The Option Investor Newsletter Sunday 08-17-2003 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: Breakout Coming? Futures Market: Skeleton Crew Index Trader Wrap: DISRUPTION Editor's Plays: Trend Change Market Sentiment: No Fear Ask the Analyst: Betting on or against Treasuries with options 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 8-15 WE 8-08 WE 8-01 WE 7-25 DOW 9321.69 +130.60 9191.09 + 37.12 9153.97 -130.60 + 96.42 Nasdaq 1702.01 + 57.98 1644.03 - 71.59 1715.62 - 15.08 + 22.20 S&P-100 498.30 + 4.50 493.80 + 0.16 493.64 - 9.30 + 1.44 S&P-500 990.67 + 13.08 977.59 - 2.56 980.15 - 18.53 + 5.36 W5000 9547.51 +154.78 9392.73 - 61.43 9454.16 -145.20 + 52.70 RUT 471.92 + 17.98 453.94 - 14.14 468.08 - 0.80 + 4.12 TRAN 2623.66 + 44.63 2579.03 - 16.88 2595.91 - 19.88 + 39.50 VIX 20.20 - 1.09 21.29 - 1.49 22.78 + 2.84 - 1.42 VXN 29.21 - 2.82 32.03 - 0.45 32.48 + 2.44 - 3.37 TRIN 1.01 0.87 1.08 0.67 Put/Call 0.53 0.81 0.91 0.67 Avg Highs 338 189 462 365 Avg Lows 62 86 72 31 ****************************************************************** Breakout Coming? by Jim Brown Despite the extremely low volume of only 1.5 billion shares across all markets the Dow ended within two points of a new 52-week closing high. The previous high was 9323 on June-17th and that level could be history if the current trend continues on Monday. Could this be the breakout the bulls are waiting for? The Dow has traded over 9300 on eight days since the 9323 close nearly two months ago. It has moved up, down and sideways for much of those two months but is finally showing an increasing amount of resilience. Considering all the negative factors we have seen this week this is an amazing feat. Current support has risen to 9285 and short of a strong shift in sentiment we could see a breakout next week. That will not be an easy task and the deck is still stacked against it but the bulls appear to have mastered the art of climbing the wall of worry. They will have to pass their greatest test next week. Friday had limited economic hurdles for the market with the biggest challenge just getting open and staying open. The CPI came in at +0.2% as expected with the core rate +0.2% also. The energy component rose +0.4% and helped hold the index up. Medical care also rose +0.5% and continued its +3.8% gain over the last 12 months. Core inflation has held to +1.5% for the last four months and suggests both deflation and inflation risks have stabilized. Helping encourage investors was a jump in Industrial Production of +0.5% and well over estimates of +0.1%. All major components reported increases but with Capacity Utilization at 74.5 it was only .2 above the 20-year lows we have seen over the prior two months. This was good news but not as good as most traders hoped. The whisper number was 75.0 and we did not come close. This suggests the economy is continuing to improve but at a snails pace that may not create a 4Q recovery. The factor which will help the most is the low inventory levels which will mean a strong ramp in production should any real demand appear. Going against the positive CPI and Industrial Production numbers was the NY Empire State Manufacturing Survey. The headline number fell to only 10 from 20.8 in July and 27.6 in June. This plummeting indicator was ignored by the markets with the power problems taking the headlines. New Orders fell to 12.5 from 15.1 but the employment component rose to zero from -9.5. The six-month outlook rose to 59.5 from 51.8. We could be seeing some summer decline but the improving jobs and outlook components could be signs of a rebound for the Fall. Unfortunately the next Empire Survey will likely show the impact of the blackout and could easily drop into negative territory. This could also happen with the NY NAPM. Just when we were beginning to get clean data we will now have to wait for two more months for these reports to rebound from what could be a serious dip. Even if the reports were going to be negative for the current month they will be ignored as "blackout" reports. This will also be seen in the Jobs Report for August as this was the survey week. Jobless Claims will be impacted for next Thursday and any low number will be ignored. The Michigan Sentiment report was rescheduled for Tuesday from Friday as a result of the blackout. Now, the question here is will the numbers be as of Thursday or as of Monday? Obviously any survey taken over the weekend would show a dramatic drop in sentiment and even if Tuesday's numbers are tame the revision in two weeks will be negative. One positive result of the blackout was the flight to quality and into bonds. Yields fell back below the 52-week highs from Thursday but still remained at extreme levels. The 10-year closed at 4.528 after reaching a low of 4.484 intraday. Once the power problems are over and that should be before Monday, we could see the bond flight return. According to the bond junkies the 10/30 year instruments saw their worst week in recent history with the yields on the 10-year jumping from the prior Friday's lows of 4.19% to Thursday's high of 4.668%. That spread is nearly unheard of in the bond markets in a single week. However, contrary to the market reaction when yields soared to their previous high on August 1st the Dow closed back at its highs and has apparently shaken off the bond fears. The most amazing component of the recent market has been the performance of the Russell-2000. Since the 450 low on August 7th it has been moving vertically until it hit the downtrend resistance on Friday. Considering the light volume we cannot make any specific analysis from the halt at resistance but this index bears watching for next week. If it can break out of the three year down trend then we could be off to the races. I mentioned the Russell last Sunday when it was at 453 and at the bottom of the initial August dip. I cautioned that should 450 fail we could test real support at 440. The instant rebound from 450 was encouraging and showed that funds were putting money back into small caps and the bond fears were easing. Russell-2000 Chart Almost as impressive as the Russell but on a different scale is the Dow which has completely reversed from the test of 9000 on August 6th. The Dow has recovered to close within two points of a new closing high and has done so under difficult circumstances. For the last two days Dow 9285 has held like a rock and could be providing a spring board for next week. Still we could just as easily slip back into out two month trading range. Dow Chart The Nasdaq is showing the least amount of excitement of the major indexes. The Nasdaq closed right on 1700 for the second consecutive day and it appears the bounce from the August lows could be running out of steam. The Nasdaq is about 30 points below its downtrend resistance if you include the artificial spike on July-31st. If you factor that out then 1705 is the current resistance and that is where we stopped on Friday. The Dell earnings did little to excite tech buyers but then they had much more on their minds on Friday. Dell did close up +95 cents on the news. Dell was the only major Nasdaq tech component in the green. Nasdaq Chart Also showing more weakness than the Dow is the S&P, which has been moving down in an orderly fashion from its June highs. The S&P has resistance at 992.50 and then again at 1000. The broader market is showing less resilience than the narrow Dow. The Dow has been buoyed by strong gains in MMM, UTX, WMT, MCD, AA and T. The composition of the Dow makes it more responsive to cyclical strengths and that is what we are seeing now. S&P Chart – daily There was not much happening on Friday other than the endless news stories on the blackout and economic factors for next week are slim. That makes this commentary brief today. There are not many ways to say we are at strong resistance on the Dow and very close to a breakout but other indexes are not confirming. With only 562 million shares trading on the NYSE and 704 million on the Nasdaq you cannot draw any real conclusions from Friday's trading. Next week is very slim economically with reports on Housing Starts and the rescheduled Michigan Sentiment not until Tuesday. Wednesday is blank and Thursday only has Jobless, Philly Fed and Leading Indicators. Friday is also blank and that allows the markets to wander on their own for most of the week. Without being too repetitive we are at resistance and poised to either break out or down very easily. The Dow could actually move to a new high without the Nasdaq and S&P following and that would set up some even stronger divergence than we saw last week. We have the perfect storm setting up. The blackout should be history by Monday. The buying in bonds on Friday as a flight to quality could see a reversal on Monday once the power problem is resolved. Traders not able to make it in on Friday should be back at work. There are no economic reports to confuse the issue. Options have expired with little market reaction and the residue of position squaring should provide enough volatility at the open to show where true resistance and support levels are hiding. The numbers at Friday's close are bogus due to the extremely low volume. There is a strong feeling among traders that we will see a big move next week. The only question is which way? Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Skeleton Crew Jonathan Levinson That was the extent of trading during the last session, a summer triple-witching Friday compounded by widespread power outages keeping traders from their screens and preventing some trades from being filled. It was such a listless session that, as Jeff Bailey pointed out, it would take a great leap of faith to attach any significance to anything that occurred during Friday's trading. Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index The US Dollar Index moved higher throughout Friday's session, peaking at 96.70 for a lower high but nevertheless printing a bullish engulfing candle for the week. Daily chart of December gold December gold got clocked on Friday on light volume of 343 contracts, but the failure at the upper trendline fits a near term bearish scenario. Surprisingly, gold was higher on the week, printing the second of two white soldiers, despite the dollar strength. This is a clear and rare divergence, with the dollar rising but gold denominated in dollars rising as well. For the day, the CRB dropped .85 to 235.67 on weakness in frozen concentrated OJ futures, silver and heating oil. Daily chart of the ten year note yield Treasuries had an exciting week, with yields setting new year highs. The ten year note yield (TNX) broke back above the rising trendline, and despite a spike below it on Friday, managed to close above it at 4.528%, down 5.8 basis points on the day. The weekly print was the second of two white soldiers, and despite the strength in treasuries on Friday, the trend in yields remains higher until proven otherwise. Note that the Fed added a huge 20B weekend repo following the widespread power outages Thursday night, and the 12B net addition against Thursday's expiring 8B overnight repo served only to muddy the waters further. This sum matures on Monday, and if not refunded, will cause corresponding drain in liquidity. Daily NQ candles Some bad data during Friday's confusion has caused a downside spike on the daily candle charts, but it is not significant to our analysis. Friday was a very narrow range, light volume day. Thankfully, price did not get very far, or we'd be faced with the prospect of analyzing the impact of a thin, low-participation day on our charts and oscillators. Friday moved sideways in most respects. The 10 day cycle oscillators moved closer to buy signals on the NQ, but the formations we've been tracking were not tested in either direction. For the week, the NQ printed a bullish harami, a positive inside week following last week's downside breakout. 30 minute 20 day chart of the NQ The sell signals commencing at Thursday's close didn't get much traction, as price drifted higher through Friday's trading. The lower ascending trendline on the 30 minute candle bear flag supported the drops, and while there was no breakdown, there was no significant bounce either, with price inching up along the support line. Again, little of significance occurred with most traders absent from the market, and we'll look to next week for clues as to the fate of this potentially bearish rise in price. Daily ES candles Once again, bad data has corrupted the Friday's print with a reported downside spike to 973 that never occurred. The oscillators advanced along the course of their buy signals as price moved sideways within the daily candle bull flag formation. For the week the ES printed an upside bullish engulfing, creating a bullish morning star formation. 20 day 30 minute chart of the ES The sell signals gained little traction on the ES 30 minute chart as price walked higher up the lower ascending trendline of the bear flag. While the weekly print and the pattern on the daily candle chart are all bullish, the 30 minute chart continues to suggest that the rally off the lows in the 960 area is due for a correction. I believe that the bottom to that correction will be determinative as to whether we've seen the year highs or not. For the moment, the price advance within its ominous bear flag continues. Daily YM candles The YM completed a positive week for a bullish morning star formation. It moved sideways for most of Friday, finishing higher by 44 points to 9322. The sideways move caused the daily candle body to close on the ascending trendline, but I ascribe no significance to it either way. The daily uptrend remains substantially intact, the oscillators still on buy signals, and volume was too light in any event. The Dow futures continue to trade as the most bullish of the three equity indices, and it remains kissing distance from its rally highs. 20 day 30 minute chart of the YM The story is the same on the YM 30 minute candles, as Friday's trade saw the contract walk up the lower flag trendline against the oscillator sell signals still in progress but in danger of reversing early. The week showed us a dramatic downside reversal in treasuries off their corrective bounce, while the US Dollar Index and gold marched higher side-by-side. I expect their opposing trends to reassert themselves soon enough, but in the meantime, it made for some peculiar sessions. The outlook for equities remains hazy, as we await the bear flag breakdowns on the 30 minute charts within their potential bull flag formations on the dailies. The Dow futures continue to outperform to the upside, and the Nasdaq to the downside, with the Dow within easy breakout territory. With current events and outside "noise" approaching crescendo levels, including terrorist captures, the largest power outage in US history, declines verging on crashes in debt markets, gold and the Dow futures near technical breakout levels, next week is lined up to be an exciting one. More importantly, however, we can hope for some insight into what are becoming increasingly contradictory intermarket relationships. We can expect some opening volatility on Monday associated with the settlement of op-ex week. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** DISRUPTION By Leigh Stevens lstevens@OptionInvestor.com Stocks ended on a slight up note Friday after a day of very light trading in the wake of widespread power outages across the Northeast. The Dow closed up 11.13 points to 9321.5 - biggest gainers were Hewlett-Packard, Home Depot and General Electric. Trading volume was thin -- only 560.6 million shares traded on the NYSE. The Nasdaq Composite (COMPX) was up a scant 1.7 points to 1,702 and the S&P 500 (SPX) Index was up a fraction of a point (.16) to 990.67. Without options expiration on Friday, we might have seen the powers that be closing more markets. And power was the problem of course. Economic impact? - probably not more than a big East coast blizzard that shut down things for a day or two. The drama of all those New Yorkers walking down 5th Ave for a change masked the boost that some good economic data might have provided otherwise. By the way, having been a city rat for umpteen years in New York, I can say for certain that it's no fun there when the power goes off, especially in August. Without air conditioning, its brutal cause it just doesn't cool down that much at night - I used to be able to say, unlike say England. But with recent highs in Paris and London hitting 100 degrees - well, time to move to Iceland. THE BOTTOM LINE - A sideways move after a sizable advance is neither bullish or bearish although traders tend to take it one way or the other. In technical analysis terms, the benefit of which way next is said to go to an eventual continuation of the preceding trend. A sideways narrow range trend is assumed to be a consolidation - as in a pattern of "consolidating" prior gains. I think this is the case here, but the economic data is tough to call. An example of this is the gain in U.S. Industrial Production announced Friday at up a half percent, stronger than the expected 0.2%. Capacity utilization increased to 74.5%. However, as Jeff (Bailey) rightly pointed out in his intraday notes, this gain may not have much impact on hiring back of workers in the industrial/manufacturing sectors. This relates to recent economic data also indicating that the average workweek is down to 33.6 hours, below a 40-hour workweek. Hence, what companies are going to do on a pickup of orders is increase hours of existing employees, not hire new ones. You can see examples of the underlying economics in the release of Applied Materials (AMAT) earnings last week - while their earnings where a penny better than expected, revenues were down 25% from a year ago. How do they increase earnings on much less revenue? Cut costs and the biggest cost cutting measure is to shed workers. The gains in productivity means that investment is made in things that allow fewer workers to turn out more goods. Bottom line - Q3 job growth is needed to kick the economy into second (third?) gear and fuel a next up leg. Otherwise, the consolidation underway will turn out to be the building of a top. Meanwhile, options traders can continue to trade a tight range, by waiting for prices to get to extremes before entering a new position that is long calls or puts. Otherwise, of course, sell premium, as it continues to slip slide away as prices fail to break out the box or relatively tight range. LAST WEEK - The Fed heads decided to keep its funds target unchanged at 1.0%, saying that low inflation, stability in spending and still weak labor markets were calling for a still-accommodative monetary policy. In the Federal Open Market Committee release, the FMOC indicated that it believes upside and downside risks to the sustainable growth is EQUAL (my caps) for the next few quarters. They also said that the probability of deflation (a downward price spiral) is greater than an inflationary rise, from an already low level. In Fed speak the Committee noted "that its policy of accommodation can be maintained for a considerable period". In other words, we're still in a mess for some time to come, but we hope that we can muddle through. June business inventories rose slightly - 0.1%. Sales in June rose a substantial 1.1%, which put the inventory-to-sales ratio, down to 1.38 months from May's 1.4 months. This is how long it would take to work down inventories to zero. Businesses are keeping to a tight production schedule with substantial production capacity in reserve. Retail sales rose 1.4% in July as the consumer continued to spend. Makes you wonder if spending is a way to stave off anxiety about not having a paycheck down the road. So, how is the consumer feeling these days? - well, the University of Michigan release of its survey of consumer "sentiment" is put off to Tuesday, thanks to lights out in Michigan. By the way, July sales strength was said to be broad-based. Building materials and garden supplies rose 1.3%, electronics sales were up by 1.2%, general merchandise was up 1.1% and gasoline station intake gained 1.6%, reflecting a rise in pump prices - tell me about it! In troubled California, where I had to move from troubled New York, premium was running close to 2.20 a gallon. Of course, I have to drive a high performance car - time for that new Toyota hybrid? FRIDAY'S TRADING & ECONOMIC NEWS - I mentioned already release of U.S. industrial output in July - the increase taken as further evidence that manufacturing is picking up. However, a very warm July resulted in total electric utility output increasing by 3.9%, after a 3.3% drop in June. This sector lifted overall industrial production to an unexpectedly large gain. Peak electric demand is seasonal - cooler fall weather is near, which will cause less use. Separately, fewer U.S. banks tightened business-loan standards over the past three months and banks had greater demand for consumer and mortgage loans, the