The Option Investor Newsletter Wednesday 11-26-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Markets Digest Economic News Futures Wrap: Turkey Day Index Trader Wrap: Totally computerized Traders Corner: Bless The Turkeys Who Make Our Profits Possible Traders Corner: Pick Your Battles Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 11-26-2003 High Low Volume Advance/Decline DJIA 9779.57 + 15.63 9794.68 9706.01 1.35 bln 1846/ 942 NASDAQ 1953.31 + 10.27 1960.31 1930.63 1.48 bln 1767/1307 S&P 100 521.21 + 1.67 521.77 516.68 Totals 4437/1546 S&P 500 1058.45 + 4.56 1058.45 1048.28 RUS 2000 545.31 + 2.13 547.32 539.70 DJ TRANS 2917.27 - 4.05 2941.86 2904.12 VIX 16.23 - 0.48 17.26 16.02 VXO 15.91 - 0.38 17.08 15.81 VXN 25.63 - 0.36 26.82 25.54 Total Volume 3,167M Total UpVol 2,259M Total DnVol 840M 52wk Highs 717 52wk Lows 22 TRIN 0.75 PUT/CALL 0.72 ******************************************************************* Markets Digest Economic News by James Brown Heading into the Thanksgiving holiday Wednesday's session began with investors selling the positive economic news before traders bought the dip midday and drove stocks into the green by the close. The early morning weakness was probably a matter of digesting the news of which there was plenty to go around. The buffet of reports was mostly positive and reaffirmed that the world's largest economy is indeed on the rebound. Since many believe the autumn market's gains were in anticipation of the news the actual announcements left little incentive to push stocks higher. As Art Cashin likes to say, the numbers were already baked in. World markets were mixed with Asian exchanges trading higher. The Japanese NIKKEI jumped 184 points to 10,144, reclaiming the 10K mark. European stocks were generally lower but losses were mild. The U.S. dollar ended the day weaker against the yen and the euro. This in turn helped push gold up to $402 an ounce intraday but gold futures closed the session at $398, up $5.60. The DJIA stretched its winning streak to three day in a row by adding more than 15 points to close at 9779. The NASDAQ Composite added 10 points closing at 1953. The S&P 500 index marked its fourth gain in a row edging up less than five points to 1058. The market's strength today was relatively broad based. Homebuilders, retail, airlines, drugs and transports were the weakest, all closing in the red but losses were mild. The best performers were gold stocks (XAU +2.9%) followed by software, networking, broker-dealers and oil service stocks. Market internals were positive for such a low volume day. Advancing stocks climbed past decliners 18 to 9 on the NYSE and 17 to 13 on the NASDAQ. Up volume was two to three times down volume on both exchanges. Chart of the DJIA Chart of the NASDAQ One of the most influential economic reports out today was the Chicago Purchasing Managers Index (PMI). The November figures hit a 9-year high at 64.1 percent. Estimates had been for a slight improvement to 56.3 percent from October's 55.0 percent. Numbers over 50 represent improvement in business conditions. One of the most compelling ingredients in the PMI was the new orders component, which jumped to 73.3 in November from 59.2 in October. The factory sector in this country has been lagging for years and we're finally seeing some month over month improvements. Unfortunately, we're not seeing factories up their hiring practices just yet as the employment component slipped from 53.1 to 48.5 percent. Investors were also treated to some strong consumer sentiment numbers per the University of Michigan report. The consumer sentiment index hit 93.7 in November up from 89.6 in October. This was the highest level since May 2002. Those surveyed felt optimistic as the current conditions component edged up to 102.5 in November up from 99 in October. The expectations component also made gains with November hitting 88.1 compared to 83.0 in October. The Durable Goods report was very bullish as well. The consumer has been carrying our economy but we're finally beginning to see signs that business will open their wallets soon. The Commerce Department said orders for durable goods, those made to last more than three years, rose 3.3 percent in October. This is great news but it gets sweeter when you also figure that September's numbers were revised higher to a 2.1 percent gain. October was the fastest pace in more than a year with the past six months soaring almost 10 percent. Wall Street focused on the core capital goods orders, which many view as a business spending forecast. The core capital goods orders rose 1.7 percent on top of September's 5.8 percent. It's about time corporations started spending some money because consumer spending was flat in October. Personal spending numbers were down 0.6 percent in September and remained unchanged in October despite a 0.4 percent increase in personal income. If you're a glass is half full type of person then the personal spending figures might show consumers taking a breather after a strong summer and now they're rested and ready for this holiday shopping season. Speaking of holiday spending the Federal Reserve released their Beige Book report and the authors seemed rather optimistic for this year's holiday retail sales. The Beige Book said the economy has continued to expand in October and early November (no surprise there) and that manufacturing was improving. While the authors were disappointed that factory hiring had not picked up they did feel that labor conditions were generally stable or improving nationwide. We see the same improving labor conditions in this morning's initial jobless claims. The Labor Department said jobless claims dropped another 11,000 to 351,000. This was the lowest level in jobless claims sine George W. Bush took office. The improving labor conditions will also be a boon for the already hot housing market. The October new home sales report was out this morning and sales slipped 3.5 percent to an annual rate of 1.105 million homes. Analysts were not concerned as October's sales still ranked as the fifth highest on record. Plus the Mortgage Bankers Association said mortgage applications grew for the second week in a row. Hardly a day goes by that we don't hear some new development in the ongoing mutual fund scandal. Today's news was a surprise as Bank One (ONE) reported late in the trading day that it expects the SEC to take enforcement action against the bank's mutual fund advisor. ONE is the country's sixth largest bank and hopes to reach a settlement with the SEC without litigation. All U.S. markets will be closed tomorrow for the Thanksgiving holiday. Friday will be a shortened trading day with both the bond market and the stock markets closing early. The commodities market will reopen on Monday. It could be a rather quiet session with no economic reports and probably very little volume as most major market players will be absent. Fortunately, the markets have a very strong historical trend of gaining on the Friday after Thanksgiving. I would not be surprised to see the VXO (old VIX) volatility index hit yet another new low as the afternoon bounce from today continues over into Friday. Personally, I want to say thank you to all of our readers. I encourage all of you to take time on Thursday to truly appreciate our freedoms we have in this country. If you are blessed enough to have family close by then give them a hug and let them know what you're thankful for. If not, then there is always the phone. I'm sure they'd be happy to hear from you. My heart also goes out to all of our brave men and women serving overseas no matter where you are. For those of you who have come home wounded, you have my utmost respect. Happy Thanksgiving! ************ FUTURES WRAP ************ Turkey Day Jonathan Levinson It was a listless but exciting session, with volume dropping throughout the day. Equities, commodities and precious metals gains, while the US Dollar Index and treasuries dropped. 