The Option Investor Newsletter Thursday 10-23-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Back From The Brink Futures Markets: MSFT Bunker Buster Index Trader Wrap: See Note Market Sentiment: Bewildered. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-23-2003 High Low Volume Advance/Decline DJIA 9613.13 + 14.90 9622.16 9551.73 2.05 bln 1527/1651 NASDAQ 1885.51 - 12.60 1893.20 1874.11 1.93 bln 1316/1839 S&P 100 514.88 + 1.48 515.59 511.21 Totals 2843/3490 S&P 500 1033.77 + 3.41 1035.44 1025.87 W5000 10029.20 + 21.90 10047.48 9955.10 RUS 2000 510.49 - 2.66 513.55 506.81 DJ TRANS 2828.52 + 10.50 2828.78 2799.99 VIX 17.68 + 0.01 18.51 17.48 VXO VIX-O 19.10 + 0.04 19.99 19.02 VXN 26.09 + 0.41 26.57 25.58 Total Volume 4,269M Total UpVol 1,729M Total DnVol 2,485M 52wk Highs 271 52wk Lows 30 TRIN 1.12 NAZTRIN 2.26 PUT/CALL 0.85 ************************************************************ Back From The Brink If you had told me at 2:AM with the Nikkei off -550 points and our futures falling through the floor that the Dow would only drop -50 points at its worst and close up +15 I would have thought I was dreaming. Sometimes reality is stranger than fiction and today was definitely one of those days. Dow Chart Nasdaq Chart Nikkei Chart We had yet another math miracle before the open with Jobless Claims. The number came in at 386,000 and a four-week low. You should be confused. Last weeks number was a multimonth low at 384,000 and the week before that was even lower at 382,000. Each was trumpeted as new cycle lows. Unfortunately the 382K from three weeks ago was revised up to 388K the next week. The 384K from two weeks ago was revised up to 390K. These revisions make today's 386K the new four week low at least until it is revised up next week. Using the +6k revision average that should put today's number near 392K. Either way there is a slight upward trend in the claims but nothing serious. A better number to gauge the strength of the job market was the Monthly Mass Layoffs for September which came in at 868 and considerably better than the prior two months. 82,647 workers were laid off in September compared to 133,839 in August and 226,435 in July. This is a definite improvement in the trend. Whether it means the pace of cost cutting has slowed as we approach a seasonal increase in business or that companies just don't have as many workers they can cut is unclear. Either way the slow down in the pace of layoffs should help ease the pressure in the job market. The lack of real economic reports today left the markets to fixate on earnings and Wednesday earnings were less than exciting on several front. Companies warning or missing estimates included some high profile names like JPM, MRK, THC, WHR, SGP, KLAC, STX and ERTS to name a few. We had the obligatory comments about "no signs of an economic recovery yet" from Dow component Dow Chemical. SNE said they had 50% excess capacity for the current demand. Bucking the trend UPS saw a strengthening in shipments. While these high profile bad apples drew the headlines the overall earnings were still strong. With over 300 of the S&P companies reported the number meeting or beating estimates is around 64%. If you have been reading my commentary you know that is down from 92% two weeks ago and 66% last week. Still strong but slipping as the smaller companies report. I have not seen Chuck Hill on CNBC this week but should he appear with a lowered estimate for 3Q earnings the sentiment could get a lot worse. Guidance for the 4Q from those 300+ companies has 36% guiding higher, 22% guiding inline and 42% warning. This means just under half of all companies are warning and very close to the historical trend. In other words the ratios are not as good as some analysts hoped. You have also seen me quote the earnings estimates for the 4Q as +20% to +25% growth based on First Calls published summaries. The 4Q estimate as of the close today had dropped to +18%. Still strong but maybe a hint of further trimming to come. After the bell today Microsoft announced earnings that beat the street by a penny and initially caused their stock to rise. The company raised guidance slightly and bragged about strong enterprise sales. They said that "while IT spending was only improving slowly over the quarter they did see increasing strength across the consumer sector". The raised guidance left little for traders to be excited about. MSFT raised full year estimates to a range of $1.10-$1.12. The analyst community was already expecting $1.11 so the fanfare fell on deaf ears. The stock began to fall almost immediately once the guidance was disseminated without waiting for the conference call. One factor suggested as accelerating the drop was a more than double than expected drop in unearned or deferred income. This line item is normally used as a slush fund for earnings that can be "adjusted" as needed to make earnings targets. Deferred income is money received before the product is shipped. If a corporation ordered a large amount of various software products late in the quarter, possibly some in short supply or not yet released then Microsoft does not claim the income until the software is shipped. There is always a backlog as companies preorder new products or products for conversions from legacy systems. This "order backlog" is seen as an indicator of strength for Microsoft. High backlog equals lots of orders, low backlog means excess product on hand. (simple explanation) Microsoft had guided analysts to expect a drop of $300 million in this number. The actual drop was over $600 mil and twice Microsoft estimates. Considering MSFT had net profits of $2.6 billion for the quarter I would not think this is a critical problem. Just something for the analysts to question to earn their 15 min of fame. Most informative was their raised guidance. They are only expecting PC growth in upper single digits for 2004. This is not going to be exciting for the tech outlook. They also projected a drop in subscribers to their MSN Internet service. A couple more less than positive comments included, "we missed some forecasts and you (analysts) should be