The Option Investor Newsletter Sunday 12-14-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Holiday Sentiment Fades Futures Market: The Teflon Market Index Trader Wrap: New Highs Editor's Plays: Painful But Quick Market Sentiment: Merry Markets Ask the Analyst: Vertical count confusion 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 12-12 WE 12-05 WE 11-28 WE 11-23 DOW 10042.16 +179.48 9862.68 + 80.22 9782.46 +153.93 -140.15 Nasdaq 1949.00 + 11.18 1937.82 - 22.44 1960.26 + 66.38 - 36.38 S&P-100 531.78 + 8.27 523.51 + 2.77 520.74 + 8.97 - 7.24 S&P-500 1074.14 + 12.64 1061.50 + 3.30 1058.20 + 22.92 - 15.07 W5000 10464.48 +111.88 10352.6 + 0.38 10352.2 +253.34 -145.78 RUT 547.59 + 8.58 539.01 - 7.50 546.51 + 20.58 - 7.03 TRAN 2983.41 + 72.83 2910.58 - 10.65 2921.23 + 75.91 - 82.32 VIX 16.41 - 0.68 17.09 + 0.79 16.30 - 2.68 + 2.04 VXO 15.95 - 1.39 17.34 + 0.63 16.71 - 3.18 + 2.26 VXN 25.86 - 1.19 27.05 + 1.44 25.61 - 3.47 + 2.92 TRIN 1.02 1.86 1.04 1.04 Put/Call 0.75 0.84 0.69 0.80 ****************************************************************** Holiday Sentiment Fades by Jim Brown Bah Humbug! That may not have been the sentiment expressed in the Friday morning report but it was definitely how traders felt when the report was released. That did not prevent the early holiday bargain shoppers from rushing to buy the dip and hold the Dow over 10,000 for the weekly close. Dow Chart - Weekly Nasdaq Chart - Weekly Wilshire-5000 Chart - Weekly The Consumer Sentiment was not the only report that surprised on Friday. The PPI for November was well below the estimate of +0.2% with a headline number of -0.3%. Minus 0.3%! Much of the decline was due to a fall in energy prices. The core rate excluding food and energy declined only -0.1%. This was the first decline after five months of increases. Also impacting the headline number was a drop in the price of autos. On the surface it would appear inflation is not a problem but the internals showed that prices for intermediate and crude goods continued to rise in November just like they have been doing for the last several months. With commodity prices soaring off the charts the odds of a continued rise in the prices of producer goods is very likely. Friday's report should not be seen as confirmation of the Fed's no inflation outlook although I am sure they were pleased. The International Trade deficit rose to $41.8 billion in October and that was slightly higher than expected. Imports rose +$500 million more than exports for the period. The strong growth in both numbers indicates increasing demand both in the US and abroad. The weak dollar makes US exports attractive and depresses growth in imports. This report was neutral for the markets on Friday but a slight positive for the continued recovery. The Federal Budget Balance came in at -$43 billion for Nov and the second month in the 2004 fiscal year and very close to the OMB estimate of -$44 billion. This was well under the street consensus of -$52 billion. The street was high because the October budget deficit was $69 billion and they were looking for a repeat. This brings the deficit for the first two months of fiscal 2004 to $112 billion. Multiply that $56B per month average by 12 months to see why there was little demand for treasury notes by foreign banks this week. Foreign investors are worried that the US deficit could run over a trillion dollars a year for the next two years and this causes conservative thinkers to ponder repayment. The biggest surprise of all was the Consumer Sentiment for December. This was the first reading for the month and analysts had expected 95.5 to 96.0, up from 93.7 last month. The 89.6 headline number shocked everyone and sent the street back to the drawing board scratching for answers. The majority of the decline came in the present conditions index and a drop from 102.5 to 93.6. Expectations also fell from 88.1 to 87.1. The excuses were quick to surface although none were conclusive. Some thought maybe the bounce in the Jobless Claims could have soured the expectations but that just came to pass this week. No sale there. Others thought the drop in the Jobs Report to only 57,000 from the 140,000 estimate could have started people worrying again. I would put more credence in that outlook. The Jobs Report was widely reported last week and could have depressed consumers. Maybe. Others thought the blizzard in the Northeast depressed shoppers by taking a weekend out of their holiday season. Come on guys, snow may close schools and work but shopping will always continue. Before you fire off the emails I know there were some stores closed in the Northeast but enough to spoil consumer sentiment? I think the problem was cashflow and the flu. Shoppers got their injection of extra cash over the summer and that cash is gone. They are now trying to make ends meet and buy for the holidays on budget money. Bonuses are going to be very light this year for workers and nearly nine million people are still out of work. Nothing spoils holiday sentiment any faster than unemployment worries and an empty wallet. With retail prices still dropping there will be plenty of bargains over the next six weeks to lift those spirits again. Retailers are going to be blowing out that inventory at record low prices if this holiday shopping season begins slowing any further. Mall reports from around the country claim good crowds and long lines so the sentiment numbers could be just a flu blip. The main factor in the sentiment dip could be due to the flu stories making the rounds. Almost every newscast is not complete without a total of the sick and dead from the flu. The lack of any flu vaccine and the dire predictions from some could have easily depressed family sentiment. Tales of children dying all over the country and shock value stories of millions of deaths possible have prompted people to stand in line for remaining shots for hours. In one city reported on Friday, homeless people were getting in line earlier and selling their spaces for $20 to late comers afraid they were going to run out of the vaccine. Consumers are wearing masks to the malls in hopes of preventing infection. How confident in the current situation are you under these conditions? Before you start assigning too much value to the first reading of Consumer Sentiment remember it comes from only 250 households in a nation of 280 million people. It would only take a few pessimists to spoil the