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 plethora of economic data released this morning was not particularly bad, but you wouldn't know by looking at the chart of the US Dollar Index. A precipitous slide took it down to sub- 90.50, and the index spent the remainder of the session chopping along uncertainly in what will either prove to be a descending triangle or a pennant. Neither formation is bullish, but support at 90.00 should be strong. Gold, silver and the CRB all rallied, with the HUI printing a new alltime high. The CRB added 2.75 to close at 248.42, led by strength in cotton, copper, sugar, crude and heating oil futures. Daily chart of December gold December gold bucked the daily cycle downphase that kicked off this week, adding 6 to close at 398.40. The intraday high was 402.50, the first break of the 400 level in several years. HUI broken 240 with authority, never looking back, and XAU broke to new highs as well above 108. HUI closed up 9.36 at 242.58, XAU +3.06 at 107.68. If gold can hold these levels without pulling back, the daily sell signal should reverse and begin trending in overbought. This remains a risky level for new long positions, but if it holds, it will be a very bullish development. Note that gold, silver and the miners all rose as equities declined, also a very bullish indicator. Daily chart of the ten year note yield Bonds sold off today in a shortened session ending at 2PM EST, despite weakness in equities and strength in commodities and metals. The ten year note yield rose 5.6 basis points to close at 4.242%, the daily candle almost engulfing yesterday's sell candle. Without wracking our brains to correlate the news with the price action in treasuries today, we see that the down phase on the daily cycle oscillators moved closer to a reversal today, and again it appears that the low in the TNX was seen last Friday. Another down day for bonds should give us our buy signal on the yield, and signal a test of the 4.4% level overhead. Daily NQ candles It was a bullish day for the indices, with fractional gains for NQ, ES and YM, but at a huge cost. The VXO finished at 15.91, which is the lowest closing price I have seen in my years of trading. The highs were printed in the opening minutes and not revisited for the duration of the session. Despite the sharp doji bottom, then NQ could not regain the failed rising wedge trendline on the daily chart, and despite the higher high, the buy signal on the 10 day stochastic retreated, closing on a bearish kiss. This wavering at current levels makes any trades of longer duration than scalps risky, because there's no way of knowing what the bias on this key time frame is going to be. However, with the VXO unsustainably low and the bulls unable to rattle the bears even on a high news / low volume day, it can be convincingly argued that the next move could see the daily cycle oscillators trending in oversold territory. 30 minute 20 day chart of the NQ The 30 minute NQ broke down out of the bear wedge, but bounced cleanly of the 1400 low, making all the way to 1422 at the close. The bounce was less than inspiring, but it was sufficient to turn the 30 minute cycle oscillators back up on buy signals. An upphase from here with even minimal price traction should be sufficient to get the 10 day stochastic back into an upphase. Resistance is at 1428, followed by 1435. However, with the VXO this low, the bullish picture just doesn't feel right. The cycles do no paint a bearish picture, but the bulls are not going to be able to just drift the NQ to new 52 week highs. Daily ES candles The daily ES played touch-and-go with the secondary wedge trendline, managing to close either right on or right above it, depending on precisely where it's drawn. The upphase on the daily cycle oscillators for ES is not quite as iffy as that on the NQ, but it's certainly not confirmed yet either. Once again, the extremely low volatility readings serve as a huge grain of salt on any bullish interpretation. But the daily candle is a large bullish hammer, and the bears aren't out of the woods by any means. The ES is clearly more oversold than overbought on a daily basis, and bulls are trying very hard to mount a charge. 20 day 30 minute chart of the ES On the 30 minute chart, we see the same truncated downphase on the 30 minute cycle oscillators, and the bear wedge breakout didn't last for long. The move off the lows hugged the lower rising trendline for its duration, heading toward price and trendline confluence between 1058-60. This entire range to 1065 is fraught with resistance for bulls, and I expect the 30 minute cycle oscillators to top out in that range as well. Bulls will have to convert the bulk of longer-term traders (as measured by the daily chart and cycles) to launch the next leg of the 2003 rally above 1065, and I don't expect that to be accomplished with volatility this low or the 30 minute cycle this close to topped out. 150-tick ES The 2-day 150-tick ES shows the short cycle oscillators looking for a fresh downphase, and reaffirms resistance at 1058-60. Daily YM candles Same picture on the YM. 20 day 30 minute chart of the YM Wednesday was mostly a throw-away day and did not serve to answer any of our questions on the nearterm outlook for equities. Gold's move and the weakness in the dollar were not bullish for equities. A bullish situation might have seen the dollar fall and bonds, equities and gold rise. Today, treasuries fell, hinting at foreign selling of US assets, and while equities rose, they failed to break any significant upside resistance and in the process drilled volatility down to extreme lows not seen in years. While it looks and feels bearish, the cycles have the potential for a new assault on the highs. Given the proliferation of shorts betting on those highs holding, the potential for a rally financed on the backs of panicked bears cannot be ruled out. Friday promises to be a low-volume session, and with the potential for meaningless price swings and the current ambiguity in the cycles, it will be a day in which I will be reluctant to enter. See you in the Futures Monitor! ******************** INDEX TRADER SUMMARY ******************** Totally computerized Traders and investors may have been inundated with a plateful of economic data today, but I think little can be read into today's trade, as I honestly believe today's session was largely controlled by computers. The reason I think this, is that today's trade was almost a mirror image of what we discussed just prior to reviewing the pivot matrix where we thought a bull might look for a short-term bullish trade back near the WEEKLY R1s and a strong close back near the WEEKLY R2s. Today's trade did see the NASDAQ-100 Index (NDX.X) 1,420 +0.61% and its Tracking Stock (AMEX:QQQ) $34.34 +0.45% as well as the Dow Industrials (INDU) 9,779.57 +0.16% and Dow Diamonds (AMEX:DIA) $97.90 +0.22% see trade just below their WEEKLY R1's today, and while these were the major indices in our pivot matrix that did see a trade at their WEEKLY R1s, the broader S&P 500 Index (SPX.X) 1,058.45 +0.43% closed at its session high, which was good enough for its first trade this week at its WEEKLY R2, while its tracker, S&P Depository Receipt (AMEX:SPY) $106.37 +0.35% traded its WEEKLY R2 for a second consecutive session. While some of this may be shrugged off as coincidental and have the aroma of pure turkey, maybe today's late morning sell program at 10:45 AM EST, and tomorrow's DAILY Pivots make the case that a large sell program at 10:45 AM EST was designed to hedge some portfolio's ahead of the Thanksgiving weekend, where the sell program came almost smack-dab between the WEEKLY R1 and R2, so senior traders could get an early start on a long weekend, but still allow the junior traders to not mess anything up, and have a bullish tone take hold into the latter half of today's session. I'll admit that I was very skeptical when a fellow trader first told me that markets tend to trade more bullish into a weekend, where a trader looks for bullishness to appear at the lunchtime hour, ahead of a vacation-lengthened weekend. The thought is that the toughest decision a trader/investor has to make, is when to SELL a stock. While it is also difficult to pull the trigger and buy a stock, the real work begins when the position is initiated, where the hardest decision to eventually hit the sell button comes later. At the institutional level, it is often the senior trader that gets first dibs on leaving early, and it is most often the senior trader that makes a sell decision, while the junior trader is usually left at his/her terminal to simply make markets or take care of the buy side customers. As such, a long weekend where the senior trader wants to get out of the office early, often executes some sell orders before the lunchtime hour, and just before heading out the door to lunch (and not returning until after his/her extended weekend) leaves the junior trader with nothing more to do than fulfill the needs of the buy side. If things get too bullish, then often times, the computers are set up to do any selling while the senior trader spends a little more quality time with family and friends. Here's a quick look at the pivot matrix for Friday (remember, markets are closed tomorrow) and I'll try and think like a computer to ascertain what a trader might look for on Friday, for those of us determined to not have a 4 or 4.5-day weekend! Pivot Analysis Matrix - In PINK I made quick note of today's HIGH and LOW trades in the SPX/SPY and NDX/QQQ, which respectively traded the WEEKLY R2 and WEEKLY S1. Why is this? I can only think that these are the two major indices, for which buy/sell programs are set on and more likely influenced by institutional computer trading. Unfortunately, my Qcharts don't have a premium symbol for the NDX buy/sell levels, but according to HL Camp & Company, only one data vendor in the world has an accurate premium alert for the NDX. Still, we will see later on what took place at 10:45 in the QQQ. In the DAILY pivot matrix for FRIDAY, I make note of the DAILY Pivots. I'll show you in a moment where these two levels were almost EXACTLY where today's 10:45 EST sell program had influence on today's trade. What was significant about 10:45 AM? Good question as the last bit of economic data released in the morning was 10:00 AM. Nope... I don't think this sell program was in relation to the economic data, but simply a hedge put on before the Thanksgiving weekend, just in case of a terrorist event. This hedge, then gives downside protection to.... the MONTHLY Pivot/DAILY S2 correlative support in the more volatile NDX and WEEKLY R1/DAILY S2 in the less volatile SPX. In the pivot matrix, you may note how the Dow Industrials (INDU) is perhaps lagging in the WEEKLY Matrix relative to the other indices. Do you see how the INDU closed 9,779.57, while its WEEKLY R2 is 9,840 and correlative resistance is found at DAILY R2? On Friday, should the other major indices break above their NOW CLOSE WEEKLY R2, I think that INDU 9,845 may well be a level where we find upside resistance. Barring any terrorist activity on Thursday, I still view the WEEKLY R1 as support. Remember that after Friday's close, we will have new MONTHLY levels and new WEEKLY levels. I also want to stress as I did last night, that I'm not turning the Index Trader Wrap into a day-trade wrap, but ahead of the Thanksgiving holiday, which is most likely a 4.5 day weekend, I'm just not in the mindset that current trade is anything more than short-term computer-related trading, as most of the "big money" went on vacation at around 12:00 PM EST today. Let's look at the NASDAQ-100 Tracking stock (AMEX:QQQ) $35.34 +0.45% on 10-minute intervals, where as it would relate to last night's Index Trader Wrap, I set up a bullish day trade in OI Market Monitor for the QQQ as it was pulling back toward its WEEKLY R1 of $38.89. The trade was initially set up as "long at $34.90, stop $34.70, target $35.35." I'm using 10-minute intervals only to be able to draw in Monday and Tuesday's trade. The little retracement levels you see are from the 5-minute retracement technique (blue is upper, red is lower) and the pink was a stacked lower just in case the QQQ "overdid it" to the downside should it trade WEEKLY R1. For you trend traders, I too was using trend in the QQQ for my trade setup, but also pulling in the pivot matrix observations. NASDAQ-100 Index Tracking Stock (AMEX:QQQ) - 10-minute intervals The main point I'm trying to get across right now is that I really don't think yesterday or today's trade, let alone Friday's is any type of REAL response form the market as it relates to the economy. There were 2 sell program premium alerts given at 10:06 and 10:16, and I do think these were a negative response to the October Help Wanted Index (37 vs. forecast 38) and October new home sales (1.015M vs. forecast of 1.138M), but had less impact as it was probably offset by the November Chicago PMI (64.1 vs. 56.5 forecast) and buyers were stemming a more notable decline from those programs. I can only think "hedge" when trying to explain the 10:45 AM EST sell program at 10:45 AM EST, which had the QQQ trading at about $35.22. Now lets look at the S&P 500 Index (SPX.X), but on the 5-minute bar scale. Here however, I'm going to not only quickly show the SPX action on the 10:45 AM EST sell program, but try and tie in the SPX DAILY R2 with the correlative INDU WEEKLY R2 and DAILY R2 of 9,845. My mindset here is that the SPX is trying to lead in the WEEKLY Matrix, but to get higher, its needs further strength from the NDX/QQQ and the INDU. We can perhaps see the challenge of a short-term downward trend in play on the QQQ in the above chart, we can see the WEEKLY R2 resistance on the SPX. For a bullish follow through session on Friday, a LOT depends on the INDU. S&P 500 Index (SPX.X) Chart - 5-minute intervals One could say that not all "buy/sell program premium alerts are created equal" or generate a notable market move. But the 10:45 sell program found a more notable decline that the two prior sell programs. My suspicion that the sell program was a hedge is further noted as I'm so suspicious as to just how Friday's DAILY Pivot seems to mark where the 10:45 AM EST sell program was generated. One piece of analysis here is that EARLY support on Friday is 1,055.06, and we can see how WEEKLY R2 plays as resistance. We've seen the indices get bullish above a WEEKLY R2, but my thinking based on the pivot matrix and lagging of the INDU in its WEEKLY pivot matrix, is derived from the correlative INDU resistance at Friday's DAILY R2 and current WEEKLY R2. If the SPX is going to have a shot at its DAILY R2 on Friday, then I think the DAILY Pivot in the SPX needs to hold support, and the INDU needs to get its tail in gear. Dow Industrials (INDU) Chart - 5-minute intervals A break above the 9,796 level and Tuesday's high should have the INDU making a gravitational move toward its correlative WEEKLY R2 and DAILY R2 and that would just about do it for what tends to be a bullish week. I would have to think the INDU needs to hold its DAILY Pivot early to have a shot at WEEKLY R2. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Bless The Turkeys Who Make Our Profits Possible By Mike Parnos, Investing With Attitude With the holiday season upon us, there will be millions of people feasting on turkey. Some will follow their meals with TUMS, while others will get to go to the bank for their well-earned dessert. Obviously, turkeys come in all shapes, sizes – and species. At the Couch Potato Trading Institute (CPTI), we feast on turkeys all year long. I'm speaking of the directional traders and speculators who place their bets frequently and foolishly. The gravy is all ours. It's only fattening for our brokerage accounts. I feel a little like the pot calling the kettle black since we recently, in a regretful moment of temporary insanity, contributed over $2,000 to the directional piss-away-pot. A very expensive lesson, indeed. I learned from it. Hopefully, you did too. Giving Thanks Let's all give thanks to OptionInvestor – that brought us together. Jim Brown, and the OI family of writers, techs, etc., work diligently to provide you with a vast base of knowledge and information. I know I've learned a lot from all of my readers and I'm pretty sure you've all learned a few things from me. I'm gratified to have provided guidance and helped put some "hypothetical" dollars in your pockets and the "hypothetical" turkey on your Thanksgiving table. I'm also glad to have provided a side dish smiles along the way and maybe garnished it with a little perspective. Personally, I'm thankful for all of your emails, your kind words, your questions, your desire to learn and your unending interest in this very stimulating world of option trading. I look forward to writing this same column next year – the only difference is that my OI readers will need two doggie bags -- one to take home extra turkey from dinner and another to carry home CPTI profits from the markets. ____________________________________________________________ December Trade Entry Progress (Or Lack Of . . .) On Monday, the market quickly moved up from the open. After waiting for amateur hour to pass, the market remained higher. Therefore, we made an adjustment or two and a few decisions. We moved our SPX Iron Condor parameters up a bit as well as picked the second BBH alternative trade – the $125/$130 Baby Condor instead of the $125 Siamese Condor. A chunk of the premium on the projected DJX Iron Condor trade disappeared over the weekend. With no premium available, there was no point attempting to enter the trade – even if we had adjusted it higher. Watch the Sunday column for a potential (and, of course, hypothetical) replacement trade for the DJX trade that didn't happen. ____________________________________________________________ DECEMBER CPTI PORTFOLIO POSITIONS SPX Iron Condor – 1058.45 We sold 7 contracts of December 1085 SPX calls and bought 17 contracts of December 1100 calls for net credit of about $1.75 ($1,225). Then, sold 7 contracts of December 1005 SPX puts and bought 7 contracts of December 990 puts for net credit of about $1.40 ($980). Total credit $2,330. Maximum profit range of 990 to 1075. Max profit potential of $2,330. BBH -- Baby Iron Condor - $127.39 BBH looks to be in a trading range. To take advantage of this range we sold 10 contracts of the Dec. BBH $130 calls and bought 10 of the Dec. $140 calls for a credit of about $2.00. Then, we sold 10 contracts of the Dec. BBH $125 puts and bought the $115 puts for a credit of about $1.85. Total credit and maximum potential profit of $3.85 if BBH finishes between $125 and $130. Safety range and suggested bailout points would be $121.15 and $133.85. Maximum potential profit of $3,850. OEX Credit Spread Boogie – 521.21 We sold 2 December OEX 520 calls @ $9.00 We bought 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). _____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $35.27 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. We're going to make money by selling near term puts and calls every month. Here's what we've done so far – all in 10 contract quantities. October: Sold Oct. $33 puts and $34 calls - total credit of $1,900. November: Sold Nov. $34 puts and calls – total credit of $1,150. December: Sold Dec. $34 puts and calls – total credit of $1,500. Note: Each month, near expiration, we buy back the expiring options and sell options for the next option cycle. We haven't included any of the proceeds from this long term QQQ ITM Strangle in our profit calculations. It's a bonus! QQQ Put Calendar Spread – Ongoing -- Trading @ $35.27 We created a cheap play that will let us take advantage of a nice down move. Meanwhile, we sell against the January puts while we wait. Bought 10 January 04 QQQ $32 puts and sold 10 October 03 QQQ $32 puts for a total debit of $1.00 ($1,000). We rolled out to the November $32 and took in a $.30 credit and then rolled to the December $32 puts for another credit of $.40. Our cost basis is now only $.30. ______________________________________________________________ Pass The Cranberry Sauce When are cannibals done with Thanksgiving dinner? When everyone's eaten. ______________________________________________________________ Don't Forget To . . . Don't forget to renew your OI subscription. Perhaps you have a friend or family member who thinks he/she knows what they're doing in the market. Quick! Before they lose any more money, give them a subscription to OptionInvestor. It's a wonderful Christmas gift. It's the gift of knowledge – and that's a gift that lasts (unless they have Alzheimer's, of course). _____________________________________________________________ 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. ************** TRADERS CORNER ************** Pick Your Battles by Mark Phillips mphillips@OptionInvestor.com Alright, I know I promised to finish up our "Adapting To Change" discussion this week, but a couple of factors pushed that topic down one notch this afternoon. The primary issue was that the erratic market over the past week has failed to give me the recent examples I want to use for the conclusion to that topic. but the thing that pushed me over the edge was a heated discussion with one of my close trading associates this morning. At the end of that discussion -- alright, it was more like an argument -- I came to the realization that some people just haven't quite got the balance right. This isn't meant to denigrate anyone -- least of all, my good friend I was arguing with -- but it is my opinion that you have to be just a little bit nuts to even consider trading on