The Option Investor Newsletter Sunday 11-16-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Big News Ahead Futures Market: The Airball Zone Index Trader Wrap: Fumble Editor's Plays: So Many Choices Market Sentiment: A Shadow of Pessimism Ask the Analyst: Buy/Sell Program Alerts, Pivot Analysis, and 5-MRT Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 11-14 WE 11-07 WE 10-31 WE 10-24 DOW 9768.68 - 41.11 9809.79 + 8.67 9801.12 +218.66 -139.33 Nasdaq 1930.26 - 40.48 1970.74 + 38.53 1932.21 + 66.62 - 46.77 S&P-100 519.01 - 1.69 520.70 + 0.72 519.98 + 9.73 - 6.87 S&P-500 1050.35 - 2.86 1053.21 + 2.50 1050.71 + 21.80 - 10.41 W5000 10244.66 - 45.10 10289.7 + 65.24 10224.5 +241.02 -114.88 RUT 532.96 - 10.00 542.96 + 14.74 528.22 + 21.79 - 13.93 TRAN 2927.64 - 51.65 2979.29 + 66.18 2913.11 + 85.86 - 20.03 VIX 16.94 + 0.01 16.93 + 0.83 16.10 - 1.61 + 0.09 VXO 17.63 + 0.07 17.56 + 0.41 17.15 - 1.78 - 0.26 VXN 26.16 + 0.96 25.20 + 0.31 24.89 - 0.56 + 0.12 TRIN 1.35 1.21 1.02 1.44 Put/Call 0.69 0.78 1.12 0.91 ****************************************************************** Big News Ahead by Jim Brown The markets received another dose of mixed economic news on Friday as well as some mixed earnings news. The result was more indecision as to direction and another aimless day spent wandering about on low volume. If November and December are going to follow through on the historical best two months of the year rally they are going to have to hurry. Dow Chart Nasdaq Chart The mixed economic reports began with the PPI at +0.8% and four times the expectations at +0.2%. Higher beef prices benefiting from the lack of cattle exports from Canada were a strong component. Higher auto prices needed to offset the high sales incentives was the other major price jump. Still, the core rate, minus food and energy, also rose +0.5%. Sure glad we don't need food and energy to live. Shucks if we took out the spike in auto prices as well the index would only be up +0.2% and inline with estimates. Obviously none of us can live without those components so the +0.8% inflation in prices put some more fear into analysts that the Fed would have to act sooner rather than later. The MARTS Retail Sales number for October fell -0.3% and more than expected. The biggest drop was in auto parts, gas stations and food and beverage stores. The drop in gas stations could be attributed to the drop in oil prices in October but on Friday oil prices again hit a three-month high. This drop in retail store sales is not really severe enough to be a problem but it was the second consecutive monthly drop. Slowing cash flow now that the tax checks are gone and the lack of mortgage refis are the real culprit. This was the first two consecutive months of drops since Jan-2002. Industrial Production fell slightly in October to only +0.2% from September's +0.5%. Remember that blowout last month and in July? (+0.8%) Back to reality again at a mediocre +0.2 and Capacity Utilization rose a miniscule +0.1% from 74.9 to 75%. This is a far cry from the hopes of rising demand causing ranks of new employees to be hired and new assembly lines purchased. With 25% capacity still unused there is not going to be a surge in equipment purchases or hiring any time soon. Production of consumer goods and business equipment fell in October after several months of gains. This follows my theory that the 3Q GDP bounce was simply a production of merchandise for the holiday season and they are going back to business as usual already. That usual business has become filling orders as they appear and no inventory building. Those inventories are still at record lows and any real increase in demand could cause a very strong spike in Industrial Production but so far it has failed to appear. Depending on what numbers you believe, consumers are a bipolar group. The November Michigan Sentiment Survey rose to 93.5 for a jump of +4 points over the October numbers. This was the high for the year and analysts were jumping all over this with glowing outlooks. More lies from men in ties would be my first thought. Retail sales is dropping like a rock from the highs in Aug/Sep. Auto sales are slowing. Home sales are slowing and mortgage loan applications hit a 52-week low last week. Wal-Mart missed earnings because the broadest measure of sentiment, their customers, were curtailing their spending. Why is the sentiment survey up when all the economics appear to be weakening. Could it be that consumers have just bought the recovery story completely and are camped out on the beach to watch the tidal wave arrive? The numbers are not adding up on my calculator but I am all for a big jump in expectations and a happy consumer. Happy people buy things and they could be already mentally cashing their January tax checks two months early. Regardless of how we read the economic reports from Friday or how we see consumer sentiment the markets did not like what they saw. With all the reports public but the sentiment the futures were trending lower and the indexes opened down. As if by magic just as the markets appeared ready to tank a major buy program appeared to push the Dow within 8 points of 9900 and the Nasdaq to nearly 1980. Nice try by somebody with deep pockets but no cigar. The instant the buy program completed the markets took back control and headed for the basement. The bulls tried to buy the dip at prior support of 9820 and 1950 but they could only slow the process, not stop it. Shortly after 1:PM there was one more attempt to rally the troops but the sellers were ready. Multiple support levels were broken on both indexes and the Dow ended up taking a loss for the week closing down -69 on Friday. The Nasdaq took the biggest hit closing nearly -50 points off the morning high and right at the lows of the day. While this may sound very bearish we need to keep it in perspective. Both indexes are still above the lows for the week. They did lose ground for the week but only about -40 points each. Definitely not a major crash despite the magnitude of the day's drop. It was the speed of the intraday drop that concerned traders not the distance. Volume was still light at 3.8 billion shares total but contrary to the strong bullish ratios from Wednesday the declining volume was better than 3:1 over advancing volume. Sounds bad but remember that Wednesday's triple digit gain came on 6:1 up volume over down. We have to keep things in perspective and part of that view has to include the new 52-week highs at over 700 on both Thursday and Friday. No weakness there. So what happened? There were multiple reasons that prompted investors to reconsider holding stocks over the weekend. GE started off the day with a major broker cutting earnings estimates by a full nickel. This put GE, which has been under pressure, on the defensive from the opening bell. GE closed at the low of the day at 27.86 and a three month low on volume of 27 million shares. That is 40% more than the average daily volume of 19 mil shares. Microsoft announced they would be taking a charge this quarter for employee stock option conversions and made some statements about continuing legal problems. MSFT has also been under pressure all week and it closed at the low of the day and a three month low of 25.46. CSCO found itself under pressure after Chambers sold two million shares. This is not a relative amount for Chambers but it helped to push CSCO back to 22.27 and erase the gains for the week. The major news and possibly the major reason for the speedy afternoon exit was an announcement by the SEC that they would announce a major settlement on Monday with a substantial financial penalty against a major broker. The advance warning with no clue as to the nature and identity of the culprit pushed financial stocks over the edge. Later in the day one SEC official said in an interview that this would be an entirely new area of investigation and not related to mutual fund market timing or late trading. This started the rumors flying and the consensus is the broker will be censured for selling higher commission funds to unsuspecting clients when possible. This was not the only new fund worries. American Express came under pressure when it was announced the NASD and the SEC had investigated fund trading and enforcement action had been recommended against them. They were not alone. Schwab announced they were under investigation by the SEC and had found instances of improper trading in their funds. While these two companies may have been seen as above the prior scandal it is clear that no stone is being left unturned. In addition to AMX and SCH there were new announcements of subpoenas or findings of problems at Legg Mason, Raymond James, Labranche and Prudential. Fidelity Investments also said they had slashed their investments in PRU, MMC, TROW and BEN as the scandal begin to grow. The explosion of negative news in the blue chip companies like AXP, PRU and SCH and the SEC warning that something big is coming on Monday probably proved too much risk for investors. Funds are still under pressure from investors shifting money but there is still money flowing into funds. The bullish 4Q sentiment continues to flow according to the fund trackers. AMG Data said $3.5 billion flowed into funds last week. TrimTabs.com claimed an inflow of +$4.4B. AMG said the four-week moving average rose to $5.4 billion and the highest level since May-2001. Obviously all the numbers contradict each other as the different companies calculate numbers differently. Both will have even more trouble in the future now that funds like Putman have stopped giving out fund flow data. I guess they were tired of hearing sound bites every two minutes about how much money investors had withdrawn from their funds. Fearing a monkey see, monkey do pattern they stopped the reporting. It was learned on Friday that Putman may face additional charges as more information is made public. They already have 16 class action lawsuits in progress. Spitzer also announced on Friday that he was not only looking at just fund timing and late trading but was branching out into all the other areas including the annuity business. This scandal is not going away anytime soon. Not only were the big caps hit today, led by GE and MSFT, but the techs that had gained the most recently were the hardest hit. After very good chip news this week the SOX lost -3% led by AMAT which lost -6.7% and Intel which lost -3% for the week. I mentioned on Thursday to watch drugs for money rotating out of techs. On Friday with the market in the tank the $DRG.x rose +5.22 or +1.62% to cap a week where it jumped from Tuesday's low of 304 to 326 at the close on Friday. (+7.2%) There are multiple reasons given for the sudden attention to drugs like the potential for a Medicare bill and some more consolidation in the industry. There is always a reason given but the coincidence is amazing. The jump in market cap on PFE, which traded a whopping 40 million shares on Friday, pushed PFE to be the third largest company by market cap at $265 billion. It ranks behind GE $280B and MSFT $276B. CSCO which once had a market cap of $550B has shrunk to only $157B, well behind INTC at $220B. Next week is shaping up to be a whopper. Not only is it an option expiration week but there are tremendous forces at work. According to the Stock Traders Almanac the week before Thanksgiving has been up TEN years in a row. That is a very good record that has traditionally been helped by the best two months of the year syndrome that begins in November. Unfortunately the history books cannot tell us what new scandal is going to be announced by the SEC on Monday. What we do know is the economic calendar will be light next week with only Business Inventories and NY State Manufacturing Survey on Monday followed by the CPI on Tuesday. If the CPI shows more inflation creeping into consumer prices you can bet the market will not be pleased. My bias is neutral for next week. For any other week of the year with the same factors leading into it I would expect a negative result. However, I think the drop on Friday was due to the fund news and the SEC announcement. The very unusual announcement on Friday that there was going to be a very big announcement on Monday was simply too much of an unknown for traders to risk. How big is very big? What new crime were they going to describe? Who was the culprit? Citibank, BAC, ONE? Nobody knows. It could even be Fidelity or Merrill. When is the next announcement going to be the last straw for investors? This unknown going into a Friday close with the Ramadan terror threat was just too much. I almost forgot to mention that at 12:30 Dow component XOM was handed an $11.9 billion judgment payable to the state of Alabama. Needless to say the market was under attack from all sides. I would continue to watch the internals once the SEC news has passed. The bullish bid is still there and with the ten year record for next week fresh in investors minds the odds are very good they will try to buy every dip. Assuming the SEC announcement on Monday does not alter reality as we know it the odds are good that Dow 9725 will hold as support. I would buy a bounce at that level once the news is out. However, should that level break the next stop could be significantly lower, possibly in the 9600-9650 range. The Nasdaq is at strong support at 1925-1930 and should that break we could easily see 1880. Neither of those worst case scenarios would be life changing for the markets. The uptrend would still be intact or maybe I should say the sideways trend since we have not made any substantial progress in over a month. The key is clearly the SEC announcement on Monday but given their penchant for showboating it may end up as no big deal when the smoke clears. Buy the bounce and sell the break but don't get married to your positions until a trend appears. You remember a trend don't you? That is where the market goes in one direction for more than two days. Until then a long term position may be measured in hours. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** The Airball Zone Jonathan Levinson Economic data released Friday morning refuted the Fed's recent comments about the continued risks of "dis-inflation", as the CRB, gold and silver hit multiyear highs. Bonds advanced, equities declined, and the US Dollar Index bounced off Thursday's low. 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 The US Dollar Index spent the week selling off and managed to not go down on Friday, closing at 91.42. This week saw the US Dollar Index sell off sharply in a bearish engulfing move that confirmed last week's candle print as a shooting star doji. 90-91 is the current bottom of this move, and a failure to hold above it should confirm the next wave down in the US Dollar bear that has taken the index down from 120 in early 2002. The CRB closed a better than 5 year high at 257.29, +2.29, led by natural gas, cocoa and silver futures. Daily chart of December gold December gold made a sharp breakout to new multiyear highs, printing a large bullish engulfing candle above 383. The intraday high on Friday was 399.40, with a low of 394.40. The move set the daily cycle oscillators on buy signals, lining up with the weekly cycle upphase. While gold and silver are clearly extended here, the higher oscillator low sets up a good launch pad for the so-far successful assault on the 390-410 resistance zone. Daily chart of the ten year note yield The ten year note cruised through resistance, with the yield (TNX) breaking support, dropping 3.8 bps to close at 4.233%. The weekly candle is a bearish engulfing resembling that on the US Dollar Index. The daily cycle oscillators are on early sell signals, while the weekly is mixed but on sell signals. In retrospect, the upside pennant breakout was a fake, and the moves from Thursday and Friday appear stronger and more reliable. Combined with the selling in equities on Friday, the pattern appears uncertain, but so far, dollar weakness has equated to strength in treasuries and weakness in equities. Daily NQ candles The NQ rewarded bears with a big reversal on Friday, dropping 30 points or 2.08%, but traversing 43 points from its 10AM spike high. The NQ severely underperformed the ES and YM, which fell 87% and .73% respectively. More significantly, however, the lower bear wedge support line failed below 1420, and the daily cycle oscillators remained in their downphases, which was an outcome not at all apparent at 10AM. The downside projection on a bear wedge breakdown is 1300, and while this is a very ambitious target, a failure to recover back above the trendline on Monday would have me looking to next support in the 1365 area. 30 minute 20 day chart of the NQ The bearish divergences we've been tracking this week paid off handsomely, with a beautiful breakdown on the 30 minute chart. The move bounced right at the last bottom above 1400, and the 30 minute cycle oscillators gave their first indication of a near term bottom. In the absence of bad news over the weekend, I would expect price to begin firming here, as the intraday short cycle oscillators are very oversold as well. However, with the weekly and daily cycles on sell signals within downphases, I believe that we may have seen a significant high today confirmed on NQ and actually breached for a tick or two on the ES. Daily ES candles As noted above the ES was stronger than the NQ, actually printing a new 52 week high on the 10AM stop-runner to 1064.25. This, however, allowed the ensuing selloff to result in a key outside reversal day, with a higher high and lower low that engulfed the previous day's candle. There are a number of bearish oscillator divergences now on the chart, but the lower support line held on the bear wedge. A break below 1045 would constitute a decisive bear wedge breakout, but as we see on Friday's 30 minute chart below, the wedge might not be ready to break just yet. 20 day 30 minute chart of the ES As with the NQ, the 30 minute chart is a thing of beauty, with bearish oscillator divergences completely refuting the 10AM panic high, and presaging the ensuing plunge. 1045 appears as a Fibonacci level on this shorter timeframe, and there's a twitch on the almost-oversold 30 minute cycle oscillator. An absence of bad geopolitical or economic news could allow for a bounce on Monday, and the top of that bounce, if lower than the Friday high, should be a good shorting opportunity. 