The Option Investor Newsletter Sunday 09-21-2003 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: Calm After The Storm Futures Market: Bonds and Gold Gain, Equities Retrace Index Trader Wrap: Higher highs Editor's Plays: Guess What? Market Sentiment: Bulls Forge Deep Into Bear Territory Ask the Analyst: Day trader's 5-minute bar technique 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 9-19 WE 9-12 WE 9-05 WE 8-29 DOW 9644.82 +173.27 9471.55 - 31.79 9503.34 + 87.52 + 66.95 Nasdaq 1905.70 + 50.67 1855.03 - 3.21 1858.24 + 47.79 + 45.13 S&P-100 520.62 + 8.32 512.30 - 0.19 512.49 + 9.13 + 5.94 S&P-500 1036.30 + 17.67 1018.63 - 2.76 1021.39 + 13.38 + 14.95 W5000 10054.07 +176.76 9877.31 - 29.38 9906.69 +136.23 +158.03 RUT 520.20 + 11.14 509.06 + 0.19 508.87 + 11.45 + 11.91 TRAN 2794.71 + 59.11 2735.60 - 11.69 2747.29 + 64.05 + 41.68 VIX 19.07 - 1.18 20.25 + 0.88 19.37 - 0.12 - 0.78 VXN 29.74 - 2.94 32.68 + 11.98 30.70 + 1.18 + 0.05 TRIN 1.35 1.11 1.04 0.78 Put/Call 0.68 0.90 0.72 1.29 ****************************************************************** Calm After The Storm by Jim Brown While the cleanup begins on the hurricane battered east coast the cleanup in the markets also began. The excesses from the big gains on Thursday eased and the NYSE board began its search for a new chairman and started the long task to rebuild its image. The quadruple witching Friday ended calmly after traders apparently cleared their books on Thursday Dow Chart Nasdaq Chart The only economic report on Friday was the Weekly Leading Index and it came in at 129.5 which was +1.0 over last weeks reading. This is a sleeper report and is not really a market mover as most of the components have been announced earlier in the week. Components of this index include Jobless Claims, Ten year yields, NYSE Composite, money supply, etc. This is an index created from all the other data for the week. Next week is devoid of material economic reports until Thursday when we will be overrun with numbers beginning with Durable Goods, Jobless Claims, Help Wanted Index, New Home Sales, Monthly Mass Layoffs and Existing Home Sales. Friday has GDP and Michigan Sentiment. While we will not get consumer sentiment numbers again until next week the sentiment numbers that matter were announced by AMG Data on Friday. U.S. stock mutual funds had inflows of $2.2 billion in the week ended Sept 17th. This was the 17th consecutive week that these funds have generated positive flows. International funds saw inflows of $987 million and small-cap funds received $615 million. The headline number was up +$94 million from the prior week. With positive fund flows continuing to feed the markets it is no wonder we are still seeing some upward pressure. The profit taking from Thursday's strong gains to new highs was weak and on low volume. The Dow only gave back -10% of its gains and the Nasdaq only slightly more. Considering the current levels this should be considered very bullish. My opinion is still the same concerning the huge spike and I think it was option related short covering. We will not know for sure until Tuesday. Impacting the markets on Friday other than the options expiration was a rebalancing of the S&P indexes and the FTSE Global Index. These were not major movers as they were simply an adjustment of percentages of stock held. As companies add or remove stock from the market the index fund managers must add and subtract stock from their portfolios to maintain an equal balance with the index. For instance MSFT has increased its weighting in the S&P-500 by 0.72%. Funds must add 0.72% to their current positions. If your fund position was 25 mil shares then you had to buy an additional 180,000 at the close on Friday to bring your position into parity. PFE saw its weighting drop -1.39% so index funds needed to reduce their holdings by that amount. Multiply this by several hundred stocks and you can see why there was some serious volume at the close. HPQ announced that is was going to buy back an additional $1 billion in stock. This means the next quarterly rebalancing will reflect the change in HPQ once they actually buys that stock back. I am not going to bore you today with repetitious stock news from Friday because there was hardly any. It was a quiet news day with most stories focusing on the Isabel damage and clean up, the Grasso exit or the California recall election. This was not a day where the news moved the markets. There were no real economics and other than a couple of small cap earnings warnings it was quiet. Boring and quiet. The calm before the storm. I know, you have heard it before, but here it is again. Is that thunder in the distance? Volume on the exchanges was evenly split between advancers and decliners and despite the negative headline numbers the new 52-week highs rose to 824 and a two week high. The quarterly quadruple witch appeared to be over after the open based on the lack of volatility for the balance of the day. The VIX closed at 19.07 and only .17 off the 52-week closing low of 18.90. The investor sentiment levels rose to 56.1% and bearish sentiment dropped to 19.4%. The Dow bullish percent rose to 83.33, OEX 87.0, SPX 82.8, Compx 77.41. In the OEX Bullish percent chart below you will notice that the index is running off the top of the chart while the RSI and MACD are showing clear bearish divergence. How much higher can it go? A reading over 80, much less 87.00, is very rare. This is the highest reading since 1996 and the oldest date I could chart. It has only been over 80 three times in six years and it has been over 80 since mid June. Think about it. Not only is it very rare but this length of time over 80 is unheard of. The VIX close at 19.07 is at a level only seen four times since Jan-1999. This is very bearish but it is not a trigger indicator. That means it can stay there for some period of time before the reaction takes place. I have shown this chart before but it bears repeating. Each time since 1998 that the VIX moved under 19 the results were the same. I don't make this up, I just report it. Everybody says quit harping on the VIX. In my opinion anybody that does not watch the VIX is asking for trouble. It is up to you to decide to react to it or ignore it. VIX/Dow 5-year chart Let's recap the facts and the result: Bullish investor sentiment at 56% (bearish) Bearish investor sentiment at 17% (bearish) Bullish percent on the OEX at 87.0 (very bearish) VIX at 19 for the 4th time in 5 yrs. (bearish) Bearish divergence on indicators on the OEX bullish percent chart (bearish) Monday begins the worst four weeks (bearish) Markets at new highs after 7 mo run (bearish) It is statistics like those that are driving the bears crazy. The market refuses to go down and extreme bullish indicators are growing even more bullish on a daily basis. The off the scale bullishness is feeding on itself and providing the urge for investors to chase stocks even higher. Next week is going to be a major test for the indexes. I have been reporting for weeks that we were about to enter the worst six weeks of the year from mid September to the end of October. Well boys and girls we are now moving into the worst four weeks of the year. This is the period after September options expiration and before the October expiration. Why? Mutual funds have an October 31st fiscal year-end. This means funds wanting to lock in profits and/or off set losses have to sell over the next four weeks. They could wait longer but the normal plan is to wait for the Sept option expiration period to pass before dumping stocks. They try to get all the portfolio rebalancing, including buying new stocks, done before the October option expiration. This compresses the time frame for all these events to occur into the next 3-4 weeks. In a year where many stocks have more than doubled in value since March the odds are good that many funds are going to lock in profits to dress up statements. After three years of a bear market the urge to show a nice profit is going to be strong. Don't get me wrong. The funds are not stupid. If the market opens up on Monday and they feel the momentum is still there they will try to stretch their gains just like everyone else. Once the momentum appears to fade it may trigger the end of that stretch attempt. The next three weeks are the three most important weeks of the year for funds. This is where all the planning and pain pays off and bonuses are earned. Until those profits are translated into cash they can disappear in an instant with any negative event. However, not all funds sell and they do not sell all stocks. If they think there is more upside in a stock and they do not have anything better to replace it with then just taking profits to take profits is a self defeating process. Confused? The bottom line is that some will and some won't and until it happens nobody has a clue. I feel like Chicken Little. I have been reporting on the "normal" market trends since late July and none of them have come to pass. The fix was in and the retail traders are convinced the worst is over and recovery is ahead. This belief has produced a positive inflow of cash to funds for the last 17 weeks. The Fed is going out of its way to promise no rate hikes until well into the recovery cycle. We are poised for a huge explosion in earnings if the recovery comes to pass. At this point that is more of "when" instead of "if" but it has not happened yet. We are seeing a slow increase in the economy but maybe not enough to justify the strong rally from March. This brings us to next week. "Normally" this would be the beginning of the lock in profits volatility period. However, with the funds still pouring in and the investing public counting dollars instead of sheep at night it remains to be seen what will happen. The Dow and Nasdaq are in nosebleed territory not seen in over a year and by many indicators very overbought. This could produce a spectacular dip back to the August lows or just another dip to be bought by the bulls. Until it happens it is just speculation and nobody has a clue. The market has embarrassed quite a few analysts over the last couple months and has proved one thing more often than not. The market will always do exactly the opposite of what analysts expect at critical points. Hopefully by doing my Chicken Little imitation again today if the sky does fall you will be ready for it. If it doesn't then no harm done. While Friday could have been the calm after the storm there is a much better chance it was the calm before the storm. Or should I say calm before the next buying opportunity? Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Bonds and Gold Gain, Equities Retrace Jonathan Levinson Friday was a quiet session following Thursday's tumult, with precious metals emerging on top, treasuries advancing and equities giving back part of Thursday's gains. Daily Pivots (generated with a pivot algorithm and unverified): 15 minute chart of the US Dollar Index The US Dollar Index got sold again in Friday's trading, compounding a week of losses and completing the fourth consecutive week of declines. The weekly candlestick is a doji, but the negative week doesn't make it look bullish to this observer. Friday saw a failure below 95 support, with a weak bounce commencing from the 94.70 area. Gold rallied, and the CRB added .93 to close at 238.50. Daily chart of December gold December gold added 5.90 on Friday to close at 383.60, printing an intraday high of 384.40. It's been rising for seven weeks, and printing a bullish hammer for the week portending further upside to come. This week's action confirmed the rising trendline support within the daily bear wedge we've been following and brought more indication of the possible truncation of the oscillator downphase. The 10 day stochastic has turned up to a bullish kiss, though it will take a new year high to drive it back to a buy signal. Such a move would be very bullish if the bulls can do it. The HUI and XAU were also very strong in Friday's trading, with the HUI breaking 207 but closing up 4.35 at 204.50, XAU up 2.77 at 95.38. Daily chart of the ten year note yield The Ten year note yield (TNX) dropped 2.2 basis points on Friday to close at 4.162%. The closing print reversed part of the day's decline, leaving a doji on the daily candle if you squint at it, but more importantly leaving the 10 day stochastic on a bullish kiss. A further decline on Monday would reverse it, but it's a sign of potential trouble for ten year note bulls. For the week, the TNX completed a third black crow, bearish for the yield / bullish for bonds, but showing early signs of possible reversal. Daily NQ candles The NQ retraced part of Thursday's considerable gains on Friday, but the bears could not keep the bulls at bay for longer than a few ticks, with the lows blowing off in a doji spike. The reversal off the lows was not particularly violent, the low volume was sufficient to create a candle shadow at the lows. If the pattern this week holds into next week, Monday will bring another "shock and awe" bullish advance, as can be seen in the repeated bullish engulfing candles that followed each negative day for the past several sessions. With quadruple witching Friday just completed, however, the pattern may well fail. The week's advance left the oscillators on bullish kisses very early in their downphases, but it will take an up Monday to seal the deal. Meanwhile, the failure below the wedge resistance line above 1400 is an encouraging sign for bears, despite the sharper uptrend within the ongoing bear wedge. 30 minute 20 day chart of the NQ The 30 minute NQ dipped from its high at the open as we speculated it might in Thursday's Futures Wrap. The downphase was orderly, and NQ bounced right on schedule, with the 300 minute oscillator confirming the lower trendline bounce. As traders, we often try to divine the future, and a trendline confirmed by oscillator patterns is as good as it gets. The upphase implies a trip to the upper trendline next, and to new rally highs in the process, but any failure will bring in an test of the lower bear flag trendline. A failure there would spell a possible end to the rally. Daily ES candles ES failed at the primary upper bear wedge trendline on the daily chart, but bounced from the secondary upper wedge, proving that even ambivalence has its merits in the market. The bounce off the lows at 1029.50 following the decline from the morning high blew off the lower candle body to leave a candlestick hammer. This ordinarily bullish candle is mitigated by a –4.50 point close on the day, and leaves it looking more bearish to me. Note that the oscillators remain choppy, looking for a confirming move on Monday to either fortify the early buy signals trying to print, or reverse them. 20 day 30 minute chart of the ES The same successful lower trendline support test seen on the 30 minute NQ is here on the ES. I noted the support in the intraday Futures Monitor as a possible long entry with a stop against the 1029.50 low of the day, and the bounce delivered but fell short below 1036. If the pattern holds true, Monday could bring upside fireworks to the upper flag resistance line above 1045. However, the unwinding of opex week could hinder the run, as suggested by the end-of-session pullback to 1032.75, the ES closing print. 150-tick ES Daily YM candles YM touched a high of 9649 but closed at 9596. 20 day 30 minute chart of the YM This week saw equity futures break to new 52 week highs. I had noted, at the previous highs 2 weeks ago, that the bounce would determine the fate of many bears and the chances for a continued rally. That bounce came this week from a low above 1000 ES and took the top off the previous 52 week highs. Whether such was the result of op-ex antics, frantic short covering, manipulation or otherwise, is only of passing interest to devoted chartists. The price is the price, and many technicians are looking for continued advances. I see the potential, and am in no hurry to chase retracements to the downside with shorts. However, the low VIX (19.07 closing print today), the widespread despair amongst bears, and the unanimous consensus amongst bulls partying like it's 1999 all raise antennae on bears looking for a significant trend change. Rallies don't tend to launch from points at which everyone is bullish, though they can drag out longer than many bears can remain liquid. Caution and active stops remain our best friend on both sides of the trade. ******************** INDEX TRADER SUMMARY ******************** Higher highs Jonathan Levinson The indices broke to higher highs this week, despite Friday's light pullback. The Nasdaq dropped 3.85 points to close at 1905, the Dow lost 14.31 to close t 9644, and the S&P 500 dropped 3.28 to close at 1036. Volume on Friday was higher than it felt, with 1.9B Nasdaq shares changing hands and 1.72B NYSE shares traded. Sellers were present for a change, generating a closing TRIN of 1.42 and TRIN.NQ of 1.19 despite the renewed complacency reflected in the volatility indices, leaving the VIX -.23 at 19.07, VXN -.01 at 29.74 and the QQV –2.11 at 24.93. As we've been squinting at intraday and multiday charts for what's proven to be a very long week, I've zoomed out to the weekly candles to review the Nasdaq and SPX. Weekly COMPX candles The COMPX chart is surprising from a bearish perspective. I've been hearing anecdotally that short interest on QQQ remains near record high, each short squeeze blamed for what feels like increasingly unsustainable advances. Yet the 4 year weekly chart doesn't confirm it, with the COMPX having retraced not even 23.6% off its lows measured from the alltime high in Spring 2000. While the move off the March 2003 lows has felt and looks like a nearly straight line up, the oscillators are only beginning to trend in overbought. A Fibonacci target of 2100 COMPX is not out of the question, though to achieve it without a prior downphase on the 10 week stochastic would be surprising. Weekly SPX candles The weekly SPX has gone relatively further, approaching its 38.2% Fibonacci resistance in the 1060 area. The oscillators are trying to start a downphase within the context of what appears as a clear bearish ascending wedge projecting to the March 2003 lows. Bears who have been shorting and getting skinned this week can consider waiting for a break below 1000 or try to catch a failure near 1060 with tight stops. The bigger picture affirms that this remains a cyclical rally secular within a secular decline, a bear market rally. Bulls will argue that every bull market begins as a bear market rally, which is true, but I don't see how we're there yet. On to the trading vehicles: Daily OEX candles The OEX daily remains a difficult chart to read, for the simple reason that it spent the better part of the summer doing nothing in a choppy range between 485 and 510. That chop creates a potential reverse head and shoulders pattern with a neckline around 511. I say "potential" because reverse head and shoulders belong at the bottom of a decline, and not near the top of an advance. Nevertheless, the formation projects to an upside target near 530, 10 points above Friday's close. That said, the better defined bearish ascending wedge should cap the advance near 525, with support again at 511. The daily chart oscillators remain toppy, and while further upside is not out of the question, risk- reward favors lower prices. 20 day 30 minute chart of the OEX The 30 minute chart of the OEX shows a bounce on schedule at the lower bear wedge trendline, lining up with a lower low on the 300 minute stochastic. The bounce projects to trendline resistance just above 525, and if the bulls can keep opex unwinding on Monday from taking out the lower rising trendline at 520, they have a good chance of seeing it. Daily QQQ candles The Qubes bounced from their lower wedge trendline on the daily chart, and failed at the lower of the two competing upper rising trendlines. A downphase aborted very early in its run this week, catching bears by surprise on what appeared to be a bear wedge breakdown. The counter-cyclical bounce was either op-ex related or not, and again, we'll find out Monday, Tuesday at the latest, whether the bounce was genuine or not. For call writers and put buyers of September contracts, that answer will be of merely academic interest. 20 day 30 minute chart of the QQQ The 30 minute chart of the NQ reveals the same trendline bounce as we see on the OEX. The stochastic upphase underway needs to be confirmed by a Macd buy signal, but any further upside on Monday will provide it. The trend remains higher within this ongoing bear wedge until the lower support line gets taken out. For next week, op-ex unwinding will be critical. If the 30 minute chart oscillator upphases are going to fail, it will occur Monday as option-related positions get squared and portfolios adjusted. If the markets don't drop, it's reasonable to expect this week's highs to be tested. ************************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 ************** Guess What? If you were expecting me to suggest index calls today you are smoking something funny. With the historical worst three weeks of the year starting on Monday it would be crazy to do anything buy play the odds with an index put. IF, and I qualify that in capital letters, IF, the normal historical trend appears then tech stocks could be hit the worst. Fortunately the put options on the QQQ are the cheapest options available. I am opting for the Oct-$34 puts at a 75-cent close as of Friday. They should be slightly lower on Monday assuming we do not gap down. If you want to get really crazy you could buy the Oct-$33 puts for 45 cents. A move to $32 would double your money and at 45 cents there is not much risk as long as you don't buy a huge quantity. QQQ Chart The second option would be to use the DJX in hopes of a retest of 9000 which I see as the worst cast October low. My preferred strike would be the Oct-95 put at $1.10. We would need to see a drop to 93 to double our money but that could easily come to pass. These are high-risk plays in a bullish market. Enter them only if you agree with the potential and accept the risk of the contrarian entry. ******************************** Play Recaps LUV Calls (recommended 9/14) We saw a bounce and then a pullback in LUV from last week but the stock finished the week flat. With the drop in oil prices the outlook is still good for the sector and this is a long term play. http://members.OptionInvestor.com/editorplays/edply_091403_1.asp Powerball The portfolio roared back with the rally to new highs. Still five months remaining and plenty of time for that 4Q recovery. We are likely to see some more negative signs before October is out but the Nov/Dec period should be strong. 