The Option Investor Newsletter Wednesday 08-20-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Gone Fishing Futures Wrap: Summer trading Index Trader Wrap: See Note Weekly Fund Family Profile: Thornburg Funds Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 08-20-2003 High Low Volume Advance/Decline DJIA 9397.51 - 31.39 9423.26 9364.03 1.49 bln 1721/1443 NASDAQ 1760.54 - 0.57 1768.52 1747.01 1.51 bln 1637/1565 S&P 100 501.89 - 2.03 503.92 500.54 Totals 3358/3008 S&P 500 1000.30 - 2.05 1003.54 996.62 RUS 2000 489.46 + 0.76 490.24 485.31 DJ TRANS 2661.90 - 2.05 2669.87 2656.49 VIX 19.71 + 0.48 20.18 19.35 VXN 27.64 + 1.14 28.66 27.36 Total Volume 3,250M Total UpVol 1,484M Total DnVol 1,697M 52wk Highs 665 52wk Lows 47 TRIN 1.19 PUT/CALL 0.62 ******************************************************************* Gone Fishing Jonathan Levinson That's what the smart money did today, with the Nasdaq closing lower by 0.57 of one point and the Dow losing 31. Volatility remained low, and the question remains whether trades at the current level are consolidation near the highs, or distribution of shares ahead of a drop. Weekly COMPX Both the Nasdaq and the Dow weekly candles are at cyclical tops on their oscillators, and the 10 week stochastics issued buy signals in July. The downphases have hiccupped on this week's gains in the Nasdaq and the Dow, and a truncation of those downphases this early in their runs would have very bullish implications. Weekly INDU 6 month daily COMPX The daily Nasdaq and Dow have yet to abandon their uptrends, with the Nasdaq trading just below it while the Dow is just above. The 10 day stochastic and MacD are both on buy signals, which is causing the upticks we saw above on the weekly oscillators. 6 month daily INDU 20 day 30 minute COMPX The lack of upward momentum today gave us sell signals on the 300 minute stochastic, with both indices trading within bear flags. A breakdown from these formations should pack sufficient power to abort the buy signals on the daily oscillators and allow the ongoing downphases on the weekly to resume. However, for the moment, the upphase on the daily appears to be dominant, causing the short cycles on the 30 minute charts to trend in overbought territory and the downphasing daily cycles to pause early within their runs. 20 day 30 minute INDU On the economic front, the Mortgage Bankers Association (MBA) announced this morning that seasonally-adjusted demand for mortgage refinancings, the MBA refi index, dropped 14.9% for the past week following the previous week's 16.1% drop, bringing the the index to its lowest level since July 12, 2002. Demand for loans with which to buy homes, the Purchase index, fell 4.9%. The Application index fell 10.7% for the week, following last week's 10.3% drop. The average interest rate for a 30-year fixed rate mortgage rose to 6.22% from 6%, now 123 basis points above its June 13 low. Recall that John Snow talked down the negative impact of rising rates: "When an economy is recovering, it is normal to see interest rates rise some. So I would point to the rising interest rates as an indication that the economy is coming back." Without a strong pickup in employment to cover this extreme increase in the cost of money to the average home borrower, I don't see how far the economy can get. Note, as Jane reported on Monday, that personal bankruptcies rose 10.2% from last year, setting a new record on both a quarterly and per household basis, reaching new record levels. One year daily chart of the thirty year note yield It's worth spending a moment to discuss the concept of the Kondratieff Cycle. I will not be able to do it justice in this limited space, but it's worth noting the concept in light of the ongoing developments we follow here on a daily and weekly basis. Nikolai Kondratieff, whose work was carried forward by Joseph Schumpeter, posited that there's a long term cycle of credit expansion and contraction, and tied the cycle in with wars, booms and busts. Briefly, economic seeds are planted following periods of credit contraction. Businesses are built, investments are made (the "spring"). As the cycle progresses, the investments mature and prosperity grows, and the economy begins to incur debt against its assets (summer). Expansion slows, but debt continues to be incurred to extend the "good" times. Debt begins to peak, at which point it becomes unsupportable. At this point, credit begins to contract, with bankruptcies increasing and economic activity slowing (the Kondratieff Winter). After debt has been cleansed from the system by these mechanisms, the economy is ripe for the new round of investments to herald the spring. http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-08-20/wave1.gif Without quoting Chauncey Gardiner from "Being There", the contraction is a necessary part of the cycle. Kondratieff and Schumpeter and others have linked the major wars to the cycle's peaks and troughs, and this is fascinating work to review for the cost of a quick Google search. Reputedly, Allan Greenspan during the late 1960s said that he'd like to be Chairman of the Fed during the 1990s, because he felt he could overcome the K-Wave Winter by flooding the financial system with liquidity. Why one would wish to do so is beyond me, but this appears to have been the case. Unfortunately, as we have seen during the past Wednesday market wraps, the Fed has succeeded not in averting a period of necessary economic contraction, but merely in creating asset bubbles in discrete sectors, first in the Nasdaq during the Dotcom boom, then in the credit and mortgage markets, with the price of real estate following along, and possibly in the Chinese manufacturing sector as well. Given the explosion in the money supply, it is my guess that commodities and particularly the precious metals sector are in the process of becoming the next asset bubble. Disclosure: I am long this sector, as