150-tick ES The intraday 150-tick ES shows the decline and subsequent failure through downtrending support. A break above 1050.25 will re- establish a possible bull wedge projecting back to the Friday high. Daily YM candles YM resembles ES most closely. Bear wedge support remains intact for now. 20 day 30 minute chart of the YM This week gave us a bearish reversal in the US Dollar Index, with a bearish-neutral doji in equities, reflecting indecision on a failure at the highs. Gold and bonds both printed bullish candles for the week. Intermarket relationships are open to interpretation, but I see nothing good on the horizon for equities. The VXO broke and held below 17, closing higher at 17.63. These outrageously low volatility levels (about which I've been ranting more violently than usual this week) are not just a signal for bulls to be careful, but in fact a ringing indictment of equities at current levels. In my view, with this much for the VXO to run to the upside, equities are potentially sitting atop a huge airball zone. Timing is everything, however, and I prefer to follow the oscillators. However, where they are uncertain or ambiguous, I believe that we are either at or very close to a period in which equities will be resolving that uncertainty to the downside. See you Monday morning! ******************** INDEX TRADER SUMMARY ******************** Fumble Jonathan Levinson Friday's numbers look stronger than the day actually felt, with the Dow dropping 69 to close at 9768, the Nasdaq 37 to close at 1930 and the SPX –8.06 to 1050.35. The bulls can take comfort in the fact that the Nasdaq did not go out with a 1929 print. For the week, the Dow lost 0.4%, the Nasdaq –2.1% and the SPX -.3%, with the bulk of these declines accounted for by Friday's drop. Year to date, the Dow is up 17.1%, the SPX 19.4% and the Nasdaq 44.5%. More ominous, however, are the following facts: the Commodities Index (CRB), the Amex Goldbugs Index, and the Phlx Gold and Silver Index (XAU) all made multiyear highs this week and on Friday, while the various volatility indices, notably the VXO, made multiyear lows. Moreover, equity weakness on Friday lined up with strength in bonds, commodities and the other classic "refuge", treasury bonds. The VXO printed a low of 16.62 on Thursday and rose 4.69% Friday to close at 17.63. Without wishing to beat a dead horse on this issue, volatility hasn’t tended to stay low for extended stretches, and this week saw sustained readings below 17 at what are 5 year lows. Unless an equity bull believes that this is a new bull market, the VXO is telling us that current price levels are simply untenable, and Friday's reversal from its highs was the first whiff of confirmation. The Nasdaq significantly underperformed the SPX and Dow, and the QQQ underperformed the Nasdaq. QQQ tends to be a market leader, and its leading weakness is yet another portent of trouble ahead. With that said, let's look at the chart and review this week's action on the cycles we follow: Weekly COMPX candles This week's bearish doji confirmed last week's shooting star doji as a top. Whether this proves to merely temporary or more significant cannot be known for the moment, but if this week's weakness continues below 1890-1900 support, bears may well have something about which to cheer. The pullback so far is routine, and does nothing to alter what remains an impressive uptrend off the March lows. But that rise is occurring within a now-extremely low volatility environment, within a large bearish ascending wedge. More worrisome is the bearish divergence on the 10 week stochastic, drifting lower against higher price highs. The Nasdaq appears very toppy on this timeframe, and while a bounce off the 1890-1900 support line is possible, the bear wedge is edging ever-closer to an apex, and a decisive break is due. The oscillators tell us that a downside break is the more likely outcome. Weekly INDU candles The picture is identical on the Dow, with 9650 the support level to watch. The Dow became less oversold than the Nasdaq last year, and it is for this reason that the bear wedge has a less positive slope than that of the Nasdaq. The Dow is even closer to its apex, and I expect a breakout anytime, with 3 weeks as my outside guestimate. The bearish oscillator divergence is also apparent here, and it portends a breakdown. Daily OEX candles Zooming in to our primary trading vehicles on the daily candles, we see more bearish divergences, both on the Macd and the stochastic, with Friday's decline confirming the sell signals on the 10 day stochastic. The weekly and daily cycle oscillators are now in gear to the downside, which puts the wind at bears' backs. The decline on Friday stopped right on the lower support trendline of a bear wedge projecting to a potential downside target of 497. If support holds, we can expect another bounce, but the synchronous downphasing weekly and daily oscillators make anything more than a deadcat bounce unlikely. 20 day 30 minute chart of the OEX The 30 minute candles show the precipitous drop from Friday's 10AM spike high. The end of day short-covering bounce caused a slight uptick in the otherwise downphasing 30 minute cycle oscillators, and this hints at a possible bounce on Monday. But, I believe that the sharp selloff from 10AM makes the outlook clear, and I don’t expect that high to be exceeded on the next bounce. The shorter the timeframe, the less power its cycles exert. With the daily and weekly cycles pointed south, the 30 minute oscillators should hit the ceiling without generating higher price highs. Daily QQQ candles The daily candle chart of the Qubes is also rich with oscillator divergences, and 35 is looking like a critical level for bulls to defend on Monday. With Friday's key outside reversal stopping just above the rising bear wedge trendline, there will either be a violent selloff on Monday, or some kind of recovery at or above the rising trendline. I'd be inclined to wait for confirmation at a conservative 35.75 to put on new shorts so as to avoid getting whipsawed. With volatility this low and prices this high, there should be plenty of downside to catch from there. I am not interested in long positions for the same reason, although more nimble or daring trades can try the bounce off the trendline in the knowledge that they're fighting a synchronous downphase on the daily and weekly oscillators. 20 day 30 minute chart of the QQQ More divergences on the 30 minute QQQ. Again, we see the 300 minute stochastic in bottoming territory, and a bounce is to be expected. If it is anything more than weak, I'll be surprised, but it wouldn't be the first time. Unless the upphase gets excellent price traction, I expect it's top to be confirmation of a new downleg in the market, possible The end to this year's rally, and, obviously, an excellent shorting opportunity. If 36 gets exceeded, we'll have to reconsider. Whichever direction you choose, we have daily and weekly wedges building to an apex, and volatility very low. That means that big, sudden moves are increasingly likely, which means more caution than usual for wise traders. Use stops, be alert, and don't get married to a direction that isn't working out. Cash is an excellent position when you're uncertain. See you at the bell! ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ************** Editor's Plays ************** So Many Choices Trapped again with too many choices and not enough answers. As I wrote the market wrap for the weekend I kept thinking picking a play for this week would be a snap. Once I started looking at charts and option prices the fog began to roll in once again. My bias is really neutral for next week. I believe the Dow will bounce at 9725 on Monday unless the SEC news is too ugly to bear and the bulls pass out from fright. However, there is just enough question in my mind to keep me from just going long at the open. Since I can't say "go long if xyz happens on the announcement" it makes it tough to pick a directional play. While I believe the SEC is grandstanding to make up for the slap on the wrist for Putman it is just speculation on my part. I looked at the DJX calls with the thought to go long if 9725 was touched but they were very expensive. (At least to me) The Nov-98 call was 60 cents and the 97 call 1.15. If we consider very little shrinkage on a drop to 9725 due to an increase in volatility from the announcement then it would take a monster bounce to recover your premium much less make any money. With only four days until expiration it is not worth the risk. Using the December calls the numbers escalate to $1.55 and $2.15 respectively and that is too much to risk in the current circumstances. I switched to the QQQ for cheaper options and with the Qs at $35 the $35 call was 45 cents. The Qs are right on support at $35 and "should" bounce if the news is tolerable. The keyword is should. Techs have been weak and there is some money rotating into drugs. I fear that any bounce could be weak and not fast enough to make any money. The December options jump up to $1.15 and again too much for a purely speculative play ahead of the unknown. The only play I would consider ahead of the announcement would be a long call on SUNW. I know, what am I thinking? The SEC was not the only organization to announce a major announcement on Monday. SUNW issued a press release that Scott McNealy will be the keynote speaker at the Comdex kickoff on Monday and he will be making a major announcement. He will also hold a press conference immediately following his speech. OK, so SUNW has not been on the A list recently. I am thinking if Lucent can recover maybe SUNW can as well. I checked on calls on SUNW and there is a great lottery play available. SUNW closed at $4.10 on Friday and the December $5 call is only 10 cents. Shucks the January $5 call is only 20 cents. Let's assume that Scott really has an ace up his sleeve and he rekindles the excitement in SUNW. It would not take much excitement to get the stock over $5.00. Granted this is a wild card of a lottery play but the price is right. While the rock and rollers are thinking 10 cents is a great price for December I am thinking 20 is better for January. You can still sell in December when there is still some time premium left if you want but there is always that extra month just in case. Heck, five contracts for $100 bucks is a bargain. I bet more than that on a single roll of the dice in Vegas and it only last 10 seconds. Here I get a full two months to agonize over it. Because this is a true "lottery" play I am not going to make it a real recommendation. I was going to say it was a coin toss more than anything else but a coin toss would have much better odds. It is just a lottery play and one with a short fuse. Who knows, maybe he will announce that IBM is buying them. (grin) Spend Monday's lunch money on SUNW and maybe you can fund your New Years Eve outing with the result. Or maybe you will just go home hungry on Monday. The speech is 9:AM-10:AM Pacific Time Press Conference 10:15 PT Webcast: http://www.sun.com/webcasts/powerplay Jan-$5 Call SUQ-AA 20 cents. SUNW Chart ******************************** Play Recaps GE Call (recommended 11/02) The GE Halloween rally has failed and the rebound attempt on Wednesday has also failed. GE closed at 27.86 on Friday and while the stop at 27.50 has not been hit I am dropping this play. The concept here was to capitalize on a fourth quarter rally into Dow 10,000. That was the outlook when GE was trading at $29.25 when October closed. We all know about the deepening mutual fund scandal and the liquidation process currently underway at some funds. GE is the largest stock and the widest held by funds. It is also the most liquid and easiest to dump. Write this one off and let's move on. http://members.OptionInvestor.com/editorplays/edply_110203_1.asp Dell Put (recommended 11/09) Dell never reached the entry point at $36.75. Play was never triggered and is cancelled. http://members.OptionInvestor.com/editorplays/edply_110903_1.asp Powerball The tech pull back knocked $75 off the portfolio but we still have two months to go. Keep your fingers crossed that next week follows the trend from the last ten years and ends with a strong bullish gain. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** A Shadow of Pessimism - J. Brown Friday just ended two weeks in a row that traders thought the markets would hit Dow 10,000 and NASDAQ 2,000. Two weeks of churning sideways for the major averages when they should have been climbing on a host of positive economic news. You probably heard the term before but is all the good news "already baked into the cake?" The sell-off on Friday fueled some strong bearish internals with decliners out pacing advancers 17 to 11 on the NYSE and 20 to 10 on the NASDAQ. Down volume more than doubled up volume on the NYSE and was nearly five times stronger on the NASDAQ. These are pretty negative but they don't eclipse the strong positive internals from Wednesday's rally. Something I will note that should raise an eyebrow or two is the net long and short positions in the new CBOT data below. Commercial traders, who tend to be right more often than not, have been net short the NDX futures for the last four weeks in a row if not longer. Obviously with the NDX and NASDAQ near one- year highs it has been somewhat painful to be short but institutions can withstand a lot more pain than retail traders. What raises a note of caution to me is how commercial traders have been slowly raising their net short positions week after week. There haven't been any huge jumps but their conviction for a reversal in the NDX is growing. Small Traders tend to be on the wrong side of the trade and just like clockwork have slowly pushed their net longs in the NDX futures to the most bullish position in weeks. It definitely makes one ponder the possibilities, especially given the extremely low volatility indices. As Jim discussed in his wrap one of the growing investor sentiment issues that could be the next market hurdle is the mutual fund scandal. Thus far it has had limited affect on the markets and fund flows remain positive. Unfortunately, the list of culprits and institutions that have "uncovered" improper trading practices is growing. Friday, two of the biggest names in the business, American Express and Charles Schwab, revealed that they are now under investigation by the SEC and/or the NASD. Meanwhile, the rest of the mutual fund community continues to announce new findings, layoffs, disciplinary actions or subpoenas. The newest development is the SEC announcement on Friday that they would unveil a major settlement against a major player on Wall Street this Monday. This sent the XBD broker- dealer index to a 4% loss on Friday. The SEC must be taking their cues from sweeps week television to leave the markets with such a cliffhanger. Until the SEC makes their announcement trading could be cautious on Monday. Traders will also keep their ears open for any news from the huge COMDEX technology conference going on this week. Comdex is one of several analyst conferences and these can be a stage for companies to announce good or bad news. Fortunately, the markets do have an historical bias to be up the week before Thanksgiving. At least that's what the Stock Trader's Almanac is reporting but the combination of options expiration and a growing mutual fund scandal might prompt November to join August as a month that failed to hold to historical norms. Trade carefully. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9903 52-week Low : 7197 Current : 9786 Moving Averages: (Simple) 10-dma: 9813 50-dma: 9639 200-dma: 8908 S&P 500 ($SPX) 52-week High: 1063 52-week Low : 768 Current : 1050 Moving Averages: (Simple) 10-dma: 1053 50-dma: 1034 200-dma: 956 Nasdaq-100 ($NDX) 52-week High: 1453 52-week Low : 795 Current : 1407 Moving Averages: (Simple) 10-dma: 1429 50-dma: 1389 200-dma: 1209 ----------------------------------------------------------------- There is little change in the volatility indices despite Friday's gains in all of them. They remain near all-time or five-year lows and continue to suggest the markets are at a top. CBOE Market Volatility Index (VIX) = 16.94 +0.47 CBOE Mkt Volatility old VIX (VXO) = 17.63 +0.79 Nasdaq Volatility Index (VXN) = 26.16 +0.71 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.69 785,626 541,118 Equity Only 0.55 662,739 361,347 OEX 1.17 32,520 38,086 QQQ 1.25 33,039 41,201 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.4 + 0 Bull Confirmed NASDAQ-100 72.0 + 0 Bear Confirmed Dow Indust. 80.0 - 3 Bull Correction S&P 500 80.8 + 0 Bull Confirmed S&P 100 80.0 - 1 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: 1.14 10-dma: 1.14 21-dma: 1.12 55-dma: 1.10 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 1100 1010 Decliners 1710 2088 New Highs 215 192 New Lows 16 12 Up Volume 537M 294M Down Vol. 1054M 1437M Total Vol. 1601M 1797M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 11/11/03 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 Commercial traders continue to stall on making any big bets. They remain slightly net short in the big S&P contracts. We see the same hesitation in the small traders with little overall change. Commercials Long Short Net % Of OI 10/21/03 394,176 411,246 (17,070) (2.1%) 10/28/03 391,596 412,498 (20,902) (2.6%) 11/04/03 391,079 415,136 (24,057) (3.0%) 11/11/03 389,965 415,259 (25,294) (3.1%) 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 10/21/03 136,643 88,290 48,343 21.5% 10/28/03 137,791 76,791 61,000 28.4% 11/04/03 137,829 78,206 59,623 27.6% 11/11/03 136,072 74,249 61,823 29.4% 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 Hmm... now we are seeing some action in the e-minis. Commercial traders have eliminated 12K short contracts and upped their longs by 7K. This has narrowed the gap but they remain net short. Small Traders have made big changes and reduced a big chunk (40K) of their long positions and 12K of their shorts but they remain net long. Commercials Long Short Net % Of OI 10/21/03 226,985 236,906 ( 9,921) ( 2.2%) 10/28/03 220,171 260,644 (40,473) ( 8.4%) 11/04/03 242,409 270,785 (28,376) ( 5.5%) 11/11/03 249,864 258,503 ( 8,639) ( 1.7%) 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 10/21/03 168,236 56,564 111,672 49.7% 10/28/03 123,569 59,742 63,827 34.8% 11/04/03 135,525 63,006 72,519 36.5% 11/11/03 94,649 51,815 42,834 29.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Unfortunately we still don't see any big changes in the NDX futures from the Commercial traders. They have slowly been upping their short positions, which is bearish for the tech-heavy NDX. Meanwhile small traders are at their most bullish in four weeks. Sounds like a potential top. Commercials Long Short Net % of OI 10/21/03 36,314 43,305 ( 6,991) ( 8.8%) 10/28/03 36,168 46,272 (10,104) (12.3%) 11/04/03 34,159 48,293 (14,134) (17.1%) 11/11/03 35,889 49,201 (13,312) (15.6%) 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 10/21/03 16,917 9,750 7,167 26.9% 10/28/03 21,640 8,830 12,810 42.0% 11/04/03 24,132 9,703 14,429 42.6% 11/11/03 26,212 10,730 15,482 41.9% 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 Commercials still aren't making big bets in the INDU futures and remain net long. Small traders are hedging their bets a bit by upping their longs and reducing their shorts by about 1,000 contracts each. Commercials Long Short Net % of OI 10/21/03 16,876 9,037 7,839 30.3% 10/28/03 20,504 11,366 9,138 28.7% 11/04/03 21,756 11,903 9,853 29.3% 11/11/03 20,209 11,660 8,549 26.8% 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 10/21/03 5,392 8,842 (3,450) (23.1%) 10/28/03 5,295 8,864 (3,569) (25.2%) 11/04/03 5,099 9,160 (4,061) (28.5%) 11/11/03 6,105 8,201 (2,096) (14.