that I've removed all the listed 2004 LEAPS from the Watch List below. With August expiration looming this Friday, that puts the '04 strikes 5 months from expiration and that is just too close for our purposes. Our anticipated play durations may run as long as 4-6 months (although that hasn't been the case lately), and during that amount of time, theta decay is just too large a detrimental factor to tolerate. Radar Screen: Idle Closing Thoughts: I started listing plays on the Radar Screen several weeks back as a sort of stop-gap measure to share with you my thoughts on play candidates that had captured my attention, but weren't quite ripe for a full-fledged Watch List play. If you recall, this was in an extended period where I wasn't adding new plays and wanted to make sure to preserve the value of this column during that period of time. Over the past few weeks though, those candidates have either been eliminated from consideration or have made it onto the Watch List. I think the Radar Screen is still a useful tool during those periods where the action on the Portfolio and Watch List is rather light. But due to time constraints, when we're adding a couple plays a week like we've been doing lately, I don't feel it is really necessary. So I'll leave the header there for the time being and we'll place plays there as circumstances dictate. As noted above, we will no longer be listing the 2004 strikes on new Watch List plays, although we will continue to track those strikes in plays that are already open in the Portfolio. Traders in those plays that want to reduce their exposure to time decay should consider rolling out to the 2005 strikes at favorable price points over the next few weeks. As denoted above, it is my belief that the rampant bullishness that brought the markets to their recent highs is finally beginning to wane. The majority of the weakness is being seen on the NASDAQ, but the sharp rebound in the DOW from Wednesday's low should make it clear that the dip-buyers haven't given up. Traders looking to put on medium- to long-term positions should still be focused on the downside, but we want to make sure and focus our efforts on pockets of weakness, and even there we need to be targeting entries on the failed rallies, not on breakdowns. I think we're starting to get a decent bearish Portfolio put together and so long as my perception that the top is in is correct, the next few months should be rather enjoyable. Have a great weekend! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: SMH 07/09/03 '04 $ 30 SMH-MF $ 2.70 $ 3.10 +14.81% $33.00 '05 $ 30 ZTO-MF $ 5.00 $ 5.30 + 6.00% $33.00 ADBE 07/17/03 '04 $ 35 AEQ-MG $ 4.20 $ 5.60 +33.33% $36.00 '05 $ 35 ZAE-MG $ 7.20 $ 8.20 +13.89% $36.00 '06 $ 35 WAE-MG $ 9.00 $10.00 +11.11% $36.00 DJX 07/31/03 '03 $ 92 DJV-XN $ 3.80 $ 4.70 +23.68% $95.50 '04 $ 92 YDK-XN $ 8.20 $ 9.10 +10.98% $95.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: LEH 07/20/03 $66-67 JAN-2005 $ 65 ZHE-MM JAN-2006 $ 60 WHE-ML BBH 08/03/03 $132-135 JAN-2005 $125 XBB-ME JAN-2006 $120 YEE-MD WMT 08/03/03 $60 JAN-2005 $ 55 ZWT-MK JAN-2006 $ 55 WWT-MK GM 08/10/03 $38-39 JAN-2005 $ 35 ZGM-MG JAN-2006 $ 35 WGM-MG QQQ 08/10/03 $31.50-32.00 JAN-2005 $ 30 ZWQ-MD JAN-2006 $ 30 WD -MD New Portfolio Plays None New Watchlist Plays GM - General Motors $36.98 **Put Play** I've made no secret of my disdain for GM over the past several months, as the company's financial condition has continued to deteriorate. Between the declining profits from its automotive operations to its looming and extremely large under-funded pension liabilities, it is only a matter of time until the company's profits take a serious hit. The company has been able to prop up its earnings over the past couple years via the huge profits from its financing arm, but with the popping of the bond bubble over the past several weeks, that gravy train is fast coming to an end as well. Taking a look at the company's Q2 profit statement shows the problems lurking under the hood. While GM managed to top profit expectations, but only because its finance unit produced a record result. For the quarter, the carmaker reported overall earnings of $901 million, while profits from its worldwide automotive operations plunged by nearly $1 billion to a paltry $140 million. On the other hand, the profit from the finance portion of the business mushroomed to $834 million. It isn't just car financing that is boosting the company's bottom line either, as $415 million of that profit came from the company's mortgage operations. So here's the $64,00 question. What happens to this car company as interest rates rise and the refi market dries up? Either profits are going to drop sharply or GM is going to have to find away to start making money by building and selling cars again. In the increasingly competitive global marketplace, that seems like an awful long shot! This is a very different play than we've recently been featuring here, as it is a longer-term proposition, where we're looking for the longer-term effects of a changing business dynamic to come home to roost. It is far less rooted in the technical analysis side of the game. Nonetheless, GM's price chart seems to be forecasting a decline as well, as the consistent pattern of lower highs is very much intact over the past year. The key to success for this play will be in picking a favorable entry price and holding on for the decline I expect. First up is the entry point, and looking at the price chart, I can connect the last three highs (December, January and June) and produce a descending trendline that currently rests just below $39. So our targeted entry will be for a failed rally in the $38- 39 area. We'll use an initial stop at $42, which is just over last December's intraday high. So how far should we look for the stock to drop? My initial target is for a retest of the March lows near $30, but I think that will just be a waypoint enroute to the next low, which could be as low as $20. While the standard scale PnF chart currently shows the stock on a Buy signal, I flipped over to the 2-point box scale for the longer-term view. there we can see GM is still on a Sell signal, with a bearish price target of -- get this -- $12! I sure like that for a risk reward ratio! It likely won't be a quick trip, but this is the sort of play perfectly suited to a LEAPS trade where we can take a position at an advantageous price point and then let time take over from there. BUY LEAP JAN-2005 $35 ZGM-MG BUY LEAP JAN-2006 $35 WGM-MG QQQ - NASDAQ-100 Trust $30.07 **Put Play** It's back! I can no longer stay away from what appears to be an ideal setup for another broad market bearish position trade. The key that has pushed QQQ back into the spotlight is the action on the bullish percent charts. The NDX bullish percent has now fallen to 64%, clearly in bear confirmed territory, and the COMPX bullish percent, while still bull confirmed at 67.88%, is sharply off of its cycle high and nearing a 3-box reversal into a column of O's, which will occur at 66%. The NASDAQ significantly under- performed the rest of the market last week, led lower by weakness in the Semiconductor sector and the 1200 level on the NDX (corresponding roughly to $30.00 on the QQQ) will likely be a critical support test next week. While support could fail, I sense there is another rebound coming as selling pressure still hasn't picked up much and it is on the failure of that rebound that we want to consider new entries. Looking at the daily chart, the $31.50-32.00 area now looks like solid resistance and that's where we'll look to take our entry. Make no mistake about it, this is an aggressive play, especially with the