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 **************** Bulls Forge Deep Into Bear Territory - J. Brown The last couple of months have certainly been eye openers. I'm not just talking about Dick Grasso's pay package. Look at the weekly charts on the Industrials and the Nasdaq composite. The NASDAQ has been up five out of the last six weeks and the INDU has been up six out of the last seven. Making the trend even harder to believe (if you're a bear) is that these gains have come in the heart of bear territory: August & September. August has broken the seasonal trend of weakness and September is on track to follow suit. However, as I mentioned on Thursday we're stepping into a dangerous part of the year. This is the thickest part of bear territory. It's time to tighten up the laces on those hiking boots and keep your eyes and ears open. Bear attacks tend to be quick! The last two weeks of September and the first week or two of October can be the most painful for the equity markets. They tend to be ripe with profit warnings about the third quarter. Fortunately, this year the earnings warning have been low in number as many analysts have already raised their expectations for the markets as whole. One of the rules for hiking in bear country is to make plenty of noise so you don't startle the bear and provoke a violent response. There's nothing more dangerous than a surprised bear except one that's also wounded and scared. You'd have to admit, given the market's performance wounded and scared is probably their current condition. Hopefully, the parade of positive analyst comments in August and September followed with the roar of the markets climbing higher may have been enough noise to actually scare aware the casual ursine. Next week's calendar is a little quiet. Keep an eye on the broker-dealers. Bear Stearns blew away earnings this last week and we'll hear from Lehman Brothers, Morgan Stanley and Goldman Sachs on Tuesday. FYI: no new CBOT data yet. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9686 52-week Low : 7197 Current : 9644 Moving Averages: (Simple) 10-dma: 9531 50-dma: 9319 200-dma: 8671 S&P 500 ($SPX) 52-week High: 1040 52-week Low : 768 Current : 1036 Moving Averages: (Simple) 10-dma: 1024 50-dma: 999 200-dma: 927 Nasdaq-100 ($NDX) 52-week High: 1406 52-week Low : 795 Current : 1392 Moving Averages: (Simple) 10-dma: 1369 50-dma: 1299 200-dma: 1136 ----------------------------------------------------------------- If you looked at a chart of the VIX on Friday you probably saw the long candlestick down towards the 16 level. We believe that is just a bad tick. The real low of the day was near the 19 mark. The markets continue to push higher, showing less and less fear, which makes the VIX drop lower and lower. CBOE Market Volatility Index (VIX) = 19.07 -0.23 Nasdaq Volatility Index (VXN) = 29.74 -0.01 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.68 970,777 660,827 Equity Only 0.53 805,493 432,906 OEX 0.82 59,414 49,129 QQQ 1.86 57,744 107,723 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.4 + 0 Bull Confirmed NASDAQ-100 80.0 + 0 Bear Correction Dow Indust. 83.3 + 0 Bull Confirmed S&P 500 82.8 + 0 Bull Confirmed S&P 100 87.0 - 1 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 0.99 10-Day Arms Index 1.15 21-Day Arms Index 1.03 55-Day Arms Index 1.02 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 1537 1594 Decliners 1250 1495 New Highs 198 266 New Lows 6 0 Up Volume 789M 882M Down Vol. 917M 977M Total Vol. 1743M 1887M M = millions ----------------------------------------------------------------- ! The COT Website has NOT updated their data since 09/09/03. Commitments Of Traders Report: 09/09/03 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 No change in sentiment for the commercial traders here. Meanwhile small traders forked out a little more cash to increase both their long and short positions. Commercials Long Short Net % Of OI 08/19/03 404,665 455,381 (50,716) (5.9%) 08/26/03 410,378 472,987 (62,609) (7.1%) 09/02/03 417,973 482,392 (64,419) (7.2%) 09/09/03 418,958 486,209 (67,251) (7.4%) 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 08/19/03 162,034 87,064 74,970 30.1% 08/26/03 170,424 76,967 93,457 37.8% 09/02/03 169,030 75,748 93,282 38.1% 09/09/03 176,401 81,444 94,957 36.8% 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 Commercial traders in the e-minis continue to pump up their long positions. The last numbers show the most bullish posture in quote sometime. Meanwhile the small trader has rotated a little bit of money from short back to long. Commercials Long Short Net % Of OI 08/19/03 296,971 235,779 61,192 11.5% 08/26/03 338,766 234,841 103,925 18.1% 09/02/03 347,724 224,011 123,713 21.6% 09/09/03 370,909 237,610 133,299 21.9% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 08/19/03 90,428 125,980 (35,552) (16.4%) 08/26/03 52,131 120,853 (68,722) (39.3%) 09/02/03 56,709 134,094 (77,385) (40.6%) 09/09/03 59,692 130,270 (70,578) (37.1%) Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders are increasing their bets on the NDX but they're still beating more heavily on a move lower. Small Traders are also active with larger net positions but they're still beating on the bulls. Commercials Long Short Net % of OI 08/19/03 32,107 53,665 (21,558) (25.1%) 08/26/03 33,991 55,849 (21,858) (24.3%) 09/02/03 37,002 55,379 (18,377) (19.9%) 09/09/03 44,677 62,369 (17,692) (16.5%) Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 08/19/03 25,607 10,134 15,473 43.3% 08/26/03 26,108 8,864 17,244 49.3% 09/02/03 23,168 10,561 12,607 37.4% 09/09/03 28,788 13,370 15,418 36.6% 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 No change in investor sentiment for the professional traders here. There is little change for the small trader but they have bumped up their long positions a tad. Commercials Long Short Net % of OI 08/19/03 21,088 18,984 2,104 5.3% 08/26/03 24,586 10,386 14,200 40.6% 09/02/03 25,462 10,447 15,015 41.8% 09/09/03 25,807 10,756 15,051 41.2% 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 08/19/03 15,717 9,143 6,574 26.4% 08/26/03 14,115 5,592 8,523 43.2% 09/02/03 6,629 13,402 (6,773) (33.8%) 09/09/03 7,429 13,796 (6,367) (30.0%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************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 *************** Day trader's 5-minute bar technique This week's e-mail was full of question's regarding the technique shown in the OptionInvestor.com Market Monitor and intra-day commentary, where a trader can utilize the retracement tool and the first 5-minutes of a day's trade to begin defining some short-term levels, where an institutional trader working an order, might set some parameters to get that order completed before the day's close. While a good investor or swing trader understands the importance of correlating a stock's price action (quarterly, monthly or weekly), a good day trader will focus on the index/sector/stock relationship as well. In Friday's Market Monitor at OptionInvestor.com, I polled subscribers for a list of three stocks they liked to day trade on a regular basis. Some sent me requests for the various tracking securities, which I thought would be a good idea to cover with this technique, as it would be useful to track the Dow Diamonds Trust (AMEX:DIA) $96.47, which tracks the Dow Industrials (INDU) 9,644.82. I was taken aback at the number of day traders that actually requested the Dow Diamonds (DIA) and the CBOE's DJX $96.45. What has the world come to when day traders vie for the sleepy Dow, when they could be getting jerked around with the NASDAQ-100 Tracking Stock (AMEX:QQQ) $34.58? What also surprised me is that 3M (NYSE:MMM) $141.98 was the most requested stock in Friday's late after-the-close poll. If I'd have thought to place the poll earlier in both the OptionInvestor.com and premierinvestor.net intra-day updates, I'm sure MMM wouldn't have received the highest number of requests. It probably would have been IBM (NYSE:IBM) $93.28. Another Dow component? And here's an interesting pattern from Friday afternoon's late session poll. NYSE listed stocks. A quick story here. In my broker days, in the early 1990's, I shared an office with a fellow broker, and before day trading of stocks was made more available with the invention of individual investor on line trading software, this guy, who was busier day trading his father's money by filling out a carbon copy paper ticket, than building a client base, would only trade NYSE listed stocks. He wouldn't look at a 4-lettered stocks, only because he felt they were just too volatile on an intra-day basis to day trade. (Lesson: If your just starting to day trade, start with a NYSE listed stock, which may tend to be less volatile than a NASDAQ listed stock, where you have to contend with market makers all jockeying for position) Of course, his observations were correct in the context of day trading when at that time we had to fill in the account number, write out the stock's name and symbol on the ticket, write the number of shares along with price, add the firm's discounted commission, then total it all up before the buy/sell order was ever placed. This 5-minute bar chart technique, whereby a trader simply look to measure the first 5-minute of trade, place TWO separate retracement on the first 5-minute bar and start trading is crazy to some. It makes little sense that the resulting levels from the retracement could ever be traded by the MARKET on an intra- day basis. While there are times when the levels won't come into play on an intra-day basis, it is uncanny how stocks will track these levels, which a day trader can trade with a very simple and disciplined approach to trading levels. The reason I polled traders for a list, is so that you and I can test this technique on a few stocks. If at the end of this article you think this might be a viable tool to add to your arsenal of day trading observations (daily pivot analysis levels, Level II bid/ask size, conventional trend and horizontal correlations) then that would be great! General rules: The first rule is to let the stock trade for 5-minutes. The second rule is for a higher probability for a lasting trend to develop over the session, the stock should trade two levels of retracement. This would be an attempt to get a feel for a lasting directional trade during the day, the trader must observe the stock trading TWO levels (up or down) AFTER the first 5- minute bar has been formed. The trader allows 5-minutes of trade to past, to try and sense, based on visual observation, just how much interest and disagreement there is on the stock. The thought being that the FIRST 5-minute bar will be the MARKET's early reaction (news, etc) that creates the length of price range in the bar. Think about it. If a $40 stock opens where it closed at the prior session and trades a 5-cent price range in the first 5-minutes, how much disagreement/interest or trend is likely to develop during the session? Trader's that can monitor volume with their charting system on 5-minute intervals may also want to observe normal or abnormal volume pattern in a stock they day trade on a regular basis to get a feel for that day's disagreement/interest in the stock at that price level early in the session. The third rule is that once a stock trades two levels higher, it should NOT violate two levels below, if a trend for the session is to have a higher probability of developing. The same would be true for a lower trade to take place where a stock that trades to levels lower, should not be able to violate two levels higher. I will try and explain this with a chart in a minute. The fourth and final rule is that the trader's goal should be to close the day trade when/if the stock trades the outer-limits of the soon-to-be-defined day trader range. Here's a chart to help with the understanding of the second rule. Second Rule Chart - I've placed two retracement brackets on a blank chart with a base value of 0.00. I've drawn in a 5-minute bar. All you should care about is after the first 5-minutes of trade is to get your BEARISH (red) retracement anchored at the top of the 5-minute bar, and fit the 80.9% retracement at the lower end of the bar. The rest of the red levels are RESULTS and further levels of trade. After you have your RED retracement drawn, then draw your blue retracement on the chart by anchoring 0% at the bottom of the first 5-minute bar, and then fit the 19.1% at the top bar. Please note that it does NOT matter if your 100% or 0% is at a top or bottom, all the trader cares about is PRICE levels to trade. A day trader is unemotional; he/she is only interested in making money short-term and if wrong, keeping losses to a minimum and moving on. The first 5-minutes of trade is NEUTRAL, let the MARKET sort things out and you look to follow the market. In PINK text, I've made note as to how a trader looking to trade a stock that has gapped higher on the session, should initially disregard the 2-level (#1, #2) approach to trading the levels initially. Often times a stock will gap higher (say $1.00, then fall back 50 cent, to then finish the session higher by $1.50.). The above retracement technique is useful for trading gapping stocks. If a stock you like to trade gaps higher at the open, then pulls back to RED #5, but is able to begin a rally back to Red #3, trader can trade long at RED #3, stop goes below RED #5 and daily target is BLUE #6. One question often asked is why might this type of trading technique have credence? Imagine that I'm a mutual fund manager and you are the primary trader I run the bulk of my mutual fund trading business through. Today, I call Christine (Christine was a subscriber that asked about IBM, as did 7 others) and tell, I mean... ask her if she can get me 100,000 shares of IBM at net $93.00 by close. Christine trades IBM frequently, has a good feel for the stock, and I've found her to be honest and gives me fair price fills for orders. Christine says, "no problem," but reminds me that today is Triple Witch Friday. I tell her I don't care what day it is. (grin). Christine goes to work. While Christine's main priority is to get my order filled by the close of the day, she will also try and work the order for me and try and get the best prices she can, as she would like to keep my business in the future. Christine has heard how pleased I've been in the past when she has delivered stock to me at prices much lower than I was willing to pay. One day I wanted here to buy 200,000 shares of Enron at $32, and she got me filled at a net of $25 by the close. I was very pleased that day. However, the LEVELS of trade at her retracement, will have her checking how much of my order is complete, as she knows she needs to get the order for 100,000 shares filled before the close, and billed to my at the 04:00 PM EST close. If there is too much bullish competition from buyers in today's trade, Christine will likely get more aggressive with here buying in an attempt to get my 100,000 shares filled before the close. What would be Christine's first alert that she might not get my order done for 100,000 shares at net $93 by the close? If you answered, "when it trades blue #2," then you're on the right track. So now that we have a feel for how an institutional trader may have to approach a session, let's come back to earth and simply trade based on our rules for the 5-minute retracement technique. IBM Chart - 5-minute intervals We won't see IBM trade 1.1 million shares in the first 5-minutes of every session, and today's Triple Witching Friday most likely had something to do with today's opening volume. When IBM traded $92.65 (BLUE #2), a day trader would have developed a bullish bias toward the stock, STOP below RED #1 as (based on the rules). I won't go into detail here, but does a bull buy BLUE #2 or look for a pullback entry to BLUE #1, with stop still at RED #1. It may depend on what the Dow Industrials as a group are doing, or broader technology in general, which might influence a bullish traders preference. Let's say a bull paid up and bought 100 shares of IBM at $92.65. At PINK "(A)" I've outlined the rules of trade. Remember, your daily goal was BLUE #6 (based on retracement). Does a bull long at $92.65 sell $93.09 (BLUE #5), and risk a stop just below $92.77 (BLUE #3), which is two levels below? Maybe, maybe not. If the Dow Industrials were higher, bull might let IBM try and run higher, feeling the risk was worth the potential reward. If Dow or broader technology were lower, IBM bull might take the money and run. The trader that uses oscillators may also use them to make a decision. Is a day trader done when they've opened a closed a trade on a stock earlier in the session? Heck no! Especially if they just found a winning trade. A trader will keep going as long as they feel their more profits to be made. Does a day trade BEAR show interest in IBM on Friday after the stock rose from $92.40 to $93.00? Probably not after seeing a trade above BLUE #4 or higher at BLUE #5. That might have been a sign that there was just too much bullish sentiment for the stock. A day trade BEAR might show interest if he/she were to see a BLUE #3 get followed by a decline to BLUE #1, but the BEAR would most likely look for a short entry back at BLUE #2 and then look for some confirming weakness to RED #1. I'll try and find this type of trade later. At the PINK (B). This is the same price level a BULL at BLUE #2 may have bought earlier in the morning, dumped at BLUE #5 for a gain. Is a day trade BULL interested here? I would think so and looks to pick up a trade at BLUE #2 ($92.65) again, or look for a bullish entry on renewed intra-day STRENGTH at BLUE #4 ($92.89) and PINK (C), with stop just below BLUE #2 and still targets BLUE #6 as a daily goal. Another tactic in all of this is for a very patient bull that saw the pullback to BLUE #2, then bounce to BLUE #4 (two levels higher) then feel the stock did something (trade two levels higher that it shouldn't have if a more BEARISH or weakening trend were going to develop), and then look for a BULLISH entry at BLUE #3 of $92.77, where I've placed the PINK (C). Take your time with this paragraph. Now, put yourself back in Christine's shoes, and work that order for long 100,000 shares of IBM at net $93 for me. Today, IBM reached BLUE #6. A day trader bull might have worked just one trade today (buy $92.65 / sell $93.09 as an example), but may have gotten two profitable trades with another at buy $92.95 and sell $93.30. Some notes a trader should be making mentally is that once you set up a retracement as such, you want to look at the RANGE, and see if the trade makes sense on a day trader perspective. If your trying to day trade 100 shares of IBM, it is one thing to have a $1 bullish potential to BLUE #6 on one day, but just $0.50 BLUE #6 the next day. While its true that this technique is based on just the first 5-minutes of trade, but one way to see if there might be the potential for a good advance or decline that you can trade. A trader that trades 1,000 shares using day trade margin, may be satisfied with a full 0.50 trade potential if the trader things they can take $500 out of the trade. From an institutional trader's perspective... What if Christine went into today's trade with a BEARISH bias on IBM, despite my instruction for her to buy 100,000 shares of IBM at net $93? If she thought she new better than the mutual fund manager's instruction to buy the stock before the close, and waited around all day with the thought the stock was GOING to trade lower, then she might not have been able to get the order done. Can you imagine the explaining that would have to be done if at 03:50 PM EST she called me and said "Jeff, I haven't bought a share, but I'll get to it on Monday." Ooooo I'd be a little upset, especially if one of my analysts had told me late Thursday that IBM might ink a deal with the Government to sell $400 million in new computers, and I had asked Christine to get me some exposure to the stock. I didn't need to tell Christine why I wanted the stock, I just wanted her as a trader to get me the 100,000 shares net $93, using her expertise as a trader. The pressures are immense for an institutional trader. They know it isn't necessarily their job to call a market. They just trade the levels and try to get the orders filled at the best possible price for their customers. Let's look at the Dow Diamonds (AMEX:DIA). Nothing different here, and all we do is let the 5-minute bar develop, then go to work with retracement! Dow Diamonds (AMEX:DIA) - 5-minute intervals A day trader lets the 5-minute bar develop, then goes to work with retracement. It may have been darned tempting after Thursday's impressive gains for an eager bull to get long the DIA when they broke to a new 52-week high 15-minutes into Friday's trade, but there wasn't quite enough bullish bias to get a trade at BLUE #2. More than an hour later, a BEARISH bias was developed with a traded at RED #2. A BEARISH day trader could have initiated a short at $96.52, or looked for a bounce back to RED #1 and $96.68. At the PINK (A) I make note that the DIA traded $96.68 exactly. Traders that subscribe to the Market Monitor will often note that I preface certain price action levels with the phrase, "look for a 5-minute close" above or below a certain level. Over the years, I've simply noticed that often times, a level will be traded, and the trade at that level may then initiated a trade in the OPPOSITE direction of how the level was traded. For instance, at points marked (A), it could be, especially on an expiration Friday, that there were a lot of computer programs set for distribution in the DIA, that may have needed to sell X- number of DIA shares before the day's session was over, and after computers (which can easily establish retracement levels based on the opening 5-minute bar chart) saw RED #3 traded, a SELL BIAS was in place at RED #1, the level was traded, and computers began feeding stock out, or selling again at that level. The reason I mention 5-minute closes ABOVE, or BELOW a level is to simply try and see if the MARKET is seeing enough BUYING or SELLING, even on such a brief time frame, to try and make sure I'm not BUYING into COMPUTER SELLING, or that I'm SELLING into COMPUTER BUYING. On Friday, a trader that did sell short the first test of RED #2, stop above BLUE #1, and did nothing until RED #4 was traded, when they would have lowered their stop to RED #2, would have been stopped out at RED #2 for roughly break-even. At PINK (B), that first test of RED #2, did see a 5-minute close above that level, and perhaps computers had finished there jobs, perhaps got things squared for the Triple Witch expiration. We don't know for sure, but by trading the rules, the DIA should not have been able to trade much above RED #2 after trading RED #4. I was rather surprised that there were so many requests regarding 3M (NYSE:MMM) $141.98. We must have a lot of big hitters in the Market Monitor. My q-charts 5-minute bar shows today's 5-minute opening range as being from $140.55 to $142.55, but there were bad ticks to the $140.55 level. Closer inspection on 1-minute intervals would have the first 5-minutes, which actually had MMM seeing a delayed open 3-minutes after the open (hey, it's the largest PRICE weighted stock in the Dow and on Triple Witch, there were probably lots of various trades around MMM on expiration) trading a high of $142.55 to low of $142.30. Not much to show today for a 5-minute open and we'll look at a different day in a second. But this brings up a quick point, especially on listed stocks. Some day's, especially with a lot of economic data, it is not uncommon to see an NYSE listed stock delayed opening until 2 or 3-minutes after the 09:30 AM EST open. A trader can still use the 5-minute bar chart technique, but I would simply change my time frame to a 10-minute interval, set your retracement just as you would if it were a 5-minute bar, then when you're done setting up your retracement levels, switch our time interval back to 5-minute and be ready to trade! This brings up another thought. A lot of day traders like to trade off of 2 or even 1-minute interval bar charts. You can do this still, but I would want at least 5-minutes of trade to set my retracement up. Get some time observation to give the market a chance to develop an early 5-minute range, then trade the time interval you prefer. Let's do this with 3M. Let's test this 5-minute interval technique on 3M, but let's go back to a gapping higher 3M, which took place on July 21, 2003. Before the opening bell, the market was abuzz as 3M had just reported Q2 earnings, beat estimates and guided higher for Q3. Still concentrate on the RED and BLUE retracement, but on this day, the technique I've shown before regarding "stacked retracement" may also have been used by traders, when MMM traded BLUE #6 just 1.5 hours into that day's session. There was still a lot of time left to the close, where the simple cloning of BLUE retracement, could have been staked on top of the first, to give further upside level for a trader to trade against. I colored the stacked retracement pink, so you can better see what a trader will do in such circumstances. 