The Option Investor Newsletter Sunday 09-28-2003 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: Storm Warnings Futures Market: Equities Drift, Gold Sells, Treasuries Gain Index Trader Wrap: Pullback Editor's Plays: Cold Day In Hell Market Sentiment: Bully Scurry On Wall Street Ask the Analyst: A quick QCharts tutorial; focus on retracement 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 9-26 WE 9-19 WE 9-12 WE 9-05 DOW 9313.08 -331.74 9644.82 +173.27 9471.55 - 31.79 + 87.52 Nasdaq 1792.07 -113.63 1905.70 + 50.67 1855.03 - 3.21 + 47.79 S&P-100 499.61 - 21.01 520.62 + 8.32 512.30 - 0.19 + 9.13 S&P-500 996.85 - 39.45 1036.30 + 17.67 1018.63 - 2.76 + 13.38 W5000 9646.48 -407.5910054.07 +176.76 9877.31 - 29.38 +136.23 RUT 485.28 - 34.92 520.20 + 11.14 509.06 + 0.19 + 11.45 TRAN 2663.83 -130.88 2794.71 + 59.11 2735.60 - 11.69 + 64.05 VIX 22.23 + 3.16 19.07 - 1.18 20.25 + 0.88 - 0.12 VXN 30.88 + 1.14 29.74 - 2.94 32.68 + 11.98 + 1.18 TRIN 1.42 1.35 1.11 1.04 Put/Call 0.98 0.68 0.90 0.72 ****************************************************************** Storm Warnings by Jim Brown No, not another hurricane but the rumblings on the horizon are growing and the storm clouds are beginning to gather. Investors are putting the shutters on the windows and loading up on extra put insurance as October approaches. Bullish investor sentiment was extremely high last week so it is no surprise there may be a change in climate ahead. Economically Friday contained another batch of mixed messages for the market with the GDP being revised up once again for the 2Q to +3.3%. The gains came from a stronger inventory build up than previously expected and gains in residential building. While the headline number rose higher than expected there were still some internal problems. Consumer spending remained unchanged at +3.8% and the bounce in the headline number was due mostly to the +6.6% jump in housing. Inventory investment still remained negative as businesses continue to lower risk and question future demand. Corporate after tax profits fell even further to -5.0%. Overall the report was positive but the buy the rumor sell the news crowd started to whine that maybe the Q3 estimates which range from +4.9% to as high as +7.0% could be too high. Duh! It appears the bulls are starting to come off their six month high and the headache of sobriety is starting to appear. Yes, the economy is recovering, yes, earnings are going to be up and the GDP could be over +4.0% but +7.0%? What were they thinking? We also need to remember that the 2Q contained two months of post war positioning for the coming recovery. You know, the one that did not appear as expected. That GDP was built on the hope that a quick war would take the worry out of the economy and we would rebound to the moon. Also, the 2Q GDP benefited in a +45.8% increase in the defense spending component. This is the largest increase since 1951 and a component that is not likely to be repeated. This sets up the 3Q and 4Q for a disappointment if the economy does not pick up the slack. A bright point in the GDP that could be pointing to the next quarter leader was the jump in capital spending for computers and software of +8.2%. The only other major report was the Michigan Sentiment final for September and it fell to 87.7 from 89.3. This makes the 3rd month of the last four that the index has declined from the high of 92.1 in post war May. Present conditions and future expectations both fell with the present conditions taking the biggest hit. Lack of jobs continues to be the biggest drag on sentiment followed by high energy prices. Now that the tax rebate checks have passed consumers have nothing to look forward to but winter. We will get the nonfarm payrolls report next Friday and it is expected to show a drop of -25,000 jobs or more. The shortage of economic reports did not give the market any good news to break it out of its dive. The news at the open from Motorola was that they were going to have to delay the delivery of their new highly featured phones for the holidays. MOT traded down all day along with the chip companies that feed the phones. About 3:PM MOT said that the delay would not impact their broader line and they would be shipping 31 new phones in the 4Q including 12 with cameras and 21 with color screens. This produced a sharp rebound in its stock as shorts got squeezed. The markets lost ground again on Friday and the Dow would have been much worse had it not been for MMM. Banc of America upgraded MMM from neutral to a buy and the stock gained nearly +2.00 on a bad day. 3M also has a 2:1 stock split that takes place after the close on Monday. Only eight of the Dow components were positive for the day and only MMM gained more than 50 cents. You can scratch September off your investment calendar. All the new highs and all the gains made in September are now history. Without a miraculous recovery by Tuesday of next week the month will close in the red. The Dow lost -3.5% or -331 points last week. The Nasdaq dropped -6.0%, -113 points. The Wilshire-5000 lost -407 points. Even the transportation index got into the act with a drop of -131 points. The Russell dropped a whopping -35 points or nearly -7%. Sectors that had been leaders got whacked badly. The Biotech sector dropped -8.6%, Semiconductor -6.3% and computers -6.6%. The Dow posted its worst weekly loss in six months, the S&P in 8 months and the Nasdaq saw the worst drop in 17 months. While all those negative numbers sound terrible they have to be taken in context. The Nasdaq was up +52% over just the last six months. Losing -6% is a minor correction. The markets are still above the mid August gains and well above July. That could be good news or bad news depending on your point of view. It means we have a nice cushion but it also means that cushion is likely to get thinner. The excuses for the correction are appearing from every direction. Earnings worries, profit taking, portfolio adjustment, year end fund selling, etc. I do not think it is any one of those specifically but more likely just a normal calendar correction that we have been expecting for weeks. Nothing to worry about unless you are long. Whenever the market tanks the talking heads on stock TV start grasping for reasons to fill the airwaves and make it appear they know what is going on. Sometimes they get it right. Regardless of the reason for this drop it was expected and it will be over soon. Soon on my calendar could be 1-3 weeks. Our only task now is deciding where to go long. According to First Call earnings for the 3Q are expected to rise +19% for the S&P. The 4Q is currently pegged at +22% to +26%. This is an amazing rebound on paper but when you look at the same periods last year the comparisons should be easy. Tech earnings for the year are expected to be up +80%. Think about it, +80% from what? Many tech companies lost money last year or barely broke even. Only the big guys like MSFT, CSCO and INTC really piled it on at the bottom of the bear market. The 3Q of last year was the bottom of the bear market and that makes the comparisons easy for Q3-2003 but it does not mean techs are raking in the dough. The economy must be getting better or companies have simply cut their estimates to the point they have no risk in making them. This time last year there had been over 500 earnings warnings for the quarter. This year there is less than 50% of that number. Companies announcing positive guidance are up +20% in the same period. The only problem facing the markets now is confidence in the numbers. With some analysts literally predicting a GDP over +6% for the 3Q there is a significant amount of hesitation on what to believe. Funds with large profits are trapped between holding on to see if the fairy tale comes true or taking profits now to preserve their strong gains. Hedge fund managers who get paid out of the profits to the tune of 20%-50% of the gains have got a huge bet riding on the line. If your fund is up +30% to +70% for the year the urge to take profits and lock in bonuses is very strong. This occurs every year at this time so the event is not new. The only difference is that there are huge profits this year instead of the huge losses over the last two years. This makes the urge to lock in now much stronger. There is also an axiom on Wall Street to Sell Rosh Hashanah (9/27) and buy Yom Kippur (10/06). Whether that is a valid cycle or not remains to be seen but it definitely corresponds with the normal end of September drop. Whatever the reason you want to blame on the selling you have to admit that the market sentiment has taken a negative turn. That turn may not have much farther to go before it reaches the first pause point. The Dow stopped falling at 9300 Friday and that was the initial support point we have been discussing. Should the 9300 level fail and I think that could happen next week we could easily see the 25% retracement level at 9100 be the next pause point. I am too bullish despite my skepticism over the rate of recovery to expect the Dow to break 9000. There is simply too much support between 9000-9100 for the bears to break. It is possible but we should see a huge buy the dip move between 9000-9100. Should that break it could severely damage the bullish case and a rapid drop to the 50% retracement level at 8550 could result. Again, I do not expect that but we need to be aware of the potential. One critical note from Friday was the break of the Dow 50-dma at 9350. It was actually broken slightly on Thursday but the Dow rebounded to 9358 on Friday and then failed again significantly. This should be seen as a definite sign of more weakness ahead. Dow Chart The Nasdaq was the biggest loser for the week but it is still in danger of dropping further. The next support is 1750 which is about 42 points away. The most likely target is still the risk range between 1600-1650. That sounds terrible but even the worst case drop to 1600 is only another -10% drop and considering the gains would just be a normal October correction. The Nasdaq broke a critical level on Friday and closed under 1800. This was a psychological level and was critical for bullish sentiment. Every century mark the index gives up puts it just that much farther from 2000 in the eyes of the bulls. The odds are very good we are not going to drop straight to 1600 next week or the week after. Any drop under 1750 will be accompanied by plenty of kicking and screaming and dip buying. The Nasdaq has not broken the 50-dma at 1775 but it is very close. Nasdaq Chart The broader market index of the S&P came within 2 points of decent support at 992 on Friday. The next critical support is 975 and 965. The 975 level should be a substantial stopping point and we could see a decent bounce. Under 965 support is pretty thin until 943 or so but if we break the 965 level the market will have worse problems to deal with. The S&P also broke its 50 DMA at 1001 on Friday. It was support in late August but has already failed in the current drop. S&P Chart Next week is filled with economic reports that could be critical to sustaining the longer term rally or accelerating the dip. Monday is light with Personal Income and Spending but the pace picks up on Tuesday with NY-NAPM, Consumer Confidence, PMI and Risk of Recession. Wednesday has ISM, Construction Spending and Challenger Layoff Report. Thursday has Jobless Claims and Factory Orders followed by Nonfarm Payrolls on Friday. The biggies of course are the NAPM, ISM and Nonfarm Payrolls. ISM is expected to be flat and that should raise some eyebrows. If the GDP is going to blow out at +7% then why should the ISM show no growth? Could be some reeling in of expectations. The Nonfarm Payrolls report is expected to show a loss of -25,000 jobs. Last month they were expecting it to be flat and it lost -93,000. If they miss on the downside again it could cause concern. The upside would be another serious drop in jobs could provoke the Fed to launch another stimulus program. I doubt it would be a rate cut but they might feel driven to do something else to provide stimulus. For next week traders should look to be light on their feet and not get married to any longs OR shorts for that matter. With the previous bullishness in the market the volatility could be huge. Whenever I say that I get emails saying "what does that mean?" It is a polite way of saying we could move a hundred points in either direction at a moments notice. You never know what level will trigger a monster buy program that causes shorts to run for cover on heavy volume. Also, for every buy program there could be a hedge fund just hoping for the next rebound to dump another load into the bounce. This erratic behavior means you can be stopped out on both longs and shorts in the same day and possibly more than once. The best plan for the next two weeks is sell any unreasonable spikes and buy any bounces off support. The chart above shows an example of an unreasonable spike. After two days of declines a strong buy program triggered at 985 in the middle of the day and the shorts were caught completely off guard. The buy program was in response to the unreasonable drop at the beginning of the day which was also totally out of character. So buy unreasonable drops, sell unreasonable spikes and buy known support levels. That support on the S&P, rather use that than the Dow for obvious reasons, is 990-992, 975, 965. Resistance is 1012, 1020, 1030. Sell resistance, buy support and take profits early. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Equities Drift, Gold Sells, Treasuries Gain Jonathan Levinson Friday’s session capped off a losing week for equity and precious metals futures and the US Dollar Index, with treasuries emerging as the big winner. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. 15 minute chart of the US Dollar Index The US Dollar Index completed its fifth consecutive down week, printing a doji star on an unfilled downside breakaway gap from last Sunday night’s disastrous open. Friday’s session saw multiple successful tests of 93.70 support, but the DX00Y spent all afternoon drifting up to close below 93.90. Despite the ongoing weakness in the US Dollar Index, the CRB dropped 2.54 on Friday to close at 239.97, while gold and silver both saw significant selling as well. Daily chart of December gold December gold did its best to scare goldbugs into submission, and the Thursday-Friday decline was in many cases successful. Friday’s low was 380, right on the lower rising trendline of the bear wedge that had been invalidated to the upside earlier on Thursday. The two days of intense selling flattened off the nascent buy signals on the daily chart oscillators and made them look bearish again, but until the lower wedge trendline breaks, it remains up for grabs. Below the lower trendline, we have a possible wedge target of 346. The more serious punishment, however, was reserved for the gold mining shares, with HUI down from above 210 on Thursday to a low above 190 Friday. See Thursday’s Futures Wrap for a deeper look at HUI. On Friday, HUI dropped 9.52 to close at 191.68, while XAU lost 3.86 to close at 89.66. December gold dropped 4.40 to close at 381.50, December silver -.079 to 5.143. For the week, the HUI printed a bearish engulfing candle, and December gold a bearish shooting star doji. Daily chart of the ten year note yield Treasuries found more bids Friday, continuing the week’s winning streak with the ten year note yield (TNX) breaking below the apex of the bullish descending wedge. The TNX dropped 7.9 basis points to close at 4.023% and closed the week on a fifth consecutive negative candle. The bearish close to the week continues a clear trend as confirmed by the ongoing daily oscillator downphase, painting a bullish picture for treasuries. The weekly chart oscillators (not shown) are also pulled into early sell signals for the TNX, bullish again for the ten year note yield. Daily NQ candles The NQ gave us a difficult trading range on Friday, closing lower by 8.50 at 1311. The oscillator sell signals extended their breadth slightly, but it was all that was needed to confirm the ongoing downphase commenced this week. While there are numerous supports on the way down, the bear wedge broken this week targets a possible visit to 1210 if it plays out fully, though I expect a significant battle at the 1280 level first. The NQ completed its first negative week in over one month, with all buy-and-hold positions from the past three weeks now in the red. 30 minute 20 day chart of the NQ The 30 minute NQ continued lower in what I believe to be a bullish descending wedge. With such a steep angle of decline, trendlines are open to wider interpretation than usual. The bounce implied by the oversold 30 minute chart oscillators, and particularly the 300 minute stochastic, took the form of a sideways upphase as discussed in Thursday’s Futures Wrap. However, the failure of that upphase had no downside energy whatsoever. Perhaps traders were hesitant to take on new positions ahead of the weekend. Either way, Monday will tell the tale. Above 1236, the bull wedge is in play, and below 1300, the bulls have a problem. While the upphase failed early, the absence of a sharp subsequent decline at the end of the afternoon is not bearish. More importantly, the oscillators on this chart are at or near the bottoms of their ranges, and the odds favor their bouncing from here. It’s the same story as reported on Thursday. With the daily and weekly chart oscillators in downphases, any shorter cycle upphase is running against the current and is expected to yield lower price highs. For this reason, I don’t expect to see the bull wedges on NQ (or ES or YM) play out to their maximum upside targets. Furthermore, the next downphase from here should take out this week’s lows. Daily ES candles The ES spent Friday going net nowhere, dropping 2.75 to close at 995, but like the NQ, it did so most interestingly. The daily chart oscillators are on clear, sharp sell signals as can only be the case from the kind of clear, sharp selloff that the daily chart depicts. The bear wedge target of 957 remains, with the battlezone shaping up for 985. 