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** Buy/Sell Program Alerts, Pivot Analysis, and 5-MRT A naive question but does a buy program mean that the basket of stocks is bought and the futures are sold? If so, there seems to have been only one program this morning, which was a buy program at 10.00 when the Consumer Confidence Report was released (10/28/03). Would that mean that the S&P futures (es0Z3) would likely pull back as it did? Thanks. The above question was asked on October 28th, and I'm just getting to it now, but the question is a very good one. I'm going to also try and tie in the Pivot Analysis levels we look at in each evening's Index Trader Wrap at OptionInvestor.com, as I feel they can play an important role in how a trader might use buy/sell program alerts, to try and figure out just what the heck these institutional computer programs are doing. Then at the end of this article, we can all fall out of our chairs when we also throw in the technique we've learned by using a retracement bracket and measuring the first 5-minutes of the opening bar on a bar chart. The trader's question is not a naive question at all. There can be multiple answers, so there is really no definitive answer. One answer could be "yes!" A buy program could be triggered if a basket of individual stocks are bought. Heck! If a big boy like GE sees a sudden and sharp rise in price, or even a decline in price, a buy or sell program could be generated as institutional computers try and adjust inventory in the stock, or move quickly to the futures markets to compensate for a sharp move in an index heavyweight. The buy/sell program premium alerts (every morning we give a buy and sell program premium level in the 09:00 AM EST Update) are generated when there is disparity between the S&P futures (sp03z) and the S&P cash (SPX.X) market. This disparity is what many traders call arbitrage. When there is arbitrage, it provides a sudden opportunity for profit, or loss, which the MARKET is always very quick to react and adjust for. To fully understand why there can be various reasons for a buy or sell program premium alert to be generated, just remember the saying, "for every action, there is a reaction." Here. Let's first go back to the Pivot Analysis Matrix shown in the October 27 Index Trader Wrap at OptionInvestor.com, which would be the night before the October 28 trader's question was asked. The reason I want to show the Pivot Matrix is I'm going to draw the correlative DAILY Pivot and WEEKLY Pivot levels on an SPX chart, where there seemed to be some type of correlation taking place near the 1,032 level. You will also see that I've drawn the WEEKLY R1 level of 1,045.55 on the SPX chart. Here's the October 27, 2003 Pivot Analysis Matrix Pivot Analysis Matrix - October 27, 2003 Each night, I try and quickly go through and look for overlapping levels of support (green) and resistance (red) in the pivot matrix. The "dashed red" squares at were considered tentative resistance levels for October 28, as the SPX has traded through the 1,031.93 (WEEKLY Pivot) and 1,032.60 (DAILY Pivot) on October 27. Might there be some significance to this 1,032 level the following day on October 28th? I had placed a green arrow pointing to the right (higher) where I thought the SPX might move if it could clear that level of near-term resistance. Let's see what the SPX did that day, and perhaps now bring in the buy/sell Premium, the S&P 500 Index (SPX.X) and the e-mini futures (es03z), which some futures traders like to trade. In the picture that follows, I've arranged in vertical order the Premium of S&P Futures (marked the buy/sell premium levels from the Oct. 28 09:00 AM EST Intra-day Update), the S&P 500 cash (SPX.X), and at the bottom, the e-mini S&P Futures Chart (es03z). It is this picture, which will hopefully build the foundation for understanding how a buy/sell program premium alert is actually generated. Or to say it simple, how arbitrage is identified. Chart Montage - 5-minute intervals, data box set at 09:30-09:35 I really want to focus on the opening trade, where we can easily begin to understand the BUY PROGRAM PREMIUM ALERT that was generated at the opening of the cash market (09:30 AM EST). For some traders that are just learning about the markets, you should know that S&P futures (the bottom chart) have actually been trading throughout the night and when 09:30 AM EST rolls around, the cash markets (SPX) then begin trading. The above picture, with all data boxes set at 09:30 to 09:35, will show how the opening tick for futures (lower chart) was at 1,034.50. The middle chart is the cash S&P 500 (SPX) and you can see its first 5-minute interval bar looks like it is trying to catch up to the futures as its opening tick is at 1,032.75. In simplistic fashion, we can see for ourselves how a program trade is created. I won't go into great detail about fair value, but in its basic form, fair value is derived by taking the value of the S&P 500 Index then multiplying it by the sum of 1.00 plus the amount of interest paid to your broker to borrow money to buy all the stocks in the SPX minus the dividends paid to you from the companies you own in the S&P 500. On October 27th when cash closed at 04:00 PM EST, and after futures settled at 04:15 PM EST, fair value was derived at $-1.16 for the next day's trade. FV = SPX [1+(I-D)]. Remember that as we near quarterly futures expiration in March, June, September, or December, fair value declines. The trader is correct in his statement that a basket of 500 stocks will be bought, and that futures will be sold against the buying of that basket of stocks. The "premium" or "spread" is the difference between the most active S&P 500 Stock Index Futures Contract minus the actual S&P 500 Stock Index (cash). That difference, which usually ranges between $10.00 to $0.00, and slowly decays as we reach the S&P 500 Futures Contract expiration, is what program trading is based on. When the PREM "premium" difference rises to a certain execution level, "buy" programs kick in. This is when large institutional clients then buy the stocks in the S&P 500 Stock Index on the New York Stock Exchange and sell the S&P 500 Stock Index Futures Contract against those positions on the Chicago Mercantile Exchange. When the PREM difference drops to a certain execution level, "sell" programs kick in and institutions will do the exact opposite. These transactions have extremely low risks because of the abnormal market differences in the PREM as traders capture those few points of profit before the PREM returns to normal and/or fair value. This type of program trading is called index arbitrage and is very common. But it accounts for less than 10% of all program trading activity done each day. What a day trader is more interested in, is knowing when these buy/sell programs are activated. We KNOW that when a buyer wants to buy something, they must be thinking price is going to advance higher. We also KNOW that when a seller wants to sell something, they must be thinking price is going to fall. These buy/sell program premium alerts serve as an ALERT to some type of large institutional activity. Let's take a closer look (2-minute bar chart) at the 10:00 AM EST BUY program premium alert, and with a basic understanding of how arbitrage creates the program alert, see if we can become alert to some type of institutional buying, and process that information. Please remember there is a "second" in time when the program alert is generated, but hopefully we can get a feel for just what took place on October 28, 2003 at 10:00 AM EST. Chart Montage - 2-minute intervals, data box set at 10:00-10:02 I've now set the bar chart intervals to 2-minute increments, and set my cursor on the 10:00-10:02 bar, which is lined up on the buy program premium alert. Do you see how the cash (SPX) showed a higher high, while futures (es03z) jumped sharply, but sold back a little more notably? Do you see the rather notable increase in volume? This confirms that a basket of stocks had been bought and futures were most likely sold against that purchase. I marked on middle chart (SPX) how we had already received the Durable Goods data before the cash (SPX) market opened. How the buy program was generated at 10:00-10:02 AM EST when durable goods data was announced. We still awaited the FOMC announcement on interest rates at 02:15 PM EST. I went back to the Market Monitor archive at OptionInvestor.com for October 28th, to see what kind of gibberish I might have been spewing out. At 10:17:55 when the QQQ was trading just about at the top of the early morning trade (just like the SPX) I thought the QQQ was a good buy at $34.64 after seeing the morning gap higher above the WEEKLY Pivot (PINK line on SPX chart) into the FOMC announcement, with a stop just below the session's low. While I had made other observations before making those comments, I observed the QQQ or even the SPX above a LEVEL I thought would be sign of a bullish move in the making, which we had discussed in the prior evening's Index Trader Wrap at OptionInvestor.com, based on the WEEKLY Pivot matrix. Perhaps the observation of a buy program at 10:00 AM EST could have given the trader the observation that maybe, just maybe, an institution was buying a basket of stocks. What that institution, or institutions were thinking we don't know. It could have been a BULL that had positive thoughts into the FOMC meeting, it could have been a BULL that liked the consumer confidence numbers. It could also have been a BEAR, that was SHORT the day before, observed the trade was going against him/her, and just like me, at the top of the morning trade, decided to buy back in! What was the upside risk to? In the very first chart shown in this column, I placed the WEEKLY R1 of 1,045.55 on the SPX chart. With a buy program at 10:00 AM EST, maybe that would be a target until a sell program would be found? You never know. Is there another day trading technique you've learned that might be able to give additional levels during a day, other that the pivot analysis matrix? How about the 5-minute bar retracement technique? Let's go back to the 5-minute bars, continue to follow our chart montage, and see how things progressed that day. See if you can create a bias based on how levels are being traded, and any buy or sell program premium alerts you receive. Chart Montage - 5-minute intervals, with added 5-MRT technique In the middle chart (SPX) I've now added the 5-minute retracement technique where all we do is fit a retracement from 0% to 19.1% on the first 5-minute bar. This technique gives additional levels, which an institutional computer might be able to easily begin calculation a DAY'S potential range, divide that range into LEVELS, and begin measuring its inventory against buyers (demand) and sellers (supply). I've marked the day's four different buy program alerts (non including the opening bell buy program) with Consumer Confidence, FOMC, Boom! and Last one. It is so fascinating to me how the 5-MRT seems to work (Cool!), and we can perhaps see that when the Boom! buy program premium alert was generated, it actually came AFTER the SPX finally made a move above 1,039.01 to 1,040.48. Doesn't it seem like institutional computers simply said.. "gosh... I've got to buy a basket of stocks because I'm running out of inventory!" Sometimes, we will find how one of the 5-MRT retracement levels, ties in with one of the levels in our pivot analysis matrix, and to our amazement, an index will gravitate (up or down) to that level, as if the MARKET was determined to get there. From the above chart, we learn that it is important to always HONOR YOUR TRADE based on price, FIRST AND FOREMOST. It would be incorrect to assume that just because there is a buy program, or a sell program, that it most definitely means PRICE MUST MOVE in the direction of the program. However, if you're a day trader, and you have your premium levels set each day, they can serve as confirmation to your analysis. They can also alert you to a potential error in your intra-day analysis. I have a long list of things I have to do during a day, and while I would LOVE to monitor and alert traders in the Market Monitor to every buy/sell program premium alert, and try to then guide traders as to their eventual impact on the trading session, there's a heck of a lot more taking place in a day that can actually be the driver for the buy/sell programs to begin with. We can never catch "all the news" and it isn't uncommon that you and I might not see, or hear about intra-day breaking news that can move a market. The buy/sell program premium alerts can be useful in this regard. I would think if a day trader were sitting at his/her trading terminal during the session and suddenly finds they are being alerted to consecutive buy or sell program alerts, that something might be going on that they should be alert for. Wow! This was a long article, based on the trader's question, but his one question just lead to one observation after another. Articles you might find further informative, that would tie in with this article are as follows. For the Pivot Matrix, a trading buddy and I teamed up on "Pivot Analysis to define levels and ranges" in a 01/19/2003 Ask the Analyst column. For the 5-minute retracement technique, you might read the 09/21/03 Ask the Analyst column titled "Day trader's 5-minute bar technique" For more information on buy/sell program premium alerts, I also wrote an article on 12/15/02 titled "Buy/Sell Program Premium Levels." One question asked about the buy/sell program premium symbol for their trading software is "Do you know what the symbol is for X- trading software?" I use QCharts, and I know the symbol is $PREM.X. I'm not familiar with other trading software programs and their symbols, but HL Camp & Company gives the following list of symbols, which you might try. They are ... sp-prem , prem , a0 , $prem , prem.x , sps , spinx ,and "any other weird ticker symbols." HL Camp & Company also says there is a separate premium symbol for the NDX, where the symbol is NPREM (nd-prem on the only data vendor in the world that gets this one right). Keep the question coming. I don't know all the answers, and NO QUESTION is considered "stupid" or "naive." Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- A Agilent Technologies Mon, Nov 17 After the Bell 0.05 ANPI Angiotech Pharm Mon, Nov 17 -----N/A----- -0.16 DRYR Dryr's Grnd Ice Crm Mon, Nov 17 After the Bell N/A EON E.ON AG Mon, Nov 17 Before the Bell N/A ITY Imperial Tobacco GroupMon, Nov 17 Before the Bell N/A JAS Jo-Ann Stores, Inc. Mon, Nov 17 After the Bell 0.51 LOW Lowe's Companies Mon, Nov 17 Before the Bell 0.53 OOM MMO2 Mon, Nov 17 Before the Bell N/A TOY Toys R Us Mon, Nov 17 Before the Bell -0.10 ------------------------- TUESDAY ------------------------------ ADI Analog Devices Inc. Tue, Nov 18 After the Bell 0.23 BJ BJ's Wholesale Club Tue, Nov 18 Before the Bell 0.27 CNO CONSECO INC Tue, Nov 18 After the Bell N/A DKS Dick's Sporting Goods Tue, Nov 18 Before the Bell 0.16 EPC Epcos Tue, Nov 18 -----N/A----- N/A HD Home Depot Inc Tue, Nov 18 Before the Bell 0.46 NTAP Network Appliance Tue, Nov 18 After the Bell 0.09 ROST Ross Stores, Inc. Tue, Nov 18 Before the Bell 0.65 SKS Saks Incorporated Tue, Nov 18 Before the Bell 0.03 SPLS Staples, Inc. Tue, Nov 18 -----N/A----- 0.32 VOD Vodafone Group Public Tue, Nov 18 -----N/A----- N/A ZLC Zale Corporation Tue, Nov 18 Before the Bell -0.35 ----------------------- WEDNESDAY ----------------------------- BLI Big Lots, Inc. Wed, Nov 19 -----N/A----- -0.04 HOTT Hot Topic Wed, Nov 19 After the Bell 0.28 INTU Intuit Wed, Nov 19 After the Bell -0.26 LALW.OBLaidlaw Intl, Inc. Wed, Nov 19 After the Bell N/A MRVL Marvell Technology GrpWed, Nov 19 After the Bell 0.24 MW Men's Wearhouse Wed, Nov 19 After the Bell 0.20 OVTI Omnivision Tech Wed, Nov 19 After the Bell 0.31 PETC PETCO ANIMAL SUPPLIES Wed, Nov 19 After the Bell 0.26 TLB Talbots Wed, Nov 19 -----N/A----- 0.60 TKA Telekom Austria AG Wed, Nov 19 Before the Bell N/A TTEK Tetra Tech Wed, Nov 19 After the Bell 0.28 UGI UGI Wed, Nov 19 Before the Bell -0.18 ------------------------- THUSDAY ----------------------------- AEOS Am Eagle Outfitters Thu, Nov 13 Before the Bell 0.24 ARO Aeropostale, Inc. Thu, Nov 20 After the Bell 0.56 ADSK Autodesk, Inc. Thu, Nov 20 -----N/A----- 0.14 BKS Barnes&Noble Thu, Nov 20 After the Bell 0.09 BGP Borders Group Inc. Thu, Nov 20 After the Bell -0.02 BRCD Brocade Cmmu Sys, Inc.Thu, Nov 20 After the Bell 0.02 CLE Claire's Stores Thu, Nov 20 -----N/A----- 0.47 FL Foot Locker, Inc. Thu, Nov 20 -----N/A----- 0.34 FRED Fred's Thu, Nov 20 Before the Bell 0.23 GPS Gap Inc. Thu, Nov 20 After the Bell 0.27 SJM J. M. Smucker Company Thu, Nov 20 Before the Bell 0.65 LMIN Lastminute.com Thu, Nov 20 Before the Bell N/A LTD Limited Brands Thu, Nov 20 Before the Bell 0.04 NGG Ntl Grid Transco plc Thu, Nov 20 Before the Bell N/A JWN Nordstrom Thu, Nov 20 After the Bell 0.22 NOVL Novell Thu, Nov 20 After the Bell 0.03 PETM PetsMart Thu, Nov 20 Before the Bell 0.20 SFD Smithfield Foods Thu, Nov 20 -----N/A----- 0.26 SCM Swisscom AG Thu, Nov 20 Before the Bell N/A TKP Technip Thu, Nov 20 -----N/A----- 0.26 DIS Walt Disney Thu, Nov 20 After the Bell 0.15 WSM Williams-Sonoma Thu, Nov 20 Before the Bell 0.19 ------------------------- FRIDAY ------------------------------- KKD Krispy Kreme Doughnut Fri, Nov 21 Before the Bell 0.23 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable BLUD Immucor, Inc 3:2 Nov 14th Nov 17th MSEX Middlesex Water Company 4:3 Noc 14th Nov 17th LYTS LSI Industries Inc 5:4 Nov 14th Nov 17th ERTS Electronic Arts 2:1 Nov 17th Nov 18th SYMC Symantec Corp 2:1 Nov 19th Nov 20th JBLU JetBlue Airway 3:2 Nov 20th Nov 21st DIOD Diodes Inc 3:2 Nov 25th Nov 26th JAH Jarden Corporation 3:2 Nov 26th Nov 27th MFLR Myflwr Co-operative Bank 3:2 Nov 28th Dec 1st -------------------------- Economic Reports This Week -------------------------- Wall Street has a full week ahead. Various economic reports dot each day this week and we'll hear from numerous analysts conferences. ============================================================== -For- ---------------- Monday, 11/17/03 ---------------- Business Inventories(BB)Sep Forecast: 0.0% Previous: -0.4% NY Empire State Indx(BB)Nov Forecast: 27.0 Previous: 33.7 CSFB Financial Services & Insurance Conference COMDEX 2003 Fall Expo ----------------- Tuesday, 11/18/03 ----------------- CPI (BB) Oct Forecast: 0.1% Previous: 0.3% Core CPI (BB) Oct Forecast: 0.2% Previous: 0.1% CSFB 4th Annual Large Cap Pharmaceutical Confernce Lehman Brothers 2003 Chip & Computer System Conf Merrill Lynch Banking Conference ------------------- Wednesday, 11/19/03 ------------------- Housing Starts (BB Oct Forecast: 1.850M Previous: 1.888M Building Permits (BB) Oct Forecast: 1.850M Previous: 1.875M Semi Book-to-Bill Report ------------------ Thursday, 11/20/03 ------------------ Initial Claims (BB) 11/15 Forecast: N/A Previous: 366K Leading Indicators (DM) Oct Forecast: 0.2% Previous: -0.2% Philadelphia Fed (DM) Nov Forecast: 25.0 Previous: 28.0 ---------------- Friday, 11/21/03 ---------------- Treasury Budget (DM) Oct Forecast: -$72.5B Previous: -$54.1B Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Sunday 11-16-2003 Sunday 2 of 5 In Section Two: Watch List: A Mixed Bag. Put Play of the Day: AVID Dropped Calls: JBL, VRTS Dropped Puts: ATH ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** A Mixed Bag. Nucor Corp - NUE - close: 55.14 change: +0.62 WHAT TO WATCH: The steel industry has been in the spotlight the last couple of weeks because of the EU's threat to raise tariffs due to President Bush's tariffs on imported steel. Shares of NUE are breaking out of a bull flag consolidation pattern and look tempting for bulls to try and capture any move towards the $60 mark. Chart= --- Bank of America - BAC - close: 74.72 change: -0.69 WHAT TO WATCH: Financials were weak on Friday and one of the banks leading the way was BAC. The stock appears to have finished its bounce from the late October drop and have now rolled back over under the simple 200-dma and the $75 mark. Interested bears might use Friday's close under 75 as an entry point and target the $70 level but watch out for support at $72.50. Chart= --- Education Management Corp - EDMC - close: 65.86 change: +0.95 WHAT TO WATCH: Merrill Lynch upgraded a couple of education stocks to "buy" today but truly leading the group higher is EDMC. The stock broke out from a week-long consolidation to hit a new all-time high today on strong volume. Bulls may want to give it another look. Chart= --- Merrill Lynch - MER - close: 56.47 change: -2.13 WHAT TO WATCH: The broker-dealer sector has been a leader on the way up but Friday it was a leader on the way down with the XBD losing more than 4 percent. Shares of MER joined the drop and fell 3.6% to close under its simple 50-dma. This moving average has been rising support for MER and the breakdown could portend further weakness for the stock. Bulls can hope that historical price support at $55 will hold up but if MER breaks the $55.00 mark as well it may end up on our put list. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- PG $95.71 -0.64 - Shares of PG are stuck in the same short-term trend of lower highs that many stocks are portraying. A breakdown under its 50-dma and it may be a put play. INTC $32.80 -0.98 - Rising in a strong channel it looks like INTC may be headed to test the lower edge of that channel near its 50- dma above $30.00. GS $93.80 -2.22 - Another broker that is showing some weakness and bearish oscillators. A pull back to $90 looks like a good bet. SNDK $80.70 -2.29 - This tech stock leader is showing some weakness and if it breaks the $80 mark it may be a good short to the 50-dma. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** THE PLAY OF THE DAY ******************** Put Play of the Day: ******************** Avid Technology - AVID - cls: 48.45 chg: -1.88 stop: 51.26 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Jabil Circuit - JBL - close: 28.85 chg: -1.39 stop: 27.99 We're going to throw in the towel early on JBL. The stock has not yet hit our stop loss but odds are good the selling will continue, at least for a couple of more days in JBL. The close under the $29.00, which should have held as support was the clincher. Its MACD and oscillators have turned bearish as well. If the SOX chip index breaks the 500 mark it could be bad news for the whole group. FYI: JBL has not yet broken its triple-top buy signal on its P&F chart. Picked on November 04 at $30.11 Change since picked: - 1.26 Earnings Date 09/18/03 (confirmed) Average Daily Volume: 1.4 million Chart = --- Veritas Software -VRTS - cls: 36.56 chng: -1.54 stop: 35.90 It looks like it is finally time to pull the plug on our VRTS play. Rather than make a renewed assault on resistance, the stock headed sharply lower on Friday in sympathy with the weakness in the overall NASDAQ market. By the end of the day, the stock had shed more than 4%, but more importantly had taken out Monday's low and closed below the 20-dma ($36.78). While it is certainly possible that the bulls will once again defend the $36 level next week and succeed in sending the stock to new highs, the odds do not favor that outcome with all the oscillators now pointing back towards earth. Our recommendation is to use any strength early next week as a better exit point, rather than a validation of upside potential. Picked on October 28th at $37.27 Change since picked: -0.71 Earnings Date 1/21/04 (unconfirmed) Average Daily Volume = 6.18 mln Chart = PUTS ^^^^ Anthem, Inc. - ATH - close: 68.72 change: +0.51 stop: 69.50 What a disappointment! We definitely got trapped by the action in ATH last week, as Monday's drop below $66 cleanly satisfied our entry target. Then, after three days of testing the $65 level, the stock began to climb strongly, moving right through what should have been firm resistance in the $68-69 area on Friday to trip our $69.50 stop. While ATH did pull back slightly at the end of the day, by then the damage had been done. ATH may turn around next week and head back down, but the high-odds breakdown move we wanted to play got pushed right back in our face. With all the oscillators just beginning to point up, this does not appear to be a good candidate for the "wait and hope" approach. We'll take our lumps and move on to the next trade candidate. Picked on November 6th at $67.22 Change since picked: +1.50 Earnings Date 1/26/04 (unconfirmed) Average Daily Volume = 1.66 mln Chart = *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 11-16-2003 Sunday 3 of 5 In Section Three: Current Calls: APA, DGX, JCI, MME, PGR New Calls: None Current Put Plays: AZO, AMGN, NFLX New Puts: AVID, MDC ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ****************** CURRENT CALL PLAYS ****************** Apache Corp. - APA - close: 72.31 change: +0.64 stop: 70.00*new* Company Description: Apache Corporation is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. In North America, the company's exploration and production interests are focused in the Gulf of Mexico, the Gulf Coast, the Permian Basin, the Anadarko Basin and the Western Sedimentary Basin of Canada. Outside of North America, Apache has exploration and production interests offshore western Australia, offshore and onshore Egypt, offshore The People's Republic of China and onshore Argentina, as well as exploration interests in Poland. Why we like it: Our APA play is finally going gang-busters, now that it decisively broke above the $70.50 resistance level. Friday's session saw the stock continue its rise above $72 and based on the rising volume, it looks like a test of $73 resistance at the early October highs could be tested as early as Monday. Conservative traders that bought the dip near the 50-dma may want to consider harvesting some gains at that point due to the fact that daily oscillators are not entering overbought territory. Owing to the fact that the market has been ignoring the oscillators a lot lately, we're still going to leave the possibility out there that APA could burn right through to new highs and take aim on the top of the broad ascending channel, now above $76. Aggressive traders can use the breakout over the October high at $73.00 to add to existing positions, looking for that run to the top of the channel, as energy prices are clearly on the rise. Note that our stop now rises to $70, as there should now be firm support near $70.50, reinforced by the 10-dma at $70.19. Suggested Options: Aggressive short-term traders can use the November 70 strike, but need to be careful with only a week until November expiration. Our preferred strike is the December 75 strike, which gives a nice balance due to being just out of the money and having plenty of time until expiration. Traders looking for even more insulation against time decay can look out to the January strike. ! Alert - November options expire next week! BUY CALL NOV-70 APA-KN OI=2728 at $2.55 SL=1.25 BUY CALL DEC-70 APA-LN OI= 357 at $3.30 SL=1.75 BUY CALL DEC-75 APA-LO OI= 551 at $0.70 SL=0.35 BUY CALL JAN-75 APA-AO OI=2778 at $1.25 SL=0.60 Annotated Chart of APA: Picked on November 2nd at $69.72 Change since picked: +2.59 Earnings Date 1/22/04 (unconfirmed) Average Daily Volume = 1.30 mln Chart = --- Quest Diagnostics - DGX - close: 70.20 change: +0.74 stop: 65.50 Company Description: Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Why we like it: Wasting no time, our DGX play pushed up through that key $70 level at the open on Friday, triggering our play to live status. With a lack of strength in the rest of the market though, DGX had no success in building on that early move and spent the remainder of the session chopping sideways in a very narrow range. But at the end of the day (despite the broad market losses), DGX held above $70 on above average volume and we'll take that as a continuation of the breakout. Traders that wanted to enter on strength got their opportunity on Friday and may get another opportunity to add to positions on a break above Friday's range early next week. At this point, the better entry point appears to be on a pullback near the $68 support (former resistance) and rebound. Once DGX gets moving to the upside, the $75 level should be a reasonable initial target, and then we can re-evaluate the potential for higher levels. Maintain stops at $65.50 for now. Suggested Options: Aggressive short-term traders can use the November 70 strike, but need to be careful with only a week until November expiration. Our preferred option is the December 70 strike, which gives a nice balance due to being at the money and having plenty of time until expiration. Traders looking for even more insulation against time decay can look out to the January strike. ! Alert - November options expire next week! BUY CALL NOV-70 DGX-KN OI=1853 at $1.20 SL=0.60 BUY CALL DEC-70 DGX-LN OI= 968 at $2.60 SL=1.25 BUY CALL DEC-75 DGX-LO OI= 389 at $0.75 SL=0.35 BUY CALL JAN-75 DGX-AO OI= 228 at $1.30 SL=0.60 Annotated Chart of DGX: Picked on November 13th at $69.46 Change since picked: +0.74 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 864 K Chart = --- Johnson Controls - JCI - cls: 107.11 chg: -0.91 stop: 104.99 Company Description: Johnson Controls is a global market leader in automotive systems and facility management and control. In the automotive market, it is a major supplier of integrated seating and interior systems, and batteries. For non- residential facilities, Johnson Controls provides control systems and services including comfort, energy and security management. (source: company press release) Why We Like It: Currently our bullish play on JCI is a couple of weeks old and we haven't progressed very far. The stock is essentially where we started after initially shooting above the $110 level it slowly sold off to profit taking as the markets churned sideways. Fortunately, JCI is still very much in a rising bullish trend and the recent bounce during Wednesday's rally helped propel the trend of higher lows. JCI's point-and-figure chart is still in a triple-top breakout buy signal despite the slide a week ago. Volume does seem to be stronger on the rallies but JCI is still a big target for harvesting gains if the broader markets continue to slip. Odds look good for yet another dip towards the $105 level or at least the $106 level. Interested traders may want to wait for a bounce before judging any new entries. We're going to keep our stop loss at $104.99. We also note that JCI is a split candidate. The company last split its stock 2-for-1 on April 1, 1997 at the $80 level. There has been ample opportunity to split since and they did not. However, shares are now trading at all-time highs and October was the first time they broke the century mark. Suggested Options: Short-term traders can choose the December options while longer- term investors may want to look at January 04 and April 04 strikes. We like the 105s and 110s. ! Alert - November options expire on Friday! BUY CALL DEC 105 JCI-LA OI= 18 at $4.00 SL=2.00 BUY CALL DEC 110 JCI-LB OI=164 at $1.50 SL=0.75 BUY CALL DEC 115 JCI-LC OI=160 at $0.40 SL= -- riskier Annotated chart: Picked on October 30 at $107.07 Change since picked: + 0.04 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 432 thousand Chart = --- Mid Atlantic Medical - MME - cls: 57.30 chng: -0.38 stop: 55.55 Company Description: Mid Atlantic Medical Services is a holding company for subsidiaries active in managed healthcare and other life and health insurance related activities. MME and its subsidiaries offer a broad range of managed healthcare coverage and related ancillary insurance and other products and deliver these services through health maintenance organizations, a preferred provider organization, and a life and health insurance company. MME owns a home healthcare company, a pharmaceutical services company and a hospice company. The company also owns a collections company and maintains a partnership interest in an outpatient surgery center. Why we like it: Steady as she goes has been the theme for MME over the past week, as the stock has rebounded from the $55.50 area and then reached to just below $58 on Friday. Doing a quick Fib retracement, we can see the 50% retrace of the decline from the late October highs comes in at $58.17, so a bit of consolidation near that level isn't a great surprise. Look for pullback entries on a rebound from the $56.50 area, near the bottom of last Wednesday's gap. Entries on further strength can be taken above $58.25, but this should only be considered by more aggressive traders looking for a quick in and out play. We'll need further strength from UNH above the $50 level (due to the merger linkage) if MME is going to continue up towards our $60-61 target, at which point we would strongly recommend taking the money off the table. Keep stops set at $55.55 until MME manages a close over that $58.25 level. Suggested Options: Aggressive short-term traders can use the November 55 strike, but need to be careful with only a week until November expiration. Our preferred option is the December 55 strike, which gives a nice balance due to being in the money and having plenty of time until expiration. Traders looking for even more insulation against time decay can look out to the March strike. ! Alert - November options expire next week! BUY CALL NOV-55 MME-KK OI= 184 at $2.80 SL=1.40 BUY CALL DEC-55 MME-LK OI= 249 at $3.50 SL=1.75 BUY CALL DEC-60 MME-LL OI=1223 at $0.85 SL=0.40 BUY CALL MAR-60 MME-CL OI= 550 at $2.00 SL=1.00 Annotated Chart of MME: Picked on November 11th at $56.65 Change since picked: +0.65 Earnings Date 2/04/04 (unconfirmed) Average Daily Volume = 698 K --- Progressive - PGR - close: 79.50 chg: +3.22 stop: 74.99 *new* Company Description: The Progressive group of insurance companies ranks third in the nation for auto insurance based on premiums written, offering its products by phone at 1-800-PROGRESSIVE, online at progressive.com and through more than 30,000 independent insurance agencies. (source: company press release) Why We Like It: Ah...finally someone pulled the trigger on PGR's bullish catapult pattern from its point-and-figure chart. The stock had been creeping along sideways in a tight $2.00 range while the broader markets churned up and down last week. Suddenly on Friday the stock took off after announcing its October 2003 results and they were good. PGR reported that net premiums written in October 2003 surged 21% from October 2002. Net income for the month jumped 53% against the same month a year ago. There were a couple of random analyst comments about the excellent results and shares of PGR soared more than 4%. Now the stock is just under our first target of $80.00. Short-term traders may want to begin evaluating their exit plan or at least harvesting some gains. Keep in mind that if the broader markets see strong selling again on Monday it could pull PGR down. We wouldn't recommend new bullish positions at this time but a pull back and bounce in the $77 to $78 range might be worthwhile. We're very encouraged by the strong volume on Friday's rally. We will raise our stop loss to $74.99 but tighter stops would not be a bad idea. Suggested Options: Short-term traders can choose from the December options while longer-term traders can look over the February or May strikes. We like the 75's and 80s. ! Alert - November options expire on Friday! BUY CALL DEC 75 PGR-LO OI= 70 at $5.30 SL=3.00 BUY CALL DEC 80 PGR-LP OI= 50 at $1.85 SL=0.90 BUY CALL FEB 80 PGR-BP OI=510 at $3.40 SL=1.70 BUY CALL FEB 85 PGR-BQ OI= 51 at $1.45 SL=0.75 Annotated Chart: Picked on November 07 at $76.25 Change since picked: + 3.25 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 654 thousand Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** AutoZone, Inc. - AZO - close: 91.52 change: -1.62 stop: 96.25 Company Description: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why we like it: One thing is certain -- AZO provided plenty of excitement over the past week, with the sharp drop to just above $90, equally sharp rebound through mid-week and finally a sharp drop on Friday. It actually looked like the stock might try to build a base up near $93, but when support failed at the end of the day, our spirits began to rise. The action over the past week looks like a dead- cat bounce and subsequent rollover below the 50-dma ($92.97). We would have preferred a push up closer to the $95 resistance level for rollover entries, but those that took an entry in the $93 area should be in good company. We're still looking for a break below $90 and challenge of major support in the $86-87 area, so aggressive momentum traders can consider entering new positions on a break below $90. Our preferred entry at this stage would be a failed bounce below the 50-dma, especially with the 10-dma ($94.17) falling to meet the 50-dma. Maintain stops at $96.25 until last Monday's closing low is broken. Suggested Options: Aggressive short-term traders can use the November 95 strike, but need to be careful with only a week until November expiration. Our preferred option is the December 90 strike, which gives a nice balance due to being closest to at the money and having plenty of time until expiration. Traders looking for even more insulation against time decay can use the December 95 strike. ! Alert - November options expire next week! BUY PUT NOV-95 AZO-WS OI=2889 at $3.60 SL=1.75 BUY PUT DEC-95 AZO-XS OI=2540 at $5.20 SL=3.25 BUY PUT DEC-90 AZO-XR OI=2063 at $2.70 SL=1.25 Annotated Chart of AZO: Picked on November 9th at $93.30 Change since picked: -1.78 Earnings Date 12/22/04 (unconfirmed) Average Daily Volume = 1.02 mln Chart = --- Amgen Inc - AMGN - close: 58.25 chg: -1.70 stop: 61.01 *new* Company Description: Founded in 1980, Amgen is a pioneer in the biotechnology industry. Based on a history of scientific innovation, Amgen launched the first biotechnology blockbuster products, EPOGEN. (Epoetin alfa) and NEUPOGEN. (Filgrastim), and continues to research, identify and develop novel therapeutics to treat grievous illness. The Company invests heavily in research and development, having invested 22 percent of total product sales in R&D in 2002, among the highest reinvestment levels in the biotechnology and pharmaceutical industries. (source: company press release) Why We Like It: We've said from the start that trading biotech companies always carries a certain amount of elevated risk. If you're long a biotech stock there is the constant risk of some drug trial not performing or threat of a patent dispute. If you're short a biotech stock then there is the threat of some incredible new breakthrough sending the stock higher. Aside from the constant volatility that can be created with each day's headlines the overall trend in AMGN is a bearish one. The bullish run higher that began in mid 2002 was broken late this summer. Shares slowly consolidated sideways but with a downward slant to the lows. Eventually that profit taking culminated in a sharp, high- volume sell off after AMGN's mid-October earnings report. Since that report shares have consolidated under its 200-dma and now looks ready for the next leg down. Volume is definitely stronger on the declines, which lends the bears confidence and adds credence to the move. Point & figure chart traders will note that AMGN has broken its rising bullish support but has also already achieved its current vertical count near $58. We think this is one of the uncommon exceptions where a stock will exceed its price objective. AMGN is the largest of the biotech firms and has numerous drugs in their pipeline. With so much research going on the company is constantly generating press. Case in point, late this week AMGN released news about a promising treatment for kidney disease related bone loss. Unfortunately for shareholders it was not enough to spur any new buying. Instead the stock was shaken after the Wall Street Journal's "Heard on the Street" column highlighted a couple of long-term threats to AMGN's profitability that could be making investors "nervous". One of the major concerns involves Medicare reimbursements for some of AMGN's drugs. We're encouraged by the high-volume declines and feel this is a good spot for new entry points. Momentum traders may want to wait for a drop under the $58.00 mark. If you prefer to target shoot look for a potential failed rally under $60.00. We are going to lower our stop to 61.01. Suggested Options: The December and January 60s and 55's look tempting. ! Alert - November options expire on Friday! BUY PUT DEC 55 YAA-XK OI= 5066 at $1.10 SL=0.55 BUY PUT DEC 60 YAA-XL OI= 5245 at $3.30 SL=1.65 BUY PUT DEC 65 YAA-XM OI= 1642 at $7.20 SL=5.00 BUY PUT JAN 60 YAA-ML OI=18712 at $4.10 SL=2.00 BUY PUT JAN 55 YAA-MK OI=18817 at $1.75 SL=0.90 Annotated Chart: Picked on November 09 at $59.95 Change since picked: - 1.70 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 8.8 million Chart = --- Netflix Inc - NFLX - close: 46.77 change: -1.73 stop: 51.01 Company Description: Launched in 1998, Netflix is the world's largest online movie rental service, providing more than one million subscribers with access to a comprehensive library of more than 15,000 DVD titles. For $19.95 a month, Netflix subscribers can rent as many DVDs as they want, with three movies out at a time, and keep them for as long as they like. There are no due dates and no late fees. DVDs are delivered directly to the subscriber's address by first-class mail from shipping centers throughout the United States. Netflix can reach more than seventy percent of its subscribers with generally overnight delivery. The Company also provides background information on DVD releases, including critic reviews, member reviews and ratings and personalized movie recommendations. (source: company press release) Why We Like It: (below