The Option Investor Newsletter Wednesday 11-05-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Markets Pause Ahead of CSCO's Numbers Futures Wrap: Upphase Delayed, Selloff Interrupted Index Trader Wrap: Late bounce leaves indices unchanged Traders Corner: Know Your Opponent Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 11-05-2003 High Low Volume Advance/Decline DJIA 9820.83 - 18.00 9859.34 9778.31 1.69 bln 1399/1397 NASDAQ 1959.37 + 1.41 1966.15 1938.22 1.93 bln 1543/1509 S&P 100 520.25 - 1.13 521.96 517.27 Totals 2942/2906 S&P 500 1051.81 - 1.44 1054.54 1044.88 RUS 2000 538.91 + 0.04 539.05 531.91 DJ TRANS 2932.74 - 8.82 2942.21 2914.64 VIX 16.86 + 0.31 17.32 16.55 VXO 17.56 + 0.14 18.33 17.44 VXN 25.20 - 0.49 26.08 25.20 Total Volume 4,025M Total UpVol 2,131M Total DnVol 1,790M 52wk Highs 697 52wk Lows 25 TRIN 1.00 PUT/CALL 0.69 ******************************************************************* Markets Pause Ahead of CSCO's Numbers by James Brown The major averages were close to unchanged by day's end but the closing numbers hardly tell the whole story. Investors took profits early in the session and chose to ignore positive economic news from the ISM services index and the U.S. factory orders. Yet the selling pressure could not gain any momentum and shorts began to cover quickly in the last half hour ahead of Cisco Systems' (CSCO) earnings report. The heaviest selling hit insurance, retail, and broker-dealer stocks. The biggest gainers were seen in homebuilders and semiconductors. Gold futures added another $2.70 to close at $382.70 and crude oil jumped $1.55 to end at $30.30 a barrel. Overall stocks were mainly flat to down. Asian and European exchanges closed negative but like their U.S. counterparts the selling was mild. Market internals for U.S. stocks were equally flat. Advancing issues were neck and neck with decliners 13 to 13 on the NYSE and 15 to 15 on the NASDAQ. Up volume just slightly out paced down volume on both exchanges. Chart of the DJIA: Chart of the NASDAQ: U.S. Factory Orders for September were released today. Economists had been looking for a 0.6 percent gain compared to a 0.8 percent decline in August. The headline number came out at a 0.5 percent gain but the August number was revised upward from a 0.8 decline to 0.3 percent decline, which is definite improvement. Defense orders were sharply lower but demand for non-defense goods jumped 4.1 percent in September, which is the best monthly improvement in nearly a year. Today's data is yet another link in the chain of economic reports that shed light on an improving manufacturing sector for the U.S. economy. The ISM Services index or non-factory businesses index rose to 64.7 percent, the second-highest level on record. This was the fourth gain in five months and above estimates for a minor jump to 63.4 percent. The ISM Services index, like its bigger brother the ISM factory report, indicates improvement or expansion with any reading above 50. Probably the most crucial part of today's report was the employment component. Today's ISM data showed employment at its highest since November 2000. It was only yesterday that investors began to doubt there would be any job improvement in this Friday's report from the Labor Department because the Challenger Gray and Christmas layoff numbers had jumped 125 percent. Current forecasts show economists expecting the Friday non-farm payroll report to improve by 65,000 jobs. However, today's ISM services data has encouraged UBS Securities to raise their estimates to a gain of 125,000 jobs. This matches Deutsche Bank Securities estimates for a 125,000 improvement in the October jobs report. Suddenly investors can renew their positive expectations and Friday's numbers become even more important. Another jump in job creation and it could refill this market's gas tank for another rally higher. Any negative surprise and bids could evaporate as the exits get crowded real fast. The economic data above should have carried more weight with investors but Wall Street was more focused on the soon to be announced earnings from Cisco Systems. As a matter of fact many traders believe the last half hour rally was short covering ahead of the CSCO numbers. Considering their earning results, short covering would have been a wise move. The company doubled its net income from a year ago with 17 cents a share, which was 2 cents above estimates. Revenues jumped 5.3% to $5.1 billion. This was a record sales quarter for CSCO as the company experienced its strongest demand in two years. Analysts had been looking for revenues near $4.86 billion. CEO John Chambers was cautiously optimistic as demand from telecom companies had risen 10 percent over the last quarter. The stock jumped 6.6 percent in after hours trading and could very well ignite a new rally in the NASDAQ tomorrow. Speaking of tomorrow economists will be looking for another decline in the weekly initial jobless claims to the 380,000 level. Last week initial claims rang in at 386K. The combination of CSCO's earnings surprise and the inability to mount any sort of selling momentum today could easily send the markets to new highs tomorrow. We continue to urge caution on bullish play selection but the 10,000 and 2,000 levels could be price magnets that are too strong for the indices to resist. Also on deck for tomorrow are the October same-store sales numbers. Trade carefully and watch those stop losses! ************ FUTURES WRAP ************ Upphase Delayed, Selloff Interrupted Jonathan Levinson In yet another chapter of what is beginning to feel like a financial shock and awe campaign, a long-awaited 30 minute cycle upphase delayed itself just long enough to trick equity bears into believing that The Plunge was upon us. But, in an inspiring display of wit and finesse, the bulls slowly turned a weak sideways-up phase into a rout, launching a multi-pronged robot assault that took on fresh energy after the cash close with positive earnings from CSCO and QCOM. The 30 minute upphase was merely delayed, but it was enough to pull in a new round of shorts to be squeezed. Bonds finished lower, gold and the US Dollar Index higher. 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. 10 minute chart of the US Dollar Index My sympathies to anyone trying to trade this violent chart. A bucking bronco on diet-aids would be easier to ride, but the trend remains inexorably higher, with the US Dollar Index up to 93.72 as of this writing. The action appears to have been sufficiently inscrutable to cause gold to rally anyway, along with the CRB, up a whopping 3.56 to 250.13. Daily chart of December gold December gold added 2 to close at 382, with an intraday high of 384, low of 379.20. The downphase on the daily oscillators wasn't impacted by the bids, and the HUI actually closed 90 cents lower at 212.09, with XAU finishing +.02. This divergence between the miners and the metal is strange, and bodes potentially ill for the metals, as I believe that the miners represent the larger market than the futures contracts on the metal itself. Nevertheless, the rally in gold alongside the US Dollar strength was bullish, and we look to tomorrow to confirm whether this anomaly is signaling something bigger at hand. In case of doubt, I'll follow the oscillators, which continue to point south. Daily chart of the ten year note yield The ten year note yield (TNX) added 4.5 bps today to close at 4.35%. The daily chart oscillators are signaling a weak upturn within the apex of the large pennant we've been tracking, and while yields might just rocket north from here, I suspect that we'll be seeing more flip-flops as the pennant narrows preceding the eventual breakout. Daily NQ candles In reviewing these charts, note that they're based on the cash closing prices at 4PM, and note (contrary to the pivot matrix values), the 4:15PM prints. After the cash close, CSCO's results added afterburners to the ramp job already in progress at 4PM, with a print of 1443 at 4:15. The weakness in the morning carried well into the afternoon, with a very timid bounce that only attracted significant buying after 3PM. The daily cycle buy signal was a breath away from truncating, but the launch into the close dusted off its lapels, straightened its bowtie, and added a jaunty spring to its step, with an upphase underway. 