PnF chart still on a Buy signal and the cause of the recent weakness likely related to hitting the bearish resistance line at $33. So clearly, the last time we played it, we were too early and had our stop set just a bit too tight at $32.50. This time we should be catching it on the way down and we can use a tighter stop at $34. A trade at $34 would not only break the bearish resistance line (and surprise the daylights out of me!), but would represent a breakout above the May 2002 highs as well. On the downside, the first real support to contend with will be at $28, but I'm looking for a retracement down into the $25-26 area to retest that major support area. Note that the PnF chart won't generate a Sell signal until the QQQ trades $23, so there is lots of downside room before the PnF chart will provide any solid guidance as to long-term direction. On the other hand, we can look at the 2-point box size (like we did on the GM play above) and see that not only is QQQ on a long-term Sell signal, but it hasn't had a Buy signal since January of 2001. The big picture still says down and it appears we're picking an advantageous point to enter for a downside play as the bullish action that has brought us this far is beginning to wane. BUY LEAP JAN-2005 $30 ZWQ-MD BUY LEAP JAN-2006 $30 WD -MD Drops HD - $32.72 There's a reason I got aggressive with the stop on our HD play, and quite simply it is because of a fear that something like the past 3 days could materialize. The stock was really stingy about sliding downhill and when CIBC came out on Wednesday saying the selloff was overdone, I expected a bit of a pop. First off, a drop from $34.75 to $30.00 in a period of a month is NOT overdone, and to regain more than half that in 3 days IS overdone. But no matter. As I've been talking about in recent weeks, the bullish sentiment in this market is still alive and well and this is just the latest irrational rebound. Fortunately, we had the stop set tight enough to get us out with a small gain. I wouldn't have felt comfortable with a wider stop, as a close back over the 50-dma negated a lot of the weakness that has developed in the past couple weeks. Time to move on. ************************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 ************** It's Time For A Quickie – Or Two – Or Three By Mike Parnos, Investing With Attitude Life and trading have a lot in common. Both are a series of trial-and-error experiences. We are taught something by a teacher, and then we try to do it ourselves. The first time we do it we probably don't get the results we want. So we try again, and again, and again. With practice we either get better or decide to take up Parcheesi instead – if we can afford it. Then we push ourselves as we try to do something that's a little bit more difficult. As we succeed, our expectations increase, and so does the satisfaction that comes from the feeling of a job well done. So we set our sights a bit higher-to improve our results as compared to what we've done before. We continue to push ourselves to new heights. When we succeed, we raise the bar again. It's OK to raise the bar – even belly up to it from time to time – as long as you can still reach your drink. However, it's more important to get comfortable with one trading style – knowing the whys the whens and hows. Concentrate on the steak – not the peas and you get your T-bone instead of getting T-bagged. _____________________________________________________________ One Week Left With only a week remaining before expiration, we'll see if we can pick up a few extra dollars by putting on some short-term trades. Last month, our Quickies made us almost $2,000. Let's see if we pick up where we left off. Remember to adjust the number of contracts to fit your risk tolerance. Here are a few ideas. Be careful. Remember, the money you trade may be your own. August Quickie Trade #1 – OEX Iron Condor – Closed @ 493.80 Sell 10 contracts of August OEX 500 calls @ $2.15 Buy 10 contracts of August OEX 510 calls @ $1.00 Credit of $1.15 Sell 10 contracts of August OEX 490 puts @ $3.30 Buy 10 contracts of August OEX 480 puts @ $2.10 Credit of $1.20 Total net credit of $2.35. Maximum profit range of 490-500. Safety range 502.35 to 487.65. Maximum potential profit of $2,350. August Quickie Trade #2 – QQQ Lottery Strangle – Closed at $30.07 It's cheap, the risk is low, and we're looking for a $2-3 move in the QQQs. Buy 10 contracts of August QQQ $29 put @ $.15 Buy 10 contracts of August QQQ $31 call @ $.15 Total debit of $3.00 ($300). Profit potential is unlimited. But, let's be reasonable. A $.60 profit would give us $600. That would be nice. We can't expect to hit our version of the "lottery" too often. With the market trading in a range, this is also a kind of insurance that will bring in a few dollars if the market breaks out of the range – and we don't particularly care which direction it takes. August Quickie Trade #3 – EBAY Sell Strangle – Closed at $100.50 Sell 10 contracts of August EBAY $100 calls @ $1.95 Sell 10 contracts of August EBAY $100 calls @ $1.35 Total net credit of $3.30. Maximum potential profit, of $3,300. We've received a maximum profit if EBAY closes at $100. The safety range is $103.30 and $96.65. If EBAY trades at these safety parameters, you should exit the trade. August Quickie Trade #4 – RUT (Small Cap Index) Iron Condor – Closed at 453.94 Sell 10 contracts of August RUT 460 calls @ 1.75 Buy 10 contracts of August RUT 470 calls @ $.70 Credit of $1.05 Sell 10 contracts of August RUT 450 puts @ $2.60 Buy 10 contracts of August RUT 440 puts @ $1.05 Credit of $1.55 Total net credit of $2.60. Maximum profit of $2,600. Maximum profit range of 450-460. Safety range 462.60 to 447.40. Let's hope the market stays in a range and so we can pick up some loose change. We need every penny. McDonalds recently raised the price of their Big & Tasty. Is nothing sacred anymore? _____________________________________________________________ AUGUST CPTI PORTFOLIO TRADES August Position #1 – BBH Iron Condor – Closed at $126.34 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. BBH tested the lows and almost got down on all fours, but bounced up a bit. If you want your maintenance money for the bear call portion of the spread to use for something else, you can buy back the $140 call for a dime – possibly a nickel on Monday. August Position #2 – LLTC Sell Straddle – Closed at $35.13 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 $35.13, we're in pretty good shape, but there's still a long way to go. August Position #3 – SPX Iron Condor – Closed at 977.59 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 has still not opened call strike prices between 1025 and 1050 (and probably won't). The SPX closed at 977.59 – still within our range. Support is at about 960. ______________________________________________________________ More Words Of Wisdom It seems that our CPTI students are full of it – wisdom, of course. Here are some of this week's submissions. Keep 'em coming. 1. Eagles may soar, but weasels don't get sucked into jet engines 2. If you think nobody cares, try missing a couple of payments. 3. There are two theories to arguing with women. Neither one works 4. A closed mouth gathers no foot. ______________________________________________________________ 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. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 08-10-2003 Sunday 5 of 5 In Section Five: Covered Calls: Who Trades Covered-Calls? Naked Puts: Q&A With The Naked Puts Editor Spreads/Straddles/Combos: Blue-Chips Drift Higher During Lackluster Session! Updated In The Site Tonight: Market Posture: Posture Adjustments ************************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 ************* Options 101: Who Trades Covered-Calls? By Mark Wnetrzak One of our readers asked about the use of covered-calls by fund managers and other institutional traders. Attn: Covered Calls Editor Subject: Strategy Selection Mark, I read about a new index on the CBOE called the "Buy-Write" or BXM. It's based on selling the near-term, at-the-money S&P 500 index call option against the S&P 500 stock index portfolio. Since there are no options for this index, why would anyone care about it? The explanation says that "general interest" from institutional customers caused them to create this index but I can't believe there are really that many professional traders using covered-calls? Is this a much used strategy among the fund managers and brokerages? LW Regarding The Use Of Covered-Calls: Surprisingly, buying stock and writing calls against that stock is a popular strategy for managed funds and other institutional traders. Covered-calls are utilized by these groups both as a hedging technique and as a vehicle for achieving conservative, long-term returns in neutral to bullish markets. Fund managers understand that the risk/reward characteristics of this approach can often be better than owning the stock outright or speculating on directional trends with options. There are a number or reasons why professional option writers use the covered-call strategy to achieve above-average returns. One motivation to sell call options comes from the fact that they are generally overpriced. Whether due to supply and demand factors or simple speculation, it’s common for traders to pay more for call options than they are worth. When options are sold at a premium, covered-call writers benefit by increasing their potential gains and even a fairly small difference in premium can result in a 3% to 5% increase in the annual returns from this strategy. The basic techniques that fund managers use when implementing this strategy can be beneficial to retail investors as well. One of the most common traits is selling short-term options to obtain higher relative time values. In many cases, longer-term series have much less premium (proportionally) in the option price due to a smaller demand from traders. Fund and pension-plan buyers generally select quality stocks and sell in- and at-the-money options for increased probability of assignment. When compared to outright ownership, this method is almost equal to "pre-selling" the issue at a profit. In covered-write positions, the owner retains any dividends issued on the stock before the option is exercised. Profits from regular dividends can increase the annual return of the position as much as 5%. For this reason, hedge-fund managers like to sell options on stocks with favorable dividends and the recent tax law changes have renewed interest in this technique. In some instances, the early exercise of options (dividend capturing) will prevent an investor from receiving this added premium but the effect can be offset by reinvesting the funds in another profitable position. Institutions also use the popular buy-write technique when placing orders. Designating the net cost of the combined position when the order is placed eliminates price risk and affords the fund manager with an opportunity to negotiate a favorable basis. A block trader will often agree to these terms in order to unload large amounts of the stock with only a small premium concession from the current market price. Institutional traders generally utilize only the most successful long-term strategies to guarantee a consistent rate of return. Any method that produces less than profitable results will inevitably lower their supply of funds. The covered-call strategy is commonly used to generate moderate (compound) returns over a complete market cycle while avoiding the potential of large portfolio losses. It appears this may be the safest way to outperform all but the most aggressive techniques in the majority of market conditions. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield SLNK 15.40 16.67 AUG 15.00 1.15 0.75* 7.6% DIGE 32.50 30.74 AUG 30.00 3.40 0.90* 6.7% IMCL 39.86 38.23 AUG 35.00 6.40 1.54* 6.7% BEAS 12.79 12.60 AUG 12.50 1.00 0.71* 6.5% CYBX 23.38 26.71 AUG 20.00 4.40 1.02* 5.8% SSTI 5.47 5.73 AUG 5.00 0.75 0.28* 5.2% DRIV 21.98 21.06 AUG 20.00 2.80 0.82* 4.6% MOGN 31.97 36.85 AUG 30.00 2.90 0.93* 4.6% EXTR 5.75 5.90 AUG 5.00 0.95 0.20* 4.5% CY 13.84 12.80 AUG 12.50 1.95 0.61* 4.5% NAV 40.59 39.59 AUG 40.00 1.75 0.75 4.2% RFMD 5.89 7.19 AUG 5.00 1.15 0.26* 4.0% ANEN 10.75 10.14 AUG 10.00 1.10 0.35* 3.9% CHIC 12.51 12.10 AUG 12.50 0.55 0.14 2.5% ROXI 7.99 7.19 AUG 7.50 0.90 0.10 2.0% ISPH 12.75 12.06 AUG 12.50 0.80 0.11 2.0% AFFX 23.30 21.60 AUG 22.50 1.45 -0.25 0.0% IMGN 5.05 4.28 AUG 5.00 0.50 -0.27 0.0% INSP 15.52 14.01 AUG 15.00 1.20 -0.31 0.0% DPMI 20.43 18.88 AUG 20.00 1.10 -0.45 0.0% CHINA 13.48 9.03 AUG 10.00 4.00 -0.45 0.0% BONZ 15.28 13.74 AUG 15.00 0.85 -0.69 0.0% * Stock price is above the sold striking price. Comments: The Nasdaq Composite Index fell out of bed this week as the Dow Jones 30 and S & P 500 indices flirted with their 50-day EMAs. As next week is expiration week for August options, it is once again time to re-evaluate any positions that are acting weaker than expected and act accordingly. Cypress Semiconductor (NYSE: CY) is at a key moment -- its 50-day EMA and the trend-line from the March low. Roxio (NASDAQ:ROXI) did manage to stay above last Friday's low and could be a candidate to hold into the September series, but the technical signals look rather bleary. With the market outlook a bit worrisome as we head into September, it may be wise to be more defensive and protect one's capital. Besides Roxi and CY, other early-exit candidates could include those issues above that are negative, depending on your long-term outlook and near-term risk tolerance. Positions Previously Closed: Boston Communications (NASDAQ:BCGI), O2Micro (NASDAQ:OIIM), Thoratec (NASDAQ:THOR), Abgenix (NASDAQ: ABGX), Stellent (NASDAQ:STEL), Instinet (NASDAQ:INET), and Allied Waste (NYSE:AW). 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 WAVX 3.46 SEP 2.50 KWW IZ 1.20 2099 2.26 42 7.7% XOMA 8.09 SEP 7.50 MBU IU 1.30 408 6.79 42 7.6% NWAC 8.30 SEP 7.50 NAQ IU 1.40 420 6.90 42 6.3% NEOF 12.45 SEP 12.50 QZX IV 0.90 32 11.55 42 5.6% USG 14.11 SEP 12.50 USG IV 2.35 284 11.76 42 4.6% ISIS 5.33 SEP 5.00 QIS IA 0.60 221 4.73 42 4.1% SNIC 11.18 SEP 10.00 QNI IB 1.70 42 9.48 42 4.