concerned" and "we are not expecting any significant revenue growth for the rest of the year." MSFT closed the after hours session at $27.54 and down nearly -1.50 from the regular session close. Wednesday's earnings and market action led to massive drops overseas. The Nikkei suffered the biggest one-day drop of (-554) since 9/12/01 and the day after the WTC attack. This was a huge event and all the Asian and European markets suffered. To some extent it was triggered by our drop on Wednesday. Still the outlook looked VERY negative at the open and a triple digit Dow drop looked like a certainty. When the Dow opened down -50 it was immediately met with a very large buy program that consumed immense amounts of selling volume as it powered the markets higher. Within 20 min the Dow was back in positive territory and the buying stopped. Almost immediately another drop began and again only 10 min later another large buy program blasted the average to a new high. Bears were dumbfounded and shorts thinking they had a free ride after the drop in Asia were starting to think about covering. Over the next hour the indexes bled points but very slowly as nobody knew what was happening. About 11:20 the Dow touched a new low and immediately was met with more buy programs. By noon traders were glazed over and the Dow was stuck just below 9600 where it hovered for two hours. Traders simply did not know what was happening. Shorts and longs alike were afraid to trade and volume slowed to a crawl. About 2:PM there appeared to be a surge in short covering in front of MSFT earnings but the bears gained confidence when the Dow could not break to a new high. They were able to knock it down once again but each dip was met with new buy programs. Market on close orders were weighted to the buy side and bears gave up. S&P Futures were 1032 at the cash close and they managed to close the Dow back over 9600. Amazing. Unfortunately once the earnings began to hit the wire the selling began again in earnest and once MSFT spoiled the party the futures hit a new low for the day at 1018.75 and significantly down from the close. As I type this at 6:30 they have recovered to 1021.50, -7.50 with Nasdaq futures down -17.00. What a day. Volume was very strong with over 2 bil shares on the NYSE and 1.93B on the Nasdaq. Because of the huge buy programs the down volume was only 4:3 over up volume. It appeared at the close that somebody with big money had rescued the markets just when they needed it worst. The reaction to the after hours earnings brings that rescue back into question. There are multiple reasons for the after hours negativity. First, MSFT did not uphold the standard set by Intel and Yahoo. Great earnings expectations had been priced into the market and we are seeing those great expectations slowly deteriorate into just good news sprinkled with some weaker than expected guidance. Is this going to cause a further dip? Odds are good but after today I would not bet on it. Deep pockets bought the open this morning to hold up the markets. Not to buy stock at bargain prices but to hold up the market. Think about it. If you were going to buy billions of dollars in stock today and the market was showing a triple digit drop before the open, possibly a -200 day or more, then why would you buy immediately at the open at -25? Would you not rather wait for an hour or so to get a better price? Wouldn't you be afraid that the negativity at the open could cause that drop AFTER you spent those billions and put you in a significant loss before the day was over? Any reasonable trader with far less money at stake would have waited for the drop to slow before buying the dip. This smacks of market manipulation by somebody. Somebody with very deep pockets. The conspiracy theorists, including me, were speculating that the Fed could be propping up the markets to keep the recovery hopes alive. Another possibility is Japan. With the Nikkei tanking -5% overnight from multiyear highs on fears about a weak U.S. recovery then what better way to spend some of those billions in dollars they have been hoarding than to buy the U.S. market. They have been spending billions each week trying to control the currency rates and boosting our markets would certainly help their markets. Another possibility was mutual fund related. Funds have been beaten so badly for the last two years that they are scared. They are riding a huge rally wave that could have been about to crumble. Investors had poured in more than $4.3 billion into funds each of the last two weeks and funds had a vested interest in keeping the markets up. A sharp correction could stem the flow of money and blunt investor sentiment for a couple more months. The only question is did the funds have enough money to orchestrate the massive buying and head off the opening crash? If so which one? Was it a team effort and if so then how did they coordinate it? Far too many questions and no answers. The real question is what about tomorrow? What a tossup! We have yet to see how the Asian markets are going to respond to tonight's earnings. Futures have stabilized at about 1021 for the time being and while negative they have at least quit falling. Traders are confused. Each time the markets reached resistance today the retail buyers disappeared. The buy programs provided the reversal momentum but nobody jumped on the train at the highs. Shorts were never forced to cover because resistance levels were never broken. If Asia shakes off the earnings from MSFT and others and their oversold conditions from Thursday then we may have a chance. If the deep pockets from this morning are still around at the open on Friday then they might be able to build on any Asian gains. If the reverse happens and Asia tanks again then it may take more than deep pockets to slow us down at Friday's open. T.G.I.F, at least most big drops do not occur on Fridays. Fridays are not immune but they tend to be less severe. Traders leaving early for the weekend and trying to capture profits for the week tend to equalize the opposing pressures. Odds favor a range bound day without a big move in either direction but then odds favored a huge drop at the open today and it did not happen. Amazing how that VXO at 17.50 worked on Wednesday. But then most assume it was just a coincidence. (grin) Now that MSFT has announced the earnings week is winding down and there will be little to capture investor attention. Less than 50 companies report on Friday and there are no major names. With six days left in October I would not count this month out just yet. Keep your fingers crossed and seatbelts fastened. