The Option Investor Newsletter Sunday 11-30-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Buyers Gave Thanks Futures Market: Tryptophan Trade Index Trader Wrap: No Turkey for Bears Editor's Plays: Switch Sides Market Sentiment: In the Turkey Trance Ask the Analyst: Which is better? The 200-day or 150-day moving average? 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 11-28 WE 11-23 WE 11-14 WE 11-07 DOW 9782.46 +153.93 9628.53 -140.15 9768.68 - 41.11 + 8.67 Nasdaq 1960.26 + 66.38 1893.88 - 36.38 1930.26 - 40.48 + 38.53 S&P-100 520.74 + 8.97 511.77 - 7.24 519.01 - 1.69 + 0.72 S&P-500 1058.20 + 22.92 1035.28 - 15.07 1050.35 - 2.86 + 2.50 W5000 10352.22 +253.34 10098.8 -145.78 10244.6 - 45.10 + 65.24 RUT 546.51 + 20.58 525.93 - 7.03 532.96 - 10.00 + 14.74 TRAN 2921.23 + 75.91 2845.32 - 82.32 2927.64 - 51.65 + 66.18 VIX 16.30 - 2.68 18.98 + 2.04 16.94 + 0.01 + 0.83 VXO 16.71 - 3.18 19.89 + 2.26 17.63 + 0.07 + 0.41 VXN 25.61 - 3.47 29.08 + 2.92 26.16 + 0.96 + 0.31 TRIN 1.04 1.04 1.35 1.21 Put/Call 0.69 0.80 0.69 0.78 ****************************************************************** Buyers Gave Thanks by Jim Brown The buyers rallied out of the gate on Monday after being depressed by new mutual fund disclosures and terror warnings the prior week. They managed to push the indexes right back to prior resistance and hold them there right into Friday's close. In short, buyers gave thanks for the dip and bought their Thanksgiving desert on sale. Dow Daily Chart Nasdaq Daily Chart S&P Daily Chart There were no economic reports on Friday but Wednesday was a banner day that needs a little review. The mostly bullish report calendar was highlighted by a massive jump in the PMI to 64.1 from 55.0. This is an eight year high and represents the seventh consecutive month of gains. The component gains were led by a jump in new orders to 73.3 from 59.2 and that would indicate the recovery in the Chicago area is picking up speed. Order backlog rose to 59.6 from 47.3. This report was very bullish but it was met with a yawn. The bad news was the jump in the prices paid component from 61.5 to 67.3. This shows that inflation is beginning to gain traction and the Fed is probably beginning to get nervous. The Jobless Claims fell again and faster than expected to only 351,000 and -9,000 below estimates. Claims were revised up for the prior week by +7,000 to 362,000. Still this is continued good news for consumers and for the markets. If jobless numbers continue to decline next week they could break the psychological 350,000 level and the level where it is commonly assumed a real turnaround in employment has occurred. This continued drop is bullish for the long term market. The drop in claims over the last four weeks should impact the non farm payroll report next Friday and estimates are for a gain of +150,000 jobs. However, the October Monthly Mass Layoffs soared to 158,240 and nearly double the 82,647 reported in September. This is in stark contrast to the Jobless Claims and the expectations for the employment report next week. It is however a late report for the October period where the other reports are more current. Manufacturing and the West Coast reported the most layoffs. The final Michigan Sentiment for November was inline with estimates at 93.7 and unlike the Consumer Confidence failed to soar to higher than expected levels. The expectations component showed the biggest gains from 83.0 to 88.1. The headline number finally exceeded the highs reached last May with the post war rebound to 92.1. The Michigan Sentiment is less dependent on business conditions than the Consumer Confidence and the smaller bounce could be due to consumers maintaining a wait and see attitude. The strongest report was the Durable Goods jump of +3.3% compared to estimates of only +0.8%. This was the strongest gain since Sept-2002 and coupled with the +2.1% jump in September shows a rapidly accelerating recovery. On a year over year basis the gain was +8.2% and the sharpest growth in over three years. Unfilled orders continues to jump indicating that orders are coming in faster than they can be filled. This is good for the employment factor as manufacturers will begin to add workers to keep up with the orders. The Beige Book described a broadening expansion over the last six weeks and suggested a positive outlook for retail sales for the holiday. Areas improving included retail sales, tourism and domestic travel. They did say that business travel remained weak. Outlooks for commercial real estate actually improved in several regions. This was one the most positive Beige Book reports since 2001. After all the positive reports last week we have a lighter calendar next week but it still contains some blockbuster names. Monday we will get the ISM data for November and it is only expected to be flat with the 57.0 reported in Oct. Based on the positive gains over the last month this could produce an upside surprise. On Wednesday we have the ISM Services Index and Productivity. The ISM Services is also expected to be flat or down at 64.0 but the Productivity is expected to jump to +8.3% with whisper numbers in the +9.0% range. Friday rounds out the reporting week with the Non Farm Payrolls and Factory Orders. Factory Orders are expected to rise by +0.8% and the economy is expected to have added +150,000 jobs. Obviously there is plenty of room for disappointment in those numbers with the ISM the only potential for a real upside surprise. This sets up next week to be confusing for most traders. The month end for November went out with a whimper with both the Dow and Nasdaq gaining less than 10 points each on Friday. Wednesday was not much better with the Dow only gaining +15 an the Nasdaq +10. Shucks Tuesday was flat also with the Dow +16 and the Nasdaq -4. The only really bullish day in a normally bullish week was Monday which stormed out of the gate as I expected. That left the indexes trending positive but unable to make any real gains for the rest of the week. Where was the month end portfolio window dressing? Where were those monster bullish days we have seen in Thanksgiving week in the past? Economics were good, terrorists were on holiday and there was not any really negative stock news. The indexes failed several times at resistance but managed to close very close on Friday. Dow 9800, Nasdaq 1960, S&P 1060 have proved to be difficult. Actually the S&P at 1060 has been the failure point for the entire month. The Dow at 9800, Nasdaq 1960 while current resistance and are actually lower highs for those indexes. Dow 9900 and Nasdaq 1980 were the prior resistance highs. Could this be a leading indicator for next week with the bearish divergence by the Dow? Dow Weekly Chart While the overall market sentiment is still strongly bullish there are numerous cracks trying to appear around the edges. In the chart above you can see the long term down trend resistance from the market highs in Jan 2000. Except for the May-16th 2001 temporary spike above the line the trend is very clear. The Dow ran full speed into the 9900 down trend several times in November and failed each time. The current down trend resistance has declined to 9850. There are many analysts who feel this resistance will hold and we are going to begin another down leg soon. The thought process is that the market is fully valued at this level until the Q4 earnings are known. Everyone is hoping for top line revenue growth based on the economics but not wanting to bet on it. Lately each time we near the 9800 level the buyers simply evaporate. Like I said last week they are willing to buy the dip but not the top. Until they are willing to push the bears out of their comfort zone we will remain trapped at this level. Nasdaq Weekly Chart The Nasdaq is not without its own level of resistance but more horizontal than down trending. The Nasdaq has strong resistance from 1960 to 2050 and that is not going to be broken quickly. Even a break over 2050 only leads to more strong resistance at 2250. With Monday typically bullish from fund inflow purchases I am a long way from predicting any sell off. I am simply suggesting that moving up from here may be difficult. The markets have huge overhead supply from 10,000 and above from traders hoping to get out of positions they have held since we traded in the 10,000 range for about seven months in early 2002. This level represents very strong congestion. In order to get through this congestion we need a catalyst. There are no events in the near future that should fill this bill. With the Dow up +33% from the March lows and the Nasdaq +56% the indexes are starting to look tired. Not weak, just tired. Like a marathon runner turning the corner at 22 miles and finding the last four miles are all up hill the markets are suffering from chest pains and leg cramps but determined to finish the race. Finish, but not sprint out into the lead. As we move into the last four weeks of the year, 22 trading days, the goal is still Dow 10,000. This is the yardstick where the market recovery will become official. It is the psychological finish line and it is tantalizing us just a few points ahead. Actually the nearness of the goal could be preventing a material sell off. The optimism is so strong that everyone expects it to be reached. Why sell now when we are so close? Good point but like the investors who have been holding since we last broke under Dow 10,000 their patience may be wearing thin. I said we need a catalyst and short of Osama and Saddam being found sharing a hideout in Tikrit the good news is already priced into the market. +8% recovery in the GDP? Priced in. Jobless Claims under 350,000? Priced in. Non Farm Payrolls +150,000? Priced in. PMI 64.1? Priced in. Consumer Confidence soaring to 91.7? Priced in. Over the last eight months the market has discounted those events and now that they have come to pass there is little to look forward to. At least nothing visible in our immediate future. The 4Q earnings will be critical. If there is top line growth then we could ratchet up expectations for 2004 to the next level. If not then investors will probably subtract some expectation premium from markets. The only real expectation in our future is for the beginning of the next rate hike cycle. The next Fed meeting is only a week away on Dec-9th and there will be quite a bit of rate hike apprehension going into that announcement. Fed funds futures are suggesting a March rate hike and the Fed needs to give the markets further assurance that there will be no hikes for a "considerable period" or the reaction could be negative. We are entering the period where talk is cheap and the Fed will likely try to talk its way out of trouble to delay the rate hikes until the last minute. I expect the Fed heads to hit the campaign trail next week with carefully crafted statements meant to calm the bond and equity markets. To put all the prior comments in perspective I am not looking for a dramatic week ahead. The first trigger will be the ISM on Monday then the INTC mid quarter update on Thursday. If INTC raises guidance then we might make that 10,000 goal. If they talk down estimates then I expect to remain range bound. The Jobs number on Friday had better be positive or the vacuum left by the imploding markets is liable to suck your keyboard into your monitor. Forget the reports from last week the ISM and JOBS are the only reports than matter now. What I am looking for is a potential retest of 9800-9850 on Monday from mutual fund cash hitting the markets. That is of course assuming the cash outflows from funds under pressure does not offset the inflows. With the dollar still falling we cannot expect help from overseas investors. We are on our own. If the ISM is less than exciting I would expect a return to 9700 and the middle of our current range to wait for the Jobs number on Friday. If the Jobs report is uninspiring then I would expect one more dip before a potential Santa Claus rally. Institutions would like to clear the decks for one more push to Dow 10K in late December so they can dress up their statements with D10K comments. With the VXO at 16.50 there should not be a lot of upside left so I am still expecting a sales event with a touch of Dow 10,000. Everybody put Dow 10K on your holiday gift list and lets get 2004 kicked off with a bang. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Tryptophan Trade Jonathan Levinson It was an abbreviated trading session following a holiday before the weekend, and only those of us truly dedicated to the markets bothered to show up. The tape felt aimless and slow. Equities and commodities gained, treasuries and the dollar fell. For the week, equity futures printed bullish engulfing candles, treasuries and the dollar bearish candlestick formations, and gold moved sideways at the highs. 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 printed new bear market lows on Friday, not challenging the 90.00 level but edging ever closer. As with the other symbols we follow, little if anything of significance occurred on Friday. However, the formation appears to be either a bearish descending triangle or a bull wedge. A move above 90.55 would confirm the latter and invalidate the former, but 90.70 is all that it projects to the upside. Daily chart of December gold December gold moved sideways on Friday, and so far I've been unable to get reliable quotes from any of the different quote sources I use, either for December, Jan, Feb or April contracts. The spot price advanced 1.60 to close at 398.10. The outlook from Wednesday is unchanged: technically, gold is either consolidating or being distributed at relative highs, and a move higher above 400 would be a trending move on the daily oscillators- very bullish but less likely. 390-410 is a significant resistance zone, and a brief spike above 400 did not last on a closing basis. However, the fundamentals for gold have never been more compelling, and this is a difficult level to trade. Longs from lower levels can wait for a decisive break of 400 or below 388. Daily chart of the ten year note yield I knew I should have shorted some ten year note futures earlier this week, but it was just too scary with the uncertainty in equities. The TNX gapped up and rain 7.8 bps higher to close at 4.32%. The Fed's 500M repo drain was insufficient to account for the selloff in ten year treasuries, and the move finally gave us our confirming buy signal on the daily oscillators for the ten year yield. Next resistance looms at 4.4%, with confluence at 4.5%. If the daily cycle upphase plays out, these levels should be exceeded, but we'll reevaluate as it progesses. Daily NQ candles Friday was a nothing day for equities, but the advance in the face of selling of bonds and the dollar was very strange. For the day, the NQ added 3, the ES 2.25 and the YM 31. It was mostly a sideways move hugging the rising daily trendline, but a sudden spike at the end of the futures session left all 3 contracts just below their session highs, with the YM going out at its high of 9799. The NQ is on very weak buy signals on the daily oscillators, and needs a directional move one way or the other to break the deadlock. An even slightly negative day from here would likely reverse the signals, while a positive day will confirm them. 1428-30 remains key resistance here, with secondary resistance at 1435. A move below 1415 should give bears some breathing room and confirm a short term negative bias. 30 minute 20 day chart of the NQ The 30 minute chart of the NQ provides few additional clues, with the NQ rising along the bottom of the broken bear wedge trendline. Obviously, this rise may confirm a looser wedge formation, but in either event it appears to be a bearish price advance- bearish insofar as it's a formation that tends to break to the south. The cycle oscillators are trending uncertainly on this timeframe, which could indicate either a consolidation below the highs or distribution along the top. We won't know until either 1435 or 1400 break. Nearterm direction is truly a tossup, with the 30 minute cycle oscillators near the top of their cycle and the daily near the bottom. Both point uncertainly higher, but again, volume was light and it's unwise to read too much into Friday's abbreviated session. Daily ES candles We have the same picture on ES. I'm looking for a break of 1061 or 1047 to break the deadlock. However, resistance is heavy all the way to 1065, above which there's the potential for a short covering rally. The cycle picture is the same as on NQ after this week: mixed and uncertain, with the daily cycle trying to put together the next leg of the rally, while the 30 minute shows signs of exhaustion. 20 day 30 minute chart of the ES The bear wedge projects to 1030. Skittish bears can look to cover if 1061 gets exceeded on Sunday night/ Monday morning. Even if it's a throwover fakeout above 1061, there should be ample time to short a failure of 1065 or to reenter at or just below 1060 for the ride back down. Again, the cycles are lined up to justify a move in either direction from here, and nearterm price projections are just guesswork in this environment. 