picture. Challenger, Gray and Christmas, an employment research firm, said today that 50 million workers could catch the flu this season. They said more and more workers are reporting to work sick because of worries about their job. The actual numbers are at a 13 year high. A poll of Dow companies found that most offered flu shots to their employees, with as many as 50,000 workers accepting the offer at one firm. The markets tanked on the news as traders recoiled in shock but the dip was quickly bought. Helping the Dow today were UTX and KO. UTX held an analyst get together last night and the stock was a favorite again today tacking on another +2.33 to $92.00. This rocket just keeps on flying. We had considered UTX as a candidate for the Top Stocks for 2004 Special Investor Guide but with the stock at an almost daily new high and closing in on $100 the options were grossly expensive. We tried to focus on stocks that will turn into a UTX and not those that are already out of sight. I like the company but it is just too expensive for most traders. KO also rocketed to a new 52-week high on news they were buying back $2 billion in stock. The company has tacked on +$3 this week alone. GM continued to jump as the picture just keeps getting better in their pension outlook. PG rounded out the top four Dow gainers. The Dow broke below 10000 at the open but the rush to buy the dip was very quick. Once back over 10K the buying pressure eased until the last hour. Traders are still not eager to buy the top but they jumped at the chance to buy the dip. About 3:PM we began to see some short covering as those with a bah humbug attitude were squeezed out of the market by holiday shoppers trying to front run any potential Santa rally. There was no rush into the market but there a constant bid. The Nasdaq was not as strong as the Dow with most of the day spent under water. The end of day rebound finally pushed it into positive territory but it failed to break resistance at 1950 once again. The Nasdaq was handicapped by the annual rebalancing it announced for Dec-22nd. The Nasdaq announced the removal of eight stocks from the Nasdaq-100 putting those stocks under pressure. The eight being dropped include ADCT, BRCD, CIEN, ERICY, HGSI, ICOS, MNST and RFMD. Stocks being added to replace those above include MRVL, GRMN, CECO, LRCX, LVLT, ISIL, ATYT and RIMM. Two of those stocks are on the Top 50 Stocks for 2004 Guide. Considering there are over 400 global products and index funds that track the Nasdaq 100 there will be strong demand for those issues over the next week. Just remember that strong demand is relative because these stocks are coming in at the bottom of the Nasdaq and the index is market cap weighted. What will help is the tracking by individuals who tend to add these stocks to their portfolios whenever the Nasdaq makes a change. Over the next two weeks the Nasdaq is likely to lag the Dow simply due to the amount of profit accumulated over the last nine months. There will be excess overhead supply until the funds rebalance their portfolios in January. This suggests the Dow will be trying to move higher while dragging the Nasdaq along behind. The Dow continues to surprise everyone and make new highs despite growing bearish sentiment. It has broken very convincingly the down trend from Jan-2000 at 9900 and the psychological 10,000 level. While the bulls are having their "been there, done that" bumper stickers printed for each of those events the buyers just keep pushing the index higher. This victory lap could come to a halt soon when the next real resistance is reached in the 10200-10250 range. Most analysts think the index is running on borrowed time but then they are not the ones buying the stock. I am one of those in disbelief as I thought the index would slow at 10K and trade in a 9700-10000 range for the next two weeks. We are still not far out of that range but with two consecutive closes over 10K the Dow is winning converts daily. With retail investors focusing on the much discussed Santa Claus rally the odds are good we will see another new high before the year is out. The rally is based on the almost always positive holiday week. This "certainty" in some minds suggests that next week could finish positive in hopes of capitalizing on the trend. Nowhere in the trend is there a rule that the week before the holidays must go up as well but given the bullish sentiment I would be very surprised if it didn't. There is a past saying for this trend that bears repeating. It is derived from historical trends for bear markets to follow weak holiday performance. If Santa Claus should fail to call, bears may come to Broad and Wall. The market managers (makers, excuse me) got their wish of a weekly close over 10K and the breakfast table conversation on Saturday will not only what toys to buy for the kids but also the market recovery. "Shucks, Martha the market has recovered from that bear market bubble thing. Maybe we should cash out those CDs and buy some stock before the market gets too high again." While that thought process is not they way you and I think it will be repeated thousands of times this weekend. I am not going into any detail about the long term market potential today but the odds are very good any money transferred into the market over the next two weeks could be a victim of bad timing. I feel the next two weeks will be a traders market and once we get to January the real fun will begin. We have spent a lot of effort picking stocks for the Top Stocks CD and I can't wait for those entry points to start getting hit. For the next two weeks I would look for the Nasdaq to remain locked in the 1900-2025 range. I have upgraded my range for the Dow to 9850-10250. The resistance at 10250-10300 is very strong and is very technical unlike the psychological 10,000 level. Plan your entries and exits at the extremes of these ranges and try to stay out of the chop in the middle. Enter Very Passively, Exit Very Aggressively! Jim Brown ***************************** 2003 Year End Renewal Special ***************************** TOP 50 STOCKS for 2004 SPECIAL INVESTOR GUIDE What better bonus could we give you than the potential to double or triple your money in 2004? Each Option Investor analyst picked their favorite stocks for 2004 out of our universe of 4500 and applied their technical and analytical skills to deciding how best to profit from them. Some will be straight stock