it seems obvious to me that if dollars are being printed at a rapid rate, the price of all things that cannot be created at the same rate should rise. Weekly chart of MZM money supply Weekly chart of December 2003 gold In any event, to conclude our musings on the Kondratieff Winter, the recent record-setting corporate bankruptcies such as Enron, Worldcom, K-Mart, Global Crossing and others, the soaring level of personal bankruptcies and the proliferation of offers of credit, including zero-down, zero-payment, cash-back deals, all fit perfectly into this century-old theory. Apparently there's talk of interest-only home mortgages resurfacing, a concept I've heard was last popular during the 1920s. As the Winter cycle progresses, we can expect to witness the last gasp of credit expansion. I believe that the uptick in rates marks the peak of the current Winter cycle. In other news, it was reported by the American Petroleum Institute (API) that crude oil inventories dropped by 1.6 million barrels to 278.8M barrels, while the Department of Energy recorded a loss of 2.03M barrels to 279.M barrels total. Either way, analysts managed to get it wrong for another week, predicting an increase in supply. The API and Energy Department data reported unleaded gasoline inventories down on the week, and distillate supplies higher during the week. It was an otherwise quiet day, and the lack of movement in the indices reflected that. We have the following economic data due tomorrow: Report Briefing Market Prior Expects Expects Aug 21 8:30 AM Initial Claims 08/16 - 395K 395K 398K Aug 21 10:00 AM Leading Indicators Jul - 0.5% 0.4% 0.1% Aug 21 12:00 PM Philadelphia Fed Aug - 11.0 10.0 8.3 I expect to see the markets react to the initial claims data before the bell. I noticed that some writers were attributing the selloff in bonds today to expectations of a bullish showing on the employment data. If that's the case, which I personally doubt, then we can expect that anything less than a downside surprise in new unemployment claims will disappoint the market. My feeling is that the conflicting cyclicality portrayed in the charts above is what's causing the market to chop sideways, and whatever the spark, we should see a resolution, and hopefully soon. Until that happens and the market shows its hand, trade safely and ride your stops. No trade beats a bad trade. ************ FUTURES WRAP ************ Summer trading Jonathan Levinson The indicators whipped this way and that, but it turned out to be a sideways day for equities, which closed lightly negative. Treasuries were negative as well, while commodities, precious metals and the US Dollar Index gained. Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index The US Dollar Index bottomed just after the cash open this morning at 97.25, and bounced in what appeared to be a corrective flag or wedge to the 97.50 level. Despite the upward slope, gold and commodities had a very strong day, with gold trying for an upside pennant breakout and the CRB, led by natural gas, cotton and cocoa, added 2.38 to 238.47. Daily chart of December gold December gold tested the upper trendline again, peeking above it for a few minutes before falling back to previous resistance just above 366. The contract was trading 367.30, up 4.30 as of this writing. The oscillators are in firm up- phases, the Fed is running amuck with repos, and goldbugs have their fists balled up and their shoulders hunched in anticipation of what could be a big day. The HUI and XAU were both very strong as well, adding 4.19 to 190.48 and 1.76 to 91.18 respectively. Daily chart of the ten year note yield Treasuries traded higher briefly before reversing their gains and falling to their lows of the day, bouncing weakly but never returning to positive territory. The ten year note yield added 6 basis points to close at 4.441%. The Fed added another 5.5B in overnight repos, bring the tally for tomorrow's expiration to a whopping 24.5B in temporary open market operations. Daily NQ candles It was a very unpredictable session, with the dollar rallying alongside gold and commodities, while bonds fell and equities traded both sides of unchanged. The NQ was the leader today, touching new highs for this month before falling back to close below 1300. The upper trendline held back the advance, with the NQ closing right in the middle of its day range for a doji star. This is a bearish print, all things being equal. The oscillators are still on buy signals and the bull flag breakout is still in effect. 30 minute 20 day chart of the NQ The NQ went nowhere today, closing lower by 3 points, but it did so most dramatically, full of sound and fury that signified nothing. Bulls cheered the new highs and bears cheered the failure to hold them. NQ fell back into the bear flag, with the oscillators on the 30 minute chart flipping back to sell signals. Daily ES candles The ES traded a very narrow range of less than 8 points, closing nearer to the low end of its range, but you had to be there following the aimlessness tick-by-tick. It was classic summer trading, with the tape frustrating most participants as it shuffled indolently to and fro. When the dust cleared, the ES had failed to set a new high as the NQ had done, failing twice at 1003.25. 20 day 30 minute chart of the ES ES also went nowhere, dropping 4.25, but bears and bulls held their breath for the two touches of 1003.25. I find the sideways move over the past week to look increasingly suspect, particularly as the cries of devoted bulls grow increasingly shrill. Bears are terrified, bulls are salivating, the put to call ratio is subterranean, and despite gains in the volatility indices today, options remain very cheap. For all that bullish consensus, and daily 5 to 20 billion dollar injections from the Fed, one would think that the S&P futures could do more than hang suspended in a bear flag. Nevertheless, it hasn't broken down either, and so we wait for a sign tomorrow. Daily YM candles The YM was weaker today, lagging the other two equity indices with a .33% drop of 31 points. Nothing to see here, other than the beginning of a possible breakdown in the bear wedge on the 30 minute chart below. 