50-tick ES There was not enough volume to generate more than a 50 tick-per- bar chart, and Friday's narrow range trading created more questions than it answered. Daily YM candles Nothing to add on YM. 20 day 30 minute chart of the YM Friday's session was not instructive and only muddied the water. The combination of stocks rising against a falling dollar and treasuries does not look sustainable to me, and the low volume and continued low volatility makes the gains appear even more suspect. When confused, I try to stay out of trouble, and this is one such time. Monday should get the ball rolling again. I don't expect yields or equities to rally far from here, but the cycle oscillators do not support me. Better to watch the intraday support and resistance levels and let the market decide for us. See you in the Futures Monitor. ******************** INDEX TRADER SUMMARY ******************** No Turkey for Bears Jonathan Levinson Equities had a positive week, pulling back from the brink of what was shaping up to be the beginning of the end for bulls last week. The Nasdaq added 66.40 points, with a gain of 6.95 on Friday to close at 1960.26. The Dow added 2.89 to complete a 153 point weekly gain, closing at 9782.46, and the SPX dropped .25, finishing the week higher by 22.92 at 1058.20. Most noteworthy during the abbreviated trading week was the plunge in volatility, with the VXO doing a Steve-McQueen u-turn at 20.84 to finish at 16.94 on Friday, with a low of 15.81 on Wednesday, closing below 16 on that day. This represented the lowest VXO (the old VIX) print in as many as years as I can chart, and represents a higher degree of complacency than has been seen at any of the significant market tops since 1998. Given that all of the indices are significantly below March 2000 levels, but optimism and complacency are well beyond levels measured at that time, one can expect that we are either near or at a significant market top now. However, the markets did not decline on Friday despite an opening dip, and as with any mania, we should be prepared for the possibility that this one could persist longer or farther than we currently expect. The synchronous sell signals we saw last week resulted in some impressive bouts of selling, but no significant technical damage was done, with all of the indices finishing in the green for the week. The Amex Goldbugs Index (HUI) rose by better than 5% for the week, reaching an alltime high and closing at 248.43. Weekly COMPX candles The weekly view of the Nasdaq shows this week’s recovery within the broader bearish ascending wedge off the March lows. The true test for the bulls will be the 2000 level, which has so far held back the advance and now coincides with trendline resistance from the failure two weeks ago. The bearish oscillator divergence is still intact, and the Nasdaq is still trading on a weekly sell signal. However, these oscillators have been trending for weeks, and while it is clear that selling pressure is building, the primary price trend since March remains higher. Weekly INDU candles I’ve left the minor bear wedge support line undrawn on the weekly INDU chart, but the setup is the same. I expect that the real battle will take place between 9820-9850, with a last hurrah at 9900 before the sprint to 10,000. The market’s advance this week looks good as a first step, but it took place on light volume in a short period of time, and drilled the volatility measures down to lows not seen in many years. I would be amazed to see the VXO down at 14 or the Dow at 10,000, but this year has been one of constant amazement. Suffice it to say that the bulls have their work cut out for them for the next 200 points of upside. Daily OEX candles The OEX dropped .47 to close at 520.74 on Friday. This week’s trade saw the OEX clawing its way back up along the broken trendline, but each attempt was quickly rebuffed. Nevertheless, the daily cycle oscillators left off on very weak and early buy signals. Once again, there’s reason to be dubious of buy signals generated on a closing VXO print below 16, but the price is the price. Any upside above 521 implies a test of resistance up to 525, and I don’t expect that level to fall easily, if at all. Nevertheless, the daily cycle oscillators are on early buy signals, and any price advance from here will give them confirmation. Longer term traders looking to establish long positions might want to wait for the test of the 52 week high before committing fully. I personally have great difficulty buying, even to cover shorts, with the VXO as low as its been for most of the week. 20 day 30 minute chart of the OEX The 30 minute OEX candles show this week’s rise in a bearish ascending wedge. A break of the lower trendline confirmed with a break of 520 implies a potential target of 510. The 30 minute cycle oscillators are on sell signals from overbought territory, and lower oscillator high compared with the higher price high forms a bearish divergence. On this basis, I expect to see selling on Monday morning, but the uncertainty on the daily cycle oscillators above confuse the issue. A move below 520 would go a long way toward emboldening the bears. Daily QQQ candles The Qubes gained 1 cent to close at 35.35, right below the start of resistance up to the 52 week high. A failure below 35 would look a lot like a head and shoulders top with an admittedly short head, neckline at 33.50. As on the OEX, the daily cycle oscillators could go either way from here, but remain closer to the bottom of their channel than to the top. A rollover from here brings the head and shoulders scenario into play and would start the 10 day stochastic trending in oversold. A bounce will have trouble up to 36, above which a short covering rally could kick off. 20 day 30 minute chart of the QQQ I’ve added the descending upper trendline to illustrate the more bullish side of the analysis, as unlikely as I take it to be. If the bulls can clear 35.60, the possibility of a reverse head and shoulders breakout exists, to be tested first at 36 and then 36.20. However, the 30 minute cycle oscillators are topping out, and rising resistance has held all week in a possible bear wedge. A break of the lower trendline from here would turn down the 300 minute stochastic and complete a bearish oscillator divergence equivalent to that on the 30 minute OEX. Putting it all together, we have the weekly cycles on a bearish divergence and tenuous sell signal, the daily trying to start an upphase, and the 30 minute commencing a downphase on the OEX and about to do so on the QQQ. The daily chart is the wildcard here, and traders should be patient until confident that the uncertainty has been resolved, either to the upside or the down. ************************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 ************** Switch Sides We picked the right horse and the right direction last week but they did not open the windows for betting until the race had already started. The DJX $97 call at $1.20 x $1.35 when recommended last Sunday gapped open to $1.40 when they opened for trading. There was one print at 1.55 on the initial tick and then they traded at 1.40 for seven minutes. The high for the week was $1.90 but even if you bought the high tick at the open it would have been hard to lose money with the average price in the $1.60-$1.65 range. We were busted due to the strong S&P futures on Sunday night. The market was ready to go and sprinted out of the gate. That was not the best for us. Obviously we would have liked to see a down tick at the open and then a rise into the highs. Time to switch sides. Just like I thought we would see a bullish week last week while sitting at the lows near 9600, I am thinking we will see a bearish trend over the next two weeks with our Friday close very near strong resistance at 9800. I am thinking 9850 should be the failure point and possibly 9900. Take a look at the down trend resistance chart below and you can see the upside possibilities face a serious challenge. Dow Weekly Chart The game plan for this week is to try and accumulate some DJX puts on any bounce and look for a retracement to the bottom of the current range at 9600. We are going to do this by entering a base position at the open on Monday and then add to it at 9800, 9850 and 9900 if possible. If we gap open over 9800 then only enter one of the first two levels below. Our target price to exit is 9600. Buy 5 DJX-97 Puts DJV-XS at the open if we open down. Buy 5 DJX-97 puts DJV-XS with a DJX print at 98.00 Buy 5 DJX-97 puts DJV-XS with a DJX print at 98.50 Buy 5 DJX-97 puts DJV-XS with a DJX print at 99.00 Sell all with a DJX print at 96.00 The stop loss on these should be 99.50 but aggressive traders may want to use 100.50 instead. I am expecting a sell off at Dow 10K and that is only 2 DJX points away from our present position. DJX Daily Chart ******************************** Play Recaps No open plays Powerball The tech rebound brought us within $80 of a 100% gain since inception. If we could just get ADCT, TLAB, JDSU and BRCD to do something besides act like penny stocks we would be in really good shape. If we get a Santa Claus rally we should be well over 100% by Dec-31st and the technical closing of the portfolio. 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 **************** In the Turkey Trance - J. Brown The stock market was in a slow drift higher on Friday but the DJIA and the NASDAQ composite still managed some huge gains adding +2.89 and +6.95 points, respectively. Traditionally the day before and after Thanksgiving is bullish and this year didn't disappoint, although I probably would have expected a bigger post-turkey day rally. The news on Friday was focused on two things. The start of the holiday shopping season with "Black Friday" and the President's surprise visit to Baghdad. Wall Street calls the day after Thanksgiving "Black Friday" not for any morbid reason but because it was often seen as a barometer for how the Christmas shopping season would pan out. Plenty of retailers do a huge chunk (20% to 50%) of their annual sales during the holidays. If shopping is strong on the Friday after Thanksgiving it indicated that the retailers would end the month "in the black" or with a profit instead of a loss. Of course we've been hearing for weeks now how analysts believe this could be the best shopping season since 1999. Expectations are high and it could lead us to a Santa Claus rally. The other big story of the day was President Bush's super-secret trip to Iraq. Bush showed up just in time to speak to, serve dinner to and eat with some 600 army soldiers for Thanksgiving. The press is giving it a lot of positive coverage and it appears to have lifted more spirits than just those on the front line. Investor sentiment feels rather positive. Many expect investors to come back on Monday in a buying mood. Yet the real question is how this attitude mixes with the hordes of money managers whose only focus is to preserve their current gains until December 31st. This lack of risk-taking could leave us in a range-bound market. We have a handful of economic reports this coming week although nothing too earth shattering. The real focus will probably be the FOMC meeting on Dec. 9th. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9903 52-week Low : 7197 Current : 9782 Moving Averages: (Simple) 10-dma: 9717 50-dma: 9670 200-dma: 8978 S&P 500 ($SPX) 52-week High: 1063 52-week Low : 768 Current : 1058 Moving Averages: (Simple) 10-dma: 1046 50-dma: 1038 200-dma: 965 Nasdaq-100 ($NDX) 52-week High: 1453 52-week Low : 795 Current : 1424 Moving Averages: (Simple) 10-dma: 1395 50-dma: 1394 200-dma: 1228 ----------------------------------------------------------------- After a shortened week of mild gains there appeared to be some put buying, possibly to protect profits, as the VIX and VXO both edged slightly higher. Together all three volatility indices remain at extreme lows and suggest very high levels of caution for bullish investors. CBOE Market Volatility Index (VIX) = 16.32 +0.09 CBOE Mkt Volatility old VIX (VXO) = 16.71 +0.80 Nasdaq Volatility Index (VXN) = 25.63 +0.00 unchanged ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.69 270,108 186,728 Equity Only 0.55 218,810 121,315 OEX 1.25 19,658 24,570 QQQ 1.11 7,850 8,707 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.2 + 1 Bull Confirmed NASDAQ-100 73.0 + 1 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 79.6 + 0 Bull Confirmed S&P 100 78.0 + 0 Bull Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 0.84 10-dma: 1.16 21-dma: 1.10 55-dma: 1.15 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 1526 1706 Decliners 1106 1179 New Highs 312 174 New Lows 12 11 Up Volume 337M 512M Down Vol. 225M 164M Total Vol. 576M 684M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 11/18/03 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 Will it never end? The commercial traders refuse to move any positions or make any more big bets in the full S&P futures contracts. They've been oscillating in the current range for weeks. Small traders have bumped up both their short and long positions but they remain relatively equidistance from each other. Commercials Long Short Net % Of OI 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%) 11/18/03 393,893 414,442 (20,549) (2.5%) 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 10/28/03 137,791 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% 11/18/03 147,842 80,047 67,795 29.7% 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 The e-minis are seeing some action. Commercials upped their short positions but not by too much. Small traders also raised their short positions by 10K contracts (almost 20% of outstanding shorts). Commercials Long Short Net % Of OI 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%) 11/18/03 249,286 264,083 (14,797) ( 2.9%) 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 10/28/03 123,569 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% 11/18/03 95,119 61,975 33,144 21.1% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders are still stuck in limbo with outstanding longs and shorts in NDX futures barely budging the last few weeks. Meanwhile small traders have turned more bullish with a nice jump in outstanding long positions. Commercials Long Short Net % of OI 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%) 11/18/03 35,608 49,689 (14,081) (16.5%) Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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% 11/18/03 32,034 10,356 21,678 51.3% 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 Ditto here as well...commercials are not making any new big bets and keeping the number of long and short contracts relatively unchanged. Small traders appeared to have scaled back on longs and inched up their shorts. Commercials Long Short Net % of OI 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% 11/18/03 20,746 11,080 9,666 30.4% 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 10/28/03 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%) 11/18/03 5,655 8,607 (2,952) (20.7%) 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 *************** Which is better? The 200-day or 150-day moving average? I've been reading various books on trading and investing and have noticed some authors prefer using the 200-day moving average for a longer-term moving average, while other authors prefer the 150- day moving average to depict a longer-term price average. There also seems to be a varying preference as to the use of either simple moving average and exponential. You seem to like the 200- day simple moving average, could you explain why? The first book I read on technical analysis was Stan Weinstein's "Secrets for Profiting in Bull and Bear Markets" where Mr. Weinstein preferred the 150-day moving average as a longer-term moving average. What Mr. Weinstein displayed in his book certainly made sense and I could see how certain stocks that broke above or below the 150- day moving average, did seem to take on a longer-term directional bias after the break of this moving average. I started using the 150-day moving average and began back testing it against stocks that I had either traded or invested in, and saw some mixed results as to the impact of the 150-day as a longer-term decision making tool. Please make note that I differentiate between trader and investor. Some VERY GOOD TRADES can be found when a security breaks above or below a longer-term moving average, or when a security comes back to test a longer-term moving average that was broken just days or weeks prior. To make a rather long story short, one day I was sitting at my desk and was drawing trends on a chart. Back then, trading/technical analysis software was relatively non-existent compared to today, and to get a chart of a stock, you pulled the stock up on your terminal and had the choice of 2 or 3 moving averages if you were lucky. Once you had the chart up on your screen, you pressed the "print screen" button, walked down the hall to the printer, picked up your chart, came back to your desk and started doctoring up the chart with support and resistance trends with a pencil and a ruler. Anyway... I was sitting at my desk and drawing some trends on some charts that I had printed out after the close, when a fellow several years older than I wandered by, introduced himself