ownership, some long term calls or puts and some with various combinations of strategies. There are actually more than 50 stocks presented as there were so many profitable picks we added a few extra. As an additional bonus Jim has put together his TOP 20 LOTTERY PICKS FOR 2004 These are cheap options with great potential for achieving a profit of 200%, 300% or much more. Also included are options on stocks he feels are take over candidates in 2004. TIMING IS CRITICAL The Special Investor Guide will be provided on CD and will be mailed by priority mail to you before Christmas. Because we at Option Investor feel strongly that there will be a significant dip in January we have planned these strategies to capitalize on that dip. We want you to have plenty of time to review the stocks and strategies including the full color charts and graphs over the holidays. We want you to be prepared to take advantage of the January dip and start 2004 off from a profitable position. Don't miss out on this highly profitable renewal bonus. Additional Bonuses Every annual renewal subscriber will also receive: TWO 2004 Option Expiration Calendar Mousepads One for home and one for the office. Also available are the: 2004 Stock Traders Almanac Video on Successful Option Trading By James Bittman In order to get your The TOP 50 STOCKS for 2004 Special Investor Guide before the holidays you MUST renew immediately. Do not miss out on these profitable opportunities! Click here to renew: https://secure.sungrp.com/04renewal/ We are not responsible for late delivery of the Special Investor Guide for renewals after December 20th. We will still send it Priority Mail but you will not receive it until three days after your subscription is received. ************** FUTURES MARKET ************** The Teflon Market Jonathan Levinson Equities sold off briefly on a series of synchronous sell signals following the release of disappointing consumer sentiment data at 9:45AM, only to bounce back to ultimately challenge and, in the case of the YM, set new highs. Bonds fell slightly, gold and silver advanced, and the CRB rose to a new multiyear high. 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 fell to 88.50, finishing near the low end of this week's range and completing a shooting star doji on the weekly chart. The dollar looked excessively, obviously bearish at this time last week, prompting most speculators to expect a bounce. Such contrarian reasoning holds that any move that is widely anticipated by market participants will not occur, often prompting seasoned traders to fade whatever trend makes the non- financial headlines. That notwithstanding, the dollar sunk after a minor bounce attempt early in the week and the Fed took care of any residual bullishness in its FOMC minutes, finishing the week on a sour note. Daily chart of February gold Predictably, gold, silver and the CRB all rose strongly on the dollar weakness, with the CRB breaking 362 on a closing basis. The XAU climbed .66 to close at 106.67, HUI +2.44 to 237.82. The move left February gold higher by 4.60 at 410, and once again defied what continues to appear to be an imminent selloff on the daily chart. The rising bear wedge lower support line held, and the daily cycle oscillators trended higher. As with the YM below, the top of this move in gold is proving impossible to call, and while further significant upside from here appears unlikely, price has proven itself firm for the week. Daily chart of the ten year note yield Treasury bonds fell slightly on Friday, the ten year note yield finishing higher by 0.4 basis points at 4.242%. The move did nothing to reverse the sell signal on the yield printed with Thursday's Fed-induced treasury rally, and for the week, yields printed a bearish candle. Break below the rising support line at 4.2% should confirm the bond rally, with the daily cycle oscillators on the yield rolling over from a lower high. Daily NQ candles The NQ closed on Friday in unchanged territory, recovering from a precipitous selloff at 9:45AM, the only one of the major equity indices to fail to finish positive. NQ traded notably weaker than the YM and ES all week, and continues to fulfill its daily cycle downphase, still resolving most uncertainty to the downside. The YM, on the other hand, has yet to roll over and is currently in an upphase. I mention this because, if memory serves, it is the first time this year that the YM has outpaced the NQ to such an extend for such an extended period of time. The NQ bounced from 1407, close enough to our 1408 confluence level for government work. The daily cycle downphase remains uncertain but intact, and it feels as if but for the YM's new "all rally all the time" stance, the NQ would be trading at significantly lower levels. A break above 1425-30 resistance could be sufficient to abort the current downphase, while below 1407, the bears regain control, targeting 1400 and 1392 as first support. 30 minute 20 day chart of the NQ The NQ rose suddenly just before 3PM on Friday, and the turn, coming unexpectedly from an ongoing 30 minute cycle downphase, was sufficient to truncate that downphase and initiate a new upphase. Bollinger resistance is in the 1425-30 area, and I wouldn't expect the bounce to get far except for the anticipated weekend bullhorning and celebrations from the bulls over their Dow 10K+ close. I expect Uncle Lou to be winking and grinning compulsively, Kudlow and Cramer to be frothing, drooling and highfiving each other into hernias, and Fox's Bull-Bear show to feature a ceremonial bear-roast. Fleck, Noland, Lewis and others will likely be despondent or even suicidal, while my father will be euphorically discussing a shopping list for the new, imminent bull market. Santa Claus will be the most popular technical indicator cited by the financial press until further notice. The only question is how far that "Get me in NOW" buying lasts before it flames out. Technically speaking, Friday's buy programs defied sell signals, downphases and negative oscillator divergences that have tended to give very reliable signals. There were no correlative or compelling buy signals to justify the timing or the extent of the buying, and for that reason, we need to take the toppy oscillators with a grain of salt. The type of buyers I expect to see on deck for Monday are those who are expected to make their moves at the very top of every rally and the bottom of every selloff, and likely think that "Fibonacci" is an exotic sex position. Be careful out there. Daily ES candles The ES printed a bullish hammer on Friday, promising further upside for Monday's open. The 1073.50 high set a new 52 week high, but I don't expect to see bears panicking if and until the upper trendline in the 1075-77 area gets taken out. The daily cycle oscillators are maxxed out, and technical traders will be keenly aware that any buying at current levels is a bet in favor of a trending move, which is the lower-odds outcome. But, again, oscillators don't tend to make it to the front page of the New York Times, I'm guessing that buyers will, at least initially, be falling all over themselves to buy the Dow so far below its projected 36,000 or whatever bullish level is currently in vogue. 