Federal Reserve said. Consumer prices rose by a slight 0.2% in July for the second month in a row, according to the Labor Department on Friday. The latest CPI (Consumer Price Index), the most closely watched inflation barometer, suggested prices are fairly stable as they were in the June report. The Institute for Supply Management said manufacturing activity grew for the first time in five months in July. The purchasing managers index rose to 51.8 from a previous reading of 49.8 in June. Readings above 50 indicate expansion of activity and prices in the manufacturing sector, while readings under 50 are defined as evidence of contraction. Also, the New York Federal Reserve said its manufacturing survey there has shown growing activity for the past several months. In the most recent index reading, the Empire State Manufacturing Survey slowed to 10 in August, down from 20.8 in July. Any number above zero means more manufacturers say business conditions are improving than say they are worsening. As noted elsewhere, recent reports suggest that total U.S. manufacturing has stabilized and may be recovering. Within the industrial production report, it was indicated that manufacturing output rose 0.2%, after a revised 0.3% rise in June. Auto production for example, rose for the second straight month. The mining industry experienced a July decline, as production fell 0.4% after a 1.2% rise in June. Price related? - Gold demand may have fallen due to higher prices. Mining capacity use sank to a level of 84.6% in July from 84.9% the month before. Less supply could also be one reason that the Philly Gold & Silver Index (XAU) has finally re-tested its prior peak? See chart - On XAU - if the Index gets above 89, a potential upside objective is to around 110 based on the breakout above the symmetrical triangle. Related to earnings, Dell Computer (DELL) rallied some 3% after posting a Q2 profit late Thursday that matched Street consensus estimates. Looking ahead, Dell said it expects to report a Q3 profit that's in line with analysts' current estimates. This may have been a factor in the firm close for Nasdaq for the week. More on that below - OTHER MARKETS - Treasury bonds closed lower. Often there will be "safe-haven" buyers coming in, in reaction to a crisis like the power outage. However, early on government officials noted that there was no terrorism link to the shutdown. The 10-year Treasury note was down a substantial 18/32 to yield 4.53%. Yields over 4.5% offer competition to equities in that this is a guaranteed return, versus further upside appreciation potential in stocks - who knows what that is this year with the market already up over 20% from the low in the S&P. A "normal" year historically will see appreciation of 10-15%. Of course, year to date, which is a more fair comparison, has the benchmark SPX up something closer to 8%. In the currency market, the U.S. dollar was steady against its major trading partners. The greenback was up 0.1% to 119.15 yen. The Euro lost 0.2% to close in New York trading at $1.1252. INDEX OUTLOOKS – SOX ROCKS - If you want to know why the Nasdaq, Nas 100 and QQQ rebounded, I see it as the influence of the chip stocks. To revisit the Semiconductor stock index or SOX chart, see the chart below. The Index rebounded back above its 50-day average, which was a near-term plus. I thought that the SOX might move down to retest the up trendline dating from February and closer to its 200-day average. It may still, but last week, the Index caught support offered by a trendline off the top as noted. The even more key factor is that the recent reaction low occurred above the prior downswing bottom. Lower (reaction) lows and higher highs - that's amori - no, that's an UPtrend. Of course, yet to come is a higher high above 400. S&P 500 (SPX) - Hourly chart: The benchmark S&P 500 (SPX) had to clear the two trendlines that intersect in the 992-995 area to suggest a re-emerging uptrend. Then of course there is anticipated resistance at 1000 - this is more psychological than based on prior highs and chart considerations in my estimation. Based on prior highs, resistance can be assumed to come in at 1005, then 1015. Paraphrasing the way that Secretary Rumsfield asks himself questions that he then answers: "would I love to buy puts if SPX was at 1015? - indeed I would." Market psychology is not something I under-estimate as I pay attention to how bullish or bearish ("sentiment") traders get as a contrary indicator. I still figure that a breakout move is not going to happen yet and I base this partially on the fact that my equities call to put ratio shot up on Friday. Yes, I know it was options expiration Friday but still, I figure that all that call activity suggests a bit too much bullishness around. On balance, I would rather own puts or be short SPX futures on a further advance, playing for another downturn ahead and the expectation of still being locked into a trading range S&P 100 Index (OEX) – Daily and Hourly charts: Speaking of my principal sentiment indicator, it is found below, under the S&P 100 (OEX) price chart. No doubt some of the unwinding of equities options was related to buying back covered calls and the like, there was this jump in CBOE daily call volume relative to puts. Anyway, it puts this indicator up fairly sharply relative to where it's been. I think the bulls are not worried or not worried enough. Being a contrarian here I still worry a good deal relative to the few stocks I am holding from lower levels, as opposed to ones I strictly "trade". Anyway, the near chart pattern is slightly bearish judging by the lower rally highs. Could be a triangle that will resolve itself by a next up leg. Time to look at the hourly chart. The hourly OEX chart pattern is looking like one that is tracing out a downtrend channel. This suggests resistance at 500 - there's one of those even big fat round numbers again! A close above 500 is needed to suggest a breakout above the hourly down trendline. Beyond a breakout OEX should also hold this 500 area on subsequent pullbacks, to suggest renewed upside momentum here in the doldrums of August. This fact noted for those of you still trading away and not taking August off like the Italians. By the way, the harder working Germans have just seen their economy also slip into recession based on a second consecutive quarter of a lower GDP. Just an aside from a Europhile folks! Back to levels - above 500, resistance is at 505-506; then, if exceeded, at 510-511. Minor support comes in at 493, but mainly can be expected back in the 485 area, on down to 483 currently gotten by tracing the lower end of the downtrend channel - and, it looks a lot like OEX is in a downtrend channel. I want to be in puts on further rally attempt, especially on a failure to pierce 500. Stay tuned! Dow Industrials Index (DJX.X)- Hourly chart: Well, the moment of truth may be at hand for the Dow Index or DJX as it tests the top end of its recent trading range. I find it suspect that the Stochastic model is not confirming the recent higher high and this is mirrored by the RSI (not shown). This type of technical divergence is usually a good indicator for an upcoming reversal, although it is a more solid signal on a daily chart basis when it (the divergence) develops over a longer time. Bullish case - a daily close above 93.5 would suggest that at least the narrow Dow was breaking out above its price range. I want to play the odds that the Index is still likely to be range bound. Acting on a trading risk to reward basis, I look to buy puts in the 93.5 area, as I figure downside potential to be at least twice that of a further upside move. Risk to reward considerations work well as a part of trading strategy provided that the trade is closed if there is a move beyond a "breakout" point, such as here, by exiting above 94.25. As suggested the week before, long DJX Index calls held from the 90 area met my profit objective on the move above 93 and I exited the trade. (I also noted that puts looked attractive in the 93- 93.5 area.) Nasdaq Composite (COMPX) – Daily & Hourly charts: Technically, the rebound in the Composite occurred in a predictable fashion according to the tendency for Indices and stocks to fill prior chart gaps. The one in question is outlined on the daily chart to the left below - I calculate resistance coming in around 1740-1750 and think that a move to this area is about the best that can be expected for COMPX. Support looks to me to come in around 1650, according the hourly trendline. I continue to suggest playing the expected trading range in the Nasdaq indices by buying puts at the top end and calls at the low end and not in between. As far as looking to where being long options is favorable, unlike maybe the futures, buying calls or puts in the middle of a relatively narrow expected range doesn't offer the needed potential for a sizable move - unless there is breakout to resolve the trend, but this doesn't seem likely anytime soon. Nasdaq 100 Tracking Stock (QQQ) - Hourly: The Q's can be traded of course for smaller moves by buying the stock. I thought QQQ might get down to 29, although the 30 area was support implied by a 50% retracement as noted coming into last week. I continue to favor shorting the stock around 32 or a bit higher - up to 32.50. Selling the stock in this area if reached, also offers my suggested profit target to those long the stock at 30, for those buying dips only. I bought a little there, but held out for 29 to buy more - WRONG! for now. Resistance at 31.75-32.25, on an hourly closing basis, is implied first by the trendline drawn on the chart below and by the previous hourly closing high. 32.50-32.60 is the next higher expected resistance. An hourly, then daily, close above 32.5 would look like a technical breakout. I rate the odds greater for a new low below the recent one at 30, than for a new sustainable high. We'll see if more buying interest comes in early in the coming trading week based on bullish economic news at week's end not realized due to lights out in New York. The Q's could still get down to the 29 area at some point, assuming they are unable to pierce 32 to the upside. Below 29, next lower technical support comes in around 27.50. Maybe 30 will be the low but buying is lackluster of late and they may drift lower again. 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 ************** Trend Change The last two weeks it appeared we were going to do the August dip but as you can tell from the charts we are dipless. The trend going into last weekend was six days of drops on the Nasdaq and two days after a 9000 retest on the Dow. What a difference a week makes. We are poised on the Dow to breakout to new highs instead of new lows. The September QQQ puts I wrote about last Sunday were $1.00 on Monday and 50 cents on Friday. We were stopped out of the play at 75 cents on Wednesday when the QQQ hit $31. While I am still a believer in the 50% off sale I am 0 for 3 over the last three weeks. July did not conform to historical trends and so far neither has August. That leaves us with the possibility that we are going to hold to this trading range until September and face the normal 3Q earnings warnings from a higher level. As I sit here this weekend trying to decide what to play for the coming week I continue to be convinced that calls are not it. My historical bias continues to cloud my vision. I considered recommending nothing but that is a cop out. I looked at DJX and QQQ calls but the DJX is at its 52-week high. Not a high percentage play. (Not that the put record has been high percentage lately) I just can't see the markets setting news highs in August. I mean real new highs like Dow 9500-9600. Just getting to 9400 will not make any money for anybody starting at our 9300 level this weekend. The problem is the non-confirmation by the Nasdaq, S&P, RUT and Wilshire-5000. Each has cycled back up to down trend resistance. Where the Dow is ready to break out to a new high the rest are ready to roll over for another down leg. They could also break that downtrend resistance but that resistance covers 5000 stocks where the Dow is only 30. Which do you think has a better chance of occurring next week? Actually both could happen. The Dow could break to 9400 intraday and the rest of the indexes could fail at resistance. It would simply be a stronger case of bearish divergence. Long story short, I am sticking with the QQQ puts. DJX puts are too expensive. (Three guesses why) I still like the September QQQ $30 puts QAV-UD at 50x55 at Friday's close. Assuming we open up on Monday we should be able to get them for 50 cents or less. Right or wrong that is the only play that makes sense to me this week. There is strong congestion between $31 and $32 on the QQQ and not much tech excitement to push it through. Dell was the only major tech in the green on Friday. Set a profit target of QQQ $29.50 and a stop loss of $32. QQQ Chart ******************************** Play updates: Powerball The Nasdaq rebound reflated the leap portfolio but RFMD is still the major drag. Still six months to go and if the recovery is for real this should turn out ok. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** No Fear Jonathan Levinson For the week, bonds moved lower, while the dollar and gold moved higher, and the equities indices all posted gains. The Dow and S&P 500 both printed bullish morning start candle formations, while the Nasdaq printed an upside inside week, known in candlestick terms as a bullish harami. The bear market in volatility continued, with QQV, VIX and VXN all closing near their year lows. The picture was no doubt distorted by triple-witching Friday, but equities remain in a significantly low volatility environment. The put to call ratio on Friday was very low, again subject to options expiration doubts, but the combination of weekly gains in the equity indices and low volatility and put to call readings should give bulls pause. Markets do not tend to go up significantly when everyone is bullish. Bonds sold off, driving yields to new yearly highs. On the theory that the spring rally was liquidity-driven, the erosion of liquidity from the bond market is another cause for concern for equity markets, as they may well be next in line. If, however, the money freed up by sales of treasuries seeks a new target, equities could be biding their time before the next leg up in this year's rally. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9361 52-week Low : 7197 Current : 9321 Moving Averages: (Simple) 10-dma: 9203 50-dma: 9154 200-dma: 8570 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 990 Moving Averages: (Simple) 10-dma: 980 50-dma: 989 200-dma: 915 Nasdaq-100 ($NDX) 52-week High: 1316 52-week Low : 795 Current : 1253 Moving Averages: (Simple) 10-dma: 1234 50-dma: 1243 200-dma: 1101 ----------------------------------------------------------------- The VIX and VXN dropped fractionally as equities rose fractionally. The VIX remains close to its widely regarded 20 level, and with the VXN below 30, equities continue to appear toppy. CBOE Market Volatility Index (VIX) = 20.20 –0.31 Nasdaq Volatility Index (VXN) = 29.21 –0.06 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.53 891,171 471,754 Equity Only 0.43 767,588 329,007 OEX 1.16 31,536 36,593 QQQ 1.01 70,301 70,997 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 68.6 + 0 Bull Confirmed NASDAQ-100 65.0 + 0 Bear Confirmed Dow Indust. 80.0 + 0 Bull Correction S&P 500 74.6 + 0 Bull Correction S&P 100 82.0 + 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 0.87 10-Day Arms Index 1.00 21-Day Arms Index 0.98 55-Day Arms Index 1.10 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1505 1423 Decliners 1197 1423 New Highs 194 203 New Lows 28 11 Up Volume 391M 286M Down Vol. 327M 384M Total Vol. 733M 690M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 08/12/03 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 Commercials added slightly to their long positions in the S&P, whilesmall traders maintained their positions, adding a net 761 contracts for the week. Commercials Long Short Net % Of OI 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%) 08/12/03 399,414 456,767 (57,353) (6.7%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 07/22/03 155,891 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% 08/12/03 158,821 71,040 87,781 38.2% 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 Commercials added heavily to their long positions in the e-mini, posting their most bullish reading of the year, while small traders added further to their short positions. Commercials Long Short Net % Of OI 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% 08/12/03 306,014 217,233 88,781 17.0% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 88,781 - 08/12/03 Small Traders Long Short Net % of OI 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%) 08/12/03 62,534 106,403 (43,869) (26.0% Most bearish reading of the year: (48,707) - 07/29/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercials and small traders moved in the same direction on the NDX, as commercials lightened up slightly on their short positions, while small traders added to their longs. Commercials Long Short Net % of OI 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%) 08/12/03 34,374 53,015 (18,641) (21.3%) 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 07/22/03 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% 08/12/03 23,957 7,871 16,086 50.5% 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 Commercials added slightly to their long positions on the Dow, but the move was sufficient to post a new bullish high for the year, close to reaching the October 2001 high of 15,135 contracts. Small traders added more substantially to their shorts. Commercials Long Short Net % of OI 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% 08/12/03 24,942 9,878 15,064 43.3% 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 07/22/03 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%) 08/12/03 6,933 13,248 (6,315) (31.3%) 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 *************** Betting on or against Treasuries with options I'm wondering with the rise in interest rates whether it would make sense to take a longer-range position in call options (like out to next spring) on ten year yields. When I look at the option chains, however, there doesn't seem to be any open interest to speak of. Is this because these are not preferred vehicles to be trading? The trader is correct in his observation that Treasury bond yield options are very thinly traded on a daily basis, with little open interest. It is arguable that one reason Treasury bond yield options are thinly traded is because Treasuries themselves are regarded as a relatively slow moving, non-volatile, but more likely is perceived as a boring investment vehicle, and therefore attracts little attention from the option trader. After all, with the bond's interest payment and the investors principal being backed by the full faith and credit of the U.S. government, many investors around the world regard U.S. Treasuries as the safest investment one can make, where upon maturity, the investor will most likely receive all of their money back. Another reason Treasury yield options are rather thinly traded is because the U.S. Treasury market is perhaps the most liquid of markets, with participants from around the world readily dealing in these bonds, especially banking and financial institutions. We are more apt to find the European Central Bank buying or selling U.S. Treasuries on any given day than you would see them buying various equity-based products, which on a relative scale may be much more illiquid than the Treasury market. For the most part, Treasury bonds are deemed an "investment vehicle" by the retail customer (you and I), than they are a "trading vehicle." It would also be my opinion that institutions, which tend to stick with the selling of calls and puts (stocks, bonds, you name it), which has premium attached and erodes over time, but a premium that the retail customer (you and I) are more apt to pay in order to limit our risk to a FINITE level. RISK that institutions are much more able to offset with a hedge in the underlying security itself. But none of this. NONE OF IT, means a trader can't profit by making a bet on or against Treasuries with options. I will say, if you are an ACTIVE options trader, that likes tight bid/ask spreads and lots of liquidity in your options trade because your planning on being in today and out tomorrow if the trade doesn't immediately move in the desire direction, then trading options on Treasuries is probably not for you. Now, while this may seem nitpicking, lets first understand that interest rates are not rising. INTEREST RATES are set by the Fed. However, Treasury yields have been on the rise, which has had many banks and mortgage lenders raising their lending rates. If we think INTEREST RATES have risen, then check your savings deposit statement again this month, and see what the rate of INTEREST is that you're receiving. I'm checking mine right now and see I'm getting a whopping 0.698% ANNUAL INTEREST RATE on some rainy day funds in my savings account. But lets imagine that INTEREST RATES are going to be on the rise, which the Treasury bond market appears to be predicting. Let me also add this little footnote, which was an interesting tidbit of information/reporting/analysis from CNBC's Rick Santelli, where he focuses on interest rates, bonds and futures. Of CNBC's various reporters, I would have to say I put most weight in Mr. Santelli's insights/reporting/analysis than any other. One point I found interesting is that he thought, based on discussions with bond traders, is that two-thirds of the move up in Treasury YIELDS has been attributed to large hedges being removed on mortgage lending, and one-third based on economic conditions showing signs of improvement. These are about the most notable comments, with some type of ratio attached to give us a feel for things. Take Mr. Santelli's comments for what you feel they're worth, but add in some observations from PIMCO's Bill Gross, when expressing his views (06/24/03) regarding Treasuries having little upside (based on price), even if the Fed were to cut INTEREST RATES to 0.00%! 