3M Chart - 5-minute intervals (07/21/03) Despite a gap higher, a day trader is still "neutral" and lets the 1st 5-minute bar develop, and gets retracement set and ready to trade. 3M didn't fill its higher gap from the Friday, July 18 close, but a rough estimate shows that a decline to approximately $131.56 would have been a 50% retracement of the gap. Remember, the RED retracement was taken from the 1st 5-minute interval too. Anyway... we see that MMM did trade BLUE #2 about 30-minutes into the session at $133.55, and as we count the levels higher, when MMM traded BLUE #3, it never came below BLUE #1, where a bullish entry at BLUE #2 would begin raising their stop at. When BLUE #4 was traded, MMMM never came back below BLUE #2, the next level for a raised stop. On and on it went as gains built. At 10:55 AM EST, MMM had already achieved BLUE #6 and a profit could have been taken. With the Dow Industrials trading lower that day, a day trader long MMM at $133.55 may have said enough was enough. The PINK retracement, is simply a clone of BLUE (or red retracement for that matter) where the PINK retracement is simply stacked on top of the BLUE, and just like that, a trader has new upside levels to trade rule number 3, where once MMM traded PINK #1, it should not trade BLUE #5. If the Dow Industrials would have been up 100-points, instead of down that day, the use of cloned and stacked retracement could have given the day trader some good level to systematically trade by. It looks like the MARKET was trading levels similar to this retracement technique. Enough with these "boring" stocks, and lets try and tackle KLA- Tencor (NASDAQ:KLAC) and take on some market makers and institutional computers in our 4-lettered friends. Are you getting the feel for how systematic this is? Do you see how you can back test this technique on a stock, any stock, index, security, over several prior days and see if a stock will show some type of consistency? If you find a stock that just gives too many "false" triggers and shows poor back testing consistency, then don't try day trading that stock with this technique. KLA-Tencor No trade in KLAC on Friday. I sure hope that those requesting a day trade lesson on KLAC aren't disappointed. I do think a good lesson from this chart is found. EVERY DAY is not necessarily THE DAY to trade a stock you like to day trade. That's why most day traders have 10 BULLISH candidates and 10 BEARISH candidates each morning. For instance, let's Stuart (one of several traders requesting KLAC) has a bearish view of KLAC after the SEMI book-to-bill data this week, or some other news on the semi-equipment sector. Stuart may also have AMAT or NVLS as stocks to trade in the sector. Stuart might also have a list of BULLISH candidates at hand in a different sector, like software. Heck, each day there's got to be a stock in the NASDAQ-100 Index (NDX.X) that is either notably up, or down early in the morning, which can easily be identified by a trader with the NASDAQ-100 heatmap at the NASDAQ web site. It's free! Here's the link. http://screening.nasdaq.com/Heatmaps/Heatmap_100.asp Speaking of the NASDAQ-100 Index, the QQQ was a tracking stock that received several votes for discussion. I'm going to look for a "gap" day, so we can try and find a tough intra-day chart to trade. I'm going to look for a gap that gets backfilled, creates a day trader loss, but see if we can't shift our first bias, get back on trend, and make back the gain. This is perhaps the toughest day trade a trader will face. NASDAQ-100 Tracking Stock (QQQ) - 5-minute intervals A quick check of the BLUE range (BULLISH) would show QQQ potential from roughly $33.33 to $33.69, so 1% gain potential to BLUE #6, and RED range (BEARISH) would show QQQ potential from roughly $33.33 to $32.97 and 1%. Not a whole lot from the mid- point, but still some room where a MAX 0.75% gain might be found. I've marked three points at PINK (A), (B) and (C), which after the September 12 morning gap lower, a day trader could have turned BEARS the QQQ at RED #2 and shorted. At RED #5, a QQQ trade was briefly found, which would have had the BEARISH trader moving DOWN his/her stop to RED #3 (two levels above RED #5) and getting stopped out at point (C) for either fractional gain or break even. A trader might then be alert to STRENGTH, or lack of weakness as the QQQ was able to trade two levels above a prior lower level test of RED #5 for the first time in the session. A trader could have made further attempts to short the QQQ while in the RED retracement area, but after 11:00 AM EST, when QQQ traded BLUE #2, further alertness to potential strength was observed. The rather tight zones and ease with witch the QQQ was trading through the various intra-day levels becomes tough to trade and looks to turn into a scalper session. While my chart is rather busy, a trader that does monitor 5- minute bars and their closing value, will note that when the QQQ first tests BLUE R2, it was NOT able to hold a close above that level of $33.44, and mental note that there was some type of formidable selling being triggered at that level, which was enough to hold on a 5-minute closing basis was just too formidable for further gains. From there, the QQQ falls lower and yet again violates RED #1 (two levels below BLUE #2), which the QQQ should not do, and falls further to RED #3 and closes below RED #2 on a 5-minute basis. At this point, it would be my analysis that the QQQ is still showing intra-day bearish tendency. A trader also notes inconsistency with the QQQ and trading system this day and either moves on to another security, which is showing consistency this session, or sticks with his favorite looking for more clues, but better yet, DIVERGENCE from daily inconsistencies. At PINK (D) the QQQ comes back to test RED #2, pierces briefly, but holds a 5-minute close. This may get the trader's attention with a pattern also be identified that this slight DIVERGENCE or holding of RED #2 comes after a higher low. At PINK (E) the QQQ is back to test BLUE #2, and for the first time in the session, the QQQ is able to hold a 5-minute close above this level $33.45. This is also DIVERGENCE from early morning trade. Intra-day simple moving averages are turning higher, MACD has moved above zero and a BULLISH bias and trade at PINK (E) could be taken, stop just below RED #1, target BLUE #6. At PINK (F) the QQQ bulls may stack retracement, but with 1.25 hours left in the session, looks to close out the trade, or has raised his/her stop to BLUE #6, with full intention to sell close if a stacked retracement (not shown) upper level were to be traded. As mentioned, this would be one of the more difficult day trades a trader would face. However, I've tried to mix in some of the observations of trying to look for clues, where the noting of a higher low, 5-minute closes, direction of intra-day moving averages and oscillator setups might be used. There are days when the QQQ is "just as easy" to trade as a single stock, but index traders must remember that there is more than 1 stock in an index, and stock-specific news on a heavily weighted stock in the index or tracking stock you're trading, brings in some complexity to the intra-day trade. I feel the key to day trading is to "get to know" the security you are trading. One of the biggest mistakes a young day trader will make, is jumping around from this stock to that stock, then to another stock, and then another, without really getting a feel for how a stock trades. A trader can take this 5-minute retracement technique and back test it on some of your favorite stocks. After you study 5 days of trade, you may be able to begin recognizing the poor trading days for that security early in the session, with the observations of "I've seen this before, tried to trade it, and either found losses, or gains that just were not worth my time." A day trader should have 2 or 3 stocks to trade in a sector. Three semiconductors, three software, three net workers, the deep cyclicals, three retailers, three banks, three gold stocks, etc. etc. Have a list of names at your ready, and look/listed for market/sector moving news. It takes about 2-minutes to slap a retracement bracket on a chart, and when you do, and see some apparent levels being traded by the MARKET, then you should be ready to roll. If a stock is making a strong advance and is trading at BLUE #4 or BLUE #5 by the time you get to it, but has been darting to through these levels, don't feel like you need to chase it at BLUE #5. Look for an intra-day pullback to BLUE #4 (stop BLUE #2) or better yet a pullback to BLUE #3 (stop BLUE #1). A general rule of thumb I like to use for day trading is if a sector or market is generally bullish, but I you like to trade the semiconductors when the QQQ is rallying, I DON'T like to try and trade a semiconductor if there is bad news in the group that day. For example, on Thursday, the market staged a nice morning rally to their close, but the semiconductors had "bad news" in the group as it relates to the weaker August book-to-bill data. The Semiconductor Index (SOX.X) fell 1.8% in the early morning, but did rally back to finish up 0.75%. While that was a nice intra- day reversal from the lows, a day trader trading a semiconductor stock may end up with his/her favorite stock not being the stock that was able to advance, where a better trade in the software sector may have been had. Don't have more than two day trades open at one time. A good day trader wants to stay focused. If you're going to have two trades open at the same time, try to have both of them in the same sector where you can pick up any divergence between the two. When you're day trading a stock, it is helpful to also be monitoring its corresponding sector. For the most part, a day trade bulls wants to see his/her stock trading as strong, if not stronger than the sector on a given day. A bearish day trade short want to be shorting a stock that is trading as weak or weaker than the sector. If so, then the sector should give earlier hint to a potential shift in intra-day momentum and if a trader sees his/her trade reaching a BLUE #6 or RED #6, then it may be time for the day trader to lock in the gain at what could be a MAX inflection point that day. Here's a profile for day trader to be looking to close out an earlier profiled day trader bullish trade in micro-cap gold producer Bema Gold (AMEX:BGO) $2.29 -1.29% in today's market monitor. It was a good thing I was keeping an eye on the AMEX Gold Bugs Index ($HUI.X) 204.45 -2.17%. Market Monitor - Sector observation for stock trade There were plenty of up-tick at the $2.46 and ample opportunity to sell the bid in BGO for a day trade bull long from $2.43, and it may have been the observation that the sector was slipping to an afternoon low that would have an a day trade bull taking a fractional gain off the table, instead of risking some intra-day loss of momentum. Well. I would have loved to cover more stocks that everyone is interested in, but hopefully you have a good grasp of the 5- minute retracement technique and see how this systematic trading of levels can be utilized. Have a great weekend, and do some back-testing on your favorite stocks! Jeff Bailey ************* COMING EVENTS ************* Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- AZO AutoZone Inc. Mon, Sep 22 After the Bell 1.92 ------------------------- TUESDAY ------------------------------ FDS FactSet Research Sys Tue, 16 Sep Before the Bell 0.37 CBK Christopher & Banks Tue, Sep 23 -----N/A----- 0.21 GS Goldman Sachs Tue, Sep 23 Before the Bell 1.22 LEH LEHMAN BROS HLDGS INC Tue, Sep 23 Before the Bell 1.34 MWD Morgan Stanley Tue, Sep 23 Before the Bell 0.69 SCHL Scholastic Tue, Sep 23 After the Bell -0.68 WOS Wolseley Tue, Sep 23 -----N/A----- N/A ----------------------- WEDNESDAY ----------------------------- BBBY Bed Bath & Beyond Inc.Wed, Sep 24 After the Bell 0.30 COGN Cognos Wed, Sep 24 After the Bell 0.18 CGA Corus Group plc Wed, Sep 24 Before the Bell N/A DRI Darden Restaurants Wed, Sep 24 -----N/A----- 0.38 LNR LNR Property Wed, Sep 24 -----N/A----- 0.88 MKC McCormick & Company Wed, Sep 24 Before the Bell 0.29 PAYX Paychex Wed, Sep 24 Before the Bell 0.20 SCS Steelcase Inc. Wed, Sep 24 After the Bell 0.02 VE Veolia Environnement Wed, Sep 24 -----N/A----- N/A V Vivendi Universal Wed, Sep 24 -----N/A----- N/A ------------------------- THURSDAY ----------------------------- COMS 3Com Thu, 18 Sep After the Bell -0.14 AM Am Greetings Corp Thu, Sep 25 Before the Bell -0.17 RIMM Res In Motion Lmted Thu, Sep 25 -----N/A----- 0.07 RAD Rite Aid Corporation Thu, Sep 25 -----N/A----- -0.04 SLR Solectron Thu, Sep 25 -----N/A----- -0.05 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable BKST Brookstone Inc 3:2 Sep 23rd Sep 24th SNPS Synopsys Inc 2:1 Sep 23rd Sep 24th SAFE Invivo Corp 3:2 Sep 26th Sep 29th CCBI Commercial Capital Bancorp3:2 Sep 29th Sep 30th KVA KV Pharmaceutical 3:2 Sep 29th Sep 30th MMM 3M 2:1 Sep 29th Sep 30th ABVA Alliance Bankshares Corp 3:2 Sep 29th Sep 30th PLMD PolyMedica Corp 2:1 Sep 29th Sep 30th WERN Werner Enterprises Inc 5:4 Sep 30th Oct 1st GPRO Gen-Probe Inc 2:1 Sep 30th Oct 1st BMTC Bryn Mawr Bank Corp 2:1 Oct 1st Oct 2nd -------------------------- Economic Reports This Week -------------------------- The first half of the week is empty of major economic reports but Thursday and Friday are full. Home sales on Thursday and the Sentiment numbers on Friday are probably the biggest ones to watch. We're still in earnings warning season. ============================================================== -For- ---------------- Monday, 09/22/03 ---------------- UBS Warburg Global Life Sciences Conference ---------------- Tuesday, 09/23/03 ---------------- Redbook Retail Sales UN General Assembly - President Bush speaks about 10:30 AM ET. UBS Warburg Global Life Sciences Conference Merrill Lynch Global Pharmaceutical Conference. ------------------- Wednesday, 09/24/03 ------------------- API/Dept. of Energy Oil/Gasoline inventories. UBS Warburg Global Life Sciences Conference ------------------ Thursday, 09/25/03 ------------------ Initial Claims (BB) 09/13 Forecast: N/A Previous: N/A Durable Orders (BB) Aug Forecast: 0.6% Previous: 1.0% Help-Wanted Index (DM) Aug Forecast: 39 Previous: 38 Existing Home Sales(DM) Aug Forecast: 6.07M Previous: 6.12M New Home Sales (DM) Aug Forecast: 1110K Previous: 1165K Wells Fargo Securities Consumer Conference Natural Gas Inventories ---------------- Friday, 09/26/03 ---------------- GDP-Final (BB) Q2 Forecast: 3.1% Previous: 3.1% Chain Deflator-Final (BB)Q2 Forecast: 0.9% Previous: 0.8% Mich Sentiment-Rev. (DM)Sep Forecast: 89.2 Previous: 88.2 Greenspan speaks to US Congressional Black Caucus. 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. 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 ************************************************************** 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-21-2003 Sunday 2 of 5 In Section Two: Watch List: Another Mixed Bag of Three-lettered stocks Call Play of the Day: Gushing Higher (SLB) Dropped Calls: None Dropped Puts: None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** Automatic Data Processing - ADP - close: 39.00 change: +0.54 WHAT TO WATCH: Falling somewhere between business services and software, ADP is making a comeback no matter what sector you classify it. The stock has been in a very steady rising trend from its March lows. The recent profit taking in September may be offering bullish traders another entry point. The stock pulled back to the $37.50 level and its simple 50-dma. The bounce on Friday looks very tempting and traders could use it as an entry point with a tight stop. More momentum-minded traders might prefer to wait and see ADP break the $41 level again but keep in mind that the P&F chart shows resistance near $45. Chart= --- DST Systems - DST - close: 39.90 change: +0.30 WHAT TO WATCH: DST is another computer services company, like ADP, but this one looks ready to attempt another breakout over long-time resistance at $40-41. Actually, looking at the weekly chart, shares of DST have already broken the multi-year trend of lower highs. Plus the point-and-figure chart has already broken bearish resistance. All we need to see now is some conviction by the bulls to break this $41 level and get this train moving again. Chart= --- Briggs Stratton - BGG - close: 60.76 change: +0.56 WHAT TO WATCH: If you look at a long-term chart of BGG you'll notice two things. Number one, shares appear to have completed a multi-year basing pattern (2000-2002). Number two, that the recent trend, while extremely overbought and extended, has broken out of that basing pattern. We hesitate to suggest bullish plays on the breakout over $60 because the stock does look so extended. The best bet would be on a pull back to the bottom of the channel near its simple 30-dma and use a tight stop loss. However, aggressive players willing to speculate that BGG might be able to make it to $65 before pulling back could use a stop near $57.50. FYI: BGG's last stock split was in November of 1994. It was a 2- for-1 when shares were trading between $60-65. Chart= --- Eli Lilly - LLY - close: 60.21 change: -0.83 WHAT TO WATCH: Profitable bearish plays have been tough to uncover in this bullish market but LLY might fit the bill. Shares dropped strongly in early September and have continued to produce lower highs as the share price creeps closer to the $60 level of support. Bearish traders will note that the point-and- figure chart is already on spread triple-bottom sell signal. We believe there is always headline risk when playing drug stocks so more research is needed but a trigger under $60 might work to open a bearish position. Chart= ************************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 PLAYS OF THE DAY ******************** Call Play of the Day: ********************* Schlumberger Ltd. - SLB - close: 50.99 change: +1.74 stop: 47.50 Company Description: Schlumberger Limited is a global technology services company consisting of three business segments: Schlumberger Oilfield Services, SchlumbergerSema and Other Businesses. Schlumberger Oilfield Services is a provider of technology services and solutions to the international petroleum industry. SchlumbergerSema is an information technology services company, providing consulting and systems integration services and network and infrastructure solutions, primarily to the global energy sector, including oil and gas, and other regional markets spanning the telecommunication, finance and public sectors. The Other Business segment includes the manufacture of smart cards, pay telephones, point-of-sale terminals, parking and mass transit terminals, meters and trading systems. In addition, this segment provides advanced test and diagnostic systems, as well as engineering services to the semiconductor industry. Why we like it: Owing in large part to the diversity of its business operations, SLB has been handily outperforming the Oil Services sector (OSX.X) for the past few months. Ever since the first wave of buying off the spring lows subsided, the stock has been building a classic bullish wedge formation, with the top forming in the $49.75-50.00 area. Over the past few weeks, price has been adhering to a slightly rising floor just above $47.50, waiting for the catalyst that would break the narrowing bullish pattern to the upside. The catalyst arrived Wednesday morning with UBS raising their price target for the stock from $55 to $63. But investors didn't quite figure it out at the time. Instead, price dipped back to the long-term ascending trendline (currently $47.85) and then launched higher on Thursday, with the volume- backed breakout coming on Friday. SLB exploded through the $50 level to gain more than 3.5% on volume that more than doubled the ADV. This breakout looks like it has room to run to the upside, and next major resistance comes in the $54-56 area. Of course, if the PnF chart is to be believed, then significantly higher price levels are in store. In that view, we have the stock in a column of X, on a mature Buy signal and with a vertical count of $77! We're not saying it can't happen, but it is exceedingly unlikely within the duration of this play. We'll content ourselves with a move to $56, with an outside chance of a move up to $60. Following Friday's breakout, there are a couple ways to play this one. The first and most obvious would be on a continuation over $51.10 with volume remaining strong. The lower risk approach will be to look for a pullback into the $49.50- 50.00 area to buy the dip. Either scenario looks equally attractive and we'll take whichever one sets up first. Initial stops should be set at $47.50, which is below both the ascending trendline and the intraday lows since the first of September. Suggested Options: Shorter Term: The October 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 November 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 November 50 Call. BUY CALL OCT-50 SLB-JJ OI= 3057 at $2.05 SL=1.00 BUY CALL OCT-55 SLB-JK OI= 96 at $0.40 SL=0.20 BUY CALL NOV-50 SLB-KJ OI=13305 at $2.90 SL=1.50 BUY CALL NOV-55 SLB-KK OI= 8345 at $0.80 SL=0.40 Annotated Chart of SLB: Picked on September 21st at $50.99 Change since picked: +0.00 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 3.07 mln See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-21-2003 Sunday 3 of 5 In Section Three: Current Calls: AMGN, AMZN, AXP, APOL, AU, ERTS, GS, LEA, LUV, MERQ, UTX New Calls: SLB Current Put Plays: KKD New Puts: GILD ************************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 ****************** Amgen, Inc. - AMGN - close: 68.89 change: -1.11 stop: 67.50 Company Description: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why we like it: The timing of the Wachovia downgrade seems just a bit suspicious, coming the day after AMGN traded the $70 level, which created a new PnF Buy signal and a new bullish price target of $81. The firm called into question investor expectations for a 20% five- year growth rate and lowered their targeted price range from $76- 84 to $66-75. Hey, that's fine with us, as our upper target for the play ($74.50) is still within that lowered range. It was actually impressive to see how the stock rebounded off the initial drop on Friday. After trading just fractionally below $68, the buyers appeared, lifting the stock back above the 10-dma ($68.62) and the 50-dma ($68.36). Last ditch support is found just above $67.50 at the juncture of the long-term ascending trendline and the 20-dma ($67.55), so our stop seems to be aptly placed at $67.50. Our ideal entry point, as noted on Tuesday, was for a trade at $70 and then a pullback into the $68-69 area. Patient traders got just that served up on Friday. Successive rebounds from the vicinity of the 50-dma can still be used for entry, while the next move over $70 (actually $70.15) can be used for entry by the momentum set. Suggested Options: Shorter Term: The October 70 Call will offer short-term traders the best return on an immediate move, as it is just slightly out of the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 75 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 January 70 Call. BUY CALL OCT-65 YAA-JM OI=16152 at $4.90 SL=3.00 BUY CALL OCT-70 YAA-JN OI=35220 at $1.65 SL=0.75 BUY CALL JAN-70 YAA-AN OI=21841 at $4.00 SL=2.50 BUY CALL JAN-75 YAA-AO OI=10725 at $2.00 SL=1.00 Annotated Chart of AMGN: Picked on September 16th at $69.81 Change since picked: -0.92 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 7.96 mln --- Amazon.com - AMZN - close: 47.58 change: -0.31 stop: 44.50 Company Description: Amazon.com is a website where customers can find virtually anything they want to buy online. The company lists millions of unique items in categories such as books, music, DVDs, consumer electronics, toys, software, computer and video games, lawn a patio items, kitchen products and wireless products. Through its Amazon Marketplace, Auctions and zShops services, any business or individual can sell virtually anything to AMZN's approximately 30 million cumulative customers. Why we like it: Friday was pretty much a throwaway, with option expiration clouding the significance of any price action. There was slight weakness across the market, but given the gains through the rest of the week, the shallow pullback can only be interpreted in a bullish fashion. AMZN pulled back with the remainder of the market, ending just above $47.50 as market makers were successful in pinning the stock to within a dime of that strike. Next week, we'll be back to business as normal and AMZN looks poised to head higher still. There might be the need for a bit more of a pullback, and if it does occur, we can consider it a gift of an entry point. Look for pullback entries in the $46.50-47.00 area, with support being reinforced by the 10-dma ($46.44) and the 20- dma ($46.35). If the bulls charge out of the gate again on Monday, breakout entries can be taken on a move over $48.24 (Thursday's intraday high). Our initial target is $50, which is currently the top of the ascending channel, but once above there, $55 looks like a reasonable goal. Suggested Options: Shorter Term: The October 47 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 January 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 January 47 Call. BUY CALL OCT-47 ZQN-JW OI=10304 at $2.35 SL=1.25 BUY CALL OCT-50 ZQN-JJ OI= 6411 at $1.25 SL=0.60 BUY CALL JAN-47 ZQN-AW OI= 2730 at $5.30 SL=3.25 BUY CALL JAN-50 ZQN-AJ OI= 9333 at $4.20 SL=2.50 Annotated Chart of AMZN: Picked on September 18th at $47.89 Change since picked: -0.31 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 8.46 mln --- American Express - AXP - close: 47.05 chg: -0.03 stop: 44.49 Company Description: American Express Company is a diversified worldwide travel, financial and network services company founded in 1850. It is a world leader in charge and credit cards, Travelers Cheques, travel, financial planning, business services, insurance and international banking. (source: company press release) Why We Like It: Thursday was an historic day for American Express. The stock rallied more than 3.8 percent to levels not seen since February 2001. The breakout above resistance was powered by news Wednesday night. A federal appeals court upheld a prior ruling that member banks belonging to the Visa and MasterCard network should be allowed to also offer credit cards from rivals American Express and Discover. Visa & MC said they would appeal the decision (again) but this has major financial implications for AXP. One J.P.Morgan analyst estimated that AXP's credit business could jump $20 billion over the next three years. Sometimes we'd rather not chase big moves but the breakout over the $46.00-46.50 level on volume of 7.4 million shares looks too tempting to pass up. The AXP weekly chart does suggest possible resistance at $50 but we do not expect it to hold for very long. We're going to start the play with a stop loss at $44.49. Friday's session held up rather well as AXP saw almost no profit taking on Thursday's breakout. Meanwhile in the news the EU has approved AXP's purchase for Britian's Threadneedle, one of England's best known fund houses for 340 million pounds in cash. Suggested Options: This is a short-term play for us but given the breakout longer- term investors who believe in the story might want to consider lengthier options. Our preference is the October 45s and 50s. BUY CALL OCT 45.00 AXP-JI OI=9331 at $2.60 SL=1.30 BUY CALL OCT 47.50 AXP-JW OI=5233 at $1.05 SL=0.50 BUY CALL OCT 50.00 AXP-JJ OI=3075 at $0.30 SL= -- Annotated Chart: Picked on September 18 at $47.08 Change since picked: - 0.03 Earnings Date 10/27/03 (unconfirmed) Average Daily Volume: 3.9 million Chart = --- Apollo Group - APOL - close: 68.03 chg: -0.97 stop: 64.00 Company Description: Apollo Group Inc. has been providing higher education programs to working adults for more than 25 years. Apollo Group Inc. operates through its subsidiaries The University of Phoenix Inc., Institute for Professional Development, The College for Financial Planning Institutes Corp., and Western International University Inc. The consolidated enrollment in its educational programs makes it the largest private institution of higher education in the United States. It offers educational programs and services at 67 campuses and 118 learning centers in 37 states, Puerto Rico and Vancouver, British Columbia. (source: company press release) Why We Like It: One of the major beneficiaries of the economic slow down are the purveyors of higher education. Stocks like EDMC, CECO, COCO and APOL have all done extremely well for investors this year based on higher enrollment numbers. Out work employees have decided to go back to school and make themselves more attractive and marketable to employers when the recovery finally does start hiring again. We like APOL out of the bunch because shares have been consolidating its gains for the last couple of months. The recent breakout to a new all-time high has much stronger legs to stand on than some of the other stocks. The company actually raised its guidance in late August telling Wall Street it expects fiscal 2004 to beat estimates fueled by higher enrollment and new campus openings. APOL forecasts that its University of Phoenix division (with its own tracking stock) should see enrollment grow from 12 to 14 percent just in the first quarter. APOL raised its Q1 revenue numbers to $392 - 395 million compared to estimates of $389 million. FRIDAY Update: The sharp spike down at the open may have been a little confusion among investors. An analyst came out with negative comments over valuation concerns for eCollege.com (ECLG) comparing it to APOL. Shares of APOL quickly recovered but started to slip later into the afternoon. Any bounce from above the $66 level looks like a bullish entry point to us. Suggested Options: Short-term traders can choose between Octobers and Novembers. We still like the 65s and 70s. BUY CALL OCT 65 OAQ-JM OI=1586 at $4.70 SL=2.75 BUY CALL OCT 70 OAQ-JN OI=2836 at $1.80 SL=0.90 BUY CALL NOV 65 OAQ-KM OI=1028 at $5.80 SL=3.85 BUY CALL NOV 70 OAQ-KN OI= 742 at $2.90 SL=1.50 BUY CALL FEB 70 OAQ-BN OI=2256 at $4.90 SL=3.25 Annotated Chart: Picked on September 16 at $68.45 Change since picked: - 0.42 Earnings Date 10/07/03 (confirmed) Average Daily Volume: 1.9 million Chart = --- Anglogold Ltd. - AU - close: 40.05 change: +0.75 stop: 38.00*new* Company Description: Anglogold Limited produces approximately six million ounces of gold each year. The company has a global presence with 20 operations comprised of open-pit and underground mines and surface reclamation plants in eight countries (Argentina, Australia, Brazil, Mali, Namibia, South Africa, Tanzania and the United States). The company's mining activities are supported by extensive and focused exploration activities in 10 countries. Why we like it: We were starting to think the Gold stocks were starting to run out of juice towards the end of last week, but then along came Friday's excitement that vaulted AU as high as $40.74 early in the day before the surge faded, allowing the stock to fall back to just above $40. While the fade was a bit discouraging in light of the fact that December gold futures held their gains to close just off their highs at $383, this is a new all-time closing high for AU. Both the Amex Gold Bugs index (HUI.X) and the Gold and Silver index (XAU.X) pushed to new closing highs and appear right on the verge of another strong breakout. Critical support for AU is now found in the $38.50-39.00 area and a pullback and rebound near that level can still be used for pullback entries. Aggressive momentum types will want to target entries on a breakout above Friday's intraday high ($40.74) and the 9/09 high of $40.90. Remember, we're looking to harvest gains when our $44 target is achieved, as that is the bullish price target from the PnF chart. Raise stops to $38.00 Suggested Options: Shorter Term: The October 40 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 January 45 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 January 40 Call. BUY CALL OCT-40 AU-JH OI= 3462 at $1.85 SL=0.90 BUY CALL JAN-40 AU-AH OI= 1445 at $3.90 SL=2.25 BUY CALL JAN-45 AU-AI OI= 510 at $1.90 SL=1.00 Annotated Chart of AU: Picked on September 2nd at $39.51 Change since picked: +0.54 Earnings Date 10/30/03 (unconfirmed) Average Daily Volume = 854 K --- Electronic Arts - ERTS - close: 94.75 chg: -0.10 stop: 89.90 Company Description: Electronic Arts (EA), headquartered in Redwood City, California, is the world's leading interactive entertainment software company. Founded in 1982, Electronic Arts posted revenues of $2.5 billion for fiscal 2003. The company develops, publishes and distributes interactive software worldwide for video game systems, personal computers and the Internet. Electronic Arts markets its products under three brand names: EA SPORTS(TM), EA GAMES(TM), and EA SPORTS BIG(TM). (source: company press release) Why We Like It: The NASDAQ may be near 18-month highs but the GSO software index is just below its own 16-month highs. A move above the 147 level by the GSO would be very encouraging for traders bullish on software stocks. Leading the software group high has been shares of ERTS, which notched a few all-time highs of its own this week. It feels like it has been a long three weeks but so far it has paid off in ERTS. The stock is up almost six points from the day we picked it. Shares of ERTS have been moving strongly higher in its channel as investors continue to pour more money into growth plays. Fortunately, ERTS is one of the better growth plays for this sector. Not only does America spend more money on video games than movie tickets but ERTS has been posting rising revenues and net income and is the titan of its field. The company beat its latest earnings report by 10-cents. We are very encouraged by the strong rise on decent volume and Friday's lack of profit taking but two things make us pause. Number one, the stock is just underneath its trendline of highs where traders normally take profits before letting it drift back to the bottom of its rising channel. This alone suggests that our readers may want to close all or part of their position and take some money off the table. Secondly, it was only a few weeks ago that Bank of America raised their price target on ERTS from $80 to $95. The stock has reached their goal and we could see a downgrade based on valuation from BAC at any time. The stock did weather a downgrade on valuation by Wedbush Morgan on September 3rd but if BAC makes the call it could carry more weight. For those doing their homework you'll also find out that Dougherty & Co raised their price target on ERTS from $85 to $100 back in mid-August. So why don't we close the play out here near $95? Two more reasons. First, the path of least resistance is still up and investors will be looking ahead to the upcoming Q4 holiday shopping season. Thus dip buyers will probably step in to buy the dip if ERTS pulls back to the $92 area in anticipation of a big Q4 run up. Third, Jeff likes to refer to it as a 90-100 rule. Most stocks that trade $90 also tend to trade to the $100 level before investors choose to take profits. It's a psychological phenomenon that doesn't always work but one to take note of. Should we see ERTS spike higher to the $97-99 area, we would suggest closing current positions for a profit. Suggested Options: Bullish traders can choose from October and December options. Right now we'd prefer to enter new plays on a pull back and the 90 or 95s probably look the best. BUY CALL OCT 90 EZQ-JR OI= 843 at $6.50 SL=4.00 BUY CALL OCT 95 EZQ-JS OI=2612 at $3.40 SL=1.70 BUY CALL OCT100 EZQ-JT OI=2327 at $1.35 SL= -- Higher risk! BUY CALL DEC 90 EZQ-LR OI=1370 at $9.40 SL=6.00 BUY CALL DEC 95 EZQ-LS OI= 219 at $6.60 SL=4.00 BUY CALL DEC100 EZQ-LT OI=2519 at $4.40 SL=2.25 Annotated Chart: Picked on August 28 at $89.06 Change since picked: +5.69 Earnings Date 07/23/03 (confirmed) Average Daily Volume: 3.3 million Chart = --- Goldman Sachs Grp. - GS - cls: 93.73 chng: +0.48 stop: 89.75*new* Company Description: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net- worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why we like it: While we had to exercise a lot of patience in waiting for it to unfold, Thursday's explosion in the Broker/Dealer index (XBD.X), thanks to the huge upside earnings surprise from BSC before the open. The XBD slammed through the $620 resistance level and came to rest just a hair below $630, while our GS play burst through the $92.25 resistance, coming to rest at $93.25, it's best close since January of 2002. Friday's action was even more encouraging, as the XBD consolidated a bit and GS moved higher to another new 52-week high. The bulls have got that $95 target in their sights and will likely achieve it early next week. Conservative traders may want to harvest some gains near that point, while those with a stronger constitution can hang on for a move to test the January 2002 highs at $97. Now we can look for a pullback and rebound in the $92 area for a continuation entry, but we are not recommending new momentum entries this close to our initial target. Note that our stop is now set at $89.75, as it continues to walk up behind the 20-dma. Suggested Options: Shorter Term: The October 95 Call will offer short-term traders the best return on an immediate move, as it is currently just slightly out of the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 100 Call. This option is currently slightly 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 January 95 Call. BUY CALL OCT- 90 GS-JR OI=23195 at $5.60 SL=3.50 BUY CALL OCT- 95 GS-JS OI=10521 at $2.25 SL=1.10 BUY CALL JAN- 95 GS-AS OI= 9515 at $4.90 SL=3.00 BUY CALL JAN-100 GS-AT OI= 7533 at $3.10 SL=1.50 Annotated Chart of GS: Picked on September 2nd at $90.45 Change since picked: +3.28 Earnings Date 9/24/03 (unconfirmed) Average Daily Volume = 3.62 mln --- Lear Corp - LEA - close: 55.32 change: -0.35 stop: 52.49 Company Description: Lear Corporation, a Fortune 500 company headquartered in Southfield, Mich., USA, focuses on integrating complete automotive interiors, including seat systems, interior trim and electrical systems. With annual net sales of $14.4 billion in 2002, Lear is the world's largest automotive interior systems supplier. The company's world-class products are designed, engineered and manufactured by 115,000 employees in more than 280 facilities located in 33 countries. (source: company press release) Why We Like It: The auto-related stocks have been hot this last quarter and LEA is certainly one of them. They've almost doubled from their March lows near $32.50. Not only has LEA's share price appreciated but they're earnings have actually been worthy of the gains. The company last announced earnings on July 17th and LEA beat estimates by 28 cents with $1.54 a share. On top of the blow out numbers they raised guidance for Q3. Prudential followed up the next day with a very encouraging upgrade. PRU raised their own outlook for LEA for 2003 and believes the company could have its credit rating improved soon while the stock might be added to the S&P 500 index over the next 12 months. A couple of weeks later in early August Barron's highlighted the stock in a positive light. We're still witnessing a bounce off the rising 50-dma for LEA and the move back over the $55 level is encouraging for bullish traders. We would like to see more volume supporting the move but we do see the MACD signaling a new bullish buy signal (well, it should be signaling a buy signal on Monday). There is some very short-term resistance near $56 and again at $57 but we don't expect these to hold. Our target is the $60 mark. Suggested Options: Short-term bullish traders should probably consider the October or December calls on LEA while long-term traders can look to January and March calls. Our preference will be for the Octobers. BUY CALL OCT 50 LEA-JJ OI= 14 at $6.00 SL=3.75 BUY CALL OCT 55 LEA-JK OI=121 at $2.10 SL=1.00 BUY CALL OCT 60 LEA-JL OI= 58 at $0.45 SL= -- riskier! BUY CALL DEC 50 LEA-LJ OI=409 at $7.00 SL=4.25 BUY CALL DEC 55 LEA-LK OI=460 at $3.70 SL=1.75 BUY CALL DEC 60 LEA-LL OI= 58 at $1.55 SL=0.75 Annotated chart: Picked on September 16 at $54.05 Change since picked: + 0.43 Earnings Date 10/17/03 (confirmed) Average Daily Volume: 694 thousand Chart = --- Southwest Airlines - LUV - close: 18.50 change: -0.17 stop: 17.75 Company Description: Southwest Airlines is a domestic airline in the United States that provides predominantly short-haul, high-frequency, point-to- point, low-fare service. As of the end of 2002, LUV operated 375 Boeing 737 aircraft and provided service to 59 airports in 58 cities in 30 states throughout the country. The company focuses principally on point-to-point, rather than hub-and-spoke, service in markets with frequent, conveniently timed flights and low fares. Why we like it: Along with the rest of the market, the Airline sector (XAL.X) saw a bit of profit taking on Friday, as much due to option expiration as to any other factor. Our LUV play got hit by the sellers as well, but we were quite pleased to see a very solid rebound from the $18.25 level, confirming old resistance is now acting as support. We've been looking for a dip and rebound from the $18.00-18.25 level as the next likely entry point for most of the past week, so we hope you took advantage of it. This support area should now define the floor for LUV to launch itself higher. Next resistance is found at $19, at last Tuesday's intraday high and then our initial target at $20. If the XAL index can finally break through the $64-65 resistance, then LUV has a fighting chance of reaching the $22 level, its highs from early 2002. Maintain stops at $17.75, which is just below the 20-dma. Suggested Options: Shorter Term: The October 17 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the December 20 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 17 Call. BUY CALL OCT-17 UVM-JW OI=1720 at $1.35 SL=0.75 BUY CALL DEC-17 LUV-LW OI=3229 at $1.80 SL=0.90 BUY CALL DEC-20 LUV-LD OI=1716 at $0.55 SL=0.25 Annotated Chart of LUV: Picked on September 11th at $18.36 Change since picked: +0.14 Earnings Date 10/20/03 (unconfirmed) Average Daily Volume = 2.60 mln --- Mercury Interactive - MERQ - cls: 50.93 chng: -0.99 stop: 47.65 Company Description: As a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications, MERQ is looking for growing e-commerce demand to continue to fuel its business. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks and automating quality assurance testing. MERQ's client base spans a wide range of industries including Internet companies such as Amazon.com and America Online, infrastructure companies Ariba and Oracle, as well as Apple Computer, Cisco Systems and Ford Motor Company. Why we like it: Offering something for everyone last week, MERQ has certainly been a cooperative bullish play. Giving us one sedate day of consolidation after we initiated coverage, the stock then broke higher to close right on the $50 resistance level on Tuesday and then breaking through it with authority (and volume) on Thursday. Then, providing one more opportunity for the bulls that hadn't yet gotten aboard, MERQ fell back to test the $50 level as support on Friday. Certainly another dip into the $49-50 area is possible, but we're looking for new entries at that point. Aggressive traders can enter on a breakout over Thursday's intraday high ($52.12), but will need to evaluate risk to reward accordingly, as our upside target for the play is $55. Maintain stops at $47.65 (just under Monday's intraday low) and look for continued strength from the Software sector (GSO.X) to continue to fuel the rally. Suggested Options: Shorter Term: The October 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 January 55 Call. BUY CALL OCT-50 RQB-JJ OI= 1573 at $3.20 SL=1.50 BUY CALL OCT-55 RQB-JK OI= 1061 at $1.10 SL=0.50 BUY CALL JAN-50 RQB-AJ OI= 582 at $5.90 SL=4.00 BUY CALL JAN-55 RQB-AK OI= 593 at $3.60 SL=1.75 Annotated Chart of MERQ: Picked on September 14th at $48.16 Change since picked: +2.77 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume = 3.14 mln --- United Technologies - UTX - cls: 79.15 chg: -0.29 stop: 77.20 Company Description: United Technologies Corp., based in Hartford, Connecticut, is a diversified company that provides a broad range of high technology products and support services to the building systems and aerospace industries. It's four main business segments are Otis, Carrier, Pratt and Whitney, and Flight Systems. (source: company press release) Why We Like It: It's been three weeks and we're starting to grow a little disappointed with the performance in UTX. Almost daily we hear analysts and economists offering their positive outlooks for the economy and suggesting that investors look to industrials to capitalize on the move. Well, UTX is an industrial but it just can't seem to break out above the $80-80.50 level. An improving economy and higher defense spending should be a strong boost for UTX business and their chairman is very optimistic for 2004. Unfortunately, their latest mid-quarter update didn't have any positive things to say about the current quarter. One bit of positive news did come out on Friday. One of UTX's subsidiaries won a $1.3 billion contract to build power systems for a Chinese aircraft manufacturer. The stock still has a very weak trend of higher lows during the last week and the longer-term trend is still positive but the failure to participate in the big rallies this last week are a little concerning. Friday's move saw volume of 2.3 million shares, which is only a little above average but felt like someone was getting out or lightening up on their positions. We're very cautious and would not recommend new long positions until UTX broke the 80.50 level. Suggested Options: We are not suggesting new plays in UTX until we see a move back above the $80.50 mark. Should that occur then our preference would be the October or November strikes. BUY CALL OCT 75 UTX-JO OI= 381 at $5.20 SL=2.75 BUY CALL OCT 80 UTX-JP OI=2182 at $1.80 SL=0.95 BUY CALL NOV 75 UTX-KO OI=2111 at $6.10 SL=3.25 BUY CALL NOV 80 UTX-KP OI=1317 at $2.90 SL=1.50 BUY CALL NOV 85 UTX-KQ OI= 162 at $1.10 SL=0.50 Annotated Chart: Picked on August 29 at $80.05 Change since picked: -0.90 Earnings Date 07/17/03 (confirmed) Average Daily Volume: 2.1 million Chart = ************** NEW CALL PLAYS ************** Schlumberger Ltd. - SLB - close: 50.99 change: +1.74 stop: 47.50 Company Description: Schlumberger Limited is a global technology services company consisting of three business segments: Schlumberger Oilfield Services, SchlumbergerSema and Other Businesses. Schlumberger Oilfield Services is a provider of technology services and solutions to the international petroleum industry. SchlumbergerSema is an information technology services company, providing consulting and systems integration services and network and infrastructure solutions, primarily to the global energy sector, including oil and gas, and other regional markets spanning the telecommunication, finance and public sectors. The Other Business segment includes the manufacture of smart cards, pay telephones, point-of-sale terminals, parking and mass transit terminals, meters and trading systems. In addition, this segment provides advanced test and diagnostic systems, as well as engineering services to the semiconductor industry. Why we like it: Owing in large part to the diversity of its business operations, SLB has been handily outperforming the Oil Services sector (OSX.X) for the past few months. Ever since the first wave of buying off the spring lows subsided, the stock has been building a classic bullish wedge formation, with the top forming in the $49.75-50.00 area. Over the past few weeks, price has been adhering to a slightly rising floor just above $47.50, waiting for the catalyst that would break the narrowing bullish pattern to the upside. The catalyst arrived Wednesday morning with UBS raising their price target for the stock from $55 to $63. But investors didn't quite figure it out at the time. Instead, price dipped back to the long-term ascending trendline (currently $47.85) and then launched higher on Thursday, with the volume- backed breakout coming on Friday. SLB exploded through the $50 level to gain more than 3.5% on volume that more than doubled the ADV. This breakout looks like it has room to run to the upside, and next major resistance comes in the $54-56 area. Of course, if the PnF chart is to be believed, then significantly higher price levels are in store. In that view, we have the stock in a column of X, on a mature Buy signal and with a vertical count of $77! We're not saying it can't happen, but it is exceedingly unlikely within the duration of this play. We'll content ourselves with a move to $56, with an outside chance of a move up to $60. Following Friday's breakout, there are a couple ways to play this one. The first and most obvious would be on a continuation over $51.10 with volume remaining strong. The lower risk approach will be to look for a pullback into the $49.50- 50.00 area to buy the dip. Either scenario looks equally attractive and we'll take whichever one sets up first. Initial stops should be set at $47.50, which is below both the ascending trendline and the intraday lows since the first of September. Suggested Options: Shorter Term: The October 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 November 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 November 50 Call. BUY CALL OCT-50 SLB-JJ OI= 3057 at $2.05 SL=1.00 BUY CALL OCT-55 SLB-JK OI= 96 at $0.40 SL=0.20 BUY CALL NOV-50 SLB-KJ OI=13305 at $2.90 SL=1.50 BUY CALL NOV-55 SLB-KK OI= 8345 at $0.80 SL=0.40 Annotated Chart of SLB: Picked on September 21st at $50.99 Change since picked: +0.00 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 3.07 mln ************************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 ***************** Krispy Kreme Doughnut - KKD - cls: 40.28 chg: -0.48 stop: 44.01 Company Description: Founded in 1937 in Winston-Salem, North Carolina, Krispy Kreme is a leading branded specialty retailer of premium quality doughnuts, including the Company's signature Hot Original Glazed. Krispy Kreme currently operates more than 305 stores in 41 states, Canada and Australia. An estimated 7.5 million Krispy Kreme doughnuts are made every day and more than 2.7 billion are produced each year. (source: company press release) Why We Like It: It's been a rough few weeks for KKD. The stock topped out near $50 near its earnings report and have sharply fallen since then. The company actually beat earnings estimates of 20 cents by a penny with strong revenue growth but the Street was not happy with the earnings quality. Average sales were flat and a couple of major brokerage downgrades quickly followed. We initially wrote the play with a trigger to go short at $41.69 and we were quickly triggered on the first drop towards $40. The bounce from Sept. 9th-15th was market related. Then shares got hit hard again when a new Wall Street Journal article revealed some concerning news for KKD. The company's average-store weekly sales were down to $35K, which is significantly less than the $64K they're used to. On top of weekly sales drops KKD's biggest franchisee, Great Circle Family Foods LLC, reported a 10% drop in wholesale shipments and a 20% drop in visitor traffic. The article also revealed that Great Circle had put themselves up for sale early this year with no takers yet. KKD has been priced for sweet perfection at 62 times earnings compared to the S&P average near 28. So bad news tends to spark a sell first and ask questions later response. We're encouraged by the drop this week back towards the $40 mark but new plays are probably best considered on a move below this support. Suggested Options: As a short-term play our preference would be the October and November 40 strikes but the 45s should work well too. BUY PUT OCT 40 KKD-VH OI=3888 at $1.90 SL=0.90 BUY PUT OCT 45 KKD-VI OI=1134 at $5.20 SL=3.20 BUY PUT NOV 35 KKD-WG OI=2721 at $1.05 SL=0.50 BUY PUT NOV 40 KKD-WH OI=2282 at $2.55 SL=1.20 BUY PUT NOV 45 KKD-WI OI=1271 at $5.70 SL=2.70 Annotated Chart: Picked on September 8 at $41.69 Change since picked: - 0.93 Earnings Date 08/21/03 (confirmed) Average Daily Volume: 1.0 million Chart = ************* NEW PUT PLAYS ************* Gilead Sciences - GILD - close: 59.96 chg: -2.29 stop: 64.01 Company Description: Gilead Sciences is a biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases worldwide. The company has seven marketed products and focuses its research and clinical programs on anti-infectives. Headquartered in Foster City, CA, Gilead has operations in the United States, Europe and Australia. (source: company press release) Why We Like It: It's a tough market to try and find attractive bearish plays these days so when we do see something that looks trade-worthy we're loathe to pass them up. Even if they were a call play earlier in the week. Shares of GILD had been enjoying a slow, but steady climb higher from the $60 level to its old highs near $70 as the BTK (biotech index) continued to make new relative highs. Then out of nowhere J.P.Morgan downgrades the stock to "neutral" from "over weight" and shares gap lower below support at the simple 50-dma. The analyst at JPM felt it was going to be a lot tougher for GILD to actually beat earnings and revenue estimates in the future and felt that the stock was already richly valued. The stock traded down more than five points on the downgrade before bouncing a bit into the close. That was four days ago. Since that time shares of GILD have continued to drop despite Merrill Lynch trying to defend the stock and reiterating their "buy" rating and $78 price target. The decline has been on decent volume and the close under $60 on Friday looks pretty ominous. However, we're a bit gun shy in this bullish market environment and want to see a little more conviction by sellers in GILD. Thus we're going to use a TRIGGER at $59.75 to open the play for us. The point-and-figure chart suggests that bears can target support near $55 while the daily chart hints at support near $50. If we are triggered we'll open the play with a stop loss at $64.01 but more conservative traders might want to consider a stop near $62.50. Suggested Options: The October and November puts are probably the best bet for short-term traders. We like the 60s but the 55s should work well too. BUY PUT OCT 55 GDQ-VK OI= 795 at $1.15 SL=0.60 BUY PUT OCT 60 GDQ-VL OI=1161 at $3.00 SL=1.50 BUY PUT OCT 65 GDQ-VM OI=2349 at $6.30 SL=4.00 BUY PUT NOV 55 GDQ-WK OI= 890 at $2.50 SL=1.25 BUY PUT NOV 60 GDQ-WL OI=1099 at $4.50 SL=2.25 Annotated Chart: Picked on September 16 at $00.00 <-See trigger Change since picked: -0.00 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. 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: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-21-2003 Sunday 4 of 5 In Section Four: Leaps: Mixed Emotions Traders Corner: The Family Jewels Are Safe – For At Least Another Month! Traders Corner: Buying the Pullbacks is notAlways as Easy as it Looks ************************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 ***** Mixed Emotions By Mark Phillips On one hand, I can look at last week's continued bullish action and I'm pleased that I finally shed my market bias and decided to trade what is in front of me, no matter how silly I think it is. On the other hand, I'm irritated that it took me this long to shift gears and start leaning to the long side. Now that I've made the switch, am I the last one and now the markets will tip over in their never-ending drive to embarrass me? Please tell me I'm not the only one that ever feels that way! In the grand scheme, it was another clearly bullish week for the broad markets, as they all notched new 52-week highs. The DOW closed over 9600 for the first time since June of 2002 and 9800 looks like a cinch to be tested next week. I idly speculated some time back that if the 9500 resistance level was broken, that 10,000 would be in the cards. The 10K level is the 62% retracement of the entire bear market decline and I know I'm not the only one that has noticed that fact. That level is looking more likely by the day, and I could even see an extreme bullish target of 10,300 being in play. The S&P 500 had another clearly bullish week, despite the slight decline on Friday. The SPX cleared the 1030 level and while 1050 looms as a near-term target, I've got my eye on the 1070 level as a reasonable upside target from here. The 38% retracement of the entire bear market decline is at 1068, while the 75% retracement of the entire 2002 range is at 1072. Until tested, these just remain idle observations, as I search for meaningful levels to monitor. Owing to the fact its losses were so much greater, the NASDAQ Composite has been the leader to the upside so far this year. I pointed out this likely occurrence back in January, but unfortunately I didn't capitalize on the observation. Lack the saying goes, timing is everything and I really didn't expect an upside continuation without some sort of summer swoon. It never occurred, and I've watched in frustration as the NAZ has climbed without me aboard. Peak to trough, the COMPX lost a whopping 78% from its March 2000 highs. Form its bottom last October, the COMPX has rebounded an impressive 72%. But putting everything in perspective, the 1875 level is only the 19.1% retracement of the entire bear market decline. It has a long ways to go before even getting close to testing its bull market highs. Putting it somewhat differently, the COMPX is still roughly 300 points below the FLOOR established in early 1999 from which this market launched to its blowoff top roughly a year later. I think it is quite reasonable that the COMPX could extend its advance as high as 2100 before running out of steam and that would be a full retracement of the 2002 high-low range. I also note that 2113 is the 25% retracement of the entire bear market decline. For now, it is just another point on a chart, but I think it deserves to be monitored as it is approached by price action. So what should we expect over the near term? I can make both a bearish and a bullish case. I think I've effectively expounded on the bearish side for these past many months. There are numerous reasons why this market should drop from here, not the least of which are the still lacking signs of true economic recovery, the high rate of joblessness, off the charts levels of debt at the government, corporate and individual levels and what I view to be very negative action in the U.S. Dollar, as a direct result of those off the chart government debt levels. And let's not forget about the huge unfunded liabilities in the government sector (Medicare, Social Security, etc.) and in the corporate sector in the form of underfunded pensions. And still the market continues to shrug off these concerns. The reason why is quite simple. A massive infusion of liquidity through the combined money-printing activities of the Fed, along with the staggering amount of cash that was released earlier this year through the refinancing boom, which is now effectively dead. All of these factors are what we term fundamentals. They affect the very long-term picture and are difficult if not impossible to trade in the intermediate term. In the trading world, timing is everything, and if we hope to remain solvent (unless we have very deep pockets), we cannot trade on fundamentals that are in opposition to the dominant trend in the market. That means that bearish fundamentals are meaningless until the market tells us through price action that they are important. So file all of those bearish facts away for a future date. For now, we must either play the bullish trend with the understanding that the music could stop at any time or we must sit on the sidelines in cash. I'm tired of doing the latter, so I have reluctantly agreed to play the upside as long as it lasts. Many of the technical tools I use are screaming that a top is near, but so far it has not come to pass. Weekly Stochastics across most of the major markets are all looking toppy in or near overbought territory. But they've been dancing around in this area since April. Bullish Percents on the major indices are also VERY extended, indicating the bulls are carrying the bulk of the risk. the BP for the OEX just recently hit 89% and the usually staid COMPX BP is currently at 77%, fully 20% higher than it has been going all the way back to 1996! And still the market churns higher. The bulls may be carrying the bulk of the risk, but that does not mean the markets must drop. How about the levels of insider selling? It's the heaviest it has been in many years, and normally this would be a sign of an impending top. Not yet. I write frequently about the VIX, as its relative levels typically tell us a lot about the overall market's propensity to either rise or fall. For the past month, it has been trolling along between 19-22, at the upper edge of what I've termed The Complacency Zone. On Friday, despite a slight drop across the market, the VIX once again dropped to just above 19, showing the fear of the downside is still quite uncommon. Certainly part of Friday's action could have been due to option expiration, but the trend is clear. The VIX is headed gradually lower until something happens to inject fear into the market. Put it all together and it tells me that it is not prudent to try to short this market by picking a top. By the same token though, I would not view it as safe to be establishing long-term bullish positions in economically sensitive areas of the market either. We've started to dabble in the long side again with a couple of new bullish play candidates last week and one this week. But I can tell you without equivocation that I view these plays as only appropriate for more aggressive traders. While the market (and these plays) may indeed go higher -- in fact I think they will – the downside risk is higher than I am normally comfortable with assuming, primarily due to the host of factors mentioned above. Let's look at a couple of recent examples proving the wisdom in laying off the short side for now. We recently dropped bearish plays on the LEH and BBH. LEH surged through the $70 level last week, aided by the strength in the XBD index. And with strength continuing to build in the Biotechs, the BBH pushed through the $140 level on Thursday. Both of these would have constituted violations of our stop losses, had we continued to keep the plays alive instead of pulling the plug prematurely. Remember when we were looking for a move UP to the $31.50-32.00 area to initiate a bearish QQQ play? Friday's close above $34.50 is well above where we would have placed a stop, and quite honestly it is showing no signs of slowing down just yet. Rant Of The Week On more than one occasion in the past few years, I have expressed my ire with the entire Brokerage industry due to what I think is shoddy research and a complete lack of concern for individual investors. I know there are notable exceptions and many individuals in that industry are first and foremost concerned with their customers. Many of the questionable practices that grew like a cancer in the late 1990s and continued even after the crash got underway have been corrected, at least on the surface. But last week I once again stumbled on a piece of information that really irked me. On Thursday, the Broker/Dealer index was launched sharply higher when Bear Stearns (BSC) reported blowout earnings. Hurray for them! What caught my attention was the subsequent comments from Smith Barney Citigroup. The firm reiterated their Sell rating on the stock based on their view that BSC's mortgage-driven fixed income strength (a large part of what enabled the company to surprise to the upside) would be unsustainable going forward. I actually happen to agree with Smith Barney's view. What really bothers me is that this was a reiterated Sell rating, while at the same time the firm raised their price target from $60 to $64. First off, how do you maintain your most negative possible view of a stock, while at the same time stating an expectation that the fair value is higher? A look at BSC's chart provides that answer, as Friday's closing price was fully $12 above the firm's view of fair value. The more important issue in my mind is the assertion that this is a "reiterated" Sell rating. I went back through the ratings history on several different sites this weekend and could find no evidence of a prior Sell rating. The most recent evaluation of BSC was back in January, when the firm upgraded the stock from Underperform to In-Line. I'm sure in a detailed search, I could find numerous instances of similar discrepancies and Smith Barney Citigroup would not be the only offender. My point in highlighting this one instance is to point out that while there are many tangible improvements that have taken place in recent years, there are numerous problems that still exist. The moral of the story is that the only research we should rely on is that which we do ourselves. Alright, rant off. Our playlist has gotten pretty meager in recent weeks, and frankly I'm content to have it that way. As I've said on numerous occasions of late, this remains a treacherous market both to the bulls and the bears. When considering the best use of your investment capital, remember that cash is a position as well. Alright, let's see what's cooking in the few plays we do have listed. Portfolio: None Watch List: AGN - It looks like we set our entry trigger right where it belonged, just above firm resistance. AGN has been struggling with resistance just below $82 since the middle of June. It is possible to draw a bullish ascending wedge, with rising support near $77.50 and based on the price action last week, that lower support just might be tested in the next week or two. Aggressive traders might try initiating new positions on a successful test of that support, but officially, we're going to stick with the trigger at $82, just above the top of that wedge. Once triggered, we'll use a wide stop at $76, which is just under nearly four months of support. AMGN - That was just about the perfect way to see things play out last week. AMGN pushed up to trade the $70 level on Thursday, creating that new PnF Buy signal and solidifying the bullish picture. Then Wachovia came out on Friday (interesting coincidence, don't you think?) downgrading the stock. That sent price down to just below $68, before the afternoon rebound took it up well off the lows. I view the shallowness of the dip and the solid rebound as quite bullish and I like the setup for new entries next week. Accordingly, our entry target rises to $67-68, as another dip to near the long-term rising trendline looks like a favorable price point at which to enter the play. Note that the PnF bullish price target is now $81, so there's enough upside potential to justify the risk to our $64 stop. WMT - Based on the price action in the Retail index (RLX.X) and my fundamental view of the U.S. Consumer being just about tapped out due to the high levels of consumer debt and unrelenting unemployment rate, I still think bearish plays in this sector will hold merit, but only when the time is right. With the RLX still in its steady ascending channel, that time is not yet here, although I do note that the RLX is starting to lag the rest of the market, falling short of reaching new highs last week. At a minimum, we'll need to see this channel break before considering an entry into our WMT play, which continues to troll along near the $58 level, just below key $60 resistance. QQQ - As noted above, I view higher levels in the NASDAQ as more likely than lower over the near-term and we're premature to consider new bearish