20 day 30 minute chart of the ES The front-running of Monday's anticipated bid-a-thon left the 30 minute cycle oscillator on an early buy signal, in a young upphase in breakout territory. Horizontal resistance has now fallen, and trendline resistance will be the bears' last stand in the 1077-8 area. Downside support is now at 1068, and a move below that level would terminate the current 30 minute cycle upphase. Note that the bull wedge objective of 1072 has already been met, and if we read the current formation as reverse head and shoulder of sorts, the upside target would be approximately 1092 ES. 150-tick ES The 150-tick ES reveals a possible upsloping head and shoulders pattern, a hunchback, with the neckline roughly 1069, a break below which could kick off some fire works. However, the intraday trend is clearly up, with the short cycle oscillators trending in overbought. Daily YM candles You're looking at the prime culprit for this week's confusion, ambivalence, and general technical chaos. The YM, the future contract of a mere 30 stocks, ground relentlessly higher, defying all bearish developments and responding only to buyers. The YM closed at a new 52 week high, with the daily cycle oscillators refusing to cross despite numerous bearish kisses throughout the week. The intraday high of 10025 is just below intersecting trendline resistance at 10035. While the daily cycle upphase continues, it appears very close to running out of racetrack. 20 day 30 minute chart of the YM We see the failed bearish oscillator divergence on the 30 minute chart, and a possible bear wedge shaping up and projecting to approximately 10030. I intend to scope for short entries as close to 10035 as the bulls take us on Monday, but will keep a short leash on it in the event that the bulls are more rabid than currently projected on these charts. Note that the YM is far more extended than either the ES or NQ, and I'd be surprised to see it continue to lead the NQ for long. For Monday, we have the US Dollar apparently intent on making lower lows, gold extended but firm, the YM in blowoff territory and the NQ and ES following along from a safe distance. With price action currently defying our indicators, traders are urged to exercise safe and sound account management, whichever direction they choose to trade. We saw sharp and sudden moves this week, less predictable than usual. Don't try to fight the tape for longer than your account can easily stand. See you Monday morning. ******************** INDEX TRADER SUMMARY ******************** New Highs Jonathan Levinson The Dow and SPX closed Friday at their highest levels since May 2002, with the Dow closing above 10K on a very light volume day. A feeble 1.21B NYSE shares and 1.46B Nasdaq shares were traded, marring the otherwise bullish picture. The Dow added 34 points or .3% to close at 10,042, adding 1.8% for the week and bringing its yearly gain to 20.4%. The Nasdaq closed higher by 6.68 points or .3% at 1949, up .6% for the week and 45.9% for the year. The S&P 500 was up 2.93 points to 1074.14, a .3% daily gain, 1.2% weekly gain and 22.1% YTD gain. Noteworthy in the above statistics is that the Dow has been leading to the upside, fueling speculation that the markets are being supported by the index covering the smallest number of stocks. Whatever the reason, the Dow has been playing catchup to the Nasdaq for the past week, leading consistently to the upside and pulling back very shallowly even when the Nasdaq dived. The Nasdaq broke below its rising lower bear wedge trendline for the first time since the March lows, but bounced to close just above it. Volatility returned to its low range, with prints below 16 for the VXO on an intraday basis. The cycles we follow became very extended, and the Dow's first break of the technically dubious but psychologically significant Dow 10K prompted the expected cheering and lofty proclamations from those voices that tend to herald the very extreme ends of market moves. An excellent anecdotal indicator, the famous "shoeshine boy tipster", is becoming overbought, with the non-financial press reporting on the banner number in big bold letters. The only question is how far the punch will go before the bowl runs dry. The Fed, once again turning a blind eye to new 7 year highs in the CRB, gold, silver, and strong gains in the prices of all assets but the dollar, reignited speculation that another tidal wave of Fed-sponsored liquidity would be unleashed to combat the "low inflation" that the governors continue to claim they somehow see. Bonds were bought, equities were bought, miners, drillers and foreign currencies were bought. In other words, the dollar was sold. On a technical basis, the indices squeezed higher within their ongoing cycle configurations and chart patterns. Nothing appears to have changed, except that the Nasdaq's bounce from its intraweek lows took the shape of a doji hammer, a reversal pattern that can portend higher highs to come. THE question will be whether the Dow gets a lift from Nasdaq strength next week, or whether it has already spent its energy. Cracks in the foundation, such as continuing lows from WMT, support the bearish interpretation, but the matter can be argued convincingly both ways. The market will have to judge. Weekly COMPX candles The Naz wanted to break down this week, fulfilling last week's gravestone doji top to a "t". This week's bounce doji portends upside to come, and the combination of the two portend uncertainty and possibly rangebound chop. The herd ran up and found an absence of bidders, then ran south and found an absence of sellers. Meanwhile, the weekly cycle rolled lower, and given