06/25/03 Market Monitor - Discussion on 5-year YIELD calls I wanted to show these comments made in the OptionInvetor.com Market Monitor on June 25th, not only as it relates to my attempt to regurgitate what Mr. Gross had said the day before (basically that risk/reward was terrible in Treasuries), but to also show what a YIELD call trader may want to consider when making a decision about YIELD calls. On June 25th, at 10:41:18, I made note that the 5-year YIELD ($FVX.X) was trading at a 2.145% YIELD. On any chart we might look at, that would be shown as 21.45. You stock traders out there will associate this with a $21.45 stock. To make money in that YIELD call, if you paid the bid at $2.80, you would have needed a move higher in YIELD (selling in the bond) to at least 24.25, or 2.425% to make money. While illiquid, I tried to bid in between the bid/offer on multiple occasions over the next couple of days and never got filled. For the most part, it's worth a try, but to get a fill, traders in yield calls/puts are going to have to trade bid/offer. To further address the traders question, think about Mr. Gross' comments in the context of risk/reward, in combination with the various maturity dates of Treasury bonds. To try and make a point. What are the odds of me (Jeff Bailey) waking up tomorrow morning? Gosh, I'm hoping on 100%. While I'm 40-year's old, I still think I've got a good chance of waking up in the morning. Now, what are the chances of me being still waking up from a night's rest 5-years from now? Hmmmm.... I hope you at least said 95%. But lets go out 10-years, ask the same question, then 30-years from today and pose the question again. As time progresses, you should find yourself LESS CERTAIN or perhaps finding a higher degree of uncertainty with your answer. As it relates to selecting a Treasury yield call or put, I would also suggest a trader think about RISK, which comes with uncertainty. Remember, Treasury yields were just at 40-year lows! While the trader mentioned a 10-year Treasury call yield with expiration extending into next spring, should Treasury yields continue higher, with thought that the Fed will be raising INTEREST RATES to try and cool down any higher rates of inflation, which could harm an economies longer-term growth prospects, then perhaps a 30-year bond carries greater uncertainty. Another alternative trading vehicle for options, that are tied to Treasuries, may also be found in some of the ishares, but here the trader is trading price equivalents on a basket of short-term (1-3 years maturity), intermediate term (7-10 years maturity) and longer-term (20+ years to maturity) Treasury bonds. The reason I mention these iShares, which are listed on the American Stock Exchange (SHY, IEF, TLT), is that I see higher levels of open interest in these Treasury-based derivatives, than in the yield calls and puts. To answer the trader's finals question, "does it make sense to take a longer-range position in call options" on Treasury yields, I would certainly have to think so, especially with the powerful move off the bottom that we've seen in YIELDS. Here's some initial work I'm putting together for my own information regarding Rick Santelli's comments that he made today, which grabbed my ear regarding the 2/3 mortgage hedge activity and 1/3 economic activity, and might tie in with past observations regarding MONEY SUPPLY, impact on MORTGAGE RATES and MORTGAGE ORIGINATIONS, which all can tie in with Treasury YIELDS. Weekly Mortgage Bankers Association Survey Statistics Traders/investors that believe the MARKET is pretty smart and can forecast events might note that mortgage applications hit an all- time high for the week ended May 30th (reported on June 4), just two weeks before home mortgage rates hit 40-year lows. Refinancing by homeowners also hit an all-time high that week, perhaps seeing a SURGE in money supply, as consumers pulled liquidity from their illiquid dwellings and shifted RISK at historically low yields to their bankers. While I put this data set together tonight, and thinking about how I can try and create a more meaningful observation from a point and figure chart to better analyze and trends, bullish/bearish vertical counts and do some back testing, I can relate some of what I see to Rick Santelli's comments regarding how some mortgage lenders may have overdone things as huge demand for mortgages and refinancing activities have started to unwind. I also looked at the Dow Jones Home Construction Index (DJUSHB) 427.30, which is comprised of home builders. It's recent relative highs of 483 were achieved on June 16 and 17, which if tied to the above table, would have come about two-week AFTER mortgage applications and refinances peaked, but right when mortgage rates were hitting their 40-year lows. I'm working on collecting further data prior to December of last year from the Mortgage Bankers Association Website , but will note the current fixed rate 30-year mortgage is 6%, which is pretty close to that found in early December of last year. The time period I think I should compare current time with is that dating back to late 1998 and 2000, when the 10-year YIELD rose from approximately 4.25% to 6.7% by January of 2002. Over the course of the next several months, if mortgage shoppers, which look pretty smart back in early June, were to tip their hand again, then this type of data may be valuable to traders in Treasury bonds, or Treasury-related options! Jeff Bailey ************* COMING EVENTS ************* Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- A Agilent Technologies Mon, Aug 18 After the Bell -0.07 DRYR Dreyer's Gnd Ice Crm Mon, Aug 18 After the Bell N/A LOW Lowe's Companies Mon, Aug 18 Before the Bell 0.69 TOY Toys R Us Mon, Aug 18 Before the Bell -0.05 ------------------------- TUESDAY ------------------------------ BJ BJ's Wholesale Club Tue, Aug 19 Before the Bell 0.32 CLL Celltech Group PLC Tue, Aug 19 Before the Bell N/A CCH Coca-Cola Hlnic Btlng Tue, Aug 19 Before the Bell 0.46 DV DeVry Tue, Aug 19 After the Bell 0.20 HD Home Depot Inc Tue, Aug 19 Before the Bell 0.54 INTU Intuit Tue, Aug 19 After the Bell -0.07 NTAP Network Appliance Tue, Aug 19 After the Bell 0.07 PETC PETCO ANIMAL SUPPLIES Tue, Aug 19 After the Bell 0.19 PCG PG&E Corporation Tue, Aug 19 -----N/A----- 0.39 SKS Saks Incorporated Tue, Aug 19 Before the Bell -0.20 SPLS Staples, Inc. Tue, Aug 19 Before the Bell 0.16 SCMR Sycamore Networks Tue, Aug 19 After the Bell -0.05 ----------------------- WEDNESDAY ----------------------------- ADCT ADC Wed, Aug 20 After the Bell -0.01 BLI Big Lots, Inc. Wed, Aug 20 Before the Bell -0.02 BCM Can Imp Bank of Comm Wed, Aug 20 Before the Bell N/A CSB Ciba Spec Chem HoldingWed, Aug 20 Before the Bell N/A EV Eaton Vance Corp. Wed, Aug 20 Before the Bell 0.39 MW Men's Wearhouse Wed, Aug 20 After the Bell 0.26 OVTI Omnivision Tech Wed, Aug 20 After the Bell 0.20 PDCO Patterson Dental Wed, Aug 20 Before the Bell 0.44 ROST Ross Stores, Inc. Wed, Aug 20 Before the Bell 0.70 STOSY Santos Ltd. Wed, Aug 20 -----N/A----- N/A SCM Swisscom AG Wed, Aug 20 Before the Bell N/A SNPS Synopsys Wed, Aug 20 After the Bell 0.80 TLB Talbots Wed, Aug 20 -----N/A----- 0.31 ------------------------- THURSDAY ----------------------------- ARO Aeropostale, Inc. Thu, Aug 21 After the Bell 0.05 AMCR Amcor Limited Thu, Aug 21 -----N/A----- N/A ADSK Autodesk, Inc. Thu, Aug 21 After the Bell 0.10 BKS Barnes&Noble Thu, Aug 21 Before the Bell 0.16 BGP Borders Group Inc. Thu, Aug 21 After the Bell 0.02 BFb Brown-Forman Corp Thu, Aug 21 Before the Bell 0.67 CIEN CIENA Corporation Thu, Aug 21 Before the Bell -0.10 CLE Claire's Stores Thu, Aug 21 -----N/A----- 0.43 DYS Dist Servicio D&S SA. Thu, Aug 21 -----N/A----- 0.07 FL Foot Locker, Inc. Thu, Aug 21 Before the Bell 0.24 FRED Fred's Thu, Aug 21 Before the Bell 0.11 GPS Gap Inc. Thu, Aug 21 -----N/A----- 0.21 HRL Hormel Foods Corp Thu, Aug 21 Before the Bell 0.27 SJM J. M. Smucker Company Thu, Aug 21 Before the Bell 0.50 KKD Krispy Kreme Doughnut Thu, Aug 21 Before the Bell 0.20 LANC Lancaster Colony Corp Thu, Aug 21 Before the Bell 0.60 LTD Limited Brands Thu, Aug 21 Before the Bell 0.16 MRVL Marvell Technology Thu, Aug 21 -----N/A----- 0.21 JWN Nordstrom Thu, Aug 21 After the Bell 0.39 NOVL Novell Thu, Aug 21 -----N/A----- -0.03 SFD Smithfield Foods Thu, Aug 21 Before the Bell 0.20 WSM Williams-Sonoma Thu, Aug 21 Before the Bell 0.14 ------------------------- FRIDAY ------------------------------- PNY Piedmont Natural Gas Fri, Aug 22 -----N/A----- -0.28 KPN Royal Kpn N.V. Fri, Aug 22 Before the Bell N/A WPPGY WPP Group PLC Fri, Aug 22 Before the Bell 1.03 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 FOBB First Oak Brook Bancshares3:2 Aug 25th Aug 26th CELL Brightpoint Inc 3:2 Aug 25th Aug 26th CBK Christopher & Banks Corp 3:2 Aug 27th Aug 28th BER W. R. Berkley Corp 3:2 Aug 27th Aug 28th EBAY eBay 2:1 Aug 28th Aug 29th JBHT J.B. Hunt Transport Serv 2:1 Aug 29th Sep 1st RCII Rent A Center 5:2 Aug 29th Sep 1st AFP United Capital Corp 2:1 Aug 29th Sep 1st JCOM J2 Global Communication 2:1 Aug 29th Sep 1st -------------------------- Economic Reports This Week -------------------------- The past earnings season is slowly coming to a halt as this weeks earnings are predominantly on the retail side. However it looks like split season is well underway, as a grunt load of companies are due to announce over the next two weeks. There are not as many economic reports this week as there was last week, but traders should keep an eye on the Mich Sentiment-Prel. due out on Tuesday and the Philadelphia Fed coming out on Thursday. ============================================================== -For- ---------------- Monday, 08/18/03 ---------------- None ---------------- Tuesday, 08/19/03 ---------------- Housing Starts (BB) Jul Forecast: 1.790M Previous: 1.803M Building Permits (BB) Jul Forecast: 1.800M Previous: 1.817M Mich Sentiment-Prel.(DM)Aug Forecast: 91.5 Previous: 90.9 Treasury Budget (DM) Jul Forecast: -$42.0B Previous: -$29.2B ------------------- Wednesday, 08/20/03 ------------------- None ------------------ Thursday, 08/21/03 ------------------ Initial Claims (BB) 08/16 Forecast: N/A Previous: 398K Leading Indicators(DM) Jul Forecast: 0.4% Previous: 0.1% Philadelphia Fed (DM) Aug Forecast: 10.0 Previous: 8.3 ---------------- Friday, 08/22/03 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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The Option Investor Newsletter Sunday 08-17-2003 Sunday 2 of 5 In Section Two: Watch List: KSS, VRTS, KKD, AZO Call Play of the Day: SPW Dropped Calls: None Dropped Puts: PGR ************************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 ********** Kohl's Corp. - KSS - close: 63.54 change: +2.50 WHAT TO WATCH: Remember our recent bullish play on KSS that we had to drop ahead of earnings? Well, the company beat estimates and the stock soared on Friday, extending the recent breakout. If the pattern continues, look for a pullback to confirm support in the $61-62 area and the subsequent rebound should be good for a run towards $66 resistance. --- Veritas Software Corp. - VRTS - close: 31.35 change: +0.35 WHAT TO WATCH: Slow and steady, shares of VRTS have held their recent highs quite well, despite a swoon in the overall Technology indices. Friday's session saw the stock climbing back over $31 and it looks like a breakout in the making. Wait for a breakout over $32 and then look for a bullish move to the $35 level, with potential for a move as high as $37.50. --- Krispy Kreme - KKD - close: 48.90 change: +1.22 WHAT TO WATCH: Sugar addicts rejoice! KKD broke out to new all- time highs on Thursday and extended those gains on Friday and on strong volume too. While we certainly wouldn't advocate chasing the stock higher here, a pullback to confirm new support near $46 could set up a nice bullish play. Doubt that the stock has the gas to continue powering higher? Take a look at the PnF chart, which shows the stock on a fresh Buy signal and just for reference, the bullish price target is $74. Warning -- not for the faint of heart or those that suffer from vertigo! --- Auto Zone - AZO - close: 86.83 change: +0.38 WHAT TO WATCH: Sure enough, AZO's breakout over $80 last month was the real deal and unfortunately we got shaken out on the dip back to the 50-dma. Believe it or not, the stock is nearing that important $88-89 resistance zone and it looks like it could result in a breakout this time around. Other automotive related stocks like AAP and AN are also showing amazing strength. Wait for the breakout over $89 before playing. Once clear of round number resistance at $90, things could get exciting for the bulls, especially if the broad market finally manages a breakout of its own. --- =================== On the RADAR Screen =================== SNDK $52.92 - Ever since the breakdown from its very aggressive bullish trend, shares of SNDK have been meandering between their recent lows and to bottom of that large gap. This is only for aggressive bears, but targeting a rollover near the bottom of that gap at $54 could yield some nice results, especially with the PnF chart on a Sell signal with a bearish price target of $36. JCI $97.40 - Here's another possible way to play the strength in the Automotive sector. JCI has been beating against the $98 resistance level for close to a month now and looks like it wants to break higher. There is likely to be some psychological resistance at $100, but with a strongly bullish PnF chart and a bullish price target of $112, we'd hazard a guess that there's a favorable risk reward ratio to be found with a trigger just over recent resistance and a stop at $94.50. HD $33.54 - Who cares about fundamentals? Despite the apparent breakdown in shares of HD, the stock has come back swinging and appears dead set on revisiting its recent highs near $34.75. A breakout over $35 could really generate some follow through, as it would not only clear stubborn resistance, but would generate a fresh PnF Buy signal and clear the bearish resistance line. Look for a breakout to have upside to at least $38 and quite possibly $45. ************************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 ******************* Call Play of the Day: ********************* SPX Corporation - SPW - close: 48.15 change: +1.65 stop: 44.00 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 ^^^^ Progressive Corp - PGR - cls: 66.50 chg: +0.96 stop: 66.01 Our PGR play has been stuck in a tight-range consolidation between $64-66 for the past two weeks, so it is rather irritating that on a light volume day for the overall market, the stock managed to finally break out of that range and to the upside no less. After waiting so long for the breakdown to materialize, it is frustrating to have to close the play for a small loss. But we're happy with the way we managed it, inching our stop down to just above resistance, minimizing the damage on the breakout. Traders that weren't stopped out on Friday will want to take advantage of any early weakness on Monday to find an exit at a more favorable price point. Picked on July 23rd at $65.22 Change since picked: +1.28 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 848 K *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 08-17-2003 Sunday 3 of 5 In Section Three: Current Calls: EBAY, HIG, LLL, PCAR, STJ New Calls: SPW Current Put Plays: BDK, IBM, YHOO New Puts: None ************************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 ****************** eBay, Inc. - EBAY - close: 103.07 change: +0.37 stop: 99.50 Company Description: After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. Why we like it: Traders looking for some indication of the market's intentions on Friday were sorely disappointed, as the major exchanges reported the lightest volume of the year. Between expiration Friday machinations and the hangover from Thursday's power outage, investors just didn't seem interested enough to push the pile either way. To its credit, our EBAY play managed to log a small gain, ending the day below the $104 resistance and above the 10- dma ($102.14). That leaves us with no choice but to wait for some clarity on Monday. Intraday dips near the $101-102 area still look good for new entries, while more conservative traders will still want to see the move through $1o4 before taking the plunge. Remember, the primary catalyst for this play is the company's split at the end of the month and we're expecting a bullish run into that event. Suggested Options: Shorter Term: The September 105 Call will offer short-term traders the best return on an immediate move, as it is the closest to being in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the October 110 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 105 Call. BUY CALL SEP-100 QXB-IT OI=3234 at $6.00 SL=4.00 BUY CALL SEP-105 QXB-IA OI=7292 at $3.20 SL=1.50 BUY CALL OCT-105 QXB-JA OI=6499 at $5.30 SL=3.25 BUY CALL OCT-110 QXB-JB OI=4157 at $3.30 SL=1.75 Annotated Chart of EBAY: Picked on August 12th at $103.43 Change since picked: -0.36 Earnings Date 10/23/03 (unconfirmed) Average Daily Volume = 6.82 mln Hartford Fin. Svcs - HIG - close: 53.72 change: -0.42 stop: 51.00 Company Description: Hartford Financial Services Group is a diversified insurance and financial services company. The company provides investment products, individual life, group life and group disability insurance products, as well as property and casualty insurance products in the United States. HIG writes insurance and reinsurance in the United States and internationally, and is organized into two major operations: Life and Property & Casualty. Why we like it: It wasn't exactly an auspicious beginning to our bullish Insurance play to see HIG pull back slightly from its breakout over the $54 level. But in all honesty, it isn't a great disappointment either, what with the complete lack of either volume or conviction on Friday following Thursday night's power outage across the Northeast. Ending right in the middle of its intraday range, the stock posted an inside day and where it goes on Monday should give us a good idea of the viability of the play. A return of the bulls will have the stock breaking out over $54.30, which will be good for momentum entries. On the other hand, a continuation of Friday's pullback will have us eyeing support in the $52.50-52.75 area as a possible entry on a rebound. The 10-dma ($52.41) is rising to meet this support area and should reinforce it. Clearly, Monday's action should provide greater clarity, if for no other reason than we'll have a return of more normal volume levels. Maintains stops at $51, which is now below the 50-dma. Suggested Options: Shorter Term: The September 55 Call will offer short-term traders the best return on an immediate move, as it is the closest to being in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the December 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 December 55 Call. BUY CALL SEP-50 HIG-IJ OI=3010 at $4.40 SL=2.75 BUY CALL SEP-55 HIG-IK OI=1944 at $1.25 SL=0.60 BUY CALL DEC-55 HIG-LK OI= 356 at $3.10 SL=1.50 BUY CALL DEC-60 HIG-LL OI= 228 at $1.35 SL=0.60 Annotated Chart of HIG: Picked on August 14th at $54.14 Change since picked: -0.42 Earnings Date 11/05/03 (unconfirmed) Average Daily Volume = 2.82 mln L-3 Communications -LLL - close: 49.10 change: -0.45 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 has come full circle since we initially picked it just below the $50 level. After just barely holding above our $47.25 stop last week, the stock rose with the rest of the market, stopping just shy of that half-century mark on Thursday and then pulling back on Friday amidst very