as "Bob" and asked me what I was doing. As it turned out, Bob was the only broker in the office that relied heavily on technical analysis when buying and selling stocks for his clients and thought it was pretty cool that a young (30-years old) broker like myself shared interest in technical analysis. Over time, I'd venture into Bob's office, ask his advice or gather his thoughts on certain stocks I was looking at and he began questioning why I was using a 150-day moving average. As it turned out, there were a couple of stocks in my stack of charts that he was also following, which he showed me, but he used a 200-day moving average, which seemed to "fit" better as to how the stock traded. Like the trader asking today's question, I too was now confused on which moving average was best to use for a longer-term moving average of price movement. To this day, I can't pound my fist on the desk and definitively say which moving average between the two is best, or has the greatest technical significance. Over the years though, I has been my observation that the 200-day moving average seems to hold a greater degree of technical significance that the 150-day moving average. I can't give quantitative evidence of this, but it has been my observation that the 200-day would have kept me out of a bad trade or in a good trade with better result than the 150-day. One test a trader or investor can perform is to simply place both moving averages on a security they are looking to trade or invest in, and look at the security on a historical basis, while making the observation of not only how the security has trade on breaks above or below the two moving averages, but how the security has tracked the 150-day or 200-day moving average. What you may find is that the security seems to track both moving averages at certain times, where it becomes more difficult to truly ascertain which moving average is having greater technical impact on the stock. When you find this type of confusion, one thing I'll do is turn on the volume indicator, where volume spikes often reveal heightened INTEREST in the stock, where the interest comes at one of the longer-term moving averages. Often times, the break above or below a longer-term moving average, which the MARKET deems most important, will have the break (up or down) taking place with an increase in volume, and gives the trader or investor an additional observation of which moving average has been deemed "most important" by the MARKET. Another observation I've found over time, which may be biased to the 200-day SMA, is that I've found some of my better short-term trades and longer-term investments have come from correlations found in point and figure charts in combination with the 200-day SMA. The reason I say this may be biased is that I've been using the 200-day SMA for a greater length of time than I have the 150- day SMA, but when I've observed/traded a stock that breaks above or below a 200-day SMA and at the same time breaks above or below a respective bearish resistance trend or bullish support trend (both longer-term trends on a point and figure chart), it really seems to have had some meaningful impact on future price action. Add a BIG volume spike, and it really gets my attention! When I see a stock breaking above or below its 200-day SMA, the first thing I do is check the PnF chart to see just where the bearish resistance trend or bullish support trend is at. Similarly, when I see a stock breaking above or below its bearish resistance trend or bullish support trend, a quick glance of the bar chart and 200-day SMA is noted. While a debate over which longer-term moving average carries greatest technical significance will most likely never be settled, there are also strong proponents of both the simple moving average and the exponential moving average. I prefer the simple moving average mainly because I'm more of a meat and potato trader where I can understand what the simple moving averages measure. A 150-day simple moving average measures the average price last 150-days, or 200-day's as the case would be for the 200-day SMA, and equal weight is given to all time periods. While I'll eat fancy French cuisine from time-to-time, the exponential moving average weights recent data more heavily than "older data." Again, it is arguable which method of charting a moving average is more accurate, but the meat and potato trader in me feels that trader/investor that bought a stock at $20.00 100-days ago, is just as important as the trader/investor that bought the stock 5-days ago for $21 or $19 and should probably be weighted equal and not be deemed any less important today. My biggest dislike for using an exponential moving average is my belief that a longer-term trend has greater significance than a shorter-term trend, and the thought of putting greater weight on near-term average price of a security, goes against my core belief that the measurement of longer-term price action is as meaningful, if not more meaningful, than shorter-term price action. Well, after all that, I know that I haven't really answered the trader/investor's question to the level all of us would have liked. I don't think there is a definitive answer to these questions, but each trader, with time, will develop his or her own preference as to time intervals used, and whether those time intervals are measured using a simple moving average or exponential. One word of advice as it relates to moving averages is to try and keep them to a minimum. I've told the story before of a trader that had 5, 10, 20, 50, 100, 150 and 200-day moving averages on his chart, and he could never really make any type of firm trade decision, because at any one point in time, one of the moving averages provided some type of support or resistance on the chart, and the number of moving averages created so much confusion that there was really no way a decision could be made. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- DCI Donaldson Mon, Dec 1 After the Bell 0.56 MCDTA McDATA Corporation Mon, Dec 1 After the Bell 0.00 ------------------------- TUESDAY ------------------------------ ADCT ADC Tue, Dec 2 After the Bell 0.00 BNS Bank of Nova Scotia Tue, Dec 2 During the Market N/A CHS Chico's FAS Tue, Dec 2 After the Bell 0.27 CPRT Copart Tue, Dec 2 After the Bell 0.16 JWa John Wiley & Sons Tue, Dec 2 Before the Bell 0.40 MBT Mobile Telesystems Tue, Dec 2 Before the Bell N/A NAV Navistar Intl Tue, Dec 2 Before the Bell 0.71 TSA Sports Authority Tue, Dec 2 After the Bell 0.14 V Vivendi Universal Tue, Dec 2 During the Market N/A ----------------------- WEDNESDAY ----------------------------- CMVT Comverse Technology Wed, Dec 3 After the Bell -0.02 MBG Mandalay Resort Group Wed, Dec 3 After the Bell 0.62 NMGa Neiman Marcus Group Wed, Dec 3 After the Bell 1.16 PLL Pall Corp. Wed, Dec 3 After the Bell 0.18 SNPS Synopsys Wed, Dec 3 After the Bell 0.41 UU United Utilities Wed, Dec 3 Before the Bell N/A ------------------------- THUSDAY ----------------------------- BTH Blyth Inc. Thu, Dec 4 Before the Bell 0.72 DLM Del Monte Foods Thu, Dec 4 -----N/A----- 0.18 DG Dollar General Corp. Thu, Dec 4 -----N/A----- 0.20 NSM National SemiconductorThu, Dec 4 -----N/A----- 0.32 PFP Premier Farnell Plc Thu, Dec 4 Before the Bell N/A ------------------------- FRIDAY ------------------------------- ABS Albertson's Fri, Dec 5 Before the Bell 0.36 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable NFI NovaStar Financial, Inc 2:1 Dec 1st Dec 2nd MMSI Merit Medical Systems Inc 4:3 Dec 2nd Dec 3rd MRTN Marten Transport, Ltd 3:2 Dec 5th Dec 8th CRRC Courier Corporation 3:2 Dec 5th Dec 8th ATA Apogee Technology, Inc 2:1 Dec 11th Dec 12th CKFB CKF Bancorp, Inc 2:1 Dec 11th Dec 12th TRID Trident Microsystems Inc 3:2 Dec 12th Dec 15th -------------------------- Economic Reports This Week -------------------------- We're officially in the holiday season now and traders will be looking for a Santa Claus rally by Christmas. This week's economic reports are spread out on Monday, Wednesday and Friday. Vehicle sales, ISM index, construction spending, productivity, unemployment and more all come out this week. ============================================================== -For- ---------------- Monday, 12/1/03 ---------------- Auto Sales (NA) Nov Forecast: 5.5M Previous: 5.1M Truck Sales (NA) Nov Forecast: 7.5M Previous: 7.4M ISM Index (DM) Nov Forecast: 57.0 Previous: 57.0 Construction Spndng (DM)Oct Forecast: 0.5% Previous: 1.3% ----------------- Tuesday, 12/2/03 ----------------- None ------------------- Wednesday, 12/3/03 ------------------- Productivity-Rev. (BB) Q3 Forecast: 8.3% Previous: 8.1% ISM Services (DM) Nov Forecast: 64.0 Previous: 64.7 ------------------ Thursday, 12/4/03 ------------------ Initial Claims (BB) 11/29 Forecast: N/A Previous: 351K ---------------- Friday, 12/5/03 ---------------- Nonfarm Payrolls (BB) Nov Forecast: 150K Previous: 126K Unemployment Rate (BB) Nov Forecast: 6.0% Previous: 6.0% Hourly Earnings (BB) Nov Forecast: 0.3% Previous: 0.1% Average Workweek (BB) Nov Forecast: 33.9 Previous: 33.8 Factory Orders (DM) Oct Forecast: 0.6% Previous: 0.5% Consumer Credit (DM) Oct Forecast: $5.0B Previous: $15.1B 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 11-30-2003 Sunday 2 of 5 In Section Two: Watch List: Leftovers? No way! Call Play of the Day: AMZN Dropped Calls: None Dropped Puts: MXIM ************************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 ********** Leftovers? No way! Broadcom - BRCM - close: 36.39 change: +0.51 WHAT TO WATCH: It may be a little hard to see but BRCM is climbing higher in a rising channel. The recent bounce off its 30-dma was the bottom of its channel. Bulls might want to consider new positions on a move over $36.50. Our first target would be $40.00. Chart= --- Merrill Lynch - MER - close: 56.75 change: +0.21 WHAT TO WATCH: MER is bouncing from a test of support at the $55 mark but has not yet reclaimed its simple 50-dma. The whole broker-dealer group seems to be in a similar pattern, at least the XBD broker-dealer index is. A move over the 50-dma and MER should retest resistance at $60.00. Its MACD is about to crossover into a bullish signal. Chart= --- Boston Scientific - BSX - close: 35.89 change: +0.65 WHAT TO WATCH: The stock hasn't been moving much but the company has been getting a lot more press recently about its Taxus drug- coated stents. Patient bulls could open long plays while BSX remains above the $35.00 level. Its P&F chart shows an ascending triple-top breakout buy signal. Chart= --- Lexmark Intl - LXK - close: 77.40 change: +0.77 WHAT TO WATCH: Bullish traders will want to keep an eye on LXK. Shares have rebounded back to long-time resistance at the $78.00 level. A breakout over $78 could be a trigger to go long. The stock wouldn't have much more resistance until the $90 region. Chart= --- Amgen Inc - AMGN - close: 57.62 change: -0.52 WHAT TO WATCH: We're keeping AMGN on the watch list. The stock has now broken support at $58.00 and fallen out of what could have been a bear flag consolidation. Shares appeared to produce a failed rally at the $58.25 level on Friday and MACD is rolling over again. Aggressive traders could initiate shorts now. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- PCAR $80.26 -0.11 - We're not giving up yet. PCAR is still trying to breakout over resistance near $81.00. ASD $99.70 +0.45 - ASD is also trying to breakout over the $100 level. On Wednesday the worst profit taking it could muster was a dip to the $99 region. CFC $105.60 +2.77 - Shares of CFC were strongly higher on Friday. Watch for a breakout over the $107 region. Its MACD is about to turn positive again. ************************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 ******************* Call Play of the Day: ********************* Amazon.com - AMZN - close: 53.97 chg: +1.01 stop: 48.99 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 ^^^^^ None PUTS ^^^^ Maxim Int. Prod. - MXIM - close: 52.17 change: +0.87 stop: 52.30 It is time to throw in the towel on our MXIM play. The benefit of hindsight allows us to see that the brief dip below $50 was a bear trap. The clincher was Friday's price action, which had the stock surging to within 4 cents of our $52.30 stop and closing very near the high of the day. With the Semiconductor index (SOX.X) back above the $525 level, and MXIM solidly above the top of its channel again, it would appear very unlikely that our stop will survive through Monday's session. Rather than take that risk, we're pulling the plug this weekend. MXIM never worked very far in our favor and it is best to admit the error and move on. Picked on November 18th at $49.89 Change since picked: +2.25 Earnings Date 1/27/04 (unconfirmed) Average Daily Volume = 6.43 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. 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 11-30-2003 Sunday 3 of 5 In Section Three: Current Calls: BBY, DGX, DHR, HOV, PGR, UTX New Calls: AMZN, ZMH, SNDK Current Put Plays: KSS New Puts: None ************************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 ****************** Best Buy Co - BBY - close: 62.00 chg: +0.90 stop: 57.95 *new* 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) Why We Like It: If you've been listening to the financial media the last few days they've all been chanting the same line..."Best Buy" is one of the best plays for this holiday season. Considering some of the lines of customers waiting to get into the technology laden stores this morning on "Black Friday" it shouldn't be a surprise. Consumers are looking for anything technology related and Best Buy has the edge over rival Circuit City. The stock recently broke out of a consolidation between $57 and $60 with volume being somewhat decent the first part of this week. Two weeks ago UBS reiterated their "buy" rating on BBY and upped their price target to $70. The stock is up five days in a row now and could be overdue for a little profit taking. Those not willing to buy it here might want to wait for a dip back towards the $61.00-60.00 levels. We're going to raise our stop loss a $1.00 to $57.95. Short-term traders who jumped in when we initiated the play can be ready to exit should BBY soar to our initial target of $65.00. Suggested Option: 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= 7091 at $7.60 SL=4.85 BUY CALL DEC 60*BBY-LL OI=16515 at $3.70 SL=1.75 BUY CALL DEC 65 BBY-LM OI= 3501 at $1.30 SL=0.65 BUY CALL JAN 55 BBY-AK OI= 3769 at $8.30 SL=5.25 BUY CALL JAN 60 BBY-AL OI= 5945 at $4.60 SL=2.30 BUY CALL JAN 65 BBY-AM OI= 2046 at $2.15 SL=1.05 Annotated Chart: Picked on November 25 at $60.36 Change since picked: + 1.64 Earnings Date 12/17/03 (unconfirmed) Average Daily Volume: 3.6 million Chart = --- Quest Diagnostics - DGX - cls: 72.97 chng: +0.31 stop: 70.25*new* 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: Our DGX play certainly isn't setting any speed records but it certainly is a consistent performer. After breaking above the top of the consolidation flag near $72, the stock has just been inching higher towards our $75-76 target. Recall that this level corresponds to the measuring objective from the breakout of that flag pattern, as well as the site of historical resistance on the weekly chart. Now that the stock has broken and held above the top of its flag, we should be able to safely raise our stop to just below the bottom of that consolidation pattern at $70.25. A pullback near the $71.50 level should provide for fresh entries into the play, but only on a rebound from the 10-dma ($71.57). We're reaching the point where it may not make sense to consider momentum entries above the $73 level, but aggressive traders may be want to consider it if they're setting their sights on the upper target at $79, which is the bullish price target from the PnF chart. Suggested Options: Shorter Term: The December 70 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 75 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the January 70 Call. Our preferred option is the December 70 strike. BUY CALL DEC-70*DGX-LN OI=1005 at $3.90 SL=2.50 BUY CALL DEC-75 DGX-LO OI= 569 at $1.15 SL=0.50 BUY CALL JAN-70 DGX-AN OI=2047 at $4.70 SL=2.75 BUY CALL JAN-75 DGX-AO OI= 455 at $1.95 SL=1.00 Annotated Chart of DGX: Picked on November 13th at $69.46 Change since picked: +3.51 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 876 K Chart = --- Danaher Corp - DHR - close: 83.20 chg: +0.55 stop: 79.50 Company Description: Danaher, a leading industrial company, designs, manufactures, and markets innovative products, services and technologies with strong brand names and significant market positions. The company was previously known as DMG Inc. In addition to process/ environmental tools the company also supplies aircraft safety equipment. Its general-purpose tools include hand tools, ratchets, sockets, wrenches and more. Why We Like It: So far so good. The general bullish mood on Wall Street has allowed DHR to slowly climb higher after bouncing from the $80 level. Short-term oscillators have been bullish for a few days now and its MACD is getting closer to a new buy signal. We haven't seen any new headlines for DHR nor have there been any new broker ratings. Investors are still attracted