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** MSFT Bunker Buster Jonathan Levinson Gold and treasuries pulled back, while equities mounted a surprisingly weak bounce from their overnight lows. Any residual uncertainty on the part of sellers appeared to have been vaporized by the market's reaction to MSFT's earnings after the cash close. 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 took its time at the overnight lows, with several spikes to the 91.10 level before beginning a timid retest of the former range bottom below 91.70, failing on each attempt. Gold declined on the dollar strength, but silver and the CRB advanced, with the latter approaching its year highs, up 2.84 to 248.17 on strength in corn, cotton, wheat and soybean futures. Daily chart of December gold December gold retraced part of yesterday's gain, spiking to a high of 389.90 while setting a higher low at 383.50. The pullback did nothing to impede the upphase now confirmed on the oscillators. To my mind, the real test begins at the lower rising wedge trendline which is now pointing at round number resistance at 395. 390-420 is the start of a confluence zone dating back to the period between 1986-89 and 1993-96 that should provide resistance. However, my having to visit a 20-year chart to examine resistance speaks volumes about the glorious move taken by gold since 1999 and 2001 lows. Daily chart of the ten year note yield Treasuries slipped today, with the TNX adding 4.3 bps to close at 4.316%, engulfing yesterday's decline and filling the gap on the daily chart. The move was good for an upward twitch on the daily chart oscillators, which remain nevertheless on sell signals. It will take a move above the 4.4% level to reverse the current downphase. Daily NQ candles It was a bad day for the NQ, becoming worse as I type with MSFT selling off following the release of its earnings report after the cash close. The move today helped the NQ catch up to the ES and YM on the downside, breaking below the 78.6% Fibonacci support line and extending the sell signals that were confirmed with yesterday's bearish engulfing candle. Volume on the Nasdaq was strong at 1.95B shares, and we saw some TRINQ readings that exceeded 3.0, showing very strong selling breadth. The bearish ascending wedge downside target of 1300 is looking increasingly plausible, with next significant support at the 1340 level. 30 minute 20 day chart of the NQ We left off last night with the 300 minute stochastic on the 30 minute chart ticking up on a buy signal from oversold territory, and reasoned that a bounce was likely. That bounce, which lined up with a bull wedge breakout, was surprisingly weak, just a sideways upphase, and couldn't clear first resistance at 1390. This looked like a return to the scene of the crime bounce below the preliminary neckline of the head and shoulders pattern discussed last night, and I've highlighted a potential secondary neckline at 1370. A break below 1370 with a high at 1440 would project to 1300 as a head and shoulders target, which lines up perfectly with our daily bear wedge projection above. With the sideways upphase almost done on this chart, and the NQ appearing to fail from a much lower high, the next downphase, commencing as soon as... now... should be reach 1340 easily. If support at 1360 holds, we will have to reassess. Daily ES candles The ES managed to not fall apart, closing the cash session at 4PM with marginal gains, but well above the overnight lows below 1020. The post-MSFT selloff has ES trading at 1024.50 currently, and on the daily chart above, the fractional gain did nothing to reverse the downphase confirmed yesterday or undo any of the significant technical damage caused by yesterday's selloff. 987.75 is the bear wedge target, with support at 1021, 1018, 1014 and 1008 below. 20 day 30 minute chart of the ES The stochastic upphase on the 30 minute chart generated shockingly little price traction, with the ES unable to crack 1034 for longer than thirty or forty seconds. I've moved the secondary, larger head and shoulders support line to 1021, which gives us a target of 987, again coinciding perfectly with the daily pattern projection. I see absolutely nothing bullish on these charts at this time, with lower bounce highs and tired- looking price action despite oscillator support. That support ended for the ES at the close, and a lower low below 1019 for this downphase, which looks easily achievable from where I sit this evening, would confirm the current bearish view. Daily YM candles The YM extended its slide, and despite the bounce fueled by the 30 minute oscillator upphase, could not close positive. The outlook is the same as for the ES and NQ. 20 day 30 minute chart of the YM The pullback in gold was expected, as was a countertrend bounce in the ten year note yield. Despite the potentially bullish implications of simultaneous declines in gold and treasuries, with a fresh bounce beginning on the longer intraday equity oscillators, bulls staggered through the stages of their bounce, unable to generate even mild short-covering, despite a market full of bears with frayed nerves and damaged accounts after over 6 months of flagpole rallies, failed bear formations, relentless short squeezes, and program bot attacks. With weakness in GE now apparently to be compounded with weakness in MSFT, there are two 1000-pound gorillas unable to pull themselves off the canvas. This bearish view makes me nervous, because it appears too obvious. Keep your stops active, be ready for possible surprises, and trade what you see. I will be following the weekly, daily and intraday oscillators, which paint a very bearish picture tonight. ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_102303_1.asp ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Bewildered. - J. Brown Investor sentiment today can probably best be summed up in one word: confused. The massive declines in the Japanese NIKKEI last night (down more than 500 points) should have sent our own markets into free fall. This is especially true considering the earnings miss and lowered guidance from KLAC last night. Yet despite all the negativity the $INDU managed to close in the green and the NASDAQ cut its losses in half. Market veterans immediately began to wonder what magic was afoot. Jim does an excellent job in the wrap tonight discussing some of the theories on why our markets didn't melt down today so I won't belabor the point. Potentially contributing to the mixed markets were the positive jobless claims number today and expectation over MSFT's earnings. However, now that MSFT has announced, the news is not sitting well with investors. Friday is liable to be weak with most of the selling focused on tech issues. Next week is the last full week of October. While we will continue to hear from corporate earnings there are numerous economic events that are likely to take center stage, not the least of which is the FOMC meeting on the 28th. Trade carefully! ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9850 52-week Low : 7197 Current : 9613 Moving Averages: (Simple) 10-dma: 9730 50-dma: 9523 200-dma: 8799 S&P 500 ($SPX) 52-week High: 1053 52-week Low : 768 Current : 1033 Moving Averages: (Simple) 10-dma: 1042 50-dma: 1020 200-dma: 943 Nasdaq-100 ($NDX) 52-week High: 1439 52-week Low : 795 Current : 1378 Moving Averages: (Simple) 10-dma: 1407 50-dma: 1356 200-dma: 1178 ----------------------------------------------------------------- The VXO has rebounded from its recent lows as have the VIX and VXN. Together they all remain very "oversold" for lack of a better term indicating the markets are still primed for more weakness. CBOE Market Volatility Index (VIX) = 17.68 +0.01 CBOE Mkt Volatility (old vix)(VXO) = 19.13 +0.07 Nasdaq Volatility Index (VXN) = 26.09 +0.41 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.85 579,837 493,493 Equity Only 0.72 493,194 354,797 OEX 1.45 15,490 22,420 QQQ 2.28 21,291 48,493 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.2 + 0 Bull Confirmed NASDAQ-100 75.0 - 3 Bear Correction Dow Indust. 83.3 + 0 Bull Correction S&P 500 79.2 - 2 Bull Confirmed S&P 100 79.0 + 0 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-dma: 1.21 10-dma: 1.09 21-dma: 1.09 55-dma: 1.06 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 1321 1281 Decliners 1482 1771 New Highs 102 140 New Lows 10 13 Up Volume 1049M 613M Down Vol. 943M 1286M Total Vol. 2003M 1927M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 10/14/03 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 Unfortunately we're still not seeing much change in sentiment for the Commercials in the big S&P futures. They remain slightly net short. Small traders aren't making many moves either and they remain net long. Commercials Long Short Net % Of OI 09/23/03 395,123 397,858 ( 2,735) (0.0%) 09/30/03 395,713 397,577 ( 1,864) (0.0%) 10/07/03 390,232 402,964 (12,732) (1.6%) 10/14/03 391,972 410,299 (18,327) (2.3%) 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 09/23/03 139,482 87,981 51,501 22.6% 09/30/03 144,681 96,801 47,880 19.8% 10/07/03 138,644 88,018 50,626 22.3% 10/14/03 133,940 86,418 47,522 21.6% 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 It's the same story here. Commercials increased their positions in both longs and shorts but remains slightly net short. Small traders trimmed some short positions and opened 30K more long contracts just in time for the late week weakness. Commercials Long Short Net % Of OI 09/23/03 109,417 204,026 ( 94,609) (30.2%) 09/30/03 163,828 218,991 ( 55,163) (14.4%) 10/07/03 212,273 225,377 ( 13,104) ( 3.0%) 10/14/03 221,897 233,066 ( 11,169) ( 2.5%) 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 09/23/03 175,750 62,558 113,192 47.5% 09/30/03 131,698 65,259 66,439 33.8% 10/07/03 134,990 63,560 71,430 36.0% 10/14/03 161,208 59,213 101,995 46.3% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Sorry...no big changes for the Commercial traders here either. They remain net short while the Small Trader remains net long. Commercials Long Short Net % of OI 09/23/03 32,648 42,565 ( 9,917) (13.2%) 09/30/03 33,571 42,993 ( 9,422) (12.3%) 10/07/03 33,253 40,861 ( 7,608) (10.3%) 10/14/03 34,639 41,880 ( 7,241) ( 9.5%) Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 09/23/03 17,862 9,880 7,982 28.8% 09/30/03 19,803 9,917 9,886 33.3% 10/07/03 18,182 9,688 8,494 30.5% 10/14/03 16,822 9,046 7,776 30.1% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL No one seems willing to make any big bets. Commercials have been stuck in the same range for weeks now and remain net long the DJ futures. Small traders took some money out of their long and dumped some of it into shorts but not much. Commercials Long Short Net % of OI 09/23/03 15,911 9,123 6,788 27.1% 09/30/03 16,561 8,932 7,629 31.5% 10/07/03 16,277 9,528 6,749 26.2% 10/14/03 16,595 9,433 7,162 27.5% 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 09/23/03 7,505 7,779 ( 274) ( 1.8%) 09/30/03 7,578 8,125 ( 547) ( 3.5%) 10/07/03 7,392 7,910 ( 518) ( 3.4%) 10/14/03 6,427 8,495 (2,068) (13.