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** WAVX - Wave Systems $3.46 *** Intel Deal! *** Wave Systems (NASDAQ:WAVX) is a development-stage company that develops, produces and markets hardware- and software-based digital security products for the Internet and e-commerce through encryption. At the heart of Wave's technology is the EMBASSY (Embedded Application Security System) Trust System (the ETS), a combination of client hardware and software and a back-office infrastructure that manages Wave's security functions. The client hardware consists of the EMBASSY 2100 security chip which may be embedded in user devices such as computer keyboards, smart card readers, PC motherboards, PC and/or cable modems, PDAs, cable set-top boxes and potentially a wide variety of other user devices. The EMBASSY chip is used to securely store the user's personal information. Wave surged last month on news of an Intel (NASDAQ:INTC) deal which will enable Intel to bundle Wave's software and services with a future Intel desktop motherboard. We simply favor the bullish breakout supported by heavy volume which suggest further upside potential. Investors can use this position to speculate on the company's future. Target-shooting a lower net-debit would lower the cost basis as well as raise the potential yield in the position. SEP-2.50 KWW IZ LB=1.20 OI=2099 CB=2.26 DE=42 TY=7.7% ***** XOMA - XOMA Limited $8.09 *** Expecting Good News! *** XOMA (NASDAQ:XOMA) is a biopharmaceutical company that develops and manufactures products to treat cancer, immunologic and inflammatory disorders and infectious diseases. The company's products are in various stages of development and all are subject to regulatory approval before it or its collaborators can commercially introduce any products. In addition, XOMA has proprietary technologies relating to recombinant antibodies and proteins, including bacterial cell expression systems and the Human Engineering method for creating human-like antibodies, both of which are available for licensing. XOMA also uses these technologies in developing its own products. XOMA rallied sharply after New data showed that Genentech's (NYSE:DNA) experimental psoriasis drug Raptiva works better over the long term. The FDA's dermatologic and opthalmic drugs advisory committee will review on Sept. 9 Genentech and partner Xoma's biologics license application for Raptiva. Investors who expect good news can speculate on that outcome with this position. SEP-7.50 MBU IU LB=1.30 OI=408 CB=6.79 DE=42 TY=7.6% ***** NWAC - Northwest $8.30 *** Bottom-Fishing: Airlines *** Northwest Airlines (NASDAQ:NWAC) is engaged in the business of transporting passengers and cargo. Northwest's business focuses on the development of a global airline network through its strategic assets, including domestic hubs in Detroit, Michigan; Minneapolis/St. Paul, Minnesota, and Memphis, Tennessee; an extensive Pacific route system with a hub in Tokyo, Japan; a trans-Atlantic alliance with KLM Royal Dutch Airlines, which operates through a hub in Amsterdam, the Netherlands, and a global alliance with Continental Airlines, Inc. Northwest operates substantial domestic and international route networks and directly serves more than 175 cities in 24 countries. Northwest has been forging a Stage I base for almost a year and once again is nearing a strong support area. A speculative position that offers a favorable reward at the risk of owning the stock near technical support. SEP-7.50 NAQ IU LB=1.40 OI=420 CB=6.90 DE=42 TY=6.3% ***** NEOF - Neoforma $12.45 *** Stage I Speculation *** Neoforma (NASDAQ:NEOF) is a provider of supply chain management solutions for the healthcare industry. Through a combination of technology, information and services, the company's Web-based supply chain management solutions are designed to enable effective collaboration among hospitals and suppliers, helping them to reduce operational inefficiencies and lower costs. Through its Healthcare Products Information Services business unit, Neoforma also offers market intelligence services and through its Med-ecom business unit, it offers contract management and administration services. Traders cheered the news in July that Neoforma would acquire I-Many's (NASDAQ:IMNY) Health & Life Sciences business for $20 million in cash and stock. The company said that it expects the acquisition to accelerate its growth and customer diversification. We favor the year-long basing formation with improving technicals and this position simply offers investors a reasonable entry point from which to speculate on the company's future share value. SEP-12.50 QZX IV LB=0.90 OI=32 CB=11.55 DE=42 TY=5.6% ***** USG - USG Corp. $14.11 *** Asbestos Speculation *** USG Corporation (NYSE;USG) produces a range of products for use in new residential, new non-residential and repair and remodel construction, as well as products used in certain industrial processes. Its operations are organized into three operating segments: North American Gypsum, which manufactures Sheetrock brand gypsum wallboard and related products in the United States, Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region, and Building Products Distribution, which distributes gypsum wallboard, drywall metal, ceiling products, joint compound and other building products throughout the United States. Shares of companies with asbestos liabilities rallied sharply this year after legislative progress raised the probability of a national fund to pay asbestos injury claims. The stocks have moved in tandem to the latest progress on the bill. Traders can use this position to speculate on the outcome of the legislative process with a cost basis closer to near-term technical support. SEP-12.50 USG IV LB=2.35 OI=284 CB=11.76 DE=42 TY=4.6% ***** ISIS - ISIS Pharma $5.33 *** Bottom-Fishing: Pharmaceuticals *** ISIS Pharmaceuticals (NASDAQ:ISIS) is a biopharmaceutical company exploiting proprietary RNA-based drug discovery technologies to identify and commercialize novel drugs to treat important diseases. With its main technology, antisense, the company creates inhibitors, or oligonucleotides, designed to hybridize, or bind, with high specificity to their RNA target and modulate the production of proteins associated with diseases. ISIS has 12 antisense products in its development pipeline with eight in human clinical trials designed to assess safety and efficacy. The company's products in development address numerous therapeutic areas, including inflammatory, viral, metabolic and dermatological diseases and cancer. Investors were apparently pleased with ISIS' earnings report on August 5 as the stock rallied on increasing volume back over its 50-day EMA. The next test will be the earl-July highs and investors who believe the stock is destined for higher prices can use this position to speculate on that outcome. Target shooting a lower net-debit increase the downside protection as well as raise the potential yield in the position. SEP-5.00 QIS IA LB=0.60 OI=221 CB=4.73 DE=42 TY=4.1% ***** SNIC - Sonic $11.18 *** Earnings Rally! *** Sonic Solutions (NASDAQ:SNIC) develops and markets computer-based tools that enable the creation of digital audio and video titles in the CD-Audio and DVD-Video formats, and in related formats. The company also licenses the software technology underlying its tools to various other companies to incorporate in products they develop. It has 3 business units: professional products, desktop products and technology products. Sonic's professional products consist of advanced DVD-Video creation tools, which are intended for use by high-end professional customers. Its desktop products include software-only DVD-Video creation tools, DVD-Video playback software, software-only CD-Audio, CD-ROM and DVD-ROM making tools, as well as data backup software. The Technology Products category includes software that the company licenses to other companies for inclusion in their DVD or CD creation and recording products. Sonic has rallied sharply after the company raised its fiscal 2004 outlook and reported 1st-quarter results that met estimates. The solid fundamental outlook has translated into higher share values and investors who wouldn't mind owning the issue near a cost basis of $9.50 can profit from future upside activity with this position. SEP-10.00 QNI IB LB=1.70 OI=42 CB=9.48 DE=42 TY=4.0% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield CLZR 13.50 SEP 12.50 UKZ IV 2.00 8 11.50 42 6.3% MVIS 7.60 SEP 7.50 QMV IU 0.70 162 6.90 42 6.3% GSIC 10.51 SEP 10.00 UGF IB 1.30 13 9.21 42 6.2% MCDTA 11.00 SEP 10.00 MQG IB 1.70 31 9.30 42 5.5% RIMM 24.61 SEP 22.50 RUL IX 3.60 3596 21.01 42 5.1% ISRG 15.10 SEP 15.00 AXQ IC 1.05 86 14.05 42 4.9% PDII 24.25 SEP 22.50 PKU IX 3.10 30 21.15 42 4.6% PGNX 15.90 SEP 15.00 GUB IC 