Friday. Think about it. It will be one of the lightest volume days of the year and most traders are going to be unwilling to take any big positions ahead of the weekend, especially with the looming concerns about a possible terror attack here in the U.S. I suppose if your idea of fun is to just watch the squiggly lines paint across the screen then you could consider spending the abbreviated day in front of the computer, but most of us have more interesting and enjoyable tasks in mind. I'll personally be recovering from my tryptophan-induced coma and looking forward to enjoying more bird over the weekend. It all comes down to picking the right battles to fight. We should all have the very clear understanding that for short-term trading, those of us trading by computer are at a distinct disadvantage to the pros on the floors of the various exchanges. The way we win (and grow our accounts) is by trading only when we can somehow skew the odds in our favor. We may do that through the use of a combination of technical indicators or price patterns that we've noted can give us a statistical edge in a given trade scenario. Another way we may do that is by avoiding the more hazardous trading time windows. Here are some of the time windows that I diligently avoid. I will carry a trade through these periods of time, but if the time window arrives and I'm not yet in the trade, then I know through experience and a copious amount of back-testing that I should stay out of the market until that period passes. 1. After-hours and pre-market trading. The cash session provides much better liquidity and tighter spreads. I cannot carve out an advantage in these two periods of time, so I avoid it altogether. 2. The lunchtime lull. While there are times that a tradable setup will materialize during the 11:30am-1:00pm ET time period, more often than not, it is fraught with peril and choppy trading. 3. The final 15 minutes before any economic report is usually a dangerous place to initiate a short-term trade. Market participants have a tendency to square up or hedge positions ahead of an important news release, meaning that most of the time, the final minutes leading up to that report do not provide a strong directional move. So taking a position just ahead of the report is akin to a coin flip on the REACTION of the market to an unknown catalyst. That is two levels of guesswork and frequently the charts will not give us even the faintest clue as to what to expect after the report is released. 4. Finally, in the big picture, I tend to avoid half-day sessions, or ones in which bonds do not trade. Certainly there are examples where equities will move strongly and predictably in the absence of bond market action. But more often than not, the result of having that part of the Financial market closed is that equities will trade in a choppy and/or unpredictable manner. The common theme in all of these periods of time is that the normal balance of market action can be more easily skewed by the lack of volume. In the pre- and post-market, volumes are significantly lower and that means it takes less effort to push prices around EXTERNAL to what the charts say the stock in question should do. Look at a typical intraday chart -- the symbol doesn't matter -- and find the lightest volume of the day. Right there in the lunchtime lull is where it is time and again. The additional risk involved in trades initiated during this period is that the entry is based on market action that is the result of light volume, meaning that it is easier for floor traders to push price around, nipping both buy and sell stops in the process. Have you noticed that stock prices will often gyrate both directions before picking the "real" direction immediately following an economic report? You don't think maybe that is floor traders sweeping for stops on trades placed just before the report do you? Nah, that wouldn't be fair. As mom always said, "Nobody ever said life was fair." You can count on that sort of volatility more often than not to make it very difficult to hold stops on trades taken just before the report. To me, the most important time periods to avoid are these holiday sessions. It isn't that they are any more hazardous than the other time periods that I diligently avoid. It is the fact that we so completely waste the opportunity to more productively use the time. There will be 3.5 hours of market "action" on Friday. Ask yourself whether the chance for a winning trade is more important than some other activity that you might choose to fill the time with. Perhaps serving your wife breakfast in bed? How about taking the kids to the park or spending the morning visiting with a friend or family member that you see all too infrequently. In the larger picture of life, using the time outside the trading arena will provide greater rewards than any financial gain from time spent in front of the computer. Our goal in this profession is to make money, grow our trading accounts and provide a better life for those we love. It requires discipline, focus and a clearly defined plan of action. Part of that plan should define when we will and will not trade, based on when we can enter the battlefield (markets) only when we can exert some control over the way the battle unfolds. One of the best ways we can do that is by only trading when the odds of erratic market action can be minimized. While we must all decide for ourselves when to trade and when not to, hopefully I've caused you to stop and think not only about the risks of trading in the lower-odds time periods, but also about the opportunity cost of sitting in front of the computer during these times, when perhaps the time could be better invested with those that are so important to us. I can tell you without a doubt that my broker window will not be opened on Friday! Have a Happy Thanksgiving! Mark P.S. Next week, I promise we'll get back to the remainder of our discussion on "Adapting to Change". ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Wednesday 11-26-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Call - BBY Spreads, Combinations & Premium-Selling Plays: Stocks Drift Higher As Holiday Season Begins Watch List: A Cornucopia of Candidates Updated on the site tonight: Market Posture: Markets Flat Line ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** Best Buy Co - BBY - close: 61.10 chg: +0.75 stop: 56.95 -Company Description- Best Buy Stores, owned and operated by Minneapolis-based Best Buy Co., Inc., is the nation's leading specialty retailer of technology and entertainment products and services. Best Buy was founded in St. Paul, Minn. in 1966. Best Buy Stores reach an estimated 300 million consumers per year through 600 retail stores in 48 states and online at BestBuy.com. (source: company press release) - Most Recent Update (Thursday, Nov. 20, 2003) - "...Silver bells...silver bells... It's Christmas time in the city..." Okay, so maybe it's a little early to be singing Christmas carols but the holiday shopping season is about to be launched this Friday. Consumer electronics are huge and BBY is one of the biggest players on the field. UBS recently reiterated their buy rating and upped their price target to $70. The company recently opened their 600th store (in Hartsdale, New York) and they've already launched the holiday price wars with rival Circuit City. Earnings should be about three weeks away and a strong run into