the steep bearish rising wedge into which price has been compressing, the COMPX is not the most inspiring of bullish charts. A closing break below 1900 or above 2075 will resolve the deadlock, but the odds favor the former over the latter. Weekly INDU candles Compared to the COMPX, the Dow was on fire. The only challenge to the bearish rising wedge was to the upside, with the upper rising trendline holding back the advance. A gap up on Monday would suggest a test of Dow 10,600, which incidentally is the level at which I sold my last Dow position in 2002. I would view any such move as a throwover such as we've seen repeatedly in our charts at the apex of rising and descending wedges this year, but for the time being, this week's action was clearly bullish. Even the weekly cycle oscillators, still bearishly diverging, twitched back up, and more upside will extend them back into trending territory. Daily OEX candles The OEX ground out a new high, catching many traders by surprise on the heels of what on Wednesday appeared to be a perfectly priced, perfectly timed cycle rollover. The daily cycle remains in an upphase, and the 525 level which had provided such strong resistance should now serve as equally compelling support. 533 is now trendline resistance. 20 day 30 minute chart of the OEX The 30 minute cycle oscillators have been negatively diverging from the bulk of the post-Wednesday bounce, and given the wedge-like appearance of that latter leg of the climb, all does not appear well in paradise. However, as noted in the Futures Wrap, the type of buying that I expect to come in at the top is not concerned with technical or risk-analysis. The patterns set up thus far should bear little relation to the type of hysteria buying that might be prompted by an aggressive, permanently bullish financial press. Remember the COMPX in March 2000, with Maria repeating "a new record" like a mantra? There's simply no telling how far such a blowoff can go before it tops, and for this reason our cyclical and price analyses are of only secondary predictive utility. Look for resistance at 532, then 533, with support at 529, followed by 525. Daily QQQ candles The Qubes, on the other hand, look like an accident waiting to happen. There is a huge, extended bearish oscillator divergence refuting the autumn climb, and the 10 day stochastic is in a downphase that has so far only twitched in response to the post-Wednesday bounce. Resistance is 35.50 followed by 36, support at 33.70, followed 33. 20 day 30 minute chart of the QQQ We will find out on Monday whether there's a reverse head and shoulders neckline at 35.40 or not. If so, 36.60 is the implied target, as difficult as that price is to imagine. 36- 36.20 has so far been a brick wall. On the bullish side, however, the 30 minute cycle downphase truncated from a higher oscillator high, and could be tipping the hand of a very bullish bid below the surface. Cyclically, we have the weekly cycles topping on the Dow and rolling over tentatively on the Nasdaq, the daily cycle upphasing but running out of time on the Dow/OEX and downphasing on the COMPX/QQQ, while the 30 minute cycles have flipped back to upphases. If that 30 minute upphase has legs, it should extend the daily OEX in a potentially terminal move, while possibly aborting the Nasdaq's downphase. The strength and duration of Monday's buying will be critical. It is also unpredictable, and for this reason, both bulls and bears should keep their entries on very tight leashes. ************************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 ************** Painful But Quick With the Dow bounce on Monday we were stopped out of the DJX put position at 3:PM when the DJX touched 99.50. The puts were trading at 30 cents at the time. Our average cost was 63 cents for a 33 cent loss. If you had filled all 15 contracts according to the plan your loss should have been in the $500 range. It was painful but at least it was over quickly. Home for the holidays? If you are going home for the holidays the chances are you will not be booking a flight on Priceline.com. The travel company's fortunes have taken a turn for the worse. Seems like there is a new weekly entry into the web based travel field and the current trend is for the hotels and airlines to offer discount prices on their own websites. There is a move underway to limit the amount of inventory that the companies like Priceline can get and some sources are saving the cheapest seats for their own website. If they can cut out the middleman they save money. Now that the public has become so accustomed to booking online there is no need to give the travel companies the cheap inventory so they can compete with the higher prices on the providers own website. Why give them the bullets to shoot down your own prices? It was great deal to dump excess inventory when the travel companies first hit the web. It is not such a good deal now that the consumer has become web fluent. PCLN enjoyed a high of $990 per share back in April of 1999. (pre-split) On Friday it was trading at $17.35 after several downgrades over the last few weeks. The last downgrade on Wednesday to underweight by JP Morgan knocked the stock below support at 17.50 to 16.12. It has recovered back to that prior support level which should now be resistance. The company is also suffering from weak results and an earnings warning from late November. The CEO said 3Q results were affected by weakening demand for tickets and that weak demand had carried over into the 4Q. He later tried to retract that statement saying he meant only the "opaque" tickets Priceline sells but since then JBLU has warned of the same thing. PCLN is trying to overcome the opaque fare problem by selling full price air fares. (their story) Considering the airlines are holding back the cheap seats they may not have any choice. I think the 4Q could be weak for air travel due to the flu bug. Travelers will not want to be cooped up in a plane with potentially sick flu patients for several hours. This could depress PCLN earnings even farther and set them up to fall even further out of favor with investors. I am looking at a longer-term play here with the April $15 put option. It closed on Friday at $1.30. By using an April option we can take advantage of any January drop and the 4Q earnings news and still have time left. Buy April $15 Put PUZ-PC ($1.30 on Friday) Profit Target PCLN at $10.00 Stop loss PCLN at $20.00 PCLN Chart - Daily ******************************** Play Recaps No open plays Powerball After the drop in the Nasdaq knocked -50% off our profit last week it did not get any better this week. The +11 point gain in the Nasdaq did little to take us back to the 95% profit level from the week before. Time is running short and we need that Santa rally to push the Nasdaq back in the 2000 range before our Jan-5th exit. 