30 minute 20 day chart of the NQ The market was so bleak for so much of the day that the shock- and-awe buying spurt had to have caught most participants completely off guard. I was writing listlessly about the fragile 30 minute cycle upphase trying to commence since the morning, but it seemed a foregone conclusion that it would wind up trending in oversold. Not so. The bounce from the intraday low sets up a potential head and shoulders top if it fails from below 1448, above which bears will have to contend with a possible reverse head and shoulders breakout theoretically projecting over 100 NQ points to the upside. Daily ES candles The ES was positive after 4PM but negative at the cash close, also on a daily cycle upphase but still laboring within the rising bear wedge. Little changed, except for a higher bounce above the secondary wedge support line, now at 1443. 20 day 30 minute chart of the ES The reverse head and shoulders pattern discussed for the NQ and which, hopefully, has bears and bulls reading with stunned attention, looks far less plausible on the ES chart. The 30 minute candles look more convincing with a head and shoulders top over the past two weeks, but to preserve its symmetry, the advance should fail at or below 1055. Once again, note that the 30 minute cycle oscillators are on buy signals, and to get an idea of how difficult trading can be (if you didn't know already), note the skidding sideways move on the 300 minute stochastic today preceding the eventual upphase. Note that the steepest price slide took place when the oscillator was actually pointed north in the morning. Daily YM candles Nothing to add on the YM. 20 day 30 minute chart of the YM For tomorrow, we have the daily and 30 minute oscillators in gear to the upside for equities, with bonds still dead in the water within the apex of the narrowing pennant, gold bucking the trend and the US Dollar Index powering north. Tomorrow, we get to learn how many shorts are actually left to squeeze, as most of today was a large bear trap. Another failure at the rally highs will set up a truncated 30 minute cycle upphase, and with the VXO closing at 17.56, we could have the potential for a meaningful selloff. However, as we discussed today in both the Futures and Market Monitor, the equity price trend is not down, and there is no shortage of bulls looking for dips to buy. Once again, caution (and active stops) is the prime directive. Trade what you see. ******************** INDEX TRADER SUMMARY ******************** Late bounce leaves indices unchanged Down, then up, then down, then up again to the close. After some marginal intra-day volatility, the major indices finished relatively unchanged ahead of networking giant Cisco Systems' (NSADAQ:CSCO) $21.80 +1.01% quarterly earnings, where bulls pushed the stock to $23.00 after the company beat Wall Street's consensus estimates by 2 cents a share. While after-hours trading is not considered a true market response, where all market participants cast their buy sell votes, bulls may have played rope-a-dope for the bulk of the session as the late afternoon rally to the close looks to have accurately forecasted a good report from Cisco. Cisco (CSCO) reported first-quarter pro forma earnings per share of 17 cents, up from 14 cents a year earlier. Net sales in the quarter rose to $5.1 billion from $4.8 billion a year earlier, where quarterly revenues exceeded the $5 billion mark for the first time in 10-quarter. Chief executive John Chambers cited "strength across our core switching and routing businesses, as well as traction in our advanced technologies." Looking ahead, CSCO's John Chambers seemed cautiously optimistic with guidance for Q2 to see revenues up slightly from Q1 (1-3% sequentially, 10% year-over-year), with gross margins remaining healthy at 67- 69%. The post 04:00 PM trade action in Cisco (CSCO), which is a component of the S&P 100 Index (OEX.X) 520.25 -0.21%, S&P 500 Index (SPX.X) 1,051.81 -0.12% and NASDAQ-100 Index (NDX.X) 1,429.56 +0.01% helped the S&P Depository Receipts (AMEX:SPY) $105.84 +0.07% and NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.84 +0.9% finish fractionally higher. As Cisco's conference call comes to an end, the SPY ticks by at $105.94, while the more actively traded QQQ has settled in at $35.90 level, and looks content below its WEEKLY R1 of $36.01. Today's biggest news may have come out of Australia, where a hike in official interest rates to 5.0% from 4.75% had Australia's All Ordinaries ($AORD) 3,255.80 closing near a one-month low. But tonight's earnings out of Australian-base FOX Entertainment Group (NYSE:FOX) $28.01, which trades as an ADR here in the U.S., helping the All Ordinaries stabilize in Thursday's early trade, with the $AORD down just 3.2 points (-0.10%) at 3,252.60. Shares of FOX jumped to $29.20 after the media giant reported first-quarter (September) earnings of $0.45 per share, which was $0.16 above consensus estimates of $0.29. FOX officials said "Overall, the first quarter has given us a great start to the fiscal year, and we are well on our way to meeting our growth forecasts for 2004." Pivot Matrix Today's trade did see the major indices lower at their DAILY S2's, but buyers were found just above our WEEKLY Pivot, where the proverbial "line drawn in the sand" looks to have ranges defined between the WEEKLY Pivots and WEEKLY R1s. After monitoring today's trade and seeing a late session rally build, I did profile a bullish trade in the QQQ from $35.74 (15:49:43) with an initial bullish target of $36.45, but after the 04:15:00 PM QQQ close, fine tuned the trade with a target of $36.35, and stop of $35.33, after quickly calculating tomorrow's DAILY Levels. If I could, I want to quickly take a moment and re-print an e- mail Jim Brown forwarded me from a trader, where I share some of his thoughts, based on observations he makes. The subject line read "I am a Frustrated Short." I respect the views you all have pertaining to the Equity Markets BUT I cannot see anything in the charts or Sentiment Indicators I follow (Save for the VXO) that lead me to believe a sell off is imminent. Compq held 1940 gap. Huge support in the 1042-1046 range on ES 60 min Stochastics are in oversold region on SPX and turning up on the COMP. Breadth continues to improve from lows. 5 and 10-day averages of Trin and the Put/call are neutral. And save for a