its announcement is a good possibility. Looking at the chart, shares of BBY have been consolidating sideways for the last three weeks between $57 and $60. The stock just broke out above $60 today and should have a clear shot at trading to $65 - our first target. Since shares have not traded below $56.95 all month that's where we'll stock our stop loss. - Play of the Day Comments - Friday is traditionally one of the biggest shopping days of the year. With expectations strong for this year's revenues investors bought the dip in BBY today (59.30) and pushed it to new highs by the close. Volume has been decent the last three days in a row. - Suggested Options - We'd be looking over the December and January calls with a preference for the $55 and $60 strikes. Right now our favorite would be the DEC 60, but if you think the Santa Claus rally will show up, then the January 60's look good too. BUY CALL DEC 55 BBY-LK OI= 6937 at $6.80 SL=4.25 BUY CALL DEC 60*BBY-LL OI=12835 at $3.00 SL=1.50 BUY CALL DEC 65 BBY-LM OI= 2788 at $0.90 SL= -- BUY CALL JAN 55 BBY-AK OI= 3655 at $7.50 SL=5.00 BUY CALL JAN 60 BBY-AL OI= 5816 at $4.00 SL=2.20 BUY CALL JAN 65 BBY-AM OI= 1842 at $1.85 SL=0.95 Annotated Chart: Picked on November 25 at $60.36 Change since picked: + 0.74 Earnings Date 12/17/03 (unconfirmed) Average Daily Volume: 3.6 million Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Stocks Drift Higher As Holiday Season Begins By Ray Cummins Investors had much to be thankful for Wednesday in light of the nearly year-long rally and upbeat economic forecasts for 2004. The Dow Jones Industrial Average was up 15 points to 9,779 with DuPont (NYSE:DD), Altria (NYSE:MO) and Exxon-Mobil (NYSE:XOM) among the best performing blue-chips. The NASDAQ Composite rose 10 points to 1,953 on strength in networking and software issues. The S&P 500 finished 4 points higher at 1,058 as gold and oil shares led the broader market sectors. Trading volume was light with about 1.1 billion shares changing hands on the NYSE, while over 1.5 billion shares were traded on NASDAQ. Advancers paced decliners 2 to 1 on the Big Board and 4 to 3 on the technology exchange. The bond market had a shortened session and finished with the 10-year note down 16/32, bringing its yield up to 4.25%. Happy Thanksgiving! *************** SUMMARY OF CURRENT POSITIONS - AS OF 11/25/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AMAT DEC 22 22.05 24.02 0.45 4.81% 2.04% EYE DEC 20 19.65 23.90 0.35 5.21% 1.78% ICOS DEC 35 34.55 45.00 0.45 3.81% 1.30% NVLS DEC 40 39.20 43.99 0.80 4.65% 2.04% PHTN DEC 35 34.25 40.18 0.75 5.41% 2.19% PMCS DEC 17 17.10 20.22 0.40 6.88% 2.34% ANPI DEC 40 39.05 47.50 0.95 7.86% 2.43% APPX DEC 25 24.55 35.22 0.45 6.28% 1.83% EASI DEC 42 42.68 52.14 0.70 4.74% 1.64% GPRO DEC 25 24.65 32.61 0.35 4.88% 1.42% INSP DEC 22 21.85 25.35 0.65 8.33% 2.97% MGAM DEC 35 34.60 40.43 0.40 4.33% 1.16% NEM DEC 42 41.60 45.75 0.90 5.61% 2.16% NVLS DEC 37 36.95 43.99 0.55 4.49% 1.49% PHS DEC 50 49.40 60.80 0.60 3.91% 1.21% UTSI DEC 30 29.65 36.99 0.35 3.83% 1.18% A few issues remain on the "watch" list and as always, traders are encouraged to exit (or adjust) any suspect positions in the interest of capital preservation. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield IACI DEC 37 35.90 32.62 0.40 3.22% 1.11% WEBX DEC 25 25.30 20.11 0.30 5.79% 1.19% MERQ DEC 50 50.40 46.69 0.40 3.21% 0.79% SEPR DEC 27 27.75 24.59 0.25 5.36% 0.90% TTWO DEC 40 40.40 33.16 0.40 5.84% 0.99% Mercury Interactive (NASDAQ:MERQ) on the "watch" list for the coming week. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status KLAC 60.08 58.11 DEC 50 55 0.75 54.25 0.75 Open MIK 50.55 47.75 DEC 42 45 0.30 44.70 0.30 Open? SMH 44.65 43.25 DEC 37 40 0.25 39.75 0.25 Open BRCM 34.62 35.58 DEC 27 30 0.25 29.75 0.25 Open BRL 81.14 81.27 DEC 70 75 0.50 74.50 0.50 Open TOL 38.27 41.75 DEC 30 35 0.55 34.45 0.55 Open KLA-Tencor (NASDAQ:KLAC) and Michael's (NYSE:MIK) remain on the potential "early exit" list. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status NE 33.79 34.19 DEC 37 35 0.40 35.40 0.40 Open? HDI 45.17 46.70 DEC 50 47 0.25 47.75 0.25 Open? SYMC 30.17 32.79 DEC 35 32 0.40 32.90 0.11 Open? All of the bearish plays in the portfolio are on the "watch" list in the wake of Monday's rebound and the expected "Santa Claus" rally. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* READERS WRITE -- E-MAIL REPLIES ************* Attn: Contact Support subject: risk/reward Hi Ray, You guys have a great site! I signed up for a 2 week freebie and will join when the trial period is over. I have a question regarding return/risk and need your input. I currently have the following Dec 2003 S&P 500 future (SP) option Iron Condor which I entered on Nov 13th when the price was approx. 1055. Long put 965, short put 985, short call 1120, long call 1140. I collected a total of 2 pts x $250 or $500 less commissions and fees of $24 x 4 legs for a net of $404. This required approx. $2300 in margin. The 20 point difference in the strikes "limits" my loss to 20 pts. less the 2 pts. premium received x $250 = $4500 of risk. This, if my thinking is correct, means I have a return to risk of $404 to $4500 or 9%. Is my strategy reasonable? Am I insane to risk that much for so little return? If either strikes were penetrated what exit plan should I incorporate? Being a novice in Iron Condors any advice you can provide will be eternally appreciated. LB Hello, Glad to have you aboard! All of the folks here at the OIN/PIN take pride in offering some of the best stock/option information available on the internet, and at a reasonable price. As far as the spread strategy you described, the profit potential (approx 8-9%/month) is acceptable as long as the risk is appropriate for your portfolio. Many professional traders use the approach you described (opposing deep-OTM credit spreads on index-based futures) and it is a viable technique when implemented correctly and managed diligently. Concerning potential adjustments for an unexpectedly large move in the underlying, the most common technique would involve "rolling" up or down (and possibly out), since you can't really cover with a long or short position. In that regard, many experienced traders would initiate the adjustment prior to or very near the time when the underlying moves past the sold strike price, not afterwards. As with most strategies, timeliness is a critical aspect of success and a timely exit or adjustment trade is even more essential with limited-profit positions. Since I am not a broker, I can't give you any specific advice on option trading. However, if you want a hands-on explanation of the position management techniques for credit spreads, send a note to Andrew Aronson, option principle at Man Financial. He is one of the contributing (professional) writers here at the OIN and his expertise/viewpoints on option strategies are a wonderful resource for new traders. His E-mail address is: Aaronson@OptionInvestor.com Good Luck! Editors Note: Below is the "follow-up" reply from Andrew Aronson. Hi Andrew, Ray Cummins referred me to you in his email. I sent Ray the email shown below [above]... Seems like Iron Condors, unless one tightens the range between the strikes of the sold call and the sold put, results in a high risk to low reward. Is what I am doing advisable? I used a wide range of 135 points thinking it will not be threatened in the 4 to 5 weeks to expiration, unless