1.75 15 14.15 42 4.4% MRN 7.59 SEP 7.50 MRN IU 0.50 302 7.09 42 4.2% GNTA 11.69 SEP 7.50 GJU IU 4.60 42 7.09 42 4.2% ***************** NAKED PUT SECTION ***************** Options 101: Q&A With The Naked Puts Editor By Ray Cummins This week's question concerns exit and adjustment strategies for uncovered puts. Attn: Naked-Puts Editor Subject: Strategies For Limiting Losses Ray, It's interesting that your last column deals with the subject of losers. It would be nice to have some specific ideas on how to deal with them. I have been trading naked puts and spreads for about 6 months with a lot of success, but some additional wisdom wouldn't hurt. Today I had a stock (CVTX) drop 25%. I put on this trade July 21st, selling the Sept 30 Put for 3.20. At the worst of the day today, the option was as high as about $4.10. I did nothing because the loss was small compared to the stock move, but I would like to know what you might do in this situation. Further, what I have been doing when a trade breaks a strike in a naked trade, I have been buying long options in the direction of the break, buying more long options than those sold short (like if I'm short 10 contracts, go long 15 or 20). My thinking being that if the trend continues, I not only reverse the loss, but have a good chance to make a profit in the end. I have had mixed results with this concept, sometimes the stock returns back to the correct side of the strike and finishes with a profit on the naked, but I end up losing on the long side, especially when I pay too much due to the increase in premiums buying the long. I am about ready to try just closing the trade when the strike is hit and move on to a new position. What are your thoughts on this concept? I read your column regularly and use your stock picks as a base for my analysis. Have had very good results, with 90 to 100% successful trades. I usually end the month with 30 to 40 positions; CVTX being the worst situation so far. Regards, PM Hello PM, Thanks for the generous comments concerning the positions offered in the OIN. If more readers realized that the newsletter plays were simply candidates, and did their own due diligence before entering positions, they would have a much higher success rate in their trading. Regarding your request for information such as "specific ideas" and "additional wisdom," there are numerous articles on spread trading and premium-selling techniques, portfolio management strategies, and position exit/adjustment methods in the archives of the OIN's Education section. Literally hundreds of articles have been written on a variety of subjects by some very experienced traders and all of these narratives are available for you to review in your spare time. One other area of the newsletter that warrants regular attention is the Commentary section. Here you'll find timely analysis on the current condition of the financial markets including recent news and events as well as fundamental outlooks and directional forecasts for individual sectors and industry groups. All of these components are necessary to make good judgments about individual positions in your portfolio. Since all of the common strategies concerning exit/adjustment techniques are described on the web-site, I won't waste your time with a "cut-n-paste" reply regarding position management for naked puts. Rather I'll comment on your unique approach from my personal experience, which has become biased over time due to a seemingly endless number of conversations with OIN readers about limiting losses in option trading. The "recovery" method you described has its merits but as you mentioned, it will be successful only "if the [new] trend continues." If a reversal in the primary trend is the basis for using the technique, you must determine if there is a high probability of that outcome. A thorough review of the technical condition of the underlying issue should answer that question, but you must assess the data with an impartial attitude that embraces no existing prejudice or disposition. In truth, that's the way you should evaluate any position adjustment; each one should be reviewed and appraised as if it were a new trade. Of course, that can be very difficult to do as there is generally the "specter of loss" hanging over the play. In all cases, the success of the strategy will determine its usefulness and in light of your "mixed results," it appears the technique, while undoubtedly useful, will be a viable solution only in specific situations. Hope that helps! 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 23.48 22.29 AUG 20.00 0.35 0.35* 3.9% 12.1% AMLN 22.97 22.29 AUG 20.00 0.55 0.55* 4.1% 11.8% RIMM 27.28 24.61 AUG 22.50 0.35 0.35* 3.4% 11.7% LEXR 12.76 10.75 AUG 10.00 0.30 0.30* 3.4% 11.4% ALGN 13.38 11.13 AUG 10.00 0.35 0.35* 3.2% 10.1% OSIP 32.70 29.85 AUG 25.00 0.30 0.30* 2.6% 9.5% OVTI 40.03 40.13 AUG 35.00 0.45 0.45* 2.8% 8.6% BLUD 23.10 23.12 AUG 20.00 0.65 0.65* 2.9% 8.3% BOBJ 25.00 23.95 AUG 22.50 0.45 0.45* 3.0% 8.2% CYBX 23.72 26.71 AUG 20.00 0.60 0.60* 2.7% 8.2% KOSP 28.29 33.45 AUG 25.00 0.45 0.45* 2.7% 7.7% UNTD 29.39 30.04 AUG 25.00 0.40 0.40* 2.4% 7.5% MRVL 35.32 32.58 AUG 32.50 0.40 0.40* 2.7% 7.4% SIE 25.36 23.25 AUG 22.50 0.35 0.35* 2.3% 6.6% SNDK 54.98 47.90 AUG 42.50 0.70 0.70* 1.8% 6.5% UNTD 33.64 30.04 AUG 30.00 0.30 0.30* 2.2% 6.4% MSTR 43.68 34.90 AUG 35.00 0.75 0.65 1.6% 5.9% AMAT 19.30 17.88 AUG 17.50 0.25 0.25* 2.1% 5.9% NFLX 26.49 23.49 AUG 20.00 0.35 0.35* 1.5% 5.4% SHPGY 22.05 22.60 AUG 20.00 0.35 0.35* 1.9% 5.3% DRIV 23.05 21.06 AUG 17.50 0.30 0.30* 1.5% 5.3% TRN 21.93 22.94 AUG 20.00 0.35 0.35* 1.9% 5.3% SNDK 48.18 47.90 AUG 37.50 0.60 0.60* 1.4% 5.1% MRVL 38.10 32.58 AUG 32.50 0.60 0.60* 1.6% 5.1% CELG 32.18 33.51 AUG 25.00 0.30 0.30* 1.3% 4.8% MNST 26.15 21.26 AUG 22.50 0.30 -0.94 0.0% 0.0% ** CLZR 17.05 13.50 AUG 15.00 0.25 -1.25 0.0% 0.0% ** SOHU 40.90 30.46 AUG 35.00 1.20 -3.34 0.0% 0.0% ** * Stock price is above the sold striking price. Comments: Technology stocks retreated for a sixth-straight session Friday after chip designer Nvidia (NASDAQ:NVDA) warned about profit margins. As noted last week, the recent downward trend in share values was expected, however it doesn't make position management any easier. Plays closed earlier this week (** for smaller than published losses) include Sohu.com (NASDAQ:SOHU), Microstrategy (NASDAQ:MSTR), Candela (NASDAQ:CLZR), Lexar Media (NASDAQ:LEXR), and Monster Worldwide (NASDAQ:MNST). Positions on the "early exit" list include Applied Materials (NASDAQ:AMAT), United Online (NASDAQ:UNTD), Marvell Electronics (NASDAQ:MRVL), and Align Tech (NASDAQ:ALGN). Previously Closed Positions: Rowan Companies (NYSE:RDC) and BJ Services (NYSE:BJS), both of which are currently profitable. 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 RIMM 24.61 SEP 20.00 RUL UD 0.75 3521 19.25 42 2.8% 9.1% THER 13.93 SEP 12.50 UKT UV 0.55 10 11.95 42 3.3% 8.5% BLUD 23.12 SEP 22.50 QMQ UX 1.00 30 21.50 42 3.4% 7.5% SEPR 21.76 SEP 17.50 ERQ UW 0.50 592 17.00 42 2.1% 7.3% TKLC 13.73 SEP 12.50 KQ UV 0.45 2 12.05 42 2.7% 6.9% JDAS 13.90 SEP 12.50 QAH UV 0.40 7 12.10 42 2.4% 6.4% PDII 24.25 SEP 20.00 PKU UD 0.50 0 19.50 42 1.9% 6.1% 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). ***** RIMM - Research In Motion $24.61 *** Speculation Only! *** 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. RIMM shares slumped this week, despite the ongoing buyout rumors, after a U.S. court issued an injunction banning sales of its BlackBerry e-mail device, but also stayed the order pending an appeal. The announcement, which was expected in light of ongoing litigation with U.S.