day or 2 here or there we rally on close. I have a Strong Bearish Leaning based on the Bullish Percents and Low VXO. But each dip is still bought ferociously. Short Interest is huge and it's difficult to sell off when everyone who is short covers on each dip and then lays out new shorts. (The opposite of overhead supply) Thanks to you all and would appreciate a reply Some of this frustrated bear's comments, I hope, have been fully addressed in past Index Trader Wraps. Believe me, there are a lot of frustrated shorts, and as I've discussed in some recent updates, my (Jeff Bailey) bullish thoughts come primarily from observations of building short interest observations, higher lows and higher highs in the daily charts that span a couple of months, that the trader's observations are correct, where there really IS NOT any apparent sign that a sell off is imminent. Sentiment indicators will frustrate bears when they're low and will frustrate bulls when they are high. Sometimes, I think there is WAY too much emphasis put on sentiment indicators. While they can suggest bullish complacency when the VIX.X, VXN.X or VXO are low, it takes one HECK of a lot of bullish sentiment to have these sentiment indicators low. While the sentiment indicators certainly depict a very HIGH level of bullishness, this has been reflected in price action of the major indices so far. My mindset at this point is that the sentiment indicators should be used by BULLS to understand the market is probably "too bullish" and that a bullish trader should not be complacent! Conversely, a BEAR should simply understand, the market is VERY bullish right now. As it relates to the bullish %, which is simply a measure of supply/demand for various stocks that comprise the indices, these market internal indicators suggest BULLS are currently in a HIGH risk environment for new bull entries. However, after profiling a BEARISH trade way back in May in a QQQ put, when the NASDAQ-100 Bullish % ($BPNDX) moved above the 70% level, the HIGH RISK for BULLS has remained high since that time, and QQQ/NDX price action has shown market participants WILLING to take on that risk. We've seen short interest in the DIA, SPY, QQQ build, but as the trader observes, that has equated to larger losing positions, where the pullbacks may not only be met with bullish buying, but BEARISH buying as well, when a new high has been achieved. Believe me when I say that EVERY bear puts on a trade when he/she believes an old high is in, and that lower lows will be seen. But it is the GOOD trader, that when proven wrong, immediately looks to correct the mistake, especially on the pullback. It is notable that while bears kept warning bulls earlier this spring that it was dangerous to try and pick lows, some bears have thrown that trading discipline out the window as they attempt to pick the highs. This comment is not directed at the trader that sent the e-mail. I (Jeff Bailey) have picked a few highs, or so I've thought. Similar to the QQQ high of $29.00 back in May. Tonight's e-mail is timely, and many of the views expressed by the trader, are probably not uncommon among MANY market participants! I (Jeff Bailey) just "know" that at some point, the high level of BULLISH RISK is going to be removed, and while I know that EVERY trader/investor/subscriber wants ME to tell you when it is going to happen, I just don't know when for certain. I dare say those that have been calling tops since April, May, June, July, August, September, October, and even today might not know where. Sure.... if somebody continues to call a top, they will eventually be proven correctly. For me, the best way I know how to trade or investor is to try and control risk. At these higher levels of RISK, I'm quicker to take a profit, and I'm quicker to cut a loss, as I (Jeff Bailey) also sense the major averages are closer to a near-term top, than they are a low. The Pivot Matrix currently gives us a decent range from WEEKLY Pivot to WEEKLY R1, and with S&P futures (sp03z) settling above the 1,051.20 level again today, and CSCO looking to provide some bullish catalyst for technology stocks tomorrow, I'm going to hold a bullish bias for the indices ABOVE their WEEKLY Pivots, and will await to see just what happens if buyers (bulls or bearish short covering) can push the indices above their WEEKLY R1s. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals Qualcomm (NASDAQ:QCOM) $46.59 -1.54% trades at $47.28 in after- hours trade after reporting upside earnings and providing guidance that was modestly above consensus estimates. One would have to think the QQQ trades higher tomorrow, but first test is for QQQ to break above the $36.15 level, where a rising 21-day SMA and WEEKLY Pivot of $35.03 are deemed support. The one difference I see in the QQQ chart tonight compared to other indices we look at is Stochastics trying to kick higher, which gives impression that QQQ becomes a "leadership" index near term, where we might look for strength. S&P 500 Index (SPX.X) Chart - Daily Intervals I hold slightest of bullish thoughts for SPX. The BULLISH side of me wanted to see firmer support at 1,047, but I won't discount the ability of SPX to hold just above the weekly pivot, and stage a rebound into the close, ahead of CSCO's earnings. S&P 100 Index Chart - Daily Intervals Support 516, resistance 525. Only higher price action will keep the OEX's MACD above its Signal. With equal highs of 525, I view the OEX with greater bullish caution as it has NOT been able to make a higher high in recent week's trade. Dow Industrials Chart - Daily Intervals My (Jeff Bailey's) market psychology was depressed as the INDU traded below the 9,800 level for the better part of today's session. I must admit that it improved late when the INDU was able to claw its way back above 9,800. One note worthy of pointing out I think is that the INDU didn't come as close to testing its WEEKLY Pivot as the SPX, but gives us a potential "domino effect" to be alert to more meaningful weakness should the SPX, or INDU violate the WEEKLY Pivot. Jeff Bailey ************************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 ************** Know Your Opponent by Mark Phillips mphillips@OptionInvestor.com We spent our time together last week looking at what's wrong with the big picture, pointing out the disconnect between the massive stimulus from the Fed and the lackluster economic growth in the U.S. In every other instance of such sharp decreases in interest rates and increases in money supply, a robust economic recovery has been the result. That begs the question (which I addressed last week) of why that hasn't been the result this time. My assertion was that the economic growth is happening, it just doesn't happen to be occurring in the U.S. The problem is that the Fed is pushing on a string. The economic stimulus is having the desired effect (supercharging the economy), but it is not being felt in THIS economy, as economic growth is running very strong in Asia, particularly in China and India. That really shouldn't be any great surprise, with the huge exodus of jobs from the U.S. to foreign lands where the cost of labor is so much lower. With the cost of a networking engineer in the U.S. being $70k/year and an engineer with the same capabilities in India only costing $5k/year, is it any surprise that companies