is the original play from Thursday) It's really hard to find any bad news on NFLX. Everyone I know loves the service. Obviously investors do to. Shares of NFLX have gone from $5 to $60 (+1100 percent) in just about a year's time. Granted earnings are doing great and expected to keep on doing great but there appears to be some room for more profit taking. The stock got hammered on Nov. 6th with a big volume surge of selling without any discernible catalyst. The selling continued the next day, again on extremely high volume, before finding support above the $45 level. Yesterday's market bounce took it back to the $50 mark but today's action looks like a failed rally. Actually it looks like the bearish reversal candlestick pattern labeled "dark cloud cover". We're going to be aggressive and suggest put plays at current level but with a very tight stop over the recent highs at $51.01. Traders might want to wait and see some follow through (like a move under $48.00) before initiating any new positions. There is obvious support at $45 and its simple 50-dma but NFLX could hit $40 if the profit taking picks up speed. Traders should note that this is an aggressive play and not for everyone. NFLX typically carries an EXTREMELY high amount of short-interest and when they cover it gets painful. The need for good stop loss is important. Plus, after such a strong rise from its IPO price less than two years ago there is the remote risk of a stock split announcement. ! Weekend Play Update: Sure enough the "dark cloud cover" candlestick reversal pattern has come through with additional selling in NFLX on Friday. We'd obviously like to see more volume on these declines but the battle for support/resistance at the $45 level is approaching. Remember, this is a high risk play. Suggested Options: We like the December 50's but the 45's could work for the speculating trader. ! Alert - November options expire on Friday! BUY PUT DEC 50.00 QNQ-XJ OI=1102 at $6.10 SL=3.75 BUY PUT DEC 47.50 QNQ-XS OI= 656 at $4.50 SL=2.25 BUY PUT DEC 45.00 QNQ-XI OI=1462 at $3.30 SL=1.65 Annotated chart: Chart = Picked on November 13 at $48.50 Change since picked: - 1.73 Earnings Date 10/15/03 (confirmed) Average Daily Volume: 1.7 million Chart = ************* NEW PUT PLAYS ************* Avid Technology - AVID - cls: 48.45 chg: -1.88 stop: 51.26 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. (source: company press release) Why We Like It: If at first you don't succeed, then try, try again. We're going to attempt another technical breakdown put play on small-cap technology stock AVID. Shares rallied from $17.50 in March to $60 in October and broke its bullish up trend in mid-October as traders took profits after its earnings report. Earnings were good and AVID raised their guidance during their conference call but investors continue to harvest gains. The five-week trend of lower highs and failed rallies at its simple 50-dma has AVID coiling for a breakdown under support at $48.00. Meanwhile its P&F chart is displaying a beautiful roll over from an extremely overbought condition and its price objective is pointing to $40.00. Our first target is the $43.50-43.25 area, which should be the 38.2% retracement of the March-October run. Our secondary target will be round-number support at $40.00. We'll start the play with a stop at 51.26. Momentum traders may want to use a trigger under the $48.00 mark to open the play for them. Suggested Option: We like the December and March 50s and 45's. ! Alert - November options expire on Friday! BUY PUT DEC 50 AQI-XJ OI= 482 at $3.90 SL=2.00 BUY PUT DEC 45 AQI-XI OI= 496 at $1.80 SL=0.90 BUY PUT MAR 50 AQI-OJ OI=1771 at $6.70 SL=4.50 BUY PUT MAR 45 AQI-OI OI=2098 at $4.40 SL=2.25 Annotated Chart: Picked on November 16 at $48.45 Change since picked: - 0.00 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 637 thousand Chart = --- M.D.C. Holdings - MDC - close: 64.55 change: -1.57 stop: 67.00 Company Description: M.D.C. Holdings, Inc. is principally engaged in owning and managing subsidiary companies that build and sell homes under the name Richmond American Homes. The company also owns and manages HomeAmerican Mortgage Corporation, which originates mortgage loans primarily for MDC's home buyers. In addition, it provides title agency services through American Home Title and Escrow Company to MDC home buyers in Virginia, Maryland and Colorado and offers third-party insurance products through American Home Insurance Agency, Inc. to the company's home buyers in all of its markets. Why we like it: The Housing sector has been the rally that won't die, up a whopping 500% since the NASDAQ bubble burst. Just since March, the index has vaulted higher by 90%, as the housing boom has continued to be fueled by easy money (asset inflation) and cheap credit (low interest rates). There are lots of sky-high Housing stocks whose price now dwarfs that of the recent past. The rally looks far too mature to jump into at this altitude, but at the same time, few of these stocks seem willing to give us a viable short setup. MDC is a definite exception to that rule right now, as the stock appears to be in the midst of a 'b' distribution pattern. The stock got nailed for a big drop a week ago before finding support at $64 and putting in a weak rebound. On Friday, that rebound failed just below the 20-dma ($66.57) and the stock fell sharply, ending just fractionally over the critical $64 level. This is clearly an aggressive play, as we're looking to pick a top in a stock with a bullish PnF chart, in a group that has been very strong lately. We're not looking for a major slide, but MDC does appear vulnerable to a pullback to $60 near the 50-dma ($60.54) or even as low as $58. The initial drop from $70 to $64 gives us the first leg of the decline, and when the current consolidation breaks to the downside, we can expect a corresponding $6 decline to the $58 area. Use a trigger of $64 and enter on the initial break, using a stop at $67. That stop is above last week's highs, as well as the 20-dma and should not be challenged if this pattern of weakness has any further downside in store. Traders looking for a bargain entry may be able to get aboard on a failed rally in the $65-66 area, but only AFTER our trigger has been satisfied. Conservative traders may want to harvest gains near $60, but we're looking to go for the gusto and hold all the way down to $58. Suggested Options: Aggressive short-term traders can use the November 65 Put, but need to be careful with only a week until November expiration. Our preferred strike is the December 65 strike, which gives a nice balance due to being at the money and having plenty of time until expiration. ! Alert - November options expire in two weeks! BUY PUT NOV-65 MDC-WM OI=142 at $1.55 SL=0.75 BUY PUT DEC-65 MDC-XM OI=104 at $3.30 SL=1.75 BUY PUT DEC-60 MDC-XL OI=178 at $1.40 SL=0.75 Annotated Chart of MDC: Picked on November 16th at $64.55 Change since picked: +0.00 Earnings Date 1/8/04 (unconfirmed) Average Daily Volume = 231 K Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. 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The Option Investor Newsletter Sunday 11-16-2003 Sunday 4 of 5 In Section Four: Leaps: Are We Having Fun Yet? Traders Corner: Let's Tweak Again Like We Did Last Summer ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ***** LEAPS ***** Are We Having Fun Yet? By Mark Phillips mphillips@OptionInvestor.com This makes 2 weeks in a row that I have struggled to find something interesting to cover in this column. Here's the problem -- nothing is happening! Oh sure, there are some individual issues that are moving up and down according to specific news items, but looking at the big picture and the broad market is just marking time. Two weeks ago, the DOW managed a whopping 8 point advance. This past week, it gave that back enroute to a 41 point loss. "So what", I can hear you saying. "We don't care where things end up, so long as there's a good tradable range." Lotsa luck on that account! For the past 10 days, the DOW has traded in a whopping 184 point range and smooth trending moves in that zone have been few and far between. Now I understand that intraday traders can consistently make hay out of the kind of movement we're seeing, although they do have to revert to scalp mode. But that does us absolutely no good here, where we're looking for strong directional movement over time to help us grow our accounts. The markets HAVE been moving erratically higher for some months now, so why haven't we taken a chunk of it? Mostly disbelief on my part, along with a big dose of an unfavorable risk-reward dynamic. According to the falling VIX and the bullish percents, risks were tilted against a long-term bullish position back in June. Since then, the scales have barely budged, but with the VIX continuing to fall lower, I'd argue that risks to bulls in long- term positions has increased. The major factor contributing to the falling VIX levels is the contracting range in the market. A few months back, I ridiculed the notion that the VIX could fall into the 12-15 range due to the degree to which the intraday, intraweek and intramonth ranges would have to fall in order to justify such low volatility ranges. I used data from the OEX and VIX from the 1992-1994 timeframe to bolster my case, noting how tight the range in the OEX was for entire years back then, which allowed the VIX to remain so low. For all of 1993, the total range of the OEX was only 15% of its starting value and in 1994 it was only 10% of its starting value. At the time, I noted that the total range of the OEX for the prior 2 months (although tight compared to what we're accustomed to) was a fairly decent 5.5%. At the time, the VIX was holding right near 20. So where are we now? First off, we need to make the transition to the SPX, as that is what the VIX is based on now, but the comparison in percentage terms should still be valid. Over the past month, the SPX has been in the range of 1018-1063 for a 4.3% range. Extend the time period to 2 months and the range expands to 7.2% as we have the late September foray down to the 990 area to factor in. How about extending the time period out to 5 months to mid-June? Now the SPX ranges from a low of 960 to a high of 1063 for a total of just over 100 points and a total percentage move of 10.3%. Putting this in perspective, the first week of the rebound off the March lows saw the SPX span a 9.9% range. It's no wonder the VIX continues to languish, with the continued lackluster trading range in the overall market. Looking back at the OEX/VIX action (or lack thereof) in 1993-1994, we can see that if the ranges continue to contract, we can expect to see the VIX continue to fall. 1993 had a total range of 15% and in the past five months we've seen the SPX confined to a range of just over 10%. To be sure, we're on track for a wider range than 1993, but not by a whole lot and that seems to be reflected in the VIX, which is trolling along at multi-year lows, telling us that if the range in the SPX continues to contract, we can look forward to lower VIX levels ahead. It's as simple as that. So just what does this have to do with what we can expect going forward in the markets? Quite honestly, I don't know that it tells us anything. The markets have been rising on a sea of liquidity in the face of a tepid recovery at best. GDP growth at 7.2%? You've got to be kidding me! That report stunk so bad, I had to open the windows in my office. And if you're looking at the "improved" employment picture as signs that we're on the road to recovery, I fear you'll be misled there as well. We've lately been seeing the jobless claims dropping steadily below the 400K mark. That's good, but a sign of economic recovery? I don't think so. It takes net job creation in order to keep pace with population growth. So long as jobs are being eliminated, that isn't going to happen. Besides that, the government statistics are a joke of an incomplete picture, designed to show things in the most favorable light possible. What happens to job-seekers that run out of employment benefits and/or quit searching for work out of frustration. What about those laid off engineers that are now working an unskilled labor job to help pay the bills? Where do these groups of displaced workers show up in the employment report? They don't and therefore we have a more favorable report than is reality. The other interesting note is that the makeup of the jobs that are being filled is on the lower end of the skills spectrum as the higher paying and more skilled jobs continue to move overseas. We're a consumer-driven economy and if we don't continue to fund the consumer spending machine, we've got problems. That leaves it all up to the business community to finally get with the program and give us some capital spending and robust growth on that front. I've been listening to the same conference calls you have, and I must say I'm not hearing the signs of confident optimism that would lead me to think we're in the process of turning the corner. We're still very much in a bear market rally (albeit a powerful one) that I feel is very close to running out of steam. When it does finally tip over (which might be as late as early next year), then we'll see some angry bears looking for retribution for allowing the bulls to romp throughout 2003. My efforts are focused on dredging up some bearish trade candidates that will allow us to take positions before the broad- based decline gets underway. Then when it does get started, it should act as a sledge-hammer to drive some of these relatively weak stocks sharply lower. It's a tedious process in this market environment, and it has forced me to dust off some tools (some of them proprietary) that I haven't used in quite some time. Hopefully in the months ahead, we'll find that it has been worth the effort! We actually had some excitement in the Portfolio this week, with WMT finally being exposed to some heavy selling in the wake of its disappointing earnings report. Let's move on to the specific plays and see what other signs of life can be found. Portfolio: WMT - Finally! Our conviction appears to have been rewarded last week, with WMT announcing earnings BELOW expectations and being severely punished for the gaffe. Thursday's session saw the stock gapping down sharply and trading as low as $55.40. Friday's showing wasn't much better, with a drop as low as $54.50, before closing right at $55. It would be surprising to see the stock proceed much lower without at least a token bounce attempt from the $53-54 area, but that bounce should now be short-lived after some of the negative comments from management in the conference call about margin pressures. WMT is supposed to be the 800-lb gorilla in the discount retail world. What does it say when even they are feeling pricing pressures? A rebound back to the bottom of the gap, perhaps as high as $56.50-57.00 is now the best shot for new entries into the play. Our ultimate target remains a drop into the $48-50 area and we can breathe a bit easier this week, as we lower our stop to $58.50, just above the top of the post- earnings gap. One note of interest is the performance of our listed LEAPS. Note that even with WMT's price well below where we initiated the play, our LEAPS prices are very near breakeven. Say hello to falling volatility, which has taken a bite out of those premiums. Watch List: QQQ - An entire week of rally attempts and the NASDAQ just couldn't get its act together to push to 2000. A look at the hourly chart now shows a semblance of a H&S top formation. I view this as a potential topping formation, but not one that I'm going to put a lot of emphasis on. If it breaks, it only portends a drop to about 1830, or about $33.25 on the QQQ. That may make for a nice swing trade, but it isn't nearly enough to justify a LEAPS play. The QQQ came to rest on Friday just above the bottom of its rising channel ($34.85) and then there's the supportive 50-dma at $34.55. I'm actually hesitant to play the breakdown from this pattern, due to the fact that breakdowns have shown absolutely no follow-through for months. But I'll leave the lower trigger in place for those who choose to take it. That lower trigger is now at $34.50, just below the 50-dma. My desired entry for the play is still a foray into the $36.50-37.00 area and subsequent rejection as the COMPX is knocked back from its first attempt on the 2000 level. SMH - What can I say here? the SMH is still firmly entrenched in its uptrend and despite Friday's drop, shows no sign of reversing course. It is right up against strong resistance in the $44-46 area, but until it breaks below the bottom of its steeper 3-month channel near $40, there's no incentive to play it to the short side. And with price right into strong resistance, there's no future in a long-term bullish play unless there is some fundamental catalyst (that has been glaringly absent throughout the earnings reports I've paid attention to) showing that robust demand-driven growth is coming back. I'm still very much looking forward to playing the downside in the SMH when the time is right, but for now, the sidelines is the prudent place to be. NEM - The price of gold knocked on the door of $400 on Friday, with an intraday high of $399.50 on the December futures contract. So it should come as no surprise that NEM had another strong week, closing above $44 for the first time since late 1997. It's too bad we haven't been able to achieve a viable entry point into the play, but we certainly don't want to chase it higher. There's a correction coming and we'll take advantage of it when it arrives. I've heard several comments pointing to a likely buying opportunity for gold and gold shares in December, so we'll watch for that as an early Christmas present. In the meantime, we'll keep our entry strategy unchanged. Look for god to come back near its 200-dma over time and we'll look for NEM to come back into strong support near $40 and preferable down to the $38 area to give us that entry point. SBUX - Just like our NEM play, SBUX is nowhere near an entry point, having charged above $32 and just now starting to show the first hints of a potential pullback. There's no need to get aggressive with this one -- it either comes back to give us the entry we want in the $29-30 area or we accept that it wasn't meant to be. DJX - What does it say about the DOW that with all that supposedly bullish economic data in the past two weeks that the buyers couldn't mount a paltry 200-point rally to get it up to the 10,000 level? It tells me that while there may not be a strong desire to sell, neither is there any gas in the tank to drive this market higher. There certainly hasn't been much of consequence in the litany of conference calls that would confirm full bull ahead into the holiday season. I still expect the DJX to stumble drunkenly higher until reaching that $100 level and then we'll see what excitement is in store. Maintain the entry point as a failed foray into the $99.50-100.00 area, which we will then manage with a broad stop at $104. Our principle downside target will be $90, although if things pick up steam, lower levels are certainly possible. Radar Screen: AIG - Although it has stubbornly held up for months, shares of AIG look to be losing strength, especially relative to the rest of the market. Now solidly below the 100-dma, AIG is fast approaching its 200-dma just below $57. Our last attempt to play the downside in AIG met with failure, primarily because it was too early in the bull cycle and the stock was lifted with the rest of the Financial complex. Now insurance and financial stocks appear to have run their course and I believe it is time to start picking off some of the weaklings. AIG seems to qualify and I think failed rally attempts below $62 should provide an attractive risk reward setup. The PnF chart is still technically bullish until the stock trades $57, but then we'll likely see a rebound off the bullish support line. Ideally