entries. The QQQ tracks the NASDAQ-100, and 1700 would be the level in that index that would correspond to my 2100 target for the COMPX. For the QQQ, that would correspond to roughly $42! Whether that level is achievable or not (I view it as highly unlikely), it is very difficult to make the case for new bearish positions making sense right here. The QQQ remains in its ascending channel, with the bottom of that formation now at $32.50, just over the 50-dma ($32.30). At a minimum, that channel will need to be broken before we can seriously consider a bearish stance. A more realistic target in this market may be the $39 level, which equates to the 19.1% retracement of the entire bear market decline. SMH - The Semiconductors seemed to lag the rest of the Technology sector last week, as the SMH found consistent resistance near the $38 level and failed to push to new highs. But on the bullish side of the coin, price continued to hold above the top of the ascending channel that had contained price action from March through late August. We may be watching a topping formation get put in place, but until we see some sign of defined weakness, the bias is still to the upside. Another upside breakout could easily take the SMH up to the $40-42 area to test the bottom of the consolidation pattern established in late 2001 and early 2002. Wait and see is the operative phrase here as well. Radar Screen: HD - Is that an inscrutable chart or what? Fundamentally I see problems ahead for HD, but as discussed above, fundamentals are difficult to turn into winning trades. With the stock essentially trading in a flat, choppy range now for more than 3 months, I'm rapidly losing interest. I'll keep it here for another week or two, but am getting very close to removing it from my list of candidates. FNM - Can you now see why I had no interest in trying to short into FNM's rise? The stock is back at the $70 level after the briefest of dips and looks to me like it wants to break higher. This is another one that should provide a very nice ride to the downside, but only when the timing is right. Clearly this is not that time. The next level to watch for some sort of inflection will be on a test of the long-term descending trendline, now at $74. But with the PnF chart now on a strong Buy signal and above the bearish resistance line, we may be best served by turning our attention elsewhere. I'll continue to monitor for a favorable entry setup, but am content to not have it be an active play for now. QCOM - Snooze and lose! QCOM broke out with a vengeance over the past week and ended the week at its highest point since January of 2002. I'm not interested in chasing the stock higher here, and will remain vigilant now for a pullback to test support in the $40-41 area as the next viable entry opportunity. Note that the PnF chart is now quite bullish with a vertical count of $67 and growing. BVF - How about another bullish candidate in the Health Care industry. BVF had quite the slide from its June highs, falling all the way back to its 200-dma. But after four successful rebounds from that moving average, the stock is starting to show some signs of life, having moved back over its 50-dma and recently gave a new PnF Buy signal. It's a bit early to be getting overly excited here, as the bullish action has been rather muted. But I'll be looking for some basing action above $40 to give us the go ahead to turn this into a Watch List play. Closing Thoughts: Quite honestly, it has been rather challenging for me to change my mindset and go along with the bullish flow in the near term, especially knowing all the longer-term risks that exist. You'll notice that the bullish plays that I've been listing these past 2 weeks are oriented towards the Health Care sector of the market, which is historically less sensitive to economic strength or weakness. Let's see if we can play the long side in this somewhat safer area over the near term, while at the same time leaving ourselves open to playing the downside once economic weakness begins to prevail in those areas that should be most susceptible. Cautious optimism remains my guiding principle for now. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: AGN 09/14/03 $82 JAN-2004 $ 85 ZFH-AQ CC JAN-2004 $ 80 ZFH-AP JAN-2005 $ 90 YOK-AR CC JAN-2005 $ 80 YOK-AP AMGN 09/14/03 $67-68 JAN-2004 $ 70 ZAM-AN CC JAN-2004 $ 65 ZAM-AM JAN-2005 $ 70 WAM-AN CC JAN-2005 $ 60 WAM-AL FRX 09/21/03 $46 JAN-2004 $ 50 ZML-AJ CC JAN-2004 $ 45 ZML-AI JAN-2005 $ 50 WRT-AJ CC JAN-2005 $ 40 WRT-AH PUTS: WMT 08/03/03 HOLD JAN-2005 $ 55 ZWT-MK JAN-2006 $ 55 WWT-MK QQQ 08/10/03 HOLD JAN-2005 $ 30 ZWQ-MD JAN-2006 $ 30 WD -MD SMH 08/24/03 HOLD JAN-2005 $ 35 ZTO-MG JAN-2006 $ 35 YRH-MG New Portfolio Plays None New Watchlist Plays FRX - Forest Laboratories, Inc. $48.93 **Call Play** In light of the price action in the rest of the market, FRX certainly doesn't seem like a favorable bullish candidate, especially as investors have dumped the stock on unfavorable fundamental developments. But I think that negative news has been factored into the stock and we're just starting to see some favorable technical developments unfold. First up was the fact that the stock rebounded from the $42 level roughly a month ago. This level was strong resistance throughout 2001 and for most of 2002 before the launch all the way above $60. Since that rebound, FRX bounced up to the $51 area, where it was turned back by the 200-dma. That is no great surprise. What catches my attention is the fact that the PnF chart is now back on a Buy signal, and has a vertical count of $70. I suspect that may be a bit optimistic, but I can easily see a return to major resistance near $56 and possibly another run at the $60 level. With the 50-dma ($46.87) still declining and below the 200-dma ($50.55), this is clearly an aggressive bullish play, but I think we can take advantage of a favorable entry on weakness. Both the 30-dma and the 50-dma appear to be converging on $46, which is also the sit of some solid support over the past few months. Note also that the weekly Stochastics (10,5,3) are just emerging from oversold and appear to have plenty of room to the upside. At the same time, weekly MACD is just threatening to give a bullish cross as well. Signs point to an early bullish setup and this looks like an attractive time to take a position. Our approach will be to game an entry on a rebound from that level, using a stop at $41. That is below the August lows and a trade at that level would clearly show the error of my ways with a new PnF Sell signal. Even if we just target a return to the $56 level, that gives us a clear 2:1 reward-risk ratio and I like those odds. BUY LEAP JAN-2005 $50 ZML-AJ BUY LEAP JAN-2005 $45 ZML-AI **Covered Call** BUY LEAP JAN-2006 $50 WRT-AJ BUY LEAP JAN-2006 $40 WRT-AH **Covered Call** 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 ************** The Family Jewels Are Safe – For At Least Another Month! By Mike Parnos, Investing With Attitude Friday. 12:15 p.m. The friendly voice paused for what seemed like an eternity. Then he said – "1039.60." Ladies and gentlemen, we have a winner -- again!! Such suspense, such intrigue, such PROFIT. A Magic Number 1039.60. No, that's not the cost of a Weight Watcher's membership, 104 large Pizza Hut pizzas, your wife's bill from the beauty parlor, or your two hour massage (therapeutic, of course) with Bambi. It's the SPX settlement number. Because we at the CPTI are such fine, upstanding, clean living (yeah, sure) citizens, the trading gods have smiled on us once again. When the S&P 500 settlement price came in Friday below 1040, our SPX Iron Condor expired harmlessly. Are We Good or Are We Lucky? Who cares? The money's in our pocket. However, this happens a little to frequently to be luck, don't you think? The family jewels are safe. Long live the CPTI! OK, let's get back to reality. It's time to review September's results. S&P 500 Iron Condor trade: $2,700 profit COF Sell Straddle trade: $550 loss Total: $2,150 Profit $30,360 And Climbing We're like The Jeffersons. We're "Movin' On Up." With the $2,150 profit for September, the CPTI portfolio charged through the $30,000 profit mark to $30,360. Not bad for a bunch of under- appreciated couch potatoes. _________________________________________________________________ SEPTEMBER POSITION RESULTS – September Position #1 – SPX Iron Condor – SPX @ 1036.30 S & P 500 Index = SPX We sold 10 contracts of SPX 1040 Sept. calls and bought 10 contracts of SPX 1050 Sept. calls for a net credit. Then we sold 10 contracts of the SPX 950 Sept. puts and bought 10 contracts of the SPX Sept. 940 puts. Our net credit was $2.70 (a total credit of $2,700). We have a huge maximum profit range of 950 to 1040. (See article above). Profit: $2,700 September Position #2 – COF Sell Straddle – COF @ $ 61.55 Capitol One Financial = COF We sold 10 contracts of COF Sept. $50 calls @ $2.35 and also sold 10 contracts of COT Sept. $50 puts @ $2.50 for a total credit of $4.85 ($4,850). We would have made 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 were the parameters of our profit range. Maximum potential profit was, again, $4,850. A lot can happen in five weeks of exposure to market movement – and did. On Sept. 2, COF continued its uptrend through our bailout point of $54.85. When COF hit out exit point, we bought back the short September $50 calls for $5.40 ($5,400). Since we had taken in premium of $4,850, we incurred a loss of only $550. This was a necessary money management move to make sure we live to trade another day. _____________________________________________________________ ONGOING POSITIONS: New CPTI Portfolio Position – QQQ ITM Strangle – Ongoing Long Term. The QQQs finished at $34.58. We bought 10 contracts of the 2005 QQQ $39 puts @ $7.00 = $7,000 and also bought 10 contracts of the 2005 QQQ $29 calls @ $7.30 = $7,300 for a total debit of $14,300. Then we sold 10 contracts of the QQQ Oct. 33 puts @ $.85 = $850 and also sold 10 contracts of the QQQ Oct. 34 calls @ $1.05 = $1,050 for a total credit of $1,900. What we've created with our long LEAPS options is a range ($28 to $38) in which the QQQs can bounce around. As the 16 months go by, we will be selling near term puts and calls against the long puts and calls. HPQ (Hewlett Packard) Bear Put Spread – HPQ at $21.15. HPQ is weak and may return to the $15 range. So, we bought 10 contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10 contracts of the HPQ Feb. 2004 $15 puts @ $.40. Total debit of $1.85. Potential max profit of $3.15. In reality, if HWP makes the move down, it will probably happen on the coattails of a market move down. It shouldn't take until February. I'd gladly accept a profit of $800-900 and close the position early if the opportunity presented itself. This is a long-term position. OEX – Bearish Calendar Spread – OEX @ $520.62 Maybe it's time for the market to return to reality. Let's see if we can take advantage of this with a calendar spread. We bought 8 contracts of OEX November 470 puts @ $10.60 and sold 8 contracts of OEX September 470 puts @ $2.20 for a total debit of $8.40. As the market retreats, we sold near term puts against the November long 470 puts to lower our cost basis. The Sept. 470 puts obviously expired worthless. Now, let's sell the October 490 puts and take in another $2.10 while we continue to patiently wait for the market to correct. Our cost basis is now $6.30. By The Way Even those traders who entered the original EBAY September position would have made a maximum profit of $1,300 as EBAY finished at $54.91 – below the $55 short call in our Iron Condor. ______________________________________________________________ NEW OCTOBER POSITIONS October Position #1 – SPX Iron Condor – Trading @ 1036.30 After the September scare, I bet you still have some TUMS left in the bottle, so here we go again. Sell 10 contracts of October SPX 995 puts Buy 10 contracts of October SPX 985 puts Credit of $1.20 ($1,200) Sell 5 contracts of October SPX 1075 calls Buy 5 contracts of October SPX 1100 calls Credit of $1.10 ($1,100). Total credit and potential profit: $2,300. The premium figures are based on Friday's posted closing prices plus an extra $.20 here and there that you should be able to shave off the wide bid/ask spreads. We've created a maximum profit range of 995 to 1075. Note that we're only trading five contracts on the calls because we have to limit our risk. Strike prices weren't available that would enable us to have a 10 point exposure, so we had to use a 25 point exposure in the calls. October Position #2 – BBH Joined Iron Condor - Trading at $139.46 This is sort of a sell straddle with protective wings. In other words, the puts and calls we are selling have the same strike prices. Sell 10 contracts of October BBH 140 calls @ $3.90 Sell 10 contracts of October BBH 140 puts @ $4.50 Buy 10 contracts of October BBH 150 calls @ $.85 Buy 10 contracts of October BBH 130 puts @ $1.40 Total credit: $6.15 ($6,150) -- which is also our maximum potential profit. We have created a profit range of $133.85 to $146.15. The closer BBH finishes to $140, the more we will make. Our risk is limited to $3.85. This trade is going to be fun – and hopefully profitable as well. October Position #3 – QQQ – Put Calendar Spread – Trading @ $34.58 Want to risk a buck? Maybe less? Since many folks think the market is due to correct, let's create a cheap play that will let us take advantage of a nice down move. Buy 10 contracts of January 04 QQQ $32 puts @ $1.20 Sell 10 contracts of October 03 QQQ $32 puts @ $.20 Total debit: $1.00 ($1,000) If/when the QQQs make their move down, the January $32 put will increase in value more rapidly than the October $32 put. We'll look for a $500-$750 profit on this position and take the money and run. The risk is small. The percentage profit potential is very appealing. October Position #4 – APPX – Short Term Straddle – Trading @ $37.24 Here's a hit and run trade. APPX (a biotech stock) is scheduled to have some FDA drug test results released this month. These announcements (good or bad – we don't particularly care) often result in $5+ moves in the stock. If there's a reaction, we want to be in position to take advantage of it – and limit our risk at the same time. Buy 10 contracts of the January AFFX $36.25 calls @ $5.90 Buy 10 contracts of the January AFFX $36.25 puts @ $5.30 Total debit: $11.20 ($11,200). You may be able to shave a little off of each bid/ask and save $.20-.30. Don't panic. I know $11,200 sounds like a huge risk, but remember that we're only going to be in this trade for 30 days or less. Since these are four-month options, only about 10-15% of the $11.20 might erode during that period. That's about $1.10-$1.50 risk. Regardless of what happens, we're out of this trade in 30 days or less. If the announcement doesn't come, we're out with an acceptable loss. We're not greedy (usually). We'll settle for a $1-2 in profit. We have to be on our toes, because the spike (up or down) happens quickly and may not last the entire day. Remember The premium prices are quoted based on Friday's closing numbers. Monday may reflect two more days of time erosion (and maybe not). If you come reasonably close to our posted numbers, the trade will still be valid. _________________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page 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 ************** Buying the pullbacks is not always as easy as it looks. Jane Fox Find a trend and buy the pullback sounds easy enough doesn't it? That's what I thought also. But I have learned simple concepts sometimes just don't work out, at least in day trading during these summer months. The ADX-5 system I use (or at least used to use) for day trading is based on this very premise. I employ the ADX and DMI indicators to define a trend, a moving average to define the pullback and get on board when the trend resumes. Nice thought, unfortunately this little simple strategy has not been working well lately. Actually not working too well since August 18. August 18 was the last time I had a winning trade with the ADX-5 day trading system. The upside is that it hasn't had a lot of losers as far as day trading system go. It has mostly sat on the sidelines and just watched the summer go by totally content to not do too much work, which may be a good thing considering the trading environment we have had this summer. To give you a recap of the ADX-5 system, it takes 1/2 profits at 3 points, called P1 and the other 1/2 at 4 points, called P2. Once P1 profits have been pocketed your stop is placed at breakeven on the remaining 1/2. Many times the system will get to the P1 level and not the P2. The last time the system took profits at both P1 and P2 was July 25th, almost two months ago. Here are the trades since August 18. The trade on September 10 was not taken because of the gap down in the morning. We had a winner on August 18 but since then every trade ended in a loss. Five loses to be exact; five loses in a row for a total of 21.5 points. So on September 18th I decided to abandon the system and try a retooling. Here is the trade for September 18th: Yup! Not only was this a positive trade it went all the way to P2, which the dang system had not done since July 25th. Imagine my surprise. However, enough lamenting for I am not here to talk about my day trades, I am here to talk about buying the pullback and jumping on board using the daily charts for a swing trade. Here is the system I use for swing trades. It is based on the same premise as the ADX-5 but triggers at different levels. It uses the ADX to define a trend, the DMI to define the direction and a moving average to define the pullback. ADX(10) = 30 DMI(14) Simple moving Average = 4 First, the ADX has to be over 30 to define a trend. Second, if DMI+ is greater than the DMI- the trend is up and if the DMI- is greater that the DMI+ the trend is down. Third, if a daily bar trades completely below the 4 MA I jump on board the next day at one tick above the high if going long or one tick below the low if short. A stop order is placed at low (or high) of the entry bar. Fourth, profits are taken in four days. It is simple but quite effective. The system also has the added bonus of relatively close stops. I have a lot of examples. First of let's look at a trade I closed on September 18th (so you see the 18th wasn't a complete waste). This is the chart for Seagate (STX). I have not allotted anything for commission, slippage and results are based on 100 shares. Each time the strategy triggers a trade, Tradestation will print "Buy 100" or "Sell 100" then draw a magenta line to the exit. If the exit was a stop loss it will print "Stop" but if the stock exited at the time elapsed exit (4 days) it will print the word "TimeExit." Each "TimeExit" print means the trade was not stopped out and the magenta line is usually going north, meaning a winning trade. But don't just believe your eyes, here is a list of the actual triggered trades. Out of the 10 trades the system triggered, it lost only twice for an 80% win/loss ratio. Here is the strategy performance report for STX. The win/loss ratio is a very impressive 80% with a profit factor (the dollar amount the strategy makes for every dollar lost) of 24.12. But let's not stop here I have more. Here is a chart of Alcon (ACL). This stock has only had 4 trades since May but all of them were winners for a win/loss ratio of 100%. This doesn't mean all of them will be winners but the odds are in your favor that you could make money on this stock using this swing trade system. How about one more? This is my favorite for I have played this stock most of the way up - JetBLue (JBLU). JBLU has an extremely impressive win/loss ratio of 80% with a profit factor of 10.69. Since I only trade this stock from the long side my win/loss ratio has been almost 90% with a profit factor of 23.70. Check some of these out for your self. Here is a list of others you can check also. LRCX, PLCM, AMLN, DG, OVTI, LIOX, PETM, SNDK, AMTD and RCL. To find these little gems, I use a stock scanner like the one at stockcharts.com with the following criteria: 1. Price greater than $5.00, don't want to trade penny stocks 2. Volume is greater than 1,000,000, you want the big guys playing. 3. Daily ADX(10) is greater than or equal to 30, nice trend. 4. Daily +DMI(14) is greater than -DMI(14), determine the direction of the trend. 