to the "old" economy cyclical stocks like DHR and the recent parade of positive economic reports adds a lot of confidence that the economy is on a sustained rebound. Shares of DHR have cleared all of their moving averages and the only resistance is its old highs from early November. We're optimistic that DHR can clear these levels and trade toward the $87.50-90.00 region by year's end. The company last split its stock 2-for-1 in June of 1998 near $72 so the possibility of another split announcement certainly exists. No change in our stop loss at $79.50. Suggested Options: Traders can choose from the December, January or March options. We like the December 80s and 85s but will suggest the DEC 80 strike as our favorite. BUY CALL DEC 80*DHR-LP OI= 815 at $4.10 SL=2.00 BUY CALL DEC 85 DHR-LQ OI=1020 at $0.95 SL= -- BUY CALL JAN 80 DHR-AP OI= 627 at $4.90 SL=2.40 BUY CALL JAN 85 DHR-AQ OI=1316 at $1.90 SL=0.95 Annotated Chart: Picked on November 23 at $81.95 Change since picked: + 1.25 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 829 thousand Chart = --- Hovnanian Enterprises - HOV - cls: 92.25 chg: +1.59 stop: 87.75*new* Company Description: Hovnanian Enterprises, Inc. was founded in 1959 by Kevork S. Hovnanian, Chairman, and is headquartered in Red Bank, New Jersey. The Company is one of the nation's largest homebuilders with operations in Arizona, California, Maryland, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia. The Company's homes are marketed and sold under the trade names K. Hovnanian, Washington Homes, Goodman Homes, Matzel & Mumford, Diamond Homes, Westminster Homes, Fortis Homes, Forecast Homes, Parkside Homes, Brighton Homes, Parkwood Builders, Summit Homes and Great Western Homes. As the developer of K. Hovnanian's Four Seasons communities, the Company is also one of the nation's largest builders of active adult homes. (source: company press release) Why We Like It: What can we say that hasn't already been said? The housing sector remains red hot. These stocks refuse to go down. Shorts are getting killed as investors have an insatiable appetite for this sector. Historically low mortgage rates have inspired strong earnings numbers from the group and mortgage applications have surged again gaining two weeks in a row. The Fed is still preaching their "low interest rate" message and some homebuilders are predicting strong growth through 2005. HOV is a stock split candidate and they might announce one around their earnings report in December. HOV last splits its stock 2- for-1 back in 1987. We know it's tough to chase these stocks that have climbed so much already but there is a growing number of analysts that believe the entire group is in the process of a strong surge in P/E appreciation. Now that HOV has broken the $90 level of resistance bulls will be aiming for the psychological round-number mark at $100. We like how HOV is climbing inside its rising channel (see chart) and we're raising our stop loss to $87.75. More conservative traders who would rather protect a larger gain can slip their stop closer to $90. Traders should keep in mind that there are only six trading days before HOV is expected to announce its earnings. We'll probably close the play before earnings. That is not a lot of time left to trade HOV and new positions should be considered carefully. Suggested Options: Short-term traders can probably do well using December strikes while longer-term traders can look over the February '04 strikes. We like the 80s, 85s and 90's. Our previous favorite was the DEC 85 strike but HOV is up so much now that the DEC 90 probably looks better. BUY CALL DEC 80 HOV-LP OI= 506 at $12.80 SL=8.00 BUY CALL*DEC 85 HOV-LQ OI=1276 at $ 8.40 SL=5.50 BUY CALL*DEC 90 HOV-LR OI=1238 at $ 4.70 SL=2.35 BUY CALL DEC 95 HOV-LS OI=1007 at $ 2.40 SL=1.20 BUY CALL FEB 85 HOV-BQ OI= 291 at $11.50 SL=7.50 BUY CALL FEB 90 HOV-BR OI= 439 at $ 8.40 SL=5.50 BUY CALL FEB 95 HOV-BS OI= 200 at $ 6.00 SL=3.75 Annotated Chart: Picked on November 21 at $85.51 Change since picked: + 6.74 Earnings Date 12/09/03 (confirmed) Average Daily Volume: 827 thousand Chart = --- Progressive - PGR - close: 78.10 chg: -0.51 stop: 75.99 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: The daily chart and its bullish catapult breakout on PGR's point- and-figure chart continue to look tempting but we're growing a little impatient. The stock continues to build on a trend of higher lows, which is good. Yet buyers have not yet retested the $80 level. We initially added PGR on a breakout above its old highs from June. Soon thereafter the stock rocketed higher on extremely positive October results. It's probably going to be a couple of more weeks before we see November results and it may not pay to wait that long. We are suggesting caution on anyone considering new plays. PGR is certainly out performing its peers in the insurance group and Warren Buffet has positive things to say about the insurance sector but then we're not holding PGR stock for 5 years either. Traders might want to look for a move over $79.00 as confirmation that there is still some buying momentum. If PGR closes under $77.00 we'll probably close the play. Suggested Options: We're not suggesting any new plays at this time until PGR can display a little more upward momentum. Annotated Chart: Picked on November 07 at $76.25 Change since picked: + 1.85 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 654 thousand Chart = --- United Tech. - UTX - cls: 85.70 chng: -0.62 stop: 83.00*new* Company Description: As a diversified manufacturing company, UTX has four principal operating segments: Otis (elevators and escalators), Carrier heating, ventilation and air conditioning systems), Pratt & Whitney (aircraft engines and space propulsion), Flight Systems helicopter electrical systems). Between the Pratt & Whitney and Flight Systems divisions, UTX participates in virtually all aspects of the design and manufacture of aircraft propulsion systems, from engines and their associated flight controls to auxiliary power units, compressors and instrumentation. Why we like it: Volume is a weapon of the bulls and with that tool locked away during Friday's short session, our UTX play really had no hope of continuing its bullish trend. After a failed attempt to move over the $86.50 level, UTX headed steadily lower into the closing bell, giving back most of Wednesday's gains in the process. It looks like the stock is setting up for a test of support in the $84.70-85.40 area early next week, as that area is the site of combined moving average support at the 10-dma ($84.70), 20-dma ($85.36) and 30-dma ($84.88). Any rebound from above $84.50 looks like a solid entry point, while a break below that level will introduce the possibility of a dip and retest of major support at the 50-dma ($83.24). Any break of the 50-dma will be a very disconcerting development, so we're raising our stop to $83, just under that key moving average. Aggressive traders targeting a rally up to the $90 level can consider breakout entries over $87, but need to do so with the understanding that the early November highs near $88 are likely to present solid resistance. Suggested Options: Shorter Term: The December 85 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 90 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the January 85 Call. Our preferred option is the December 85 strike. BUY CALL DEC-85*UTX-LQ OI=2894 at $2.20 SL=1.00 BUY CALL DEC-90 UTX-LR OI=1079 at $0.35 SL=0.00 BUY CALL JAN-85 UTX-AQ OI=1505 at $3.30 SL=1.75 BUY CALL JAN-90 UTX-AR OI=4483 at $0.95 SL=0.50 Annotated Chart of UTX: Picked on November 23rd at $83.90 Change since picked: +1.80 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 1.84 mln Chart = ************** NEW CALL PLAYS ************** Amazon.com - AMZN - close: 53.97 chg: +1.01 stop: 48.99 Company Description: Amazon.com, a Fortune 500 company based in Seattle, opened its virtual doors on the World Wide Web in July 1995 and today offers Earth's Biggest Selection. Amazon.com seeks to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices. Amazon.com and sellers list millions of unique new and used items in categories such as jewelry and watches, gourmet food, apparel and accessories, sporting goods, electronics, computers, kitchenware and housewares, books, music, DVDs, videos, cameras and photo items, toys, baby items and baby registry, software, computer and video games, cell phones and service, tools and hardware, travel services, magazine subscriptions and outdoor living items. (source: company press release) Why We Like It: We're going to keep this play simple. It doesn't matter whether you think AMZN is a highly overvalued pig or the brave prospector to a new online world, no one can deny the growth or the gold in online shopping. Analysts are hailing this the best shopping season in four years for brick-and-mortar retailers but online shopping is expected to surge as well. No one is better positioned to capture a good chunk of those sales than AMZN, with or without its traditional "delight-o-meter" on its homepage. A story that has the sound of bearish desperation to it has recently risen over Amazon.com not posting its traditional holiday "delight-o-meter" on its home page, which measured how many gifts that consumers had purchased from AMZN. In the past some traders had used this meter as a proxy for how well the company's holiday sales were doing. The bears would tell you that AMZN isn't so sure about its upcoming performance and decided not to advertise it with the meter. Bulls will say that AMZN has found a better use for such highly valued retail "space" on its front page. Technically speaking we noticed that AMZN has bounced from the 38.2% retracement level of its April low to October high run. Furthermore, the recent bullish breakout over its simple 50-dma has also broken the trend of lower highs. Third, the stock has reversed an ugly looking sell signal on its P&F chart into a "low pole reversal". Now shares might pull back after four days up in a row and a bounce above the $50 level still looks buyable but odds are the rally looks ready to continue on Monday. There is some overhead resistance at $58 but our initial target is $60. We'll start the play with a stop loss at 48.99. We always tend to consider any option play in AMZN as aggressive due to its violent swings. Granted the stock isn't as volatile as it used to be it can still move fast. Wisely consider what your tolerance for risk is before you play. Suggested Options: We have plenty of December and January options to choose from but our favorite is the January 50's. BUY CALL DEC 47.50 ZQN-LW OI= 4777 at $7.00 SL=4.85 BUY CALL DEC 50.00 ZQN-LJ OI=14219 at $4.70 SL=2.50 BUY CALL DEC 55.00 ZQN-LK OI=11465 at $1.75 SL=0.90 BUY CALL JAN*50.00 ZQN-AJ OI=12039 at $5.80 SL=3.35 BUY CALL JAN 55.00 ZQN-AK OI=12237 at $2.95 SL=1.50 BUY CALL JAN 60.00 ZQN-AL OI=10221 at $1.30 SL= -- Annotated Chart: Picked on November 30 at $53.97 Change since picked: + 0.00 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 10.7 million Chart = --- Zimmer Holdings - ZMH - close: 65.92 chg: +0.43 stop: 62.89 Company Description: Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer is the worldwide #1 pure-play leader in the design, development, manufacture and marketing of reconstructive orthopaedic, spinal and dental implants, trauma products and related orthopaedic surgical products. The new Zimmer has operations in more than 24 countries around the world and sells products in more than 80 countries. In October, 2003, the company finalized its acquisition of Centerpulse AG, a Switzerland-based orthopaedics company and the leader in the European market. For the year 2002, the pro forma worldwide combined revenues of Zimmer and Centerpulse were approximately $2.2 billion. On a combined basis, Zimmer and Centerpulse are supported by the efforts of nearly 7,000 employees. (Source: company press release) Why We Like It: It must be inflation. Instead of the $6 million dollar man, we have the $108 million man. Okay, we're joking but considering ZMH's product line of reconstructive implants they probably hear jokes like that all the time. Last month ZMH just finished its $3.2 billion acquisition of Swiss rival Centerpulse AG. Now ZMH just recently announced a $108 million acquisition of New Jersey based Implex Corp. The stock shot higher and broke resistance at $65.00. It's somewhat uncommon for the acquirer to trade higher on merger news but ZMH did. Usually that means the market strongly approves of the merger. Shares of ZMH have continued to inch higher after Monday's big gain and the bounce from $64 on Wednesday looks buyable. With the stock trading at all-time highs we'd like to say it is a split candidate but ZMH does not have a split history (it has never split its stock yet). After a strong bull run from July the best profit taking sellers could do to ZMH was a couple of weeks of sideways trading. That sounds like there is a shortage of willing sellers. Short-term oscillators are bullish and its MACD is about to issue a new buy signal. Before continuing traders need to consider ZMH's longer-term overbought status. Looking at the weekly chart could give you vertigo. It is essential that you trade with a stop loss should the market and ZMH suddenly turn sour. We're going to initiate the play with a stop loss at $62.89. Our first target is $70. Suggested Option: Short-term traders can look over the December calls but we prefer the January strikes. Longer-term traders have March and June strikes to consider. The DEC 65s look good because they have more open interest but we're going to favor the JAN 65s. BUY CALL DEC 60 ZMH-LL OI=1378 at $6.30 SL=3.85 BUY CALL DEC 65 ZMH-LM OI=1870 at $2.05 SL=1.00 BUY CALL JAN 60 ZMH-AL OI= 0 at $6.70 SL=4.20 BUY CALL JAN 65 ZMH-AM OI= 20 at $2.95 SL=1.50 BUY CALL JAN 70 ZMH-AN OI= 21 at $0.85 SL= -- Annotated Chart: Picked on November 30 at $65.92 Change since picked: + 0.00 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 1.8 million Chart = --- Sandisk Corp. - SNDK - close: 80.82 change: +1.02 stop: 75.50 Company Description: What's in a name? SNDK provides computer storage sans disk. The company is a leading provider of flash memory storage devices – integrated circuits that retain data when power is off. The company is involved in all aspects of flash memory process development, chip design, controller development, and system- level integration. SNDK has customized its products to address the needs of many emerging applications in the consumer electronics and industrial/communications markets, including digital cameras, smart phones, personal digital assistants (PDA), and MP3 portable music players. Why we like it: There aren't many Technology stocks that can boast the kind of gains that SNDK can brag about this year. Bottoming near $16.50 in mid-April, the stock has had a nearly-uninterrupted bullish run that recently took the stock above $85. That's more than a 400% gain in 7 months and normally we wouldn't be bold enough to try entering such an extended trend. But if this is just another dip in the trend, then this is just about the best entry we're likely to see. Driving the stock's strong performance has been the company's strong growth and continued dominance in the flash memory market. These ubiquitous flash memory cards seem to be found in more and more consumer electronics devices and with the holiday season now underway, it makes sense that business should continue to be strong heading into the end of the year. Throughout its meteoric rise, SNDK has found consistent support at the bottom of its rising channel. The latest bout of profit taking however, pushed price below the bottom of its channel and it looked like the trend just might be in trouble. But last week, the stock rebounded and managed to close back inside the channel on Friday. Ending just below the 20-dma ($80.86) on Friday, SNDK looks like it wants to make another run at the early November highs and quite possibly the top of the channel, now at $90. Since Friday's volume was so light, we're going to use a trigger of $81.55 (just over Tuesday's intraday high) to avoid the possibility of a rollover below resistance. Use the initial breakout to initiate momentum-based positions, or a subsequent dip and rebound from the lower channel line (currently $80) to enter on a pullback. Given the aggressive nature of this play, we're starting coverage with a fairly wide stop at $75.50, just under the recent low. More conservative traders may want to use a stop at $77.40, just under Wednesday's low. Our initial target will be for a return to the $86 level at the early November highs, but we're really looking for a return to the top of the channel near $90. Suggested Options: Shorter Term: The December 80 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 85 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the January 80 Call. Our preferred option is the December 80 strike. BUY CALL DEC-80*SWQ-LP OI=4303 at $4.10 SL=2.50 BUY CALL DEC-85 SWQ-LQ OI=3778 at $1.85 SL=0.90 BUY CALL JAN-80 SWQ-AP OI=2541 at $6.70 SL=4.75 BUY CALL JAN-85 SWQ-AQ OI=2242 at $4.30 SL=2.75 BUY CALL JAN-90 SWQ-AR OI=1851 at $2.70 SL=1.25 Annotated Chart of SNDK: Picked