20 day 30 minute chart of the ES On the 30 minute chart, the anticipated upphase moved sideways, failing on numerous attempts to break the upper descending bear wedge trendline. The failure extended the losing streak on this timeframe as evidenced by the pattern of lower highs on the stochastic and Macd oscillators. The working range for this wedge is now 989 to 996, and while the action on Friday was certainly not bullish, upside energy for a bounce continues to get compressed within the context of the longer cycle downphases now in progress. I’d expect a bounce to a lower high, with solid resistance above at 1008, 1012, and 1015. The next downphase that follows should, in theory, break the ES to lows below the 994 set this week. As for the NQ, I expect a weak bounce followed by a deeper plunge. Daily YM candles We have the same story on the YM, except that it closed in the green, up 6 points at 9286. Note that on the 30 minute charts for ES and YM, the attempted upphase did not fail to the same degree as it did on the NQ. Whether the NQ is portending a failure on the ES and YM, or whether the NQ selloff at the end of Friday’s session is false will have to be seen on Monday. 20 day 30 minute chart of the YM This week showed us lower prices for the dollar, precious metals, and equities, with bonds closing positive. The lower dollar does not fit with weakness in precious metals and other commodities. Whether we’re looking at the beginning stages of a general deflation cannot be known yet. The bid in treasuries looks defensive, but the slam that took place in gold and silver during the last two days of this week is puzzling. Perhaps it was merely a consolidative shakeout to trim some of the froth built up from recent speculation. What is evident is that the Spring Rally’s pattern of a lower dollar, higher treasuries, equities and metals is no longer in play. With talk of foreign liquidation of dollars and dollar- denominated assets, we may be about to see what the true winners from the recent rally are. So far, equities look to be bringing up the rear, with treasuries in the lead and metals somewhere in between. For next week, we will continue to follow the charts, and look for possible reversals of the broader trends that continue to develop. ******************** INDEX TRADER SUMMARY ******************** Pullback Jonathan Levinson Friday saw the indices extend their losses, with the Dow dropping 30, the S&P 6.4 and the Nasdaq 25 points to finish their first negative week in one month and a half. Volume expanded on Wednesday and Thursday, the days which saw the strongest selling, but was lighter on Friday ahead of the Jewish holidays. 2 year weekly chart of the COMPX Viewed on the weekly (above) and daily candles (below), the technical damage wrought by this week’s selling is not particularly catastrophic. If anything, the selling was more surprising than anything else, for the simple reason that there hasn’t been any for so many consecutive weeks. The move did not challenge the broader rising trendlines on either the weekly or the daily Nasdaq charts, though it did give oscillator sell signals on the longer timeframes. On the weekly, we see a bearish stochastic divergence since June, with the 10 week stochastic declining against advances in weekly price. The selloff this week gave us a fresh stochastic sell signal on that oscillator, and the laggier Macd is not far behind. Trendline support between 1760-70, but the oscillators indicate that a deeper move could occur. If that lower trendline support breaks, the bear wedge targets a possible move to 1260. Note that the 1760 area coincides with those levels on the daily chart below. The oscillators on this shorter daily timeframe are also in gear to the downside, and it’s only the intraday 30 minute chart oscillators (shown for our trading vehicles, the OEX and QQQ below) that give reason to expect a bounce. However, 1760 is 32 points below Friday’s Nasdaq close, and we can expect a battle in that area if the bulls do not appear sooner. Daily COMPX candles 2 year weekly chart of the INDU This week’s selling hurt the Dow more than it did the Nasdaq, as can be seen in the trendline violations on the daily and weekly Dow charts. On the weekly above, this week caused a clear wedge break, suggesting a possible wedge target of 7400, while the daily wedge breaks suggest first 9000, followed by possible support at 8300. Again, the bearish oscillator divergence on the weekly and the coincident daily and weekly cycle downphases should have bulls looking to secure their profits and bears looking for short entries on every bounce in the timeframes they trade. That said, there are bounces to be expected. 9275 Dow is the start of significant support, and as we will see on the shorter term views of the OEX and QQQ, there’s already buying pressure building from the declines we saw this week. Daily INDU candles Daily OEX candles The OEX dropped 3 points on Friday to close at 499, one point above Fibonacci support at 498. The VXO (the old VIX, measuring option volatility for the OEX) closed higher by .38 at 23.8 after being below 20 last week. As we saw on the daily COMPX and INDU charts, the 10 day stochastic is in a full bear roll, confirmed by the sharp sell signal on the Macd. With the weekly oscillators (not shown) rolling over as well, investors in this timeframe are in ‘short and hold’ mode, having gotten short earlier this week. Those trading shorter timeframes were covering today and/or looking to go long on a dip to ride the bounce implied by the 30 minute chart oscillators below. As we see, the selling this week set a pattern of lower highs in price as well as on the oscillators. However, the most recent downphase today ended prematurely on the 300 minute stochastic, suggesting at least some type of bounce to begin from current levels. However, the upper descending bull wedge trendline capped every attempt on the part of bulls to mount a charge, and the upphase could not get beyond a sideways drift. As the longer cycles are headed south, I expect the pattern of lower highs on the 30 minute chart oscillators to continue. This should reflect itself in lower price highs as well. Traders can buy the cycle bottoms and sell the tops at resistance, using tight stops on opening positions. So far, the overall decline has been relatively orderly. 20 day 30 minute chart of the OEX Daily QQQ candles On the Qubes, we see the same picture presented on the daily and 30 minute charts. The bear wedge target on this move is 30.0, which lines up with Fibonacci support as well. Note how well the Fibonacci retracement captures the different price confluence zones in both directions. Like the OEX, QQQ closed Friday right at support. Like the VXO, the QQV made a 10% advance this week, showing a clear spike in options volatility (often likened to ‘fear’) as price declined. The Friday bounce attempt was weaker than that on the OEX, which I would tend to view as a bearish sign. Nevertheless, the easy part of this decline has been seen, and bulls and bears alike are on the alert for at least a short term bounce from current levels. Look for resistance at 32.80, followed by 33, then 33.35. 20 day 30 minute chart of the QQQ For next week, traders will want to keep an open mind and stay nimble. While my analysis confirms my gut feeling, the Spring Rally and its summer followthrough contained a number of shocking moves that defied analysis and caught bear and bulls by surprise. For this reason, plan your trade and trade your plan, but don’t get married to an idea, and use stops always. See you at the bell! ************************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 ************** Cold Day In Hell It must be a cold day in hell or Christmas in September because THE drop finally appeared. For almost six weeks I kept expecting the historical calendar trends to kick in and every week the market just kept teasing with a small dip and a bigger bounce. Well, if this is the next small dip then I can't wait for the next bounce. The QQQ and DJX puts from last week are rocking and we still have a couple weeks to go. I find it hard to believe a rebound will instantly appear next week so the game plan is to hold for another week. The Oct-$34 QQQ put that was recommended at last Friday's close of 75 cents gapped open to 95 cents on the Nikkei crash last Monday. It traded down as low as 65 cents as the fear subsided on Wednesday but closed at $1.80 on this Friday. Regardless of where you entered that trade it is successful. The most likely scenario presented was a QQQ drop to $32 and that looks like a pretty good chance today. If you are in this trade I would look to exit at least half at $32 and another 1/2 at $31. Trail the stop at a level you are comfortable with once the $32 level is hit but not more then $33. You should have a 125% return or better at $32 and selling half guarantees you a profit. Just do not let the rest get away from you. The $33 put that was listed as a wild card play at 45 cents is now $1.20. QQQ Chart The DJX play was the Oct $95 put at $1.10. That put opened at $1.30 and traded as low as $1.15 during the week. It closed this Friday at $2.60 with a high of $2.75. We already got the drop to 93.00 that was expected and I would target 92.00 to exit at least 1/2 position with another 1/2 at 91. I have a hard time believing 90 will actually get hit with all the bulls looking to buy the dip. DJX Chart ******************************** Play Recaps LUV Calls (recommended 9/14) The oil production cutback by OPEC has depressed the airline sector and LUV has pulled back to $17.64 from the 18.58 when recommended. The overall market weakness is also not helping. We are using January $20 options at 75 cents so we have plenty of time and not much risk. The 50 DMA at 17.31 should be the next support. http://members.OptionInvestor.com/editorplays/edply_091403_1.asp Powerball The massive -6% drop in the Nasdaq sank the value of the portfolio back significantly from last weeks highs but we have plenty of time left. We have expected the October dip all along so it was no surprise. 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 **************** Bully Scurry On Wall Street -J. Brown Five out of the last six sessions for the DJIA and the S&P 500 have been negative with the selling picking up speed in the last three days. Bulls are running for cover as the bears finally make an appearance during their traditional September feeding time. The $INDU lost 3.5 percent last week with the NASDAQ Composite dropping even faster, down 5.5 percent. The recent weakness was very wide spread as bears made their late September appearance an international one. The G7 finance summit launched a worldwide drop after issuing a statement to deter currency manipulation. The dollar quickly fell against the yen and the Japanese NIKKEI average lost almost 900 points off its fresh 15-month high. European exchanges also lost ground as traders took profits, expecting the weaker dollar to impact exporters to the U.S. At the same time gold bugs witnessed their beloved metal mark a fresh 7-year high before promptly falling. The XAU gold & silver index has really taken a beating the last two sessions, falling out of its rising channel. Yet gold (December) futures remain in their own rising channel and above the $380 an ounce mark. The profit taking has been strong and all of September's gains have evaporated into losses marking 2003 as yet one more year where the historical trends have held in place. Yet as Jim mentions in the wrap this weekend, looking at the YTD gains for the major indices this week's drop is nothing but overdue. We still have one week before the October earnings season begins and this coming week is full of economic reports to stall the fall or accelerate it. From the looks of it the markets still have further downside with the DJIA's breakdown below the 50-dma, which was duplicated by the S&P 500. Furthermore, we could still see more window "undressing" with the end of the quarter on Tuesday as funds take some profits. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9686 52-week Low : 7197 Current : 9313 Moving Averages: (Simple) 10-dma: 9505 50-dma: 9342 200-dma: 8687 S&P 500 ($SPX) 52-week High: 1040 52-week Low : 768 Current : 996 Moving Averages: (Simple) 10-dma: 1020 50-dma: 1001 200-dma: 930 Nasdaq-100 ($NDX) 52-week High: 1406 52-week Low : 795 Current : 1309 Moving Averages: (Simple) 10-dma: 1362 50-dma: 1305 200-dma: 1144 ----------------------------------------------------------------- The volatility indices are still bouncing higher but have yet to truly mark a trend change or any relative new highs but this could change if the major indices keep dropping. CBOE Market Volatility Index (VIX) = 22.23 -0.03 Nasdaq Volatility Index (VXN) = 30.88 +0.23 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.98 575,209 562,769 Equity Only 0.87 420,092 364,314 OEX 0.55 31,050 17,233 QQQ 5.63 17,408 98,060 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 71.8 - 1 Bull Confirmed NASDAQ-100 79.0 + 0 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 78.2 - 3 Bull Confirmed S&P 100 80.0 - 4 Bull Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.66 10-Day Arms Index 1.29 21-Day Arms Index 1.17 55-Day Arms Index 1.07 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 876 778 Decliners 1917 2281 New Highs 51 83 New Lows 23 8 Up Volume 441M 178M Down Vol. 1225M 1642M Total Vol. 1716M 1831M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 09/23/03 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 The latest option/futures expiration appears to have reduced some outstanding positions and commercial shorts saw the biggest drop. Suddenly, professional longs are dead even with shorts. Meanwhile, small traders closed a large chunk of long positions. Commercials Long Short Net % Of OI 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%) 09/23/03 395,123 397,858 ( 2,735) (0.0%) 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 08/26/03 170,424 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% 09/23/03 139,482 87,981 51,501 22.6% 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 We have a major reversal in the works here. Commercial long positions dropped about 260K, instantly changing sentiment to bearish. Small traders had a change of heart and suddenly went excessively long, which is ironic now that the SPX just broke support. Commercials Long Short Net % Of OI 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% 09/23/03 109,417 204,026 ( 94,609) (30.2%) 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 08/26/03 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%) 09/23/03 175,750 62,558 113,192 47.5% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 The recent expiration appears to have reduced the number of outstanding positions but sentiment remains bearish for commercials and bullish for small traders. Commercials Long Short Net % of OI 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%) 09/23/03 32,648 42,565 ( 9,917) (13.2% 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 08/26/03 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% 09/23/03 17,862 9,880 7,982 28.8% 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 The same can be said for the $INDU futures with outstanding positions dropping, the sentiment remains the same with commercials feeling bullish. However, small traders are feeling a lot more neutral with a drop in short positions. Commercials Long Short Net % of OI 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% 09/23/03 15,911 9,123 6,788 27.1% 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 08/26/03 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%) 09/23/03 7,505 7,779 ( 274) ( 1.8%) 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 *************** A quick QCharts tutorial; focus on retracement Jeff: I really like the 5-minute bar day trading technique, but having to do this on 5 stocks I like to short-term trade each day is taking me a lot of time, when each time I have to go back and type in all the different levels. Isn't there a place where I can set some defaults within QCharts? A lot of subscriber at OptionInvestor.com and premierinvestor.net like to use QCharts, so they can follow along on with similar charts that will be shown in various intra-day updates and market wraps, and after last weekend's column titled "Day trader's 5- minute bar technique" I received several e-mails from traders that were having difficulty figuring out how to get their retracement set, and then KEEPING those settings without having to go through a bunch of complicated steps, each time they wanted to place a new retracement on their chart. I received other questions regarding how to get things done quickly, but also how to the upper and lower retracement to match each other, with the first 5-minute bar in the neutral zone. Let's start with While last weekend's article may have stimulated many questions regarding QCharts, over the course of a week, I will get questions from traders and investors on how to set some preferences that they like to use on a regular basis, but just don't know where to go. I could probably write a 500 page instruction manual an all the things QCharts trading platform offers, but I'm going to show some of the basics, with a focus on the retracement tool. Does everyone know you can actually set an alert (automatically) at various retracement levels, where your computer will alert you when a level has been traded? QCharts Tool Bar buttons - I like to have my various QCharts charting tools on the left side of my trading terminal. I've labeled the various tools that QCharts offers. Many of them I use regularly (Bar Chart, Cursor Tracking, Data Box, Daily Snapshot, Pointer (turned on), Line Segment, Line Ray, Extended Line, Retracement, Regression, Price Magnet) and the MAIN focus of this article will be on the Preferences button, where a trader would want to set his/her own preferences for any of the tools listed. While I won't explain in detail how to use all of the tools, I learned what I know about QCharts from simply paying around with them before finally figuring out what they did. On the above chart, I've also placed two retracement brackets and labeled certain parts of the retracement that we will want to know what they are when we start setting some defaults for these settings. Only difference between the two retracement brackets above (other than their color) is that the upper retracement and where the anchor line is shown, would be used to measure a stocks retracement that had previously declined from $56 to $50, where a trade at $51.14 would be a 19.1% retracement of the recent decline. The lower retracement and anchor line show would be just the inverse, where a trader is measuring percentage retracement of a range after a stock had advanced in price. We will note that in the upper retracement we would see its 80.9%, where in