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Thursday 10-23-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: ABC, AZO, BBY, COO, FD, QLGC New Calls Plays: LOW Put Play Updates: ATK, DNA, MATK New Put Plays: AVID, WFT **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** None ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** AmerisourceBergen - ABC - close: 58.79 change: +1.68 stop: 55.75 Shares of ABC have certainly offered up plenty of volatility since we initiated coverage on Tuesday, reversing sharply lower yesterday and then rallying even stronger today to finally push through the 200-dma ($58.59) for the first time since mid- September. Fortunately, we had the foresight to initiate the play with a $59 trigger and since that hasn't yet been met, we're still on the sidelines as interested observers. Today's bullish price action looks quite encouraging though and we could see that breakout as early as tomorrow morning, depending on investors' reaction to the myriad earnings reports tonight and in the morning. After the breakout, aggressive traders can take the momentum entry, while those with a slightly more conservative style can look to buy a subsequent dip and rebound that confirms new support in the $57.50-58.50 area. Picked on October 21st at $58.44 Change since picked: +0.35 Earnings Date 11/05/03 (confirmed) Average Daily Volume = 1.71 mln Chart = --- AutoZone, Inc. - AZO - close: 95.58 change: +1.35 stop: 91.95 While there wasn't much immediate follow-through to Tuesday's peek over the $95 level, in hindsight, it was an important metric that showed us the bulls' willingness to push shares of AZO higher. Yesterday's dip to the 10-dma (currently $93.90) provided the perfect springboard for today's rally that punched the stock solidly through that $95 ceiling to actually kiss $96 before pulling back slightly into the close. AZO looks like it is ready to deliver on expectations of a run at the $100 resistance level and today's breakout was just the opening volley. Traders that didn't enter on the initial breakout have two choices here. Wait for another pullback and rebound from above the 10-dma or enter the fray on a breakout over $96. The one other remaining obstacle here is the 9/24 intraday high of $96.10, so it might be best to wait for a trade above that level before entering on strength. While we're keeping our stop at $91.95 tonight, more conservative traders can use a tighter stop at $92.75, which is below both the 20-dma ($93.11) and last Thursday's intraday low. Picked on October 14th at $94.42 Change since picked: +1.16 Earnings Date 12/22/03 (unconfirmed) Average Daily Volume = 923 K Chart = --- Best Buy Company - BBY - cls: 54.81 chng: +0.70 stop: 52.50*new* Anyone that thinks the bulls are just going to roll over and play dead has failed to notice the strong price action in certain Retailers like BBY. Each dip is met with eager bargain hunters, as seen this week. After falling back to the vicinity of $52.50 last Friday, shares of the electronics retailer rebounded smartly and today's strong move back over $54 has us looking for that elusive breakout to new recent highs. Traders that took advantage of the recent dip should be well positioned for the expected breakout and aggressive momentum players can get set to enter on a break above the 10/15 intraday high of $55.11. Remember, we're looking to exit the play with a tidy gain if BBY can trade into the $57-58 area, which is the site of solid resistance from early 2000. Raise stops to $52.50, just below last Friday's intraday low. Picked on October 5th at $51.00 Change since picked: +3.81 Earnings Date 12/17/03 (unconfirmed) Average Daily Volume = 3.94 mln Chart = --- Cooper Cos - COO - close: 40.93 chg: +0.34 stop: 39.99 Our bullish play in COO may be on the endangered list. The stock has continued to slip and only found support near the 40.50 level just above its simple 50-dma. This could be an entry point just above support for traders brave enough to take it. Right now we'd rather see COO trade back above 41.50 or 42.00 before initiating any new positions. Failure to see a bounce soon could have us closing the play for lack of performance. Picked on October 12 at $41.40 Change since picked: - 0.47 Earnings Date 09/03/03 (confirmed) Average Daily Volume: 391 thousand Chart = --- Federated Dep Store - FD - cls: 46.50 chng: +0.95 stop: 44.25 Things weren't looking too great for our FD play earlier in the week, as the stock just continued to lose ground from last week's highs, a move that looked all the more ominous after yesterday's drop to just above $45. But the bulls came to the rescue once again, buying the dip aggressively and vaulting the stock back over the 10-dma ($46.42) to wipe out the losses seen in the first three days of the week. This rebound from above former resistance (now support) in the $44.50 area looks quite constructive and a fresh assault on the highs seems in order. Entries near $46 look favorable for upside continuation to $48 and possibly $50 ahead of the company's earnings report in mid- November. Maintain stops at $44.25 until FD can touch the $48 mark. Picked on October 9th at $45.60 Change since picked: +0.90 Earnings Date 11/12/03 (unconfirmed) Average Daily Volume = 1.90 mln Chart = --- QLogic Corp. - QLGC - close: 51.90 change: -1.42 stop: 50.00 To say our QLGC play got off on the wrong foot would be a large understatement, as it fell prey to the selling frenzy in the Semiconductor sector (SOX.X) today, in the wake of the dismal earnings forecast from KLAC last night. Today's drop broke the 3-week ascending channel and the picture looks grim. But things have looked bad before in recent months and buyers have continued to show up to support stocks at critical points. QLGC is at one of those points tonight, as it came to rest right in the middle of the $51.50-52.00 support area. A break below here could have a trip back down to the $50/50-dma area before a bounce can materialize. Aggressive traders can look at buying a rebound from the $51 area, but those with a more conservative stance should really wait until QLGC can fight its way back inside the rising channel, the bottom of which is currently at $53.70. Maintain stops at $50 and look for renewed signs of life from the SOX before playing. Picked on October 21st at $54.21 Change since picked: -2.30 Earnings Date 1/14/04 (unconfirmed) Average Daily Volume = 4.88 mln Chart = ************** NEW CALL PLAYS ************** Lowe's Companies - LOW - close: 46.31 change: +1.66 stop: 43.75 Company Description: As a retailer of home improvement products, Lowe's has a specific emphasis on retail do-it-yourself and commercial business customers. The company specializes in offering products and services for home improvement, home decor, home maintenance, home repair and remodeling and