we'll see the PnF Sell signal, add the play to our Watch List and then enter on the next failed rebound. AMGN - AMGN has certainly been losing strength lately, having come sharply off of its summer highs. Over the past few weeks, James and I have been "fighting" over whether to play the downside in the stock, with him being the proponent, and me the dissenter. My big concern has been the strength of the $58 support level, with even stronger support at $55. But based on Friday's action, the stock appears headed lower. The bearish price target from the PnF chart is only $57, so I'm hesitant to game a downside play right now. But with the Biotechs weakening and AMGN now below all its moving averages, perhaps we can take a piece of this decline before it completely runs its course. But we want to get in on a failed rebound, not on further weakness. Looking at the daily chart, that should correspond to a failed rally in the $62 area. But I'd really like to see the 50-dma ($64.32) cross under the 200-dma ($62.72) before getting aggressive with a downside play here. GENZ - Now here's a Biotechnology stock that's got some room to fall. GENZ traded in a rising channel for more than a year before finally breaking down in late October. In hindsight, we had a hint of that breakdown as the stock was confined to the lower half of that channel throughout August, September and most of October. But now that the breakdown is complete, the high odds continuation entry to the downside will be on a rally failure below the bottom of the channel (currently $49). Realistically, I think we'll be lucky to see a failed bounce to the 50-dma at $47.71. We certainly don't want to chase GENZ lower, with the stock just above the PnF bullish support line at $42, conveniently just below the 200-dma ($42.50). But the PnF chart IS on a Sell signal, with a target of $33. Now that gives us an attractive risk-reward dynamic if we can get an entry anywhere near the bottom of that broken channel. MEL - Looking for another relative weakling in the Financial arena? Shares of MEL got smacked hard in late October and it looks like the first rebound attempt is failing now. The stock is definitely weak and selling volume is once again on the rise, but this one will definitely be a slow mover. The fly in the ointment here is that the PnF chart is still on a Buy signal, although within an overall multi-year declining trend. Our optimum entry into the play will come on a failed rebound in the $31-32 area, where we can set a stop just above the PnF bearish resistance line ($34) and then target a downside move to major support in the $21- 22 area. Closing Thoughts: Well, with much diligent searching, I think I managed to dredge up a few Radar Screen candidates this week that are technically favorable, as well as in line with my big picture view -- which is down, in case you missed that! GRIN I'm not ready to put them on the Watch List just yet, but I suspect one or two of them might find their way there in the next couple weeks. The market environment is as treacherous as I've ever seen it and I suspect it could turn and run strongly in either direction, given the right catalyst. That means we pick our plays (and entries) very careful, religiously use stops and let the price action shake out where it may. If we have any clue what we're doing, that ought to be enough to keep our equity curve on the rise. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: WMT 10/03/03 '05 $ 55 ZWT-MK $ 5.10 $ 5.20 + 1.96% $58.50 '06 $ 55 WWT-MK $ 7.20 $ 6.90 - 4.17% $58.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 10/05/03 $37-38, $40 JAN-2005 $ 35 ZIE-AG CC JAN-2005 $ 30 ZIE-AF JAN-2006 $ 35 WIE-AG CC JAN-2006 $ 30 WIE-AF SBUX 10/12/03 $29-30 JAN-2005 $ 30 ZIE-AG CC JAN-2005 $ 25 ZIE-AF JAN-2006 $ 30 WIE-AG CC JAN-2006 $ 25 WIE-AF QCOM 11/16/03 $42-43 JAN-2005 $ 45 ZLU-AI CC JAN-2005 $ 40 ZLU-AH JAN-2006 $ 45 WLU-AI CC JAN-2006 $ 40 WLU-AH PUTS: QQQ 08/10/03 $36.50-37.00 JAN-2005 $ 32 ZWQ-MF $34.50 JAN-2006 $ 32 WD -MF SMH 08/24/03 HOLD JAN-2005 $ 35 ZTO-MG JAN-2006 $ 35 YRH-MG DJX 11/02/03 $99.50-100.00 DEC-2004 $ 96 YDK-XR JUN-2005 $ 96 ZDK-RR New Portfolio Plays None New Watchlist Plays QCOM - Qualcomm Inc. $47.40 **Call Play** Just as promised last week, QCOM is making a move to the Watch List this weekend, but not without reservations. From a fundamental perspective, the stock is still overvalued but it's been awhile since that was an important consideration. With the revenue and earnings stream looking solid, it's no great surprise to see the way the stock has continued moving up over the past 6 months. That said, my expectations are for a pullback in the NASDAQ, and that should surely affect QCOM negatively. My hope is that it will create enough of a pullback to give us a solid entry, but not enough to generate a PnF Sell signal. QCOM is currently on a PnF Buy signal with a $67 price target. If we can get into the play in the low $40s, then that makes for an attractive entry point. However, if the stock trades down to hit $40, then we'll have a fresh PnF Sell signal on our hands, which will negate the current bullish price objective. So let's see if we can thread the needle with an entry target of $42-43. That should be just above strong support, yet close enough to where we'd like to place our stop ($39) to make the risk manageable. Note that if that entry point is reached, it will be a violation of both the 50-dma and the bottom of the ascending channel, both of which are currently near $44.50. Traders willing to take a bit more risk to make sure they get an entry might want to use an entry target in the $44-45 area. While the $67 target would be a welcome gift, I just don't have that much confidence in the play. I think a more realistic target is the strong resistance in the $60-62 area, which still gives us a very favorable risk-reward ratio. BUY LEAP JAN-2005 $45 ZLU-AI BUY LEAP JAN-2005 $40 ZLU-AH **Covered Call** BUY LEAP JAN-2006 $45 WLU-AI BUY LEAP JAN-2006 $40 WLU-AH **Covered Call** Drops None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Let's Tweak Again Like We Did Last Summer By Mike Parnos, Investing With Attitude An education never hurt anybody who was willing to learn after he got it. Education should be an ongoing function of life. I'm constantly learning. Wouldn't have it any other way. Some people are afraid to open their minds. They're not worried about what might find its way into an open mind, but rather what might fall out. Let's Trap Some Premium In option trading, there are only so many strategies out there. Nobody is going to suddenly come up with a better mousetrap. We might use a different kind of cheese now and then, but the traps are basically the same. Let the mice beware. Another Look Before We Boogie Based on reader emails and suggestions, I've taken another look at our CS Boogie strategy. We may be able to make it a little easier on ourselves when we initiate the spread. Originally, we generated $6.70 credit on a 15-point spread (in Thursday's column). Then, if things went against us, we were going to wait until it would cost $13.40 to close the spread and make the adjustment. It was brought to my attention that, with only a 15-point spread, waiting for a reverse move to cost $13.40 to close was unreasonable. The OEX would have to go much too far into the money before we made our adjustment. The Tweak So, I propose we expand the entry spread to 25-points. We can accomplish a few things by using a 25-point spread as opposed to a 15-point spread. Instead of using an in-the-money short strike to generate the appropriate amount of credit, we can use an at-the-money or an out-of-the-money. How does this benefit us? The wider spread makes it easier to get a sufficient initial credit. Plus, it doesn't require any movement to put us into a profitable position. A 25-point spread would require additional maintenance. However, since we're only trading a few contracts, the additional maintenance should be a major obstacle in putting on the CS Boogie strategy. The New Position Based on the above "tweak" and Friday's OEX closing price of 519.01, our projected revised position would look like this: Sell 2 December OEX 520 calls @ $9.00 Buy 2 December OEX 545 calls @ $1.55 Total credit and potential maximum profit of $7.45 ($1,490). Exposure $17.55 ($3,510). Maintenance $25.00 ($5,000). As a matter of fact, let's make this "hypothetical" educational position and official CPTI Portfolio position for December. _____________________________________________________________ NOVEMBER QUICKIE IDEAS SPX Iron Condor – 1050.35 Sell 10 contracts of Nov. SPX 1030 puts and buy 10 contracts of Nov. 1015 SPX puts for a credit of about $1.10. Then, sell 10 contracts of Nov. SPX 1070 calls and buy 10 contracts of Nov. 1085 calls for a credit of about $.90. Total credit of about $2.00. Can the SPX stay in a 40-point range for a week? Stay tuned . . . QQQ Lottery Strangle -- $35.03 Buy 10 contracts of Nov. QQQ $34 puts for $.15 and buy 10 contracts of Nov. $36 calls for $.15. Total risk of $.30 ($300). If the market goes nuts in either direction next week, there's a chance to double or triple our little risk. Money is always welcome. Put it in your rhinoplasty, enhancement or liposuction fund. Before long, we won't even recognize you. IBM Siamese Condor -- $90.25 Sell 10 contracts of Nov. IBM $90 puts and sell 10 contracts of Nov. $90 calls for $1.75. Buy corresponding protective $100 calls and $80 puts for $.10. Your net credit is $1.65. Look at the chart. There seems to be nice support above $88 and resistance near $92. Maybe the market makers will cooperate and have IBM finish darn close to $90. Wouldn't that be nice? Bailout points are $91.65 and $88.35. MMM Lottery Put -- $78.53 If you want to bet $.15 on a longshot, look at the MMM chart. It doesn't seem to want to go through $80. If it breaks below $78, it could go all the way to $75, perhaps lower. So, buy 10 contracts of the MMM Nov. $75 puts at $.15 for a total risk of $150. On Monday you may even be able to get it for a dime. LOW Siamese Condor -- $58.63 This one is a little iffy and risky. It's trading in a narrow range between $57 and $60. Sell 10 contracts of the Nov. LOW $60 puts and Nov. LOW $60 calls for about $3.00. Then buy the corresponding protective $50 puts and $70 calls for a total of $.10-.15. Net credit of $2.90. Bailout points of $57.10 and $62.90. _____________________________________________________________ Those Friendly Reminders November is a standard four-week option cycle. The premiums quoted on the above educational trades are based on Friday's closing bid/ask prices. On Monday the premiums may be different due to market movement and/or the additional two days of time erosion. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you a trader. And make sure you know the intricacies of a strategy before you trade. __________________________________________________________ NOVEMBER POSITIONS Position #1 – SPX Iron Condor – Trading @ 1050.35 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 two weeks left, anything can happen. A pullback would be nice. Position #2 – AFCI Iron Condor – Position closed for $700 loss. Que sera, sera. Position #3 – OEX Iron Condor (By Request) – 519.01 We sold 10 contracts of the OEX November 490 puts and bought 10 contracts of the OEX November 480 puts for a credit of about $.90. Then, sold 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 - $126.30 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. The closer BBH finishes to $130, the more we can make. Position #5 – QQQ Put Calendar Spread – Trading @ $35.03 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 @ $519.01 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. QQQ ITM Strangle – Ongoing Long Term -- $35.03 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, but, again, a pullback would be nice. _____________________________________________________________ Cannibals really are terrible folk. Sometimes they pass their best friends. _____________________________________________________________ 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. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? 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The Option Investor Newsletter Sunday 11-16-2003 Sunday 5 of 5 In Section Five: Covered Calls: Covered-Call Fundamentals Naked Puts: Q&A With The Editor Spreads/Straddles/Combos: The Dreaded "Pause In The Rally" Arrives! Updated In The Site Tonight: Market Posture: Markets Close Lower ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************* COVERED CALLS ************* Trading Basics: Covered-Call Fundamentals By Mark Wnetrzak One of our readers submitted an excellent question about option exercise and assignment with covered-calls. Attn: mark@OptionInvestor.com Subject: Covered Calls -- Examples at Expiration Mark, A quick question... Using a current pick from this month, TLAB, I purchased the stock at $7.97 and the Nov-7.50 call at $0.75. I set my stock stop for $7.22 and was stopped out two weeks ago. I still own the Nov-7.50 call currently at (ask) $0.45. Question: At expiration, what happen to the option if the stock price is over the strike price (TLAB is current at $7.72) and I do not have any stock to cover the expiring option? I have been a reader of OIN for years and finally understand the power covered calls and compounding money. Thanks for the helpful articles. Bscoot p.s. I attended the first workshop in Denver way back in 1999, and have been "hooked" even since. Hello Bscoot! Thank you for the kind words and OIN loyalty! Generally, when a trader decides to "exit" a covered-call position, he or she will buy back (to close) the sold calls and sell the stock. With some brokerages, this can be done as a combination order to buy back the calls and sell the stock for a net credit. Remember, when a call is sold, you have granted the "buyer" the right to buy the underlying security from you (at any time with American options) at the strike price. At expiration, the option will either be exercised (called out) or expire. So, if the stock is trading above the striking price at expiration, the call will most likely be exercised. If your option is exercised, stock will be sold at the strike price and posted as a short position in your portfolio. If the option is exercised early and you are assigned, it's very important to be notified by your broker in a timely manner so that you can use the flexibility of options to eliminate or offset the obligation without undue losses. Again, you could simply buy-back the calls prior to them being exercised to eliminate the obligation and close the position. When your broker informs you of a call option assignment, there are a number of alternatives available. The method you select will depend on several factors including the current outlook for the underlying issue and the amount of uncommitted funds you have available to apply to future transactions. As you might expect, the broker looks upon the assignment of short calls in the same manner as a pending stock purchase. You have three days before funds are required for the actual settlement, thus there is ample time to study the situation and determine the best response. The easiest course of action is to purchase the stock that has been assigned and replace that which is short in your portfolio. There are other, more advanced, adjustment techniques depending on your available capital, and experience level, and these include offsetting trades and various combination positions. Regards, Mark W. OIN SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield AKAM 10.30 10.97 NOV 10.00 0.75 0.45* 10.2% SGMO 5.10 5.00 NOV 5.00 0.55 0.45 8.6% IDTI 17.60 18.21 NOV 17.50 0.65 0.55* 7.0% FFIV 25.49 25.07 NOV 25.00 1.25 0.76* 6.8% MONE 5.14 5.40 NOV 5.00 0.40 0.26* 6.0% TMM 3.44 3.30 NOV 2.50 1.10 0.16* 5.9% PLUG 5.91 5.58 NOV 5.00 1.15 0.24* 5.5% TLAB 7.53 8.15 NOV 7.50 0.30 0.27* 5.4% ITMN 20.03 19.88 NOV 20.00 0.85 0.70 5.3% ALGN 15.60 16.88 NOV 15.00 1.60 1.01* 5.2% CMOS 16.31 15.34 NOV 15.00 1.80 0.49* 4.9% PUMA 5.54 6.78 NOV 5.00 0.85 0.31* 4.8% GSS 5.49 5.90 NOV 5.00 0.70 0.21* 4.8% CMNT 9.22 10.74 NOV 7.50 2.10 0.38* 4.6% OXGN 10.51 9.79 NOV 10.00 1.10 0.38 4.4% VECO 25.67 26.27 NOV 25.00 1.85 1.18* 4.3% EMBT 12.90 15.79 NOV 12.50 0.75 0.35* 4.2% BRCD 6.33 7.63 NOV 6.00 0.65 0.32* 4.1% CDN 15.39 16.10 NOV 15.00 0.80 0.41* 4.1% CRYP 10.84 11.58 NOV 10.00 1.20 0.36* 4.1% SSTI 11.21 13.05 NOV 10.00 1.65 0.44* 4.0% BVSN 5.31 4.91 NOV 5.00 0.65 0.25 3.9% TLAB 7.83 8.15 NOV 7.50 0.70 0.37* 3.8% AFFX 25.63 24.54 NOV 25.00 1.30 0.21 1.2% RTEC 26.15 24.21 NOV 25.00 1.95 0.01 0.1% QSFT 14.90 14.33 NOV 15.00 0.55 -0.02 0.0% ACN 25.05 24.35 NOV 25.00 0.55 -0.15 0.0% XOMA 7.83 6.87 NOV 7.50 0.80 -0.16 0.0% EMIS 7.90 6.91 NOV 7.50 0.80 -0.19 0.0% VSAT 22.98 21.02 NOV 22.50 1.15 -0.81 0.0% SEAC 15.57 13.19 NOV 15.00 1.50 -0.88 0.0% * Stock price is above the sold striking price. Comments: If the major averages continue to weaken, a defensive posture could be in order. As there is only one week left for the November option series, it is time to reassess all positions. A bullish stock will tend to consolidate near the "top" of a support area while a "weak" stock tends to move to, and usually through, the bottom of a support area. Currently on the list (non-inclusive) for an early exit or adjustment are: Credence Systems (NASDAQ:CMOS), Quest Software (NASDAQ:QSFT), Broadvision (NASDAQ:BVSN), Rudolph Technologies (NASDAQ:RTEC), Xoma (NASDAQ: XOMA), and Seachange (NASDAQ:SEAC). Emisphere (NASDAQ:EMIS) and Viasat (NASDAQ:VSAT) could also be considered for an exit, depending on your outlook. As for Infineon (NYSE:IFX), the gap-lower open on Monday this week offered no chance nor any incentive to enter the play as listed, and therefore it is not in the above summary. Positions Previously Closed: Alkermes (NASDAQ:ALKS) and Ibis Technology (NASDAQ:IBIS), which is this month's Murphy's Law candidate as the rebound continues! NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield ARIA 7.70 DEC 7.50 UAQ LU 0.80 199 6.90 35 7.6% AVII 4.99 DEC 5.00 QVI LA 0.40 2870 4.59 35 7.6% GSS 5.90 DEC 5.00 GSS LA 1.25 269 4.65 35 6.5% BRCD 7.63 DEC 7.00 BQB LJ 1.00 6164 6.63 35 4.8% MMR 16.30 DEC 15.00 MMR LC 2.00 125 14.30 35 4.3% CLHB 6.12 DEC 5.00 QPB LA 1.35 329 4.77 35 4.2% TIVO 9.02 DEC 7.50 TUK LU 1.85 579 7.17 35 4.