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 The profit high of $1175 was hit on Friday November 28th. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Merry Markets - J. Brown Is the path of least resistance still up? That's what some market watchers are saying. Disappointing consumer sentiment numbers and PPI results could not dissuade investors from buying the early Friday dip and the DJIA posted two consecutive closes over the 10,000 mark. Investor sentiment does indeed seem cheerful. Equities have managed to hold on to their gains and money managers are getting closer to their best year-end since 1999. The fight now is the urge to take profits versus hanging on just a little while longer to catch the top if indeed a Santa Claus rally has materialized. The next five to seven trading days are historically bullish heading into the Christmas holiday and this year looks ready to follow the seasonal pattern. Now that talk has turned from a stimulus-induced economic recovery to a self-sustaining one the mood is certainly more optimistic. This is especially true given the expectation for the Federal Reserve to hold back on any future rate hikes. The odds are leaning toward new highs for the DJIA & SPX with the NASDAQ panting wearily behind them. Meanwhile the volatility indices are likely to hit even new lows as bullish sentiment reaches holiday-induced heights. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10052 52-week Low : 7416 Current : 10042 Moving Averages: (Simple) 10-dma: 9928 50-dma: 9770 200-dma: 9089 S&P 500 ($SPX) 52-week High: 1074 52-week Low : 788 Current : 1074 Moving Averages: (Simple) 10-dma: 1065 50-dma: 1048 200-dma: 976 Nasdaq-100 ($NDX) 52-week High: 1453 52-week Low : 795 Current : 1417 Moving Averages: (Simple) 10-dma: 1416 50-dma: 1408 200-dma: 1249 ----------------------------------------------------------------- No changes here. With the major stock indices at or near their highs for the year these volatility indices are near their multi- year lows. Given the strength in equities we could see these sentiment indicators continue to sink. CBOE Market Volatility Index (VIX) = 16.41 -0.32 CBOE Mkt Volatility old VIX (VXO) = 15.95 +0.09 Nasdaq Volatility Index (VXN) = 25.86 -0.29 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 683,513 513,507 Equity Only 0.50 511,771 257,406 OEX 1.16 29,641 34,370 QQQ 1.76 24,533 43,075 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 74.1 + 0 Bull Confirmed NASDAQ-100 67.0 + 0 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 80.4 + 0 Bull Confirmed S&P 100 79.0 + 0 Bull Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.09 10-dma: 1.13 21-dma: 1.15 55-dma: 1.13 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 1908 1897 Decliners 933 1112 New Highs 294 177 New Lows 10 17 Up Volume 937M 828M Down Vol. 507M 511M Total Vol. 1464M 1426M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 12/09/03 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 There is just a hint of bearishness in the Commercials who have upped their short positions. Right on cue the small traders have increased their long positions but to a greater extent. Commercials Long Short Net % Of OI 11/11/03 389,965 415,259 (25,294) (3.1%) 11/18/03 393,893 414,442 (20,549) (2.5%) 12/02/03 394,531 414,223 (19,692) (2.4%) 12/09/03 396,882 420,859 (23,977) (2.9%) 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 11/11/03 136,072 74,249 61,823 29.4% 11/18/03 147,842 80,047 67,795 29.7% 12/02/03 154,788 85,776 69,012 28.7% 12/09/03 172,178 99,484 72,694 26.8% 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 spread is narrowing between longs and shorts in the commercials. The opposite is happening in small traders' positions with longs surging more than 20K contracts. Commercials Long Short Net % Of OI 11/11/03 249,864 258,503 ( 8,639) ( 1.7%) 11/18/03 249,286 264,083 (14,797) ( 2.9%) 12/02/03 283,199 268,833 14,366 2.6% 12/09/03 294,006 288,385 5,621 1.0% 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 11/11/03 94,649 51,815 42,834 29.2% 11/18/03 95,119 61,975 33,144 21.1% 12/02/03 119,555 77,609 41,946 21.3% 12/09/03 142,173 76,171 66,002 30.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 There is a similar surge in commercial positions for the NDX as seen in the S&P futures. Small traders also increased long and shorts but leaning heavily on new longs. Commercials Long Short Net % of OI 11/11/03 35,889 49,201 (13,312) (15.6%) 11/18/03 35,608 49,689 (14,081) (16.5%) 12/02/03 35,569 48,552 (12,983) (15.4%) 12/09/03 39,612 51,443 (11,831) (13.0%) 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 11/11/03 26,212 10,730 15,482 41.9% 11/18/03 32,034 10,356 21,678 51.3% 12/02/03 21,594 9,429 12,165 39.2% 12/09/03 25,842 10,228 15,614 43.3% 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 There is little to report for DJ futures by commercial traders but small traders have significantly increased their short positions. Commercials Long Short Net % of OI 11/11/03 20,209 11,660 8,549 26.8% 11/18/03 20,746 11,080 9,666 30.4% 12/02/03 21,128 12,379 8,749 26.1% 12/09/03 20,378 11,934 8,444 26.1% 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 11/11/03 6,105 8,201 (2,096) (14.7%) 11/18/03 5,655 8,607 (2,952) (20.7%) 12/02/03 6,667 9,302 (2,635) (16.5%) 12/09/03 6,858 12,006 (5,148) (27.3%) 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 *************** Vertical count confusion I'm all confused about the vertical counts, and wondered if you can help me? I read your column on how to calculated the bullish and bearish vertical counts, but when I look at StockCharts' point and figure charts, the bullish vertical count on IBM is nowhere close to my calculation of $122. Is it me, or StockCharts.com? It's Stockcharts.com! So be careful! I've now figured out why I get quite a few e-mail from traders and investors that have them asking if the bullish vertical count (or bearish vertical count) for a particular stock or index is XXX.XX, where that value is nowhere close