maintenance of commercial buildings. Why we like it: The price action in shares of LOW has been truly impressive in recent months, as the stock broke out to new all-time highs back in the middle of August. Since then, LOW twice tested that breakout level as support and then vaulted to new highs yet again in early October. LOW has spent the past couple weeks in a tight-range consolidation and with Thursday's 1.89% gain in an overall weak market, a breakout to new all-time highs appears imminent. The PnF chart certainly gives a clear picture of the stock's strength, as it is still on a solid Buy signal with a ludicrous price target of $82! Initiating a bullish play near the all-time highs is definitely an aggressive approach and that's why we've opted to use an entry trigger of $59.00, just over last Friday's intraday high of $58.94. A breakout over that level should be free to run to at least $61 in the near-term, as that is currently the site of the upper Bollinger band. We're actually setting our sights a bit higher and looking for a continued rally up to the $65 area ahead of earnings in the third week of November. Entries on the initial break of $59 should work well, although it's possible to also get a secondary entry on a subsequent pullback near $58. Because of the aggressive nature of the play, we're using a tight stop at $56.75, just under the intraday lows of the past 2 weeks. Suggested Options: Shorter Term: The November 55 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 60 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the December 60 Call. BUY CALL NOV-55 LOW-KK OI= 2245 at $4.30 SL=2,75 BUY CALL NOV-60 LOW-KL OI=11330 at $1.15 SL=0.60 BUY CALL DEC-55 LOW-LK OI= 29 at $5.00 SL=3.00 BUY CALL DEC-60 LOW-LL OI= 225 at $1.90 SL=1.00 Annotated Chart of LOW: Picked on October 23rd at $58.65 Change since picked: +0.00 Earnings Date 11/17/04 (unconfirmed) Average Daily Volume = 3.90 mln Chart = ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* Alliant Tech Systems - ATK - cls: 48.46 change: +0.01 stop: 50.51 Right up until the final hour today, ATK looked like it might actually deliver a decent rebound. But a solid bout of selling in the final 30 minutes wiped out the stock's intraday gains to leave it essentially unchanged. A failed rebound in the $49.00- 49.50 area certainly looked good for new entries -- unfortunately we never quite got there on Thursday. That area still looks attractive for new entries, with the 50-dma looming overhead at $49.55 and falling daily. Traders looking to enter on weakness should wait for a break below $48 (just under yesterday's intraday low). Maintain stops at $50.51. Remember, ATK is set to release earnings on October 30th, so there's only another week to for the stock to reach our $45 target before we have to exit. Picked on October 19th at $49.12 Change since picked: -0.66 Earnings Date 10/30/03 (confirmed) Average Daily Volume: 386 K Chart = --- Genentech Inc - DNA - close: 79.13 change: +1.56 stop: 82.30 Would you believe DNA is right where it left us on Tuesday? Shares of DNA are unchanged after two days of volatility. Meanwhile the BTK biotech index, which dropped strongly on Wednesday produced a small bounce from the 450 level but did so with out its biggest component AMGN. Shares of AMGN continue to sink. The biotech giant has dropped below its simple 200-dma and support at the $60.00 level. This will weigh on the biotech sector and potentially influence investors in DNA. We still feel that more confident entries can be made in DNA on a move below 77.50 but more aggressive traders can use these failed rallies under $80 as entry points. Picked on October 20 at $77.50 Change since picked: + 1.63 Earnings Date 10/08/03 (confirmed) Average Daily Volume: 2.5 million Chart = --- Martek Biosciences - MATK - cls: 46.00 chg: +0.23 stop: 50.51 MATK continues to consolidate its recent declines, which is fine with us. Bears need to catch their breath too if they're going to continue the chase. The question is which direction will MATK move next? The three-day consolidation has both lower highs and higher lows, hinting at a breakout soon but one that could go up or down. Right now we'd probably refrain from opening new bearish positions unless MATK traded below the 45.00 or 44.50 levels. Our next target is $40.00. Picked on October 16 at $49.48 Change since picked: - 3.48 Earnings Date 09/09/03 (confirmed) Average Daily Volume: 466 thousand Chart = ************* NEW PUT PLAYS ************* Avid Technology - AVID - cls: 51.39 chg: -2.46 stop: See below Company Description: Avid Technology, Inc. is the world leader in digital nonlinear media creation, management and distribution solutions, enabling film, video, audio, animation, games, and broadcast news professionals to work more efficiently, productively and creatively. For more information about the company's Oscar., Grammy., and Emmy. award-winning products and services, please visit: www.avid.com. (source: company press release) Why We Like It: Why do we like AVID as a put play? That's a good question because longer-term we're pretty bullish on the stock. The company recently announced earnings earlier this month and beat estimates by 5 cents. Not only were revenues up more than 10% for the quarter but AVID guided higher for the fourth quarter's revenues and income. That certainly doesn't sound like a bearish play to us. However, nothing goes up forever and we want to try and capture any profit taking in this technology stock. Shares of AVID have tripled from the March '03 lows and have run up more than 600% from early October a year ago. Now it looks like investors are ready to take some money off the table. The stock just broke its simple 50-dma for the first time since March and technical indicators have all turned negative. It's point- and-figure chart just produced its first bearish sell signal since last March as well. However, we're concerned that traders might try and buy the dip at $50.00 so we're going to use a TRIGGER at $49.90 to open the play for us. Until then we're just spectators. A 38.2% retracement of the March '03 to October run up should