-based patent holding company NTP Inc., puts RIMM in a difficult position, however some analysts believe there is no reason for the company to settle the case soon because the disputed patents are being re-examined by the patent office. Traders who want a little excitement in their portfolio should consider this position. SEP-20.00 RUL UD LB=0.75 OI=3521 CB=19.25 DE=42 TY=2.8% MY=9.1% ***** THER - TheraSense $13.93 *** Diabetes Monitoring Device *** TheraSense (NASDAQ:THER) develops, manufactures and sells easy to use glucose monitoring systems that dramatically reduce the pain of testing for people with diabetes. The company began selling its first product, the FreeStyleR blood glucose monitoring system, in June 2000. The FreeStyle system has wide distribution in the U.S. through national retailers including Walgreens, Wal-Mart, CVS, Eckerd and Rite Aid. The FreeStyle system is also distributed in various European countries and in Japan. Shares of THER jumped in late July after the maker of a popular blood-glucose monitoring system posted a narrower-than-expected loss for its second quarter. The company also predicted a profit for the third quarter, due to rising demand for its FreeStyle monitor, and investors who wouldn't mind owning the stock near a basis of $12 should consider this position. SEP-12.50 UKT UV LB=0.55 OI=10 CB=11.95 DE=42 TY=3.3% MY=8.5% ***** BLUD - Immucor $23.12 *** What's Up BLUD? *** Immucor (NASDAQ:BLUD) develops, manufactures and sells a complete line of reagents and automated systems used mainly by hospitals, clinical laboratories and blood banks in a range of tests used to detect and identify certain properties of the cell and serum components of human blood prior to blood transfusion. Immucor also markets a complete family of automated instrumentation for all of their market segments. During the past year, the company resolved the remaining performance issues relating to its ABS2000 instrument and launched new software for the product. The company has recently signed an agreement with the University of Vermont to commercialize an in-vitro diagnostic test to measure platelet markers useful in anti-platelet pharmacological drug development and potentially to improve real-time treatment of cardiovascular disease. BLUD appears to be back in favor with investors after the issue rose sharply on Friday. There is no "public" news to explain the activity but the heavy-volume rally suggests further upside potential. Traders who agree with a bullish outlook can speculate conservatively on the future share value of BLUD with this position. SEP-22.50 QMQ UX LB=1.00 OI=30 CB=21.50 DE=42 TY=3.4% MY=7.5% ***** SEPR - Sepracor $21.76 *** Drug Stock Speculation! *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical firm dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The firm's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to current products. SEPR shares rallied in late July after the company announced it had narrowed its second-quarter loss on increasing revenues, due to strong product sales. The stock has consolidated since the news and now investors are awaiting the results of application for Estorra, a treatment for insomnia, which was submitted to the FDA earlier this year. Traders who think SEPR has upside potential with reasonable downside risk should consider this position. SEP-17.50 ERQ UW LB=0.50 OI=592 CB=17.00 DE=42 TY=2.1% MY=7.3% ***** TKLC - Tekelec $13.73 *** Telecom Sector Speculation *** Tekelec (NASDAQ:TKLC) is a leading developer of telecommunications signaling solutions, packet-telephony infrastructure, network monitoring technology, and value-added applications. Tekelec's innovative solutions are widely deployed in traditional and next generation wireline and wireless networks and contact centers worldwide. TKLC was recently upgraded by Deutsche Securities and Advest Inc., after the company reported sequential increases of 14% in revenue and 18% in orders. Tekelec also completed a refinancing of its convertible debt under terms that will lower annual pretax interest expense by about $5.5 million and yearly cash interest payments by about $1.5 million. Apparently, analysts believe the fundamental outlook for the company is favorable and investors who agree with that assessment should consider this position. SEP-12.50 KQ UV LB=0.45 OI=2 CB=12.05 DE=42 TY=2.7% MY=6.9% ***** JDAS - JDA Software $13.90 *** An Old Favorite! JDA Software Group (NASDAQ:JDAS) is a provider of sophisticated software solutions designed specifically to address the demand and supply chain management, business process, decision support, e-commerce, inventory optimization and collaborative planning and forecasting requirements of the retail industry and its suppliers. The company's solutions enable its customers to collect, manage, organize and analyze information throughout their retail enterprise, and to interact with suppliers and customers over the Internet at multiple levels within their organization. JDA's customers include retail, manufacturing and wholesale organizations and the company's software solutions business is enhanced and supported by its retail specific professional services. JDAS shares rallied in mid-July after the company reported second quarter earnings that exceeded analyst expectations due to higher software license sales than the previous quarter. Product revenue, which includes licenses and maintenance services, totaled $32.8 million, a 36% increase from the first quarter and slightly above last year. Traders who think the recovery will continue can establish a low risk cost basis in the issue with this position. SEP-12.50 QAH UV LB=0.40 OI=7 CB=12.10 DE=42 TY=2.4% MY=6.4% ***** PDII - PDI Incorporated $24.25 *** Rally Mode! *** PDI, Inc. (NASDAQ:PDII) is a commercial sales and marketing firm serving the biopharmaceutical and medical devices and diagnostics industries. The company creates and executes sales and marketing campaigns intended to improve the profitability of pharmaceutical or MD&D products. PDI does this by partnering with companies that own the intellectual property rights to the products and recognize PDI's ability to commercialize these products and maximize their sales performance. The company offers a variety of contracts for partner companies, from fee-for-service arrangements to equity investments in a product or company. Shares of PDI have been in "rally mode" since the company posted favorable results for the second quarter. Net total revenue for the quarter was 7% higher than net total revenue for the same period last year and operating income was $4.5 million, compared to an operating loss of $14.9 million for the quarter ended June 30, 2002. Investors seem to be pleased with the news and traders who believe the upside activity will continue should consider this position. SEP-20.00 PKU UD LB=0.50 OI=0 CB=19.50 DE=42 TY=1.9% MY=6.1% ***** ***************** 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 GFI 12.55 SEP 12.50 GFI UV 0.70 430 11.80 42 4.3% 8.9% IMCL 38.23 SEP 30.00 QCI UF 1.00 778 29.00 42 2.5% 8.4% AU 35.34 SEP 35.00 AU UG 1.80 220 33.20 42 3.9% 8.4% BDY 20.65 SEP 20.00 BDY UD 1.00 4 19.00 42 3.8% 8.4% CRAY 10.56 SEP 10.00 HQC UB 0.45 30 9.55 42 3.4% 7.9% PCLN 31.11 SEP 25.00 PUZ UE 0.75 63 24.25 42 2.2% 7.7% INVX 13.55 SEP 12.50 IVQ UV 0.50 5 12.00 42 3.0% 7.4% TRN 22.94 SEP 22.50 TRN UX 0.95 60 21.55 42 3.2% 7.1% SIL 17.99 SEP 17.50 SIL UW 0.60 3 16.90 42 2.6% 5.9% ATN 22.00 SEP 20.00 ATN UD 0.60 252 19.40 42 2.2% 5.9% SMMX 21.75 SEP 20.00 OFU UD 0.60 22 19.40 42 2.2% 5.