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ARIA - Ariad $7.70 *** New Drug Speculation: Part I *** Ariad Pharmaceuticals (NASDAQ:ARIA) is engaged in the discovery and development of breakthrough medicines that regulate cell signaling with small molecules. The company is developing a comprehensive approach to the treatment of cancer. It is mainly focused on a series of product candidates for targeted indications: AP23573, which is in Phase I development, to treat solid tumors and other malignancies; AP23464, which is intended to block the spread of cancer and to treat certain forms of leukemia, and AP23841, which is intended to treat cancer that has spread to bone, as well as to treat primary bone cancers, such as osteogenic sarcomas. Ariad has rallied to a multi-year high on positive news and investors who believe the bullish trend will continue can profit on that outcome with this play. DEC-7.50 UAQ LU LB=0.80 OI=199 CB=6.90 DE=35 TY=7.6% ***** AVII - AVI BioPharma $4.99 *** Drug Speculation: Part II *** AVI BioPharma (NASDAQ:AVII) is a biopharmaceutical company developing therapeutic products based on two distinct core technologies, its Neugene antisense and its Avicine cancer vaccine. The company's principal products will target life-threatening diseases, with initial applications in cardiovascular disease, pancreatic cancer, polycystic kidney disease, drug metabolism and viruses. A patent estate, including 74 issued patents and 110 applications pending, protects their technologies. Each of its lead product candidates, Resten-NG and Avicine, will address a large worldwide market. AVI announced the cancellation of a proposed share sale and it appears investors were pleased with the news. The stock has been trading around $5 for several months and this position allows speculators to profit from that trend. Due diligence is a must! DEC-5.00 QVI LA LB=0.40 OI=2870 CB=4.59 DE=35 TY=7.6% ***** GSS - Golden Star $5.90 *** Gold Hedge *** Golden Star Resources (AMEX:GSS) is an international gold mining and exploration company producing gold in Ghana in West Africa. Through its various subsidiaries and joint ventures the company owns a controlling interest in four gold properties in Ghana: the Bogoso property, the Prestea property, the Wassa property and the Prestea underground property. Bogoso and Prestea are adjoining properties and both are owned by Golden's 90%-owned subsidiary, Bogoso Gold Ltd. These two properties function as a single operation referred to as Bogoso/Prestea. The company also holds other active exploration properties in Suriname and Ghana through its 73%-owned subsidiary, Guyanor Ressources S.A. In addition, Golden has interests in several gold exploration properties in French Guyana. Golden Star rallied to a new high this week and the heavy-volume rally suggests further upside activity in the future. Traders interested in a broad market hedge can speculate on gold prices with this position in GSS. DEC-5.00 GSS LA LB=1.25 OI=269 CB=4.65 DE=35 TY=6.5% ***** BRCD - Brocade $7.63 *** Recovery Mode! *** Brocade Communications Systems (NASDAQ:BRCD) develops, markets, sells and supports data storage networking products and services. Brocade offers a line of intelligent storage networking products and SAN management software that enables companies to implement highly available, scalable, manageable and secure environments for data storage applications. Their products and services are marketed, sold and supported worldwide to end users through distribution partners, including OEM partners, value-added distributors, systems integrators and VARs. Brocade is stock that has been forging a Stage I base for about a year and this position offers a conservative method for investors to speculate on the company's future. DEC-7.00 BQB LJ LB=1.00 OI=6164 CB=6.63 DE=35 TY=4.8% ***** MMR - McMoRan $16.30 *** Oil Hedge *** McMoRan Exploration (NYSE:MMR) is engaged in the exploration, development and production of oil and gas offshore in the Gulf of Mexico and onshore in the Gulf Coast region. The company has rights to explore on over 400,000 gross acres, which is one of the largest exploration acreages held by any independent company in the Gulf of Mexico. In November, shares of McMoRan rallied sharply after it said it found hydrocarbons at an exploratory well in the Gulf of Mexico. We simply favor the bullish break-out on increasing volume and the current upside momentum in the oil and gas industry. This position offers excellent reward potential at the risk of owning MMR stock. DEC-15.00 MMR LC LB=2.00 OI=125 CB=14.30 DE=35 TY=4.3% ***** CLHB - Clean Harbors $6.12 *** Bottom-Fishing! *** Clean Harbors (NASDAQ:CLHB) through its subsidiaries, is managed in two segments, Technical Services and Site Services, which provide a wide range of environmental services and solutions. Following the 2002 acquisition of Safety Kleen Services, they became a provider of environmental services and an operator of hazardous waste treatment facilities in North America. The company has a network of 52 active hazardous waste management properties. Services offered at these properties include incineration at five facilities, nine commercial landfills, 12 wastewater treatment operations, 23 transportation, storage and disposal facilities and six locations specializing in polychlorinated biphenyls management. Investors cheered the company's earnings report on Friday as the stock surged almost $2. Traders who believe that Clean Harbors has seen its low for the year can target-shoot an entry point in this rebounding issue. DEC-5.00 QPB LA LB=1.35 OI=329 CB=4.77 DE=35 TY=4.2% ***** TIVO - TiVo $9.02 *** Trading Range? *** TiVo (NASDAQ:TIVO) is a provider of television services for digital video recorders (DVRs), a growing consumer electronics category. Its subscription-based TiVo Service provides consumers with a way to record, watch and control television. It also offers advertisers, content creators and television networks a platform for promotions, content delivery and audience research. The company's revenues come from three different sources. It receives revenues from providing the TiVo Service to consumers and from providing advertising and research services to media and consumer product marketers. TiVi receives licensing and engineering professional services revenues from companies that create products providing DVR functionality as well as from the sale of DVR hardware. TiVo appears to have broken the down-trend from the July high and is moving into a lateral trading range. This position offers investors a reasonable entry point from which to speculate on the company's future. Earnings are due on November 20. DEC-7.50 TUK LU LB=1.85 OI=579 CB=7.17 DE=35 TY=4.0% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield IBIS 13.70 DEC 12.50 UIB LV 1.95 205 11.75 35 5.5% AKAM 10.97 DEC 10.00 UMU LB 1.50 1420 9.47 35 4.9% PRTL 10.60 DEC 10.00 PWU LB 1.10 215 9.50 35 4.6% LTXX 15.97 DEC 15.00 UXT LC 1.70 72 14.27 35 4.4% NPSP 28.12 DEC 25.00 QKK LE 4.30 174 23.82 35 4.3% VIRL 10.18 DEC 10.00 UVB LB 0.65 130 9.53 35 4.3% PXLW 13.24 DEC 12.50 PUO LV 1.30 62 11.94 35 4.1% APHT 6.12 DEC 5.00 HQY LA 1.30 495 4.82 35 3.2% ***************** NAKED PUT SECTION ***************** Options 101: Q&A With The Editor By Ray Cummins This week's question concerns adjustment strategies with naked put positions. Attn: Naked-Puts Editor Subject: CYD Position After seeing the naked put play on CYD (China Yuchai Intl.) keep showing up in that [naked puts] section, I did the position. Any salvage ideas? Thinking of rolling down to DEC-$20 [puts] and increasing [the number of] contracts or just leaving. Can't find any news... Thanks for your writing of this section of OI. I am a 4 yr. subscriber and I love to sell time! BM Hello BM, You are correct in that China Yuchai International (NYSE:CYD) has been listed as a candidate in the Naked-Puts section a number of times over the last few weeks and up to this point, it had been a very successful selection for bullish traders. However, the recent bout of profit-taking affected many of the "high-flyers" and CYD is no exception. As far as "salvage ideas," which to me means closing or adjusting a losing position prior to expiration: That kind of thinking is definitely the key to success with high probability/low profit strategies such as writing out-of-the-money "naked" puts. There are no big winners to offset the big losers, so there simply can't be any big losers. Obviously, a "gapping" issue may wipe-out a portion of previous gains and there is nothing you can do about it but at the same time, you must try to manage the remaining positions effectively or there will be no portfolio profits to offset the (rare) catastrophic losers. Both of the methods you mentioned are viable methods for limiting losses with short (uncovered) option positions, provided they are implemented correctly, in a timely manner. In fact, a trader has many different alternatives when the underlying issue moves beyond the sold strike however in most cases, the appropriate action must be taken prior to that event, when the stock undergoes a technical change in character, such as "breaking-out" of a trading range or closing below a moving average. Most methods for taking profits and preventing losses, as well as making position adjustments such as rolling down and out to new options, fit into two categories: a pre-arranged target gain or loss limit; or a technical exit based on the chart indications of the issue. The first technique, using a mechanical or mental closing stop to terminate a play or initiate a roll-out trade, is simple as long as you adhere to the initially established limits. The alternate method, a technicals-based exit, is more difficult. However, there are many different indicators that can help establish an acceptable exit point; moving averages, trend-lines, previous highs/lows, oscillators, etc., and with this type of loss-limiting system, you simply exit the position after a violation of a pre-determined level. In addition, the closing or adjustment transaction should be based on the existing market and sector conditions as well as the current outlook for the underlying issue and the ratio of potential gain to additional risk. Writing "naked" options is a very popular strategy and there are a few ways to limit potential losses or even capitalize on a reversal (or transition) to a bearish trend with uncovered puts. The three most common methods to exit or cover a losing position include: a "buy-to-close" stop order, based on either the option or stock price; a "roll-out" to a longer-term option, possibly to a lower strike price as well; and "shorting" the underlying issue to cover the sold option. The first method is relatively simple, however it requires knowledge of option pricing and an effective floor-broker or trading platform to limit slippage. The second technique is popular among long-term investors who sell options only on stocks they wouldn't mind owning (a cardinal rule!), but the strategy requires the commitment of collateral for extended periods and the downside risk may increase if the primary market trend changes for the worse (consider the 2000-2002 timeframe). The last method: covering (by shorting the stock) the sold option as the underlying issues moves below the short strike, is perhaps the most popular technique among experienced traders. Indeed, it may be the best method for bailing out on an issue in which the trend or technical character has changed significantly due to unexpected news or events. To initiate this strategy, place place an order to short the underlying stock, in an equivalent number of shares, any time the issue trades (preferably closes) below technical support or a well-established trend-line, support area, or moving average on substantial volume. Of course, there are more precise signals available but this technique is based on the assumption that once a reversal has occurred, the stock will continue to move in that direction until a new catalyst emerges. "Shorting to cover" can be a difficult technique to perform when emotion enters the formula but the strategy works well after you become experienced at it. The key to success is initiating the trade at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move. The outstanding principle that many traders fail to adhere to is the need to outline a basic exit strategy, before initiating any position, to eliminate emotional decisions. This plan should be simple enough to implement while monitoring a portfolio of plays in a volatile market. In addition, these exit-adjustment rules should apply across a wide range of situations and be designed to compensate for one's weaknesses and inadequacies. To be effective in the long run, they must be designed to help maintain discipline on a general basis and at the same time, offer a timely memory aid for difficult situations. Utilizing this type of system addresses a number of problems, but the biggest obstacle it removes is the need for "judgment under fire." In short, a sound exit strategy will help you avoid exposing your portfolio to excessive losses and that's important because the science of successful trading is far less dependent on making profits but rather on avoiding undue outflows. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield CYD 29.90 28.80 NOV 25.00 0.65 0.65* 3.9% 12.2% PMCS 22.12 21.30 NOV 20.00 0.40 0.40* 4.4% 12.2% ONXX 24.76 24.36 NOV 20.00 0.50 0.50* 2.8% 9.6% ESPR 23.02 22.87 NOV 20.00 0.60 0.60* 3.4% 9.6% ONXX 25.93 24.36 NOV 20.00 0.60 0.60* 2.7% 9.0% XMSR 19.10 22.89 NOV 17.50 0.85 0.85* 3.7% 8.9% CYD 27.57 28.80 NOV 22.50 0.50 0.50* 2.5% 8.4% ESPR 23.87 22.87 NOV 20.00 0.35 0.35* 2.6% 8.4% FCEL 14.35 16.13 NOV 12.50 0.50 0.50* 3.0% 8.2% XMSR 20.25 22.89 NOV 17.50 0.30 0.30* 2.5% 7.7% AFCI 26.70 23.85 NOV 22.50 0.60 0.60* 2.4% 7.4% PHTN 40.90 39.63 NOV 37.50 0.45 0.45* 2.6% 7.3% ECLG 25.25 24.14 NOV 22.50 0.25 0.25* 2.4% 7.1% PXLW 12.10 13.24 NOV 10.00 0.30 0.30* 2.2% 7.1% INSP 26.05 25.46 NOV 22.50 0.35 0.35* 2.3% 7.0% CELL 28.65 24.57 NOV 23.38 0.30 0.30* 1.9% 6.7% FFIV 25.01 25.07 NOV 22.50 0.35 0.35* 2.3% 6.5% MTZ 12.81 12.00 NOV 10.00 0.25 0.25* 1.9% 6.4% NWAC 12.18 12.95 NOV 10.00 0.25 0.25* 1.9% 6.2% SCUR 14.09 15.27 NOV 12.50 0.30 0.30* 2.1% 6.0% ALGN 15.21 16.88 NOV 12.50 0.25 0.25* 1.8% 6.0% FCS 20.04 23.00 NOV 17.50 0.40 0.40* 2.0% 5.9% SCRI 25.49 26.81 NOV 22.50 0.40 0.40* 2.0% 5.7% MCD 26.01 25.68 NOV 25.00 0.25 0.25* 2.2% 5.6% AVCT 36.00 38.00 NOV 32.50 0.75 0.75* 2.1% 5.6% FCS 22.60 23.00 NOV 20.00 0.25 0.25* 1.8% 5.4% CNX 21.88 21.63 NOV 20.00 0.55 0.55* 2.0% 5.4% ERES 46.78 41.20 NOV 40.00 0.30 0.30* 1.6% 5.3% IDXC 24.30 23.90 NOV 20.00 0.35 0.35* 1.5% 5.3% SCHN 36.92 43.60 NOV 30.00 0.40 0.40* 1.5% 5.3% CY 20.44 21.47 NOV 17.50 0.40 0.40* 1.7% 5.1% RTEC 27.18 24.21 NOV 25.00 0.45 -0.34 0.0% 0.0% CYD 36.45 28.80 NOV 30.00 0.25 -0.95 0.0% 0.0% * Stock price is above the sold striking price. Comments: Stocks ended on a negative note Friday as the early bullish bias gave way to broad-based selling pressure amid valuation concerns. The downbeat activity, even among the best performing sectors as of late, suggests a continuation of the recent "range-bound" trading pattern in the coming weeks. With that outlook in mind, traders are advised to initiate new positions only in the most technically favorable issues and to pay considerable attention to current portfolio plays. China Yuchai (NYSE:CYD); at the $25 and $30 strikes, eResearch Technologies (NASDAQ:ERES), Brightpoint (NASDAQ:CELL), Rudolph Technologies (NASDAQ:RTEC), and Advanced Fibre (NASDAQ:AFCI) are candidates for early exit. In addition, the profitable position in Palm (NASDAQ:PALM) has been removed from the portfolio due to the complex share value adjustments in the wake of the company's merger with Handspring (NASDAQ:HAND), which produced PalmOne (NASDAQ:PLMO), and also the spin-off of PalmSource (NASDAQ:PSRC). Previously Closed Positions: CV Therapeutics (NASDAQ:CVTX), which is currently profitable. WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield RDWR 23.46 DEC 20.00 AUD XD 0.65 0 19.35 35 2.9% 8.6% APPX 32.29 DEC 25.00 AQO XE 0.55 1023 24.45 35 2.0% 6.8% SWIR 18.75 DEC 15.00 IYQ XC 0.30 140 14.70 35 1.8% 6.4% FFIV 25.07 DEC 22.50 FLK XX 0.55 415 21.95 35 2.2% 6.0% ECLG 24.14 DEC 20.00 EGU XD 0.40 30 19.60 35 1.8% 5.9% PDII 25.97 DEC 22.50 PKU XX 0.45 12 22.05 35 1.8% 5.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** RDWR - Radware $23.46 *** Favorable Earnings! *** Radware (NASDAQ:RDWR) is dedicated to providing Intelligent Application Switching, guaranteeing the best operation and servicing of IP applications and enterprise traffic across the Internet. Radware aligns application needs with the network infrastructure to seamlessly allocate resources, optimize application operations and extend security, ensuring the integrity of critical business processes. Radware's unique solutions address the needs of corporate enterprises, service providers, and e-commerce business through one or more of their award winning products including: Web Server Director (WSD), Cache Server Director (CSD), Content Inspection Director (CID), FireProof, LinkProof, Peer Director, CertainT 100. The firm's comprehensive suite of products service end-to-end application operations, providing robust and scalable network traffic assurance. This week, Radware reported record revenues of $14 million for the third quarter of 2003, an increase of over 25% from the third quarter of 2002, and a sequential increase of 6% over the previous period. Net profit for the third quarter of 2003 was $1.9 million or $0.10 per diluted share, compared to a year-ago net loss of $0.4 million. Investors who like the fundamental outlook for Radware should consider this position. DEC-20.00 AUD XD LB=0.65 OI=0 CB=19.35 DE=35 TY=2.9% MY=8.6% ***** APPX - American Pharma Partners $32.29 *** Bottom Fishing! *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty drug company that develops, manufactures and markets injectable pharmaceutical products, focusing on the oncology, anti-infective and critical care markets. The company is one of the largest producers of injectables, with more than 130 generic products in more than 350 dosages and formulations. American Pharmaceutical has been in the news recently with a number of lawsuits concerning the drug Abraxane. More specifically, the complaints alleges that APPX officials made materially false and misleading statements about the product and its potential. Regardless of the ongoing litigation, APPX appears to be poised for further upside movement and speculative traders can profit from that outcome with this position. DEC-25.00 AQO XE LB=0.55 OI=1023 CB=24.45 DE=35 TY=2.0% MY=6.8% ***** SWIR - Sierra Wireless $18.75 *** Bullish Industry! *** Sierra Wireless (NASDAQ:SWIR) is a leader in delivering highly differentiated wireless solutions that enable our customers to improve their productivity and lifestyle. Sierra Wireless develops and markets AirCard, the industry-leading wireless PC card line for portable computers; embedded modules for OEM wireless applications; the MP line of rugged vehicle-mounted connectivity solutions and Voq, a line of professional phones with secure, easy-to-use, products for mobile professionals. Shares of SWIR traded near 2-year highs this week, despite the completion of a previously announced offering of $4.6 million of its common stock at a price of $16.25 per share. Traders who share the optimism of the offering participants can establish a conservative entry price in the issue with this position. DEC-15.00 IYQ XC LB=0.30 OI=140 CB=14.70 DE=35 TY=1.8% MY=6.4% ***** FFIV - F5 Networks $25.07 *** Uptrend Intact! *** F5 Networks Inc. (NASDAQ:FFIV) provides integrated products and services to manage, control and optimize Internet traffic. FFIV's core products, the BIG-IP Controller, the 3-DNS Controller and the BIG-IP Link Controller, help manage traffic to servers and network devices in a way that maximizes availability and throughput. The company's iControl Architecture integrates its products and also allows its customers to integrate them with other third-party products. FFIV's solutions address many elements required for successful Internet and Intranet business applications, including high availability, high performance, intelligent load balancing, fault tolerance, security and streamlined manageability. FFIV spiked to a two-year high in late October after the firm said it returned to profitability in the fourth quarter due to an increase in sales across all product lines. Net income was $1.4 million, or 5 cents a share, which exceeded the company's previous guidance and the consensus estimate of 3 cents a share. The technical indications suggest a neutral to bullish bias in the near-term and this position offers traders a way to profit from upside movement in the issue with relatively low risk. DEC-22.50 FLK XX LB=0.55 OI=415 CB=21.95 DE=35 TY=2.2% MY=6.0% ***** ECLG - eCollege.com $24.14 *** Entry Point? *** eCollege.com (NASDAQ:ECLG) is a provider of technology, products and services that enable colleges, universities, primary and high schools, grade schools and corporations to offer online classes for distance, on-campus and hybrid learning. The firm's unique technology enables it's customers to reach students who wish to take courses at convenient times and locations via the Internet. Its customers can also use its technology to supplement on-campus courses with an online environment. In addition, the company offers services to assist in the development of online programs, including online course and campus