5. Daily high(low) is less (more) than the 4 day simple moving average, stock has made a pullback. Once I have my done the scan and created my nightly list I use Tradestation to show me how well the strategy would have worked in the past. If you don't have Tradestation it will take a little more work but you can still see if the strategy will work. Use the price formations of some of stocks I have mentioned and see if the stocks you find have the same type of formation. I can usually pick the winners without even looking at the TS reports for I know what the other charts look like. You probably have noticed that I have only shown long trades. I have found this system works best on the long side and I'm sure when (if) we ever start a healthy decline it would work equally well on the short side but for now we are into a very bullish period and I for one plan on making hay while the sun shines. Now you go make some hay. Remember plan your trade and trade your plan. Jane Fox ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Sunday 09-21-2003 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Stock Stages Explained -- Part III Naked Puts: Options 101: Making Money Is One Thing -- Keeping It Is Another! Spreads/Straddles/Combos: Equities Consolidate Amid Minor Profit-Taking Updated In The Site Tonight: Market Posture: Another Bullish Week ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************* COVERED CALLS ************* Trading Basics: Stock Stages Explained -- Part III By Mark Wnetrzak Our readers offered some great comments on "Sko's dilemma" with the Western Wireless (NASDAQ:WWCA) trade. Editors Note -- For those of you who are not familiar with Sko's questions about stage analysis, read these articles first: http://members.OptionInvestor.com/coveredcalls/cc_090703_1.asp and http://members.OptionInvestor.com/coveredcalls/cc_091403_1.asp Now that we are all on the same page, here's a chart of the stock we are referring to: Western Wireless (NASDAQ:WWCA) Chart http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-09-21/oicc_092103_01.gif My views... With an entry near $11+, Stan Weinstein's 30-week MA (150-DMA) gives up all of the potential profit. One reader noted that a 6-month MA was only violated in April. My view from this point is that a breach of the 30-dma, which was tested in August and appears to define the current trend, would be a good stop-loss signal. Or, using the low near the end of August could offer another reasonable stop-loss point while still allowing for a continuation of the current trend. The recent pullback to the $19 range should offer a clue as to the potential of the next leg up. If the high in early September can't be overcome soon, tightening stops to the recent low would be a prudent way to lock-in some profit while allowing for lateral consolidation. As always, it's a balancing act between downside risk and potential profit, but at least the exit point (in this case) is on the positive side of the equation. And here are some comments from one of our diligent readers... Subject: Sko's dilemma From personal experience, do not give back any profits and definitely don't let a winner turn into a loser. In my opinion, the best method is to use a trailing stop of say 5 or 10 percent below the current price, and enter a GTC order to close the trade out automatically so you don't let your emotions talk you out of it. This stop price can be adjusted daily or weekly, but make sure you have an actual stop order in place with your broker. This forces you to keep most of your profits, not lose all of your gains and it certainly won't let a winner turn into a loser. Also, if you do get stopped out, you can always get back into the stock at a lower price as long as the chart pattern continues to look promising, and ride the stock up to a higher level for even more profits. This is the kind of problem I wish I would encounter more often! Good Luck! DR And from another reader... Subject: Sko' Dilemma -- WWCA follows a 6-month DEMA Hi Mark, WWCA has been playable with crossings of the 6-month DEMA. This had 1 significant error in April '02, and a minor whip-lash in April 03, but overall did very well. MA And here's what Sko had to say about my latest reply... Subject: Stage II -- Now What? Thank you for your well thought out response Mark. I am continually fascinated by the psychology of trading and its impact on my emotions, Elder's book was a good read. From the time that I placed my very first trade evolving into a business has been one of the most challenging paths I have chosen to travel. While at first I felt bad about selling too early my feelings quickly changed when I realized that I had dropped my cost basis to around $9 and I am sitting on a double. There is always more than one way to look at things and you are dead on when you mention that it could have easily collapsed and vaporized my gains. In one sense I am pretty lucky as I am the type of person that embraces change. Keeping an open mind with a willingness to be flexible can go long way in improving my money management and trade decisions. Hey this was my first time out attempting a different type of strategy and I have learned a great deal about myself. When you wrote about the different stages they were foremost on my mind and simply had to solicit your thoughts. Thanks for a few different suggestions about looking at other indicators. I know there was not a set in stone type of answer to my question and I appreciate your thoughts. I will definitely put them to good use. Keep up all the great work. You may not hear from me very often but you can be guaranteed that I am listening and learning. Take no prisoners! Sko 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 CBST 13.51 12.98 SEP 12.50 1.50 0.49* 8.9% PLXT 5.25 7.71 SEP 5.00 0.60 0.35* 8.2% IPXL 15.16 15.66 SEP 15.00 0.70 0.54* 8.1% WAVX 3.46 3.22 SEP 2.50 1.20 0.24* 7.7% XOMA 8.09 8.31 SEP 7.50 1.30 0.71* 7.6% PLUG 5.13 5.27 SEP 5.00 0.45 0.32* 7.4% TER 20.11 22.00 SEP 20.00 0.75 0.64* 7.2% ENER 10.39 15.67 SEP 10.00 1.10 0.71* 6.6% KVHI 30.99 32.42 SEP 30.00 1.85 0.86* 6.4% EMBT 10.25 10.49 SEP 10.00 0.65 0.40* 6.3% NWAC 8.30 10.93 SEP 7.50 1.40 0.60* 6.3% EPNY 5.07 6.05 SEP 5.00 0.40 0.33* 6.1% NEOF 12.45 16.49 SEP 12.50 0.90 0.95* 6.0% FLML 28.49 42.85 SEP 25.00 4.40 0.92* 5.8% WAVX 3.20 3.22 SEP 2.50 0.85 0.15* 5.5% MCRL 12.60 13.61 SEP 12.50 0.65 0.55* 5.0% IBIS 10.70 13.00 SEP 10.00 1.00 0.30* 4.7% USG 14.11 17.51 SEP 12.50 2.35 0.74* 4.6% XOMA 9.45 8.31 SEP 7.50 2.25 0.30* 4.5% ITMN 19.01 21.69 SEP 17.50 2.00 0.49* 4.4% VSAT 15.09 18.25 SEP 15.00 0.80 0.71* 4.3% TKLC 15.46 18.00 SEP 15.00 1.15 0.69* 4.2% CCRN 15.60 15.42 SEP 15.00 1.00 0.40* 4.2% ISIS 5.33 8.05 SEP 5.00 0.60 0.27* 4.1% RFMD 8.07 10.06 SEP 7.50 0.90 0.33* 4.0% SNIC 11.18 16.52 SEP 10.00 1.70 0.52* 4.0% ADLR 13.96 15.10 SEP 12.50 1.90 0.44* 4.0% GSIC 11.52 11.45 SEP 10.00 1.95 0.43* 3.9% CREE 16.30 17.40 SEP 15.00 1.75 0.45* 3.4% TALK 15.34 14.60 SEP 15.00 0.80 0.06 0.9% SIB 22.60 20.95 SEP 22.50 0.90 -0.75 0.0% FWHT 25.56 20.21 SEP 25.00 1.40 -3.95 0.0% SCMR 5.20 5.00 OCT 5.00 0.65 0.45 8.6% CHU 7.43 8.00 OCT 7.50 0.50 0.57* 7.1% ARIA 5.24 5.91 OCT 5.00 0.60 0.36* 6.7% VXGN 6.50 8.75 OCT 5.00 1.80 0.30* 5.5% THOR 16.83 18.60 OCT 15.00 2.70 0.87* 5.4% HEPH 26.29 30.20 OCT 22.50 4.90 1.11* 4.5% DSCM 7.99 8.48 OCT 7.50 0.85 0.36* 4.4% * Stock price is above the sold striking price. Comments: The September option expiration ended in a rather lackluster way after Thursday's impressive rally. The major averages were down slightly Friday, but did end the week in positive territory. The Covered-Call Portfolio performed fairly well this month, even though a couple of issues were spanked by investors for negative news. Why couldn't FindWhat.com (NASDAQ:FWHT) have waited until Monday to announce that it's renegotiating a deal to buy Espotting? Murphy's Law I guess. Staten Island Bancorp (NYSE:SIB) continues to act a bit worrisome as it tests it 50-DMA. Prudent investors may have already exited the position. As for October, a few of the new candidates like Vaxgen (NASDAQ:VXGN) may have required a "roll-in" entry as the stocks jumped higher at the open on Monday. With the unsettling month of October before us, now is not the time to become undisciplined and reckless with your portfolio. Positions Previously Closed: Cerus (NASDAQ:CERS) 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 INCY 5.15 OCT 5.00 IPQ JA 0.50 0 4.65 28 8.2% BEAV 5.12 OCT 5.00 BQV JA 0.45 521 4.67 28 7.7% MXO 12.90 OCT 12.50 MXO JV 1.05 5642 11.85 28 6.0% ALKS 14.23 OCT 12.50 QAL JV 2.20 81 12.03 28 4.2% HEPH 30.20 OCT 25.00 QGQ JE 6.10 962 24.10 28 4.1% ISIS 8.05 OCT 7.50 QIS JU 0.80 3735 7.25 28 3.7% IDBE 18.95 OCT 15.00 QQ JC 4.40 429 14.55 28 3.4% 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). ***** INCY - Incyte $5.15 *** New Drug Speculation *** Incyte (NASDAQ:INCY) is a drug discovery company that develops proprietary genomic information and applies its expertise in medicinal chemistry and molecular, cellular and in vivo biology to the discovery of novel small molecule and protein therapeutics. The company's current products include information databases, intellectual property licensing, and certain other products, such as full-length clones. Incyte's databases integrate bioinformatics software with proprietary and, when appropriate, publicly available genomic data. Its products can be applied to gene and target discovery, functional genomics studies, preclinical pharmacology and toxicology studies. The portfolio of database products and services includes: LifeSeq Foundation; ZooSeq; Bioknowledge Library; and DrugMatrix. Incyte rallied earlier this month after the company announced that they have entered into a collaborative licensing agreement with Pharmasset to develop and commercialize the antiretroviral drug Reverset(TM). Investors can use this position to speculate conservatively on the company's future. OCT-5.00 IPQ JA LB=0.50 OI=0 CB=4.65 DE=28 TY=8.2% ***** BEAV - BE Aerospace $5.12 *** On The Move! *** BE Aerospace (NASDAQ:BEAV) manufactures cabin interior products for commercial aircraft and business jets and distributes aftermarket fasteners. The company sells its manufactured products directly to most of the world's major airlines and airframe manufacturers, and a variety of general aviation customers. The company's major product categories include commercial aircraft seats; aircraft food and beverage preparation and storage equipment; both chemical and gaseous aircraft oxygen delivery systems; business jet and general aviation interior products. The current technical outlook for BE is "recovering" and our position offers speculators an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. Target-shooting a lower "net debit" will raise the potential yield and lower the cost basis in the position. OCT-5.00 BQV JA LB=0.45 OI=521 CB=4.67 DE=28 TY=7.7% ***** MXO - Maxtor $12.90 *** Bullish Sector! *** Maxtor (NYSE:MXO) is a provider of hard disk drives for a variety of applications, including desktop computers, servers, near-line storage systems and consumer electronics. Maxtor's desktop products are marketed under the Fireball, DiamondMax and MaXLine brand names, and consist of 3.5-inch hard disk drives with storage capacities ranging from 20 to 300 gigabytes per platter and speeds of 5,400 RPM and 7,200 RPM. The company also provides a line of high-end 3.5-inch hard disk drives for use in high-performance, storage-intensive applications such as workstations, enterprise servers and storage subsystems. These Intel-based server products are marketed under the Atlas brand name and provide storage capacities of 18.4 to 146.9 gigabytes at speeds of 10,000 RPM and 15,000 RPM. Maxtor continues to move higher on heavy volume and traders who believe the bullish trend will continue can use this position to target-shoot an entry point closer to technical support. OCT-12.50 MXO JV LB=1.05 OI=5642 CB=11.85 DE=28 TY=6.0% ***** ALKS - Alkermes $14.23 *** Bracing For A Rally? *** Alkermes (NASDAQ:ALKS) is a pharmaceutical company developing products based on applying its sophisticated drug delivery technologies to enhance therapeutic outcomes. The company's areas of focus include controlled, extended-release of injectable drugs using its ProLease and Medisorb delivery systems, and the development of inhaled pharmaceuticals based on its proprietary Advanced Inhalation Research pulmonary delivery system. Alkermes partners its proprietary technology systems and drug delivery expertise with many other pharmaceutical companies, and it also develops novel, proprietary drug candidates for its own account. The company has a pipeline of products in various stages of development including: Risperdal Consta, Nutropin Depot, Vivitrex, inhaled epinephrine, r-hFSH (recombinant human follicle stimulating hormone), Exenatide LAR, inhaled insulin and inhaled human growth hormone. ALKS has been in a lateral consolidation phase since June with strong buying support near our cost basis. Investors who believe the trend will continue can use this position to profit from that outcome. OCT-12.50 QAL JV LB=2.20 OI=81 CB=12.03 DE=28 TY=4.2% ***** HEPH - Hollis-Eden $30.20 *** Another Week, Another Rally *** Hollis-Eden Pharmaceuticals (NASDAQ:HEPH), a development-stage pharmaceutical company, is engaged in the discovery, development and commercialization of products for the treatment of immune system disorders and hormonal imbalances. HEPH's development efforts target a series of indications in which the body is unable to mount an appropriate immune response: radiation and chemotherapy induced immune suppression and immune dysregulation from infectious diseases such as HIV, malaria and tuberculosis. The company's initial technology development efforts are focused on a series of potent hormones and hormone analogs that are key components of the body's natural regulatory system. Hollis-Eden continues to rise on heavy volume and conservative investors can use this position to obtain an entry point closer to technical support. OCT-25.00 QGQ JE LB=6.10 OI=962 CB=24.10 DE=28 TY=4.1% ***** ISIS - ISIS Pharma $8.05 *** New Drug Speculation: Part II *** ISIS Pharmaceuticals (NASDAQ:ISIS) is a biopharmaceutical firm exploiting proprietary RNA-based drug discovery technologies to identify and commercialize novel drugs to treat major diseases. With its main technology, antisense, the firm creates inhibitors, or oligonucleotides, designed to hybridize, or bind, with high specificity to their RNA target and modulate the production of proteins associated with diseases. ISIS has 12 antisense products in its development pipeline with eight in human clinical trials designed to assess safety and efficacy. The company's products in development address numerous therapeutic areas, including inflammatory, viral, metabolic and dermatological diseases and cancer. Some favorable results on early clinical trials of ISIS' second generation experimental arthritis and diabetes drugs has sparked a heavy-volume rally in the stock. Investors can use this position to establish a conservative entry point in the issue. OCT-7.50 QIS JU LB=0.80 OI=3735 CB=7.25 DE=28 TY=3.7% ***** IDBE - ID Biomedical $18.95 *** Rocketing Higher! *** ID Biomedical (NASDAQ:IDBE) is a biotechnology company focused on the development of proprietary subunit vaccines, including those based on its Proteosome protein intranasal adjuvant/delivery technology. In addition, the company owns and licenses rights to its proprietary genomics analysis system, Cycling Probe Technology. IDB has three subsidiaries: ID Biomedical Corp. of Washington, ID Biomedical Corp. of Quebec and ID Biomedical Corp. of Maryland. The company is developing subunit vaccines for the prevention of a number of different diseases. Subunit vaccines differ from traditional vaccines in that they consist of proteins or other components of the organism rather than the whole, live organism. Their product candidates in clinical development are StreptAvax vaccine, a multivalent subunit vaccine against group A streptococcus, and FluINsure vaccine, an intranasally delivered subunit influenza vaccine. On Thursday, ID Biomedical announced that its preliminary data from its most recent influenza challenge study of FluINsure showed "significant" reductions in clinical illness across all vaccine regimens tested when compared with placebo. Traders jumped on the "buying" bandwagon and propelled the stock up nearly $4 in two days on extremely heavy volume. Investors who believe the rally will continue can use this play to target-shoot an entry price a bit closer to technical support. OCT-15.00 QQ JC LB=4.40 OI=429 CB=14.55 DE=28 TY=3.4% ***** ***************** 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 ROXI 10.09 OCT 10.00 RXU JB 1.00 515 9.09 28 10.9% EMIS 8.43 OCT 7.50 MTQ JU 1.55 181 6.88 28 9.8% IIJI 8.70 OCT 7.50 IQD JU 1.75 1679 6.95 28 8.6% CEGE 15.10 OCT 15.00 UCG JC 1.05 266 14.05 28 7.3% SANM 10.49 OCT 10.00 SQN JB 1.05 6577 9.44 28 6.4% VXGN 8.75 OCT 7.50 UWG JU 1.65 3202 7.10 28 6.1% WAVX 3.22 OCT 2.50 KWW JZ 0.85 118 2.37 28 6.0% NKTR 13.75 OCT 12.50 QNX JV 1.90 3526 11.85 28 6.0% CRA 12.61 OCT 12.50 CRA JV 0.70 433 11.91 28 5.4% THOR 18.60 OCT 17.50 TQU JW 1.90 2328 16.70 28 5.2% PPCO 24.01 OCT 20.00 OGQ JD 4.90 104 19.11 28 5.1% NEOF 16.49 OCT 15.00 QZX JC 2.15 38 14.34 28 5.0% TWR 5.34 OCT 5.00 TWR JA 0.55 291 4.79 28 4.8% SONS 8.54 OCT 7.50 UJS JU 1.35 3530 7.19 28 4.7% COB 15.97 OCT 15.00 COB JC 1.55 349 14.42 28 4.4% ABGX 16.58 OCT 15.00 AZG JC 2.15 511 14.43 28 4.3% LEXR 19.61 OCT 17.50 EQG JW 2.75 1202 16.86 28 4.1% CMOS 13.65 OCT 12.50 CQS JV 1.45 126 12.20 28 2.7% ***************** NAKED PUT SECTION ***************** Options 101: Making Money Is One Thing -- Keeping It Is Another! By Ray Cummins Stocks have always outpaced every other type of investment over periods of time, however that doesn't mean that simply throwing money into the market will guarantee success over the long haul. The key to lasting prosperity in any financial endeavor is to develop a sound plan for growing your wealth and then follow a sensible course of action to hold on to your assets. Most of the instructional narratives in the newsletter concentrate on profitable trading but it's also important to focus on ways to preserve your hard-earned assets. A well-known axiom suggests, "An investor accumulates wealth through portfolio concentration but keeps his wealth through portfolio diversification." In light of the recent recovery in equity values, that is a great topic for discussion. The first phase of asset management begins with an evaluation of your overall financial situation. That means you must list all of your assets including cash and cash-equivalents; checking and savings accounts, money-market funds and short-term certificates of deposit. The second group of holdings should include all of your active and tradable investments such as stocks, options, futures or commodities contracts, bonds, and mutual fund shares. The final category might consist of all your income-producing instruments that are not readily liquid such as rental or lease properties, real-estate deeds, trust notes, promissory agreements, and similar contracts. Among the various classes of investments, individual categories can be made for positions with different time-frames and risk profiles. Once you have thoroughly reviewed your current holdings, you can begin to evaluate the risk potential of each individual position and decide which ones merit a place in your investment portfolio. From a financial standpoint, risk is the possibility of losing money, either in a specific transaction or multiple trades in a market of issues such as equities or bonds. While that is the primary focus or portfolio management, there are other forms of risk that can affect asset value and one of the most obvious is lost potential. An investor stands to lose prospective profits if he (or she) takes no action on a specific set of favorable circumstances and the failure to act or react, in a timely manner, can be a very costly decision. A similar type of risk can emerge when a person has unrealistic objectives or goals. In fact, a correctly defined financial target or goal, based on historical performance and practical estimates, is often the only difference between a profitable outcome and a losing position. For long-term investors, a risk that is often forgotten is inflation risk; the possibility that higher prices will reduce the relative gains of a successful portfolio. All of these concerns need to be taken into account when deciding what strategy or approach offers the most conservative and practical means of capital appreciation for your portfolio. Regardless of the approach or techniques one uses to maintain wealth, there is risk in all areas of finance. Fortunately, there are also some basic guidelines that will substantially reduce investing losses. The first step is to identify any attitudes or behaviors that can lead to unfavorable results. This step is very important because it is hard to control or manage risk when emotion and instinct are primary players in the investing process. The next phase requires a thorough understanding of the methods used to control risks. The most popular technique for limiting financial exposure, regardless of the commodity or instrument, is diversification. The rule here is very simple: "Don't put all your eggs in one basket!" Spread your portfolio holdings over a broad range of issues and instruments so they don't all decrease in value because of a single event or trend. While even the most catastrophic events can generally be managed to reduce the effects of the shortfall, there are occasions when issues plunge without warning leaving no opportunity for exit or adjustment. Unforeseen events simply occur; negative announcements, shareholder lawsuits, detrimental news in a particular industry or sector, and changes in public sentiment. All of these activities can affect the success of an individual position but with a diversified portfolio, the overall effects are minimal. Diversification also allows you to take advantage of the wide variety of investment vehicles available in the global financial markets, and an assortment of positions in different categories will ensure that at least a portion of your holdings are outperforming the major indices. In the next segment, we'll talk more about developing a plan for protecting wealth in a long-term investment portfolio. 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 GNTA 16.20 15.05 SEP 12.50 0.45 0.45* 8.1% 26.5% AMSC 13.20 11.65 SEP 10.00 0.70 0.70* 6.5% 18.2% CBST 12.72 12.98 SEP 10.00 0.50 0.50* 4.6% 14.3% NEOF 16.40 16.49 SEP 15.00 0.35 0.35* 5.2% 13.8% GNTA 16.00 15.05 SEP 10.00 0.30 0.30* 4.7% 13.0% RIMM 24.61 33.71 SEP 20.00 0.75 0.75* 2.8% 9.1% RIMM 28.48 33.71 SEP 25.00 0.50 0.50* 3.1% 9.0% SINA 34.32 40.23 SEP 30.00 0.40 0.40* 2.9% 8.9% OVTI 43.77 46.10 SEP 35.00 0.95 0.95* 2.4% 8.5% CVTX 27.33 27.27 SEP 25.00 0.35 0.35* 3.1% 8.5% THER 13.93 13.50 SEP 12.50 0.55 0.55* 3.3% 8.5% DRIV 28.75 30.15 SEP 25.00 0.30 0.30* 2.6% 8.1% NFLX 34.55 37.00 SEP 30.00 0.35 0.35* 2.6% 7.9% RIMM 28.74 33.71 SEP 25.00 0.60 0.60* 2.7% 7.8% NTAP 22.36 22.77 SEP 20.00 0.35 0.35* 2.7% 7.7% IDTI 13.10 14.50 SEP 12.50 0.35 0.35* 3.1% 7.6% FLML 28.49 42.85 SEP 22.50 0.30 0.30* 2.1% 7.6% BLUD 23.12 28.88 SEP 22.50 1.00 1.00* 3.4% 7.5% BOBJ 27.05 28.84 SEP 25.00 0.45 0.45* 2.8% 7.4% SEPR 21.76 31.30 SEP 17.50 0.50 0.50* 2.1% 7.3% NFLX 28.80 37.00 SEP 25.00 0.55 0.55* 2.4% 7.2% TKLC 13.73 18.00 SEP 12.50 0.45 0.45* 2.7% 6.9% PHTN 28.90 32.20 SEP 25.00 0.65 0.65* 2.3% 6.8% TIVO 10.91 9.93 SEP 10.00 0.30 0.23 2.6% 6.7% SRNA 18.77 19.86 SEP 17.50 0.40 0.40* 2.5% 6.5% JDAS 13.90 16.80 SEP 12.50 0.40 0.40* 2.4% 6.4% UTEK 25.75 30.63 SEP 22.50 0.55 0.55* 2.2% 6.3% SEPR 23.49 31.30 SEP 20.00 0.45 0.45* 2.0% 6.2% PDII 24.25 26.42 SEP 20.00 0.50 0.50* 1.9% 6.1% NFLX 33.33 37.00 SEP 27.50 0.30 0.30* 1.7% 5.8% IMCL 46.56 46.15 SEP 40.00 0.30 0.30* 1.6% 5.3% BRCM 25.80 26.42 SEP 22.50 0.35 0.35* 1.7% 5.2% PSUN 22.37 22.48 SEP 20.00 0.23 0.23* 1.8% 5.1% ** AEIS 21.02 22.36 SEP 17.50 0.30 0.30* 1.5% 5.0% PHTN 29.57 32.20 SEP 25.00 0.35 0.35* 1.5% 5.0% EMIS 6.19 8.43 OCT 5.00 0.35 0.35* 6.5% 18.6% ADLR 15.95 15.10 OCT 12.50 0.50 0.50* 3.6% 11.8% STAT 14.58 14.30 OCT 12.50 0.40 0.40* 2.9% 8.4% ASKJ 21.29 21.67 OCT 17.50 0.45 0.45* 2.3% 7.6% NKTR 13.83 13.75 OCT 10.00 0.25 0.25* 2.2% 7.2% INSP 19.92 21.85 OCT 17.50 0.35 0.35* 1.8% 5.2% GOLD 23.93 25.82 OCT 20.00 0.35 0.35* 1.5% 5.1% * Stock price is above the sold striking price. ** Adjusted for a 3-2 Split Comments: Friday's quadruple-witching expiration of options on stocks, stock indexes and futures contracts was a "non-event" and just what we needed to keep the Naked-Puts portfolio "in the black" for the month of September. There were virtually no surprises during the session and all the major equity indices remain in a relatively bullish trend for the coming week. At the same time, the quarterly earnings season is approaching, so it is prudent to remain vigilant in position management (even though there are no positions on the early-exit "watch" list). Previously Closed Positions: None 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 USG 17.51 OCT 12.50 USG VV 0.35 1156 12.15 28 3.1% 9.9% SEAC 14.34 OCT 12.50 UEG VV 0.35 50 12.15 28 3.1% 9.0% NPSP 32.82 OCT 25.00 QKK VE 0.50 1242 24.50 28 2.2% 7.7% ONXX 23.92 OCT 20.00 OIQ VD 0.40 100 19.60 28 2.2% 7.2% THOR 18.60 OCT 15.00 TQU VC 0.25 723 14.75 28 1.8% 6.6% CEPH 49.62 OCT 40.00 CQE VH 0.65 1755 39.35 28 1.8% 6.5% IDXC 26.02 OCT 22.50 XQW VX 0.35 0 22.15 28 1.7% 5.3% 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). ***** USG - USG Corporation $17.51 *** Asbestos Speculation! *** USG Corporation (NYSE:USG) produces a range of products for use in new residential, new non-residential and repair and remodel construction, as well as products used in certain industrial processes. Its operations are organized into