light volume. The 20-dma ($48.22) has now risen over the $48 level and should hold up in the face of any attempts to break the stock down. Another rebound from the vicinity of the 20-dma can be used for aggressive entries into the play, although at this point, we'd prefer to finally get the confirmation of a breakout over $50.50 before opening new positions. Note that volume has been consistently drifting lower over the past 2 weeks and if LLL is going to confirm our bullish view, it is going to need to see a rise in volume to do so. Suggested Options: Shorter Term: The September 50 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the October 55 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the October 50 Call. BUY CALL SEP-45 LLL-II OI= 282 at $4.80 SL=3.00 BUY CALL SEP-50 LLL-IJ OI=1125 at $1.50 SL=0.75 BUY CALL OCT-50 LLL-JJ OI=2431 at $2.15 SL=1.00 BUY CALL OCT-55 LLL-JK OI= 235 at $0.60 SL=0.25 Annotated Chart of LLL: Picked on August 3rd at $49.90 Change since picked: -0.80 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 939 K PACCAR - PCAR - close: 81.64 change: +0.77 stop: 78.00*new* 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: Consistent as the sunrise, PCAR defied the odds on Friday and charted to yet another new high and closed at its high of the day. It is notable that although volume was on the light side (608K vs. the 1.16 mln ADV), that still represented stronger volume than what was seen in many other stocks and on the major exchanges. The stock has been channeling higher between the upper Bollinger band ($82.28) and the 10-dma ($78.76) for 8 days now and with daily Stochastics stretched into overbought, we can't help but feel that this trend is due for an adjustment and probably early next week. The trend is still strong, but conservative traders should be taking advantage of further strength to harvest gains and then look for another entry opportunity on the next pullback to support. With PCAR now $4.40 above our picked price, we feel it is time to start getting a bit more aggressive with our stop, so we're raising it to $78.00 this weekend. Any mild pullback should be halted by the 10-dma, so a trade at $78 would indicate a potential end (even if just temporary) to this bullish trend. Traders still looking for an entry will want to use the 10-dma as their guide. A dip and rebound above this average is a viable entry setup, but only if the rebound is accompanied by rising volume. Suggested Options: PCAR currently has September, November and January options available. We're going to list September and November strikes with a preference for September 80s and 85s. BUY CALL SEP 80 PAQ-IP OI= 208 at $4.00 SL=2.50 BUY CALL SEP 85 PAQ-IQ OI= 412 at $1.55 SL=0.75 BUY CALL NOV 80 PAQ-KP OI= 81 at $6.40 SL=4.50 BUY CALL NOV 85 PAQ-KQ OI= 0 at $3.70 SL=2.25 Annotated Chart for PCAR: Picked on July 31st at $77.24 Change since picked: +4.40 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.16 mln St. Jude Medical - STJ - close: 54.00 change: +0.00 stop: 53.50 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: We didn't have high hopes for our STJ play on an expiration Friday and we weren't disappointed, with the stock trading in a narrow range and ending the day unchanged on almost nonexistent volume that only reached about 20% of the ADV. It is certainly hard to draw any conclusions from that sort of action. The stock is still holding just above key support and our stop at $53.50 and if that level is violated, then clearly we'll be dropping coverage of the stock. On a positive not though, the 20-dma ($53.41) is rising to meet price and will be above our stop on Monday, hopefully adding to that critical support. As noted on Thursday, we aren't advocating new entries at this time unless STJ can get back over the $56 level, preferably on strong volume Suggested Options: Shorter Term: The September 55 Call will offer short-term traders the best return on an immediate move, as it closest to being in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the October 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 55 Call. BUY CALL SEP-55 STJ-IK OI= 581 at $1.65 SL=0.75 BUY CALL SEP-60 STJ-IL OI= 543 at $0.40 SL=0.20 BUY CALL OCT-55 STJ-JK OI=3612 at $2.55 SL=1.25 BUY CALL OCT-60 STJ-JL OI= 781 at $0.85 SL=0.40 Annotated Chart of STJ: Picked on August 10th at $54.23 Change since picked: -0.23 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume = 2.18 mln ************** NEW CALL PLAYS ************** SPX Corporation - SPW - close: 48.15 change: +1.65 stop: 44.00 Company Description: SPX Corporation is a global provider of technical products and systems, industrial products and services, flow technology and service solutions. The company offers networking and switching products, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, dock products and systems, cooling towers, air filtration products, valves, back-flow protection and fluid handling devices and metering and mixing solutions. The company also provides specialty service tools, diagnostic systems, service equipment and technical information services. SPW services a broad array of customers in a variety of industries, including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecommunications, financial services, transportation and power generation. Why we like it: Expiration Friday's are normally rather quiet and surreal, but last Friday was even more so due to the overhang from the blackout in the Northeast that had markets moving in a very tight range on almost non-existent volume. So it was pretty impressive to see shares of SPW clear recent resistance and move to new highs for the year on better than half the average daily volume. Believe it or not, that is actually respectable volume for Friday, where many stocks traded less than a quarter of their ADV. A quick look at the daily chart of SPW shows a stock with potentially stiff resistance in the $48-50 area and then another potential obstacle at $53. So where's the reward on the play, you ask? Shift your attention to the PnF chart, and things start looking better. The breakout in late July that took the stock over $46 generated a new Buy signal and now has SPW well above its bearish resistance line. The buy signal generated during May and June projects a bullish price target of $74, which is interesting in that it corresponds quite closely with the stock's all-time highs. Whether that target is realistic or not really doesn't factor into our play, as all we're looking for is solid upside potential. Coming back to that overhead resistance at $48-50 and then again at $53, a big part of our willingness to give the stock a chance at pushing through is because of the way it handled its last resistance test. Go back to the middle of July and the $45 level looked like strong overhead resistance until the stock just blasted through. It is entirely possible that SPW will do the same thing again, trading sideways and then moving sharply higher. It would be our preference to see a steady trending move higher, but we need to recognize that may not happen. Intraday dips into the $46-47 area look like a solid entry opportunity. Because of the overhead resistance, we aren't so wild about trying to enter on strength due to our expectation that it will take a few attempts to get through each resistance level. Buy the dips and target an eventual move to the $55 area. Initial stops are set at $44, just below the 50-dma ($44.04) and the August 7th intraday low of $44.38. Suggested Options: Shorter Term: The September 47 Call will offer short-term traders the best return on an immediate move, as it is slightly in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the December 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 December 47 Call. BUY CALL SEP-47 SPW-IW OI= 477 at $1.95 SL=1.00 BUY CALL SEP-50 SPW-IJ OI=1044 at $0.80 SL=0.40 BUY CALL DEC-47 SPW-LW OI= 246 at $4.00 SL=2.50 BUY CALL DEC-50 SPW-LJ OI= 422 at $2.80 SL=1.50 Annotated Chart of SPW: Picked on August 14th at $48.14 Change since picked: +0.00 Earnings Date 10/27/03 (unconfirmed) Average Daily Volume = 929 K ************************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: 40.77 chg: +0.52 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: Can you believe just how long this rebound off the recent lows has lasted, without a conclusive bullish move? BDK is now back to the level where the stock initially broke below the 200-dma in late July and squeaked out a close over both the 200-dma ($40.53) and the 20-dma ($40.72) on Friday on very light volume. Without the conviction of stronger volume, it is hard to determine if Friday's action means anything or not. For now, we're content to let the play ride, allowing our stop at $41.01 to do its job. We still aren't recommending new positions at this time. At a minimum, BDK needs to break back under $40 in order to be a candidate for new entries. Suggested Options: We are not suggesting new positions at this time. Annotated Chart for BDK: Picked on August 4th at $39.99 Change since picked: +0.27 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 729 K Intl Business Mach - IBM - cls: 81.79 chg: +0.23 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: Like a reflection of the overall market, shares of IBM spent last week creeping ever so slightly higher but on rather light volume. Friday's session was much the same and the stock ended at its best closing level since July 29th. So is this an entry point for the next rollover, or is the market telling us that the recent break under $80 was a bear trap? It is hard to tell, especially with the disruptions to Friday's trading session that already compounded the normally unreliable expiration Friday action. Daily Stochastics (5,3,3) have already turned down and we have the 200-dma ($82.13) just overhead to provide more resistance. So long as there is no strong bullish follow through early next week, a rollover below the 200-dma looks like a decent entry point, although more conservative traders will want to see a decline back under $80 to confirm that weakness before playing. The other thing to monitor is the action in the DOW. The industrials ended the week just a couple points below their June 17th closing high. A strong breakout over this level will likely generate some sympathy buying in IBM and likely have the play tripping our stop. On the other hand, if the DOW is once again rejected from this pivotal resistance, then it will reinforce our conviction for bearish positions in IBM on that rollover from resistance. Suggested Options: Aggressive short-term traders will want to focus on the September 80 Put, as it will provide the best return for a short-term play. More conservative traders will want to utilize the October 80 contract, which should be less susceptible to the ravages of time decay. BUY PUT SEP 85 IBM-UQ OI= 3037 at $4.20 SL=2.50 BUY PUT SEP 80 IBM-UP OI=13194 at $1.40 SL=0.75 BUY PUT OCT 80 IBM-VP OI=28099 at $2.75 SL=1.25 BUY PUT OCT 75 IBM-VO OI=16147 at $1.25 SL=0.60 Annotated Chart of IBM: Picked on August 5th at $79.85 Change since picked: +1.94 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 7.06 mln Yahoo! Inc. - YHOO - close: 29.88 change: +0.11 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: As we noted on Thursday, we didn't expect much from Friday's expiration session other than to see shares of YHOO likely pinned close to the $30 level. While the bulls managed to trade briefly above that level, the stock ended just below it, keeping our play in limbo. Just as was seen in the rest of the market, volume was exceedingly light, with YHOO seeing about 25% of its ADV. Daily Stochastics (5,3,3) have now stretched into overbought and if they roll over from here, we'll have some nice bearish divergence at play, which will add to our conviction in the play. The action plan remains unchanged this weekend, where failed rallies below the $30.75 level (reinforced by the 20-dma at $30.68) should provide attractive entries. Traders that would prefer to enter on weakness will need to see price drop back under $29.25 before playing, keeping in mind that the $28 level needs to crack before we'll really have a breakdown move in progress. Once that happens, we'll be able to think more seriously about whether the stock has a reasonable shot at our $26 target. 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= 3255 at $1.45 SL=0.75 BUY PUT SEP-27 YHQ-UY OI= 4777 at $0.55 SL=0.25 BUY PUT OCT-27 YHQ-VY OI= 7853 at $1.25 SL=0.60 Annotated Chart of YHOO: Picked on August 7th at $28.87 Change since picked: +1.01 Earnings Date 10/08/03 (unconfirmed) Average Daily Volume = 13.4 mln ************* NEW PUT PLAYS ************* None ************************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 *********************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 08-17-2003 Sunday 4 of 5 In Section Four: Leaps: Still No Confirmation Traders Corner: Surviving The Power Outage - Barely Traders Corner: Where is the Dow Going? Traders Corner: Elliott Wave Play Updates Brokers Corner: Readers Write ************************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 ***** Still No Confirmation By Mark Phillips mphillips@OptionInvestor.com As amazing as it seems, here we are 2 full months after the June 17th highs were recorded and there has been no bullish confirmation with a succeeding breakout. At the same time, there's been no confirmation of weakness, as each pullback has been eagerly scooped up by the bulls. On May 30th, the S&P 500 closed above the 960 level for the first time since last August and so far hasn't closed back under that level. At the same time, the index has recorded a series of lower highs, with the trendline connecting those highs now resting near 995. We've seen significantly more weakness than that in the NASDAQ market, but each time a breakdown appears imminent, the bulls buy the dip. Most notable in that area has been the action in the Semiconductor index (SOX.X), which broke down out of its ascending channel just over a week ago and then spent this week fighting its way back into the channel and came to rest on Friday just below the pivotal $400 resistance. In my mind, the DOW is the key to where we go from here, as it is really demonstrating the most strength relative to the other major indices. The June 17th closing high was 9323 and Friday's close at 9321 was so close to finally giving us a breakout to new highs. I can't help but feel there are a lot of traders watching that 9323 level and things could turn exciting if the bulls can manage a close over that level. Take a look at the chart below and I think you'll see why I shifted my focus to the DOW, at least in terms of trying to determine if we're going higher. Daily Chart of the Dow Industrials When this incessant range looked like it might be starting to weaken towards the end of July, I turned my focus to the 50-dma and looked for a break of that level to be important. Clearly that expectation was wrong, as the DOW sliced right through it a couple weeks ago. But isn't it interesting how the index found support right at the exponential 50-dma on the latest pullback before going right back to the recent highs. Closing above 9323 will be very important to DOW Theorists (more on that in a bit), but even if the bulls can manage a close over 9350 horizontal resistance, there's that pesky descending trendline from the early 2001 highs lying in wait just under 9400. When playing with charts this weekend and looking at the longer- term trendlines, I was reminded of Linda's comments that frequently these trendlines are more accurately drawn on a logarithmic chart. So just for grins, I shifted the scaled to LOG and guess where that long-term trendline falls? 9500!! Remember that number, as it is also important when we delve into the topic of Dow Theory. The action in the VIX is starting to get interesting again, as it threatens to break back under 20. If the broad market breaks above resistance then it is a safe bet that the VIX is heading to new lows for the year. That means we'll be right back in Complacency Central, indicating there are too many investors lined up in the bullish camp. As we've seen over the past two months, it isn't a guarantee that the markets are headed lower, but it sure makes it difficult to push appreciably higher. We've looked at a stacked chart of the VIX and the SPX in the past and I think it is worth revisiting this weekend. Daily Chart of the SPX vs. the VIX The pattern of lower highs on the SPX is much clearer here than on the DOW, with trendline resistance at 995. At the same time, the VIX is right back at its lows. This could be the prelude to a breakout, or it could be an artifact of expiration Friday monkey business. Either way, it bears watching as we head into next week. What I really find intriguing about the VIX chart is the way it spiked up near 26 on the most recent dip in the SPX, with the rise being halted right at that descending trendline that connects the July and October highs. Coincidence? I think not! While we haven't seen a major breakdown in the bullish percents, they are still indicating more weakness than strength. The notable exception here is the DOW, which is stubbornly holding onto Bull Correction at the 80% level. Also showing impressive strength is the OEX at 82%, and it is the only major index other than the OEX still in Bull Confirmed status. NASDAQ-100 - 65% Bear Confirmed NASDAQ Composite - 68.32% (well off the 73.50 all-time high) DOW - 80% (Still in Bull Correction) S&P 500 - 74.60% (Cycle high of 82.80% - Still Bull Correction) S&P 100 - 82% (Just below cycle high, still Bull Confirmed) Taking a look at the Bullish Percent SharpCharts, we have an interesting setup in play. After each of the indices generated sell signals with the bullish support lines dropping under their 10-dmas, we have each of them trying to hook higher. The rebound looks pretty anemic (except in the case of the OEX) and my expectation is for another rollover at lower highs, confirming the pattern of weakness. As I've been doing for the past couple months, I'm including the link to the StockCharts site for those of you that want to take a look for yourself. Here are the pertinent Bullish Percent symbols. DOW - $BPINDU SPX - $BPSPX OEX - $BPOEX NDX - $BPNDX COMPX - $BPCOMPQ Alright, as I promised earlier, I want to say a few words about Dow Theory, as it pertains to the current situation in the market. The basic premise that I'm focused on is the inter-relationship between the averages, primarily the Industrials ($INDU) and the Transports ($TRAN). One of the principal tenets of Dow Theory says that for confirmation of strength (weakness) in the market, a new high (low) in one average needs to be confirmed by a new high (low) in the other average. Over the past two months, the $TRAN has steadily marched higher, recording new highs on 7/08 (2565), 7/16 (2597), 7/25 (2615), 7/31 (2622) and 8/15 (2623). Throughout that period of time, the $INDU has yet to better its June highs. That is a bearish non-confirmation. But wait, there's more. Since the $TRAN set a new high on Friday, there's the very real possibility that the $INDU could follow through next week and that would produce a bullish confirmation. Are you confused yet? Here's where it gets really interesting. There's another aspect to Dow Theory that looks at the 50% levels. If in a primary bear market (which the DOW is clearly in), the index is unable to rally through the 50% mark of the overall bear market, then over time the index should work its way down to test the lows. On the other hand, if the DOW can close above that 50% level, then it ought to work higher and eventually test those highs. For reference, that level for the DOW is 7286. The closing high from January 2000 was 11722, and doing some quick math, we can see that the midpoint of that decline is 9502. See, I told you we'd come back to that 9500 level. There are lots of details and nuances that we don't have time to cover here this weekend, but that alone gives us two important measures of the strength of this cyclical bull market we've been watching. First, the DOW needs to post a new closing high over 9323. If successful in that venture, the bulls will then need to convince the real doubters (like me) by rallying through the 50% level at 9502. I really don't believe they can do it, but I'm willing to let them try. At any rate, you can see how at current levels, the market is at a pivotal point, at least in the eyes of the Dow Theorists. In the meantime, we're aligned with what SHOULD be the likely direction for this market, based on both fundamentals and my technical view. I remain cautiously bearish over the next couple months, but as we've been reminded all too often lately, the market can do anything! That's enough of my big picture analysis and prognostications. Let's turn our view now to our list of plays. Portfolio: SMH - Remember last week, when we looked at the relative price