put AVID near $43.25, which coincides with the early August support. Once we are triggered we'll initiate the play with a stop loss at 52.51. Suggested Options: Short-term traders can look at the November and December 55's, 50's and 45's. Longer-term traders can choose from the March '04 strikes. We probably like the November 50's best or 45's if you're more aggressive. BUY PUT NOV 45 AQI-WI OI= 509 at $1.00 SL= -- BUY PUT NOV 50 AQI-WJ OI= 753 at $2.35 SL=1.15 BUY PUT NOV 55 AQI-WK OI= 135 at $5.10 SL=3.00 BUY PUT DEC 45 AQI-XI OI= 385 at $1.95 SL=1.00 BUY PUT DEC 50 AQI-XJ OI= 126 at $3.70 SL=1.75 BUY PUT DEC 55 AQI-XK OI= 101 at $6.30 SL=4.00 Annotated chart: Picked on October xx at $xx.xx Change since picked: - 0.00 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 628 thousand Chart = --- Weatherford Intl - WFT - close: 34.70 change: -0.27 stop: 36.01 Company Description: Weatherford is one of the largest global providers of innovative mechanical solutions, technology and services for the drilling and production sectors of the oil and gas industry. Weatherford operates in over 100 countries and employs approximately 16,000 people worldwide. (source: company press release) Why We Like It: Shares of WFT have been under performing the market for quite some time. We've had our eye on it lately for a break under long-time support at $35.00. That breakdown came today after the company warned that Q3 earnings would not meet expectations. Consensus analyst estimates for WFT's Q3 performance were for revenues of $672 million and net income at 38 cents a share. WFT's new guidance puts revenues at $660 million and 35 cents a share. It's not a huge miss but it should be enough to spark a new round of selling. There is potential support in the $32.50 range but our target is the round-number support at $30.00. We'll initiate the play with a stop loss at 36.01. Suggested Options: Short-term traders can choose between the November and December options while longer-term players can evaluate the January and February strikes. The $35 and 30's look good to us but don't buy too many 30's just because they look cheap! Trade carefully. BUY PUT NOV 35 WFT-WG OI= 2120 at $1.65 SL=0.85 BUY PUT NOV 30 WFT-WF OI= 1543 at $0.35 SL= -- BUY PUT DEC 35 WFT-XG OI= 25 at $2.10 SL=1.00 BUY PUT DEC 30 WFT-XF OI= 30 at $0.60 SL= -- Annotated chart: Picked on October 23 at $34.70 Change since picked: - 0.00 Earnings Date 10/30/03 (confirmed) Average Daily Volume: 1.3 million Chart = ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Thursday 10-23-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - WFT Traders Corner: Reality Check: If The Enemy Is In Range, So Are You ********************* PLAY OF THE DAY - PUT ********************* Weatherford Intl - WFT - close: 34.70 change: -0.27 stop: 36.01 Company Description: Weatherford is one of the largest global providers of innovative mechanical solutions, technology and services for the drilling and production sectors of the oil and gas industry. Weatherford operates in over 100 countries and employs approximately 16,000 people worldwide. (source: company press release) Why We Like It: Shares of WFT have been under performing the market for quite some time. We've had our eye on it lately for a break under long-time support at $35.00. That breakdown came today after the company warned that Q3 earnings would not meet expectations. Consensus analyst estimates for WFT's Q3 performance were for revenues of $672 million and net income at 38 cents a share. WFT's new guidance puts revenues at $660 million and 35 cents a share. It's not a huge miss but it should be enough to spark a new round of selling. There is potential support in the $32.50 range but our target is the round-number support at $30.00. We'll initiate the play with a stop loss at 36.01. Suggested Options: Short-term traders can choose between the November and December options while longer-term players can evaluate the January and February strikes. The $35 and 30's look good to us but don't buy too many 30's just because they look cheap! Trade carefully. BUY PUT NOV 35 WFT-WG OI= 2120 at $1.65 SL=0.85 BUY PUT NOV 30 WFT-WF OI= 1543 at $0.35 SL= -- BUY PUT DEC 35 WFT-XG OI= 25 at $2.10 SL=1.00 BUY PUT DEC 30 WFT-XF OI= 30 at $0.60 SL= -- Annotated chart: Picked on October 23 at $34.70 Change since picked: - 0.00 Earnings Date 10/30/03 (confirmed) Average Daily Volume: 1.3 million Chart = ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** Reality Check: If The Enemy Is In Range, So Are You By Mike Parnos, Investing With Attitude OK, troops. We're finally settled on our November CPTI portfolio positions. The market may be trying to tell us something – that it wants to come down. Our cushions are ample – both front and back. Hopefully, so are our Iron Condor cushions. Actually, some of our longer-term positions will benefit by a market retreat. We may have a casualty in AFCI. Remember, when it's time to get out, GET OUT! It brings to mind a sign posted in an Air Force Ammo Facility – "If you see a bomb technician running, follow him!" The military has a way of putting things in perspective. Quote from an Infantry Journal: "Try to look unimportant. They may be low on ammo." ______________________________________________________________ SPX Plans A & B In Wednesday's update I noted that SPX premium had disappeared early in the week and the SPX Iron Condor (as originally posted) was not realistic. Well, apparently some CPTI students had success in entering the trade Monday morning (go figure) with the projected premiums. However, we came up with a Plan B for the less fortunate CPTI students and had no problem filling our new "hypothetical" SPX Iron Condor. Some readers (hopefully newbies) requested I go over the criteria of what we look for in an Iron Condor. Criteria For Iron Condor We've been doing these Iron Condors long enough now that you should be familiar with the basic criteria. Here's a quick review in case your head has been somewhere where it's not exposed to the sun. a) With over four weeks left until expiration, we want to establish a range of anywhere between 