are sending every possible job they can to lands with lower labor costs? It isn't a marginal difference, it is an order of magnitude. Of course, the problem is that as companies are able to reduce their labor costs, they are able to further lower costs for the products and services they provide here at home. That creates further pressure on all companies in the same industry to lower their own costs, which has the result of having more and more companies sending more and more jobs overseas. Remember, it isn't just the manufacturing jobs that are leaving, it is also the design, engineering, consulting and services jobs that are leaving our shores. That produces an interesting dynamic. Falling prices from the fierce competition is a good thing to the consumer, as the products and services purchased cost less money. But with more jobs moving offshore, employment continues to fall, reducing the pool of consumers with the necessary discretionary income with which to purchase the products and services, even though the cost is falling. This is where the Fed has really created a problem through the unprecedented levels of money creation. The more of something there is in existence, the less valuable it is. Well, with a veritable flood of new money being injected into the system over the past couple years, is it any wonder the Dollar has been falling steadily against virtually every other major currency? The Dollar index (DX00Y) is currently near $93.50, fresh off fresh multi-year lows just above $91.00. At the same time that the dollar has been weakening, foreign governments have been intervening in the currency markets to depress their own currencies relative to the dollar, which has the effect of helping to prop up the dollar in relative terms. This is the hazard of fiat currencies -- the world may reach a kind of equilibrium between all the major currencies (wouldn't that be nice!), but if it is being done through the printing press (creating money out of thin air), then the value of those currencies will continue to deteriorate against known values. Investors aren't stupid and they see the hazards being created by the Fed's wanton money printing activities (and those of the other central banks) and have been shifting assets to hard currency over the past couple years. When I say 'hard currency' I hope many of you instantly think of gold, because it is the ultimate store of value, having held its value for thousands of years. Here's a little example that ought to drive the point home. Fifty years ago, let's say a loaf of bread cost a nickel. Today that same loaf of bread costs over a dollar. That means the dollar is only worth 5% of what it was 50 years ago. In contrast, 50 years ago, an ounce of gold would have bought a nice (not extravagant, but nice) men's suit. Today, that same ounce of gold can still buy the suit. Gold retains its value, just as fiat currencies lose theirs. Gold is popular because of its consistency and portability, but that doesn't mean it is the only true store of value. Real estate is another good example. It is a hard, tangible asset that appreciates over time, negating most of the ravages of inflation. Art and collectibles (cars or antiques, not Beanie Babies) are other forms of tangible, hard assets that will retain their value over time. The reason why is that they have real intrinsic value. Fiat money does not. A dollar is only worth something because the U.S. government says it is. Any notion of intrinsic value vanished when we went off the gold standard. Since then the Fed has gone about its merry business of destroying the value of the dollar -- never has the pace of this destruction been so great as under the 'leadership' of Sir Greenspan. Remember that interesting dynamic that I mentioned above? With the foregoing background information, now I think you can see the corner we've painted ourselves into. As more dollars have been printed, the value of all tangible assets has been rising. This is classic inflation and to look at the price of these tangible goods, we can see that inflation is moving along at a pretty good clip. Don't believe me? How much is your house up in value in the past 12 months? 5 years? What was it worth 10 years ago? The cost of most manufactured goods is falling however, due to the continued squeeze on the cost of production by moving more and more jobs overseas. This loss of jobs continues to reduce the pool of liquid income available for purchasing all these products now being made elsewhere. At some point, the irresistible force meets the immovable object and there just aren't enough dollars available to chase the excessive supply of stuff and even at the reduced prices, merchandise doesn't move in sufficient quantities for companies to continue to grow profits. So far, the Fed has been able to dodge this bullet by driving interest rates to multi- decade lows, coercing millions of people to pull money out of those inflating assets, which has been used to help keep up the spending spree. Tax stimulus from the Bush administration hasn't hurt either. But now we're faced with the very cold reality that the refinancing boom has run its course, the tax cuts have already been implemented and the job market isn't improving at anywhere near the pace necessary to sustain any meaningful economic recovery. Corporate profitability is looking much better over the past couple quarters, to be sure. But remember the stimulus of the cash out refinancing and the tax cuts? Don't you think that has had a significant impact on consumers' spending patterns in recent months? Do you think that profligate spending is likely to continue in the quarters ahead? Only if business spending picks up quickly and sharply, which will translate into more capital investment and more hiring -- but that hiring must take place domestically and the capital investment dollars need to be spent here in order for that growth to translate into an improvement in the U.S. economy. Otherwise we're looking at a very unpleasant situation in the not-too-distant future. Ever since the first whiff of deflation was in the air, the Fed has had one mission, to reflate the economy. They've used the standard tools to do so, but it hasn't worked and it can't work because it is now a global economy, not a national economy. What the Fed has managed to do is inflate the value of tangible assets, stimulate foreign economies that provide the bulk of our manufactured goods and weaken our currency. There's one other by- product of the Fed's actions that is at the heart of what is interesting to us here -- they've managed to re-inflate the stock market bubble that popped in early 2000. You see, the inflation the Fed has accomplished in housing has translated into inflation in the equity market because of a dangerously mistaken belief on the part of the investing public -- namely that stocks have intrinsic value. They don't. When you buy a stock, you are either speculating that the price of the stock will rise due to improving business conditions and profits, or you are looking to be paid a residual income in the form of dividends. In the case of the dividend, an argument can be made that you do have an asset, but it is only a known quantity until management decides to change it. Stock shares are a piece of paper (now an electronic receipt) that are deemed to have value