channels and 50-dmas for the Semiconductor index (SOX.X) and the SMH? With the benefit of hindsight, we can clearly see that the unbroken channel and 50-dma for the SMH was the key level to watch, as the broken channel and 50-dma in the SOX meant nothing. Both rebounded firmly last week, with the SOX once again nearing $400 resistance and the SMH tapping its channel center line on each of the past 3 sessions. So for the duration of this play (which will be short if SMH charges through our $33 stop next week), we'll restrict our view to what is going on in the SMH. I still have a bearish overall view for this sector and think new entries near current levels are favorable on a risk-reward basis with our closing stop set at $33. But we must keep in mind that the Tech bulls may just defy logic and power through that resistance, which has held for a solid month now. If stopped out, I can tell you without equivocation that SMH will cycle right back onto the bearish Watch List and we'll be looking for a higher entry point into the play. ADBE - The absence of a breakdown in shares of ADBE on the latest downdraft proved to be an important tell for our bearish play there, as demonstrated by last week's rise from the $31 support level. It was a choppy and low-volume rise to be sure, but it managed to put the stock back over the broken ascending trendline and the stock is once again nearing major resistance just over $35. I have a hard time seeing how the stock can move higher, but we do have the specter of earnings to be released in a little under a month on September 10th and that may provide a lift in the weeks ahead. We'll continue to key off of the two key levels for now, using $36 on the upside (which would be a new PnF Buy signal) and $31 on the downside (which would break strong support that has been holding since the June swoon began), as well as finally break the PnF bullish support line. The PnF chart is still on a Sell signal with a bearish price target of $21 -- now we need to see if the bears can follow through on that elusive promise. Maintain those stops at $36 and wait for a break back under the 50-dma before initiating new positions. DJX - Are we having fun yet? My comments above should pretty much spell out the situation on our DJX play. We need to see a break below the $90 level on a closing basis before we'll have any confidence in the downside. But right now, it looks like resistance that is going to be tested. Keep those stops set at $95.50, as the DJX should be unable to come near there unless I've badly miscalculated. I still favor new entries on rally failures near the $93.50 area. It's likely to still be a rather choppy ride until we move past Labor Day, so more conservative traders may want to wait on the sidelines until that point on the calendar comes and goes. Watch List: LEH - Either LEH is setting us up for a choice entry next week or it is going to blast right through strong resistance and from where I sit, I can't tell you which it is. The stock is still underperforming the overall Broker/Dealer index (XBD.X), which is back over the $550 support level, but below $580 resistance. LEH is still on a PnF Sell signal (target $52) and appears to be stalling out just below strong resistance in the $66-67 area. We could have a nice entry setting up early next week, but we'll just have to wait and see. With the 50-dma curling lower and just above $67, failed rallies below that average still look good for new entries. After entry, we'll use an initial stop at $70 and let gravity take over from there. BBH - The pattern is repeating across all the major indices, as apparent breakdowns are miraculously reversed. BBH got slammed lower during the first week of August, and last week it came chugging back up to the $130 resistance area. Not quite enough lift to get it into our targeted entry zone ($132-135), but unless I miss my guess, the bulls will make another assault on the recent highs over the next couple weeks and I'll view that as a solid entry point when the rally attempt fails. Keep in mind that BBH has yet to issue a PnF Sell signal, so caution is warranted as we attempt to pick a top in this relatively strong sector of the market. Due to its aggressive nature, if filled, we'll be using a rather wide stop at $141, just above the late 2001 highs. WMT - Just as I feared, WMT pushed through the $58 level ahead of earnings, stretching as high as $58.50 before pulling back in the wake of earnings which were essentially in line. Aside from the Sell the News reaction (which was quite mild), the only notable development last week was A.G. Edwards cutting the stock from Buy to Hold due to valuation on Wednesday. Note how the stock held above $58 even after the downgrade and I think this hints at a near-term rally attempt towards the $60 resistance, which is right at that multi-year descending trendline. My primary concern here is the PnF chart, which with the trade at $58 is now on a new Buy signal with a bullish price target of $78! WMT will now need to trade down to $51 just to give a PnF Sell signal, so it is entirely possible that we're early to the party here. Let's give this one some room to prove itself and not be too aggressive. A rejection from that descending trendline will give us the go ahead for aggressive entries, but we'll be giving it some room to breathe, with our initial stop at $64, just over the March 2002 highs. GM - Don't look for any excitement here. GM is just meandering sideways with little apparent impetus to go either up or down. I expect another irrational surge upward sometime in the weeks ahead, and that will be our opportunity to initiate a bearish position at an advantageous price level. Once initiated, this one could be on the list for awhile, as we let the very bearish fundamental picture play out. Because of my lack of a desire get a premature entry, I'm raising the entry target to $39-40 this weekend. QQQ - This one looks to be setting up in almost perfectly ideal fashion. The Nasdaq-100 bullish percent is bear confirmed, price is creeping back up to known resistance and the volatility indices are flirting with new lows for the year. Sounds to me like an ideal situation for a bearish position trade! As noted last week, we're looking for a failed rally in the $31.50-32.00 area as our cue to initiate new positions. Our initial target will be a drop to $28 (a 50% retracement of the March-July rally) and a 38% retracement of the rally off the October bottom. Then, based on the position of the bullish percents, as well as price action relative to the weekly oscillators, we'll be able to make a determination of the viability of a drop to our eventual target of $25-26. Remember, we are not looking for a breakdown to new lows with this play. That move likely won't come along until next year when it becomes crystal clear that once again the second half recovery was once again only a work of fiction. Radar Screen: HD - We certainly made the right decision by keeping a tight rein on our bearish play on HD, and exiting it for a slight gain last week. The stock continued to rise this week, ending just over $1 below its June/July double top. The PnF chart is still bullish, but I continue to be amazed at the stock's ability to rise, especially with the refinancing binge officially dead and the Housing bubble soon to follow. Needless to say, I think watching the site of the recent highs over the next couple weeks could provide another setup for a favorable bearish play. FNM - I mentioned FNM in a bearish light several weeks ago and my view hasn't changed. The only reason the stock never made it onto the Watch List was that price action peeled away from resistance before we got a chance. I think the stock is finding a temporary base near $62 and we just might get another pop back towards the $70-72 resistance. That should provide for an attractive point to initiate bearish position trades, as we can anticipate the potential unpleasantness related to the bond selloff that will have to be revealed in the next round of earnings. With the extensive derivative portfolio with which the company manages its interest rate risks, I can only imagine what problems crept in during the past two months. Now all we need to do is find a favorable entry point into the play. Closing Thoughts: Just when it looked like the bears were gaining the upper hand, we get a bullish expiration week and all the major averages are back to testing resistance. Buying interest is still rather meager, but the markets continue floating higher as selling interest is even weaker. The sea of liquidity is still floating the market higher, leaving us with a rather interesting situation. Expect more of the same over the next couple weeks, as major moves in either direction should be difficult to sustain until after Labor Day, when volume should return to normal. I can't shake the feeling that things are setting up very similarly to August of 2000, but I'll save that discussion for my article on Monday. The big unknown and potential danger is where all the money that is flowing out of the bond market is going. If it is going back to foreign hands, then it is a confirmation of the negative economic picture, with foreigners voting with their feet and giving the US economy a vote of No Confidence. On the other hand, if that money is just lying in wait for a major asset allocation program, then it could be very unpleasant for the bears. In either case, I suspect the next couple weeks to continue to deliver rather muted action. If my bearish views are correct, then we have plenty of exposure to the downside in both our Watch List and Portfolio. I'm going to be very stingy about adding new plays to the Watch List until the market agrees to tip its hand, an event that I don't expect to materialize next week. Pick your entry points for bearish plays carefully and be aggressive about protecting bullish gains. Have a great weekend! Mark P.S. As I sat in the dark yesterday, my mind idly wondered where all my readers are, spread around the globe. How many are right in my neighborhood (southern California) and how many exotic locations might be represented. I know I have some in Hawaii, and have regularly corresponded with some in Denmark, Sri Lanka, Turkey, Spain and Greece. So if you feel like satisfying my curiosity, feel free and let me know what other locations are represented. Thanks! 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 $ 2.05 -24.07% $33.00 '05 $ 30 ZTO-MF $ 5.00 $ 4.40 -12.00% $33.00 ADBE 07/17/03 '04 $ 35 AEQ-MG $ 4.20 $ 4.00 - 4.76% $36.00 '05 $ 35 ZAE-MG $ 7.20 $ 6.80 - 5.56% $36.00 '06 $ 35 WAE-MG $ 9.00 $ 8.80 - 2.22% $36.00 DJX 07/31/03 '03 $ 92 DJV-XN $ 3.80 $ 3.90 + 2.22% $95.50 '04 $ 92 YDK-XN $ 8.20 $ 8.40 + 2.22% $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 $39-40 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 None Drops 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 ************************************************************** ************** TRADERS CORNER ************** Surviving The Power Outage - Barely By Mike Parnos, Investing With Attitude This week I ran the entire gamut – from feeling powerful to powerless to powerful again. Powerful is good. Powerless is not good. How is a couch potato supposed to survive during a power outage? A few more days of no electricity in the Northeast (I'm in Detroit) and this couch potato would have joined the bald eagle and buffalo as an endangered species. Can you imagine? No TV. No Internet. No phone. No videos. No stock quotes. No water. No carry out. Warm beer. In less than a week they would have come into my condo and discovered my body – simply another cushion on the couch, breathless, pale, aromatic, emaciated and clutching the remote control. I know that, sooner or later, representatives from Hostess, Domino's Pizza, Pepsi and Budweiser would check on me to make sure I was OK. My only connection to the outside world for over two days was a $5 transistor radio. After an hour of listening to people piss and moan about their lack of power, I resorted to the unthinkable – reading. I read during the daylight hours and read by candlelight in the evening. I read mysteries, trading books, the back of cereal boxes. When the power finally went on Friday night at 1 am, I was thrilled to discover that our CPTI portfolio was yet another big winner – to the tune of a profit of $4,710. That brings our nine- month total profit to $28,210 – and using only about $30-$35 per month of our brokerage account. Here's a review of our August trades. Enjoy! BBH Iron Condor - $1,550 SPX Iron Condor - $2,310 LLTC Sell Straddle - $850 Total: $4,710 profit ______________________________________________________________ AUGUST CPTI PORTFOLIO TRADES August Position #1 – BBH Iron Condor – Closed at $129.80 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 had a maximum profit range of $125 to $140 with a total credit of $1,550. Our risk was $3,450. BBH tested the lows and almost got down on all fours, but bounced up and finished at $129.80 – comfortably in our range. We pocketed $1,550 for our trouble. Nice. Very nice indeed! August Position #2 – LLTC Sell Straddle – Closed at $37.64 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. When, shortly before the close, LLTC was trading at $37.50, we bought back our short call for $2.60. We originally took in $3,450. Our profit was a respectable $850. August Position #3 – SPX Iron Condor – Closed Friday at 990.67 This was a slightly more aggressive position than usual. Why? The range is smaller. Note the different number of contracts we used 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. It all worked out nicely as the SPX closed almost exactly in the middle of our range and we pocketed a robust $2,310. ______________________________________________________________ Quickie Results August Quickie Trade #1 – OEX Iron Condor – Closed @ 498.30 We sold 10 contracts of August OEX 500 calls @ $2.15 and bought 10 contracts of August OEX 510 calls @ $1.00 for a credit of $1.15. Then we sold 10 contracts of August OEX 490 puts @ $3.30 and bought 10 contracts of August OEX 480 puts @ $2.10 for a credit of $1.20. Total net credit of $2.35. OEX finished within our maximum profit range, so we pocket $2,350. August Quickie Trade #2 – QQQ Lottery Strangle – Closed at $31.17 It's cheap, the risk is low, and we're looking for a $2-3 move in the QQQs. We bought 10 contracts of August QQQ $29 put @ $.15 and bought 10 contracts of August QQQ $31 call @ $.15. Total debit of $3.00 ($300). Profit potential was unlimited if we got a big move. We didn't. So, we take a baby loss of $300. August Quickie Trade #3 – EBAY Sell Strangle – Closed at $103.07 We sold 10 contracts of August EBAY $100 calls @ $1.95 and sold 10 contracts of August EBAY $100 puts @ $1.35 for a total net credit of $3.30. Maximum potential profit, of $3,300. EBAY finished at $103.07. However, when EBAY broke above $102.60 about noon, we decided to buy back the short calls at $2.80 and lock in a small, but spendable, profit of $500. August Quickie Trade #4 – RUT (Small Cap Index) Iron Condor – Closed at 471.92 We sold 10 contracts of August RUT 460 calls @ 1.75 and bought 10 contracts of August RUT 470 calls @ $.70 for a credit of $1.05. Then we sold 10 contracts of August RUT 450 puts @ $2.60 and bought 10 contracts of August RUT 440 puts @ $1.05 for a credit of $1.55. Total net credit of $2.60. Maximum profit of $2,600. On Tuesday, when RUT broke above our upper parameter of 460, we unwound the trade for $3.15 and settled for a $550 loss. Our Quickie total was a profit of $2,000 – thanks primarily to our OEX trade. ______________________________________________________________ NEW SEPTEMBER POSITIONS – Remember that September is a five-week option cycle. September Position #1 – SPX Iron Condor – SPX @ 990.67 S & P 500 Index = SPX Sell 10 contracts of SPX 1040 Sept. calls Buy 10 contracts of SPX 1050 Sept. calls Look for a net credit of $1.30. Sell 10 contracts of the SPX 950 Sept. puts Buy 10 contracts of the SPX Sept. 940 puts Look for a net credit of $1.40 Total credit of $2.70 ($2,700). We have a huge maximum profit range of 950 to 1040. That's peace of mind! More aggressive investors can narrow the range a bit and take in more money. September Position #2 – SMH Sell Straddle – SMH @ $32.50 Semiconductor Holders Trust = SMH Sell 10 contracts of SMH Sept. $32.50 calls @ $2.50 Sell 10 contracts of SMH Sept. $32.50 puts @ $2.35 Total credit of $4.85 ($4,850). We will make some profit if SMH finishes anywhere between $27.65 and $37.35. The closer SMH finishes to $32.50, the more money we will make. The bailout points are the parameters of our profit range. SMH can be volatile. This is an uncovered spread, so you need to pay attention. Maximum potential profit is $4,850. September Position #3 – COF Sell Straddle – COF @ $49.76 Capitol One Financial = COF Sell 10 contracts of COF Sept. $50 calls @ $2.35 Sell 10 contracts of COT Sept. $50 puts @ $2.50 Total credit of $4.85 ($4,850). We will make some profit if COF finishes anywhere between $45.15 and $54.85. The closer COF finishes to $50, the more money we'll make. Our bailout points are the parameters of our profit range. Maximum potential profit is, again, $4,850. September Position #4 – EBAY Iron Condor -- EBAY @ $103.07 Sell 10 contracts of the EBAY Sept. $95 puts @ $1.20 Buy 10 contracts of the EBAY Sept. $90 puts @ $.65 Net credit of $.55 Sell 10 contracts of the EBAY Sept. $110 calls @ $1.35 Buy 10 contracts of the EBAY Sept. $115 calls @ $.60 Net credit of $.75 Total credit of $1.30 ($1,300). Exposure of $3.70. Maximum profit range of $35 to $45. Potential maximum profit of $1,300. Remember that these prices are based on Friday's close. Monday's prices will vary. If you come within $.20 of our estimates, it's still a good trade. Also, remember, NO market orders. _________________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since last July. To find past CPTI (Mike Parnos) articles, look under "Education" and click on "Traders Corner." They're waiting for you 24/7 ______________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP ************** TRADERS CORNER ************** I am back from vacation. I had a great time. We went back for my high school reunion. I showed the kids where I grew up and my old stomping grounds. They loved looking at my old high school pictures and could not believe how much hair I used to have. I did learn three things while I was in Chicago. First, do not believe the computer tech if he says he fixed your laptop. Check it out before you go. Second, 56K modems are dog slow. Third it is not the walking you do while site seeing that enervates you, it is the SLOW walking you do that saps your strength. I discovered that just meandering through the museums takes a heavy toll on the legs. When we were walking to/from the parking lots, around my old schools and up and down the old neighborhood, we could go for hours. However, just slowly going from exhibit to exhibit to exhibit really is tiring. And now as I look at charts of the indices, I am becoming really tired. For the last 2+ months, the S&P 500, Dow and NASDAQ have been meandering around a trading range sapping out all my energy. I am discovering that this is a much more painful process than a trending market. At least at the zoo, you can actually see the bears or bulls. I left August 1st and the net difference between then and now is really insignificant. So let's see what has happened while I was gorging myself with Chicago pizza. Chart: S&P 500 Weekly 8/15/2003 Let's start with a weekly chart of the S&P 500 since January 2000. The S&P 500 shows the waves much more clearly than the Dow, but the analysis can be carried over to the Dow or NASDAQ as they generally move in tandem. I am using Advanced Get's longer term labeling which is more accurate than the default labeling. Based on this labeling, the S&P 500 is still in the process of the wave 4 correction. This correction is shaping up nicely to be an expanded flat. The characteristics of an expanded flat are 1. The A-B-C waves segment into a 3 wave, a 3 wave and a 5 wave. So far the A wave is a 3 wave, the B wave is a 3 wave and the C wave is an incomplete 5 wave. 2. The A wave and B wave are the same height (plus/minus 25%). Right now the B wave is 90% of the A wave. 3. The C wave is somewhere between 1.38 to 1.62 times the height of the A wave. Currently the C wave is only 1.20 times the height of the A wave. This wave 4 does not seem to be anywhere near complete. Typically 4 waves correct at least 38% but 24% is not uncommon. However, in order for the 4 wave to meet the criteria of at least 138% of wave A, the S&P 500 still needs to extend a bit higher. The oscillator can still absorb a bit more before the 1.38 level is reached. Let's take a closer look at the daily charts and dissect the C wave to see how high the S&P 500 will go before reversing course. Chart: S&P 500 Daily 8/15/2003 The daily chart of the S&P 500 