20 day 30 minute chart of the YM Today was a choppy day today, with little to be gathered from equities or treasuries. The real action was in gold, with the metals on the verge of a potential breakout, with the HUI and XAU setting new mutli-year highs today. With a major bill coming due tomorrow in expiring fed repos, we'll gain some insight into Greenspan's view on the markets. The addition of any less than 24.5B in open market ops will constitute a drain. See you at the bell! ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_082003_1.asp ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ************************** WEEKLY FUND FAMILY PROFILE ************************** Thornburg Funds This week, we look at the Thornburg Funds advised by Thornburg Investment Management, an investment firm based in Sante Fe, New Mexico that's committed to disciplined investing and controlling risk in all market environments, through laddered fixed income and focused equity portfolios. This firm seeks to provide core strategies for serious investors, and focuses on preserving and increasing the real wealth of shareholders after accounting for inflation, taxes and expenses. Today, Thornburg Investment Management advises four stock funds, eight bond funds and separately managed portfolios for high net worth individuals (private clients) and institutional investors. The separately managed portfolios are based on their mutual fund strategies, which represent the bulk of assets under management. According to Morningstar, over $3.1 billion is currently invested in the Thornburg mutual funds, including $1.7 billion invested in the Thornburg Value Fund. Thornburg mutual funds are sold through investment professionals, including investment advisors, brokerage firms, trust companies, bank trust departments, and other financial intermediaries. For more information on the Thornburg Funds, or Thornburg Investment Management as an investment advisor, go to the Thornburg website at www.thornburginvestments.com. There, you can download a fund prospectus containing complete information on the funds including charges and expenses. For our purposes, we'll use the Class "A" shares of the funds, but Class B and C shares are also available. Thornburg Fund Overview There are currently 13 Thornburg mutual funds to pick from: four equity funds, eight fixed income funds and one money market fund. Below is a summary of the Thornburg fund lineup (Class A shares), per company sources. Thornburg Equity Funds (4): Value Fund A (TVAFX) International Value Fund A (TGVAX) Core Growth Fund A (THCGX) Investment Income Builder Fund A (TIBAX) Thornburg Municipal Bond Funds (6): Intermediate Municipal National Fund A (THIMX) Limited Term Municipal Fund - National A (LTMFX) Limited Term Municipal Fund - California A (LTCAX) New Mexico Intermediate Municipal Fund A (THNMX) New York Intermediate Municipal Fund A (THNYX) Florida Intermediate Municipal Fund A (THFLX) Thornburg Taxable Bond Funds (2): Limited Term U.S. Government Fund A (LTUSX) Limited Term Income Fund A (THIFX) Thornburg Money Market Fund (1): Daily Tax-Free Income (THMXX) The Thornburg municipal bond funds seek to provide income that's exempt from Federal income taxes, including four portfolios that are also exempt from certain state taxes. We'll leave those for you to review at your own leisure. Same goes for the money fund option. We really want to look at the four equity funds and the two taxable bond funds advised by Thornburg Investment Management Inc. Thornburg’s equity mutual funds seek to provide long-term growth of capital through superior equity research. Equity research is performed utilizing a fundamental (and comprehensive) analytical approach, with many factors taken into account. When investment decisions are made, the firm invests only when and where the most compelling values are perceived. Each of the stock funds focuses on only a limited number of securities (35-50 range) so that each holding can have a material impact on performance. Many holdings may be viewed as "contrary" to consensus of the moment, they say. Thornburg Value Fund, the firm's most successful mutual fund with $1.7 billion in assets, has been run by William Fries since 1995. Since inception, the fund has amassed a strong performance record by investing in basic value stocks as well as stocks of companies that are market leaders, consistent earners, and rapidly growing, emerging franchises. Mr. Fries attempts to buy good companies at great prices and will hang on to his winners if he perceives they have room to grow. The result is a value fund that can fall into the "blend" style box, per Morningstar, and can perform well in a variety of style environments, whether value or growth is in sync with market. A healthy dose of mid-cap stocks makes this fund an excellent "all-cap" investment option. The $168 million Thornburg International Value Fund is similar to its sibling, Thornburg Value Fund, except that it invests in non- U.S. companies and has a lower average market capitalization. It recently had roughly half of portfolio assets invested in mid-cap and small-cap ranges. This also helps in terms of "international diversification" since international mid/small-cap stocks may not move in sync with the developed markets of U.S., Europe and Asia. Both the Value Fund and International Value Fund receive 5 stars from Morningstar for risk-adjusted performance relative to peers, their highest overall rating. Thornburg Core Growth Fund, managed by Alex Motola since December 2000, is relatively unknown, but that may not last for long since the fund is up over 45 percent on a YTD