there is an awful terrorist attack causing a string of circuit-breaker "limit down" days. Earning $404 on a margin (collateral) of $2300 results in a super monthly return. Even doubling the margin for price swings gives one an enviable annualized return. LB Hello LB, I think the first thing to realize is the fact that the market would have to rally or fall over 5% in a month to result in an unprofitable outcome. The risk to reward ratio is going to look awful but if you expect that a vast majority of your positions will expire worthless (a good outcome), I feel the ratio is worth the risk. I am currently advising client to be very careful of selling options (especially puts) in this very low volatility market. If and when volatility returns to the market, we will see short options explode in price. I work with my clients to help formulate and manage positions in all markets. The commission cost is a good value, if you have someone to advise and help you when the market really gets wild. We charge $20 per option and are always here to help advise and recommend strategies to keep our clients out of trouble. If you are interested in opening an account, please feel free to contact me. Thank you, Andrew Aronson V.P. Investments OneStopOption Division of Man Financial (888) 281-9569 Andrew Aronson and Alan Knuckman are skilled option principles, as well as long-time OIN associates, and they recently started a specialty brokerage for derivatives traders. Their personalized service will enable traders to be more confident, comfortable and successful with options. They will also help new market players learn the "right" way to trade options with education and coaching for maximum portfolio performance. Alan and Andrew's expertise is a valuable resource that will easily pay for itself through timely executions and the piece of mind that comes from someone watching your trades throughout the day. The commissions are comparable to those of discount brokers but you get to speak directly with option professionals, not customer service clerks. Clients can call them directly to review positions and update orders and they also offer "auto-trading" for many of the plays in the newsletter. OneStopOption Strengths: * Dedicated option brokerage with "live" option principals/brokers * Order routing to "best-priced" exchange and timely executions * All types of orders (stop/limit/OCO) to encourage disciplined trading and proper money management * Advanced option trading level approval for inexperienced traders * Foreign accounts including Canada -- Futures trading available * Direct electronic trading and personalized customer services * Ability to filter recommendations and provide strategy advice * Free OIN subscription for those who qualify (based on account size and portfolio activity) Get Execution, Education, and Option Experience at OneStopOption Visit their new site -- www.onestopoption.com ************* NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** APPX - American Pharma Partners $35.56 *** Recent High! *** 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. APPX - American Pharma Partners $35.56 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 30 AQO XF 1735 0.50 29.50 7.2% 1.7% * SELL PUT DEC 35 AQO XG 774 1.95 33.05 16.5% 5.9% ************** BRCM - Broadcom $35.88 *** Networking Sector Favorite! *** Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated silicon solutions that enable broadband communications and the networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for all broadband communications markets. Their diverse product portfolio includes solutions for digital cable and satellite set-top boxes; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network processors; and SystemI/O(TM) server solutions. BRCM - Broadcom $35.88 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 32.5 RCQ XZ 3542 0.40 32.10 4.7% 1.2% * SELL PUT DEC 35 RCQ XG 2387 1.10 33.90 10.0% 3.2% ************** EASI - Engineered Support Systems $53.09 *** All-Time High! *** Engineered Support Systems (NASDAQ:EASI) along with its various subsidiaries, designs and manufactures military support equipment and electronics for the United States armed forces. The company also engineers and manufactures air handling and heat transfer equipment, material handling equipment and custom molded plastic products for commercial and industrial users. Engineered Support Systems' six wholly owned subsidiaries are Systems & Electronics (SEI), Engineered Air Systems (Engineered Air), Keco Industries, (Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered Electric Company (d/b/a Fermont) and Engineered Specialty Plastics. EASI - Engineered Support Systems $53.09 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 45 UFE XI 94 0.35 44.65 3.4% 0.8% TS SELL PUT DEC 46.62 FPE XZ 21 0.55 46.08 4.7% 1.2% * SELL PUT DEC 50 UFE XJ 236 1.45 48.55 9.8% 3.0% ************** GPRO - Gen-Probe $33.75 *** Rally In Progress! *** Gen-Probe (NASDAQ:GPRO) is a leader in the development, manufacture and marketing of rapid, accurate and cost-effective nucleic acid testing products used for the clinical diagnosis of human diseases and for screening donated human blood. Using its patented NAT technology, Gen-Probe has received FDA approvals or clearances for over 60 products that detect a variety of infectious microorganisms, including those causing sexually transmitted diseases, tuberculosis, strep throat, pneumonia and fungal infections. Additionally, the company developed and manufactures the only FDA-approved blood screening assay for the simultaneous detection of HIV-1 and HCV, which is marketed by Chiron Corporation. Gen-Probe has 20 years of nucleic acid detection research and product development experience, and its products are used daily in clinical laboratories and blood collection centers throughout the world. GPRO - Gen-Probe $33.75 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 30 PSU XF 1596 0.40 29.60 5.2% 1.4% * SELL PUT JAN 30 PSU MF 18 1.05 28.95 5.8% 3.6% ************** PHTN - Photon Dynamics $40.59 *** Consolidation Complete? *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display (FPD) industry. The company also offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries and the cathode ray tube display and CRT glass and auto glass industries. The firm's test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing. PHTN - Photon Dynamics $40.59 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 35 PDU XG 40 0.40 34.60 4.8% 1.2% * SELL PUT DEC 37.5 PDU XU 88 0.80 36.70 7.6% 2.2% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** TARO - Taro Pharmaceutical $68.59 *** All-Time High! *** Taro Pharmaceutical Industries (NASDAQ:TARO) is engaged in the production, research and development and sale of pharmaceutical products. The company is an Israeli corporation that operates in Israel and through various subsidiaries. All of the company's industrial pharmaceutical activities in Israel are performed by the company. The activities in North America are performed by Taro Pharmaceuticals North America and Taro Pharmaceuticals U.S.A. Taro Research Institute provides research and development services to the company. Taro International and Taro Pharmaceuticals U.K. are engaged in the marketing activities of the firm outside North America. TARO - Taro Pharmaceutical $68.59 PLAY (conservative - bullish/credit spread): BUY PUT DEC-60.00 QTT-XL