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Blue-Chips Drift Higher During Lackluster Session! By Ray Cummins Industrial stocks ended on a bullish note Friday with McDonald's at the forefront of the upbeat activity after the fast-food giant announced that sales for July jumped over 4% amid brisk demand for new products. The Dow Average climbed 64 points to finish at 9,191 with solid performances coming from Wal-Mart (NYSE:WMT), Home Depot (NYSE:HD), International Paper (NYSE:IP) and computer-maker Hewlett-Packard (NYSE:HPQ). The technology-laden NASDAQ Composite continued its losing ways, down 8 points to 1,644 on weakness in semiconductor shares. The broader Standard & Poor's 500 Index added 3 points to finish at 977 as investors shopped for bargains in restaurants, footwear, healthcare facilities, wireless services, gold, banks, broadcasting & cable TV shares. Trading was moderate, with about 1.1 billion shares changing hands on the Big Board and almost 1.3 billion shares traded on the NASDAQ. Advancers outpaced decliners 3 to 2 on the NYSE but on the technology exchange, losers exceeded winners by a small margin. Treasuries were higher with the price of the benchmark new 10-year note up one tick, sending its yield down to 4.28%. ***************** 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 30.09 AUG 22 25 0.25 24.75 $0.25 Open MER 49.25 51.76 AUG 42 45 0.25 44.75 $0.25 Open EBAY 113.07 100.50 AUG 95 100 0.50 99.50 $0.50 Open GENZ 44.02 43.38 AUG 35 37 0.20 37.30 $0.20 Open MEDI 39.01 36.05 AUG 32 35 0.25 34.75 $0.25 Open SYMC 45.65 46.75 AUG 35 40 0.55 39.45 $0.55 Open CCMP 57.61 59.09 AUG 45 50 0.55 49.45 $0.55 Open GILD 66.52 62.25 AUG 55 60 0.55 59.45 $0.55 Open SII 37.87 36.89 AUG 32 35 0.25 34.75 $0.25 Open AMZN 41.60 39.15 AUG 35 37 0.25 37.25 $0.25 Open NTES 42.07 44.79 AUG 30 35 0.50 34.50 $0.50 Open ADI 39.51 36.03 SEP 30 35 0.65 34.35 $0.65 Open BOW 38.57 39.44 SEP 30 35 0.60 34.40 $0.60 Open MXIM 39.11 37.21 SEP 30 35 0.65 34.35 $0.65 Open IMCL 39.86 38.23 AUG 30 32 0.00 32.50 $0.00 No Play LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Positions in Yahoo! (NASDAQ:YHOO) and Garmin (NASDAQ:GRMN) have been closed to limit potential losses. Spreads on the "early exit" list include eBay (NASDAQ:EBAY) and MedImmune (NASDAQ:MEDI). Some stocks to "watch" closely are Amazon.com (NASDAQ:AMZN) and Analog Devices (NYSE:ADI). There was no play initiated in ImClone as the $32.50 strike was posted in error by the OCC/ISE. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ACS 45.06 44.12 AUG 55 50 0.65 50.65 $0.65 Open BBBY 38.59 39.85 AUG 45 42 0.35 42.85 $0.35 Open ICUI 27.90 25.15 AUG 35 30 0.60 30.60 $0.60 Open PG 88.56 89.08 AUG 95 90 1.25 91.25 $1.25 Open BGEN 40.05 36.77 AUG 47 45 0.30 45.30 $0.30 Open NVLS 35.70 33.32 AUG 42 40 0.30 40.30 $0.30 Open BSTE 46.06 42.08 AUG 55 50 0.60 50.60 $0.60 Open BVF 41.60 39.65 AUG 50 45 0.50 45.50 $0.50 Open FNM 62.35 63.82 AUG 70 65 0.50 65.50 $0.50 Open INTU 42.86 42.30 SEP 50 47 0.30 47.80 $0.30 Open JPM 33.36 32.99 AUG 37 35 0.25 35.25 $0.25 Open CI 44.49 44.48 AUG 55 50 0.30 50.30 $0.30 No Play BRL 59.25 65.03 AUG 70 65 0.00 65.00 $0.00 No Play LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Federal National Mortgage (NYSE:FNM) is on the "early-exit" list. 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 29.90 AUG 25 30 4.20 29.20 0.70 Open? EBAY 110.02 100.50 AUG 95 100 4.60 99.60 0.40 Open? RGLD 23.94 23.36 AUG 20 22 2.20 22.20 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss eBay (NASDAQ:EBAY) and Tech Data (NASDAQ:TECD) are on the "early exit" list. Conservative traders should consider closing these positions on further downside movement. Royal Gold (NASDAQ:RGLD) has recovered with the recent rally in gold prices and the bullish trend appears to be intact. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status LXK 73.50 61.14 AUG 85 80 4.80 80.20 0.20 No Play BRCM 22.76 20.24 AUG 27 25 2.30 25.20 0.20 Open KBH 55.84 58.88 AUG 65 60 4.60 60.40 0.40 Open? LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss KB Homes (NYSE:KBH) is on the "early exit" list. 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 SHPGY 22.77 22.60 JAN 30 17 0.00 0.00 Open AVCT 27.83 26.31 SEP 30 25 (0.10) 0.00 Open ITT Educational Services (NYSE:ESI), which has previously been closed, 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 GP 19.25 21.64 OCT-20C AUG-20C 0.90 1.00 Open MSFT 27.31 25.58 JAN-27C AUG-27C 1.40 1.50 Open NE 34.86 34.57 DEC-37C AUG-37C 1.40 1.40 Open ING 19.07 19.62 JAN-20C AUG-20C 0.90 1.00 Open SPW 44.65 45.63 DEC-47C AUG-47C 2.50 2.50 Open NSM 22.77 21.90 JAN-20C SEP-25C 3.90 3.75 Open Bullish traders in the Georgia-Pacific (NYSE:GP) position had a great opportunity this week to transition to a diagonal spread (OCT-20C/SEP-22C). The speculative play in Netscreen Technology (NASDAQ:NSCN) has previously 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 OVER 23.68 22.20 SEP 25 22 1.50 1.60 Open SNE 30.74 29.72 OCT 30 30 3.75 3.60 Open 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), which will likely be profitable, Dollar General (NYSE:DG), and Boston Scientific (NYSE:BSX) have previously 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. ***** BBY - Best Buy Company $47.90 *** Hot Sector! *** Best Buy Company (NYSE:BBY) is specialty retailer of consumer electronics, personal computers, entertainment software and appliances. Best Buy operates retail stores and commercial Websites under the brand names Best Buy, Media Play, On Cue, Sam Goody, Suncoast, Magnolia Hi-Fi and Future Shop. The firm operates three segments: Best Buy, Musicland and International. Best Buy is mainly a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products. Their Musicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and other entertainment-related products. The International segment consists of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada. BBY - Best Buy Company $47.90 PLAY (conservative - bullish/credit spread): BUY PUT SEP-40.00 BBY-UH OI=5450 ASK=$0.45 SELL PUT SEP-42.50 BBY-UV OI=6545 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$42.20 ***** JCI - Johnson Controls $96.49 *** Safety Stock! *** Johnson Controls (NYSE:JCI) is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems, and batteries. For non-residential facilities, Johnson Controls also provides building control systems and services, energy management and integrated facility management. Johnson Controls conducts its business in two operating segments: Controls Group and Automotive Systems Group. The Controls Group is a global supplier of control systems, services and unique integrated facility management to the non-residential buildings market. The Automotive Systems Group makes automotive interior systems for OEMs (original equipment manufacturers) and automotive batteries for the replacement and original equipment markets. JCI - Johnson Controls $96.49 PLAY (conservative - bullish/credit spread): BUY PUT SEP-85.00 JCI-UQ OI=25 ASK=$0.60 SELL PUT SEP-90.00 JCI-UR OI=67 BID=$1.25 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$89.35 ***** MBI - MBIA Incorporated $53.13 *** New Trading Range? *** MBIA Incorporated (NYSE:MBI) is engaged in providing financial guarantee insurance, investment management services and municipal services to public finance clients and financial institutions on a global basis. Financial guarantee insurance provides customers an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The firm conducts its financial guarantee business through its wholly owned subsidiary, MBIA Insurance, which is the successor to the business of the Municipal Bond Insurance Association that began writing financial guarantees for municipal bonds in 1974. MBIA is the parent of MBIA Insurance of Illinois and Capital Markets Assurance Corporation, both financial