the lower retracement (red) we see 19.1% at a similar level. Add the two together at we get 100% of a RANGE. When we use the 5-minute retracement technique, we don't really care if these percentage (%) levels grammatically depict what the stock is currently doing in relation to a prior move. All we would care about is the levels, and price associated with those levels. When I firs started using QCharts, I too was constantly having to draw a retracement on a chart, and edit that retracement's preferences (for that one chart) and type in the 7 levels I like to use (0%, 19.1%, 38.2%, 50%, 61.8%, 80.9%, 100%). It wasn't until I realized I could actually set PREFERENCES for my retracement that things got a heck of a lot easier, and faster. To set your preferences on retracement (or any other tool shown) you will LEFT CLICK (mouse button) on the PREFERENCES button when you have a chart window open. SPECIAL NOTE: I only have 3 chart windows open on my QCharts trading station. The reason for this is that once I place a retracement, line, or regression on a chart, it will only be there in the future as long as that chart window is open. If I CLOSE that chart window, all the work I did will be lost if I ever come back to it. Some traders have 50-different chart windows open, some minimized, on their QCharts trading station and this eats up memory, as your computer is trying to update all 50 charts at once. When you have LEFT CLICKED on the PREFERENCES tool button, you should get this window popup. QCharts Tool Prefersences - Retracement Here are the settings I used to draw the BLUE retracement bracket in the explanation for the various QCharts tools shown earlier. Point (A) is where you can select any color you want for the Anchor Line, and can either have this line displayed (checked box) or not displayed (unchecked box). Point (B) is the Vertical Line for your retracement bracket with the same color/display options. Point (C) allows you to display or not display certain labels for the retracement bracket. I've enabled (chosen to show) the % and price levels with right justification. At times, when I may be showing overlapping retracement, I may disable the right justification before placing a new retracement on a chart. Point (D) is where a trader can enable (checked box) the display of certain levels. Sometimes, when I'm showing a stacked retracement) where there is overlap at 0%, I will chose to not display the 0% level in the newly added retracement, which is simply overlapping the 100%, or 0% retracement level in a prior retracement bracket that I am stacking to. Point (E) is a nice feature. If you enable alerts at the various levels, this will allow you to set trading alerts, at these levels, once you have a retracement bracket in place. I'll show you how to do this in a minute. Point (F) shows that I've decided to have my retracement brackets extend to the right of the chart forever. As time passes, a retracement drawn with the above settings would stay in place forever. Point (G) is an alternative to (F). Sometimes you will note that one of my retracement brackets on a chart extends forever, while a different retracement on the same chart is abbreviated. The abbreviated length simply depends on the distance between anchor points, and I will usually just plink around with this number on an individual retracement basis to then get the look that I want. Once you have things set up like you want, simply click the OK button and you should now have a set of DEFAULT tool setting for retracement that will be in place until you change them. Now that you have a basic set of parameters in place for your retracement, lets say you are setting up your chart one morning for the 5-minute trading technique. Your default settings are for a BLUE retracement, and the first 5-minute bar has been formed. (In the following example, I'm using Friday's last 5- minute bar, in order to show how the first retracement would be applied for the 5-minute retracement technique. I'm using the last 5-minutes ONLY for example, as we use the FIRST five minutes for this technique to day trade a security) Getting your retracement exact - Clone, Preferences, Alerts Several traders were having problems getting their 100% and 80.9% retracement to mark the LOW and HIGH of the first 5-minutes. If you have your PRICE MAGNET enabled, you should be able to "snap" your anchor point to the bottom of the bar. It's the 80.9% that is tricky. You will not that I've really expanded the vertical scale, as if to magnify the 5-minute bars. You can do this by placing your cursor in the price column and left click your mouse. With mouse button still held down, you can compress or expand the vertical scale. Expanding the vertical scale as shown makes it MUCH easier to get your 80.9% retracement right on top of the 5-minute bar. Remember, all the levels above 80.9% (or 19.1% depending on where your anchor line is headed) are RESULTS of your 5-minute interval technique. Once you have your first retracement set up, you may want to do a couple of things with this retracement. By RIGHT clicking your mouse, with cursor on or near the retracement, it should "light up" and a pop up menu should appear as shown, with four options. Point (A) will be used in a minute as we are going to "clone" this BLUE retracement as it will become the RED retracement for the lower retracement used for the 5-minute bar trading technique. What's 100% - 80.9%? 19.1% right? Once we have our blue retracement accurately in place, all we have to do is clone it, and move it lower, then change the color to RED on the lower one. Point (B) is where you could change the preferences of the retracement ON THIS CHART ONLY. I emphasize THIS CHART ONLY as the changes made from this preferences menu is not what we did earlier, where we changed the preferences from the tools menu, and that was for the ENTIRE default settings we preferred. Point (C) is where I could have QCharts alert me to a level being traded on the retracement bracket. As long as I had enabled the alert setting in the preference menu, then by LEFT clicking on the Add Alert in the pop up menu, alerts will now be set at retracement levels. This is a handy feature for ANY trader/investor using retracement. You may be a swing trader, have bought a stock at 50% retracement, and wanted to be alert when it rose to 80.9% retracement several weeks later. Now we want to get our LOWER level of retracement in place. Let's "clone" the BLUE retracement and copy it lower like this. Your going to select "clone" from the pop up menu by LEFT clicking on "clone" and you should see another blue retracement attacked you your cursor. Simply drag that retracement lower and overlay the 32.59 and 32.52 levels of this cloned retracement, with the upper retracement. Like this. After cloning upper, and sliding cloned lower By cloning the retracement, and moving it lower, a trader may have saved a little time, instead of trying to create the lower retracement by anchoring 0% at 32.58 and then trying to once again fit the 19.1% at 32.52. Once you set your alerts (if your watching the cart throughout the day you don't need to set alerts) and changed the lower retracement color to RED, your chart should look like this. Completed Chart - Quick reference to alerts There you have it! After you do this 5 or 6 times a day, 200- days a year, you'll be able slap two retracement brackets on a chart and rather exact levels in about 30-seconds per chart. I think this covers the bulk of questions received this week on QCharts and retracement. I also received some questions from traders using other trade platforms that I am not familiar with, but maybe the above tool and preference options are available in the platform you are using, but you just don't know how to get to them. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- WAG Walgreen Mon, Sep 29 Before the Bell 0.27 ------------------------- TUESDAY ------------------------------ STZ Constellation Brands Tue, Sep 30 After the Bell 0.64 PBG Pepsi Bottling Group Tue, Sep 30 Before the Bell 0.66 ----------------------- WEDNESDAY ----------------------------- FDO Family Dollar Wed, Oct 01 Before the Bell 0.28 ------------------------- THURSDAY ----------------------------- None ------------------------- FRIDAY ------------------------------- ATYT ATI Technologies Fri, Oct 03 Before the Bell 0.10 AVT Avnet Fri, Oct 03 -----N/A----- 0.09 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 MYL Mylan Laboratories Inc 3:2 Oct 8th Oct 9th -------------------------- Economic Reports This Week -------------------------- It's the end of the Quarter on Tuesday. Will we see window dressing or undressing? With just a week or two before the Q3 earnings announcements, the markets will be driven by the parade of economic reports this week. ============================================================== -For- ---------------- Monday, 09/29/03 ---------------- Personal Income (BB) Aug Forecast: 0.3% Previous: 0.2% Personal Spending (BB) Aug Forecast: 0.8% Previous: 0.8% ----------------- Tuesday, 09/30/03 ----------------- Consumer Confidence(DM) Sep Forecast: 82.0 Previous: 81.3 Chicago PMI (DM) Sep Forecast: 55.5 Previous: 58.9 ------------------- Wednesday, 10/01/03 ------------------- Auto Sales (NA) Sep Forecast: 6.1M Previous: 6.1M Truck Sales (NA) Sep Forecast: 8.1M Previous: 9.3M ISM Index (DM) Sep Forecast: 55.0 Previous: 54.7 Construction Spendng(DM)Aug Forecast: 0.4% Previous: 0.2% API weekly statistics Goldman Sachs Communacopia Conference RBC Capital Markets Consumer Conference ------------------ Thursday, 10/02/03 ------------------ Initial Claims (BB) 09/27 Forecast: N/A Previous: 381K Factory Orders (DM) Aug Forecast: 0.6% Previous: 1.6% Natural Gas Inventories ---------------- Friday, 10/03/03 ---------------- Nonfarm Payrolls (BB) Sep Forecast: -30K Previous: -93K Unemployment Rate (BB) Sep Forecast: 6.2% Previous: 6.1% Hourly Earnings (BB) Sep Forecast: 0.2% Previous: 0.1% Average Workweek (BB) Sep Forecast: 33.7 Previous: 33.6 ISM Index (DM) Sep Forecast: 63.8 Previous: 65.1 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 09-28-2003 Sunday 2 of 5 In Section Two: Watch List: Potential Entry Points! Put Play of the Day: ITT Dropped Calls: AXP, IBM 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 ********** Potential Entry Points! Wellpoint Health Network - WLP - close: 74.59 change: -0.45 WHAT TO WATCH: The trend of lower highs continues for shares of WLP as the stock once again breaks under its simple 200-dma. The selling pressure has also broken WLP's $75 level but it looks like the true double bottom is at $74 (from the August low). Bears could use a trigger with a break under $74 target a quick move down to $70. The same move under $74 would etch a new P&F sell signal. Chart= --- National Semiconductor - NSM - close: 33.43 change: -0.79 WHAT TO WATCH: The SOX has been no exception to the profit taking in technology stocks but traders may want to take note of NSM. Bulls will see it and recognize its relative strength against the recent weakness. Aggressive bears might want to consider playing the rollover with a target at $30 but be careful. The bottom of the "gap" higher between 31.50-32.00 could be support. Chart= --- Scientific Atlanta - SFA - close: 31.61 change: -0.27 WHAT TO WATCH: Shares of SFA have thus far been able to maintain some strength in spite of the market's weakness. Old resistance at the $31 level has become new support. However, we're not quite convinced this is an entry point for new bullish plays as the stock did break its simple 50-dma on Friday. A bounce from the $30 level with a very tight stop might work. Otherwise, keep an eye on it for a move back above $34.50. Chart= --- Symantec Corp - SYMC - close: 62.00 change: -1.39 WHAT TO WATCH: SYMC is another stock that has shown some decent relative strength despite the market pull back. The stock is extremely overbought but there appears to be a lack of willing sellers. The stock is showing a new bearish sell signal in its MACD but we'd wait for a breakdown at the $60 mark to evaluate bearish positions. If you're a bull who'd rather play the bounce then look for a possible bounce at $60. Otherwise, the $57.50 mark might work, which is a 50% retracement of the $50-$65 move and the low from mid September. Chart= ---------------------------------- RADAR SCREEN: more stocks to watch ---------------------------------- LSI $9.76 - It's a bit cheap to be playing options on but traders will note the breakdown under the $10.00 psychological mark and its simple 50-dma. There is some congestion in the $9.00 area but bears might target a move to $8.00, which would be a 50% retracement of the $4-to-$12 move. PCAR $74.71 - Shares of PCAR have fallen out of their rising channel as investors lock in some profits. The rally from $41 to $87 would put a 38 percent retracement near $70 and a 50 percent retracement near $65, both are current support levels. CCL $32.91 - CCL isn't the fastest moving stock but it might drop a lot faster than it climbs. Shares have broken their bullish trend on strong volume but there is some support/congestion near $32. MMC $48.00 - This insurance stock has a very consistent trend of lower highs and it has brought shares back to support at $48. Bears might want to consider a trigger under the August 4th low of $47.70 or under the 200-dma currently at $47.38. The weekly chart suggest some support at $45 and then very strong support near $40. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************* THE PLAY OF THE DAY ******************* Put Play of the Day: ******************** I T T Industries - ITT - cls: 59.64 chg: +0.12 stop: 62.51 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 ^^^^^ American Express - AXP - close: 44.86 chg: -0.75 stop: 44.49 We have not yet been stopped out in this AXP call play but given its weakness and the weakness in the DJIA it didn't seem worthwhile to just sit here and wait for our stop to be hit. The roll back under what should have been support near $46 was bad enough but Friday's session put AXP under its simple 50-dma. The intraday chart shows a steady trend of lower highs and it looks like this stock is headed for a retest of $44.00. Bullish traders who believe in the story might want to wait and look for a bounce from $44 as a potential entry point for new plays. Picked on September 18 at $47.08 Change since picked: - 2.22 Earnings Date 10/27/03 (unconfirmed) Average Daily Volume: 3.9 million Chart = --- Intl Business Machines -IBM- cls: 89.05 chg: -0.36 stop: 87.90 Wednesday was bad enough when IBM fell through what should have been support at $90. Thursday's failed rally and roll over back under $90 didn't help. Friday was the second failed rally at $90 and looks like a clear signal that Big Blue is headed lower. We are being a little premature by closing IBM out here. The stock could still have support at $88 (and the minor support at $89) just as the DJIA has "support" at 9300 and 9250. Unfortunately, the new mood on Wall Street is profit protection and there is still a lot of money on the table. Besides, we certainly don't like the new sell signal on IBM's MACD. Combined with the roll over under support and IBM looks like a put play with a target near $85. Picked on September 23 at $91.34 Change since picked: - 2.29 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume: 6.7 million Chart = 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 09-28-2003 Sunday 3 of 5 In Section Three: Current Calls: AMZN, APOL, LEA, SLB New Calls: EXC Current Put Plays: KKD, CCMP, GILD, JCI New Puts: ITT ************************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 ****************** Amazon.com - AMZN - close: 48.56 change: -1.49 stop: 46.50 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: As much as we would have liked to see AMZN power higher following last Tuesday's blast above $50, it just wasn't feasible, especially with the rest of the market going into serious profit taking mode. AMZN held up fairly well right through Thursday's session, stubbornly refusing to relinquish the $49.50-50.00 area, but by Friday the bulls finally gave in a little and allowed the stock to fall back. It should come as no great surprise that AMZN was turned back from the $50-51 area, as that was the top of the rising channel, not to mention our initial profit target for the play. Now we'll see if there's another bullish run in store, and we really think there is. Look for support to be strong in the $47.00-47.50 area, as this is the site of former resistance (now support), the center of the rising channel, not to mention the 20-dma ($47.21). Look to initiate new positions on a rebound from this area and then hold for a breakout to new highs above $52. Our ultimate target remains $55 for those traders aggressive enough to shoot for that goal. Maintain stops at $46.50. Suggested Options: Shorter Term: The October 47 Call will offer short-term traders the best return on an immediate move, as it is slightly in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the November 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 November 47 Call. BUY CALL OCT-47 ZQN-JW OI=11966 at $2.85 SL=1.50 BUY CALL OCT-50 ZQN-JJ OI=16745 at $1.60 SL=0.75 BUY CALL JAN-47 ZQN-KW OI= 116 at $4.50 SL=2.75 BUY CALL JAN-50 ZQN-KJ OI=10353 at $3.20 SL=1.50 Annotated Chart of AMZN: Picked on September 18th at $47.89 Change since picked: +0.67 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 8.79 mln Chart = --- Apollo Group - APOL - close: 65.90 chg: +0.31 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 of 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 group above 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. This Friday the company announced that its UOPX subsidiary had received approval to do business in the state of New Jersey. While the fundamental story looks good the recent trading action has been bearish, influenced by the falling broad market indices. Bullish traders can use the pull back to support near the $65 mark as an entry point. However, it takes a bit of faith to buy today's intraday bounce at $65 when the markets are tumbling. Cautious investors should feel free to wait and see if the bounce continues on Monday. Suggested Options: Short-term traders can choose between Octobers and Novembers. We still like the 65s and 70s. BUY CALL OCT 60 OAQ-JL OI= 144 at $6.90 SL=4.50 BUY CALL OCT 65 OAQ-JM OI=1833 at $3.10 SL=1.65 BUY CALL OCT 70 OAQ-JN OI=3335 at $0.90 SL= -- BUY CALL NOV 65 OAQ-KM OI=1115 at $4.30 SL=2.15 BUY CALL NOV 70 OAQ-KN OI= 889 at $2.00 SL=1.00 BUY CALL FEB 70 OAQ-BN OI=2268 at $4.00 SL=3.05 Annotated Chart: Picked on September 16 at $68.45 Change since picked: - 2.55 Earnings Date 10/07/03 (confirmed) Average Daily Volume: 1.9 million Chart = --- Lear Corp - LEA - close: 53.48 change: -0.14 stop: 53.25 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 had been hot this last quarter and LEA is certainly one of them. Shares of LEA 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. The recent bounce in shares of LEA continues to wither under the market's weakness. The pull back in Lear has been somewhat orderly and the stock stalled at the simple 50-dma. Unfortunately, we fear that if the markets drop again we'll quickly be stopped out at the $53.25 stop loss price. We're certainly not suggesting new bullish plays at this time. 