because the market says they do. But it is a very dynamic equation and if the profits of the underlying company should fall, so will the price of the stock. During an economic growth phase, owning stocks can be quite lucrative as earnings grow and P/E multiples expand. During these times, investors and speculators are well-rewarded for buying values. But things are different right now than in any other economic recovery on record. Stock valuations are already above levels that usually denote an OVERVALUED market (i.e. a bull market top). Normally, a market top can be found with aggregate P/E ratios at 20 or above and market bottoms are found when P/E ratios are in the 8-10 area. Another metric that seems to hold true on a marketwide basis is that dividend yields should reach into the 5-7% area near a market bottom. We're nowhere near market bottom valuations right now and even if we are in an economic recovery phase, the rise in stock valuations has already more than accounted for any recovery. I ran across the following statistics earlier this week that I think help to drive the point home. According to a 10/27 report from Merrill Lynch's Chief U.S. Strategist, Richard Bernstein, this is where the valuations currently rest for the DOW and the NASDAQ-100 DOW NASDAQ-100 Trailing P/E 21.0 81.7 Future P/E 18.4 37.8 Dividend Yield 2.2% 0.2% That's a sobering look at the current state of the market don't you think? It's currently priced to perfection, with the expectation of strong economic recovery, a myth that I hope I've helped to dispel here today. But even if there were a strong recovery, can stocks realistically be expected to go much higher when starting out from a point of such overvaluation? Is it any wonder that Warren Buffet can't find a value he likes, anywhere? My personal opinion is that the stock market is due for a large fall, and we will likely see new lows across the board when some of the economic realities I've laid out here come to pass. However, please don't take my diatribe as marching orders to go out and place large bearish trades. What I've attempted to lay out in the past two articles is the very big picture and where the pitfalls lie. Trying to trade fundamentals requires a lot of time and a lot of patience -- not to mention very deep pockets. If we've developed a market bias, we have to then turn to the charts and use what they are telling us to determine when is the time for action. Despite many tantalizing teasers over the past several months, the charts have not yet given us that green light. My intent in these past two articles was to help provide a framework of the economic landscape in which we are currently trading. Hopefully it provides a good perspective so that when the music stops and the rats scurry for the exits, you'll be in a position to protect your assets and profit from the downside. Have a great week! Mark ************************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 ************************************************************** ******************* 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. 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The Option Investor Newsletter Wednesday 11-05-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: VRTS Dropped Calls: ADTN, IMDC Dropped Puts: None Play of the Day: Call - VRTS Spreads, Combinations & Premium-Selling Plays: An Incredible Comeback! Watch List: A Few Three-Lettered Stocks to Watch Updated on the site tonight: Market Posture: Mixed Day ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** ADTN - CALL Raise stop from 34.50 to 34.95 ************* DROPPED CALLS ************* ADTRAN, Inc. - ADTN - close: 65.05 change: -6.68 stop: 66.40 No matter how good the chart of ADTN looked last night, it was no match for the negative reception of news that the CEO had just dumped 4 million shares (half his holdings) and the stock gapped sharply lower and then continued to deteriorate throughout the day, ending with a more than 9% loss on the day. As noted this morning in the Market Monitor, we wanted to avoid taking a position unless the stock was able to shake off the negative news and bounce from support near $69. That bounce clearly never happened, so no entries should have even been considered. We've got to just chalk it up as a case of unfortunate timing that we fortunately managed to escape from unscathed. Clearly after such a dismal performance and a violated stop, we have no interest in doing anything but dropping the play tonight. Picked on November 4th at $71.73 Change since picked: -6.68 Earnings Date 1/12/04 (unconfirmed) Average Daily Volume = 1.02 mln --- Inamed Corp - IMDC - cls: 77.79 chg: -10.06 stop: 82.49 The drama over the introduction of silicone implants continues. Last month a FDA advisory panel voted 9 to 6 in approval of reintroducing silicone breast implants with certain conditions. The FDA usually follows the guidance of its advisory panels and shares of IMDC shot higher on the positive vote. Now the chairman of the U.S. advisory panel is having second thoughts. Dr. Thomas Whalen's term had expired in 2002 but he was asked to preside over the panel as acting chairman, a non-voting position except in the case of a tie. Now Dr. Whalen has mailed the FDA and urged agency not to approve this application. His concerns stem from long-term safety issues that he feels are still unknown. As would be expected Wall Street reacted strongly to the news and IMDC gapped lower at the open. Our put play would have been closed at the open, under our stop loss. Picked on November 02 at $86.16 Change since picked: - 8.37 Earnings Date 10/29/03 (confirmed) Average Daily Volume: 514 thousand Chart = ************ DROPPED PUTS ************ None ************************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 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** Veritas Software -VRTS - close: 38.36 change: +1.31 stop: 34.95*new* -Company Description- As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. - Most Recent Update (Tuesday, Oct 21, 2003)- While it certainly isn't setting any records, VRTS is still looking like a decent breakout candidate. Over the past week, it has been trying to solidify its breakout above $36, trading in a fairly tight range between $36.00-37.50. Despite the lack of additional upside progress so far this week, we certainly like the way the 10-dma ($36.23) appears to be providing intraday support, with the 20-dma ($35.49) as backup. Intraday dips and rebounds in the $35.50-36.00 area look good for new entries as old resistance is verified as new support. Once clear of near- term resistance, the next upside target will be $40, where conservative traders may look to harvest some partial gains. We're raising our stop to $34.50 tonight, which is now under the 30-dma ($34.57) and will be under the 50-dma ($34.42) by tomorrow. - Play of the Day Comments - Finally! Now we're beginning to see the bullish breakout in shares of VRTS. The stock surged higher in the last couple of hours of the day on very strong volume. There was little news to explain the move, which could scare shorts into covering their positions even faster. The positive CSCO news tonight should set the tech sector on fire tomorrow. We'll be looking for some follow through from VRTS. - Suggested Options - Shorter Term: The November 35 