three operating segments: North American Gypsum, which manufactures Sheetrock brand gypsum wallboard and related products in the United States, Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region, and Building Products Distribution, which distributes gypsum wallboard, drywall metal, ceiling products, joint compound and other building products throughout the United States. Companies with asbestos-related liabilities continue to enjoy lots of "premium" in their options (suggesting a potential for volatility) and traders who think that recent legislation will lead to a favorable reform of laws concerning asbestos litigation can use this position to speculate on that outcome. OCT-12.50 USG VV LB=0.35 OI=1156 CB=12.15 DE=28 TY=3.1% MY=9.9% ***** SEAC - SeaChange International $14.34 *** Rally Mode! *** SeaChange International (NASDAQ:SEAC) is a developer, builder, and marketer of systems (video storage servers) that automate the management and distribution of long-form video streams such as movies or other feature presentations, and short-form video streams such as advertisements. The company sells products and services to cable system operators, including AOL Time Warner, Cablevision, Charter Communications, Comcast, Cox Communications and Insight Communications, telecommunications companies, as well as Deutsch Telecom and broadcast television companies, including Ascent Media, Clear Channel Communications and Echostar. SEAC's broadband network segment includes its video-on-demand system, which digitally manages, stores and distributes digital video, allowing cable system operators and telecommunications companies to offer VOD and other interactive television services, including interactive electronic advertising and retrieval of web content, through the television. In August, SeaChange announced a second quarter profit versus a year ago loss that resulted from rising orders for its video systems. Revenue for video-on-demand rose 16% and the company believes the bullish trend will continue in the coming quarter. Investors can establish a relatively low risk entry point in the issue with this position. OCT-12.50 UEG VV LB=0.35 OI=50 CB=12.15 DE=28 TY=3.1% MY=9.0% ***** NPSP - NPS Pharmaceuticals $32.82 ** New Drug Speculation! *** NPS Pharmaceuticals (NASDAQ:NPSP) is engaged in the discovery, development and commercialization of pharmaceutical products. Its product pipeline consists of product candidates in various stages of clinical development and preclinical development. Two of these product candidates, PREOS and cinacalcet HCl, are in Phase III clinical trials. A third product candidate, ALX-0600, has completed a pilot Phase II clinical trial and plans are now underway to commence additional clinical trials. PREOS is NPS' brand name for a recombinant, full-length parathyroid hormone it is developing for the treatment of osteoporosis. ALX-0600 is the company's analog of glucagon-like peptide 2 that it is developing for the treatment of gastrointestinal disorders. Cinacalcet HCl, its orally active, small-molecule compound for the treatment of hyperparathyroidism, is being developed by the company's licensees, Amgen and Kirin Brewery Company. NPSP is another company with drugs awaiting FDA approval and investors who perform the necessary due-diligence may find this position attractive for a speculative portfolio. OCT-25.00 QKK VE LB=0.50 OI=1242 CB=24.50 DE=28 TY=2.2% MY=7.7% ***** ONXX - Onyx Pharmaceuticals $23.92 *** Multi-Year High! *** Onyx Pharmaceuticals (NASDAQ:ONXX) is engaged in the discovery and development of novel cancer therapies utilizing two primary technology platforms, small molecules that inhibit the proteins involved in excess growth signaling, and therapeutic viruses that selectively replicate in cells with cancer-causing genetic mutations. The firm is developing a new small molecule compound, BAY 43-9006, in collaboration with Bayer Pharmaceuticals. Using its proprietary virus technology, the company is also developing ONYX-411, a second-generation product that targets cancers with abnormal function of the retinoblastoma tumor-suppressor gene, and is developing Armed Therapeutic Virus products. Onyx is set to present at the UBS Global Life Sciences Conference in New York City on Monday (9/22) and investors are hoping for an optimistic outlook. Traders who believe the reception will be positive, and the recent upside activity will continue, should consider this position. OCT-20.00 OIQ VD LB=0.40 OI=100 CB=19.60 DE=28 TY=2.2% MY=7.2% ***** THOR - Thoratec $18.60 *** Medicare Approval Coming? *** Thoratec (NASDAQ:THOR) offers two complementary circulatory support product lines, the Thoratec Ventricular Assist Device system (Thoratec VAD system), an external device for short- to mid-term cardiac support, and the HeartMate Left Ventricular Assist system (HeartMate), an internal device for longer-term cardiac support. In addition to its cardiac assist products, the company offers vascular access grafts used in hemodialysis for patients with end-stage renal disease. The firm is also developing a small-diameter access graft for use in coronary artery bypass graft surgery. In addition, the Thoratec sells whole-blood coagulation testing equipment used in bedside anticoagulation management, coagulation screening and skin incision devices for the drawing of blood from adult, children and infant patients. Thoratec has requested that approval for one of its devices for treating late-stage congestive heart failure be expanded to include Medicare patients who are not candidates for heart transplants. The decision is expected in the coming weeks and traders can speculate conservatively on that outcome with this position. OCT-15.00 TQU VC LB=0.25 OI=723 CB=14.75 DE=28 TY=1.8% MY=6.6% ***** CEPH - Cephalon $49.62 *** New Trading Range? *** Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril for the treatment of partial seizures associated with epilepsy. The most recent news for Cephalon is their offer to buy Cima Labs for $26-a-share and investors are apparently happy with the potential merger. CEPH shares closed Friday's session near the top of a four-month trading range and the issue looks poised to continue higher in the coming weeks. OCT-40.00 CQE VH LB=0.65 OI=1755 CB=39.35 DE=28 TY=1.8% MY=6.5% ***** IDXC - IDX Systems $26.02 *** A Big Day! *** IDX Systems Corporation (NASDAQ:IDXC) is a provider of software, services and technologies for healthcare organizations. IDX's core business segment, providing information systems, services and connectivity for group physician practices, hospitals and integrated delivery networks, operates under the IDX brand name and consists of software licensing, services and hardware sales. Shares of IDXC rallied Friday amid optimistic comments from a brokerage firm regarding the firm's chances of winning major contracts in the United Kingdom's initiative to automate all of its hospitals. W.R. Hambrecht & Co. analyst Sean Wieland said IDXC is "well-positioned for success in two of the five contracts to be awarded by the U.K.'s National Health System." Investors who agree with that optimistic assessment should consider this position. OCT-22.50 XQW VX LB=0.35 OI=0 CB=22.15 DE=28 TY=1.7% MY=5.3% ***** ***************** 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 ZIXI 8.98 OCT 7.50 HQU VU 0.40 135 7.10 28 6.1% 17.3% FLML 42.85 OCT 35.00 FLU VG 1.15 205 33.85 28 3.7% 12.0% XING 9.13 OCT 7.50 QAE VU 0.25 98 7.25 28 3.7% 12.0% KVHI 32.42 OCT 30.00 VJU VF 1.15 42 28.85 28 4.3% 10.7% STAT 14.30 OCT 12.50 TAQ VV 0.35 83 12.15 28 3.1% 8.9% CMTL 28.25 OCT 25.00 CQH VE 0.70 144 24.30 28 3.1% 8.7% NFLX 37.00 OCT 30.00 QNQ VF 0.60 735 29.40 28 2.2% 7.8% CELL 32.01 OCT 25.00 ULN VE 0.45 104 24.55 28 2.0% 7.1% RIMM 33.71 OCT 27.50 RUL VY 0.50 689 27.00 28 2.0% 7.0% INSP 21.85 OCT 20.00 IOU VD 0.45 91 19.55 28 2.5% 6.7% JCOM 42.42 OCT 32.50 JQF VZ 0.55 747 31.95 28 1.9% 6.6% VSH 19.00 OCT 17.50 VSH VW 0.35 422 17.15 28 2.2% 5.9% SINA 40.23 OCT 30.00 NOQ VF 0.40 1050 29.60 28 1.5% 5.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Equities Consolidate Amid Minor Profit-Taking By Ray Cummins Stocks closed lower Friday as investors took profits in the wake of the recent sharp rally, which propelled the major indices to levels not seen in over a year. The Dow Jones industrial average slipped 14 points to 9,644 with Merck (NYSE:MRK), Honeywell (NYSE:HON), Boeing (NYSE:BA) and Coca Cola (NYSE:KO) among the worst performers. The tech-laden NASDAQ Composite Index slumped 3 points to 1,905 with the biggest losses emerging in communications equipment stocks. The broad Standard & Poor's 500 Index ended 3 points lower at 1,036, despite buying pressure in footwear, gold, oil and gas services, retail apparel, and healthcare facilities. Trading was active with 1.46 billion shares changing hands on the New York Stock Exchange while 1.86 billion shares were crossed on the NASDAQ. Advancers outnumbered decliners 9 to 7 on the Big Board, and by a slightly larger margin on the technology exchange. In the U.S. bond market, the price of the 10-year note finished almost unchanged with its yield at 4.16%. ***************** 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 ADI 39.51 41.21 SEP 30 35 0.65 34.35 $0.65 Closed BOW 38.57 44.48 SEP 30 35 0.60 34.40 $0.60 Closed MXIM 39.11 43.35 SEP 30 35 0.65 34.35 $0.65 Closed BBY 47.90 51.44 SEP 40 42 0.30 42.20 $0.30 Closed JCI 96.49 99.95 SEP 85 90 0.65 89.35 $0.65 Closed MBI 53.13 56.95 SEP 45 50 0.65 49.35 $0.65 Closed WMT 57.77 58.14 SEP 50 55 0.50 54.50 $0.50 Closed BSX 63.25 68.41 SEP 50 55 0.40 54.60 $0.40 Closed SNPS 66.53 68.57 SEP 55 60 0.50 59.50 $0.50 Closed ISIL 27.58 27.98 SEP 22 25 0.30 24.70 $0.30 Closed POWI 32.08 37.30 SEP 25 30 0.55 29.45 $0.55 Closed VIA 44.64 42.05 SEP 40 42 0.30 42.20 ($0.15) Closed AMZN 46.32 47.58 SEP 40 42 0.25 42.25 $0.25 Closed GS 88.48 93.73 SEP 80 85 0.40 84.60 $0.40 Closed TTWO 29.81 36.12 SEP 25 27 0.30 27.20 $0.30 Closed SYMC 59.45 63.46 SEP 50 55 0.40 54.60 $0.40 Closed AMLN 29.04 29.73 OCT 22 25 0.30 24.70 $0.30 Open MERQ 49.41 50.93 OCT 40 42 0.30 42.20 $0.30 Open BBH 137.69 139.46 OCT 120 125 0.45 124.55 $0.45 Open CELG 45.48 45.89 OCT 35 40 0.50 39.50 $0.50 Open MYL 39.00 40.27 OCT 32 35 0.20 34.80 $0.20 Open SINA 37.41 40.23 OCT 25 30 0.45 29.55 $0.45 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss The suggested position in Lowe's (NYSE:LOWE) was not available near the target credit. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ESRX 62.23 60.35 SEP 75 70 0.60 70.60 $0.60 Closed DB 59.64 66.57 SEP 70 65 0.60 65.60 ($0.97) Closed AMGN 66.48 68.89 SEP 75 70 0.35 70.35 $0.35 Closed MEDI 34.58 36.00 SEP 40 37 0.25 37.75 $0.25 Closed CTX 75.42 76.42 SEP 85 80 0.40 80.40 $0.40 Closed DNA 79.40 87.72 SEP 90 85 0.50 85.50 ($2.22) Closed CNF 28.87 32.36 OCT 32 30 0.40 30.40 ($1.96) Closed CAH 56.36 58.60 OCT 65 60 0.65 60.65 $0.65 Open PFE 30.51 31.45 OCT 35 32 0.25 32.75 $0.25 Open XL 76.05 77.25 OCT 85 80 0.60 80.60 $0.60 Open APC 42.70 43.60 OCT 47 45 0.35 45.35 $0.35 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss CNF Transportation (NYSE:CNF) picked a great time to announce that it was raising its third-quarter earnings guidance, citing strong performance across its operating units and an improving economy. The freight company now expects third-quarter earnings of $0.45 to $0.50 a share, and investors applauded the news with a sharp rally. Intuit (NASDAQ:INTU), Investors Financial Services (NASDAQ:IFIN) and SAP AG (NYSE:SAP) have previously been closed to limit losses. Deutsche Bank AG (NYSE:DB) and Genentech (NYSE:DNA) were profitable until Thursday's market-wide rally. Anadarko Petroleum (NYSE:APC) and XL Capital (NYSE:XL) are on the early-exit "watch" list. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status MWD 48.54 52.38 SEP 40 45 4.45 44.45 0.55 Closed MGAM 24.97 29.10 SEP 20 22 2.30 22.30 0.20 Closed MUR 52.94 56.58 SEP 45 50 4.45 49.45 0.55 Closed CTSH 31.90 40.41 SEP 25 30 4.40 29.40 0.60 Closed ERTS 89.97 94.75 SEP 80 85 4.50 84.50 0.50 Closed HTCH 33.02 36.58 OCT 25 30 4.50 29.50 0.50 Open AVII 5.54 5.86 DEC 5 7 0.90 5.90 (0.04) Open APPX 38.74 37.24 OCT 30 33 2.95 32.95 0.42 Open HEPH 26.29 30.20 OCT 20 22 2.25 22.25 0.25 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Multimedia Games (NASDAQ:MGAM) was not available at the target debit, however the risk/reward outlook (potential profit of 8%) at a basis of $22.30 was acceptable for conservative traders. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status HSY 69.64 73.05 SEP 75 70 4.10 70.90 (2.15) Closed LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss The "Reader's Request" position in Hershey Foods (NYSE:HSY) has previously been closed for a smaller-than-published loss. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SHPGY 22.77 22.70 JAN 30 17 0.00 0.20 Closed AVCT 27.83 30.85 SEP 30 25 (0.10) 1.30 Closed ADRX 20.79 21.93 DEC 25 17 (0.20) 0.15 Open CVTX 27.55 27.27 OCT 35 20 (0.10) 0.00 Open GLGC 6.00 6.38 NOV 7 5 (0.10) 0.00 Open CV Therapeutics (NASDAQ:CVTX) remains near a "key" support area and a move to the downside would suggest an early exit in the speculative position. Avocent (NASDQ:AVCT) has been a solid performer with a potential credit of up to $1300 on $950 invested in less than one month. There was no opportunity to trade the synthetic position in Devry (NYSE:DV) during the "gap-up" rally, and the subsequent sell-off on news of lower quarterly profits was not conducive to a new entry in a bullish play. 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 24.95 OCT-20C SEP-22C 1.90 2.25 Closed NE 34.86 33.24 DEC-37C SEP-37C 1.15 1.50 Closed NSM 22.77 35.90 JAN-20C SEP-25C 3.90 5.30 Closed GNTA 13.95 15.05 OCT-12C SEP-15C 2.00 2.45 Closed MSFT 27.31 29.96 JAN-27C SEP-30C 2.20 2.40 Open ING 19.07 20.86 JAN-20C OCT-20C 0.55 0.75 Open MDCO 26.17 28.17 JAN-30C OCT-30C 0.50 1.20 Open PRU 36.41 37.70 DEC-37C OCT-37C 0.30 0.60 Open Genta (NASDAQ:GNTA) was a pleasant surprise, offering a favorable profit in less than one week. National Semiconductor (NYSE:NSM) has also exceeded our expectations, offering a potential gain of up to $1.40 on $3.90 invested in less than one month. Microsoft (NASDAQ:MSFT) required an adjustment to reflect the new "bullish" outlook and the spread is now diagonal with a larger debit. The older position in SPX Corporation (NYSE:SPW) was closed early for a profit and the Brady Pharmaceuticals (NYSE:BDY) position is no longer being tracked in the summary. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ADBE 34.36 41.37 SEP 35 35 2.80 6.50 Closed BBY 50.08 51.44 SEP 50 50 4.05 4.90 Closed PDCO 54.42 59.70 SEP 55 55 2.35 5.50 Closed SNE 30.74 37.39 OCT 30 30 3.75 8.00 Open? AMTD 10.00 13.00 OCT 10 10 1.45 2.90 Open? TRI 30.50 31.11 NOV 30 30 4.90 5.00 Open CLS 17.55 17.87 OCT 17 17 2.35 3.10 Open NVDA 18.17 19.84 OCT 17 17 2.90 3.50 Open EASI 59.70 64.28 NOV 60 60 8.50 9.00 Open AFCI 22.66 22.75 OCT 22 22 3.10 3.00 Open Sony (NYSE:SNE), Adobe Systems (NASDAQ:ADBE), Patterson Dental (NASDAQ:PDCO) and Ameritrade (NASDAQ:AMTD) were "big" winners this month. Straddle plays in Best Buy (NYSE:BBY), Celestica (NYSE:CLS), Nvidia (NASDAQ:NVDA) and Overture (NASDAQ:OVER), which was closed early for a loss, have achieved also small profits. Engineered Support Systems (NASDAQ:EASI) is off to a great start as well. CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance, and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** COGN - Cognos $33.16 *** Solid Outlook! *** Cognos (NASDAQ:COGN), the world leader in business intelligence and performance management, delivers software that helps companies drive, monitor and understand corporate performance. The firm's competitive advantage is achieved through strategic application of BI on an enterprise scale. Their integrated CPM solution helps customers drive performance through planning; monitor performance through scorecarding; and understand performance through business intelligence. Cognos serves more than 22,000 customers in over 135 countries. Cognos enterprise business intelligence and performance management solutions and services are also available from more than 3,000 worldwide partners and resellers. COGN - Cognos $33.16 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-27.50 CRQ-VY OI=0 ASK=$0.30 SELL PUT OCT-30.00 CRQ-VF OI=31 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$29.70 ***** CTSH - Cognizant Tech. $40.41 *** Up-Trend Intact! *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. CTSH - Cognizant Tech. $40.41 PLAY (conservative - bullish/credit spread): BUY PUT OCT-30.00 UPU-VF OI=1834 ASK=$0.30 SELL PUT OCT-35.00 UPU-VG OI=466 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$34.50 ***** IMDC - Inamed $76.91 *** Booming Beauty-Treatment Market! *** Inamed (NASDAQ:IMDC) is a global medical device company that develops, manufactures and markets a diverse line of products that enhance the quality of people's lives. The company has three principal product lines: breast aesthetics, consisting primarily of breast implants and tissue expanders sold largely for use in plastic and reconstructive surgery; facial aesthetics, consisting primarily of collagen and other dermal fillers sold largely to dermatologists and plastic surgeons, and obesity intervention, consisting of products for use in treating severe and morbid obesity. The company also offers collagen products for use by medical manufacturers. IMDC - Inamed $76.91 PLAY (conservative - bullish/credit spread): BUY PUT OCT-60.00 UZI-VL OI=206 ASK=$0.55 SELL PUT OCT-65.00 UZI-VM OI=889 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$64.45 ***** NEM - Newmont Mining $40.66 *** Gold "Bulls" Only! *** Newmont Mining (NYSE:NEM), along with its subsidiaries, is a worldwide company engaged in the production of gold, exploration for gold and acquisition of gold properties. The company also has an interest in a copper/gold mine that commenced production in late 1999. In addition, the company produces zinc, lead and copper concentrates at its property in Western Australia. The company approved in 2002 a restructuring plan to facilitate the acquisitions of Normandy Mining Limited and Franco-Nevada Mining Corporation Limited, and to create a more flexible corporate structure. NEM - Newmont Mining $40.66 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-35.00 NEM-VG OI=4293 ASK=$0.20 SELL PUT OCT-37.50 NEM-VU OI=2125 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.20 ***** CI - Cigna $47.15 *** Consolidation In Progress! *** Cigna Corporation (NYSE:CI) and its subsidiaries are investor- owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and other services, life, accident and disability insurance, retirement products and services and investment management. CIGNA's main perating divisions include Employee Health Care, Disability and Life Benefits, CIGNA Group Insurance, Employee Retirement, and Investment Services, and International Life, Health and Employee Benefits. CI - Cigna Corporation $47.15 PLAY (conservative - bearish/credit spread): BUY CALL OCT-55.00 CI-JK OI=1502 ASK=$0.15 SELL CALL OCT-50.00 CI-JJ OI=4928 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$50.55 ***** FRX - Forest Labs $48.93 *** Trading Range? *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. The company's many products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. Principal products include Celexa, an SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, a once-daily diltiazem for the treatment of hypertension and angina; and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Labs $48.93 PLAY (less conservative - bearish/credit spread): BUY CALL OCT-60.00 FHA-JL OI=3609 ASK=$0.50 SELL CALL OCT-55.00 FHA-JK OI=4793 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$55.60 ************* 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. ***** NVLS - Novellus Systems $38.55 *** Trading Range? *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $38.55 PLAY (less conservative - bullish/debit spread): BUY CALL OCT-32.50 NLQ-JZ OI=448 ASK=$6.50 SELL CALL OCT-35.00 NLQ-JG OI=753 BID=$4.30 INITIAL NET-DEBIT TARGET=$2.10-$2.15 POTENTIAL PROFIT(max)=16% B/E=$34.65 ***** LMT - Lockheed Martin $48.70 *** A Reader's Request! *** Lockheed Martin (NYSE:LMT) is a customer-focused, global enterprise primarily engaged in the research, design, development, manufacture and integration of advanced technology systems, products and services for government and commercial customers. The company's core business areas are systems integration, aeronautics, space and technology services. The company's Systems Integration segment is engaged in the design, development, integration and production of electronic systems for undersea, shipboard, land and airborne applications. Space Systems is engaged in the design, development, engineering and production of commercial and military space systems. Aeronautics designs, researches and develops, produces and supports combat and air mobility aircraft, surveillance, reconnaissance, platform systems integration and advanced development programs. Technology Services provides information management, engineering, scientific and logistic services. LMT - Lockheed Martin $48.70 PLAY (less conservative - bearish/debit spread): BUY PUT OCT-55.00 LMT-VK OI=122 ASK=$6.50 SELL PUT OCT-50.00 LMT-VJ OI=1492 BID=$2.00 INITIAL NET-DEBIT TARGET=$4.40-$4.45 POTENTIAL PROFIT(max)=12% B/E=$50.55 ******************* 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. ***** XING - Qiao Xing Univ. Telephone $9.13 *** Speculation Only! *** Qiao Xing Universal Telephone (NASDAQ:XING) is one of the largest telephone manufacturers in China. The firm currently produces over 200 models of corded and cordless telephones and distributes such products through an extensive network of more than 3,500 retail stores throughout China. In May 2002, Qiao Xing's 80%-owned subsidiary Qiao Xing Mobile Communication acquired a 65% interest in CEC Telecom, which was formally approved by all the necessary government authorities in February, 2003. XING - Qiao Xing Universal Telephone $9.13 PLAY (very speculative - bullish/synthetic position): BUY CALL DEC-12.50 QAE-LV OI=614 ASK=$0.90 SELL PUT DEC-7.50 QAE-XU OI=135 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.10-$0.25 INITIAL TARGET PROFIT=$0.55-$0.80 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $300 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($7.50). *********************** 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. ***** YHOO - Yahoo! $37.24 *** Earnings Volatility? *** Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 200 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the firm also provides many business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. The company's next quarterly earnings report is due on October 8, 2003 YHOO - Yahoo! $37.24 PLAY (speculative - neutral/debit straddle): BUY CALL OCT-37.50 YHQ-JU OI=5809 ASK=$1.75 BUY PUT OCT-37.50 YHQ-VU OI=837 ASK=$2.15 INITIAL NET-DEBIT TARGET=$3.70-$3.80 INITIAL TARGET PROFIT=$1.40-$1.90 ***** ************************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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