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. ! Remember, we're not suggesting new plays until we see another bounce. BUY CALL OCT 50 LEA-JJ OI= 19 at $4.30 SL=2.25 BUY CALL OCT 55 LEA-JK OI=169 at $1.10 SL=0.65 BUY CALL DEC 50 LEA-LJ OI=410 at $5.50 SL=3.25 BUY CALL DEC 55 LEA-LK OI=467 at $2.65 SL=1.40 Annotated chart: Picked on September 16 at $54.05 Change since picked: - 0.57 Earnings Date 10/17/03 (confirmed) Average Daily Volume: 694 thousand Chart = --- Schlumberger Ltd. - SLB - close: 48.72 change: -0.67 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: Failure comes to the oil patch. As convincing as SLB's breakout over the $50 level appeared at the time, there was an apparent lack of bullish conviction. So after tagging the $52 level, the stock succumbed to the weakness in the rest of the market, and has since fallen all the way back to test the long-term rising trendline. Falling back inside a bullish pattern like the bullish triangle SLB broke out of just over a week ago is never a good sign. But we're encouraged by the fact that the stock did bounce from that rising trendline on Friday afternoon, with the $48.50 level providing support. In addition to the primary trendline, there's a shorter and slightly shallower one that has been building for roughly a month (see chart) and it should help to reinforce primary support above $48. We're not in a hurry to initiate new positions here, with daily Stochastics still falling back to earth, but the best odds for a solid entry will come on a successful rebound from one or both of these trendlines. Then we can turn our focus back to the upside, using the recent highs near $52 as a primary target. Maintain stops at $47.50. Suggested Options: Shorter Term: The October 45 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the November 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 November 45 Call. BUY CALL OCT-45 SLB-JI OI= 1457 at $4.20 SL=4.50 BUY CALL OCT-50 SLB-JJ OI= 8601 at $0.80 SL=0.40 BUY CALL NOV-45 SLB-KI OI= 4223 at $4.80 SL=3.00 BUY CALL NOV-50 SLB-KJ OI=13151 at $1.60 SL=0.75 Annotated Chart of SLB: Picked on September 21st at $50.99 Change since picked: -2.27 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 3.18 mln Chart = ************** NEW CALL PLAYS ************** Exelon Corporation - EXC - close: 62.64 change: +0.95 stop: 60.25 Company Description: Exelon Corp. is the parent corporation for each of Commonwealth Edison Company (ComEd) and PECO Energy Company (PECO), which are electric utilities. Exelon, through its subsidiaries, operates in three business segments: Energy Delivery, Generation and Enterprises. The Energy Delivery segment consists of the retail electricity distribution and transmission businesses of ComEd in northern Illinois and PECO in southeastern Pennsylvania and the natural gas distribution of PECO in the Pennsylvania counties surrounding the city of Philadelphia. Generation is made up of the electric generating facilities, energy marketing operations and equity interests in Sithe Energies, Inc. and AmerGen Energy Company, LLC. Enterprises consists of competitive retail energy sales, energy and infrastructure services, communications and other investments weighted towards the communications, energy services and retail services industries. Why we like it: With the Utility index (UTY.X) making steady upward progress over the past several weeks, and avoiding most of the carnage seen in the broad markets last week, there just might be something there to catch a bull's attention. What caught our attention was the very bullish action in shares of EXC, which broke out strongly over the $60.50 level a couple weeks ago before continuing upward into the $62-63 area. Last week saw a bit of a pullback to fill in the 9/18 gap and it looks like the buyers are eager to see fresh 2-year highs. Friday's action say the stock advance 1.5% on the best volume since early August (roughly 40% above the ADV), and that pushed the stock back into the upper half of the rising channel that has been governing price action since the low in the middle of August. EXC is not a fast moving stock, but it does tend to trend rather well. So as long as the stock remains in this bullish channel, we have a trend to ride. According to the PnF chart, there's plenty of upside remaining, as EXC is still on a Buy signal, with a vertical count of $85. We'll content ourselves with a more modest goal, looking initially for a move up to $66, with an optimistic target of $68- 70, which would represent a retest of the 2000-2001 highs. Either move will take awhile to unfold, unless EXC is able to break out of the channel to the upside. Otherwise, by the time earnings roll around, the $66-67 area is probably all we can expect, as that is the projected top of the channel by late October. Our preference for new entries is on intraday pullbacks near support, first in the $61.50-62.00 and then closer to $61, which happens to coincide with the rising 20-dma. We're setting our initial stop at $60.25, just below the recent breakout, as well as the 30-dma. Suggested Options: Shorter Term: The October 60 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 January 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the January 60 Call. There are November strikes available, but open interest is too low to be deserving of serious consideration. BUY CALL OCT-60 EXC-JL OI= 1116 at $3.20 SL=1.50 BUY CALL OCT-65 EXC-JM OI= 205 at $0.30 SL=0.00 BUY CALL JAN-60 EXC-AL OI= 2982 at $4.00 SL=2.50 BUY CALL JAN-65 EXC-AM OI= 441 at $1.15 SL=0.50 Annotated Chart of EXC: Picked on September 28th at $62.64 Change since picked: +0.00 Earnings Date 10/28/03 (unconfirmed) Average Daily Volume = 1.15 mln Chart = ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Krispy Kreme - KKD - cls: 37.90 chg: +0.07 stop: 40.36 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. (WEEKEND UPDATE) The trend of lower highs continue for KKD as the stock finds no relief in the broader market weakness. We're very close to our exit range between $35 and $37.50 (I realize I said $36 on Thursday). Given that the simple 200-dma is sitting at $36.50 that would be a good target to shoot for but there is no rule that says you can't harvest gains at current levels. This is especially true now since KKD has fallen nearly two weeks straight without a bounce. Thus, it's overdue for one. Should a bounce occur, the most likely range is back towards the $40 mark. We're going to set an official exit price of $36.50 and if the stock trades there, we're out! Suggested Options: Since we are so close to our exit, we're not suggesting new plays. Annotated Chart: Picked on September 8 at $41.69 Change since picked: - 3.79 Earnings Date 08/21/03 (confirmed) Average Daily Volume: 1.0 million Chart = --- Cabot Microelect. - CCMP - cls: 55.83 chng: -0.74 stop: 59.25*new* Company Description: Cabot Microelectronics is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. Why we like it: The Semiconductor stocks got pummeled last week for the first time in several months and by the time Friday's closing bell rang, the Semiconductor index (SOX.X) had endured a 7.6% 5-day slide. That leaves the SOX resting just above $420 support, and we would expect a near-term rebound from either that level or $400 early next week. Our CCMP play has been performing right to script, and last week's tally left the stock sitting on a 9.8% loss. A consistent pattern of lower highs and lower lows has taken price below initial support at $58 and then $56.50 and we're looking at a very likely test of the $55 (our initial profit target) early next week. Conservative traders ought to harvest partial gains at that point, as the odds of a rebound in the SOX spilling over into shares of CCMP is pretty good. Better to take the gains off the table and then look for a fresh entry opportunity when that rebound loses steam. The most likely point for new entries will be on a failed rebound in the $58.00-58.50 area, in conjunction with a failed rebound in the SOX near $445. Lower stops to $59.25, just above the intraday highs from last Tuesday. Suggested Options: Aggressive short-term traders will want to focus on the October 55 Put, as it will provide the best return for a short-term play. If looking for a longer-term play, then we would favor the November 50 Put. Even though it is currently out of the money, it should provide sufficient time for the move to unfold without time decay becoming a significant factor. BUY PUT OCT-55 UKR-VK OI=2717 at $2.25 SL=1.10 BUY PUT OCT-50 UKR-VJ OI=1731 at $0.75 SL=0.30 BUY PUT NOV-50 UKR-WJ OI= 232 at $2.20 SL=1.10 Annotated Chart of CCMP: Picked on September 23rd at $59.05 Change since picked: -3.22 Earnings Date 10/23/03 (unconfirmed) Average Daily Volume = 767 K Chart = --- Gilead Sciences - GILD - close: 55.42 chg: -0.33 stop: 60.01 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: The sell-off in shares of GILD have continued pretty nicely. It's still producing a series of lower highs and volume has been strong on the declines indicating some conviction. Now the stock has paused near the $55 level and it's time for a decision. Short-term traders should be planning their exits now. We suspected that $55 might be support and shares are down almost three weeks straight with almost no bounce. However, even though GILD is overdue for a bounce the weakness in broader markets could keep the current bearish trend intact. GILD's point-and-figure chart displays the rising bullish support level near $53.00. Yet the normal weekly candlestick chart shows virtually no support until the $50 area, which would almost coincide with the daily's 200-dma about $48.50. We're going to leave the play open and see if GILD can drop to the $50 area but we do suggest that traders consider taking some profit off the table. We have a wide stop at $60 but more conservative investors might be able to get by with a stop near $58.00. Keep an eye on the BTK biotech index. The BTK has broken its 50-dma and is currently near round-number support at 450. Another breakdown here would be even more discouraging for the bulls. 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=2233 at $2.30 SL=1.15 BUY PUT OCT 60 GDQ-VL OI=1463 at $5.60 SL=3.25 BUY PUT NOV 50 GDQ-WJ OI= 925 at $1.90 SL=0.90 BUY PUT NOV 55 GDQ-WK OI=1187 at $3.80 SL=1.75 BUY PUT NOV 60 GDQ-WL OI=1139 at $6.80 SL=4.00 Annotated Chart: Picked on September 16 at $59.40 Change since picked: -3.98 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = --- Johnson Controls - JCI - close: 95.32 change: -0.43 stop: 99.25 Company Description: Johnson Controls, Inc. is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems and batteries. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Why we like it: Close, but no cigar! We were looking for shares of JCI to confirm their bearish intentions by trading below $95 last week. Price action was looking favorable for such a development on Friday, but buyers appeared just in the nick of time, limiting the low to $95.01. That level is critical because it is historical support, as well as the site of the ascending trendline from the March lows. But perhaps most important, $95 is the level at which the PnF chart will issue a new PnF signal. We haven't set this play up with a trigger, but conservative traders may want to wait for a break below that level before initiating new positions. At that point, either the break below support or a subsequent failed rebound below $95-96 looks good for an entry point. More aggressive traders can try to front run that breakdown, by looking for a failed bounce below the 50-dma ($97.59). Once that breakdown occurs, we'll be looking for an initial drop to the $90 level, with an outside chance of a decline all the way to strong support near $86. Leave stops set at $99.25. Suggested Options: Aggressive short-term traders will want to focus on the October 95 Put, as it will provide the best return for a short-term play. Longer term traders will want to look to the November 90 Put, as it should provide ample time for JCI to move in our favor without time decay becoming a major factor. But take note that these were just listed on Monday and open interest is still very low. BUY PUT OCT-95 JCI-VS OI=407 at $1.95 SL=1.00 BUY PUT OCT-90 JCI-VR OI=192 at $0.60 SL=0.30 BUY PUT NOV-90 JCI-WR OI= 12 at $1.60 SL=0.75 Annotated Chart of JCI: Picked on September 25th at $95.75 Change since picked: -0.43 Earnings Date 10/22/03 (confirmed) Average Daily Volume = 479 K Chart = ************* NEW PUT PLAYS ************* I T T Industries - ITT - cls: 59.64 chg: +0.12 stop: 62.51 Company Description: ITT Industries, Inc. (www.itt.com) supplies advanced technology products and services in key markets including electronic interconnects and switches; defense communication, opto- electronics, information technology, and services; fluid and water management; and specialty products. Headquartered in White Plains, NY, the company generated $4.99 billion in 2002 sales. In addition to the New York Stock Exchange, ITT Industries stock is traded on the Midwest, Pacific, Paris, and Frankfurt exchanges. (source: company press release) Why We Like It: We like ITT as a put play for several reasons. The month of September should have been more bullish for the stock. The company reiterated their financial guidance twice and received a nice upgrade from Goldman Sachs. Yet investors ignored all of it and have sent shares strongly lower. As a matter of fact shares of ITT have been slowly eroding over the last few months while most of the market has been climbing. The slow trend of lower highs and lower lows has given way to a technical breakdown at the simple 200-dma and the $60 psychological level. Volume has been pretty strong the last several days of declines indicating some conviction by the bears. The recent breakdown on Wednesday was confirmed with additional weakness Thursday and Friday with Friday's session displaying new selling pressure at the $60 mark (see the intraday chart). We also note that ITT's point-and-figure chart looks pretty bearish. Our target is going to be for a move to the $55 level. Look for some support near the 57.50 area but we don't expect it to hold. Suggested Options: Our preference to play the drop in ITT would be the October and November 60's and 55's but investors who prefer a higher delta can consider the 65's. BUY PUT OCT 55 ITT-VK OI= 82 at $0.40 SL= -- BUY PUT OCT 60 ITT-VL OI= 81 at $1.65 SL=0.85 BUY PUT OCT 65 ITT-VM OI=170 at $5.60 SL=3.25 (low premium) BUY PUT NOV 55 ITT-WK OI= 0 at $0.85 SL= -- BUY PUT NOV 60 ITT-WL OI= 90 at $2.50 SL=1.25 BUY PUT NOV 65 ITT-WM OI= 0 at $5.90 SL=3.50 Annotated Chart: Picked on September 28 at $59.64 Change since picked: -0.00 Earnings Date 07/28/03 (confirmed) Average Daily Volume: 546 thousand Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. 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The Option Investor Newsletter Sunday 09-28-2003 Sunday 4 of 5 In Section Four: Leaps: If I Had Known... Traders Corner: We All Need A Little Action – And This Week We Got It! Traders Corner: Where is the Dow Going? ************************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 ***** If I Had Known... By Mark Phillips mphillips@OptionInvestor.com If I had known I could put a top in the market so easily, I would have done it long ago! About three weeks ago, I finally threw in the towel and decided to quit banging my bearish drum and try to get with the bullish program. I did so with the full knowledge (that I alluded to on several occasions) that the market would probably take my capitulation as the final signal that it was time to reverse to the downside. The major indices banged around near their highs just long enough for me to stick some bullish play candidates out there and start feeling like we might have another buyable dip. The problem with the bearish case all along is that there hasn't been the catalyst or fundamental change to spook the bulls. I believe that catalyst arrived last weekend in the form of the G7 meeting, which sent all the major markets plunging lower. The specific statement that I think sparked the selloff in equities was the basic agreement that the dollar needed to be allowed to weaken. Ok, our Treasury Secretary came out with the same line of BS about no change to the strong dollar policy, but come on. There has really been nothing done from a policy standpoint to support the dollar since early in 2002. During that roughly 20- month span of time, the Dollar index (DX00Y) has dropped by 22%! All the while, the Fed has been printing money like mad (which weakens the value of the dollar), the administration has been running up record setting deficits and running a wildly expanding and record-setting current account balance. What has our administration done to shore up the dollar? Issue statements about how we still support a strong dollar and then follow that up with more BS about how the dollar is strong if it is viewed as a stable store of value. I'm sorry, I just don't see anything here that speaks to me of a strengthening dollar. This whole redefining of what a strong-dollar policy is and then saying we still support it is patent nonsense. Yet the American public goes happily along its way knowing that their leaders support a strong-dollar policy. It is truly mind-boggling to me how our government treats us like simpletons and we dutifully endeavor to fall short even of the lowly qualifications ascribed to us by our politicians. I could go on and on with respect to my political ramblings and all of the issues that drive me into "rant" mode, but we don't have the time for it. Suffice to say, the dollar is weak and it's going to