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the December 40 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 35 Call. BUY CALL NOV-35 VIV-KG OI=15939 at $3.80 SL=2.00 BUY CALL NOV-40 VIV-KH OI= 7030 at $0.75 SL= -- BUY CALL DEC-35 VIV-LG OI= 1437 at $4.60 SL=2.30 BUY CALL DEC-40 VIV-LH OI= 5628 at $1.60 SL=0.80 Annotated Chart: Picked on October 28th at $37.27 Change since picked: +1.09 Earnings Date 1/21/04 (unconfirmed) Average Daily Volume = 6.21 mln Chart = ************************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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* An Incredible Comeback! By Ray Cummins The major U.S. equity indexes ended on an upbeat note Wednesday, despite being deep in the red for most of the session. Mediocre earnings and concerns over Friday's upcoming employment report kept traders on the sell side for most of the day, however bargain hunters reversed the trend near the closing bell. The Dow Jones Industrial Average slipped 18 points to 9,820 even as United Technologies (NYSE:UTX) and 3M Corp. (NYSE:MMM) hit 52-week highs. The NASDAQ Composite moved into positive territory near the close, up 1 point at 1,959 despite profit-taking in internet, networking, semiconductor and software shares. The Standard & Poor's 500 Index fell 1 point to 1,051 as buying pressure in homebuilders, gold and oil services stocks could not overcome a slump in transportation and financial issues. Volume picked up late in the day with over 1.3 billion shares traded on the New York Stock Exchange while 2 billion shares were swapped on the NASDAQ. Breadth was roughly neutral on both exchanges. Bonds headed to new lows going into the close with the 10-year treasury note falling 14/32 to yield 4.35%. Later in the week, the U.S. government plans to auction $57 billion of notes to fund borrowing and refund maturing debt. *************** SUMMARY OF CURRENT POSITIONS - AS OF 11/04/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield DRIV NOV 25 24.50 28.00 $0.50 4.78% 2.04% ERES NOV 32 31.50 47.00 $1.00 6.89% 3.17% NTAP NOV 20 19.50 24.96 $0.50 5.70% 2.56% BRCM NOV 27 27.00 33.72 $0.50 4.69% 1.85% CYD NOV 18 17.20 33.66 $0.30 4.95% 1.74% ERES NOV 35 34.20 47.00 $0.80 6.19% 2.34% GENZ NOV 47 46.55 44.99 ($1.56) 0.00% 2.04% * LRCX NOV 22 22.20 29.81 $0.30 3.86% 1.35% NVLS NOV 35 34.15 44.45 $0.85 5.35% 2.49% RMBS NOV 20 19.55 25.01 $0.45 6.20% 2.30% TXN NOV 22 22.10 29.84 $0.40 4.23% 1.81% VECO NOV 22 22.00 27.00 $0.50 5.04% 2.27% APPX NOV 22 22.05 25.30 $0.45 7.08% 2.04% CKFR NOV 22 22.20 27.49 $0.30 4.03% 1.35% CYD NOV 20 19.75 33.66 $0.25 4.37% 1.27% ERES NOV 35 34.55 47.00 $0.45 4.25% 1.30% LEND NOV 20 19.70 29.85 $0.30 5.40% 1.52% NFLX NOV 40 39.45 59.60 $0.55 4.89% 1.39% NSCN NOV 20 19.70 26.14 $0.30 4.96% 1.52% ONXX NOV 17 17.15 24.60 $0.35 6.57% 2.04% ANPI NOV 40 39.35 45.68 $0.65 6.30% 1.65% CYD NOV 22 22.25 33.66 $0.25 4.91% 1.12% GPRO NOV 22 22.10 28.40 $0.40 6.92% 1.81% LEXR NOV 20 19.70 23.76 $0.30 5.59% 1.52% MSTR NOV 45 44.55 56.03 $0.45 4.32% 1.01% NTE NOV 35 34.40 39.90 $0.60 6.92% 1.74% NTLI NOV 50 49.50 66.91 $0.50 4.38% 1.01% There was no opportunity to initiate the bullish positions in New Century Financial (NASDAQ:NCEN), Photon Dynamics (NASDAQ:PHTN) or Netscreen Technologies (NASDAQ:NSCN) due to "gap-up" in the underlying issues on the day after the plays were offered. The position in Palm (NASDAQ:PALM), although profitable, has been removed from the portfolio due to its split into shares of PalmSource (NASDAQ:PSRC) and PalmOne (NASDAQ:PLMO). Genzyme (NASDAQ:GENZ) is the first naked-put position to be closed in November. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield FLML NOV 40 40.80 25.90 $0.80 8.88% 1.96% IMCL NOV 45 45.65 35.99 $0.65 6.97% 1.42% SOHU NOV 45 45.55 34.96 $0.55 5.85% 1.21% BGEN NOV 40 40.50 38.30 $0.50 3.96% 1.23% MGAM NOV 45 45.30 37.70 $0.30 3.99% 0.66% NPSP NOV 35 35.25 25.51 $0.25 4.53% 0.71% NTES NOV 60 60.70 45.16 $0.70 7.65% 1.15% SEPR NOV 30 30.60 25.75 $0.60 9.84% 1.96% There was no opportunity to initiate the bearish position in Surmodics (NASDAQ:SRDX) due to the "gap-down" in the underlying issue on the day after the play was offered. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status CUM 50.77 47.54 NOV 42 45 0.30 44.70 $0.30 Open CYMI 45.27 49.13 NOV 35 40 0.60 39.40 $0.60 Open ERTS 103.58 99.32 NOV 90 95 0.55 94.45 $0.55 Open SYK 78.92 81.73 NOV 70 75 0.45 74.55 $0.45 Open APOL 63.95 65.39 NOV 55 60 0.60 59.40 $0.60 Open BDK 45.96 47.63 NOV 40 45 0.75 44.25 $0.75 Open SEE 52.31 53.82 NOV 45 50 0.50 49.50 $0.50 Open GDT 51.47 51.22 NOV 45 50 0.60 49.40 $0.60 Open IFIN 35.10 35.99 NOV 30 32 0.25 32.25 $0.25 Open MXIM 48.24 49.64 NOV 40 45 0.45 44.55 $0.45 Open The position in J2 Global Communications (NASDAQ:JCOM) has previously been closed to limit potential losses. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status MEDI 33.09 25.16 NOV 40 37 0.30 37.80 $0.30 Open BUD 48.89 49.02 NOV 55 50 0.50 50.50 $0.50 Open KMX 32.31 31.99 NOV 40 35 0.70 35.70 $0.70 Open NBR 36.75 36.80 NOV 42 40 0.25 40.25 $0.25 Open AMGN 60.30 61.09 NOV 70 65 0.45 65.45 $0.45 Open FRE 57.03 56.25 NOV 65 60 0.60 60.60 $0.60 Open FNM 72.75 70.87 NOV 80 75 0.65 75.65 $0.65 Open BBOX 42.35 44.55 NOV 50 45 0.45 45.45 $0.45 Open GILD 52.00 53.66 NOV 60 55 0.60 55.60 $0.60 Open MANH 28.30 28.64 NOV 35 30 0.50 30.50 $0.50 Open Wellpoint Health Networks (NYSE:WLP) has previously been closed to limit potential losses. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** ICOS - ICOS Corporation $46.87 *** Next Leg Up? *** ICOS Corporation (NASDAQ:ICOS) develops pharmaceutical products with significant commercial potential by combining its unique capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. The firm applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis, pulmonary arterial hypertension and cardiovascular diseases, as well as inflammatory diseases. The company has established collaborations with pharmaceutical and biotechnology companies to enhance its internal development capabilities and to offset a substantial portion of the financial risk of developing its product candidates. ICOS - ICOS Corporation $46.87 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 40 IIQ WH 2320 0.35 39.65 5.1% 0.9% * SELL PUT NOV 45 IIQ WI 1509 1.35 43.65 13.2% 3.1% ************** IMCL - ImClone $36.47 *** Erbitux Approval Coming? *** 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 $36.47 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 30 QCI WF 3011 0.25 29.75 5.3% 0.8% * SELL PUT NOV 35 QCI WG 3005 1.25 33.75 15.6% 3.7% ************** GPRO - Gen-Probe $29.11 *** Recovery In Progress! *** Gen-Probe (NASDAQ:GPRO) is a 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 over 60 products that detect a variety of infectious microorganisms, including those causing sexually transmitted diseases, tuberculosis, strep throat, pneumonia and fungal infections. Additionally, the company developed and manufactures the only FDA-approved blood screening assay for the simultaneous detection of HIV-1 and HCV, which is marketed by Chiron Corporation. Gen-Probe 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 product development experience, and its products are used daily in clinical laboratories and blood collection centers throughout the world. Quarterly earnings are due on 