design, development, management and hosting, as well as ongoing administration, faculty and student support. eCollege is a leader in the development of e-learning solutions for post-secondary education programs and the company's stock price reflects that fact. Investors who believe the trend towards this type of curriculum will continue can profit from that outcome with this position. DEC-20.00 EGU XD LB=0.40 OI=30 CB=19.60 DE=35 TY=1.8% MY=5.9% ***** PDII - PDI Incorporated $25.97 *** Consolidation Complete? *** PDI (NASDAQ:PDII) is an innovative healthcare sales and marketing provider to biopharmaceutical and medical devices companies and and the diagnostics industry. Its three business units offer service and product-based capabilities for companies seeking to maximize profitable brand sales growth. The three units include PDI Pharmaceutical Products, PDI Sales and Marketing Services, and PDI Medical Devices and Diagnostics. Shares of PDII rallied in early July when the company announced that full-year earnings would likely exceed analysts' consensus estimates, due to new business contracts awarded to its sales unit and expectations of a solid performance from its hypertension drug Lotensin. The upside momentum has carried the stock to a higher trading range over the past three months and investors who believe the bullish trend will continue should consider this position. DEC-22.50 PKU XX LB=0.45 OI=12 CB=22.05 DE=35 TY=1.8% MY=5.3% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield OIIM 23.95 DEC 22.50 XQQ XX 1.00 0 21.50 35 4.0% 9.5% XMSR 22.89 DEC 20.00 QSY XD 0.70 1884 19.30 35 3.2% 8.7% NTPA 12.67 DEC 10.00 NQD XB 0.25 26 9.75 35 2.2% 7.8% TLAB 8.15 DEC 7.50 TEQ XU 0.25 2733 7.25 35 3.0% 7.6% SII 39.07 DEC 37.50 SII XU 0.70 60 6.80 35 8.9% 7.1% TRR 20.44 DEC 20.00 TRR XD 0.60 0 19.40 35 2.7% 6.3% GNSS 18.10 DEC 15.00 QFE XC 0.30 873 14.70 35 1.8% 5.9% MRVL 43.99 DEC 37.50 UVM XU 0.70 824 36.80 35 1.7% 5.2% MIK 48.00 DEC 42.50 MIK XV 0.80 2693 41.70 35 1.7% 4.8% NPSP 18.12 DEC 22.50 QKK XX 0.60 775 21.90 35 2.4% 4.3% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Dreaded "Pause In The Rally" Arrives! By Ray Cummins U.S. equities retreated Friday amid mediocre earnings reports and concerns that the economic recovery may be slower than expected. The Dow Jones industrial average slid 69 points to 9,768, despite gains in blue-chip drug companies. The NASDAQ Composite fell 37 points as computer chip-makers and biotechnology stocks succumbed to profit-taking. The broader Standard & Poor's 500 Index slipped 8 points to 1,050 as brokerage, airline, automobile, homebuilding, hotel, and aerospace issues moved lower. Trading was moderate, with about 1.3 billion shares changing hands on the New York Stock Exchange and 1.8 billion shares crossed on the NASDAQ. Declining issues outpaced advancing stocks more than 3 to 2 on both the Big Board and the technology exchange. U.S. bond prices recovered as equity values slumped. The 10-yr note finished up 19/32 while its yield fell to 4.22%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position or to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status AET 62.76 59.86 NOV 50 55 0.55 54.45 $0.55 Open MXIM 44.82 52.12 NOV 35 40 0.50 39.50 $0.50 Open PHS 54.50 58.10 NOV 45 47 0.30 47.20 $0.30 Open PIXR 71.56 70.40 NOV 60 65 0.70 64.30 $0.70 Open COH 31.43 37.70 NOV 27 30 0.35 29.65 $0.35 Open CYMI 44.99 46.38 NOV 35 40 0.65 39.35 $0.65 Open SAP 36.00 38.28 NOV 30 32 0.30 32.20 $0.30 Open ICOS 45.42 45.40 NOV 35 40 0.50 39.50 $0.50 Open SINA 42.00 34.43 NOV 30 35 0.45 34.55 ($0.12) Closed SMH 38.55 42.31 NOV 32 35 0.20 34.80 $0.20 Open BBY 58.31 57.38 NOV 50 55 0.40 54.60 $0.40 Open CTX 97.50 99.02 NOV 85 90 0.40 89.60 $0.40 Open VSEA 48.40 48.44 NOV 40 45 0.45 44.55 $0.45 Open LNCR 41.05 43.85 DEC 35 37 0.30 37.20 $0.30 Open MGAM 41.45 42.80 DEC 30 35 0.45 34.55 $0.45 Open PLMD 31.35 31.42 DEC 27 30 0.30 29.70 $0.30 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Sina Corporation (NASDAQ:SINA), which has been on the "watch" list for a few weeks, became an exit candidate during Friday's session. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CA 23.50 22.86 NOV 30 27 0.35 27.85 $0.35 Open MTG 53.79 51.40 NOV 65 60 0.55 60.55 $0.55 Open BJS 32.50 33.75 NOV 37 35 0.30 35.30 $0.30 Open CEPH 45.77 46.68 NOV 55 50 0.55 50.55 $0.55 Open HDI 47.26 46.61 NOV 55 50 0.50 50.50 $0.50 Open SEPR 26.98 24.61 NOV 35 32 0.25 32.75 $0.25 Open AMZN 54.51 52.45 NOV 65 60 0.50 60.50 $0.50 Open OEX 511.25 519.01 NOV 540 535 0.45 535.45 $0.45 Open EBAY 55.93 54.38 NOV 65 60 0.50 60.50 $0.50 Open FNM 71.69 69.55 NOV 80 75 0.50 75.50 $0.50 Open KSS 56.07 51.80 NOV 65 60 0.40 60.40 $0.40 Open NBIX 46.88 49.32 NOV 55 50 0.50 50.50 $0.50 Closed AIG 58.28 58.31 DEC 65 60 0.90 60.90 $0.90 Open BJS 32.18 33.75 DEC 37 35 0.30 35.30 $0.30 Open SNPS 30.85 30.28 DEC 37 35 0.25 35.25 $0.25 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss As mentioned last week, Neurocrine Biosciences (NASDAQ:NBIX) was a candidate for early exit and conservative traders should have closed the bearish position during Thursday's session. Mercury Interactive (NASDAQ:MERQ), which has previously been closed to limit losses, is now profitable. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status LLTC 40.77 42.40 NOV 35 37 2.20 37.20 0.30 Open QCOM 47.49 47.40 NOV 42 45 2.25 44.75 0.25 Open VLO 44.00 44.41 DEC 37 40 2.20 39.70 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss CV Therapeutics (NASDAQ:CVTX) was crushed by investors recently after the U.S. Food and Drug Administration said it would grant conditional approval for the company's angina drug Ranexa, but also indicated that it wants "additional clinical information" before it issues final marketing clearance. The announcement was totally unexpected and with little hope of a near-term rebound, the position has previously been closed to limit losses. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status NPSP 25.45 28.12 NOV 35 30 4.40 30.40 0.60 Open IACI 37.34 32.62 NOV 42 40 2.25 40.25 0.25 Open LTR 38.99 43.40 NOV 45 40 4.40 40.60 (1.90) Closed As mentioned last week, the recent upside activity in Cablevision (NYSE:CVC) suggested an early exit in the position and it has been closed to limit losses. The speculative play in Loews (NYSE:LTR) quickly became a poor candidate with Monday's sharp rebound after an optimistic Barron's article and traders who opened the spread should have exited no later than Tuesday afternoon. The portfolio summary reflects the loss on that date. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status XING 9.13 9.04 DEC 12 7 0.10 0.30 Open JNPR 16.63 17.75 NOV 19 14 (0.20) 1.00 Closed LRCX 24.38 29.75 DEC 30 20 0.15 2.20 Open? PHTN 32.40 39.63 JAN 40 25 0.00 3.40 Open? IDCC 19.00 19.86 JAN 25 15 0.20 0.20 Open Lam Research (NASDAQ:LRCX) and Photon Dynamic (NASDAQ:PHTN) have provided outstanding profits for speculative traders. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status PRU 36.41 36.90 DEC-37C NOV-37C (0.20) 0.40 Open? SCRI 20.52 26.81 FEB-22C DEC-25C 1.40 2.10 Open GPRO 26.77 29.00 FEB-30C NOV-30C 1.95 2.25 Open Traders in the Prudential (NYSE:PRU) position can close the play for a favorable gain. Sicor (NASDAQ:SCRI) has previously been adjusted to a diagonal spread and that position is reflected in the summary. The Microsoft (NASDAQ:MSFT) spread, which offered a number of profitable opportunities, has previously been closed. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ZMH 55.52 63.80 DEC 55 55 5.20 10.25 Closed PCLN 30.45 17.90 NOV 30 30 4.90 11.90 Closed ADVP 49.05 55.07 NOV 50 50 3.40 6.20 Open? TM 59.45 62.20 NOV 60 60 3.40 4.25 Closed DIGE 35.10 37.44 NOV 35 35 4.50 6.00 Closed PLCE 30.10 29.81 NOV 30 30 3.00 3.20 Closed RMBS 24.79 25.00 NOV 25 25 2.50 2.35 Open? KDE 25.00 29.43 NOV 25 25 1.70 4.30 Closed URBN 35.07 36.04 NOV 35 35 2.70 2.80 Closed There were two more big winners in the straddle portfolio this week: AdvancePCS (NASDAQ:ADVP) and 4Kids Entertainment (NYSE:KDE). Priceline.com (NASDAQ:PCLN) exceeded all expectations, providing over a 100% gain in the wake of the company's mediocre earnings. Zimmer Holdings (NYSE:ZMH) traded lower this week, so the play was closed to lock-in profits. The position in Toyota Motors (NYSE:TM) achieved a small short-term gain and the straddle in Engineered Support Systems (NASDAQ:EASI), which has previously been closed, offered traders a number of lucrative opportunities. Triad Hospitals (NYSE:TRI), which has never achieved profits on a simultaneous order basis, has previously been closed to preserve capital. CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance, and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** ANPI - Angiotech Pharmaceuticals $48.77 *** Technicals Only! *** Angiotech Pharmaceuticals (NASDAQ:ANPI) is engaged in the fusion of medical device technologies and pharmaceutical therapies. The company's first product was a drug-coated stent. Angiotech's goal is to develop other products to enhance the performance of medical devices and biomaterials through the use of pharmatherapeutics. In September 2002, the company and Cohesion Technologies agreed to a merger in which Cohesion will merge with a wholly owned subsidiary of Angiotech, with Cohesion continuing as a wholly owned subsidiary of the company. ANPI - Angiotech Pharma $48.77 PLAY (very conservative - bullish/credit spread): BUY PUT DEC-35.00 AUJ-XG OI=1886 ASK=$0.35 SELL PUT DEC-40.00 AUJ-XH OI=1997 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$39.60 ***** PFE - Pfizer $34.08 *** Rally Mode! *** Pfizer (NYSE:PFE) is a research-based, global pharmaceutical firm that discovers, develops, manufactures and markets prescription medicines for humans and animals, as well as consumer products. The company operates in two business segments: Pharmaceuticals and Consumer Products. The Pharmaceuticals segment includes prescription pharmaceuticals for treating cardiovascular diseases, infectious diseases, central nervous system disorders, diabetes, urogenital conditions, allergies, arthritis and other disorders; products for livestock and companion animals, and the manufacture of empty soft-gelatin capsules. The Consumer Products segment includes self-medications for oral care, upper respiratory health, eye care, skin care, gastrointestinal health and other products. PFE - Pfizer $34.08 PLAY (conservative - bullish/credit spread): BUY PUT DEC-30.00 PFE-XF OI=26705 ASK=$0.10 SELL PUT DEC-32.50 PFE-XB OI=18337 BID=$0.35 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$32.25 ***** PHS - PacifiCare Health Systems $58.10 *** Strong Sector! *** PacifiCare Health Systems (NYSE:PHS) is one of the nation's largest consumer health organizations with over 3 million health plan members and approximately 9 million specialty plan members nationwide. PacifiCare offers individuals, employers and Medicare beneficiaries a variety of consumer-driven health care and life insurance products. Currently, more than 99% of PacifiCare's commercial health plan members are enrolled in plans that have received Excellent Accreditation by the National Committee for Quality Assurance. PacifiCare's specialty operations include behavioral health, dental and vision, and complete pharmacy and medical management through its subsidiary, Prescription Solutions. PHS - PacifiCare Health Systems $58.10 PLAY (conservative - bullish/credit spread): BUY PUT DEC-47.50 PHS-XS OI=122 ASK=$0.60 SELL PUT DEC-50.00 PHS-XJ OI=1510 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$49.75 ***** SII - Smith International $39.07 *** New Trading Range? *** Smith International (NYSE:SII) is a worldwide supplier of premium products and services to the oil & gas exploration and production industry, the petrochemical industry and other industrial markets. The firm provides a comprehensive line of technologically advanced products and engineering services, including various drilling and completion fluid systems, solids control, waste management services, production chemicals, three-cone and diamond drill bits, turbines, fishing services, drilling tools, underreamers, casing exit and multilateral systems, packers and liner hangers. The firm also offers supply chain management solutions through an large North American branch network providing pipe, valves, fittings, mill, safety and other maintenance products. SII - Smith International $39.07 PLAY (moderately aggressive - bullish/credit spread): BUY PUT DEC-35.00 SII-XG OI=210 ASK=$0.25 SELL PUT DEC-37.50 SII-XU OI=60 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=21% B/E=$37.05 ***** CCMP - Cabot Microelectronics $54.16 *** Downtrend Resumes? *** Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels, smoothes, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $54.16 PLAY (conservative - bearish/credit spread): BUY CALL DEC-65.00 UKR-LM OI=212 ASK=$0.35 SELL CALL DEC-60.00 UKR-LL OI=262 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$60.55 ***** KKD - Krispy Kreme $41.85 *** Stuck In A Trading Range? *** Krispy Kreme Doughnuts (NYSE:KKD) is a branded specialty retailer of doughnuts. The company has established Krispy Kreme as a consumer brand. Krispy Kreme's principal business is owning and franchising doughnut stores where it makes and markets over 20 varieties of doughnuts, including its Hot Original Glazed. Each of its stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Their business is driven by two complementary business units: its Company and franchise stores (collectively, Store Operations) and Krispy Kreme Manufacturing and Distribution (KKM&D). Its principal source of revenue is the sale of doughnuts produced and distributed by Store Operations. KKD - Krispy Kreme $41.85 PLAY (less conservative - bearish/credit spread): BUY CALL DEC-50.00 KKD-LJ OI=796 ASK=$0.25 SELL CALL DEC-45.00 KKD-LI OI=1835 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$45.65 ***** SNPS - Synopsys $30.28 *** Same Play -- Different Week! *** Synopsys (NASDAQ:SNPS) is a global supplier of electronic design automation software to the electronics industry. The company offers customers a comprehensive suite of products used in the logic synthesis and functional verification phases of chip design, including a broad array of reusable design building blocks. It also offers a set of physical synthesis and design products and a number of physical verification products. The company offers its customers products required to design a chip from concept to the point at which it goes to the manufacturer for fabrication, as well as an array of design building blocks. It also offers a range of professional services, including turnkey design services, design assistance and methodology consulting. The company is organized into four product development groups: Integrated Circuit Implementation, Verification Technology, Nanometer Analysis and Test and Intellectual Property and Design Services. Earnings are due on 12/03/03. SNPS - Synopsys $30.28 PLAY (conservative - bearish/credit spread): BUY CALL DEC-37.50 YPQ-LU OI=874 ASK=$0.25 SELL CALL DEC-35.00 YPQ-LG OI=5998 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$35.30 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** CTMI - CTI Molecular Imaging $16.08 *** Earnings Speculation! *** CTI Molecular Imaging (NASDAQ:CTMI) is a provider of positron emission tomography imaging equipment and related products used in the detection and treatment of cancer, cardiac disease and neurological disorders. The company provides a complete and integrated product line for positron emission tomography (PET), including scanners, cyclotrons, radiopharmaceuticals, detector materials and support services. The firm's products and services can be broadly classified into four principal categories: PET and PET/CT scanners; detector material products; radiopharmaceuticals, and other PET products and services. The firm manufactures and distributes a broad line of sophisticated PET and PET/CT scanners through CTI PET Systems, which the firm markets as ECAT scanners. The company manufactures the detection materials utilized in PET scanners including its proprietary LSO technology. Earnings are due on 11/18/03. CTMI - CTI Molecular Imaging $16.08 PLAY (speculative - bearish/debit spread): BUY PUT NOV-20.00 QPQ-XD OI=135 ASK=$4.10 SELL PUT NOV-17.50 QPQ-XW OI=97 BID=$1.85 INITIAL NET-DEBIT TARGET=$2.15-$2.20 POTENTIAL PROFIT(max)=14% B/E=$17.80 ***** ADRX - Andrx Corporation $21.66 *** Drug Stocks Are Hot! *** Andrx Corporation (NASDAQ:ADRX) is a specialty pharmaceutical company engaged in the formulation and commercialization of oral controlled-release generic and brand pharmaceuticals utilizing its proprietary drug delivery technologies. It manufactures and sells bioequivalent versions of Cardizem CD, Dilacor XR, Ventolin, Glucophage, K-Dur and Naprelan. In its own brand program, Andrx sells and markets Altocor, its first internally developed brand product, as well as brand products it has acquired or licensed from third parties. It also distributes pharmaceutical products manufactured by third parties, primarily generics, to independent pharmacies, pharmacy chains, pharmacy buying groups and, to a lesser extent, physicians' offices. ADRX - Andrx Corporation $21.66 PLAY (conservative - bullish/debit spread): BUY CALL DEC-17.50 QAX-LW OI=1503 ASK=$4.50 SELL CALL DEC-20.00 QAX-LD OI=4139 BID=$2.25 INITIAL NET-DEBIT TARGET=$2.15-$2.20 POTENTIAL PROFIT(max)=14% B/E=$19.70 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** ACS - Affiliated Computer $46.86 *** Aggressive Accounting? *** Affiliated Computer Services (NYSE:ACS) is a global company delivering comprehensive business process outsourcing and information technology outsourcing solutions to commercial and government clients. The company is organized into commercial, state and local government and the federal government segments. Within the commercial segment, ACS also provides technology outsourcing, business process outsourcing and systems integration services to clients in such industries as insurance, utilities, manufacturing, financial institutions, telecommunications, healthcare, retail and transportation. In the state and local government segment, the company is a business process outsourcing provider to state & local governments. In the federal government segment, ACS provides systems integration services, business process outsourcing and technology outsourcing to a variety of federal agencies. ACS - Affiliated Computer $46.86 PLAY (speculative - bearish/calendar spread): BUY PUT DEC-45.00 ACS-XI OI=524 ASK=$1.10 SELL PUT NOV-45.00 ACS-WI OI=4888 BID=$0.30 INITIAL NET DEBIT TARGET=$0.70-$0.75 INITIAL TARGET PROFIT=$0.35-$0.60 *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** VIP - Vimpel Communications $65.11 *** Earnings Play! *** Vimpel Communications (NYSE:VIP) is an established provider of telecommunications services in Russia, operating under the Bee Line family of brand names. VimpelCom's license portfolio covers approximately 92% of Russia's population (134 million people), including the City of Moscow and the Moscow Region. VimpelCom introduced two digital cellular communications standards to Russia and built a dual band GSM-900/1800 cellular network. The company also led the development and emergence of the mass consumer market for wireless communications in Russia by introducing a prepaid product solution. VimpelCom offers various technologies, such as wireless application protocol and BeeOnline, a multi-access web portal that provides a multitude of wireless information and entertainment services, including location-based features. The company's quarterly earnings report is due 11/19/03. VIP - Vimpel Communications $65.11 PLAY (very speculative - neutral/debit straddle): BUY CALL NOV-65.00 VIP-KM OI=283 ASK=$1.35 BUY PUT NOV-65.00 VIP-WM OI=353 ASK=$1.25 INITIAL NET-DEBIT TARGET=$2.40-$2.50 INITIAL TARGET PROFIT=$0.80-$1.25 ***** ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... 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