on November 30th at $80.82 Change since picked: +0.00 Earnings Date 1/14/04 (unconfirmed) Average Daily Volume = 3.63 mln Chart = ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Kohl's Corporation - KSS - close: 48.32 change: +0.22 stop: 52.00 Company Description: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why we like it: Friday kicked off the holiday shopping season, but there wasn't anything for the bulls to cheer about in KSS' price action. The stock did continue to look weak, but being confined to a narrow 78 cent range certainly didn't provide much room to maneuver. Wednesday's dip below $48 certainly looked encouraging though and the fact that the stock ended near its low on Friday bodes well for the bearish potential. As noted when we initiated coverage, KSS has been trading extremely poorly relative to the rest of the Retail sector (RLX.X) and with the break of the ascending trendline off the October-2002 lows, it should continue to do so. At the same time, we're a bit leery of chasing the stock lower with potential support at $48.25 and then down at $46.25. Entering on failed bounces below resistance holds greater appeal, so next week we want to target a failed bounce below the $50 level. In addition to historical support-turned-resistance, the 10-dma ($49.45) is clearly exerting downward pressure, and will be reinforced by the falling 20-dma ($51.04). Maintain stops at $52 for now, just above the 30-dma ($51.82). Suggested Options: Aggressive short-term traders can use the December 45 Put, while those with a more conservative approach will want to use the December 50 put. Our preferred option is the December 50 strike, which gives a nice balance due to being slightly in the money and having ample time until expiration. BUY PUT DEC-50*KSS-XJ OI=5145 at $2.75 SL=1.40 BUY PUT DEC-45 KSS-XI OI=5230 at $0.65 SL=0.30 BUY PUT JAN-45 KSS-MI OI=8134 at $1.35 SL=0.75 Annotated Chart of KSS: Picked on November 18th at $48.75 Change since picked: -0.43 Earnings Date 2/12/04 (unconfirmed) Average Daily Volume = 3.97 mln Chart = ************* NEW PUT PLAYS ************* None ************************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 *********************************************************************** ********** 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 11-30-2003 Sunday 4 of 5 In Section Four: Leaps: One More Month Traders Corner: Paying A Steep Price For Not Paying Attention ************************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 ***** One More Month By Mark Phillips mphillips@OptionInvestor.com With the Thanksgiving holiday behind us, there's only one more month to endure until we can close the book on 2003, which I don't mind telling you has been the most frustrating year of my trading career. Never before have I seen so many failed technical patterns, irrational price movement and so much untradable price action. In hindsight of course it is clear where I zigged and should have zagged. But in the past, I could easily have made twice as many mistakes and still had a hugely profitable year. My ire with 2003 is two-fold -- first in its inscrutability on a short-term basis, but secondly because I started out the year with a clear picture of what I expected over the course of the year. While that big picture view was largely correct, it was in the nuances of reading the short-term fluctuations that I missed the boat. I "knew" that the NASDAQ would outperform to the upside, yet failed to snag a viable long-term entry in this column. We had our bullish QQQ Watch List play cued up back in the middle of March, but I failed to capture a solid entry and then watched over the past several months as it steadily rose, albeit in an ugly manner, to gain more than $10 from our desired entry point. Probably my most frustrating miss of the year was neglecting to capture the long-term entry in NEM near the $24 level. I also "knew" that it would be a bullish year for gold stocks due to the continued dollar weakness, yet failed to grab that highly profitable entry point. As I type, NEM has advanced more than $20 from that missed entry. There were other misses that bother me, but those two are probably the most irritating. What is the lesson to be learned? In every case, I find that the entry point I defined was just a bit too aggressive. The solution is to not be quite so stingy/greedy in defining the entry points when we have a high degree of conviction about the direction of a given stock. Why the confessional to start off this week's column? Partially because with a lack of meaningful market action since last Monday's closing bell, I've been in a reflective mood. But the real catalyst is the reality that we really only have 3 more trading weeks between now and the time the New Years Eve ball drops. The Friday before the Christmas holiday will effectively mark the end of trading for 2003 as far as I'm concerned. Part of my own trading plan requires me to set aside some time at the end of each year, reflect on what went right and what went wrong and hopefully learn from the process, improving my results in the year ahead. I'm getting an early start on that activity this year and while there have been marked successes to go along with the failures cited above, I find it is from the biggest failures that I learn the biggest lessons. Hopefully my reflection here will help you to examine your own trading results from the past year, and learn and improve in 2004. Have you noticed that I haven't said anything about last week's market action? It's intentional, as I view it as essentially a throwaway. Monday's rally was expected and should have left no one surprised. Beyond that closing bell, essentially nothing happened. Oh there were certain story stocks that had substantial movement, but in terms of the broad market action, no progress was made. So where are we? The DOW is trolling along just below 9800 and I sense the bulls are still itching to take a serious run at the 10,000 level before the year is out. Likewise, the SPX is just below 1060 and I will be quite surprised if we don't see a serious run at major resistance in the 1065-1070 area, the key level being 1068, which is the 38% retracement of the entire bear market decline. We shouldn't leave the NASDAQ out of this discussion either, as it is lurking just below that key 2000 level, which should be seriously challenged before the year is out. We've talked at great length about the factors that have kept this market rising as a whole and all the factors that should prevent it from doing so. The bottom line is that the sea of Fed-created liquidity has served its purpose of pushing the market back into a sustained bullish trend, prompting many to state the bear is dead. I'm not in that camp, but at the same time I can recognize there are industries and areas of the economy that do appear to be growing. Not nearly enough to justify the rich valuations we're once again seeing unless that 8.2% GDP number (which I believe to be complete fiction) is sustainable and repeatable. I'm not holding my breath on that one. My interpretation is that the strong GDP growth and other strong economic numbers have already been priced into the market. Remember, the market looks forward 6-9 months. It has now gotten that first big growth spurt and investors are now asking themselves if it is a one-trick pony or if we have sustainable growth on the horizon. I don't think sustainable growth is really the issue. Whether the economy continues to grow, valuations in so many stocks far exceed what is reasonable to expect even in a strongly growing economy. Let's look at a few examples. INTC is currently trading near its 2002 highs, with a PE ratio of 49. That's the sort of PE associated with a high growth stock. With annual revenues of roughly $26 billion, is it reasonable to expect the kind of growth that should be expected from a stock garnering such a rich valuation? How about AMZN? Technically, there is no PE ratio, as the company is still not truly cash-flow positive. But that doesn't stop it from continuing to rise to nose-bleed valuation levels. CSCO is back to a PE ratio of 40, and MSFT, which is growing revenues at an anemic rate is boasting a PE ratio of 28. Compare these with REAL growth stocks like SNDK (P/E = 62), which has been growing revenues at 80-100% year-over- year for the past 5 quarters and something is truly amiss. There are too many richly valued stocks that have no hope of growing fast enough to grow into those valuations and the strong growth stocks are already fully valued (I'm being generous) with the best that can be seen ahead already factored into the share price. Most stocks and indeed the broad market is significantly overvalued at current prices, and that assumes the economy is recovering and will continue to do so. Should the current rate of apparent growth slow or stall, I suspect it won't take long for that reality to be felt in the form of falling stock prices. So therein lies the rub as we continue into the end of the year. The market has already fully discounted a steady (and perhaps strong) recovery, which is reflected in equity prices here. At the same time, it is my belief that with the still anemic job growth, huge government deficits and record levels of business and consumer indebtedness, not to mention global competition and a looming trade war, that market participants are being far too optimistic in their willingness to be long equities. At the same time, the price action in the markets (both individual equities, sectors and the broad indices) if refusing to show even a hint of weakness beyond the occasional bout of normal profit taking. This reality is precisely why a week ago I predicted we'd have a bullish week leading up to the Thanksgiving holiday. The market (and most stocks) do not want to go down and the volatility indices make it quite clear that there is very little fear of the downside. The VIX (SPX Volatility) and VXO (OEX Volatility) indices are both trolling along very near multiyear lows and not to be left behind, the VXN (NASDAQ 100 Volatility) isn't very far above its own all-time lows near 24.00. In a way it is a bit like the "chicken and egg" puzzle in terms of what comes first. Intraday ranges in the broad indices have been compressed for so long that the volatility indices must contract -- that's precisely what they're telling us is that there is very little volatility in the market. But at the same time, we know that readings as low as what we have been seeing lately have a tendency to presage an increase in volatility and falling prices. The exception as I noted in a recent article is the 1992-94 time period when the intraday, intraweek and intramonth ranges compressed so far on a percentage basis as to make what we've seen in recent months look volatile. An argument could be made that the 1992-1994 timeframe is a model for what we can expect in the future. I find that highly doubtful, in large part because the underlying economic conditions are so different. Gold is charging to multi-year highs and the dollar is hitting multiyear lows. Friday saw it hit all-time lows against the Euro and this trend doesn't appear likely to reverse any time soon. So what do we have to look forward to? My expectation is that we'll see more of the same heading into the end of the year. The bullish sentiment will keep the markets dancing near their highs and most likely have them pushing a bit higher, while the volatility indices should provide a mirror image, drifting along near their multi-year lows and possibly moving a bit lower. I think it will be very difficult to infer much in the next few weeks as to what to expect from 2004. I have my opinion (as does every other trader out there) and my expectation remains the same -- we should be very near a major top for the broad market and then we should see volatility and intraday ranges expand after the New Year, with prices trending downwards. We have the same set of tools to use to determine when the trend has truly changed. Watch the ascending channels for a clear breakdown. Watch for weekly (and more importantly monthly) oscillators to turn bearish. Watch for clear Sell signals on the Bullish Percent charts, both on the SharpChart and on the PnF views and watch for the VIX/VXO/VXN to break from their persistent descending trends. It isn't necessary to have all of these ingredients before we can have a high degree of confidence in a trend change, but the more we can line up in our favor, the better. Until then, keep in mind that every bearish play we consider here is an attempt to pick a top in an over-extended, over-valued market that could continue to drift higher, fueled by the dual factors of hype and hope. Turning away from the action of the broad indices, there are in fact stocks that continue to look quite bullish and appear to have further upside in store. The challenge we face here is to find those that look strong and have LEAPS available for our use. The vast majority of stocks do not have LEAPS due to a failure to meet one of the several conditions necessary for the CBOE to list them. My current project is culling the updated list of LEAP-able stocks and seeing where that list matches up with the list of stocks that seem to have significant upside potential, even from current levels. We'll continue to look at bearish plays as well, but must remember that until we see those concrete signs of a trend change, they must be considered as more aggressive. I think I've rambled on long enough, and now we should turn our focus to the topic of individual plays, both those currently under consideration and those that are just under the surface. Portfolio: WMT - If you need a visual example of the effect of plunging volatility, look no further than our WMT play. The stock is significantly below where we initiated coverage, yet both the '05 and '06 LEAPS are currently showing a loss. That isn't a major concern so long as the play continues to work in our favor, but it is a near-term frustration. I liked the way the stock rolled over again near $56, just below the bottom of the 11/13 gap. But as you can see, that pesky 200-dma continues to provide support. The results of spending through the holiday season will likely prove key to the success of our play. We took our position at the right time technically and we're managing it effectively with our stop just above the top of that gap. Now we just have to wait and see whether the weekly Stochastics turn up in bullish fashion (they're in full bearish plunge right now) or if price breaks down into our target range in the $48-50 area. SBUX - As noted last week, I decided to wait for more conviction in terms of price action before initiating the Portfolio play on SBUX. Monday's rally to close over $31 was good enough for me, so we finally have a bullish entry in the Portfolio again. Watch List: QQQ - If you doubted the conviction of the bulls, then last week's price action should have been very instructive. Following the prior week's break of both the ascending channel and the 50-dma, the QQQ shot higher on Monday, easily clearing the 50-dma and just kissing the bottom of the broken channel. The remainder of the week saw QQQ riding along the underside of that channel line and the all-important question is whether we'll finally see a rollover from the underside of the channel or a break back inside the channel. In reality, it could go either way, but I'm expecting another push higher early next week and then a rollover. Weekly Stochastics have rolled down out of overbought, but are threatening to turn bullish again, while daily Stochastics are once again nearing overbought. We've reached the point where I think it is warranted to do what is necessary to take an entry and then let the chips fall where they may. A break and close below $35 will satisfy the current entry trigger. As an alternate, I will also list $36.50 as a target-shooting entry. If the NASDAQ takes a serious run at 2000, then we ought to see the QQQ near $36.50 and I would consider that a viable (although aggressive) entry point. We'll take whichever one sets up first, using a tight initial stop at $37. SMH - What can I say? The SMH is back to its old tricks, rebounding well within the steeper channel we've been discussing these past several weeks. Higher highs and higher lows remain the pattern and there's no hint of a bearish play here just yet. SMH is right into major resistance in the $44-46 area, but that doesn't mean it's heading lower anytime soon. Watch and wait remains the (in)action plan, as SMH remains on HOLD. NEM - Sheesh! What does a guy have to do to get an entry into this runaway bullish trend? NEM absolutely exploded to the upside the past couple days and there's no way we want to even consider chasing it higher. Either it comes back to give us an entry near the 50-dma (or lower) or we don't play. I'm still not willing to raise our entry target, as I'm looking at the potential for a bout of profit taking in the gold market heading into the end of the year. Of course, all bets could be off if gold futures manage a decisive breakout over $400, a major resistance level that has been flirted with for more than 2 weeks. Maintain the entry target