get a lot weaker before it shows any appreciable signs of strength. Contrary to the desires of the Fed, you can't print your way to economic prosperity. There is a lot that needs to change before we're going to see true, sustained economic growth, not the least of which are untold mountains of debt, unfunded obligations in both the government and corporate sector, a still very large amount of unused manufacturing capacity and rising unemployment. So what does any of this have to do with the market? Until a week ago, nothing. Investors were going along their merry way, buying the slightest dip and driving the markets and most stocks to new highs for the year. But the G7 statements injected a dose of reality into a frothy and over-valued market. The DOW fell back to just above 9300, the S&P 500 fell back under 1000 and the NASDAQ Composite dropped below 1800. All of these represented large declines off of their values of just one week ago. For the week, the DOW lost 3.4%, the S&P 500 lost 3.9% and the NASDAQ Comp shed 5.9%. So, is this the beginning of the Big Decline? Believe it or not, my answer is no. At the same time, I do not think we've seen the extent of the near-term downside. Wasn't that helpful? GRIN I've written at great length of my perception that we're in a long-term secular bear market. Nothing short of true economic growth and the major indices charging to new all-time highs can shake my belief in that reality. But at the same time, there will be very tradable mini bull markets as investors correct the bearish excesses from time to time. We can think of these as brief pauses along the road to the eventual bottom in the market where we'll actually find something not seen in a very long time -- attractive valuations. More and more, our current market is reminding me of both the 1929 crash and the implosion witnessed in the Japanese Nikkei. Not so much in terms of price structure or anything so measurable. But in terms of the underlying psychology, which drives market sentiment and short-term buy/sell decisions. Since October 2002, the markets have been correcting upwards in a very bullish fashion, with sentiment readings moving to record highs and valuations following suit. This is the first serious bullish correction that we've seen in this secular bear market, and I don't expect one week of sharp selling to have brought that cycle to an end. Let's look at specifics. At the bull market peak in 2000, the valuation on the S&P 500 propelled the valuation of that index to a P/E ratio of 29.41. Today, the P/E ratio (according to S&P's own website) is 29.46. That means that since the end of March 2000, we have made NO PROGRESS along the path of correcting the excesses of the preceding bull market. Let's look at the sentiment figures, which show the latest numbers from Investor's Intelligence. The latest figures show 57.4% of newsletter writer's hold a bullish stance, while a mere 18.8% being bearish. That is extreme and last week's slide in the market did little to reverse the strong bullish bias. I write every week about my thoughts on the VIX (the CBOE market volatility index), but I'm having a hard time interpreting it this week in light of the changes made there. Up until last Monday, the VIX was based on the Black Scholes calculation on the S&P-100 (OEX). It has now been changed to a different calculation method (supposedly more accurate than the old Black Scholes model) and is now related to the S&P 500 (SPX). The market began a pretty large slide last Monday, and the VIX rose last week from 19.07 to 22.23 (a 16.5% rise) to end at its highest level since the first week of August. Normally, I would view that rise from below 20 as the beginning of a major correction in the market. But I'm not as convinced due to the shakeup in the calculation method. Is it a coincidence that the changes in the VIX took place when it seems every market commentator had been fixated on it and at the exact same time that the markets began to correct? I'll let you be the judge. Suffice to say, I'm regarding the VIX readings with a certain degree of skepticism until I see how the VIX and the VXO (the new volatility measure for the OEX) move. I don't know about other charting programs, but the VIX is now a composite index, showing OEX volatility information going back to the beginning of time, even though the underlying instrument on which it is calculated changed one week ago. At the same time, the VXO (which is the extension of the OEX volatility data) only shows one week of data. Why not leave the VIX alone and linked to the OEX, while introducing the VXO and basing it on the SPX? I have a hard time coming up with any answer other than to introduce confusion. For what it is worth, the VXO ended the week at 23.88 after tagging an intraday high of 24.89 on Friday. Trough to peak, that makes the move of the OEX volatility measure equal to 30.5%! Was the switch made in this manner and at this time in order to camouflage the magnitude of the shift in market sentiment last week? Inquiring minds would like to know! Coming back on track with my market view, I do not expect a straight plunge lower from here. I can see the SPX falling back into the range in which it traded for most of the summer, but in reality, I would be surprised to see a drop through the 960 level before we start getting the October earnings announcements. Investors are still relying on the prognostication for a second half economic recovery and will be loathe to relinquish their lofty dreams of making back what they had lost throughout the first leg of this bear market. That said, if the bullish percent charts are to be believed, this is the time to start looking for new bearish position trades. Not at current levels, but on the next failed rebound. I really don't have the time this weekend to go into it in great detail, but will go through a detailed analysis in next week's Trader's Corner article. Suffice to say that the Bullish Percent charts of the SPX, OEX and COMPX have tipped over with very convincing Sell signals, at least on the Sharp Chart view that I've harped about for several months. This appears to be happening at the same time that the VIX (as best as I can read it) has launched higher out of the depths of the "complacency zone" and the overall markets have tipped over from very strong resistance levels. Unfortunately, we saw this same scenario play out in early August and we all know the results from that. Bullish percent readings reversed and went higher, the VIX went lower and the major indices surged to fresh 52-week highs. While I think this time is a bit different, I don't really think we're going to see a major slide in the market just yet. I think last week's slide was a wake-up call that all is not as rosy as it had been portrayed in the financial media. But at the same time, the bullish sentiment has not been dealt a lethal blow. Over the next few weeks, I'll be endeavoring to build a balanced list of plays so that we can benefit from either a continued upward push or a serious selloff after we start to get the Q3 earnings results. So let's see what's up with the plays. Portfolio: None Watch List: AGN - With the slide in the rest of the market, it was no great shock to see AGN distance itself from our bullish entry trigger at $82. Friday's price action dropped the stock right to the long- term ascending trendline, where we saw a minor bounce, but nothing to get excited about. This is definitely a play that we want to be in the watch-and-wait mode on. If AGN can rally again and take out the $82 resistance level, then by all means we'll play it to the long side. On the other hand, if price breaks below $76, we'll know that the bulls have lost the battle, as we'll be faced with a new PnF Sell signal. AMGN - Wow! Now that was not pleasant for the Biotechnology bulls! AMGN is the bellwether stock for the group, and Wednesday's plunge below $66 is not a good sign. The stock did manage to firm a bit at the end of the week, holding just above $64, but signs are not positive. The prior week's trade at $70 is looking an awful lot like a bull trap and a quick look at the PnF chart shows precisely why the $64 level was defended so staunchly last week. A trade at $64 will put AMGN on a PnF Sell with an initial vertical count of $57. I'm not quite ready to pull the plug on this play, but I am also not interested in actually initiating new positions until we see a bit more price action unfold. Let's err on the side of caution here and put the play on hold for a week. WMT - The past few weeks have been looking rather bearish for WMT (ever since I chickened out and put the play on hold) and it looks like the first leg of the downward move is close to being complete with support being found near $56.50. Last week finally got something constructive done on the daily chart of the Retail index (RLX.X), as it finally broke below the bottom of the ascending channel that has been building since early April. A rebound from here should give us the lower high we want to see for WMT, confirming the lower high already in place on the RLX. Let's reactivate WMT with an entry target of $58-59. A rebound to that level should be accompanied by the RLX rebounding into the $355- 360 area and rolling over from the bottom of the fractured channel. We'll use an initial stop at $61, just above the early September highs. QQQ - Hey, now that is really encouraging! The QQQ broke down hard last week, and by Friday's close was resting below the bottom of the rising channel (currently $32.70), but still above the 50- dma ($32.45). It isn't a decisive breakdown just yet, but I think we are getting close. If October earnings fail to deliver on the lofty expectations, we could be looking at some serious pain for the bulls and I wouldn't rule out a drop below $30 to actually test the 200-dma (currently $28.44). Another encouraging sign is the fact that the NASDAQ-100 bullish percent is still in bear correction status, while the NASDAQ Composite bullish percent gave a very clear Sell signal on the Sharp Chart view (although it is clearly still in a very strong bull confirmed status on the PnF chart). But we definitely don't want to chase this market lower without stronger bearish indications. QQQ does look weak enough though that I'm willing to reinstate the play with an aggressive entry target of $34. A failed rally near that level looks attractive for a position trade. We'll use a tight initial stop at $35 (just over the recent highs) and look for a drop to at least $30 in the weeks ahead. SMH - Leading the Technology market higher throughout the past several months, the Semiconductors look like they may be poised to deliver that outperformance to the downside in the months ahead. The past 3 days saw the SMH drop sharply back into the rising channel from which it broke out in late August. Just like what we saw in early August, the SMH came to rest right on its rising 50- dma. But this time, that moving average may not be enough to stem the decline, as the bottom of the channel is significantly lower this time down at $33. Like we've done with several of our other plays this week, the SMH is coming off the bench and is ready for action. Look for the next rebound to provide the best entry. We'll target an entry in the $36-37 area and use an initial stop at $39, just over the early September high. Our initial target on the downside will be $30, although the possibility exists for a continuation down to the 200-dma (currently $27.89). Note that the weekly Stochastics are finally tipping over out of overbought, but the PnF chart is still bullish. This is still a very aggressive play and it is critical that we get a good entry point on a rebound, rather than trying to chase it lower. FRX - So close, yet so far away. FRX drifted down early last week and then vaulted sharply higher from just above $47. In very volatile fashion, the stock surged over $52 before the excitement faded and it is drifting back down, now resting just above the 200-dma. Driving that volatile price action was news that the FDA had decided to back the company's Alzheimer's drug. That certainly bodes well for our play, but it remains to be seen if we can get a favorable entry. Chasing the stock higher is not the way I'd choose to play it, especially in an overall weak market. Let's raise our entry target just a bit to $47-48 and look for a pullback and rebound from that area to give us what we want. Radar Screen: HD - I've lost interest in HD as a position trade. The stock seems to have found an equilibrium point between $30-35, with insufficient buying or selling interest to break it out of the range. I'm removing it from the Radar Screen this weekend to make room for better candidates. FNM - Isn't it interesting how FNM really wasn't affected by the decline in the broad markets last week? Chalk it up to the impact of falling interest rates. With bond yields falling again, it appears the risk of an interest-related derivative fiasco have been mitigated. I still favor the downside in FNM, but now does not appear to be the time to take a position. The principal descending trendline that I'm following currently rests just below $74, even though I could make an argument for trendline resistance at $70. I'm content to let it lie for now, as weekly Stochastics are still in a strong bullish ascent. FNM will find its way to our Watch List soon enough and quite possibly over the next few weeks. QCOM - Proving the wisdom of not chasing the stock higher with a new bullish position, QCOM finally succumbed to the selling last week and is fast approaching the $40 support level. In reality, we could be looking at a nice bullish entry point in the $38-39 area, but I want to see how the current decline plays out first. We might get lucky enough to see a better entry down near the 200- dma if the selling gets a bit carried away. QCOM's fundamentals look pretty solid to me and now we'll just have to see if price action supports that view in the weeks to come. BVF - Fuggedaboudit! That tantalizing bullish setup I saw last week vanished in a flash as BVF broke down in a big way. So big in fact that the stock found its way onto the regular OIN Put list this weekend. The stock clearly is not a bullish candidate following its break of the 200-dma. DJX - It's baaaack! You had to know as soon as we saw some signs of actual weakness, I'd be foaming at the mouth to reinstate our bearish DJX play. But I'm restraining myself this week, as we really haven't seen a crack in the bullish percent readings for the DOW yet. To make for a viable play, we'll need to be able to get an entry on a failed rebound near $95 and then look for a subsequent decline to at least the $90 level. Barring an explosive rebound next week, look for the DJX put play to make its reappearance on the Watch List. NEM - Speaking of plays I've been dying to bring back, NEM has been at the forefront of my mind. I just couldn't justify a bullish play here until we saw some kind of significant pullback. The selling in the Gold sector over the past 2 days has been a good start, but has a long ways to go before I'll be ready to take the plunge. Gold stocks have been outperforming actual gold for several months now, so it is reasonable to assume that they'll see more weakness in the near term. But the long-term picture is very bullish, and a weakening dollar only reinforces that view. We don't even want to consider a long-term bullish stance until this decline extends a bit further. At a minimum, I'd like to see a 38% retracement of the rally off the March lows, which comes in around $35.50. Even better would be a 50% retracement down near the $33 level. Either way, I think we have plenty of time, with weekly stochastics still pegged in overbought and the daily oscillator just starting to release from overbought. But if we can get the entry right, this is the one bullish play that I feel the most strongly about over the next 1-2 years. Closing Thoughts: I don't mind telling you that last week was very reassuring to me, because of the more rational price action. But I still have mixed emotions about committing completely to the bearish camp. Sentiment is still strongly bullish -- that could be a contrarian indicator or a signal that this correction in an overall bear market has further to run to the upside. As I'm sure you all know, my long-term view is to the downside, due to the excesses that haven't even begun to be wrung out of stock valuations. But I've grown tired of being bearish and being wrong. So as I endeavor to both provide my views of the market and provide winning trading suggestions, I'll endeavor to build a balanced list of plays, allowing us all to benefit in either a rising or falling market. 