shows that the C wave is segmenting into a five wave basic pattern rather nicely. Looking more closely at the 4-circle wave we can see that the S&P 500 has not yet retraced to the 38% level yet. The oscillator has retraced to zero but I do not think that the 4 wave is complete just yet. The correction pattern just doesn't look fully formed. I believe that what we are seeing is the 1 and 2 waves of the five wave basic pattern of the unfolding C wave and that the S&P 500 will retrace to around the 930-900 level before heading back up. Once the S&P 500 starts heading back up, the question becomes just how far up will it extend? Consider this scenario. Let's say that the S&P 500 retraces all the way down to the 62% level. That puts the S&P 500 at about 909. According to Elliott Wave theory, the 3 wave is never the shortest wave and normally it is the longest wave. This 3 wave is 174 points (1016-843). Therefore, in order for the 3 wave to be the longest, the 5 wave can be no longer than 909 + 173 = 1082. In addition, the point where 1.62 x A wave falls is at 1088. The 38% retracement level on the weekly 4 wave falls at 1060. We are therefore looking as some rather heavy resistance at the 1060-1090 range as all these confluences converge at a super mega major pivot point. When the S&P 500 reaches these levels, I will be looking for reversal signals as the weekly 4 wave will be complete. The S&P 500 should then reverse course as it starts the 5 wave and begins heading down to about 650 over the course of the next year. A reasonable time line, based on historic market patterns, would be the decline to 900 through October and then a bear market rally through at least the end of the year and possibly into January or February of next year. More on that as the pattern unfolds. Unless of course, it doesn't. Last time I presented an alternate scenario. Chart: S&P 500 Weekly Alternate 8/15/2003 In this scenario, the S&P 500 has already completed the five wave basic pattern and is in the process of the A-B-C correction. The A wave is still unfolding as a five wave basic pattern which would most likely make the A-B-C correction a zigzag. The short term result would be the same. The S&P 500 would rise to about the same level as the first scenario (1060-1090) to complete the A wave and then decline in the B wave correction. The B wave would be shallower as is typical in zigzags, but then the C wave could take the S&P 500 to around the 1200-1300 level. I do not like the alternative as much because the oscillator looks yukky. That is a technical term Elliotticians use to describe an oscillator that does not correlate well to the wave pattern. What I find is that if I use the longer term labeling, then I have to use the longer term oscillator as I did in the first scenario. The long term oscillator does not support this alternate labeling. Go back to the weekly chart of the first scenario. Notice that the oscillator did not retrace the minimum level of 90% to support an already formed 5 wave. Although the alternate scenario could come to pass and we would have to accommodate the oscillator, I would not give the alternative a high confidence rating. The bottom line though, in either case, is that we still see a S&P 500 (and Dow and NASDAQ for that matter) falling a bit to complete the 4 wave, rising to complete the 5 wave and then we should see a longer term decline in the markets. ************** TRADERS CORNER ************** Elliott Wave Play Updates DJX Chart: DJX update 8/15/2003 The Dow seems to be taking an inordinate amount of time tracing out this retracement pattern. We have run out of time. If you have not already closed out this play, do so on Monday. Option The original option values on 6/6/2003 were DJX – 90.62 Pos Qty Sym Strike Type Bid Ask Delta IV Buy* DJVIN SEP 92 Call 2.80 3.00 0.51 15 Buy DJVUJ SEP 88 Put 2.70 2.90 -0.33 23 ---- ---- ----- 5.50 5.90 0.18 Current values on 8/15/2003 are DJX – 93.22 Pos Qty Sym Strike Type Bid Ask Delta IV Buy* DJVIN SEP 92 Call 2.50 2.65 0.64 13 Buy DJVUJ SEP 88 Put 0.45 0.65 -0.22 22 ---- ---- ------ 2.95 3.30 0.29 * already sold QQQ Chart: QQQ update 8/15/2003 The QQQs should follow the Dow and S&P 500 in retracing this 4 wave. The first target is going to be 28.50 by early September. Stochastics indicate that the QQQs may trend a bit higher first, but I suspect that the QQQ should continue to decline. Hold. Option The original option values on 6/13/2003 were QQQ – 29.96 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 KLFME Jan 04 31 Put 3.00 3.20 -0.44 32 Sell 1 QQQSK Jul 03 37 Put 6.90 7.10 0.99 41 Credit: .50 Current values on 8/15/2003 are QQQ – 31.17 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 KLFME Jan 04 31 Put 2.10 2.20 -0.44 29 Sell 1 QQQSK Sep 03 37 Put 5.70 5.90 0.99 33 Liquidation 1: -1.70 + .50 = -1.20 BA Chart: BA update 8/15/2003 BA did continue a bit lower while I was on vacation, but it appears to have bottomed out and is now heading higher. This chart shows BA and volume. Notice that as BA was increasing in value from March to June, the volume was increasing. During the wave 4 correction from June to August, the volume dried up. This is a good sign especially since BA has been in the news lately and the news has not been all that good. Look for BA to head higher over the next several months as it completes the 5 wave. Our target is about 38.50 by November. Hold. Option The original option values on 6/17/2003 were BA – 36.15 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 BAGF Jul 03 30 Call 6.10 6.40 -99.5 29 Buy 2 BAAU Jan 04 37.5 Call 2.70 2.85 52.6 25 Credit: 0.40 Current values on 7/25/2003 are (Buy back the Aug 30 Call) BA – 32.68 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 BAHF Aug 03 30 Call 2.75 2.85 -95 21 Buy 2 BAAU Jan 04 37.5 Call 0.75 0.80 26 22 Current values on 8/15/2003 are BA – 32.94 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 BAAU Jan 04 37.5 Call 0.80 0.85 27 25 Liquidation value: -2.85 + .40 + 1.60 = -0.85 T Chart: T daily update 8/15/2003 T went up as expected and it should start heading back down toward $12.50. As T decreases in value, the September call will decrease in value and hopefully expire worthless next month. On the other hand, the weekly chart now implies that T is going up. Chart: T weekly update 8/15/2003 Either way, depending on how fast this transpires, this play should be profitable. Hold. Option T: $20.00 (entry) Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 TIC Sep 03 15 Call 5.00 5.30 100 21 Buy 3 TJX Oct 03 22.5 Call 0.50 0.65 31 22 Credit: $305 T: $21.03 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 TIC Sep 03 15 Call 5.90 6.20 -98 60 Buy 3 TJX Oct 03 22.5 Call 0.60 0.70 34 35 Liquidation 1: -4.40 + 2.05 = -1.35 WEN Chart: WEN daily update 8/15/2003 The daily chart of WEN is not entirely clear as to what it is doing. However the weekly still suggests that the play is right on schedule. Chart: WEN weekly update 8/15/2003 The weekly chart shows that WEN is on track to $23.00. Hold. Option The original option values on 7/22/2003 were WEN – 28.84 Option Pos Qty Sym Strike Type Bid Ask Delta IV Buy 10 WENME Jan 04 25 Put 0.85 0.95 -20 34 Current values on 8/15/2003 are WEN – 28.52 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 10 WENME Jan 04 25 Put 0.75 0.85 -22 30 ************** BROKERS CORNER ************** Readers Write By Andrew Aronson One of our readers submitted some excellent questions about trading index options and we asked Andrew Aronson, Options Principle at OneStopOption to provide some answers. Attn: Contact Support Subject: Trading Index Options Ray, I am new to index options but have bought and sold equity options for years sometimes with assignments forcing me to be short or long stock. I would like to move onward and upward into index options and have a lot of questions mostly related to what one does in rolling as they are cash settled. Please allow me to list the questions by number as this would allow you to follow in kind. 1) I predominantly sell uncovered put options on stocks I may want to own and I sell uncovered call options on stocks I may want to short. What does one consider (prerequisites) before entering into an uncovered index option or does one almost always enter a spread? I have noticed that some brokerage firms such as Quick and Reilly do not even allow uncovered index options. So at this brokerage one can only purchase index options. 2) If an uncovered put goes against me I sometimes sell the stock short to reduce my exposure, sometimes I accept assignment then sell the stock and sell double to triple the number of uncovered option contracts at a lower strike price, and rarely do I buy to close as a stop loss. If an uncovered call goes against me I sometimes buy the stock to reduce my exposure, sometimes I accept assignment then sell the stock and then sell double to triple the number of option contracts at a higher strike price, and rarely do I buy to close as a stop loss. Since assignment is not an option I guess that leaves me fewer alternatives but what is your strategy when positions are not in your favor? 3) Equities are easy to remember regarding the conversion, that is 1 contract equals 100 shares of stock. With so many index options how does one learn the conversion factor before considering a trade? 4) What considerations about option expiration besides American or European must one learn? Equity options always expire the third Friday of the month but the exercise and assignments take place over the weekend. When do index options expire such as oex, spx, sox, btk in comparison to its component equity options and how does this influence ones trading decisions? Please excuse this novice question: are the qqq to the ndx like smh to sox, that is equity option to index option or is qqq considered an index option? 5) What considerations about pre- and post-market trades are important regarding the settlement of index options and how do you make contingencies for the unexpected? Please provide any peculiarities as I have come across people surprised at some of the outcomes unique to expiration. 6) I was thinking of an iron condor on the oex but will not place the order due to my timidity and because of the likelihood that you will not be able to respond to this email prior to August expiration. Please critique my thinking: OEX 493.78 intraday... Sell 480p oxb tp .75 to 1, Buy 475p oxb po .4 to .5 for credit of 35 to .5 and sell aug 505c oeb ha .7 to .9 and buy aug 510c oeb hb 2 to .35 for a credit of .5 to .65. Potential total credit .85 to 1.05 to risk 5 if $1/contract. It's midday and is this considered a reasonable reward/risk return for 4 and 1/2 days? 7) Which options expire on Thursday instead of Friday and how does this influence what you do in cash settlement options? 8) How does one place stop loss orders on options without getting burned by the spread? I learned never to place market orders on options as most equity options are thinly traded and market orders allow the market maker to burn the customer. If I place an order to close an index option position based on the index then I believe the option order is a market order. If I place a stop loss based on the option price it is a limit order but I wonder what guideline one would use in choosing a stop loss for the index option price as it seems a "guestimate" unless one has a special calculator with software on the black-scholes? With many index options highly liquid is this what you do for protection on index options as opposed to equity options? At my broker I have to give telephone orders for anything but standard buy and sell orders. So for spreads, buy writes, collars, stop loss, etc. it is a higher commission schedule placing orders with a broker. Although I have traded a lot of equity options please allow me some leeway on these novice questions. Thanks, ES Hello ES, You sent a few questions to Ray Cummins, the Spreads/Combos editor at OptionInvestor.com. Many of the questions are brokerage related, so he asked if I could help answer them. 1) Because Index options are cash settled, this adds an additional element of risk to trading. As you explained, if you are put the stock you may hold it and sell calls against the position. When using index options, we do not get put shares. Cash is simply added and subtracted from your account at expiration. Man Financial is the firm that our division uses to clear our business. The minimum equity needed to sell "naked" index options is $100,000. Spreads can be done with $10,000. 2) I advise clients to have a predetermined exit strategy before entering a trade. If you are doing credit spreads on stocks or indexes, your risk is predetermined when you place the trade. If a client is uncomfortable with the risk, I would advise that they reduce the number of contracts. 3) When dealing with indexes, I like to explain the amount of leverage involved with these options. An example may help. The SPX @ 990.00 represents $99,000 worth of stock. If we sell a 990 Put naked, our maximum exposure is $99,000 per option (minus the initial credit received). With the OEX @ 500.00, this represents $50,000 worth of stock, etc. The options work the same as regular equity options; a $1 move = $100 per contract. 4) I would consider the QQQ an index and a stock option. These options are settled with stock. The price of the QQQ is based on the NASDAQ 100 index. 5) If you are able to call me during trading hours I would love to share some horror stories with you. 6) The Iron condor is a good strategy because no matter what, one half of the position will expire worthless. In your example, a credit of 1 will result in a maximum risk of $4 per spread (5- 1=4).Is it a good risk to reward ratio? You put yourself against the wall if the market moves suddenly. I like to trade credit spreads further from the market and with more time. 7) The SPX options stop trading on Thursday, but are settled by the OPENING price of all 500 stocks on Friday morning. This should have little bearing in decision of doing a trade or not. 8) Stop-loss questions are never easy to answer. When our clients stops are triggered, we work the orders to get the best possible prices in the closing or adjustment transaction. The great thing about a stop-loss is the fact that the trader has thought about the position in advance and is trying to quantify the risk. With credit spreads, I advise that you do not place a stop-loss. The risk is already predefined. If you are uncomfortable, please do not do the trade or lower the quantity of contracts. I would welcome the opportunity to speak to you about how we work with our clients to help the develop good trading techniques. I am vailable during market hours to speak to you. Please feel free to contact me at (888) 281-9569. Thank you, Andrew Aronson V.P. Investments OneStopOption Division of Man Financial 141 W. Jackson Blvd Ste 1800-A Chicago, IL 60604 Andrew Aronson and Alan Knuckman are skilled option principles, as well as long-time OIN associates, and they recently started a specialty brokerage for derivatives traders. Their personalized service will enable traders to be more confident, comfortable and successful with options. They will also help new market players learn the "right" way to trade options with education and coaching for maximum portfolio performance. Alan and Andrew's expertise is a valuable resource that will easily pay for itself through timely executions and the piece of mind that comes from someone watching your trades throughout the day. The commissions are comparable to those of discount brokers but you get to speak directly with option professionals, not customer service clerks. Clients can call them directly to review positions and update orders and they also offer "auto-trading" for many of the plays in the newsletter. OneStopOption Strengths: * Dedicated option brokerage with "live" option principals/brokers * Order routing to "best-priced" exchange and timely executions * All types of orders (stop/limit/OCO) to encourage disciplined trading and proper money management * Advanced option trading level approval for inexperienced traders * Foreign accounts including Canada -- Futures trading available * Direct electronic trading and personalized customer services * Ability to filter recommendations and provide strategy advice * Free OIN subscription for those who qualify (based on account size and portfolio activity) Get Execution, Education, and Option Experience at OneStopOption Visit their new site -- www.onestopoption.com -- or send an E-mail to: Aaronson@OptionInvestor.com ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? 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The Option Investor Newsletter Sunday 08-17-2003 Sunday 5 of 5 In Section Five: Covered Calls: Options 101: Success Basics Naked Puts: Options 101: More Q&A With The Naked Puts Editor Spreads/Straddles/Combos: Power Outage Makes August Options Expiration A Non-Event Updated In The Site Tonight: Market Posture: Inside Day ************************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: Success Basics By Mark Wnetrzak New readers often ask for suggestions on how they can be successful in the options market. The decision to trade options on a regular basis requires serious consideration before a commitment can be made. Option trading is similar to an occupation or a career; it requires much more effort and dedication than a hobby. In fact the very nature of trading, as opposed to long-term investing, will prevent the majority of participants from devoting the time necessary to succeed, due to their regular jobs and responsibilities. With proper portfolio administration, investments can be left unattended for weeks but in contrast, some option positions need to monitored, evaluated, and adjusted almost continuously. Those who are considering the possibility of option trading as a principal vocation should determine if they can earn enough money after the cost of doing business to justify the endeavor. In short, does the potential profit justify the time needed to become successful? There are a number of elements necessary to be successful in the options market. Knowledge, ability and a suitable personality are among the common traits exhibited by experienced traders and as a group, most conform to the same basic plan. They use sound and sensible methods for trading options; implementing strategies that work best for each particular situation. They acquire the proper tools for accurate analysis of potential candidates and construct positions based on the appropriate market outlook and risk/reward attitude of their portfolio. Professionals traders also utilize various mechanical systems and exit strategies to manage their positions. Setting up specific rules and targets before a position is initiated will help control emotions and improve consistency with exit decisions. Of course, opening a new position is easier because you can choose from a variety of candidates and you don't have to buy unless you are completely satisfied. Successful traders will search through charts for the perfect opportunity, waiting for the best combination of bullish technical indicators and favorable market conditions. They study historical pricing patterns and perform extensive due-diligence until the number of reasons to buy becomes overwhelming. In all cases, the choice to trade is yours to make and the timing in new positions is not a constraint or limitation. However, the entry transaction is particularly important and it deserves your best analysis and judgment. In buying strategies, the option or issue should be one you want to own and the price must be technically favorable, with minimal downside risk. A timely entry requires a thorough knowledge of charting techniques and market trends and the entire process is something you must completely understand because a successful exit is by and large the product of a proper entry. One of the most critical conditions for success which new traders often overlook is the importance of market selection. In most cases, option buying strategies work best in issues with high volatility; the rate of change on a daily basis. Of course, all markets can provide an opportunity for trading but those with low intra-day movement usually do not offer enough profit potential to justify the risk of the position. Gauging volatility in a market allows a trader to estimate potential returns and determine the correct methodology and approach for a particular trade. However, it is also important to identify situations that have acceptable price activity; that which can generate a reasonable profit with minimum capital exposure. The market must be somewhat predictable as opposed to one which exhibits extremely violent swings and the best conditions will be accompanied by vigorous trading volume in the underlying along with robust liquidity in its options. An individual's personality plays an important and crucial role in the ability to profit in the options market. The reality of trading is that you need to have an insightful understanding of your character and emotional traits in order to identify personal strengths and weaknesses. We all have favorable and detrimental qualities and like everything else in life, the key to success is exploiting your positive attributes rather than trying to change your personality. For example, traders who find it difficult to make timely decisions might use strategies that require very few adjustments. Those that have trouble exiting a losing position should consider using a protective stop-loss, to ensure that a bad trade is not exacerbated by one's natural reluctance to delay the proper resolution. Another common personality trait among new traders is the desire to be perfect; to not have any losing trades. Unfortunately, the very nature of the market guarantees that it is unpredictable and a trader who can not learn to live with losing plays (and learn from them) will eventually endure the setbacks he was trying so hard to avoid. The cycle often continues to the point where, having relinquished his initiative, the trader is forever relegated to lost opportunities. These are just a few of the unwanted characteristics that can plague your trading career and make achieving success in the options market one of the most difficult tasks you will ever undertake. 