at $40 and hope for a reasonable pullback. DJX - Just like the picture we've discussed in the past on the SPX, the DOW has some major bearish Stochastics divergence setting up on the monthly chart and barring a continued rally up to the 10,700 level before the monthly Stochastics turn down, we ought to have a sizable bearish move once this divergence confirms with the monthly Stochastics turning down. Another metric I've got my eye on is the 100-dma, which is now at 9484, inching up on that 9504 50% retracement of the entire bear market decline. I suspect we won't truly have bearish confirmation until price breaks below the 100-dma (which hasn't happened since late April) and even better will be when the 50-dma crosses down through the 100-dma. Needless to say, we're nowhere close to either of those events coming to pass, which keeps this play in the aggressive top- fishing category. While I still think DOW 10K is in the cards before the year is out, I still want to stick with the lower target at $98.50-99.00 on the DJX. Remember, we don't want to enter just on achieving that price zone, but on a break back under it AFTER reaching it. That means if price just breaks out over $100, we won't be sitting on a losing position. QCOM - Last week was certainly not one to inspire confidence in my bullish outlook for QCOM, as the stock got hit lower the past two days, erasing most of the gains from earlier in the week. With the stock having broken below its rising channel, we're definitely operating in the more aggressive category here, a point that is made all the more clear with the decisive break of the 50-dma as well. But as we've covered above, broken channels and 50-dmas don't seem to be carrying the weight we would normally expect. As with the DJX, I've got my eye on that 100-dma, now at $42. A pullback and rebound from the $42-43 area certainly looks like a viable entry point into this bullish trend and the first sign of trouble will come with a trade at $40, which would generate a Sell signal on the PnF chart. Technology is still bullish and QCOM is too until that Sell signal is printed, so we'll stick with the plan and look to buy the dip if the market will give it to us. With risk to our $39.50 stop and a bullish price target (from the PnF chart), we definitely have to classify the risk/reward on this play as favorable. Radar Screen: GENZ - Now that's what I was looking for. That strong rebound on Monday had GENZ looking a bit more bullish, and Friday's push back to close just under the 50-dma has the stock looking like it really will head up to challenge the bottom of that broken channel, now at roughly $50. Between that and strong historical resistance at $52, I'm looking at potentially adding this one to the Watch List next weekend. Of course, a break back inside the channel will have me feeling much more cautious. Let's see where things are at a week from now. MEL - Price action in MEL still looks weak, but I can't shake the feeling that it is setting up for a strong rebound from the 200- dma. It is simply too difficult to balance risk and reward in our favor near current levels, so the most prudent course of action is simply to wait. A failed rally near the $31 level looks far more palatable and we'll just have to wait and see if it sets up as we head into the end of the year. For now, we wait and watch. EK - EK certainly traded weak last week, but not enough so that I have any desire to rush a play here. The stock has had an amazing ability to rebound to resistance over the past few years, so we'll wait for a fill of that gap and then we'll look for an entry near $27. It may not happen in the next few weeks and that's just fine. If there's one thing that should be clear from the current market, it is that entries on bearish plays must be just right. Closing Thoughts: Let's keep it very simple this weekend. The market still wants to go up, there is very little fear of the downside among investors, and there is nary a catalyst for downside action aside for the occasional bout of profit taking. Expect to start hearing the phrase "Santa Clause Rally" with greater frequency and it could become a self-fulfilling prophecy. Take the bullish plays that make sense and the bearish ones that fit your risk profile. But before doing so, make sure you understand that the current market environment is one that could potentially move big with the right catalyst. Down seems like the more likely direction for a large move, but we can't rule out the possibility of new market highs between now and the end of the year. If you're going to initiate new long-term bearish plays, make sure to do so on the failed rallies, not on breakdowns. And initiating new bullish plays should be done on bounces from support, not on breakouts. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: SBUX 11/24/03 '05 $ 30 ZOS-AF $ 4.30 $ 5.30 +23.26% $26.50 '06 $ 30 WSP-AF $ 6.40 $ 7.10 +10.94% $26.50 Puts: WMT 10/03/03 '05 $ 55 ZWT-MK $ 5.10 $ 4.80 - 5.88% $58.50 '06 $ 55 WWT-MK $ 7.20 $ 6.30 -12.50% $58.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 10/05/03 $40 JAN-2005 $ 40 ZIE-AH CC JAN-2005 $ 35 ZIE-AG JAN-2006 $ 40 WIE-AH CC JAN-2006 $ 35 WIE-AG 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 $35.00-35.50 JAN-2005 $ 32 ZWQ-MF JAN-2006 $ 32 WD -MF SMH 08/24/03 HOLD JAN-2005 $ 35 ZTO-MG JAN-2006 $ 35 YRH-MG DJX 11/02/03 $98.50-99.00 DEC-2004 $ 96 YDK-XR JUN-2005 $ 96 ZDK-RR AIG 11/30/03 $60-61 JAN-2005 $ 60 ZAF-ML JAN-2006 $ 60 WAP-ML New Portfolio Plays SBUX - Starbuck Corp. $31.10 **Call Play** It has been so long since a bullish play made it into the Portfolio, I almost forgot what to do! SBUX teased us the week before last, vacillating about the $30 level, but we got the confirmation we needed this past Monday, as the stock got its bounce going with a close over $31. In hindsight, that rebound from the 50-dma sure looks nice and we can even draw a more aggressive channel beginning in late May, the lower boundary of which provided support on the latest pullback. The bottom line is SBUX continues to look bullish and despite its rich valuation, looks to be headed higher from here. Successive dips near the $30 level can still be used for entry, although an even better entry might be had on a dip near $29, as we would then have support from the midline of the longer term channel and the 100-dma coming into play. So long as the PnF chart remains on a Buy signal (current bullish price target = $37) and SBUX remains within the confines of the broad ascending channel, it should be good to continue moving higher. We're using a wide stop initially at $26.50. That's just below both the 200-dma and the lower channel line and should prevent us from being stopped out in any near-term weakness, while the overall bullish trend remains intact. BUY LEAP JAN-2005 $30 ZOS-AF $4.30 BUY LEAP JAN-2006 $30 WSP-AF $6.40 New Watchlist Plays AIG - American International Group $57.95 **Put Play** It may not be obvious from the daily price chart, but it looks like AIG is about ready to head substantially lower. In contrast to the rest of the market, the Insurance stock has been posting lower highs and lower lows since peaking near $65 in late July. It's hard to use the 50-dma as a gauge of price action, as AIG has been dancing on both sides of that average since June. The 200- dma appears a bit more meaningful though and last week's rebound from there shows that the bears are not yet feeling bold. But we can connect a trendline between the last three price peaks (July, October and November) and see that resistance seems to be firming up there in the $60-61 area, the lower bound of which is delineated by the 100-dma. Weekly Stochastics are nearing oversold already, but looking at the monthly chart, we can see that resistance is coming in consistently at the 20-month moving average and the Stochastics are just starting to tip bearish. Not only that, but when they do finally cross and tip over, we'll have a nice instance of bearish divergence working in our favor. The PnF chart has already turned bearish with a Sell signal at $57 and a bearish price target of $50. Note also that price found support (as we would expect) at the bullish support line at $56, so a near-term rebound is expected. As noted in the closing comments above, we don't want to chase these bearish plays lower. We need to initiate positions on failed rebounds near support. That will have us targeting entries in the $60-61 area, looking for a decline to the $50 area. Initial stops will be set at $64, as AIG would have to trade that level to generate a new Buy signal and negate the current Sell signal. BUY LEAP JAN-2005 $60 ZAF-ML BUY LEAP JAN-2006 $60 WAP-ML 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 ************** Paying A Steep Price For Not Paying Attention By Mike Parnos, Investing With Attitude Looking for an absolute? – "Education is what you get from reading about the mistakes of others. Experience is what you get from not reading it." Parents (at least the good ones) spend years imparting advice to their children based on their experiences. In life, most parents have "been there, done that." However, more often than not, kids will ignore their parents and make their own mistakes. Survival Of The Fittest – And Most Sensible We're adults now – chronologically, if not emotionally. We've been blessed with the ability to think – to use common sense. It's what separates us from the animals. Occasionally, in life, we can get away without using it. Many people do. However, in the world of trading, we don't have that luxury. It's survival of the fittest. The casualties? They'll be trading hot apple pies at the Golden Arches to supplement their Social Security. At the CPTI we're training to become survivors -- one strategy at a time -- one trade at a time. Our trades aren't always pretty, but they make sense and, on the whole, they tend to generate a nice stream of income. Michael Caine, the actor, was once asked why he made a particularly bad movie. He responded by saying, "The movie may have been bad, but the house that it bought was wonderful." A practical man indeed! That's our goal. A practical, knowledgeable trader translates into a successful trader. _________________________________________________________________ Hi Mike! I'm a newcomer to the CPTI and am playing my first SPX Iron Condor this month. Unfortunately, I went ahead and entered the short 1075/long1085 call positions per your 11/23 instructions as well as the 990/975 put positions. I didn't get the message that, with the Monday morning ramp up in prices, you changed the positions to 1085/1100 calls and 1005/990 puts. How were we notified? Market Monitor? E-mail? Whatever it was, I missed it. Anyway, now that the SPX is approaching the 1075 level, I want to be prepared to act if necessary. What would be your bailout point if you were short the 1075's? And, if you close the 1075's, would you continue to hold the long 1085's, particularly if you expected the SPX to rise in a continuing pre-holiday rally? I assume you would close the long puts. What about the short puts? HELP!! Thanks...JK Hi JK, Sorry you got into the trade so soon. First, there are a few things we should go over. 1. You didn't read the November 23rd column carefully. You missed the "Friendly Reminders" section in which I warn about trading on those Monday after expiration where the market gaps. Here's what it says: Those Friendly Reminders December 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 premium erosion. In some instances, when the bid/ask spread is wide, I 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." 2. You also didn't catch the section that suggests new readers of my column take advantage of the comprehensive OI archives to get answers and explanations. Here's what it says: 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." If you're going to trade options (or anything else for that matter), you have to be a lot more thorough than you've demonstrated to this point. OK, now that I'm done chastising you (don't worry, you're not alone), there are a few different ways to deal with a potential violation of a short strike price. a) You can roll up and/or out. You can close out the bear call spread and roll it up and out -- trading an increased number of contracts on the rollout to replenish what it cost to close out the original bear call spread. b) You can wait and see what happens. As you know (hopefully), the market fluctuates. There's still a reasonable chance that the market will come back down and finish comfortably below the short call strike. c) When a trend becomes somewhat clear, you can close out the bear call spread and establish a bull put spread below the strike and trade a sufficient number of contracts so the credit taken in will replenish what it cost to close out the original bear call spread. d) You can buy back the short call of the bear call spread and, if you anticipate a continued upward move, ride the remaining long call up. e) I wouldn't necessarily close out the put spread – unless you need to close the spread to free up maintenance dollars for another purpose, or unless you can do it inexpensively -- a nickel or dime. If the SPX is threatening the upper bear call spread, the put spread will likely expire worthless. Why spend the money and commissions if you don't have to? There are not always cut and dried solutions. Sometimes you just have to suck it up, take your medicine, and chalk it up to being an expensive lesson. We had an OEX trade last month on which we lost over $2,000. Shit happens. All we can do it hope to learn from it and not make similar mistakes in the future. I don't know that even the 1085s are safe. Time will tell. But we're both OK for a while. About notification -- regular readers of my column know that we try and establish the SPX Iron Condors about 40-50 points above and below where the SPX is currently trading. We try to take in a total of about $2.00 in premium when we initiate the trade. The big move up required an adjustment in potential parameters. We also try to limit the exposure to about $10,000 per side. We might trade 10 contracts of a 10-point spread, 7 contracts of a 15-point spread and 5 contracts of a 20- point spread. My column normally appears on Thursday evenings and Sundays. Occasionally, I'll publish an update column during the week, but I mostly stick to the regular schedule. If you have any doubts, don't hesitate to email me. I' receive a lot of emails, but my readers know I respond quite quickly. The above are just basic guidelines. Nothing is etched in stone. Remember, the trades I post are "hypothetical" and for educational purposes. Let me reiterate what I said before: "And make sure you know the intricacies of a strategy before you trade." I hope this helped. Good luck, keep in touch and do your homework. _____________________________________________________________ CPTI REPLACEMENT POSITION NDX Iron Condor – 1424.30 Here's a new index we haven't traded before. The NDX mirrors the NASDAQ 100 stocks, just like the QQQs. We'll try to establish a huge range, giving the market room to roam, and take in some premium for the good guys. The NDX can move in chunks, but we'll see if it can control itself for the next three weeks. We'll sell the December NDX 1325 puts and buy the December NDX 1300 puts, taking in about $1.70. Then, let's sell the December NDX 1525 calls and buy the December 1550 calls for a credit of about $1.00. Total credit: $2.70. Maximum profit range: 1325 to 1525. Be careful! These are 25-point spreads, so you should adjust your number of contracts to suit your risk tolerance. For the CPTI portfolio, we're going to use 6 contracts. That amounts to a $15,000 maintenance requirement for each side of the Iron Condor. Our potential profit is $1,620 – not bad for three weeks. ______________________________________________________________ DECEMBER CPTI PORTFOLIO POSITIONS SPX Iron Condor – 1058.21 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 - $127.62 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 – 520.74 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 -- $35.38 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 Oct. $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 @ $35.38 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. ______________________________________________________________ It May Be Fattening, But . . . What did the cannibal give his wife for Valentine's Day? A box of farmer's fannies. _____________________________________________________________ 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? 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. 