to the conventional method for calculating a stock's bullish or bearish vertical count. After further reviewing the trader's hand calculations, I came up with the same price objective the he did, and I have no clue how StockCharts.com is calculation its bullish price objective. I tried and tried to figure out how StockCharts.com is calculating their bullish vertical counts, but I can't figure it out, but here's what I think is happening, and being somewhat of a supply/demand purist, I'd want to be very careful of this.... When you look at a StockCharts.com point and figure chart, when you first type in the stock symbol, this is what comes up. IBM Chart - $1 box size For the life of me, I can't figure out how StockCharts.com is coming up with $142.00 as the bullish vertical count for IBM. I read their instructions for "About Price Objectives" and following those instructions, couldn't come up with $142.00. Long story short... be careful if looking at the StockCharts.com calculated bullish vertical count, which somehow is "revised" as a stock's price fluctuates. This dynamic changing of price is like putting a carrot on a pole and strapping it to the neck of a horse. Adjusting the bullish (or bearish) price objective is like leading a horse around with a carrot, that the horse probably will not achieve. It's also a moving target. Remember! The bullish (or bearish) vertical counts are to be used for establishing some type of longer-term risk/reward in a stock. While StockCharts.com correctly instructs investors that "the price objective should not be used as the sole reason for buying or selling a stock - it is just a guide based on what the current P&F chart is saying. Stocks frequently move past the price objective and just as frequently reverse before getting to the price objective. The best way to use a price objective is as a cautionary sign - if prices get to the price objective, it might be prudent to monitor the stock more closely and move stops closer in case the move is done." The reason a point and figure chart "purist" will disagree with a dynamic, or constantly changing price objective, is that one of the fundamental beliefs behind the bullish (or bearish) vertical count is that the vertical count column, once constructed, is the market's way of telling investors that it may know something about the future, that is going to have the stock achieving its bullish (or bearish) vertical count. In essence, its just ONE bullish (or bearish) vertical count column, not a series of price movements, or new buy and sell signals that is thought to be THE signal from the market of where a stock is headed. For instance... let's say 5 institutions suddenly figured out in September (red 9 on a PnF chart) that there was some catalyst that had just presented itself, that would have IBM eventually being worth $120, and those institutions, with that information, began buying the stock at $80.00, all the way up to $93, on the thought that IBM's stock was going to be worth $120. This buying from $80.00 up to $93.00 is the bullish vertical count column. For those wanting to know how to calculate the bullish and bearish vertical counts, I've written columns in the Bailey's Basics section of the newsletter, which were written on September 14, 2001. The articles are titled "The Bullish vertical count" and "The bearish vertical count." The trader asking the question on IBM was actually interested in IBM after reading the above articles. I don't want to sound like I'm beating up on StockCharts.com, I believe their instruction falls short of how to properly calculate vertical counts. Anyway... the above chart is difficult to read. Isn't it? Click the "text" button on the chart, and I think you will find the "text version" much easier on the eyes. Can IBM trade its bullish vertical count of $120? What would be the catalyst for the move higher? C'mon... think real hard. Believe me... we can lay out 10 different scenarios of why, and even why IBM will NOT trade $120. I was talking to my dad on the phone today. He called to see how things were going, and he had heard that the Dow Industrials had traded 10,000 and was wondering how the market was doing. He also asked me if I still had that General Motors (NYSE:GM) stock. He read in the papers that it had just traded a 52-week high. When I told him I was sill holding an option on it (dad isn't real sure about options and how they work), he asked me when I was taking him and mom out for dinner! Long story short, dad thought I was real smart, and that I should buy mom and him dinner, as I should be grateful for how I figured out that car sales were going to recover as the economy improved, and that GM's price would rise. The reason dad asked about GM, is that after I had profiled some GM January 2005 $50 LEAPS calls back in July of this year when the stock was trading near $38.00, dad and I had gone out to dinner, and got started talking about stocks and GM came up. Boy... I had laid out this wonderful scenario of how GM could fulfill its bullish vertical count of $52, based on the scenario that auto sales were starting to steady, but the main reason that GM was going to move higher was that as the economy improved, GM would eventually stop offering 0% financing deals, and offering all these different incentives, and all that money would flow to the bottom line and the stock would rise. Laughing... I told my dad that he and mom should buy me dinner, because the wonderful scenario I had laid out wasn't the reason at all for the stock's price move higher, and I wasn't as smart as he thought, and because I had to live with this brain the rest of my life, they should feel sorry for me, and buy me dinner. You see, the reason, or what has suddenly become the reason, for the stock shooting higher and now nearing its bullish vertical count, wasn't that auto sales were surging, or that GM has cancelled its 0% financing. No! It's because the broader market just found out, or figured out, that the rise in stock prices (the broader market) has actually lessened the amount of capital GM needed to come up with to fund its pension plan. How overly simple would that have been to figure out? For the last 8 months, you and I, and even some highly paid analysts, that do nothing BUT follow/analyze GM, didn't figure out that broader market equity gains would have GM's pension fund actually showing improvement, and lessen the amount of money GM needed to