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 HOLD 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 $47-48 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 $58-59 JAN-2005 $ 55 ZWT-MK JAN-2006 $ 55 WWT-MK QQQ 08/10/03 $34 JAN-2005 $ 32 ZWQ-MF JAN-2006 $ 32 WD -MF SMH 08/24/03 $36-37 JAN-2005 $ 35 ZTO-MG JAN-2006 $ 35 YRH-MG New Portfolio Plays None New Watchlist Plays None Drops None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** We All Need A Little Action – And This Week We Got It! By Mike Parnos, Investing With Attitude Smoking A Little Grass-o It was about time the NYSE cut its "GRASSO." It had been growing out of control – with the help of some personal and political fertilizer. I'm sure (well, maybe not that sure) he's a nice guy, but I still think he looks like an alien (albeit a rich one). This guy was making tens of millions of dollars – for what? For that kind of money, even I'd be willing to lift my lazy butt up off the couch, put on a tie, and shake hands with Larry, Moe and Curly every morning in the exchange opening ceremony. I'm a gracious kind of guy – or at least a good actor. Hell, I'd even do it for half! With that kind of money, I could buy my own Domino's franchise, a Krispy Kreme franchise, plus have my choice of servants to press the buttons on my remote – and anything else that needed pressing. ______________________________________________________________ Putting Our Portfolio Money To Work – Again! Well, it's been an eventful week – to say the least. We closed two positions – one for a nice profit and the other for a not-so- nice loss. We're still ahead of the game, though. The result is that we have freed up over $30,000 that we can use elsewhere. With three weeks left until expiration, let's see if we can squeeze out a little more profit from the October option cycle. NEW CPTI POSITIONS. October Position #3 – FDC (First Data Corp.) "Joined" Condor – Trading at $39.80. We selected FDC, a financial stock, because is may be less vulnerable volatile movements of the tech stocks. We're going to sell 10 contracts of the October FDC $40 calls and sell 10 contracts of the October FDC $40 puts for a total credit of $2.40 ($2,400). Then, for protection, we'll buy 10 contracts of the October FDC $45 calls and 10 contracts of the October FDC $35 puts for a total debit of $.30 ($300). Our total net credit is $2.10 ($2,100). Our profit range is $37.90 to $42.10. The closer FDC finishes to $40, the more profit we will make. The parameters of our profit range are also our bailout points. October Position #4 – INTC (Intel Corp.) "Joined" Condor – Trading at $27.27. We're going to sell 10 contracts of the October INTC $27.50 calls and sell 10 contracts of the October INTC $27.50 puts for a total credit of $2.10 ($2,100). Then, for protection, we'll buy 10 contracts of the October INTC $32.50 calls and 10 contracts of the October INTC $22.50 puts for a total debit of $.20 ($200). Our total net credit is $1.90 ($1,900). Our profit range is $25.60 to $29.40. The closer INTC finishes to $27.50, the more profit we will make. The parameters of our profit range are also our bailout points. An Important Reminder. These option prices are based on Friday's closing prices. The prices on Monday may reflect an addition two days of time erosion. The trades are still valid if you can come within $.10-$.15 of the net premium. And BEWARE of significant Monday morning gaps! With these "Joined" Condors, a gap may change the whole dynamic of the trade. It using good judgment and money management techniques to pass up trades where our chances of success have been reduced. It's hard enough to make a buck in this market. We don't need to look for trouble. Believe me, it will find us. ____________________________________________________________ Not Getting The Credit You Deserve? A number of CPTI students have been getting less premium on their trades than they could have for a variety of reasons. a) The order for each option was entered individually instead of as a combined spread order. b) Your broker's online software does not have spread order entry capability. c) You are trying to leg into the position d) Your telephone broker is not familiar enough with options. e) You didn't explain your order to your broker correctly. f) Maybe you've been too greedy, trying to get too much and missing the trade. If you have to place your order verbally, here is what you need to tell your broker. (This is only an example): "I'd like to place a bull put spread order. I'd like to sell 10 contracts to open of the IBM November $85 puts and buy 10 contracts to open of the IBM November $80 puts for a credit of $1.05, good for the day." Remember, we're only going to enter orders as "spread" orders if the best bid and ask prices are offered on the same exchange. Indexes are more conducive to this because they normally trade on only one exchange. ______________________________________________________________ OCTOBER POSITIONS October Position #1 – SPX Iron Condor – Trading @ 996.85 We were going to create an Iron Condor with a range of 995-1075 and take in $2,300 in premium. However, on the Monday following expiration Friday, the SPX gapped lower. So, we adjusted our condor to take the gap into consideration. We created the Iron Condor with a new range is 980-1065. We sold 10 contracts of the October 980 puts and also sold 10 contracts of the October 1065 calls. Then we bought our protection in the form of 10 contracts of the October 970 puts and 10 contracts of the October 1075 calls. We took in a total of $2,300 in premium and that's our maximum potential profit. Our maximum profit range is 980 to 1065. Our safety range is 977.70 to 1077.30. We were able to shave off a little from the bid ask spreads by submitting our orders as spread order (see above). The market took a pretty good hit last week, but, even at 996.85, we still have some cushion in our Iron Condor position. October Position #2 – QQQ – Put Calendar Spread – Trading @ $32.58 We decided to risk a buck. Since many folks think the market is due to correct. So we created a cheap play that will let us take advantage of a nice down move. We bought 10 contracts of January 04 QQQ $32 puts and sold 10 contracts of October 03 QQQ $32 puts for a total debit of $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. This week the market moved down nicely. Another few points down for the QQQs and we'll be in healthy profit territory. QQQ ITM Strangle – Ongoing Long Term -- $32.58. 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. HPQ (Hewlett Packard) Bear Put Spread – HPQ at $19.40. 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 is $3.15. We'd gladly accept a profit of $800-900 and close the position early if the opportunity presents itself. This is a long-term position. OEX – Bearish Calendar Spread – OEX @ $499.61 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. The Sept. 470 puts obviously expired worthless. We were going to sell the October 490 puts and take in another $2.10. However, with the Monday market gap-down, we were able to take in $3.10 instead. Our new cost basis is $5.30. OCTOBER CLOSED POSITIONS #1 – APPX Short Term Straddle: $1,400 Profit #2 – BBH "Joined" Iron Condor: $300 Loss For trade details, refer to Sept. 21 and Sept. 25 columns __________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? The OptionInvestor archives offer a wealth of information – from my columns to past and present informational and educational columns by my OI colleagues. 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 ************** Where is the Dow Going? By Steve Gould It has been about a month since I wrote my last "Where is the Dow Going?" analysis and over the last month I have learned two things. One, it is a lot easier to write a market analysis once a month, because given a month's time, the market usually does something. Two, I have recently been writing more about the S&P 500 than the Dow, but it is too late to change the name of the column. Besides, the wave pattern on the Dow will eventually stabilize and become clearer. So let's take a look at the market and see what exciting things have transpired over the last month. Chart: S&P 500 Weekly 9/26/2003 This is a weekly chart of the S&P 500. I use the S&P 500 because the Elliott Wave pattern is much clearer than either the Dow or the NASDAQ. In fact, this pattern is almost textbook grade. Since its high in January 2000 until the last quarter of 2002, the S&P 500 has completed waves 1-3. It is currently in the midst of the wave 4 correction. The question now becomes, is this the top of the 4 wave? If so, how far down will the market go before changing direction? The A-B-C correction pattern of this 4 wave appears to be an expanded flat. The characteristics of an expanded flat are 1. The A-B-C waves segment into a 3 wave, a 3 wave and a 5 wave. Based on this chart, the A wave is a 3 wave, the B wave is a 3 wave and the C wave is a 5 wave. 2. The A wave and B wave are the same height (plus/minus 25%). The B wave is 90% of the A wave. 3. The C wave is somewhere between 1.38 to 1.62 times the height of the A wave. The C wave is 1.40 x Wave A. So far the A-B-C correction pattern seems to have fulfilled all the criteria necessary for an expanded flat. Additionally, the 4 wave has retraced a bit less than 38.2% of wave 3 and the oscillator appears to be peaking out at just over a 138% retracement. This pattern has all the makings of a completed 4 wave. Let's examine the daily chart to scrutinize the five wave basic pattern of the C wave more closely to see if it has truly completed. Chart: S&P 500 Daily 9/26/2003 If I were to write another primer article on Elliott Waves and I needed a classic example of a bullish five wave basic pattern, I could very easily use this chart of the daily S&P 500 from March to the present. It just doesn't get any better than this. Everything just divides and subdivides so nicely, you would think that there was a vast left/right wing conspiracy dictating marching orders to the market. After examining the daily chart, can we ascertain if this is indeed the top of the market? Yes it is and here are the two reasons why. 1. The five wave basic pattern is complete. We know this because this pattern is the classic Type II set up. A Type II setup occurs at the end of the 5 wave when the following criteria are met: A. A 5 wave is confirmed The 5 wave is confirmed because it subdivides into another five wave basic pattern. B. There is oscillator divergence The second peak is lower than the first. C. The stock closes below the lower displaced moving average and then another bar closes below the low of the first bar. The bar following the arrow closed lower. Each of these criteria have been met. 2. Since the five wave basic pattern of the C wave is complete, the C wave is complete. Since the C wave is complete, the A-B-C correction is complete and the 5 wave is about to start. Another possibility would exist that the S&P 500 has not yet completed the five wave basic pattern of the last 5 wave, but that is not a likely event. I will not be a 100% confident (I am 99% right now) until the S&P 500 breaks 992 and the top of the 1 wave is pierced. At that point, the first rule of Elliott Waves would be violated. (The four wave can not violate the territory of the 1 wave.) At 992 the S&P 500 is at the point of no return of going short term higher. Chart: S&P 500 Hourly 9/26/2003 The S&P 500 hourly chart shows a definite impulsive wave down. It appears that the S&P 500 is nearing the end of the 3 wave and should be starting the wave 4 retracement shortly. The S&P 500 will most likely retrace to the 1009-1017 level before continuing its 5 wave downward thrust. It is hard to determine the exact level it will reach, but it should be somewhere below 995. At that point the S&P 500 will enter into a very short corrective (bullish) phase, probably sometime late in the week, and then begin a more definite downward move. Over the past several months, the pattern of the markets was ambiguous at best. The market hit juncture points and could go either way depending on if the pattern was complete or not. However, this pattern is rather clear and I have a high confidence level that the S&P 500 is on its way to the 650 level. (See the turquoise/pink bar on the weekly chart.) Nevertheless, I do have one reservation. There is a radio commentator who is predicting a Dow 10,000 by the end of the year. He has been right quite a bit lately and I do respect his opinion. He is also predicting an ugly correction and so far it has started to sprout warts everywhere. Can we both be right? I think so. In order for the S&P 500 to hit 650, it will have to drop 500 points over the next month or so. Has this ever happened? Almost. Look at the weekly chart. The S&P 500 has dropped 300-400 points over 1-2 months several times over the last 2 years. This is a definite possibility. With a 400 point drop, the S&P 500 will hit the 740 mark which would take it below the October 2002 low. This would satisfy a completed Elliott Wave pattern and the markets could very easily turn to surpass the current highs. We shall see. Bottom line, I am very short term very bearish and I am expecting a substantial drop in the market. After that, well, I will discuss that when the time comes. ************************Advertisement************************* No time to follow the Market Monitor? 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The Option Investor Newsletter Sunday 09-28-2003 Sunday 5 of 5 In Section Five: Covered Calls: Stock Stages Explained -- Part IV Naked Puts: Q&A With The Editor Spreads/Straddles/Combos: Stocks Slump As Earnings Season Approaches Updated In The Site Tonight: Market Posture: A Week for the Bears ************************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 IV By Mark Wnetrzak With the recent market retreat, it's a good time to continue our review of the terms that are commonly used when describing the technical character of an issue. One of the most well-known techniques for chart analysis comes from the book "How to Profit in Bull and Bear Markets", by Stan Weinstein. He describes in detail the condition and outlook for most stocks in terms of stages. This week, we will continue this segment with a brief description of stages III and IV, including some hints for timing your exit transactions. First, we'll look at a stage III, which is usually described as a "consolidation" phase. Stage III is the area where the stock begins to encounter weakness and fails to make new highs. It is defined by sideways trend in the issue and a flattening of the long-term moving average. This is the place to tighten stop losses and take profits if the rally fails to continue. Of course, you should allow for a possible resumption of stage II as well. Stage III Chart - Proctor and Gamble (NYSE:PG) http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-09-28/oicc_092803_01.gif Proctor and Gamble (NYSE:PG) is not a "perfect" stage III chart, but it's close. The sharp decline back in July, 2002 probably shook out a lot of long-term shareholders as the issue violated its 30-week MA. However, the stock has essentially undergone a lateral correction and the long-term moving average has been moving sideways for a lengthy period. This "trading range" can last a long time and the uptrend can even resume. Remember, technical analysis is not an exact science and this is a good example because stage III "tops" can exist for several years before a primary direction is redefined. Stage IV is when the bullish primary trend breaks down completely, with the stock falling through a long-term moving average and then failing to rebound above it. The moving average will turn downward as the stock continues to decline and make new lows. When a stock enters stage IV, it’s your last chance to sell. For those who use bearish strategies, make sure the issue has room to fall further before shorting the stock or buying puts. Also, by defining the support area below the current price you can place your sell-limits and closing orders accordingly. Stage IV Chart - Gatx Corporation (NYSE:GMT) http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-09-28/oicc_092103_02.gif Gatx Corporation (NYSE:GMT) is an excellent example of how the trend can change from stage III (lateral activity) to stage IV (bearish decline) in a relatively stable stock. The stock began its down-trend in early 2001 but "key" transition occurs in conjunction with the terrorist-driven market sell-off in September. The move below a multi-year support level near $30 is simply too much for the stock to overcome and subsequent "recovery" rallies eventually fail to inspire any sustained buying pressure in the issue. The downtrend lasts a little over two years. Only in the last few months has the issue shown signs of breaking its downtrend and in time, after building a Stage I base, the cycle may begin all over again. Trade Wisely! P.S. Readers: Feel free to send us your candidates for review! 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 CHU 7.43 8.10 OCT 7.50 0.50 0.57* 7.1% ARIA 5.24 6.10 OCT 5.00 0.60 0.36* 6.7% VXGN 6.50 11.16 OCT 5.00 1.80 0.30* 5.5% THOR 16.83 16.16 OCT 15.00 2.70 0.87* 5.4% HEPH 26.29 24.68 OCT 22.50 4.90 1.11* 4.5% ALKS 14.23 12.90 OCT 12.50 2.20 0.47* 4.2% IDBE 18.95 15.45 OCT 15.00 4.40 0.45* 3.4% MXO 12.90 12.20 OCT 12.50 1.05 0.35 3.2% HEPH 30.20 24.68 OCT 25.00 6.10 0.58 2.6% DSCM 7.99 7.22 OCT 7.50 0.85 0.08 1.0% SCMR 5.20 4.51 OCT 5.00 0.65 -0.04 0.0% INCY 5.15 4.54 OCT 5.00 0.50 -0.11 0.0% BEAV 5.12 4.21 OCT 5.00 0.45 -0.46 0.0% ISIS 8.05 6.41 OCT 7.50 0.80 -0.84 0.0% * Stock price is above the sold striking price. Comments: Ah, finally a correction. The worrisome action was bound to happen sooner or later. The question is: now that the rally lasted longer than anyone expected, will the pull-back be more extreme than expected? The next few weeks should be interesting, to say the least, as the major averages test technical support areas. Hollis-Eden Pharma (NASDAQ:HEPH) came under some selling-pressure this week and dropped to a key support area Friday after announcing a follow-on share offering priced at $25. ID Biomedical (NASDAQ:IDBE) also dropped rather sharply this week (to its 30-dma) and is at a key moment. Some other stocks to consider for an early exit may include: DSCM, SCMR, INCY, BEAV and ISIS. Positions Previously Closed: None 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 HLIT 5.48 OCT 5.00 LOQ JA 0.80 954 4.68 21 9.9% QSFT 12.44 OCT 12.50 QUD JV 0.50 661 11.94 21 6.1% OXGN 11.17 OCT 10.00 QYO JB 1.55 796 9.62 21 5.7% XING 8.43 OCT 7.50 QAE JU 1.20 344 7.23 21 5.4% CREE 19.21 OCT 17.50 CVO JW 2.25 7571 16.96 21 4.6% NABI 8.22 OCT 7.50 NIQ JU 0.95 30 7.27 21 4.6% SEAC 13.18 OCT 12.50 UEG JV 1.05 207 12.13 21 4.4% 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). ***** HLIT - Harmonic $5.48 *** Cheap Speculation! *** Harmonic (NASDAQ:HLIT) signs, manufactures and sells a variety of broadband solutions that allow communications service providers around the world to deliver video, voice and data to their subscribers. The company's fiber-optic and digital video systems enable network operators to provide a range of interactive and advanced digital services that include digital video, high-speed Internet access, telephony, HDTV, video and audio streaming and video-on-demand. The Broadband Access Networks Division applies its strengths in optics and electronics, including expertise with lasers, modulators and radio frequency technology, to develop products that provide enhanced network reliability and allow broadband service providers to deliver advanced services. The Convergent Systems Division develops standards-based solutions that enable operators to increase the capacity of their broadband networks with advanced compression and stream processing systems. This week, shares of Harmonic set a 52-week high after SoundView said the company is returning to its position as a leading vendor of high-end digital products for cable and satellite industries. Reasonable short-term speculation that offers favorable reward at the risk of owning Harmonic near technical support. OCT-5.00 LOQ JA LB=0.80 OI=954 CB=4.68 DE=21 TY=9.9% ***** QSFT - Quest Software $12.44 *** Stage I Base *** Quest Software (NASDAQ:QSFT) is an independent software vendor for the