90-100 points. There's a little flexibility here, depending on your risk tolerance. The wider the range, the safer the trade. b) We want to keep our exposure to about $10,000 per spread. That means 10 contracts on a 10-point spread, 4 contracts on a 25-point spread, 7 points on a 15-point spread, etc. c) Try to make the spread as close to equidistant from where the stock is trading as possible. If the SPX is at 1030, we would initially look at the 1075/1085 bear call spread and the 985/975 bull put spread. d) Take in at least a total of $1.50 - $2.00. Again, that can vary depending on your risk tolerance. ______________________________________________________________ Hey Mike: I was wondering if you could direct me in the proper direction to find out the margin requirements for the "Iron Condor" technique you utilize. Specifically, what is the margin requirement for 10 contracts on the S&P market? I love to read your weekly columns. They are informative and humorous. The markets are tough but you always seem to keep your perspective. Keep up the good work! Thanks for the help. Kevin Kevin, Glad you're enjoying, and hopefully profiting (hypothetically, of course) from, my column. Margin requirements on the Iron Condor are as follows: 1. The margin requirements differ depending on the size of each spread. 2. A 10-point SPX bear call spread (for example 1090/1100) would require $1,000 per contract ($10 x 100) less the credit taken in $120 ($1.20 x 100). That would make the maintenance requirement on the bear call spread portion of the Iron Condor $880 ($1,000 less $120). Ten contracts would require $8,800 ($880 x 10 contracts) 3. The same holds true for the bull put spread. Then, you would have to add up the maintenance for both the bear call and bull put spread to get the total required for the position). 4. A 15-point spread (890/875) would use a similar formula. $150 x 100 = $1,500 per contract less the credit taken in. Multiply that figure by the number of contracts and you'll have the maintenance required. The above is true at most brokerages. Double-check your broker's policy. Also, remember that you can't be wrong on both sides. Your actual (worst case scenario) risk is only the highest maintenance of one side less the total amount of premium you've taken in on both sides. _____________________________________________________________ NOVEMBER AND ONGOING POSITIONS Position #1 – SPX Iron Condor – Trading @ 1033.77 We sold 10 contracts of November SPX 985 puts and bought 10 contracts of November SPX 975 puts for a credit of $1.10 ($1,100). Then we sold 7 contracts of November SPX 1075 calls and bought 7 contracts of November SPX 1090 calls for a credit of $1.50 ($1,050) and a total net credit of $2,150. We've created a maximum profit range of 985 to 1075. With four weeks left, that's a reasonable range. Position #2 – AFCI Iron Condor – Trading @ $23.10 Sell 10 contracts of the AFCI November $25 puts and buy 10 contracts of the AFCI November $20.00 puts for a credit of $1.05. Then sell 10 contracts of the AFCI November $30 calls and buy 10 contracts of the AFCI November $35.00 calls for a credit of $.60. Our total net credit is $1.65. Our maximum profit range is $25 - $30. Our safety range is $23.35 to $31.65. Those will also be our exit parameters. Position #3 – OEX Iron Condor (By Request) – 514.88 Sell 10 contracts of the OEX November 490 puts and buy 10 contracts of the OEX November 480 puts for a credit of about $.90. Then, sell 10 contracts of the OEX November 545 calls and buy 10 contracts of the OEX November 555 calls for a credit of about another $.90. Our total net credit will be about $1.80. Our maximum profit range is 490 to 545. Position #4 – BBH – Siamese Condor - $126.12 Sell 10 contracts of the BBH November $130 puts and 10 contracts of the BBH November $130 calls for about $8.50. Then, buy 10 contracts of BBH November $140 calls and 10 contracts of the BBH November $120 puts for about $2.40. The net credit should be about $6.10. Our profit range is $123.90 to $136.10 and those are also our exit parameters. Position #5 – QQQ Put Calendar Spread – Trading @ $34.17 We decided to risk a buck. Since many folks think the market is due to correct. We created a cheap play that will let us take advantage of a nice down move. Meanwhile, we will continue to sell against the January put while we wait. 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). The October $32 puts expired worthless and, on Wednesday, we rolled out to the November $32 and took in a $.30 credit. We now have a new cost basis of $.70. OEX – Bearish Calendar Spread – OEX @ $514.88 We own 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 sold the October 490 puts, took in another $3.10 and those also expired worthless. On Thursday we sold the November 485 puts for $2.60. Our cost basis is now $2.70. If we're going to make money on this position, we'll need some cooperation from the market. The OEX will have to trade down to about 490 in the next few weeks. Then, we may have to make an adjustment. This may get a bit tricky – another adventure and learning experience. QQQ ITM Strangle – Ongoing Long Term -- $34.17. We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the 2005 QQQ $29 calls for a total debit of $14,300. Then we sold 10 contracts of the QQQ Oct. 33 puts and 10 contracts of the QQQ Oct. 34 calls for a total credit of $1,900. We bought back our $33 puts and $34 calls and rolled out to November $34 puts and $34 calls, taking in another $1.15 ($1,150). So far, so good. HPQ (Hewlett Packard) Bear-Put Spread – HPQ at $21.00 This is a directional bet. We anticipate HPQ may return to the $15 range. We own 10 contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10 contracts of the HPQ Feb. 2004 $15 puts @ $.40. Total debit of $1.85. Potential max profit of $3.15. 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. __________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page and click on "Traders Corner." They're waiting for you 24/7. ___________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. 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