10/30/03. GPRO - Gen-Probe $29.11 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 25 PSU WE 943 0.25 24.75 5.7% 1.0% * SELL PUT NOV 27.5 PSU WY 1505 0.70 26.80 11.7% 2.6% ************** MRVL - Marvell Technology $45.21 *** Testing 2003 Highs! *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. MRVL - Marvell Technology $45.21 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 40 UVM WH 2094 0.35 39.65 4.7% 0.9% * SELL PUT NOV 45 UVM WT 1720 0.90 44.10 8.6% 2.0% ************** MSTR - MicroStrategy $56.06 *** Another 2-Year High! *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. MSTR - MicroStrategy $56.06 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 50 EOU WJ 479 0.45 49.55 4.8% 0.9% * SELL PUT NOV 55 EOU WK 216 1.85 53.15 14.3% 3.5% ************** NVLS - Novellus Systems $44.31 *** New Trading Range? *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $44.31 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 40 NLQ WH 7390 0.35 39.65 4.5% 0.9% * SELL PUT NOV 45 NLQ WA 2947 0.85 44.15 7.9% 1.9% ************** PHTN - Photon $40.91 *** Rally Mode! *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display (FPD) industry. The company also offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries and the cathode ray tube display and CRT glass and auto glass industries. The firm's test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing. PHTN - Photon $40.91 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 35 PDU WG 179 0.25 34.75 4.2% 0.7% SELL PUT NOV 37.5 PDU WU 45 0.60 36.90 7.9% 1.6% * SELL PUT NOV 40 PDU WH 30 1.35 38.65 14.4% 3.5% ************** PMCS - PMC-Sierra $21.15 *** On The Move! *** PMC-Sierra (NASDAQ:PMCS) designs, develops, markets and supports a broad range of high-performance integrated circuits primarily used in the telecommunications and data networking industries. The company has more than 120 different semiconductor devices that are sold to equipment manufacturers, who in turn supply their equipment principally to communications network service providers and enterprises. The firm also provides semiconductor solutions for customers by leveraging its intellectual property, design expertise and systems knowledge across a wide range of applications. The company's networking products are sold into four areas of the global network infrastructure: metro, access, enterprise/storage and consumer-related markets. PMCS - PMC-Sierra $21.15 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 17.5 SQL WW 1467 0.25 17.25 8.8% 1.4% * SELL PUT NOV 20 SQL WD 510 0.80 19.20 17.6% 4.2% ************** NTAP - Network Appliance $25.19 *** Consolidation Complete? *** Network Appliance (NASDAQ:NTAP) is a provider of enterprise network storage and data management solutions. NetApp network storage solutions and service offerings provide data-intensive enterprises with consolidated storage, improved data center operations, economical business continuance and efficient remote data access. The company's solutions meet the needs of archive, reference, departmental/remote office, business internal and business operations, and business-critical data with a common product architecture and data management methodology. NTAP - Network Appliance $25.19 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 22.5 NUL WX 2946 0.25 22.25 5.9% 1.1% * SELL PUT NOV 25 NUL WE 6876 1.05 23.95 17.2% 4.4% ************** QCOM - Qualcomm $46.59 *** Solid Earnings! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $46.59 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 42.5 AAO WV 6911 0.35 42.15 4.2% 0.8% * SELL PUT NOV 45 AAO WI 14048 0.95 44.05 9.4% 2.2% ************** VRNT - Verint Systems $22.34 *** Trading Range? *** Verint Systems (NASDAQ:VRNT), headquartered in Melville, New York, is a leading provider of analytic software-based solutions for communications interception, video security and surveillance, and enterprise business intelligence. Verint software, which is used by over 1,000 organizations in over 50 global countries, generates actionable intelligence through the collection, retention and analysis of voice, fax, video, email, Internet and data sent from multiple communications networks. Verint Systems is a subsidiary of Comverse Technology (NASDAQ:CMVT). VRNT - Verint Systems $22.34 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT NOV 20 JOQ WD 122 0.25 19.75 6.5% 1.3% * SELL PUT NOV 22.5 JOQ WX 29 1.10 21.40 19.3% 5.1% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** ELAB - Eon Labs $43.74 *** Bullish Outlook! *** Eon Labs (NASDAQ:ELAB) is a generic pharmaceutical company engaged in developing, licensing, manufacturing, selling and distributing a range of prescription pharmaceutical products primarily in the United States. The company focuses on drugs in a variety of solid oral dosage forms, utilizing both immediate and sustained release delivery, in tablet, multiple layer tablet, film-coated tablet and capsule forms. The company does not depend on any single drug or therapeutic category for a majority of its sales. ELAB - Eon Labs $43.74 PLAY (conservative - bullish/credit spread): BUY PUT NOV-35.00 ESQ-WG OI=32 ASK=$0.15 SELL PUT NOV-40.00 ESQ-WH OI=50 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$39.60 ************** HIT - Hitachi $63.61 *** New 2003 High! *** Hitachi (NYSE:HIT) is a global electronics company that makes and markets a range of products, including computers, semiconductors, consumer products, and power and industrial equipment. The firm's business is very diversified, and is classified into five industry segments: Information Systems and Electronics, Power and Industrial Systems, Consumer Products, Materials, and Service and Other. HIT - Hitachi $63.61 PLAY (less conservative - bullish/credit spread): BUY PUT NOV-55.00 HIT-WK OI=144 ASK=$0.20 SELL PUT NOV-60.00 HIT-WL OI=41 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$59.45 ************** WFMI - Whole Foods Market $59.00 *** Earnings Speculation *** Whole Foods Market (NYSE:WFMI) owns and operates a chain of natural and organic foods supermarkets. The categories of products that the company offers include: produce, grocery, meat and poultry, seafood, bakery, prepared foods, specialty (beer/wine/cheese), nutritional supplements, body care, pet products, floral, household products and educational products such as books. On average, the company's stores carry approximately 26,000 SKUs (stock-keeping units) of food and non-food products. Whole Foods has a broad product selection with a heavy emphasis on perishable foods that appeal to both natural foods and gourmet shoppers. Earnings are due on 11/12/03. WFMI - Whole Foods Market $59.00 PLAY (conservative - bullish/credit spread): BUY PUT NOV-50.00 FMQ-WJ OI=1484 ASK=$0.25 SELL PUT NOV-55.00 FMQ-WK OI=1273 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$54.55 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** FLML - Flamel Technologies $24.86 *** Profit-Taking Continues *** Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company engaged mainly in the development of two polymer-based delivery technologies for medical applications. The company's Micro-pump technology is a multi-particulate technology for oral ingestion of small molecule drugs with applications in controlled release, tastemasking and bioavailability enhancement. The company has three major products