primary database management systems and packaged and custom applications used by large and medium-sized enterprises. The company generates revenues by licensing its products, mainly on a perpetual basis, and by providing support, maintenance and implementation services for these products. Quest's products improve the quality of service of its customers' key software applications. Many of its products also initiate reduction in associated capital and operating expenses by minimizing hardware, software and/or personnel costs. The company markets over 50 products grouped into three main categories: database products, application performance management products and Microsoft infrastructure products. Quest continues to forge a Stage I base and this position offers investors a great method to target shoot an entry point closer to technical support. OCT-12.50 QUD JV LB=0.50 OI=661 CB=11.94 DE=21 TY=6.1% ***** OXGN - OXiGENE $11.17 *** New Drug Speculation *** OXiGENE (NASDAQ:OXGN) is a biopharmaceutical company engaged principally in research into, and the development of, products for use in the treatment of cancer. The company's efforts are focused on developing products for application as direct cancer treatment agents, particularly vascular targeting agents (VTAs). These agents attack a tumor's network of existing and emerging blood vessels, which are its main life support system. Oxigene is also investigating the use of certain products for other applications in the field of ophthalmology, in particular, age-related macular degeneration and diabetic retinopathy. The company is in various stages of clinical and pre-clinical development for multiple therapeutic product candidates that were derived from its principal vascular targeting platform. Oxigene's main technology is based on Combretastatin, a family of proprietary small molecule anti-tumor VTAs. Oxigene jumped on favorable news earlier this year and has since traded in a lateral range with support near $10. Traders who believe the trend will continue can profit from that outcome with this position. OCT-10.00 QYO JB LB=1.55 OI=796 CB=9.62 DE=21 TY=5.7% ***** XING - Qiao Xing $8.43 *** Chinese Telecom *** Qiao Xing Universal Telephone (NASDAQ:XING) is engaged in the design, manufacture and sale of telecommunication terminals and equipment in the People's Republic of China, including in-house corded and cordless telephone sets under the Qiao Xing trademark. Its QX Communication subsidiary also designs, develops and manufactures global standard for mobile (GSM) mobile telephones for CEC Telecom Co., Ltd. Qiao Xing has a nationwide sales network that includes 3,500 retail outlets in China. The company has introduced smart card telephones and expects to develop and introduce a number of special function corded telephones to the market. Qiao Xing has also developed and introduced caller ID display and coin operated telephones. Xing is another stock that is stuck in a lateral trading range and this short-term position allows for a reasonable reward at the risk of owning XING shares near recent technical support. OCT-7.50 QAE JU LB=1.20 OI=344 CB=7.23 DE=21 TY=5.4% ***** CREE - Cree $19.21 *** Near Historical Support *** Cree (NASDAQ:CREE) is engaged in the development and manufacture of compound semiconductor materials and electronic devices made from silicon carbide (SiC), and a developer and manufacturer of optoelectronic and electronic devices made from gallium nitride (GaN) and related materials. The company also produces radio frequency (RF) power transistor components and modules for wireless infrastructure applications using silicon-based bipolar and laterally diffused metal oxide semiconductor (LDMOS) process technologies. Cree operates its business in two segments, the Cree segment, which consists of its SiC-based products and research contracts; and the Cree Microwave segment, which consists of RF transistors and RF transistor modules based on a silicon platform. Cree has been hampered recently by lawsuit issues and a SEC investigation but has recently rallied on favorable news. The current outlook is recovering and the recent bullish activity supported by heavy volume bodes well for the future. We simply favor the long-term support area near $16 and investors can speculate on the near-term performance of the issue with this position. OCT-17.50 CVO JW LB=2.25 OI=7571 CB=16.96 DE=21 TY=4.6% ***** NABI - Nabi Biopharma $8.22 *** More Drug Speculation *** Nabi Biopharmaceuticals (NASDAQ:NABI) discovers, develops, makes and markets products that power the immune system to help people with serious, unmet medical needs. Their product portfolio and research capabilities are focused on developing and commercializing novel vaccines and antibody-based biopharmaceutical products that prevent and treat infectious, autoimmune and addictive diseases, including hepatitis B, hepatitis C and Staphylococcus aureus infections, immune thrombocytopenia purpura (ITP) and nicotine addiction. The company also has a clinical trials program involving its lead investigational products, StaphVAX, Altastaph, Civacir and NicVAX. In addition, Nabi Biopharmaceuticals collects specialty and non-specific antibodies for use in its products, as well as to supply pharmaceutical and diagnostic customers for the subsequent manufacture of their products. The recent bullish break-out on heavy volume above resistance near $7.50 (which now becomes support) suggests further upside potential. Traders can use this position to speculate on the near-term performance of the issue. OCT-7.50 NIQ JU LB=0.95 OI=30 CB=7.27 DE=21 TY=4.6% ***** SEAC - SeaChange $13.18 *** New Trading Range? *** SeaChange International (NASDAQ:SEAC) is a developer, manufacturer and marketer 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 its products and services to cable system operators, telecommunications companies and broadcast television companies. The company's broadband network segment includes its VOD (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 Internet content, through the television. Earlier this month SeaChange broke out on heavy volume as the stock continues to stair-step higher. We favor the technical support near the cost basis in this play and traders who are interested in a long-term portfolio position should consider a covered-call on SEAC. OCT-12.50 UEG JV LB=1.05 OI=207 CB=12.13 DE=21 TY=4.4% ***** ***************** 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 PLUG 5.18 OCT 5.00 PQL JA 0.55 429 4.63 21 11.6% VRST 12.53 OCT 12.50 UVQ JV 0.50 595 12.03 21 5.7% MVIS 8.29 OCT 7.50 QMV JU 1.05 314 7.24 21 5.2% VANS 10.76 OCT 10.00 VQG JB 1.10 128 9.66 21 5.1% TRDO 23.04 OCT 22.50 UNC JX 1.25 481 21.79 21 4.7% SLNK 18.65 OCT 15.00 SXU JC 4.10 0 14.55 21 4.5% NPSP 27.15 OCT 25.00 QKK JE 2.90 1332 24.25 21 4.5% ***************** NAKED PUT SECTION ***************** Options 101: Q&A With The Editor By Ray Cummins One of our readers offered some great questions on evaluating volatility in stocks; a subject which is important for both option "buying" and "selling" strategies. Attn: Contact Support Subject: Implied Volatility Hello Ray, How are you doing? Hope you had a nice time in Florida. I have a question on Implied Volatility. I am looking at NTES, SINA and SOHU for straddle/strangle plays using December options. My theory is these stocks move almost 20%, easily, in any given calendar month and since they have had a parabolic move so far, they would be good "Waterfall Decline" candidates. At the same time they are heavily shorted and so I wouldn't be surprised if they just keep going up till December. So I looked at their Implied Volatility and historic volatility. Their HVs are at their 52 week lows, however their IV is still around 70%. On other stocks, I would think 70% is high. But, should I be looking at IV for these stocks based on just their past IV to see if they are cheap or not rather than looking at a number like 70 and thinking it is high compared to IV of other stocks in the internet space? I am confused to see the HV at 52 week lows while the options are still trading at a lofty level. Any thoughts would help me in a big way in understanding this puzzle. Thanks again. Cheers, PA PS: I closed my IVGN [NOV] straddles at 59; picked at 54.55; for a quick, small profit of 17%. Hello PA Great job with the IVGN straddle -- a good play for sure! As far as evaluating the implied volatility in bullish Internet stocks: You are experiencing another dilemma for the volatility trader. How do you rank volatility in a very active (magnitude) issue that has moved mostly in one direction? The problem with using longer-term historical volatility in the calculations is that it is based on a statistical measure - which reflects standard deviation of the stock from the mean over the trading pattern of past stock prices, averaged over some period such as 20, 50 or 100 trading days. This is not as effective with issues such as SINA, NTES, and SOHU as they simply don't "fit the mold" of an average stock's movement pattern, thus they do not conform well to that type of analysis. As you mentioned (and as Larry McMillan suggests), a better way to evaluate option prices in this case might be to calculate the current implied volatility, then compare it with a past measure of implied volatility. If the current is way above the past, then the option is "overpriced", if it is way below, then it's "underpriced". Using historical values to calculate "fair value" is somewhat misleading because implied and actual volatility can remain at much different levels for long periods of time. As Larry says, you might also consider using the average implied volatility over some past period of time or using an "adverse" volatility estimate, based on historical volatility, in order to give you a conservative price estimate. For example, if you are going to buy an option, use a low estimate -- perhaps the minimum of the 20-, 50-, and 100-day historical volatility. Then, if the option still seems inexpensive, you'll know you are at least getting it at a fairly good price, based on actual stock volatility movements. For option selling, you'd want to inflate the volatility estimate -- perhaps using the maximum of those 3 historical volatility periods. In that way, the current price would have to be very high in order for the option to appear overpriced. In those situations where you focus on historic volatility¸ Larry suggests studying 20-day and 50-day, as well as 1-year periods, because that gives you a better idea of what level of volatility you can generally expect to experience over the life of the option you are buying or selling. For instance, if you are going to be holding the option for a few weeks or a few months, then you can expect volatility to be in a specific range related to that time frame. However, that method does not always apply and in the case of high-flying stocks (such as NTES, SOHU and SINA), it may not accurately reflect the future potential of the underlying issues. Volatility is indeed the most important variable in valuing an option. All other factors are known; stock price, strike price, dividends, interest rates, and time remaining. If you want to be an expert on the subject (which is not something I can teach you in an E-mail), read the bibles of option trading: Larry McMillan's Options As A Strategic Investment, and Sheldon Natenberg's Option Volatility & Pricing. Both are available in the OIN bookstore. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield EMIS 6.19 6.85 OCT 5.00 0.35 0.35* 6.5% 18.6% ADLR 15.95 18.17 OCT 12.50 0.50 0.50* 3.6% 11.8% USG 17.51 17.20 OCT 12.50 0.35 0.35* 3.1% 9.9% SEAC 14.34 13.18 OCT 12.50 0.35 0.35* 3.1% 9.0% STAT 14.58 13.28 OCT 12.50 0.40 0.40* 2.9% 8.4% NPSP 32.82 27.15 OCT 25.00 0.50 0.50* 2.2% 7.7% NKTR 13.83 12.73 OCT 10.00 0.25 0.25* 2.2% 7.2% ONXX 23.92 20.00 OCT 20.00 0.40 0.40 2.2% 7.2% THOR 18.60 16.16 OCT 15.00 0.25 0.25* 1.8% 6.6% CEPH 49.62 45.76 OCT 40.00 0.65 0.65* 1.8% 6.5% IDXC 26.02 22.79 OCT 22.50 0.35 0.35* 1.7% 5.3% INSP 19.92 20.99 OCT 17.50 0.35 0.35* 1.8% 5.2% GOLD 23.93 22.46 OCT 20.00 0.35 0.35* 1.5% 5.1% ASKJ 21.29 17.15 OCT 17.50 0.45 0.10 0.5% 1.7% * Stock price is above the sold striking price. Comments: Into every life a little rain must fall and this week, it really poured! Friday's closing prices pushed share values to one-month lows and the recent technical patterns suggest further downside potential. With that outlook in mind, traders should exit any positions with less than outstanding technical indications and these issues are in that category: Ask Jeeves (NASDAQ:ASKJ), IDX Systems (NASDAQ:IDXC), Onyx Pharmaceuticals (NASDAQ:ONXX), Nps Pharmaceuticals (NASDAQ:NPSP) and Thoratec (NASDAQ:THOR). Stocks on the early-exit "watch" list include Seachange (NASDAQ:SEAC) and i-Stat (NASDAQ:STAT). 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 GERN 12.98 OCT 10.00 GQD VB 0.25 1879 9.75 21 3.7% 12.7% LRCX 22.81 OCT 20.00 LMQ VD 0.40 64 19.60 21 3.0% 8.6% PDII 25.06 OCT 22.50 PKU VX 0.40 31 22.10 21 2.6% 7.4% RIMM 37.29 OCT 32.50 RUL VZ 0.50 1102 32.00 21 2.3% 6.8% AMHC 41.98 OCT 35.00 QMH VG 0.40 123 34.60 21 1.7% 5.7% ERES 33.63 OCT 27.50 UDB VY 0.30 23 27.20 21 1.6% 5.7% MERQ 45.76 OCT 40.00 RQB VH 0.50 4207 39.50 21 1.8% 5.6% 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). ***** GERN - Geron $12.98 *** Drug Speculation Only! *** Geron (NASDAQ:GERN) is a biopharmaceutical company focused on developing and commercializing therapeutic and diagnostic products for various applications in oncology and regenerative medicine, as well as research tools for drug discovery. The firm's product development programs are based on three core technologies: telomerase, human embryonic stem cells and nuclear transfer. Telomerase is an enzyme that, when placed in normal cells, is capable of restoring telomere length, thus increasing the lifespan of cells without altering their normal function or causing them to become cancerous; human embryonic stem cells enable the development of transplantation therapies by providing standard starting material for the manufacture of cells and tissues, and nuclear transfer is used for creating cloned animals. Shares of biotech company Geron rallied last week after its CEO announced positive early findings from a prostate cancer vaccine study. Dr. Thomas Okarma said Monday at the UBS Global Life Sciences Conference that Geron's Phase I-II trial of a prostate cancer vaccine targeting telomerase, a protein highly expressed and specific for cancer cells, has met a key goal. Trades who believe the results will translate into high share values for the issue in the near-term should consider this position. OCT-10.00 GQD VB LB=0.25 OI=1879 CB=9.75 DE=21 TY=3.7% MY=12.7% ***** LRCX - Lam Research $22.81 *** Chip-Equipment Specialist! *** Lam Research Corporation (NASDAQ:LRCX) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The company's products are currently used in the front-end of the wafer processing manufacturing cycle: etch, CMP, and post-CMP clean. Lam's unique family of etch systems incorporates plasma technologies designed to meet both current and future needs. The company offers both 200-milimeter and 300-milimeter Teres CMP integrated polishing and cleaning systems with Linear Planarization Technology (LPT), which uses a high-speed belt instead of the rotating table used in conventional polishers. The company also provides the Synergy Integra, which incorporates advanced cleaning technology with a platform that integrates polisher and cleaner. LRCX is one of our old favorites in the chip-equipment segment and the company was recently upgraded by Credit Suisse First Boston based on an expected continuation of positive order trends in the second half of 2003. The current consolidation period may find support near the mid-summer trading range and investors who think that bullish activity will resume in the coming weeks can profit from that outcome with this position. OCT-20.00 LMQ VD LB=0.40 OI=64 CB=19.60 DE=21 TY=3.0% MY=8.6% ***** PDII - PDI Incorporated $25.06 *** A Necessary Consolidation? *** PDI (NASDAQ:PDII) is an innovative healthcare sales and marketing provider to biopharmaceutical and medical devices companies and and the diagnostics industry. Its three business units offer service and product-based capabilities for companies seeking to maximize profitable brand sales growth. The three units include PDI Pharmaceutical Products, PDI Sales and Marketing Services, and PDI Medical Devices and Diagnostics. Shares of PDII have been "on the move" since early July when the company announced that full-year earnings would likely top analysts' predictions, due to new business contracts awarded to its sales unit and expectations of a solid performance from its hypertension drug Lotensin. The bullish momentum has carried the stock higher in recent months and traders who believe the trend will continue, after a necessary consolidation, should consider this position. OCT-22.50 PKU VX LB=0.40 OI=31 CB=22.10 DE=21 TY=2.6% MY=7.4% ***** RIMM - Research In Motion $37.29 *** Multi-Year High! *** Research In Motion Limited (NASDAQ:RIMM) is a designer, builder, and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, the firm provides solutions for seamless access to time-sensitive information and communications, including e-mail, telephone, messaging and Internet- and intranet-based applications. The company's technology also enables a broad array of third-party developers and manufacturers around the world to enhance their own products and services with wireless connectivity. RIM's portfolio of products includes a family of wireless handhelds, the BlackBerry wireless e-mail solution, embedded radio modems and a suite of software development tools. RIMM shares soared Friday, despite the broad sell-off, after a Bear Stearns upgrade. Analyst Andrew Neff upgraded RIMM to "peer perform" based on stronger growth prospects, driven by new products, retail channel expansion and international growth. Traders who wouldn't mind owning the issue near a basis of $32 should consider this position. OCT-32.50 RUL VZ LB=0.50 OI=1102 CB=32.00 DE=21 TY=2.3% MY=6.8% ***** AMHC - American Healthways $41.98 *** Uptrend Intact! *** American Healthways (NASDAQ:AMHC) is the nation's leading and largest provider of specialized, comprehensive care enhancement services to hospitals, physicians and health plans. In addition, American Healthways is the only company in its industry whose programs are designed to meaningfully address the needs of 100% of its customer populations. The