basis through August 20th using Morningstar's number. Like Fries, Motola seeks to purchase great companies at good prices. Motola focuses on quality growth stocks that he and the Thornburg growth team believe will exhibit superior revenue and earnings growth over time. While the growth fund falls into the mid-cap growth style box per Morningstar, the fund's holdings may be any size from larger established companies to smaller, emerging enterprises. According to Morningstar, fund holdings recently consisted primarily of large, mid and small-cap stocks, giving it "all-cap" growth characteristics. The firm's most recent equity fund addition, Thornburg Investment Income Builder Fund, brings together the firm's equity and income research into one portfolio. This hybrid fund, through a mixture of equity and fixed income holdings, seeks to provide attractive, above average, and growing dividends to shareholders. The equity component is comprised mostly of dividend-paying stocks (domestic and foreign issuers). The fund's fixed income component supports the growth of its "dividend stream", investing primarily in bonds in the corporate sector. While this fund emphasizes dividends as a component of building wealth over time, it also pursues capital appreciation. Thornburg's two taxable bond funds, Limited Term U.S. Government Fund and Limited Term Income Fund, invest in short/intermediate- term investment grade bonds, with the goal of earning attractive yields for shareholders, without incurring excessive risks. The two funds in other words do not make big duration or sector bets; rather they employ a more conservative "laddering" strategy that moderates interest-rate and market-price risks in various "yield curve" environments. According to Morningstar, both fixed income portfolios hold a basket of high-grade debt securities (AAA or AA rated) and have an average duration in the 3.7 years to 3.8 years range. Thornburg Fund Performance As we alluded to earlier, both the Thornburg Value and Thornburg International Value funds currently receive Morningstar's highest overall rating of 5 stars for risk-adjusted performance relative to category peers. The Thornburg Value Fund A shares have risen at an annual-equivalent rate of 13.4 percent for the period from inception (10/95) through June 30, while Thornburg International Value Fund A shares have produced an average annual total return of roughly five percent since inception (12/98) through June 30. William Fries and the Thornburg value team remain at the helm of these two funds today, so all the performance is attributable to them. In relation to other large-blend funds, Thornburg Value Fund has produced high returns with average risk overall, while Thornburg International Value Fund has produced above average returns with average risk overall in relation to its foreign stock fund peers, per Morningstar, earning them both 5-star (highest) fund ratings. Thornburg Core Growth and Investment Income Builder funds aren't yet rated by Morningstar. The Core Growth Fund began operations in December 2000, and for most of its life, growth investing has been out of favor with the market. Accordingly, the fund sports a negative annualized total return of 8.6 percent for the period from inception through mid-year 2003. However, over the past 12 months, the Core Growth Fund has risen nearly 50%, ranking it in the top 1% of the Morningstar mid-cap growth category. Its year to date return of 45.4% also ranks in the category's top 1%. So, if you perceive (as I do) that we are in the early stages of the next growth cycle, this is one fund to watch and consider now for investment. Investment Income Builder Fund is less than a year old, but since inception (12/02) the fund has increased in value by more than 15 percent through June 30. So, it is off to a promising beginning. Thornburg's two taxable bond funds also sport competitive records of performance. The Limited Term U.S. Government Fund has posted an average annual total return of 6.1% for the trailing five-year period through August 19, per Morningstar, while the Limited Term Income Fund has produced an annualized total return of 6.4% (both funds ranking in their respective category's top quartile). Both funds are also holding up well so far in 2003, with the threat of higher interest rates looming. The Limited Term U.S. Government Fund is up 0.6% (top 15%), while the Limited Term Income Fund has risen two percent to rank in the top one-third of its Morningstar category. Conclusion There is a lot to like about Thornburg Investment Management and its mutual funds. The value fund strategies have performed well under various market conditions due to solid equity research and security selection. William V. Fries deserves much of the credit there. The core growth strategy struggled a little bit at first, but is now scorching the competition in 2003 with growth equities back in favor with investors. Thornburg's taxable bond portfolios play it safer than many bond funds on the market, avoiding excessive risks and using a ladder portfolio strategy that moderates interest-rate and market-price risks in various yield curve environments. Keeping fund average durations below four years should help a little bit in the event rates do in fact rise in the second half of 2003 or next year vs. longer duration funds. The Thornburg Investment Income Builder Fund has the makings of a top hybrid offering, one that emphasizes the power of compounding dividend income. It could be a beneficiary of recent tax cuts on dividends. For more information or to download a fund prospectus go to www.thornburginvestments.com. Steve Wagner Editor, Mutual Investor email@example.