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 ISPH 12.75 13.98 AUG 12.50 0.80 0.55* 10.0% SLNK 15.40 18.36 AUG 15.00 1.15 0.75* 7.6% ROXI 7.99 7.45 AUG 7.50 0.90 0.36 7.4% DIGE 32.50 33.18 AUG 30.00 3.40 0.90* 6.7% IMCL 39.86 39.98 AUG 35.00 6.40 1.54* 6.7% BEAS 12.79 12.58 AUG 12.50 1.00 0.71* 6.5% NAV 40.59 41.84 AUG 40.00 1.75 1.16* 6.5% AFFX 23.30 22.49 AUG 22.50 1.45 0.64 6.4% DPMI 20.43 19.88 AUG 20.00 1.10 0.55 6.2% CYBX 23.38 28.87 AUG 20.00 4.40 1.02* 5.8% SSTI 5.47 6.65 AUG 5.00 0.75 0.28* 5.2% DRIV 21.98 21.75 AUG 20.00 2.80 0.82* 4.6% MOGN 31.97 36.21 AUG 30.00 2.90 0.93* 4.6% EXTR 5.75 6.07 AUG 5.00 0.95 0.20* 4.5% CY 13.84 14.30 AUG 12.50 1.95 0.61* 4.5% RFMD 5.89 8.07 AUG 5.00 1.15 0.26* 4.0% ANEN 10.75 11.40 AUG 10.00 1.10 0.35* 3.9% BONZ 15.28 14.50 AUG 15.00 0.85 0.07 0.7% CHIC 12.51 11.93 AUG 12.50 0.55 -0.03 0.0% INSP 15.52 14.29 AUG 15.00 1.20 -0.03 0.0% IMGN 5.05 4.35 AUG 5.00 0.50 -0.20 0.0% CHINA 13.48 8.67 AUG 10.00 4.00 -0.81 0.0% WAVX 3.46 3.20 SEP 2.50 1.20 0.24* 7.7% XOMA 8.09 8.32 SEP 7.50 1.30 0.71* 7.6% NWAC 8.30 8.76 SEP 7.50 1.40 0.60* 6.3% NEOF 12.45 12.95 SEP 12.50 0.90 0.95* 6.0% USG 14.11 14.86 SEP 12.50 2.35 0.74* 4.6% ISIS 5.33 5.40 SEP 5.00 0.60 0.27* 4.1% SNIC 11.18 11.80 SEP 10.00 1.70 0.52* 4.0% * Stock price is above the sold striking price. Comments: The major averages rebounded this week only to once again test key resistance areas. Is anybody seasick yet? With the primary direction of the next trend unknown, protecting capital remains the "name of the game." Evaluate any August positions you may own after this week's options expiration and act accordingly. 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 ENER 10.39 SEP 10.00 EQI IB 1.10 512 9.29 35 6.6% EPNY 5.07 SEP 5.00 UEP IA 0.40 1100 4.67 35 6.1% WAVX 3.20 SEP 2.50 KWW IZ 0.85 2358 2.35 35 5.5% VSAT 15.09 SEP 15.00 IQS IC 0.80 75 14.29 35 4.3% TKLC 15.46 SEP 15.00 KQ IC 1.15 36 14.31 35 4.2% RFMD 8.07 SEP 7.50 RFZ IU 0.90 7303 7.17 35 4.0% GSIC 11.52 SEP 10.00 UGF IB 1.95 13 9.57 35 3.9% 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). ***** ENER - Energy Conversion $10.39 *** Blackout Rally! *** Energy Conversion Devices (NASDAQ:ENER) is a technology, product development and manufacturing company engaged in the invention, engineering, development and commercialization of new materials, products and production technology. The company develops Ovonic materials so as to design and commercialize new products, such as nickel metal hydride (NiMH) batteries, thin-film solar (photovoltaic) cell products and phase-change optical memory media. The company has established a multi-disciplinary business, scientific, technical and manufacturing organization to market products based on its technologies. ENER manufactures and sells its proprietary products through its joint venture companies and through licensing arrangements with major companies worldwide. Shares of alternative energy companies surged Friday after the nation's largest blackout. Energy Conversion has been in a basing formation for almost a year with a support area near $9. Traders can speculate on the near-term performance of the issue with this conservative position. SEP-10.00 EQI IB LB=1.10 OI=512 CB=9.29 DE=35 TY=6.6% ***** EPNY - E.piphany $5.07 *** Cheap Speculation! *** E.piphany (NASDAQ:EPNY) develops, markets and licenses the E.piphany E.6 suite of software products, an integrated set of customer relationship management (CRM) software products. The E.6 Suite includes multiple CRM software products designed to solve specific business problems in areas such as customer analytics, marketing, service and sales. Their software solutions can be deployed simultaneously or in incremental steps as its customers seek to address new business problems. Customers can deploy these software solutions to enhance, supplement or replace previously installed software products. The E.6 Suite is made up of several software modules: E.piphany Insight, E.piphany Marketing, E.piphany Sales, E.piphany Service and E.piphany Interaction Advisor. E.piphany has been forging a Stage I base for over a year and has established a strong support area near $4. Investors who believe the current lateral trend will continue can profit from that outcome with this play. SEP-5.00 UEP IA LB=0.40 OI=1100 CB=4.67 DE=35 TY=6.1% ***** WAVX - Wave Systems $3.20 *** 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 suggests 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=0.85 OI=2358 CB=2.35 DE=35 TY=5.5% ***** VSAT - ViaSat $15.09 *** Next Leg Up? *** ViaSat (NASDAQ:VSAT) is a provider of advanced broadband digital satellite communications and other wireless networking and signal processing equipment and services to the government and commercial marketplace. The company's defense products include tactical data links, such as advanced multi-function information distribution system (MIDS) product line, simulation and test equipment (which allows the testing of sophisticated airborne radio equipment without expensive flight exercises), ultra-high frequency (UHF) Demand Assigned Multiple Access (DAMA) satellite communications products, consisting of modems, terminals and network control systems, and the networks business, where ViaSat's information security segment is gaining traction. This week, ViaSat reported a profit for its fiscal 1st-quarter citing a balanced mix of government and commercial contracts. We simply favor the bullish technical indications and investors can use this position to establish an entry point with a cost basis closer to support. SEP-15.00 IQS IC LB=0.80 OI=75 CB=14.29 DE=35 TY=4.3% ***** TKLC - Tekelec $15.46 *** 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. This week Tekelec was upgraded by Raymond James to a "Strong Buy." TKLC 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-15.00 KQ IC LB=1.15 OI=36 CB=14.31 DE=35 TY=4.2% ***** RFMD - RF Micro Devices $8.07 *** Bottom Fishing! *** RF Micro Devices (NASDAQ:RFMD) is a designer, developer, producer and marketer of proprietary radio frequency integrated circuits (RFICs), primarily for wireless communications products and applications. The company's products are included in cellular and personal communications service (PCS) phones, base stations, wireless local area networks (WLANs) and cable television modems. The company offers a broad array of products, including amps, mixers, modulators/demodulators and single chip transmitters, receivers and transceivers that represent a substantial majority of the RFICs required in wireless subscriber equipment. These ICs perform the transmit and receive functions that are critical to the performance of wireless and PCS phones. The current technical outlook is recovering and this play offers favorable reward potential at the risk of owning this industry-leading issue at a reasonable cost basis. SEP-7.50 RFZ IU LB=0.90 OI=7303 CB=7.17 DE=35 TY=4.0% ***** GSIC - GSI Commerce $11.52 *** Internet Sector *** GSI (NASDAQ:GSIC) develops and operates electronic commerce businesses for retailers, branded manufacturers, media companies, television networks and professional sports organizations. GSIC's solutions encompass Website design and development, e-commerce technology, customer service, fulfillment, merchandising, content development and marketing. GSI enables its partners to remain focused on their core businesses and avoid substantial investments and operating expenses and the commitment of significant resources relating to e-commerce. Depending upon the specific needs of a partner, it can undertake either a complete outsourcing of the partner's e-commerce activities or a more customized solution that uses portions of its platform. The near-term price history of GSIC reveals one of the better charts we've seen recently (jinx?) and investors who believe the rally will continue can profit from that outcome with this position. SEP-10.00 UGF IB LB=1.95 OI=13 CB=9.57 DE=35 TY=3.9% ***** ***************** 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 XOMA 8.32 SEP 7.50 MBU IU 1.50 873 6.82 35 8.7% PLUG 5.16 SEP 5.00 PQL IA 0.50 695 4.66 35 6.3% ENMD 3.29 SEP 2.50 QMA IZ 0.95 380 2.34 35 5.9% PSTI 15.00 SEP 15.00 MQA IC 0.95 52 14.05 35 5.9% NXTL 17.51 SEP 17.50 FQC IS 1.05 4194 16.46 35 5.5% ADLR 13.19 SEP 12.50 UAH IV 1.40 39 11.79 35 5.2% SMMX 22.65 SEP 22.50 OFU IX 1.35 35 21.30 35 4.9% ISPH 13.98 SEP 12.50 JPU IV 2.05 970 11.93 35 4.2% TRN 25.38 SEP 25.00 TRN IE 1.35 150 24.03 35 3.5% ***************** NAKED PUT SECTION ***************** Options 101: More Q&A With The Naked Puts Editor By Ray Cummins With the recent volatility in the market, we've received a number of questions concerning exit and adjustment strategies for naked puts. Attn: Naked-Puts Editor Subject: Naked Puts and Stop Losses In Sunday's (8-3-03) Naked Put section, you mentioned limiting losses to 20% of the initial investment. Would that mean that if I received $0.50 for the premium, I would buy it back if the cost of the option goes up to $0.60 or more, or does the stock price need to move down by 20%? BJN Regarding the comment on position management with uncovered puts: "While each individual situation will require a slightly different solution, we suggest limiting individual position losses to 20% of the initial investment." Actually, the percentage loss-limiting technique with "naked" puts is based on the initial collateral (or investment) required for the position. Using an example: the Research In Motion (NASDAQ:RIMM) play on 8/3: With the stock at $27.28, the AUG-22.50 Put (RUL-TX) is trading at $0.35. Thus, the position requires collateral of approximately $650 per contract. If you sell 5 contracts of the AUG-22.50 Put, the total margin (investment) will be roughly $3250. Since 20% of $3250 is $650, the maximum amount of investment collateral allotted to this position should be no more than $3900. That equates to a stock price near $25, so the underlying issue has at least $2.25 of downside potential before an exit should be considered (based on this technique). Keep in mind this is just a suggested exit point with regard to one particular "loss-limiting" strategy. It will not be appropriate for all (naked put) positions due to differences in option premiums, the volatility and technical character of the underlying issue, and your personal trading style, experience level and risk tolerance. Hope that helps! Attn: Contact Support Subject: Covering sold puts with short stock I noticed you talk a lot about exiting naked put plays when the stock price drops below the strike sold, but what about shorting the stock to cover the sold put and then buying it back if the stock recovers? I haven't seen anything on this subject in your Email replies...is the strategy feasible and do traders use it very often? EW Hello Again EW, Indeed, one of the less utilized loss-limiting techniques for put writers is to cover the sold option with "short" stock. For those who are new to this technique, recall that writing uncovered puts is an option strategy that basically involves the sale of insurance for a premium on issues that the trader expects to remain above the sold strike price. In most cases, puts sold deep out-of-the-money expire worthless, allowing the investor to retain the premium and receive a profit without ever having to buy the underlying stock. The strategy is used with neutral to bullish issues and can produce consistent, low-risk returns when applied correctly. The broker's margin requirement ensures that the short option is covered against a decline in price in the underlying issue and this collateral is posted in the form of equities or cash deposits in the trader’s account. A put writer is also "covered" if there is a corresponding short position in the underlying security, or its equivalent, in his account. Remember that a "short" sale is the sale of a security that is not owned, with the intention of repurchasing it later, at a lower price. An investor borrows the stock from another investor through a broker and then sells it in the open market. Eventually, the investor repurchases the stock and returns it to the broker, replacing the borrowed position. The technique where a stock is "shorted" after the sale of a (naked) put is used with bullish issues that change direction abruptly due to unfavorable news or events. The sold (short) put is "covered" with the sale of stock as the issue moves below the options’ strike price. If the short put is exercised, and the stock is purchased, the shares can be further assigned to replace the previously borrowed stock. The main problem with this strategy is the risk involved when the underlying stock is volatile as a rebound above the initial short price can cause large losses if the sold stock is not repurchased in a timely manner. In that case, the short (stock) position will generate losses offset only by the initial option premium received and that will generally be a small amount with "out-of-the-money" puts. Slippage (buying at the "bid" and selling and the "ask") and the requirement to sell stock short only on the "up-tick" will also affect the success of this technique, so it is not recommended for inexperienced traders. For the average investor, the potential for loss far outweighs the limited gains that might be achieved through the effective use of this strategy. For more information on basic option trading strategies, review Options as a Strategic Investment, by Lawrence McMillan, which is available in the OIN bookstore. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield AMLN 23.48 23.86 AUG 20.00 0.35 0.35* 3.9% 12.1% AMLN 22.97 23.86 AUG 20.00 0.55 0.55* 4.1% 11.8% RIMM 27.28 25.97 AUG 22.50 0.35 0.35* 3.4% 11.7% ALGN 13.38 11.18 AUG 10.00 0.35 0.35* 3.2% 10.1% OSIP 32.70 33.03 AUG 25.00 0.30 0.30* 2.6% 9.5% OVTI 40.03 43.77 AUG 35.00 0.45 0.45* 2.8% 8.6% BLUD 23.10 23.00 AUG 20.00 0.65 0.65* 2.9% 8.3% BOBJ 25.00 24.52 AUG 22.50 0.45 0.45* 3.0% 8.2% CYBX 23.72 28.87 AUG 20.00 0.60 0.60* 2.7% 8.2% KOSP 28.29 34.65 AUG 25.00 0.45 0.45* 2.7% 7.7% UNTD 29.39 34.29 AUG 25.00 0.40 0.40* 2.4% 7.5% MRVL 35.32 36.20 AUG 32.50 0.40 0.40* 2.7% 7.4% SIE 25.36 24.00 AUG 22.50 0.35 0.35* 2.3% 6.6% SNDK 54.98 52.80 AUG 42.50 0.70 0.70* 1.8% 6.5% UNTD 33.64 34.29 AUG 30.00 0.30 0.30* 2.2% 6.4% AMAT 19.30 18.95 AUG 17.50 0.25 0.25* 2.1% 5.9% NFLX 26.49 24.99 AUG 20.00 0.35 0.35* 1.5% 5.4% SHPGY 22.05 22.77 AUG 20.00 0.35 0.35* 1.9% 5.3% DRIV 23.05 21.75 AUG 17.50 0.30 0.30* 1.5% 5.3% TRN 21.93 25.38 AUG 20.00 0.35 0.35* 1.9% 5.3% SNDK 48.18 52.80 AUG 37.50 0.60 0.60* 1.4% 5.1% MRVL 38.10 36.20 AUG 32.50 0.60 0.60* 1.6% 5.1% CELG 32.18 35.91 AUG 25.00 0.30 0.30* 1.3% 4.8% RIMM 24.61 25.97 SEP 20.00 0.75 0.75* 2.8% 9.1% THER 13.93 14.00 SEP 12.50 0.55 0.55* 3.3% 8.5% BLUD 23.12 23.00 SEP 22.50 1.00 1.00* 3.4% 7.5% SEPR 21.76 23.49 SEP 17.50 0.50 0.50* 2.1% 7.3% TKLC 13.73 15.46 SEP 12.50 0.45 0.45* 2.7% 6.9% JDAS 13.90 14.12 SEP 12.50 0.40 0.40* 2.4% 6.4% PDII 24.25 24.25 SEP 20.00 0.50 0.50* 1.9% 6.1% * Stock price is above the sold striking price. Comments: The East Coast power outage had far-reaching effects, not the least of which was silencing the recent volatile activity in the equity markets. The major averages finished almost unchanged on meager trading volume and there was little directional bias for the coming week. With that outlook in mind, we will continue to monitor the issues in our portfolio diligently and exit or adjust any positions with less than outstanding technical indications. Previously Closed Positions: Candela (NASDAQ:CLZR), Lexar Media (NASDAQ:LEXR), Microstrategy (NASDAQ:MSTR), Monster Worldwide (NASDAQ:MNST), Rowan Companies (NYSE:RDC), and BJ Services (NYSE:BJS), all of which ended profitable, and Sohu.com (NASDAQ:SOHU). 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 AMSC 13.20 SEP 10.00 QAY UB 0.70 4 9.30 35 6.5% 18.2% CBST 12.72 SEP 10.00 UTU UB 0.50 680 9.50 35 4.6% 14.3% OVTI 43.77 SEP 35.00 UCM UG 0.95 1325 34.05 35 2.4% 8.5% PHTN 28.90 SEP 25.00 PDU UE 0.65 264 24.35 35 2.3% 6.8% UTEK 25.75 SEP 22.50 UQT UX 0.55 241 21.95 35 2.2% 6.3% SEPR 23.49 SEP 20.00 ERQ UD 0.45 666 19.55 35 2.0% 6.2% AEIS 21.02 SEP 17.50 OEQ UW 0.30 1 17.20 35 1.5% 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** AMSC - American Superconductor $13.20 *** Blackout = Rally! ** American Superconductor (NASDAQ:AMSC) develops solutions and builds products to dramatically improve the cost, efficiency and reliability of systems that generate, deliver and use electric power. The company has a vertically integrated portfolio of products supported by more than 500 patents, patent applications, and licenses covering technologies fundamental to revolutionizing the way the world uses electricity. Products from AMSC include high temperature superconductor equipment for electric power, transportation, medical and industrial processing applications; motors and generators for ship propulsion; and advanced power electronic systems that ensure the quality and reliability of electricity for residential, commercial and industrial customers. Shares of alternative energy companies surged Friday as much of the Northeast staggered back from the nation's largest blackout. Analysts say the outage highlights the weakness of the power grid as the major cause of disruptions and could act as a catalyst for alternative distribution and backup-power companies. Traders who agree with that viewpoint can speculate on the future of back-up power generation and alternative energy companies with this play. SEP-10.00 QAY UB LB=0.70 OI=4 CB=9.30 DE=35 TY=6.5% MY=18.2% ***** CBST - Cubist $12.72 ** Drug Speculation! *** Cubist Pharmaceuticals (NASDAQ:CBST) is a biopharmaceutical firm focused on the research, development and commercialization of antiinfective drugs. Cubist has submitted a New Drug Application to the U.S. Food & Drug Administration for Cidecin (daptomycin for injection) for the treatment of complicated skin and skin structure infections. The NDA for CIDECIN is currently being reviewed by the FDA under priority review status. The company's pipeline also includes CAB-175, a next-generation parenteral cephalosporin antibiotic in Phase 1 trials, and an oral version of ceftriaxone, a broad-spectrum cephalosporin antibiotic in pre-clinical development. Investors are speculating on the revenue potential of Cidecin, which analysts say will likely be approved by the FDA in the near future. Cidecin is among a new generation of antibiotics that may help to combat "super bugs," which are deadly pathogens that are resistant to most drugs in the antibiotic arena. Traders who are optimistic about the drug's future success should consider this position. SEP-10.00 UTU UB LB=0.50 OI=680 CB=9.50 DE=35 TY=4.6% MY=14.3% ***** OVTI - OmniVision $43.77 *** New All-Time High! *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. Analysts suggest that Omnivision's chips are cheaper, smaller, and simpler than those of their competitors and the company's sales reflect that opinion, having more than doubled in the latest twelve months. Traders who think the upside bias will continue can profit from that outcome with this position. SEP-35.00 UCM UG LB=0.95 OI=1325 CB=34.05 DE=35 TY=2.4% MY=8.5% ***** PHTN - Photon Dynamics $28.90 *** On The Rebound! *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display (FPD) industry. The company also offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries and the cathode ray tube display and CRT glass and auto glass industries. The firm's test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing. Shares of PHTN have been in "recovery mode" over the past few sessions and the move above near-term resistance at $27 bodes well