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The Option Investor Newsletter Sunday 11-30-2003 Sunday 5 of 5 In Section Five: Covered Calls: What is a Covered Call? Naked Puts: Using Portfolio Collateral For Uncovered Options Spreads/Straddles/Combos: Bracing For The Next Leg Up? Updated In The Site Tonight: Market Posture: Record Breaker ************************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: What is a Covered Call? By Mark Wnetrzak One of our new readers asked for an explanation of this popular strategy. Many investors view options as speculative, high-risk investments. However, there are several option strategies that are conservative and one such strategy is covered-call writing. Investors write covered-calls for several reasons: to realize additional income (cash flow) on the underlying stock by earning premium income; to provide a measure of downside protection against small declines in the price of the stock; and to yield a consistent monthly return even if the share price of the underlying stock remains unchanged. Covered call writing is usually considered to be a more conservative strategy than just stock ownership, because the investor's downside risk is reduced by the amount of the premium received for selling the call. Generally, the covered-call strategy requires a neutral to slightly bullish outlook as one must be willing to limit the upside potential of stock ownership in exchange for some downside protection. Any investor, using sound money management, can profit from the strategy. The covered call writer either buys stock and simultaneously sells calls against the shares purchased (a "buy-write" order), or sells calls against common stock that is already owned. Generally, 100 shares of the underlying stock "cover" one call-option contract at the stated exercise (striking) price. For example, if you owned 500 shares of XYZ stock, you could sell up to 5 contracts of a XYZ call option. If the share price of XYZ stock was $11.00: you might sell (write) an in-the-money (ITM) XYZ call option at the $10.00 or $7.50 striking price; or you could sell an out-of-the-money (OTM) XYZ call option at the $12.50 or $15.00, or higher striking price. You can also choose a near-term option series such as the current month, or longer-term series such as a few months out to a year or more (LEAPS), depending on your outlook. Once an option series (strike price and expiration period) has been selected, the seller of the call option is "paid" for the obligation to provide the underlying stock at the striking price of the sold option, if assigned. An investor should be prepared to deliver the common stock shares, if assigned, at any time during the life of the option (early assignments are rare but do happen). To avoid losing the stock, an investor may cancel or remove the obligation closing the short position (buying-back the sold call). The primary disadvantage of the covered-write strategy is the limited profit potential. Remember, a covered-call writer is willing to give up share value increases above the sold-option strike price in return for the money received from the sale of the call. Thus, an extremely bullish move in the underlying stock can be quite disheartening to a covered-call writer. At the same time, there is risk of loss in all forms of trading and although covered-calls "hedge" against downside movement in the stock, they are not a panacea for protracted bearish activity in the market. The main benefit of writing "covered" calls is that different approaches to the strategy can meet the needs of a wide range of investors and in addition, it is one of the few option trading techniques available in retirement accounts (IRAs/KEOGHs). If you are considering covered-calls for your portfolio, you simply need to ask yourself, "Do I want to get paid for trying to sell my stock at a predetermined price, which sacrifices upside potential in return for downside protection?" If the answer is "yes," then this strategy may be appropriate for you. Trade Wisely! 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 ARIA 7.70 8.29 DEC 7.50 0.80 0.60* 7.6% GSS 5.90 7.54 DEC 5.00 1.25 0.35* 6.5% AVII 4.99 4.90 DEC 5.00 0.40 0.31 5.9% PAAS 12.57 13.22 DEC 12.50 0.70 0.63* 5.8% MOBE 11.19 11.21 DEC 10.00 1.60 0.41* 4.6% ISSI 16.33 18.70 DEC 15.00 1.90 0.57* 4.3% MMR 16.30 17.96 DEC 15.00 2.00 0.70* 4.3% CLHB 6.12 9.16 DEC 5.00 1.35 0.23* 4.2% INSP 24.39 26.25 DEC 22.50 2.70 0.81* 4.1% TIVO 9.02 8.32 DEC 7.50 1.85 0.33* 4.0% ESPR 22.21 22.84 DEC 20.00 2.90 0.69* 3.9% CANI 14.05 14.98 DEC 12.50 1.95 0.40* 3.6% TLAB 8.08 8.01 DEC 7.50 0.80 0.22* 3.3% * Stock price is above the sold striking price. Comments: The Holiday shortened week was bullish indeed as investors helped the major averages rebound quite nicely. Will the Russell 2000, which just made a new 52-week high, continue to lead the way? Or is it a sign of speculation fluff? Ah, there are never any easy answers in the game called the stock market. As for the covered-call portfolio, the rebound was a nice respite from last week's bearishness, though it could be cause some "call-selling" regret. The early-exit watch list includes: TiVo (NASDAQ:TIVO), Avi Biopharama (NASDAQ:AVII) and Mobility (NASDAQ:MOBE). Positions Previously Closed: Brocade (NASDAQ:BRCD). 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 NTPA 15.30 DEC 15.00 NQD LC 1.30 601 14.00 21 10.3% PDLI 13.86 DEC 12.50 PQI LV 2.05 1944 11.81 21 8.5% XXIA 12.70 DEC 12.50 UJC LV 0.70 30 12.00 21 6.0% KMRT 30.44 DEC 30.00 KTQ LF 1.50 8249 28.94 21 5.3% SLNK 20.61 DEC 20.00 SXU LD 1.25 460 19.36 21 4.8% IBIS 16.25 DEC 15.00 UIB LC 1.65 447 14.60 21 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). ***** NTPA - Netopia $15.30 *** Climbing Higher! *** Netopia (NASDAQ:NTPA) develops, markets and supports broadband equipment, software and services that enable its carrier and broadband service provider customers to simplify and enhance the delivery of broadband services to their residential and enterprise-class customers. The company's product and service offerings enable carriers and broadband service providers to improve their profitability with feature rich routers and gateways and software that manages to the edge of the network to reduce costs, and provide value-added services to enhance revenue generation. These bundled service offerings often include DSL or broadband cable equipment bundled with back-up, bonding, virtual private networking (VPN), firewall protection, parental controls, Web content filtering, integrated voice and data and e-site and e-store hosting. Netopia continues to rally, making another new multi-year high on heavy volume, and it appears destined to climb higher. This short-term position offers traders a method to profit from the current trend at the risk of owning NTPA near a basis of $14.00. DEC-15.00 NQD LC LB=1.30 OI=601 CB=14.00 DE=21 TY=10.3% ***** PDLI - Protein Design Labs $13.86 *** Lateral Trend *** Protein Design Labs (NASDAQ:PDLI) is engaged in the discovery and development of humanized monoclonal antibodies for the treatment of various diseases. The company's is focusing on oncology and inflammatory and autoimmune diseases. They have several humanized antibodies in clinical development for inflammatory bowel disease, psoriasis and asthma. The company is fully integrated from research through clinical development. PDLI conducts multiple activities in support of the clinical development program, including pre-clinical studies, process development and antibody manufacturing. They have significant research activities aimed at the discovery of new antibodies that may be useful for the treatment of certain cancers and autoimmune and inflammatory diseases. Protein Design has been in a lateral consolidation pattern for several months. Traders who believe the current trend will continue can profit from that outcome with this position. DEC-12.50 PQI LV LB=2.05 OI=1944 CB=11.81 DE=21 TY=8.5% ***** XXIA - Ixia $12.70 *** Rally Mode! *** Ixia (NASDAQ:XXIA) provides multi-port traffic generation and performance analysis systems for high-speed data communications markets. Their product line is made up of analysis systems that simulate large-scale networks, and of stand-alone software products to allow its customers to verify conformance of their products to industry standards. The company's systems consist of interchangeable interface cards, multi-slot chassis, a power supply and a backplane. The interface cards generate, receive and analyze data traffic. The software for these systems includes management software and application-specific test suites. Ixia recently rebounded off its 30-day MA and appears to be headed for a test of the mid-November high. Reasonable short-term speculation with a cost basis near technical support. DEC-12.50 UJC LV LB=0.70 OI=30 CB=12.00 DE=21 TY=6.0% ***** KMRT - Kmart $30.44 *** Retail Sector Play *** Kmart Corporation (NASDAQ:KMRT) is a discount retailer and a general merchandise retailer. The company operates 1,829 Kmart discount stores with locations in all 50 states, Puerto Rico, the U.S. Virgin Islands and Guam; and through its e-commerce shopping site, www.kmart.com. On January 22, 2002, Kmart and 37 of its U.S. subsidiaries filed under Chapter 11 of the federal bankruptcy laws, and, subsequently, obtained an exit financing facility. On January 28, 2003, the court approved the closure of 326 stores located in 40 states, which number was later reduced to 316 stores, or approximately 17%, of their 1,829 stores. In May 2003, Kmart emerged from Chapter 11 protection. The retail sector is expecting a favorable Christmas season and investors who want to speculate on Kmart's return to favor can use this position to establish a favorable cost basis in the issue. DEC-30.00 KTQ LF LB=1.50 OI=8249 CB=28.94 DE=21 TY=5.3% ***** SLNK - SpectraLink $20.61 *** On The Rebound *** SpectraLink (NASDAQ:SLNK) designs, creates and sells workplace wireless telephone systems that complement existing telephone systems by providing mobile communications in a building or campus environment. SpectraLink's product portfolio consists of two product categories differentiated by the wireless technology implemented: the Link Wireless Telephone System (Link WTS) and NetLink Wireless Telephones. Link WTS uses a proprietary radio infrastructure and targets organizations that only require a wireless voice solution for their on-premises mobile workforce. The NetLink products operate over IEEE 802.11-compliant wireless LANs and target organizations that want both a wireless-voice and -data solution on a single network. The rebound back above the 50-day MA on increasingly heavy volume bodes well for SLNK in the near-term. Maybe investors really do appreciate the company issuing its first dividend. We simply favor the recent technical strength and investors can use this play to speculate on the company's future share value. DEC-20.00 SXU LD LB=1.25 OI=460 CB=19.36 DE=21 TY=4.8% ***** IBIS - Ibis Technology $16.25 *** Semiconductor Sector *** Ibis Technology (NASDAQ:IBIS) develops, manufactures and markets SIMOX-SOI implantation equipment and wafers for the worldwide semiconductor industry. SIMOX, or Separation by IMplantation of Oxygen, is a form of silicon-on-insulator (SOI) technology that creates an insulating barrier below the top surface of a silicon wafer. SIMOX-SOI products are well suited for many commercial applications, including servers and workstations, portable and desktop computers, wireless communications and battery-powered devices such as laptop computers, personal digital assistants (PDAs) and mobile telephones, integrated optical components and harsh-environment electronics. Sales of 300-millimeter wafers accounted for approximately 44% of the company's total wafer product sales in 2002. Shares of Ibis Technology have rallied strongly since May and are now testing an "old" resistance area. Investors with a bullish outlook who believe the rally will continue can use this position to establish a favorable cost basis in the issue. DEC-15.00 UIB LC LB=1.65 OI=447 CB=14.60 DE=21 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 GSS 7.54 DEC 7.50 GSS LU 0.55 844 6.99 21 10.6% MMR 17.96 DEC 17.50 MMR LW 1.30 1114 16.66 21 7.3% CVTX 18.05 DEC 15.00 UXC LC 3.60 2502 14.45 21 5.5% SSTI 13.57 DEC 12.50 SJV LV 1.50 2150 12.07 21 5.2% TQNT 8.14 DEC 7.50 TQN LU 0.85 1171 7.29 21 4.2% FHRX 11.37 DEC 10.00 FUF LB 1.65 51 9.72 21 4.2% ***************** NAKED PUT SECTION ***************** Options 101: Using Portfolio Collateral For Uncovered Options By Ray Cummins One of our readers submitted some excellent questions concerning margin requirements for "naked" puts and other option-selling strategies. Subject: Naked Calls & Puts - Margin Requirements I would like to enquire about margin requirements on the various trade platforms and if you have any advice on (i) how (i.e. which strategy) and where (i.e. trading platform) would be the best way & best place to minimize these margin cost requirements please. Optionsxpress for example, has the following margin requirements (10~25% of market price + premium earned), which for some of the optionwriters recommendations of naked call/put writes for $40 and $60 stock means that each of the transactions recommended is incurring very high margin costs requirements. Would I be right in presuming that 'covered call writes' and 'credit spreads' are one of the best ways of minimizing margin and costs requirements? What other method(s) would you recommend in line with the CBOE requirements, but that does not impose too high a cost for the average trader, especially for credit spreads or naked put/call transactions? Your very kind + learned advice is much appreciated. Kind thanks, S.K.K. Hello SKK, The first thing option traders must understand is the difference between the initial margin requirement and the maintenance requirement. Initial Margin The initial margin is the amount of collateral you must have in your account to initiate a 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, or in the case of cash-settled options, to pay the cash settlement amount, if assigned through an exercise. The minimum margin requirements are imposed by the Board of Governors of the Federal Reserve, the options markets, and other self-regulatory organizations and the most widely used margin requirements are based on the regulations at the Chicago Board Options Exchange: Writers of uncovered puts or calls must deposit and maintain 100% of the option proceeds* plus 20% of the aggregate contract value (current equity price x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use the option's market value instead of the option's proceeds.) (http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf) Maintenance Margin 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. In most cases, initial margin and maintenance margin are based on the CBOE's guidelines. However, different margin amounts may be needed at specific exchanges such as the NYSE, which requires 100% of the option's market value, plus 20% of the underlying security's value less any out-of-the-money amount, down to a minimum of the option's market value plus 10% of the underlying security's value. In addition, most brokerages supplement the CBOE's formula with slightly higher requirements based on the average capital holdings and experience level of their clientele. For example, to sell puts at E-trade, the requirement is the greater of: 40% of the underlying security's market value plus the option premium received, minus any out-of-the-money amount or, 20% of the underlying issue's market value plus the option premium received. At Wall Street Access, the requirement for selling uncovered options is 100% of the option's market value, plus 25% of the underlying security's value less any out-of-the-money amount, down to the option's market value plus 15% of the underlying security's value. At Preferred Trade, the margin maintenance requirement is equal to the option premium received plus the greater of 20% of the underlying stock's price less any out-of-the money amount or, 10% of the underlying stock's price. Obviously, there are many variations of margin requirements for uncovered options and this will certainly be part of the criteria you use in determining which brokerage best meets your trading needs. But, as you mentioned, you can reduce margin costs with different option trading strategies and of the two you noted, a (vertical) credit spread is probably the most popular technique for a "directional" position. We'll talk more about using a credit-spread instead of a "naked" put in next week's narrative. 