guarantee companies that were acquired by MBIA Corp. MBIA also owns MBIA Assurance S.A., a French insurance company, which writes financial guarantee insurance in the countries of the European Community. MBI - MBIA Incorporated $53.13 PLAY (conservative - bullish/credit spread): BUY PUT SEP-45.00 MBI-UI OI=381 ASK=$0.40 SELL PUT SEP-50.00 MBI-UJ OI=1363 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$49.35 ***** WMT - Wal-Mart $57.77 *** Rallying Retailer! *** With annual sales of $218 billion, Wal-Mart Stores (NYSE:WMT) operates more than 2,800 discount stores, Super-Centers and Neighborhood Markets, and more than 515 SAM'S CLUBS in the U.S. Internationally, the firm operates over 1,200 units and employs 1.3 million associates worldwide. Last year, Wal-Mart associates raised and contributed $196 million to support communities and local non-profit organizations. FORTUNE magazine recently named Wal-Mart the third "most admired" company in America and one of the 100 best companies to work for in the U.S. According to a recent study, Americans say Wal-Mart is the company they think of first in supporting local causes and issues, and that is one of the main reasons people shop at Wal-Mart. WMT - Wal-Mart $57.77 PLAY (conservative - bullish/credit spread): BUY PUT SEP-50.00 WMT-UJ OI=15791 ASK=$0.25 SELL PUT SEP-55.00 WMT-UK OI=10984 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$54.45 ***** DB - Deutsche Bank $59.64 *** Consolidation Underway *** Deutsche Bank (NYSE:DB) ranks among the world leaders in corporate banking and securities, transaction banking, asset management, and private wealth management, and also has a significant private and business banking franchise in Germany and other selected countries in Continental Europe. With roughly euro 802 billion in assets and approximately 70,900 employees, Deutsche Bank offers its 13 million clients unparalleled financial services in 76 countries throughout the world. The Bank aspires to be a leading global provider of integrated financial solutions for demanding clients as well as the pre-eminent bank in Germany, generating exceptional value for its shareholders and customers. DB - Deutsche Bank $59.64 PLAY (conservative - bearish/credit spread): BUY CALL SEP-70.00 DB-IN OI=41 ASK=$0.25 SELL CALL SEP-65.00 DB-IM OI=27 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$65.55 ***** ESRX - Express Scripts $62.23 *** Sector Slump! *** Express Scripts (NASDAQ:ESRX) is one of the largest pharmacy benefit management companies in North America. Express Scripts provides integrated PBM services, including network pharmacy claims processing, mail pharmacy services, benefit design consultation, drug utilization review, formulary management, disease management, medical and drug data analysis services and medical information management services. The firm also provides distribution services for specialty pharmaceuticals through its Specialty Distribution subsidiary. ESRX - Express Scripts $62.23 PLAY (speculative - bearish/credit spread): BUY CALL SEP-75.00 XTQ-IO OI=280 ASK=$0.50 SELL CALL SEP-70.00 XTQ-IN OI=3667 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$70.55 ************* 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. ***** MWD - Morgan Stanley $48.54 *** Bullish Broker! *** Morgan Stanley (NYSE:MWD) is a preeminent global financial services company and a market leader in securities, asset management, and credit services. The company's top-ranked research, along with world class product origination, asset management and other extensive resources create a unique combination of capabilities that provide both individual and institutional clients with access to the most comprehensive array of high quality products and services in the financial services industry today. The company has offices in New York, London, Tokyo, Hong Kong and other principal financial centers around the world and has 475 branch offices serving individual investors throughout the United States. MWD - Morgan Stanley $48.54 PLAY (conservative - bullish/debit spread): BUY CALL SEP-40.00 MWD-IH OI=29 ASK=$8.90 SELL CALL SEP-45.00 MWD-II OI=1619 BID=$4.40 INITIAL NET-DEBIT TARGET=$4.40-$4.45 POTENTIAL PROFIT(max)=12% B/E=$44.45 **************** 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. ***** BDY - Bradley Pharmaceuticals $20.65 *** Technicals Only! *** Bradley Pharmaceuticals (NYSE:BDY), along with its subsidiaries, markets over-the-counter and prescription pharmaceutical and health related products. The company's product lines include dermatological brands, marketed by its wholly owned subsidiary, Doak Dermatologics, and nutritional, respiratory and internal medicine brands marketed by its Kenwood Therapeutics division. Bradley is actively promoting products in dermatology and gastroenterology, and, to a lesser extent, nutritional markets. All of its product lines are made and supplied by independent contractors that operate under the company's quality control standards. Its products are marketed primarily to wholesalers, which distribute the products to retail outlets and healthcare institutions throughout the United States and international markets. BDY - Bradley Pharmaceuticals $20.65 PLAY (speculative - bullish/calendar spread): BUY CALL JAN-22.50 BDY-AX OI=454 ASK=$1.85 SELL CALL SEP-22.50 BDY-IX OI=2 BID=$0.50 INITIAL NET DEBIT TARGET=$1.25-$1.30 INITIAL TARGET PROFIT=$0.55-$0.80 *********************** 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. ***** AMTD - Ameritrade $10.00 *** Cheap Speculation! *** Ameritrade Holding Corporation (NASDAQ:AMTD) is a provider of securities brokerage services and technology-based financial services to retail investors and business partners, primarily through the Internet. The firm also provides trading execution and clearing services for its own broker-dealer operations and for unaffiliated broker-dealers through its major subsidiaries, Ameritrade and iClearing LLC. The company's new structure has two principal business units, a Private Client Division and an Institutional Client Division. The Private Client Division provides brokerage services directly to individual investors. The Institutional Client Division provides clearing services, brokerage capabilities and advisor tools as co-branded or private-label products to partners and their customers. AMTD - Ameritrade $10.00 PLAY (very speculative - neutral/debit straddle): BUY CALL SEP-10.00 TQA-IB OI=1516 ASK=$0.70 BUY PUT SEP-10.00 TQA-UB OI=268 ASK=$0.80 INITIAL NET-DEBIT TARGET=$1.40-$1.45 INITIAL TARGET PROFIT=$0.45-$0.75 ***** TRI - Triad Hospitals $30.50 *** A Reader's Request *** Triad Hospitals (NYSE:TRI) provides healthcare services through hospitals and ambulatory surgery centers that it owns and manages in small cities and urban markets, primarily in the southern, mid-western and western United States. The company's hospital facilities include approximately 50 general acute care hospitals and 15 ambulatory surgery centers located in Alabama, Arizona, Arkansas, California, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nevada, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, Texas and West Virginia. Included with these facilities is one hospital operated through a joint venture, one hospital under construction and two hospitals that are leased to third parties. TRI - Triad Hospitals $30.50 PLAY (speculative - neutral/debit straddle): BUY CALL NOV-30.00 TRI-KF OI=405 ASK=$2.75 BUY PUT NOV-30.00 TRI-WF OI=332 ASK=$2.10 INITIAL NET-DEBIT TARGET=$4.65-$4.75 INITIAL TARGET PROFIT=$1.85-$2.10 ***** ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... 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