OI=145 ASK=$0.35 SELL PUT DEC-65.00 QTT-XM OI=95 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$64.55 ************** TECD - Tech Data $36.13 *** Optimistic Outlook! *** Tech Data (NASDAQ:TECD) is a distributor of information technology products, logistics management and other value-added services worldwide. The company serves over 100,000 value-added resellers, direct marketers, retailers, corporate resellers and Internet resellers in more than 80 countries throughout the United States, Europe, Canada, Latin America, the Caribbean and the Middle East. It offers a variety of products from manufacturers and publishers such as Adobe, Apple, Cisco, Computer Associates, Creative Labs, Epson, Hewlett-Packard, IBM, Intel, Iomega, Lexmark, Microsoft, Nortel Networks, NEC, Palm, Seagate, Sony, Symantec, 3Com, Toshiba, Viewsonic and Western Digital. Products are generally shipped the same day the orders are received from regionally located logistics centers. TECD - Tech Data $36.13 PLAY (less conservative - bullish/credit spread): BUY PUT DEC-30.00 TDQ-XF OI=716 ASK=$0.15 SELL PUT DEC-35.00 TDQ-XG OI=1226 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$34.35 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** CVTX - CV Therapeutics $17.41 *** Ranexa Review Speculation! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on the discovery, development and commercialization of new small molecule drugs for the treatment of cardiovascular diseases. The company's New Drug Application (NDA) for Ranexa (ranolazine) for the treatment of chronic angina has been filed at the U.S. FDA. Tecadenoson (CVT-510), an A1-adenosine receptor agonist, is being developed for the potential reduction of rapid heart rate during atrial arrhythmias. CVT-3146, an A2A-adenosine receptor agonist, is being developed for the potential use as a pharmacologic agent in cardiac perfusion imaging studies. Adentri, an A1-adenosine receptor antagonist, is being developed by the company's partner, Biogen, for the potential treatment of acute and chronic congestive heart failure. CVTX also has several research and preclinical development programs designed to bring additional drug candidates into human clinical testing. CVTX - CV Therapeutics $17.41 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 25 UXC LE 10534 0.40 25.40 13.6% 1.6% * SELL CALL DEC 22.5 UXC LX 7310 0.70 23.20 22.1% 3.0% ************** TTWO - Take-Two Int. Software $32.86 *** Sales Slump! *** Take-Two Interactive Software (NASDAQ:TTWO) is an integrated developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the personal computer, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering of Developers, TalonSoft, Joytech, PopTop, Global Star and under the Take-Two brand name. The company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. TTWO - Take-Two Int. Software $32.86 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 37.5 TUO LU 870 0.45 37.95 6.6% 1.2% * SELL CALL DEC 35 TUO LG 1652 1.00 36.00 11.0% 2.8% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** AMGN - Amgen $58.14 *** Next Leg Down? *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States and has clinical development staff in the United States, the European Union, Canada, Australia and Japan. Amgen has acquired Immunex, a biopharmaceutical firm dedicated to developing immune system science to protect human health. Immunex has developed two major products, Enbrel and Leukine, and has two other products, Novantrone and Thioplex, which can be used in treating multiple indications. AMGN - Amgen $58.14 PLAY (less conservative - bearish/credit spread): BUY CALL DEC-65.00 YAA-LM OI=15972 ASK=$0.15 SELL CALL DEC-60.00 YAA-LL OI=16323 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$60.65 ************** SNPS - Synopsys $29.57 *** Earnings Speculation! *** Synopsys (NASDAQ:SNPS) is the world leader in electronic design automation (EDA) software for integrated circuit design. The company delivers technology-leading IC design and verification platforms to the electronics market, enabling the development of complex systems-on-chips. Synopsys also provides intellectual property and design services to simplify the design process and accelerate time-to-market for its customers. The company is headquartered in Mountain View, California and has offices in more than 60 locations throughout North America, Europe, Japan and Asia. Quarterly earnings are due in early December. SNPS - Synopsys $29.57 PLAY (conservative - bearish/credit spread): BUY CALL DEC-35.00 YPQ-LG OI=6016 ASK=$0.20 SELL CALL DEC-32.50 YPQ-LZ OI=2780 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$32.75 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** A Cornucopia of Candidates Amgen Inc - AMGN - close: 58.20 change: -0.71 WHAT TO WATCH: AMGN continues to drag on the BTK biotech index and the stock appears to have fallen out of an ugly bear-flag consolidation pattern. The recent failed rally at $60 looks like an entry point for bears but more conservative traders looking for some conviction may want to use a trigger under the $58 mark. There is potential support near $57.00 from last spring but it doesn't look that formidable. Chart= --- PACCAR - PCAR - close: 80.37 change: +0.44 WHAT TO WATCH: PCAR seems to be a perennial entry in the watch list but it is one stock option traders may want to keep an eye on. The stock has refused to break support just under $74 and has now rebounded back toward resistance. The move today put it above round-number resistance at $80 and more aggressive bulls might want to take a closer look. The rest of us might do better to wait for PCAR to break October resistance at $81.60. Chart= --- American Standard Cos - ASD - close: 99.25 change: -0.10 WHAT TO WATCH: Demonstrating some relative strength today, shares of ASD refuse to pull back in profit taking. The 10 cent decline today can hardly be called profit taking and ASD spent a good portion of today's session trading in a tight range between $99.00 and $99.25. Should ASD offer a pull back bulls can look for a bounce anywhere in the $96 to $98 range. The stock does not have a split history but as it nears the century mark odds are growing that management might be contemplating a stock split. Chart= --- Zebra Technology - ZBRA - close: 63.12 change: +1.31 WHAT TO WATCH: Charging ahead on Wednesday were shares of ZBRA, which have hit a new all-time high and building on Monday's big gains. We commented in the MarketMonitor that a pull back to the $60 level might be buyable but with ZBRA closing near its highs of the session waiting for a dip may take some patience. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- NAV $42.70 +0.15 - Keep an eye on NAV. The stock broke out over resistance at $42 and has spent the last couple of sessions consolidating between $42 and $43. Aggressive traders might buy the bounce from $42 today. The stock has some resistance at $45. BLI $14.83 -0.10 - Bulls might want to keep an eye on BLI for a move above its simple 50-dma and resistance at $15.25. SNA $29.86 -0.09 - Shares of Snap On (tools) have been consolidating under the $30 level for months now. A breakout could push it to $32 on short covering. ************** MARKET POSTURE ************** Markets Flat Line To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/mp_112603.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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