for its future share value. Traders can profit from continued bullish activity in PHTN with this position. SEP-25.00 PDU UE LB=0.65 OI=264 CB=24.35 DE=35 TY=2.3% MY=6.8% ***** UTEK - Ultratech $25.75 *** Rally Mode! *** Ultratech (NASDAQ:UTEK) designs, makes and markets photolithography equipment used worldwide in the fabrication of semiconductor and nanotechnology devices. The company produces products designed to substantially reduce the cost of ownership for manufacturers in the electronics industry. Ultratech is the market leader in gold and solder bump lithography and 300 mm wafer-level chip scale packaging. Shares of UTEK have been in "rally mode" since last Tuesday and the bullish technical indications show no sign of a retreat in the near future. Traders can speculate on the issue's near-term performance with this position. SEP-22.50 UQT UX LB=0.55 OI=241 CB=21.95 DE=35 TY=2.2% MY=6.3% ***** SEPR - Sepracor $23.49 *** Own This One! *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery and development of innovative pharmaceutical products that are directed toward serving unmet medical needs. Sepracor's drug development program has yielded an extensive portfolio of pharmaceutical compound candidates, including candidates for the treatment of respiratory, urology and nervous system disorders. In July, Sepracor reported a far narrower second-quarter loss than expected, driven by higher sales of its allergy and asthma drugs. Revenue rose 59% to $76.5 million, from $48.1 million a year ago, and company officials told analysts that the firm is on track to become profitable in 2004, assuming its new sleep drug, Estorra, wins regulatory approval later this year. Investors who wouldn't mind owning the issue near a cost basis of $20 should consider this position. SEP-20.00 ERQ UD LB=0.45 OI=666 CB=19.55 DE=35 TY=2.0% MY=6.2% ***** AEIS - Advanced Energy $21.02 *** Rally Underway! *** Advanced Energy (NASDAQ:AEIS) is a leader in the development and support of technologies for unique high-technology manufacturing processes used in the production of semiconductors, flat panel displays, data storage products, compact discs, digital video discs, architectural glass, and similar product applications. Leveraging a diverse product portfolio and technology leadership, the firm creates solutions that maximize process impact, improve productivity and lower cost of ownership for its customers. This portfolio includes a comprehensive line of technology solutions in power, flow, thermal management, plasma and ion beam sources, and integrated process monitoring and control for original equipment manufacturers and end-users around the world. Advanced Energy posted mediocre results for the second quarter but the company also said it expects demand to increase in the coming months with third quarter revenue rising 3% to 8%. Investors are apparently happy with the outlook as they have supported the stock with new buying pressure since the earnings report and traders can profit from continued upside activity in AEIS with this position. SEP-17.50 OEQ UW LB=0.30 OI=1 CB=17.20 DE=35 TY=1.5% MY=5.0% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield SGR 8.26 SEP 7.50 SGR UU 0.50 217 7.00 35 6.2% 14.3% RIMM 25.97 SEP 22.50 RUL UX 0.80 947 21.70 35 3.2% 9.0% FLSH 16.09 SEP 15.00 FFU UC 0.60 32 14.40 35 3.6% 8.8% DCTM 18.20 SEP 17.50 QDC UW 0.70 75 16.80 35 3.6% 8.4% AG 20.46 SEP 20.00 AG UD 0.75 33 19.25 35 3.4% 7.7% NTE 23.65 SEP 20.00 NTE UD 0.55 92 19.45 35 2.5% 7.5% DIGE 33.18 SEP 30.00 QDG UF 0.85 167 29.15 35 2.5% 6.8% NTES 44.52 SEP 35.00 NQG UG 0.70 2329 34.30 35 1.8% 6.3% ACN 20.60 SEP 20.00 ACN UD 0.55 0 19.45 35 2.5% 5.8% WMS 22.60 SEP 20.00 WMS UD 0.45 11 19.55 35 2.0% 5.7% ************************ SPREADS/STRADDLES/COMBOS ************************ Power Outage Makes August Options Expiration A Non-Event By Ray Cummins Stocks traded in small range Friday after a massive blackout brought the Northeast United States to a virtual standstill. The major exchanges opened normally, and on schedule, however trading volume was diminutive as brokerage firms depended on emergency power and stores and offices in New York's financial district remained closed due to lack of electricity. The Dow Jones Industrial Average added 11 points to close at 9,321 with 3M Corp. (NYSE:MMM), McDonald's (NYSE:MCD) and Eastman Kodak (NYSE:EK) among the few bullish issues. The technology-laced NASDAQ Composite Index closed up 1 point at 1,702 with little activity of significance in any segment. The broad Standard & Poor's 500 Index finished unchanged at 990, despite the added volatility that is normally present during the monthly options expiration. Only 699 million shares traded on the technology exchange, making it the lightest trading day so far this year. Volume was also extremely light on the Big Board, with just 562 million shares changing hands. Advancers outpaced decliners 17 to 14 on the NYSE while winners roughly equaled losers on the NASDAQ. The bond market closed early because of transportation problems linked to the blackout. Treasury issues ended lower, with the 10-year note down a 18/32 to yield 4.53%. Trim Tabs said that equity funds continued to attract investors. They estimated that all equity funds had inflows of $4.3 billion during the week ended August 13, compared with inflows of $400 million in the prior week. ***************** 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 33.84 AUG 22 25 0.25 24.75 $0.25 Closed MER 49.25 52.99 AUG 42 45 0.25 44.75 $0.25 Closed EBAY 113.07 103.07 AUG 95 100 0.50 99.50 $0.50 Closed GENZ 44.02 45.35 AUG 35 37 0.20 37.30 $0.20 Closed MEDI 39.01 35.46 AUG 32 35 0.25 34.75 $0.25 Closed SYMC 45.65 48.71 AUG 35 40 0.55 39.45 $0.55 Closed CCMP 57.61 62.05 AUG 45 50 0.55 49.45 $0.55 Closed GILD 66.52 62.32 AUG 55 60 0.55 59.45 $0.55 Closed SII 37.87 37.39 AUG 32 35 0.25 34.75 $0.25 Closed AMZN 41.60 40.10 AUG 35 37 0.25 37.25 $0.25 Closed NTES 42.07 44.52 AUG 30 35 0.50 34.50 $0.50 Closed ADI 39.51 36.35 SEP 30 35 0.65 34.35 $0.65 Open BOW 38.57 42.07 SEP 30 35 0.60 34.40 $0.60 Open MXIM 39.11 39.96 SEP 30 35 0.65 34.35 $0.65 Open BBY 47.90 49.32 SEP 40 42 0.30 42.20 $0.30 Open JCI 96.49 97.40 SEP 85 90 0.65 89.35 $0.65 Open MBI 53.13 53.59 SEP 45 50 0.65 49.35 $0.65 Open WMT 57.77 58.10 SEP 50 55 0.50 54.50 $0.50 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Positions in Yahoo! (NASDAQ:YHOO) and Garmin (NASDAQ:GRMN) have previously been closed to limit potential losses. Analog Devices (NYSE:ADI) is on the "watch" list. There was no play initiated in ImClone (NASDAQ:IMCL) as the AUG-$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 45.34 AUG 55 50 0.65 50.65 $0.65 Closed BBBY 38.59 40.53 AUG 45 42 0.35 42.85 $0.35 Closed ICUI 27.90 28.62 AUG 35 30 0.60 30.60 $0.60 Closed PG 88.56 89.12 AUG 95 90 1.25 91.25 $1.25 Closed BGEN 40.05 37.74 AUG 47 45 0.30 45.30 $0.30 Closed NVLS 35.70 35.72 AUG 42 40 0.30 40.30 $0.30 Closed BSTE 46.06 43.37 AUG 55 50 0.60 50.60 $0.60 Closed BVF 41.60 41.59 AUG 50 45 0.50 45.50 $0.50 Closed FNM 62.35 62.37 AUG 70 65 0.50 65.50 $0.50 Closed JPM 33.36 33.66 AUG 37 35 0.25 35.25 $0.25 Closed INTU 42.86 44.58 SEP 50 47 0.30 47.80 $0.30 Open ESRX 62.23 63.75 SEP 75 70 0.60 70.60 $0.60 Open DB 59.64 61.96 SEP 70 65 0.60 65.60 $0.60 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Bearish spreads in Barr Labs (NYSE:BRL) and Cigna (NYSE:CI) were not initiated as both issues "gapped" at the open on the day after the plays were offered. The position in 3M Corporation (NYSE:MMM) has previously been closed to limit potential losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status TECD 31.03 31.39 AUG 25 30 4.20 29.20 0.70 Closed EBAY 110.02 103.07 AUG 95 100 4.60 99.60 0.40 Closed RGLD 23.94 23.48 AUG 20 22 2.20 22.20 0.30 Closed MWD 48.54 48.64 SEP 40 45 4.45 44.45 0.55 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status LXK 73.50 62.75 AUG 85 80 4.80 80.20 0.20 No Play BRCM 22.76 21.26 AUG 27 25 2.30 25.20 0.20 Closed KBH 55.84 56.94 AUG 65 60 4.60 60.40 0.40 Closed LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss There was no position initiated in Lexmark (NYSE:LXK) as the issue "gapped" lower prior to the open on the first trading day after the play was offered. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SHPGY 22.77 22.77 JAN 30 17 0.00 0.00 Open AVCT 27.83 28.95 SEP 30 25 (0.10) 0.60 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 $6 (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 22.09 OCT-20C SEP-22C 1.90 1.75 Open MSFT 27.31 25.54 JAN-27C AUG-27C 1.40 1.50 Open NE 34.86 34.90 DEC-37C AUG-37C 1.40 1.50 Open ING 19.07 20.90 JAN-20C AUG-20C 0.90 1.00 Open SPW 44.65 48.15 DEC-47C AUG-47C 2.50 3.20 Open NSM 22.77 24.11 JAN-20C SEP-25C 3.90 4.50 Open BDY 20.65 24.19 JAN-22C SEP-22C 1.35 1.60 Open? As noted last week, traders have had plenty of opportunities to transition to a diagonal spread in the Georgia-Pacific (NYSE:GP) position. A similar situation is emerging in SPX Corporation (NYSE:SPW), which is now profitable, and an adjustment may also become necessary in the Ing Groep (NYSE:ING) time spread. The new position in Brady Pharmaceuticals (NYSE:BDY) was far more bullish than anyone could have expected, but the brisk upside activity, which began Monday morning, left little opportunity to enter the play at the target debit and required close attention to achieve a profit before issue continued its sharp rally. The speculative position 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 22.76 SEP 25 22 1.50 1.60 Open SNE 30.74 31.30 OCT 30 30 3.75 3.60 Open AMTD 10.00 10.07 OCT 10 10 1.45 1.25 Open TRI 30.50 29.86 NOV 30 30 4.90 4.75 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), 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 ************* READERS WRITE ************* Attn: Contact Support Subject: Margin requirements for Straddle/Strangles Ray, I closely follow your section on OIN and must say that I have learned a lot from you by just simply looking at the tables of spreads, combos, etc. Next to the general market comments, yours is the part of OIN I go right after for information. A long time ago, I downloaded from OIN a spreadsheet on ROI, margin reqs, etc., on covered calls, naked puts, and credit/debit spreads. Do you have a similar spreadsheet for evaluating strangles and straddles? If you do, would you please provide the subscribers with it? If not, would you please give me some quick formulas for evaluating those option strategies; margin requirements, ROI, etc? I would really appreciate your help on this. A lot of other subscribers will also be thankful. Best Regards, EZ (London) Hello EZ, Regarding the spreadsheet, we did not include straddles and strangles in the calculations, however the formulas for margin/collateral are fairly simple: Debit straddles/strangles -- No margin; full cost of each option paid in advance (equivalent to buying call and put options outright). Uncovered "naked" options -- For individual options (uncovered equity or index calls or puts), the margin requirement is the greater of the following per contract: Premium received plus 40% of the underlying issue price, minus the out-of-the-money amount -or- Premium received plus 20% of the underlying issue price. Uncovered equity or index straddles/strangles -- For short combinations, the margin is generally equal to the greater collateral requirement of the two positions (uncovered call or put), plus the premium amount received from the other position (uncovered call or put). For practical purposes, OTM credit strangles require roughly 25% of the underlying value of the stock as an initial margin requirement and ATM credit straddles require approximately 40% of the underlying value of the stock as an initial margin requirement. For the official OCC margin requirements, go here: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf Hope that helps! ************* 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. ***** BSX - Boston Scientific $63.25 *** Stent-Maker Extraordinaire! *** Boston Scientific (NYSE:BSX) is a global developer, manufacturer and marketer of less-invasive medical devices. The firm's unique products are offered by two major business groups, Cardiovascular and Endosurgery. The Cardiovascular segment focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. BSX - Boston Scientific $63.25 PLAY (conservative - bullish/credit spread): BUY PUT SEP-50.00 BSX-UJ OI=8909 ASK=$0.45 SELL PUT SEP-55.00 BSX-UK OI=12955 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$54.50 ***** LOW - Lowe's Companies $48.90 *** Earnings Speculation! *** Lowe's Companies (NYSE:LOW) is the world's second largest home improvement retailer. Headquartered in Wilkesboro, N.C., Lowe's is the 14th largest retailer in the United States as well as the 30th largest retailer worldwide. With over 100,000 employees, Lowe's is "Improving Home Improvement" for over seven million do-it-yourself retail and commercial business customers each week. Lowe's reports earnings on 8/18 (Home Depot reports a day later). LOW - Lowe's Companies $48.90 PLAY (conservative - bullish/credit spread): BUY PUT SEP-42.50 LOW-UV OI=958 ASK=$0.25 SELL PUT SEP-45.00 LOW-UI OI=444 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$44.75 ***** SNPS - Synopsys $66.63 *** Near All-Time Highs! *** Synopsys (NASDAQ:SNPS) is the world leader in electronic design automation (EDA) software for integrated circuit design. The company delivers technology-leading IC design and verification platforms to the electronics market, enabling the development of complex systems-on-chips. Synopsys also provides intellectual property and design services to simplify the design process and accelerate time-to-market for its customers. The company is headquartered in Mountain View, California and has offices in more than 60 locations throughout North America, Europe, Japan and Asia. SNPS - Synopsys $66.63 PLAY (conservative - bullish/credit spread): BUY PUT SEP-55.00 YPQ-UK OI=2160 ASK=$0.30 SELL PUT SEP-60.00 YPQ-UL OI=1148 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$59.45 ***** IFIN - Investors Financial Services $28.42 *** Bond Market Woes? *** Investors Financial Services (NASDAQ:IFIN) provides services for a variety of financial asset managers such as mutual fund complexes, investment advisors, banks, and insurance companies. Through a wholly-owned subsidiary, Investors Bank & Trust Company, they offer core services including global custody, multicurrency accounting, and mutual fund administration, and value added services including securities lending, foreign exchange, and cash management. IFIN - Investors Financial Services $28.42 PLAY (speculative - bearish/credit spread): BUY CALL SEP-32.50 FLQ-IZ OI=16 ASK=$0.40 SELL CALL SEP-30.00 FLQ-IF OI=29 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.50-$0.65 POTENTIAL PROFIT(max)=25% B/E=$30.50 ***** SAP - SAP Ag Ads $27.56 *** Software Slump! *** SAP (NYSE:SAP) is the world's leading provider of business software solutions. Through mySAP(TM) Business Suite, people in businesses around the globe are improving relationships with customers and partners, streamlining operations and achieving significant efficiencies throughout their supply chains. The unique core processes of various industries, from aerospace to utilities, are supported effectively by SAP's 23 industry solution portfolios. Today, more than 20,000 companies in over 120 countries run more than 64,500 installations of SAP software. With subsidiaries in over 50 countries, the company is listed on several exchanges, including the Frankfurt stock exchange and the NYSE. SAP - SAP Ag Ads $27.56 PLAY (conservative - bearish/credit spread): BUY CALL SEP-32.50 SAP-IZ OI=922 ASK=$0.20 SELL CALL SEP-30.00 SAP-IF OI=3056 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$30.25 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** MGAM - Multimedia Games $24.97 *** Trading Range? *** Multimedia Games (NASDAQ:MGAM) is the leading supplier of interactive electronic games and player stations to the rapidly growing Native American gaming market. The company's games are delivered through a telecommunications network that links its player stations with one another both within and among gaming facilities. Multimedia Games designs and develops networks, software and content that provide its customers with a range of gaming systems. The company's development and marketing efforts focus on Class II gaming systems and Class III video lottery systems for use by Native American tribes throughout the United States. MGAM - Multimedia Games $24.97 PLAY (conservative - bullish/debit spread): BUY CALL SEP-20.00 QMG-ID OI=625 ASK=$5.30 SELL CALL SEP-22.50 QMG-IX OI=92 BID=$3.00 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$22.25 ***** MUR - Murphy Oil $52.94 *** Solid Earnings! *** Murphy Oil Corporation (NYSE:MUR) is a worldwide oil and gas exploration and production company with refining and marketing operations in the United States and the United Kingdom. The firm's operations are classified into two business activities: Exploration and Production; and Refining and Marketing. Murphy's principal exploration and production activities are conducted in the United States, Ecuador and Malaysia by wholly owned Murphy Exploration & Production Company and its subsidiaries; in western Canada and offshore eastern Canada by wholly owned Murphy Oil and its subsidiaries; and in the U.K. North Sea and Atlantic Margin by wholly owned Murphy Petroleum Limited. Murphy Oil USA, Inc., a wholly owned subsidiary, owns and operates two refineries in the United States. MUR - Murphy Oil $52.94 PLAY (conservative - bullish/debit spread): BUY CALL SEP-45.00 MUR-II OI=52 ASK=$8.40 SELL CALL SEP-50.00 MUR-IJ OI=3275 BID=$3.90 INITIAL NET-DEBIT TARGET=$4.40-$4.45 POTENTIAL PROFIT(max)=12% B/E=$49.45 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** DV - DeVry $27.16 *** Upside Potential! *** DeVry (NYSE:DV) is the holding company for DeVry University, Ross University and Becker Conviser Professional Review. DeVry University offers associate, bachelor's and master's degree programs in technology, business and management. Ross University is focused exclusively on professional medical and veterinary education awarding both doctor of medicine and doctor of veterinary medicine degrees. Becker Conviser Professional Review is a leading provider of preparatory coursework for the certified public accountant, certified management accountant and chartered financial analyst exams. DV - DeVry $27.16 *** Upside Potential! *** PLAY (speculative - bullish/synthetic position): BUY CALL NOV-30.00 DV-KF OI=70 ASK=$1.20 SELL PUT NOV-25.00 DV-WE OI=510 BID=$1.10 INITIAL NET CREDIT TARGET=$0.00-$0.15 INITIAL TARGET PROFIT=$0.75-$1.05 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $985 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25.00). **************** 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. ***** MDCO - The Medicines Company $26.17 *** Testing 2003 Highs! *** The Medicines Company (NASDAQ:MDCO) operates as a pharmaceutical company selling and developing products for the treatment of hospital patients. MDCO acquires, develops and commercializes biopharmaceutical products that are in late stages of development or have been approved for marketing. The company began selling Angiomax, its lead product, in U.S. hospitals in January 2001 as an anticoagulant replacement for heparin. MDCO is developing Angiomax for additional potential hospital applications as a procedural anticoagulant and for use in the treatment of ischemic heart disease. MDCO - The Medicines Company $26.17 PLAY (speculative - bullish/calendar spread): BUY CALL JAN-30.00 MQL-AF OI=95 ASK=$1.90 SELL CALL SEP-30.00 MQL-IF OI=43 BID=$0.30 INITIAL NET DEBIT TARGET=$1.45-$1.55 INITIAL TARGET PROFIT=$0.65-$0.90 *********************** 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. ***** ADBE - Adobe Systems $34.36 *** Earnings Speculation *** Adobe Systems (NASDAQ:ADBE), the leader in network publishing, offers a comprehensive line of software for enterprise and creative professional customers. Its products enable customers to create, manage and deliver visually rich, compelling and reliable content. Adobe Systems helped launch the desktop publishing revolution in 1982 and is at the heart of the next publishing revolution, network publishing. Network publishing is about making reliable, visually rich information available to anyone, anywhere, on any device. Today, Adobe offers a comprehensive line of software for enterprise and creative professional customers. Adobe's quarterly earnings report is due on 3/10. ADBE - Adobe Systems $34.36 PLAY (very speculative - neutral/debit straddle): BUY CALL SEP-35.00 AEQ-IG OI=3491 ASK=$1.15 BUY PUT SEP-35.00 AEQ-UG OI=404 ASK=$1.80 INITIAL NET-DEBIT TARGET=$2.80-$2.90 INITIAL TARGET PROFIT=$0.95-$1.25 ************************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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