clinical excellence of the firm's programs have been reviewed and approved by Johns Hopkins, and their quality has been recognized by the National Committee on Quality Assurance, the Joint Commission on Accreditation of Health Care Organizations, and the American Accreditation Health Care Commission, making American Healthways the first and only care enhancement provider in the nation to be accredited or certified by all three organizations. American Healthways contracts to provide disease and care management programs to health plans with members in all 50 states, the District of Columbia and Puerto Rico. The firm also operates diabetes management programs in hospitals nationwide. AMHC is one of the few stocks that has continued to move higher during the recent market slump and a cost basis near $35 seems reasonable for this unique health services company. OCT-35.00 QMH VG LB=0.40 OI=123 CB=34.60 DE=21 TY=1.7% MY=5.7% ***** ERES - eResearch Technology $33.63 *** Entry Point? *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services to the pharmaceutical, biotechnology and medical device industries on a global basis. The firm is a leader in providing centralized core-diagnostic electrocardiographic (ECG) technology and services to evaluate cardiac safety in clinical development. The firm is also a leader in providing technology and services for streamlining the clinical trials process by enabling its customers to automate the collection, analysis, and distribution of clinical data in all phases of clinical development. Developing new drugs and health related products is one of the most complex industries in the world and ERES is a leader in this growing market segment. The firm has recently announced some new agreements for cardiac safety monitoring and information distribution services and the fundamental outlook for the company is favorable. Traders who wouldn't mind owning a unique stock in the Health Services sector should consider this position. OCT-27.50 UDB VY LB=0.30 OI=23 CB=27.20 DE=21 TY=1.6% MY=5.7% ***** MERQ - Mercury Interactive $45.76 *** Entry Point? *** Mercury Interactive (NASDAQ:MERQ) is a global leader in business technology optimization, and is committed to helping customers optimize the business value of information technology. Founded in 1989, Mercury Interactive conducts business in more than 35 countries and is one of the fastest growing enterprise software companies today. Mercury Interactive offers a range of software and services to govern the priorities, people, and practices of IT; deliver and manage applications; and integrate IT strategy and execution. More than 30,000 customers rely on the company's offerings to improve quality and performance of applications and manage IT costs, risks and compliance. Shares of MERQ have been among the most consistent performers in the Technical and System Software group and the recent decline may offer a suitable entry point for investors who want a long-term positioning the issue. OCT-40.00 RQB VH LB=0.50 OI=4207 CB=39.50 DE=21 TY=1.8% MY=5.6% ***** ***************** 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 CIPH 11.85 OCT 10.00 UBI VB 0.30 0 9.70 21 4.5% 13.6% SLNK 18.65 OCT 15.00 SXU VC 0.35 4 14.65 21 3.5% 12.2% CREE 19.21 OCT 17.50 CVO VW 0.50 1672 17.00 21 4.3% 11.2% LEXR 17.59 OCT 15.00 EQG VC 0.30 872 14.70 21 3.0% 9.2% VXGN 11.16 OCT 7.50 UWG VU 0.15 851 7.35 21 3.0% 9.1% NFLX 33.49 OCT 27.50 QNQ VY 0.40 2023 27.10 21 2.1% 7.4% JCOM 37.34 OCT 30.00 JQF VF 0.40 468 29.60 21 2.0% 7.2% NCR 31.56 OCT 30.00 NCR VF 0.55 244 29.45 21 2.7% 6.9% BRCM 26.57 OCT 22.50 RCQ VX 0.30 2497 22.20 21 2.0% 6.3% URBN 25.85 OCT 25.00 URQ VE 0.40 326 24.60 21 2.4% 5.9% TRDO 23.04 OCT 20.00 UNC VD 0.20 40 19.80 21 1.5% 4.5% MGAM 34.53 OCT 30.00 QMG VF 0.30 80 29.70 21 1.5% 4.5% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Slump As Earnings Season Approaches By Ray Cummins The major equity averages fell again Friday as investors sold for profits ahead of the quarterly earnings reporting season. Technology shares led the retreat with the NASDAQ Composite Index down 25 points to 1,792. Blue-chip stocks fared a little better on a percentage basis, with the Dow Jones industrials losing only 30 points to end at 9,313. The broad Standard & Poor's 500 Index slid 6 points to 996. Trading was active with 1.4 billion shares crossed on the New York Stock Exchange while 1.8 billion shares changed hands on the NASDAQ. Losers outpaced winners 2 to 1 on the Big Board and 3 to 1 on the technology exchange. In the bond market, treasury prices rose in the wake of falling equity values. The 10-year note finished up 16/32 at 101 26/32, yielding 4.02%. ***************** 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 AMLN 29.04 27.15 OCT 22 25 0.30 24.70 $0.30 Open MERQ 49.41 45.76 OCT 40 42 0.30 42.20 $0.30 Open BBH 137.69 129.40 OCT 120 125 0.45 124.55 $0.45 Open CELG 45.48 42.50 OCT 35 40 0.50 39.50 $0.50 Open MYL 39.00 37.57 OCT 32 35 0.20 34.80 $0.20 Open SINA 37.41 33.68 OCT 25 30 0.45 29.55 $0.45 Open COGN 33.16 30.93 OCT 27 30 0.40 29.60 $0.40 Open CTSH 40.41 36.19 OCT 30 35 0.55 34.45 $0.55 Open IMDC 76.91 72.79 OCT 60 65 0.55 64.45 $0.55 Open NEM 40.66 38.91 OCT 35 37 0.30 37.20 $0.30 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Virtually any "bullish" positions are suspect given the current market outlook, thus traders are encouraged to close losing plays before they become very costly. Every issue in this category is a candidate for early exit. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CAH 56.36 57.65 OCT 65 60 0.65 60.65 $0.65 Open PFE 30.51 30.56 OCT 35 32 0.25 32.75 $0.25 Open XL 76.05 76.07 OCT 85 80 0.60 80.60 $0.60 Open APC 42.70 41.51 OCT 48 45 0.35 45.35 $0.35 Open CI 47.15 44.30 OCT 55 50 0.50 50.50 $0.50 Open FRX 48.93 50.70 OCT 60 55 0.50 55.50 $0.50 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Forest Laboratories (NYSE:FRX) is one to "watch" as it has seen renewed buying pressure in recent sessions. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status HEPH 26.29 24.68 OCT 20 22 2.25 22.25 0.25 Closed APPX 38.74 30.81 OCT 30 33 2.95 32.95 (2.14) Closed NVLS 38.55 33.62 OCT 32 35 2.10 34.60 (0.98) Closed HTCH 33.02 32.78 OCT 25 30 4.50 29.50 0.50 Open? AVII 5.54 5.21 DEC 5 7 0.90 5.90 (0.69) Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss There was little alternative but to close the bullish spreads in technology stocks as the recent run-up has made them candidates for large declines. Avi Biopharma (NASDAQ:AVII) is a speculative play based on potential news-driven activity later in 2003, thus it will remain open until a major change in (technical) character occurs. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status LMT 48.70 45.43 OCT 55 50 4.60 50.40 0.40 Open Lockheed Martin (NYSE:LMT) did not offer the target debit in the bearish position, however the available spread price was viable for conservative traders with a bearish outlook on the issue. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status ADRX 20.79 17.81 DEC 25 17 (0.20) 0.15 Closed CVTX 27.55 21.89 OCT 35 20 (0.10) 0.00 Closed GLGC 6.00 4.90 NOV 7 5 (0.10) 0.00 Closed XING 9.13 8.43 DEC 12 7 0.10 0.30 Open? Qiao Xing Universal Telephone (NASDAQ:XING) offered a small profit before the market-wide retreat, but all of the previous (bullish) synthetic positions became candidates for early exit during the past week. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status PRU 36.41 37.01 DEC-37C OCT-37C 0.30 0.60 Open MSFT 27.31 28.19 JAN-27C OCT-30C 2.20 2.40 Open ING 19.07 18.69 JAN-20C OCT-20C 0.55 0.75 Closed MDCO 26.17 24.01 JAN-30C OCT-30C 0.50 1.20 Closed Prudential (NYSE:PRU) and Microsoft (NASDAQ:MSFT) have weathered the recent storm but both issues are on the "watch" list for the coming week. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status SNE 30.74 35.35 OCT 30 30 3.75 8.00 Closed CLS 17.55 16.55 OCT 17 17 2.35 3.10 Open NVDA 18.17 16.86 OCT 17 17 2.90 3.50 Open AFCI 22.66 20.07 OCT 22 22 3.10 3.00 Open TRI 30.50 29.52 NOV 30 30 4.90 5.00 Open EASI 59.70 60.19 NOV 60 60 8.50 9.00 Open YHOO 37.24 35.08 OCT 37 37 3.75 3.90 Open Celestica (NYSE:CLS), Nvidia (NASDAQ:NVDA), Engineered Support Systems (NASDAQ:EASI), and Yahoo! (NASDAQ:YHOO) have achieved small profits. The position in Sony (NYSE:SNE) has been closed to "lock-in" favorable gains. 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. ***** EBAY - eBay Inc. $54.22 *** Trading Range? *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. EBAY - eBay Inc. $54.22 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-47.50 QXB-VR OI=19841 ASK=$0.35 SELL PUT OCT-50.00 QXB-VJ OI=41810 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$49.70 ***** GENZ - Genzyme $46.00 *** Uptrend Intact! *** Genzyme (NASDAQ:GENZ) is a global biotechnology firm that develops and markets therapeutic products and services for serious diseases. The company's broad product portfolio is focused on rare genetic disorders, renal disease and osteoarthritis and includes an array of diagnostic products and services. Genzyme researches a range of novel approaches to cancer, heart disease and other areas of unmet medical need. The firm serves patients in over 80 countries worldwide. GENZ - Genzyme $46.00 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-40.00 GZQ-VH OI=1156 ASK=$0.40 SELL PUT OCT-42.50 GZQ-VR OI=2807 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$42.20 ***** RIMM - Research In Motion $37.29 *** Rally Mode! *** Research In Motion Limited (NASDAQ:RIMM) is a designer, builder, and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, the firm provides solutions for seamless access to time-sensitive information and communications, including e-mail, telephone, messaging and Internet- and intranet-based applications. The company's technology also enables a broad array of third-party developers and manufacturers around the world to enhance their own products and services with wireless connectivity. RIM's portfolio of products includes a family of wireless handhelds, the BlackBerry wireless e-mail solution, embedded radio modems and a suite of software development tools. RIMM - Research In Motion $37.29 PLAY (conservative - bullish/credit spread): BUY PUT OCT-30.00 RUL-VF OI=1778 ASK=$0.30 SELL PUT OCT-32.50 RUL-VZ OI=1102 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$32.25 ***** BVF - Biovail $36.75 *** Back In a Trading Range? *** Biovail Corporation (NYSE:BVF) is a pharmaceutical firm engaged in the development, manufacture and marketing of medications utilizing advanced drug delivery technologies for the treatment of chronic medical conditions. The company's primary focus is on three major therapeutic areas: cardiovascular (including Type II diabetes), central nervous system and pain management. Other areas of interest include antiviral medicine and select niche therapeutic categories with identified potential. The firm's Canadian subsidiary performs sales and marketing activities in Canada for company products, as well as for products licensed from third parties. Biovail also has a full-service independent Contract Research Division that provides clinical research and laboratory testing services for its product development projects and for third-party international and domestic pharmaceutical companies, including several developmental partners. BVF - Biovail $36.75 PLAY (conservative - bullish/credit spread): BUY PUT OCT-45.00 BVF-JI OI=5557 ASK=$0.15 SELL PUT OCT-40.00 BVF-JH OI=5506 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$40.55 ***** CERN - Cerner $31.42 *** Sell-Off In Progress! *** Cerner Corporation (NASDAQ:CERN) designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and consumers. The company's solutions give end users secure access to clinical, administrative and financial data in real-time. Consumers retrieve appropriate care information and educational resources via the Internet. The company implements these solutions as stand-alone, combined or enterprise-wide systems. Cerner solutions can be managed by the firm's clients or via an application outsourcing or hosting model. Cerner provides hosted solutions from its data center in Lee's Summit, Missouri. CERN - Cerner $31.42 PLAY (conservative - bearish/credit spread): BUY CALL OCT-40.00 CQN-JH OI=565 ASK=$0.50 SELL CALL OCT-35.00 CQN-JG OI=348 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$35.55 ***** GPRO - Gen-Probe $51.70 *** Profit-Taking Underway! *** Gen-Probe (NASDAQ:GPRO) is a global leader in the development, manufacture and marketing of rapid, accurate and cost-effective nucleic acid testing products used for the clinical diagnosis of human diseases and for screening donated human blood. Using its patented NAT technology, Gen-Probe has received FDA approvals or clearances for more than 50 products that detect a variety of infectious microorganisms, including those causing sexually transmitted diseases, tuberculosis, strep throat, pneumonia and fungal infections. The company also develops and manufactures the only FDA-approved blood screening assay for the simultaneous detection of HIV-1 and HCV, which is marketed by Chiron. The company and Bayer Corporation have formed a collaboration to develop, manufacture and market nucleic acid diagnostic tests for certain viral organisms, and under the agreement Bayer has the right to distribute these tests. Gen-Probe has 20 years of nucleic acid detection research and development experience, and its products are used daily in clinical laboratories and blood collection centers throughout the world. The stock will split 2-for-1 on 10/01/03. GPRO - Gen-Probe $51.70 PLAY (conservative - bearish/credit spread): BUY CALL OCT-65.00 PSU-JM OI=871 ASK=$0.50 SELL CALL OCT-60.00 PSU-JL OI=375 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$60.55 ***** IMCL - ImClone $37.73 *** Consolidation or Correction? *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL - ImClone $37.73 PLAY (conservative - bearish/credit spread): BUY CALL OCT-50.00 QCI-JJ OI=7511 ASK=$0.35 SELL CALL OCT-45.00 QCI-JI OI=7338 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.40-$0.60 POTENTIAL PROFIT(max)=8% B/E=$45.40 ************* 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. ***** CCMP - Cabot Microelectronics $55.83 *** Rolling Over? *** Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels, smoothes, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex devices with fewer defects. CCMP - Cabot Microelectronics $55.83 PLAY (less conservative - bearish/debit spread): BUY PUT OCT-65.00 UKR-VM OI=394 ASK=$9.40 SELL PUT OCT-60.00 UKR-VL OI=1365 BID=$5.00 INITIAL NET-DEBIT TARGET=$4.30-$4.40 POTENTIAL PROFIT(max)=14% B/E=$60.40 ******************* 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. ***** NTE - Nam Tai Electronics $24.51 *** A Reader's Request! *** Nam Tai Electronics (NYSE:NTE) is a electronics manufacturing and design services provider to original equipment manufacturers of telecommunication and consumer electronic products. Through its electronics manufacturing services operations, the company makes electronic components and subassemblies, including liquid crystal display panels, transformers, LCD modules, and radio frequency modules. The firm also manufactures finished products, including cordless phones, palm-sized personal computers, personal digital assistants, electronic dictionaries, calculators and digital camera accessories for use with cellular phones. In addition, the company assists its OEM customers in the design and development of their products and furnishes full turnkey manufacturing services. Its services include hardware and software design, component purchasing, assembly into finished products or electronic subassemblies and post-assembly testing. NTE - Nam Tai Electronics $24.51 PLAY (very speculative - bearish/synthetic position): BUY PUT OCT-20.00 NTE-VD OI=26 ASK=$0.45 SELL CALL OCT-30.00 NTE-JF OI=984 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.10-$0.25 INITIAL TARGET PROFIT=$0.45-$0.60 Note: Using options, the position is similar to being short the stock. The minimum initial margin/collateral requirement for the sold option is approximately $550 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($30.00). *********************** 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. ***** ZMH - Zimmer Holdings $55.52 *** Probability Play! *** Zimmer Holdings (NYSE:ZMH) is engaged in the design, development, manufacture and marketing of orthopaedic reconstructive implants and trauma products. Orthopaedic reconstructive implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Trauma products are devices used primarily to reattach or stabilize damaged bone or tissue to support the body's natural healing process. The company also manufactures and markets orthopaedic surgical products, which include surgical supplies and instruments designed to aid in orthopaedic surgical procedures. Zimmer has operations in over 20 countries and markets products in more than 70 countries. The firm's primary customers include orthopaedic surgeons, hospitals and healthcare purchasing organizations or buying groups. These customers range from multinational enterprises to independent surgeons. ZMH - Zimmer Holdings $55.52 PLAY (conservative - neutral/debit straddle): BUY CALL DEC-55.00 ZMH-LK OI=1816 ASK=$3.00 BUY PUT DEC-55.00 ZMH-XK OI=61 ASK=$2.40 INITIAL NET-DEBIT TARGET=$5.25-$5.30 INITIAL TARGET PROFIT=$1.90-$2.35 ***** MANH - Manhattan Associates $27.68 *** Pure Premium Selling! *** Manhattan Associates (NASDAQ:MANH) is a provider of technology solutions to improve the effectiveness of and the efficiencies within and across the supply chain. The firm's solutions include software, services and hardware that enhances distribution and transportation efficiencies through the real-time integration of supply chain constituents, including manufacturers, distributors, retailers, suppliers, transportation providers and consumers. Its software provides solutions for the four principal elements of supply chain execution: warehouse management, transportation management, trading partner management and performance management. MANH - Manhattan Associates $27.68 PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-30.00 MQR-JF OI=2132 BID=$0.75 SELL PUT OCT-25.00 MQR-VE OI=803 BID=$0.75 INITIAL NET-CREDIT TARGET=$1.50-$1.65 POTENTIAL PROFIT(max)=21% UPSIDE B/E=$31.50 DOWNSIDE B/E=$23.50 ***** ************************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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