based on its Micropump technology: Asacard, a controlled-release formulation of aspirin for the treatment of cardiovascular disease; Metformin XL, a controlled-release form of Metformin that is in development for use for the treatment of Type II diabetes, and Genvir, a controlled-release acyclovir for the treatment of genital herpes. In addition, FLML has developed new herbicide delivery systems and has patented a biomaterial, ColCys. FLML - Flamel Technologies $24.86 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 30 FLU KF 2,836 0.25 30.25 8.6% 0.8% * SELL CALL NOV 25 FLU KE 723 1.60 26.60 25.1% 6.0% ************** PCLN - Priceline.com $21.66 *** Post-Earnings Sell-Off! *** Priceline.com (NASDAQ:PCLN) offers products for sale in two major categories: a travel service that offers leisure airline tickets, hotel rooms, rental cars, packaged vacations and cruises; and a personal finance service that offers home mortgages, refinancing and home equity loans through an independent licensee. PCLN also owns travel Web sites Lowestfare.com and Rentalcars.com. The firm is part-owner of Internet travel service Travelweb. Priceline.com licenses its business model to independent licensees, including pricelinemortgage and certain international licensees. PCLN - Priceline.com $21.66 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 25 PUZ KE 379 0.30 25.30 9.5% 1.2% * SELL CALL NOV 22.5 PUZ KX 205 0.80 23.30 16.6% 3.4% ************** SEPR - Sepracor $26.26 *** Downtrend Intact *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The firm's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to current products. SEPR - Sepracor $26.26 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 30 ERQ KF 1,247 0.25 30.25 6.4% 0.8% * SELL CALL NOV 27.5 ERQ KY 745 0.80 28.30 14.2% 2.8% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** ATH - Anthem $68.61 *** WellPoint Buyer In A Slump! *** Anthem (NYSE:ATH) is an Indiana-domiciled publicly traded firm that, through its subsidiary companies, provides health care benefits to more than 11.8 million people and specialty benefits to 12.1 million people. Anthem is the fourth largest publicly traded health benefits company in the United States and also an independent licensee of the Blue Cross Blue Shield Association. Anthem is the Blue Cross and Blue Shield licensee for Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado, Nevada, Maine and Virginia, excluding the suburbs of Washington, D.C. ATH - Anthem $68.61 PLAY (moderately aggressive - bearish/credit spread): BUY CALL NOV-75.00 ATH-KO OI=2933 ASK=$0.15 SELL CALL NOV-70.00 ATH-KN OI=3144 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.70-$0.80 POTENTIAL PROFIT(max)=16% B/E=$70.70 ************** MDT - Medtronic $44.03 *** Industry Pricing Pressure? *** Medtronic (NYSE:MDT) is a medical technology firm that provides lifelong solutions for people with chronic disease. The company offers products and therapies for use by medical professionals to meet the healthcare needs of their patients. Primary products include those for bradycardia pacing, tachy-arrhythmia management, heart failure, atrial fibrillation, coronary vascular disease, endovascular disease, peripheral vascular disease, heart valve replacement, extra-corporeal cardiac support, minimally invasive cardiac surgery, malignant and non-malignant pain, diabetes, urological disorders, gastroenterological ailments, movement disorders, spinal surgery, neurosurgery, neurodegenerative disorders and ear, nose and throat surgery. MDT - Medtronic $44.03 PLAY (moderately aggressive - bearish/credit spread): BUY CALL NOV-47.50 MDT-KW OI=4550 ASK=$0.10 SELL CALL NOV-45.00 MDT-KI OI=1809 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=19% B/E=$45.40 ************** MMC - Marsh & McLennan $44.10 *** Putnam Problems Continue! *** Marsh & McLennan Companies (NYSE:MMC) is a global professional services firm. MMC is the parent firm of various subsidiaries and affiliates that provide clients with analysis, advice and transactional capabilities in the fields of risk and insurance services, investment management and consulting. The company's risk and insurance services are provided by its subsidiaries and their affiliates as broker, agent or consultant for insureds, insurance underwriters and other brokers, on a worldwide basis, in the areas of risk management and insurance broking, reinsurance broking and services and related insurance services. Investment management and other related services are provided by Putnam Investments Trust and its subsidiaries. Mercer Incorporated and related affiliates, separately and in collaboration, provide consulting and related services from locations around the world, primarily to business organizations. MMC - Marsh & McLennan $44.10 PLAY (moderately aggressive - bearish/credit spread): BUY CALL NOV-50.00 MMC-KJ OI=1797 ASK=$0.10 SELL CALL NOV-45.00 MMC-KI OI=6392 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$45.65 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** A Few Three-Lettered Stocks to Watch Progressive Corp - PGR - close: 75.18 change: -0.29 WHAT TO WATCH: We are keeping an eye on shares of insurance company Progressive. The stock is very close to its all time highs and overhead resistance near the $76.20 level. Its P&F chart is showing a bullish catapult breakout. We'd like to see a new high before opening any new bullish positions. Chart= --- Best Buy Co - BBY - close: 58.34 change: -1.07 WHAT TO WATCH: There will be lots of retail news tomorrow with a parade of October same-store sales numbers. We're curious to know if BBY will see any selling. A pull back and bounce from the $55 level looks like an attractive entry point for new bullish positions. However, given its rising trend from April it could be due for a three to four week consolidation before its next leg up. Chart= --- Caterpillar - CAT - close: 74.94 change: +0.13 WHAT TO WATCH: With the steady stream of positive economic manufacturing data there appears to be a new interest in industrial stocks like CAT. Shares continue to build slowly on a steady bounce from the $70 level and look ready to fill the gap from mid-October. MACD is positive. Chart= --- Illinois Tool Works - ITW - close: 74.60 change: +0.26 WHAT TO WATCH: The relative strength in shares of ITW is impressive. This is another cyclical stock that should be benefiting from the improving manufacturing data. The daily chart appears to show a reverse H&S pattern breakout. We do see long-time resistance near $77.50 on its weekly chart. While we like the relative strength the recent rally has been fueled by declining volume. That's typically a bad sign. This could be one worth watching. Chart= --- Johnson and Johnson - JNJ - close: 49.15 change: +0.00 WHAT TO WATCH: We've been watching JNJ for a long time. While we've privately been correct on its declining trend the stock just doesn't appear to move very fast and that can be frustrating for option traders (thus we've chosen to not add it to the OI put list). Now the stock is very close to breaking support at the $49.00 level, a battleground bitterly fought over by bulls and the bears. A decisive break could lead the stock toward the $45 level. Unfortunately, we may not know if there is any momentum behind it until it pierces the $48 level. 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