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Wednesday 08-20-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Call - OMC Spreads, Combinations & Premium-Selling Plays: Rally Pauses After Hewlett-Packard Report Watch List: A Steady Mix Updated on the site tonight: Market Posture: 15 to 8 Bulls ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********************** PLAY OF THE DAY - CALL ********************** Omnicom Group - OMC - close: 76.67 chg: +0.84 stop: 72.99 Company Description: Omnicom is a leading global marketing and corporate communications company. Omnicom's branded networks and numerous specialty firms provide advertising, strategic media planning and buying, direct and promotional marketing, public relations and other specialty communications services to over 5,000 clients in more than 100 countries. (source: company press release) Most Recent Update (Tuesday, August 19, 2003): Keeping with the biotech-drug theme we're going to suggest a bullish play on OMC, an advertising company. Makes sense, doesn't it? Oh wait, maybe we should explain. American consumers are about to witness a three-way rumble for their dollars over erectile dysfunction. Right now if someone mentions any sort of drug related to this topic you're probably going to think of Pfizer's (PFE) little blue pill called Viagra. It's been a huge success for the drug maker. However, the U.S. is about to approve two more competitors. Bayer AG and GlaxoSmithKline have produced a drug called Levitra and Eli Lilly & Co (LLY) and Icos Corp (ICOS) have developed Cialis. It's going to become a battle-royale and some of the biggest winners could be the advertising agencies hired to promote these products. OMC is certainly going to be a benefactor. Yet this isn't the only reason we're suggesting calls on OMC. The improving economy is a much more big-picture influence for rising business for ad agencies. Plus it doesn't hurt to see a new closing 52-week high and positive technicals. We listed OMC on the OptionInvestor.com watch list on Monday with its breakout over $75.00. Today's move just confirms it and we feel that bulls might be able to cash in on a move to $80 (initial target) and potentially $85 (secondary target). We're going to start the play with a stop loss at $72.99, which keeps it under the simple 50-dma. - Play of the Day Comments - Shares of OMC continue to add to Monday's breakout over the $75 level. It wasn't much but we were encouraged by the stock's relative strength over the $Industrials and S&P 500 today. Suggested Options: Currently OMC has September, October and January calls to choose from. Our preference is for the September 75s and 80s. BUY CALL SEP-75 OMC-IO OI= 1524 at $3.40 SL=1.70 BUY CALL SEP-80 OMC-IP OI= 1362 at $0.90 SL=0.45 BUY CALL OCT-75 OMC-JO OI= 1427 at $4.60 SL=2.25 BUY CALL OCT-80 OMC-JP OI= 1726 at $2.05 SL=1.00 Annotated chart (dated Aug. 19th, 2003): Picked on August 19 at $76.67 Change since picked: +0.20 Earnings Date 07/29/03 (confirmed) Average Daily Volume: 881 thousand Chart link: ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Rally Pauses After Hewlett-Packard Report By Ray Cummins A mediocre quarterly report from Dow component Hewlett-Packard (NYSE:HPQ) was enough to stall the rally today, despite renewed strength in networking stocks and optimism in the data storage sector. The Dow Jones industrial average ended 31 points lower at 9,397 on weakness in Hewlett-Packard (NYSE:HPQ), Honeywell (NYSE:HON), General Electric (NYSE:GE) and Merck (NYSE:MRK). The composite technology index finished unchanged at 1,760 as buying pressure in networking and storage stocks equalized the downward bias in computer hardware and software shares. The Standard & Poor's 500 stock index edged lower, down 2 points at 1000 with airline, gold, utility, and oil among the few bullish groups. Volume was light with 1.20 billion shares traded on the NYSE while 1.50 billion shares were swapped on the NASDAQ. Winners outpaced losers by a slim margin on both the Big Board and the technology exchange. Treasurys retreated from early gains to close in the red. The 10-year note ended down 18/32 to yield 4.44% while the 30-year government bond finished 18/32 lower with a yield of 5.28%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 8/19/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield DRIV SEP 17 17.15 24.28 $0.35 4.88% 2.04% IMCL SEP 30 28.85 40.30 $1.15 8.88% 3.99% LLTC SEP 32 31.75 39.38 $0.75 4.40% 2.36% OVTI SEP 30 29.15 44.81 $0.85 6.18% 2.92% SINA SEP 22 21.90 31.48 $0.60 5.80% 2.74% ZRAN SEP 20 19.60 24.69 $0.40 4.92% 2.04% CBK SEP 35 34.55 42.70 $0.45 3.39% 1.30% IMCL SEP 30 29.45 40.30 $0.55 5.18% 1.87% LLTC SEP 32 32.00 39.38 $0.50 3.64% 1.56% NVLS SEP 30 29.55 38.01 $0.45 3.92% 1.52% OVTI SEP 30 29.35 44.81 $0.65 5.83% 2.21% PCLN SEP 25 24.65 37.53 $0.35 4.03% 1.42% PHTN SEP 22 22.10 29.79 $0.40 5.24% 1.81% RIMM SEP 20 19.60 27.84 $0.40 5.78% 2.04% URBN SEP 40 39.40 47.36 $0.60 3.78% 1.52% AEIS SEP 17 17.10 22.66 $0.40 5.97% 2.34% Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CVTX SEP 32 32.95 25.63 $0.35 5.65% 1.06% MEDI SEP 40 40.65 35.47 $0.65 4.68% 1.60% RJR SEP 35 35.55 31.92 $0.55 4.15% 1.55% Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status KSS 60.64 62.70 SEP 50 55 0.60 54.40 $0.60 Open WHR 66.05 69.62 SEP 55 60 0.60 59.40 $0.60 Open XAU.X 82.67 91.18 SEP 70 75 0.55 74.45 $0.55 Open APPX 43.86 46.65 SEP 30 35 0.55 34.45 $0.55 Open CHIR 46.33 47.76 SEP 40 42 0.25 42.25 $0.25 Open TIF 37.42 39.31 SEP 30 35 0.45 34.55 $0.45 Open Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status UNH 48.79 51.47 SEP 58 55 0.30 55.30 $0.30 Open WLP 76.49 78.74 SEP 90 85 0.50 85.50 $0.50 Open CTX 73.74 78.59 SEP 85 80 0.65 80.65 $0.65 Open NBIX 49.52 51.40 SEP 60 55 0.60 55.60 $0.60 Open Centex (NYSE:CTX) is on the "watch" list after Tuesday's rally in the Homebuilder group. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** ANPI - Angiotech $44.80 *** Stent-Coating Maker *** Angiotech Pharmaceuticals (NASDAQ:ANPI) is engaged in the fusion of medical device technologies and pharmaceutical therapies. The company's first product was a drug-coated stent. Angiotech's goal is to develop other products to enhance the performance of medical devices and biomaterials through the use of pharmatherapeutics. In September 2002, the company and Cohesion Technologies, agreed to a merger in which Cohesion will merge with a subsidiary of Angiotech, with Cohesion continuing as a wholly owned subsidiary of the company. ANPI - Angiotech $44.80 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 35 AUJ UG 3,228 0.45 34.55 4.7% 1.3% * SELL PUT SEP 40 AUJ UH 3,147 1.50 38.50 10.1% 3.9% ************** AEIS - Advanced Energy $22.98 *** The Rally Continues! *** Advanced Energy (NASDAQ:AEIS) is a leader in the development and support of technologies for critical high-technology manufacturing processes used in the production of semiconductors, flat panel displays, data storage products, compact discs, digital video discs, architectural glass, and other advanced 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. AEIS - Advanced Energy $22.98 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 20 OEQ UD 32 0.50 19.50 7.3% 2.6% * SELL PUT SEP 22.5 OEQ UX 4 1.30 21.20 12.7% 6.1% ************** FLML - Flamel Technologies $22.34 *** Hot Biotech Stock! *** Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company engaged mainly in the development of two polymer-based delivery technologies for medical applications. The company's Micro-pump technology is a multi-particulate technology for oral ingestion of small molecule drugs with applications in controlled release, tastemasking and bioavailability enhancement. The company has three major products based on its Micropump technology: Asacard, a controlled-release formulation of aspirin for the treatment of cardiovascular disease; Metformin XL, a controlled-release form of Metformin that is in development for use for the treatment of Type II diabetes, and Genvir, a controlled-release acyclovir for the treatment of genital herpes. In addition, FLML has developed new herbicide delivery systems and has patented a biomaterial, ColCys. FLML - Flamel Technologies $22.34 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 17.5 FLU UW 217 0.50 17.00 9.9% 2.9% * SELL PUT SEP 20 FLU UD 237 1.20 18.80 15.1% 6.4% ************** IMCL - ImClone $40.81 *** Becoming An Old Favorite! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL - ImClone $40.81 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 35 QCI UG 1,792 0.50 34.50 4.5% 1.4% * SELL PUT SEP 40 QCI UH 1,865 2.05 37.95 11.5% 5.4% ************** JCOM - j2 Global Communications $61.49 *** New All-Time High! *** j2 Global Communications (NASDAQ:JCOM) provides outsourced value added messaging and communications services to individuals and businesses throughout the world. The company offers faxing and voicemail solutions, Web initiated conference calling, document management solutions and unified messaging services. j2 Global markets its services principally under the brand names eFax and jConnect. The company delivers its services through its global telephony/Internet protocol network, which spans more than 600 cities in 18 countries across five continents, including four capital cities in Latin America where j2 Global is in the process of launching its unique service. JCOM - j2 Global Communications $61.49 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 50 JQF UJ 363 0.45 49.55 3.3% 0.9% TS SELL PUT SEP 55 JQF UK 298 1.30 53.70 6.6% 2.4% ************** MGAM - Multimedia Games $25.99 *** Entry Point? *** 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 $25.99 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 22.5 QMG UX 599 0.30 22.20 4.1% 1.4% * SELL PUT SEP 25 QMG UE 592 1.05 23.95 9.9% 4.4% ************** NFLX - Netflix $27.72 *** Buy-Out Rumors? *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. NFLX - Netflix $27.72 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 22.5 QNQ UX 5,128 0.25 22.25 4.0% 1.1% * SELL PUT SEP 25 QNQ UE 3,618 0.70 24.30 7.6% 2.9% ************** NTES - NetEase.com $51.20 *** China Internet Revolution *** NetEase.com (NASDAQ:NTES) is a China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. The NetEase Web sites, operated by a company affiliate, organize and provide access to 18 content channels through distribution arrangements with more than one hundred international and domestic content providers. In addition, the NetEase Internet sites offer a variety of products and services, including Instant Messaging (Popo), Dating, Love, Alumni and Personal Home Page. These products and services enable users to communicate about interests and areas of expertise. At the end of March 2003, the number of registered users of the NetEase Web sites reached 114 million with the average number of daily page views over 370 million. NTES - NetEase.com $51.20 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 40 NQG UH 2,200 0.45 39.55 4.1% 1.1% * SELL PUT SEP 45 NQG UI 1,890 1.45 43.55 9.0% 3.3% ************** PHTN - Photon $29.64 *** Recovery In Progress! *** 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. PHTN - Photon $29.64 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 25 PDU UE 315 0.40 24.60 5.2% 1.6% * SELL PUT SEP 27.5 PDU UY 177 1.05 26.45 9.6% 4.0% ************** RIMM - Research In Motion $27.64 *** Next Leg Up? *** Research In Motion Limited (NASDAQ:RIMM) is a designer, builder, and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, the firm provides solutions for seamless access to time-sensitive information and communications, including e-mail, telephone, messaging and Internet- and intranet-based applications. The company's technology also enables a broad array of third-party developers and manufacturers around the world to enhance their own products and services with wireless connectivity. RIM's portfolio of products includes a family of wireless handhelds, the BlackBerry wireless e-mail solution, embedded radio modems and a