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 RDWR 23.46 26.84 DEC 20.00 0.65 0.65* 2.9% 8.6% SANM 11.11 12.19 DEC 10.00 0.25 0.25* 2.8% 7.6% APPX 32.62 36.04 DEC 25.00 0.45 0.45* 2.0% 7.0% APPX 32.29 36.04 DEC 25.00 0.55 0.55* 2.0% 6.8% AEIS 26.30 26.47 DEC 22.50 0.45 0.45* 2.2% 6.8% SWIR 18.75 18.16 DEC 15.00 0.30 0.30* 1.8% 6.4% ALTR 23.93 25.36 DEC 22.50 0.50 0.50* 2.5% 6.3% FFIV 25.07 25.82 DEC 22.50 0.55 0.55* 2.2% 6.0% ECLG 24.14 22.10 DEC 20.00 0.40 0.40* 1.8% 5.9% XMSR 22.10 24.88 DEC 17.50 0.25 0.25* 1.6% 5.8% PDII 25.97 28.90 DEC 22.50 0.45 0.45* 1.8% 5.3% MGAM 42.90 40.93 DEC 35.00 0.45 0.45* 1.4% 5.0% NPSP 29.26 30.14 DEC 25.00 0.35 0.35* 1.5% 4.9% * Stock price is above the sold striking price. Comments: The month of November came to an end on an upbeat note as stocks held their gains for the week after Friday's lackluster session. There were few investors participating in the market on the day after Thanksgiving but the positive breadth figures bode well for the coming month. Despite the potential for a "Santa Claus" rally, we recommend unremitting diligence with current portfolio positions and we will continue to monitor the primary candidate on the "watch" list: eCollege.com (NASDAQ:ECLG). The issue has yet to close below the sold (put) strike at $20, so the bullish trend may eventually resume. Previously Closed Positions: None WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield RMBS 30.00 DEC 25.00 BNQ XE 0.55 2709 24.45 21 3.3% 10.6% RDWR 26.84 DEC 25.00 AUD XE 0.60 111 24.40 21 3.6% 9.2% ADEX 25.14 DEC 22.50 QDE XX 0.45 49 22.05 21 3.0% 8.3% FLEX 16.00 DEC 15.00 QFL XC 0.30 2182 14.70 21 3.0% 7.6% NTE 36.99 DEC 22.50 HEH XX 0.35 355 22.15 21 2.3% 6.5% APPX 36.04 DEC 30.00 AQO XF 0.35 1776 29.65 21 1.7% 5.8% 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). ***** RMBS - Rambus $30.00 *** Unocal Settlement! *** Rambus (NASDAQ:RMBS) designs, develops and markets "chip-to-chip" interface solutions that enhance the performance and effectiveness of its client's chip and system products. These solutions include multiple chip-to-chip interface products, which can be grouped into two categories: memory interfaces and logic interfaces. Rambus' memory interface products provide an interface between memory chips and logic chips. In addition, the firm's logic interface products provide an interface between two logic chips. Rambus has two major memory interface products: Rambus dynamic random access memory and Yellowstone. Additionally, it offers a logic interface product for high-speed serial chip-to-chip communications between logic chips in a range of computing, networking and communications applications. Shares of Rambus rallied Friday in the wake of a new legal ruling involving Unocal (NYSE:UCL), which analysts say could foreshadow a positive outcome for Rambus in its suit with the government. The ongoing saga of the company's royalty issues may be resolved in a favorable manner after this ruling, and traders can profit from that outcome with this position. DEC-25.00 BNQ XE LB=0.55 OI=2709 CB=24.45 DE=21 TY=3.3% MY=10.6% ***** RDWR - Radware $26.84 *** Multi-Year High! *** 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, RDWR climbed to a multi-year high with much of the activity due to its recent bullish earnings report. The company reported record revenues of $14 million for the third quarter of 2003, an increase of over 25% from the third quarter of 2002, and an increase of 6% over the previous period. Investors who like the fundamental outlook for Radware should consider this position. DEC-25.00 AUD XE LB=0.60 OI=111 CB=24.40 DE=21 TY=3.6% MY=9.2% ***** ADEX - ADE Corporation $25.14 *** Earnings Speculation! *** ADE Corporation (NASDAQ:ADEX) is engaged in the design, building, marketing and service of production metrology and inspection systems for the semiconductor wafer, semiconductor device, magnetic data storage and optics manufacturing industries. The company's products have evolved from single instruments used in offline engineering analysis to full, 100% inline, automated metrology solutions throughout the wafer, semiconductor device and hard disk drive manufacturing processes. Its systems analyze and report product quality at critical manufacturing process steps, sort wafers and disks and provide manufacturers with certification data upon which they rely to manage processes and accept incoming material. Semiconductor wafer, device and magnetic data storage manufacturers use the firm's systems to improve yield and capital productivity. ADE is due to report earnings next week (12/3) and investors are bidding up the price in anticipation of a favorable outcome. Traders can speculate conservatively on the announcement with this position. DEC-22.50 QDE XX LB=0.45 OI=49 CB=22.05 DE=21 TY=3.0% MY=8.3% ***** FLEX - Flextronics $16.00 *** Lawsuit Settlement! *** Flextronics International (NASDAQ:FLEX) is a provider of advanced electronics manufacturing services to OEMs (original equipment manufacturers), primarily in the hand-held electronics devices, information technologies (IT) infrastructure, communications infrastructure, computer and office automation and other consumer devices industries. The company provides a network of design, engineering and manufacturing operations in 28 countries across four continents. The company's strategy is to provide customers with end-to-end solutions in which it takes responsibility for engineering, new product introduction and implementation, supply chain management, manufacturing and logistics management, with the goal of delivering a complete packaged product. This week, FLEX and Beckman Coulter agreed to settle a breach of contract lawsuit where Beckman will receive $22 million in damages. Apparently, investors are happy with the news as the stock closed Friday's session near an 18-month high. Traders who believe the upside activity will continue can profit from that outcome with this position. DEC-15.00 QFL XC LB=0.30 OI=2182 CB=14.70 DE=21 TY=3.0% MY=7.6% ***** NTE - Nam Tai Electronics $36.99 *** Consolidation Complete? *** Nam Tai Electronics (NYSE:NTE) is a electronics manufacturing and design services provider to original equipment manufacturers of telecommunication and consumer electronic products. Through its electronics manufacturing services operations, the company makes electronic components and subassemblies, including liquid crystal display panels, transformers, LCD modules, and radio frequency modules. The firm also manufactures finished products, including cordless phones, palm-sized personal computers, personal digital assistants, electronic dictionaries, calculators and digital camera accessories for use with cellular phones. In addition, the company assists its OEM customers in the design and development of their products and furnishes full turnkey manufacturing services. Its services include hardware and software design, component purchasing, assembly into finished products or electronic subassemblies and post-assembly testing. Shares of NTE are once again in an uptrend and the recent consolidation appears to be at an end with traders supporting a bullish resolution. Investors who share an optimistic outlook for NTE can speculate on its future performance with this position. DEC-22.50 HEH XX LB=0.35 OI=355 CB=22.15 DE=21 TY=2.3% MY=6.5% ***** APPX - American Pharma Partners $36.04 *** Premium Selling! *** 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 recently received received FDA approval to launch Piperacillin for injection, the generic equivalent of Wyeth's Pipracil. The drug is an antibiotic for the treatment of serious infections caused by designated susceptible microorganisms. APPX has also 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-30.00 AQO XF LB=0.35 OI=1776 CB=29.65 DE=21 TY=1.7% MY=5.8% ***** ***************** 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 DNDN 7.89 DEC 7.50 UKO XU 0.30 521 7.20 21 6.0% 14.2% XICO 13.03 DEC 12.50 UOB XV 0.45 10 12.05 21 5.4% 12.7% TTEK 25.50 DEC 25.00 TQI XE 0.65 26 24.35 21 3.9% 9.1% IMCL 39.12 DEC 35.00 QCI XG 0.75 1897 34.25 21 3.2% 8.8% CC 13.02 DEC 12.50 CC XV 0.30 3535 12.20 21 3.6% 8.7% ZRAN 18.45 DEC 17.50 ZUO XW 0.35 1062 17.15 21 3.0% 7.5% PHTN 40.81 DEC 37.50 PDU XU 0.65 88 36.85 21 2.6% 6.9% IPXL 14.10 DEC 12.50 UPR XV 0.20 225 12.30 21 2.4% 6.8% ADSK 23.17 DEC 22.50 ADQ XX 0.40 701 22.10 21 2.6% 6.4% NFLX 49.00 DEC 42.50 QNQ XT 0.55 1343 41.95 21 1.9% 5.8% TECD 36.84 DEC 35.00 TDQ XG 0.50 2050 34.50 21 2.1% 5.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Bracing For The Next Leg Up? By Ray Cummins Stocks ended relatively unchanged Friday amid light volume as many traders skipped the session to extend the Thanksgiving holiday with their families. The Dow Jones Industrial Average ended 2 points higher at 9,782 while the NASDAQ Composite Index finished up 6 points at 1,960. The S&P 500 closed where it started at 1,058 as gains in gold and airline shares offset losses drug and oil service issues. Breadth was positive with advancers outnumbering decliners by a 3 to 2 ratio on the New York Stock Exchange, where trading volume was slightly over 480 million shares. NASDAQ winners outpaced losers by a similar margin on volume of 700 million shares. In the bond market, treasury prices slumped with the benchmark 10-year note down 16/32 at 99 16/32 to yield 4.31%. ***************** 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 MGAM 41.45 40.93 DEC 30 35 0.45 34.55 0.45 Open ANPI 48.77 49.32 DEC 35 40 0.45 39.55 0.45 Open PFE 34.08 33.57 DEC 30 32 0.25 32.25 0.25 Open PHS 58.10 65.11 DEC 47 50 0.30 49.70 0.30 Open SII 39.07 37.54 DEC 35 37 0.45 37.05 0.45 Open? IVGN 64.85 68.17 DEC 55 60 0.50 59.50 0.50 Open NTLI 58.96 65.16 DEC 45 50 0.45 49.55 0.45 Open NVLS 42.54 43.76 DEC 35 37 0.25 37.25 0.25 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Smith International (NYSE:SII) remains on the early-exit list with the stock treading water at the sold (put) strike price. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status AIG 58.28 57.95 DEC 65 60 0.90 60.90 0.90 Open BJS 32.18 31.89 DEC 37 35 0.30 35.30 0.30 Open SNPS 30.85 29.96 DEC 37 35 0.25 35.25 0.25 Open CCMP 54.16 53.25 DEC 65 60 0.50 60.50 0.50 Open KKD 41.85 41.37 DEC 50 45 0.60 45.60 0.60 Open SNPS 30.28 29.96 DEC 37 35 0.20 35.20 0.20 Open ITMN 18.28 21.11 DEC 22 20 0.30 20.30 (0.81) Closed MRVL 38.90 39.49 DEC 45 42 0.30 42.80 0.30 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Intermune (NASDAQ:ITMN) became an early-exit candidate after its sharp rebound on no news. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status VLO 44.00 43.10 DEC 37 40 2.20 39.70 0.30 Open ADRX 21.66 21.96 DEC 17 20 2.15 19.65 0.35 Open ELAB 48.17 53.03 DEC 40 45 4.50 44.50 0.50 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status CTMI 16.08 15.40 DEC 20 17 2.25 17.75 0.25 Open AHG 26.00 27.11 DEC 30 27 2.20 27.80 0.30 Open? Apria Healthcare (NYSE:AHG) will be one to monitor in the coming sessions. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status IDCC 19.00 20.44 JAN 25 15 0.20 0.45 Open SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status SCRI 20.52 27.59 FEB-22C DEC-25C 1.40 2.10 Open CEPH 46.34 46.88 FEB-50C DEC-50C 1.30 1.40 Open DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ATN 17.93 19.42 JAN 17 17 2.40 2.75 Open MACR 20.22 20.52 DEC 20 20 2.20 2.10 Open 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. ***** HOV - Hovnanian Enterprises $92.25 *** New All-Time High! *** Hovnanian Enterprises (NYSE:HOV) constructs and sells single-family detached homes and attached condominium apartments and townhouses in more than 196 new home communities in New Jersey, Pennsylvania, New York, Virginia, Maryland, North Carolina, Texas and California. The firm offers a wide variety of homes that are designed to appeal to first-time buyers; first- and second-time, move-up buyers; luxury buyers; active adult buyers, and empty nesters. In addition, the company provides financial services, including mortgage banking and title services to the homebuilding operations' customers. The firm does not retain or service the mortgages that it originates, but rather sells the mortgages and servicing rights to investors. HOV - Hovnanian Enterprises $92.25 PLAY (less conservative - bullish/credit spread): BUY PUT DEC-80.00 HOV-XP OI=1156 ASK=$0.35 SELL PUT DEC-85.00 HOV-XQ OI=1317 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$84.45 ***** IMCL - ImClone $39.29 *** The Uptrend Resumes! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL - ImClone $39.29 PLAY (less conservative - bullish/credit spread): BUY PUT DEC-30.00 QCI-XF OI=1897 ASK=$0.20 SELL PUT DEC-35.00 QCI-XG OI=1897 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$34.45 ***** MATK - Martek Biosciences $60.74 *** New "All-Time" High! *** Martek Biosciences (NASDAQ:MATK) develops and sells products made from microalgae. Microalgae are microplants. The firm is engaged in the commercial development of microalgae into a portfolio of high value products and new product candidates consisting of Nutritional Products, Advanced Detection Systems and Other Products, primarily Algal Genomics. Their nutritional products include nutritional oils for infant formula, dietary supplementation and other products. Advanced Detection Systems products include fluorescent dyes from various algae for use in scientific applications for detection of certain biological processes. MATK - Martek Biosciences $60.74 PLAY (conservative - bullish/credit spread): BUY PUT DEC-50.00 KQT-XJ OI=164 ASK=$0.15 SELL PUT DEC-55.00 KQT-XK OI=729 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$54.55 ***** MSTR - MicroStrategy $54.00 *** Consolidation Complete? *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. MSTR - MicroStrategy $54.00 PLAY (moderately aggressive - bullish/credit spread): BUY PUT DEC-45.00 EOU-XI OI=344 ASK=$0.35 SELL PUT DEC-50.00 EOU-XJ OI=319 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$49.35 ***** MHK - Mohawk Industries $72.08 *** Trading Range? *** Mohawk Industries (NYSE:MHK), including its primary operating subsidiaries, Mohawk Carpet and Aladdin Manufacturing, is a producer of woven and tufted broadloom carpet and rugs for principally residential applications. The company designs, manufactures and markets carpet and rugs in a broad range of colors, textures and patterns. The company's brands include Mohawk, Aladdin, Mohawk Home, American Weavers, Bigelow, Custom Weave, Durkan, Galaxy, Helios, Horizon, Image, Karastan, Mohawk Commercial, Newmark Rug, World, Harbinger and WundaWeve. Their products are marketed primarily through carpet retailers, home centers, mass merchandisers, department stores, commercial end users and dealers. Some products are also marketed through private labeling programs. MHK - Mohawk Industries $72.08 PLAY (conservative - bearish/credit spread): BUY CALL DEC-80.00 MHK-LP OI=27 ASK=$0.20 SELL CALL DEC-75.00 MHK-LO OI=241 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$75.45 ***** TTWO - Take-Two Int. Software $33.10 *** 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 $33.10 PLAY (conservative - bearish/credit spread): BUY CALL DEC-40.00 TUO-LH OI=3314 ASK=$0.25 SELL CALL DEC-37.50 TUO-LU OI=880 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$37.75 ************* 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. ***** ANPI - Angiotech $49.32 *** Next Leg Up? *** 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. A stent is a cylindrical medical device, usually made of metal, inserted into a body duct or tube to prevent collapse, blockage or overgrowth of the duct or tube. Angiotech's primary goal is to develop new products to enhance the performance of medical devices and other biomaterials through the use of pharmatherapeutics. In 2002, the company agreed to a merger with Cohesion Technologies, which will continuing as a wholly owned subsidiary of Angiotech. ANPI - Angiotech $49.32 PLAY (less conservative - bullish/debit spread): BUY CALL DEC-40.00 AUJ-LH OI=4720 ASK=$9.60 SELL CALL DEC-45.00 AUJ-LI OI=1262 BID=$5.10 INITIAL NET-DEBIT TARGET=$4.45-$4.50 POTENTIAL PROFIT(max)=11% B/E=$44.50 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** ELX - Emulex $29.50 *** Break-Out Coming? *** Emulex (NYSE:ELX) is a designer, developer and supplier of a line of storage networking host bus adapters and application specific computer chips that provide connectivity solutions for storage area networks, network-attached storage and redundant array of independent disks storage. HBAs are the basic data communication products that enable servers to connect to storage networks by offloading processing tasks as information is delivered and sent to the network. The company's products are based on internally developed ASIC and embedded firmware and software technology, and offer support for a wide variety of SAN protocols, configurations, system interfaces and operating systems. ELX - Emulex $29.50 PLAY (speculative - bullish/synthetic position): BUY CALL APR-35.00 UMQ-DG OI=1215 ASK=$1.75 SELL PUT APR-25.00 UMQ-PE OI=167 BID=$1.60 INITIAL NET-CREDIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.90-$1.60 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $900 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25.00). *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** MYL - Mylan Laboratories $25.32 *** A Reader's Play! *** Mylan Laboratories (NYSE:MYL) is primarily engaged in developing, licensing, manufacturing, marketing and distributing generic and brand pharmaceutical products. The company conducts business through its generic and brand pharmaceutical operating segments. The Generic segment consists of two principal business units, Mylan Pharmaceuticals and UDL Laboratories, both of which are wholly owned subsidiaries. The Brand segment consists of two principal business units, Bertek Pharmaceuticals and Mylan Tech, both of which are wholly owned subsidiaries. Bertek's principal therapeutic areas of concentration include neurology, dermatology and cardiology. MYL - Mylan Laboratories $25.32 PLAY (speculative - neutral/debit straddle): BUY CALL JAN-25.00 MYL-AE OI=6011 ASK=$1.40 BUY PUT JAN-25.00 MYL-ME OI=294 ASK=$1.00 INITIAL NET-DEBIT TARGET=$2.20-$2.30 INITIAL TARGET PROFIT=$0.85-$1.35 ***** ************************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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