suite of software development tools. RIMM - Research In Motion $27.64 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 22.5 RUL UX 1,144 0.35 22.15 5.5% 1.6% * SELL PUT SEP 25 RUL UE 3,728 0.85 24.15 9.0% 3.5% ************** SINA - SINA Corporation $33.27 *** Up-trend Intact! *** SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an online media company and value-added information service provider for China and the global Chinese communities. With a branded network of localized Websites targeting China and overseas Chinese, the company provides an array of services to its users including region-focused online portals, search, directory, interest-based and community-building channels, free and premium e-mail, wireless short messaging, online games, virtual Internet service provider, classified listings, e-commerce, e-learning, and enterprise e-solutions. In turn, SINA generates revenue through advertising, fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $33.27 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT SEP 25 NOQ UE 2,588 0.30 24.70 4.2% 1.2% * SELL PUT SEP 30 NOQ UF 3,330 1.35 28.65 11.6% 4.7% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** AMZN - Amazon.com $43.76 *** Testing 3-Year Highs! *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. AMZN - Amazon.com $43.76 PLAY (less conservative - bullish/credit spread): BUY PUT SEP-37.50 ZQN-UU OI=12500 ASK=$0.30 SELL PUT SEP-40.00 ZQN-UH OI=7801 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$39.70 ************** KLAC - KLA Tencor $54.35 *** Chip Sector Speculation! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC - KLA Tencor $54.35 PLAY (less conservative - bullish/credit spread): BUY PUT SEP-47.50 KCQ-UT OI=5816 ASK=$0.45 SELL PUT SEP-50.00 KCQ-UJ OI=9166 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$49.70 ************** RCII - Rent A Center $75.80 *** Why Buy When You Can Rent? *** Rent-A-Center (NASDAQ:RCII) is a primary store operator in the rent-to-own industry. Rent-A-Center operates approximately 3,000 company-owned stores in 50 states, the District of Columbia and Puerto Rico. The company's subsidiary, ColorTyme, is a national franchisor of rent-to-own stores. ColorTyme has over 300 stores in 42 states, 330 of which operated under the ColorTyme name and 12 stores of which operated under the Rent-A-Center name. The company's stores offer popular consumer products, such as home electronics, appliances, computers and furniture, and accessories under flexible rental purchase agreements that typically allow the customer to obtain ownership of the merchandise at the conclusion of an agreed-upon rental period. These unique agreements cater to customers who only have a temporary need, or who simply desire to rent rather than purchase, the merchandise. The rent-to-own store operator is planning a 5-for-2 stock split on 9/2/2003. RCII - Rent A Center $75.80 PLAY (less conservative - bullish/credit spread): BUY PUT SEP-65.00 RQG-UM OI=429 ASK=$0.75 SELL PUT SEP-70.00 RQG-UN OI=190 BID=$1.40 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$69.35 ************** 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. ************** ABC - AmerisourceBergen $60.00 *** Probability Play! *** AmerisourceBergen (NYSE:ABC) is a wholesale distributor of pharmaceutical products and related healthcare services and solutions. The company distributes a full line of products, including pharmaceuticals, proprietary medicines, cosmetics, toiletries, personal health products, sundries and home healthcare supplies and equipment. It provides services to acute care hospitals and health systems, independent retail pharmacies, alternate site customers and national and also egional retail pharmacy chains located throughout the United States. The company distributes pharmaceuticals to long-term care and workers' compensation patients and provides product distribution, logistics, pharmacy management programs, pharmacy automation, consulting services and web fulfillment services. The firm operates in two segments: Pharmaceutical Distribution, mainly its wholesale and specialty drug distribution business, and PharMerica, its institutional pharmacy business. ABC - AmerisourceBergen $60.00 PLAY (conservative - neutral/debit straddle): BUY CALL NOV-60.00 ABC-KL OI=800 ASK=$3.80 BUY PUT NOV-60.00 ABC-WL OI=383 ASK=$3.70 INITIAL NET-DEBIT TARGET=$7.25-$7.40 INITIAL TARGET PROFIT=$2.45-$3.25 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** CVTX - CV Therapeutics $24.96 *** Premium-Selling Only! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on the discovery, development and commercialization of new small molecule drugs for the treatment of cardiovascular diseases. The company's New Drug Application (NDA) for Ranexa (ranolazine) for the treatment of chronic angina has been filed at the U.S. FDA. Tecadenoson (CVT-510), an A1-adenosine receptor agonist, is being developed for the potential reduction of rapid heart rate during atrial arrhythmias. CVT-3146, an A2A-adenosine receptor agonist, is being developed for the potential use as a pharmacologic agent in cardiac perfusion imaging studies. Adentri, an A1-adenosine receptor antagonist, is being developed by the company's partner, Biogen, for the potential treatment of acute and chronic congestive heart failure. CVTX also has several research and preclinical development programs designed to bring additional drug candidates into human clinical testing. CVTX - CV Therapeutics $24.96 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL SEP 30 UXC IF 2,072 0.45 30.45 8.1% 1.5% * SELL CALL SEP 27.5 UXC IY 1,030 0.95 28.45 11.1% 3.3% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** LLY - Eli Lilly $61.61 *** Sector Slump! *** Eli Lilly & Company (NASDAQ:LLY) discovers, develops, manufactures and sells pharmaceutical products. The company manufactures and distributes its products through owned or leased facilities in the United States, Puerto Rico, and 19 other countries. Eli Lilly's products are sold in approximately 150 countries and most of the products the company sells were discovered or developed by its own scientists and its success depends to a great extent on its ability to continue to discover and develop new pharmaceutical products. Eli Lilly directs its research efforts primarily toward the search for products to diagnose, prevent and treat human diseases. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. LLY - Eli Lilly $61.61 PLAY (conservative - bearish/credit spread): BUY CALL SEP-70.00 LLY-IN OI=3079 ASK=$0.15 SELL CALL SEP-65.00 LLY-IM OI=3964 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$65.50 ************** MRK - Merck $52.12 *** Murky Future After Medco Spin-off! *** Merck (NYSE:MRK) is a global research-driven pharmaceutical products and services company that discovers, develops, makes and markets a broad range of products to improve human and animal health, directly and through its joint ventures. The firm also previously provided pharmacy benefit management services through Medco Health Solutions. Merck's operations were comprised of two business segments: Merck Pharmaceutical and Medco Health. Merck Pharmaceutical's products consist of therapeutic and preventive agents, sold by prescription, for the treatment and prevention of human disorders. Medco Health, which has been spun-off as a new company, provides pharmacy benefit services, including sales of prescription drugs through managed prescription drug programs. The company sells its human health products primarily to drug wholesalers and retailers, hospitals, clinics, government agencies and managed healthcare providers, such as health maintenance organizations and other institutions. MRK - Merck $52.12 PLAY (conservative - bearish/credit spread): BUY CALL SEP-60.00 MRK-IL OI=3354 ASK=$0.10 SELL CALL SEP-55.00 MRK-IK OI=5331 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$55.55 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** A Steady Mix Bank of America - BAC - close: $81.71 change: +0.50 WHAT TO WATCH: The recent advance for some of the financials appears to be stalling but not for BAC. The bank stock just keeps inching higher using its rising 50-dma as support. Its MACD is about to produce a new buy signal and with psychological support of $80 nearby this might be a tempting entry point for some bullish traders. There is some congestion/resistance at $84 and $85 for the share price but UBS just upgraded the stock to a "buy" and put a $95 price target on it. Chart= --- Bear Stearns - BSC - close: $69.26 change: -1.00 WHAT TO WATCH: Broker/Dealer BSC is another financial stock we've been watching. Shares dropped from $85 to less than $65 in the mid-June to early August sell-off. Now shares have bounced back towards the $70 level, which was old resistance in the spring. Today's weakness is hinting at a potential roll over as are the stock's stochastics and momentum indicators. Aggressive bears could speculate on additional weakness but only with a tight stop in case of a reversal. There is plenty of congestion near $68 and that can slow down any descent. Chart= --- Cigna Corp - CI - close: $46.55 change: +1.59 WHAT TO WATCH: Insurance equity CI has been trading sideways at the $45 level for most of August and on light volume. The light volume is to be expected during the dog days of summer but today's rally on decent volume without news is interesting. Shares stalled at late July resistance near $47.00 so we're not suggesting bullish entries just yet. However, we do note that the recent consolidation at $45 coupled with its simple 50 & 200- dma's looks like a base bulls could build on. Chart= --- Thor Industries - THO - close: 49.85 change: +2.12 WHAT TO WATCH: Shares of THO have been up almost non-stop for two weeks straight. The last three days almost looks like a short squeeze on the breakout over the $45.00 level. That or someone knew ahead of time that THO would buy privately held motor home maker Damon Corp before the Aug. 19th announcement. THO said the acquisition would add about 20 cents to its fiscal 2004 earnings. While bulls should be encouraged to see the big rally on growing volume we're not suggesting plays at current levels. A pull back (maybe to $46.00 or $47.50) might be an entry point worth evaluating. Chart= --- J2 Global Comm. - JCOM - close: $61.41 change: +2.16 WHAT TO WATCH: Still climbing into the upper stratosphere, shares of JCOM fired their latest round of booster rockets a few days ago. Shares are up six days in a row and have cleared resistance just above $55 and again at $60. This stock does have a 2:1 stock split scheduled for August 29th but we'd still be hesitant to buy it here. A pull back and bounce above $56 might be tempting though. Chart= =================================== RADAR SCREEN - more stocks to watch: =================================== MGA $81.35 - Shares of MGA are still climbing and appear to be hitting new all time highs on a daily basis. Volume was very strong on today's gain. RARE $38.38 - The owner of several different restaurant chains, RARE has been climbing strongly since its bounce off the 50-dma in early August. Volume has been strong the last three days and so have the percentage gains. PG $87.38 - A favorite stock on the watch list, shares of PG keep dropping and have now closed below their simple 200-dma again. WWW $20.50 - WWW has been in a slow, meandering but rising channel since late January. The breakout today just broke through resistance at $20 and crossed the centerline of the channel. Patient traders with plenty of time might find this one interesting. ************** MARKET POSTURE ************** 15 to 8 Bulls To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_082003.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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