come up with to fund the pension plan for its current and retired employees! Could it be that the "reason" GM generated that "low pole warning" in April (column of X from $31 to $37) and then its bullish vertical count column ($34 to $39), was that SMART MONEY figured all this out back in April and June? And that knowledge, or smarts, established a potential price target of $52? One just never knows for sure, but it sure makes you wonder. While this article was really to make traders aware that the price objectives calculated for the StockCharts.com point and figure charts are not how a point and figure charting purist would calculate price objectives, I would also suggest that traders and investors read an article I wrote in a prior Ask the Analyst column titled "Risk/Reward, Point & Figure, and minimizing risk with options." STOCK traders and investors are also URGED to read that article, as it brings into the fold of how a bullish (or bearish) vertical count can be used in trade management. After you read that article, pull up a chart of the stock used in that example, and understand the significance of the bullish support trend, especially when you calculate bearish vertical counts ABOVE trend. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- LEN Lennar Corporation Mon, Dec 15 After the Bell 3.06 ORCL Oracle Mon, Dec 15 After the Bell 0.11 ------------------------- TUESDAY ------------------------------ FDS FactSet Research Sys Tue, Dec 16 -----N/A----- 0.39 GTK GTECH Holdings Corp. Tue, Dec 16 Before the Bell 0.63 MATK Martek Biosciences Tue, Dec 16 After the Bell 0.21 PIR Pier 1 Imports, Inc. Tue, Dec 16 -----N/A----- 0.35 ----------------------- WEDNESDAY ----------------------------- COMS 3Com Wed, Dec 17 -----N/A----- -0.14 BSC Bear Stearns Wed, Dec 17 Before the Bell 1.79 BBBY Bed Bath & Beyond Inc Wed, Dec 17 After the Bell 0.31 BBY Best Buy Co., Inc. Wed, Dec 17 Before the Bell 0.37 KMX CarMax, Inc Wed, Dec 17 Before the Bell 0.17 CTAS Cintas Corporation Wed, Dec 17 Before the Bell 0.39 CC Circuit City Stores Wed, Dec 17 Before the Bell -0.07 COGN Cognos Wed, Dec 17 After the Bell 0.25 FDX FedEx Wed, Dec 17 Before the Bell 0.90 GIS General Mills, Inc. Wed, Dec 17 -----N/A----- 0.85 MLHR Herman Miller Wed, Dec 17 After the Bell 0.16 JBL Jabil Wed, Dec 17 After the Bell 0.23 LEH LEHMAN BROS HLDGS INC Wed, Dec 17 Before the Bell 1.57 SCHL Scholastic Wed, Dec 17 After the Bell 1.67 TIBX TIBCO Software Wed, Dec 17 After the Bell 0.02 WGO Winnebago Wed, Dec 17 Before the Bell 0.86 WOR Worthington Ind Wed, Dec 17 -----N/A----- 0.11 ------------------------- THUSDAY ----------------------------- AYI Acuity Brands, Inc . Thu, Dec 18 -----N/A----- 0.25 APOL Apollo Group Thu, Dec 18 Before the Bell 0.39 BMET Biomet, Inc. Thu, Dec 18 Before the Bell 0.31 CCL Carnival Corp & Crnvl Thu, Dec 18 -----N/A----- 0.28 DRI Darden Restaurants Thu, Dec 18 After the Bell 0.16 FDO Family Dollar Thu, Dec 18 Before the Bell 0.37 GPN Global Payments Inc. Thu, Dec 18 After the Bell 0.41 GS Goldman Sachs Thu, Dec 18 Before the Bell 1.52 MWD Morgan Stanley Thu, Dec 18 Before the Bell 0.89 NKE Nike Thu, Dec 18 After the Bell 0.61 PAYX Paychex Thu, Dec 18 After the Bell 0.21 RHAT Red Hat, Inc. Thu, Dec 18 After the Bell 0.02 RAD Rite Aid Corporation Thu, Dec 18 Before the Bell 0.02 SLR Solectron Thu, Dec 18 -----N/A----- -0.03 SCS Steelcase Inc. Thu, Dec 18 After the Bell -0.06 TTWO Take-2 Inter. Sftwr Thu, Dec 18 Before the Bell 0.59 TEK Tektronix Inc. Thu, Dec 18 After the Bell 0.16 ------------------------- FRIDAY ------------------------------- ATYT ATI Technologies Fri, Dec 19 Before the Bell 0.18 GUC Gucci Group NV Fri, Dec 19 Before the Bell 0.63 JOYG Joy Global Inc. Fri, Dec 19 Before the Bell 0.16 KBH KB Home Fri, Dec 19 After the Bell 3.08 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable ADTN Adtran 2:1 Dec 15th Dec 16th PX Praxair Inc 2:1 Dec 15th Dec 16th IMDC Inamed Corporation 3:2 Dec 15th Dec 16th FFIC Flushing Finl Corporation 3:2 Dec 15th Dec 16th CFC Countrywide Finl Corp 2:1 Dec 17th Dec 18th WSBK Wilshire State Bank 2:1 Dec 17th Dec 18th CW Curtiss-Wright C 2:1 Dec 17th Dec 18th ROST Ross Stores Inc 2:1 Dec 18th Dec 19th CLE Claires Stores Inc 2:1 Dec 18th Dec 19th AMHC American Healthways Inc 2:1 Dec 18th Dec 19th MBFI MB Financial, Inc 3:2 Dec 18th Dec 19th SSYS Stratasys Inc. 3:2 Dec 22nd Dec 23rd EDMC Education Management Corp 2:1 Dec 22nd Dec 23rd DFG Delphi Financial Grp, Inc 3:2 Dec 22nd Dec 23rd -------------------------- Economic Reports This Week -------------------------- There are two and a half trading weeks left for 2003 and traders will be hoping the Santa Claus rally can stay aloft. This Tuesday and Thursday are packed with economic reports like the CPI, industrial production, capacity utilization, business inventories and the semi book-to-bill report. ============================================================== -For- ---------------- Monday, 12/15/03 ---------------- NY Empire State Index(BB) Dec Forecast: 35.0 Previous: 41.0 ----------------- Tuesday, 12/16/03 ----------------- CPI (BB) Nov Forecast: 0.1% Previous: 0.0% Core CPI (BB) Nov Forecast: 0.1% Previous: 0.2% Housing Starts (BB) Nov Forecast: 1.910M Previous: 1.960M Building Permits (BB) Nov Forecast: 1.900M Previous: 1.973M Current Account (BB) Q3 Forecast:-$136.1B Previous: -$138.7B Industrial Production (DM) Nov Forecast: 0.5% Previous: 0.2% Capacity Utilization (DM) Nov Forecast: 75.3% Previous: 75.0% GE's Annual Outlook ------------------- Wednesday, 12/17/03 ------------------- None ------------------ Thursday, 12/18/03 ------------------ Initial Claims (BB) 12/13 Forecast: 360K Previous: 378K Business Inventories (DM) Nov Forecast: 0.3% Previous: 0.4% NY Empire State Index (DM) Dec Forecast: 25.5 Previous: 25.9 Semiconductor Book-to-Bill Report ---------------- Friday, 12/19/03 ---------------- None 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. 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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 12-14-2003 Sunday 2 of 5 In Section Two: Watch List: Breakouts, Bounces and More Call Play of the Day: QCOM Dropped Calls: None Dropped Puts: 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 ************************************************************** ********** Watch List ********** Breakouts, Bounces and More Eaton Corp - ETN - close: 107.38 change: -0.50 WHAT TO WATCH: Highflying stock ETN managed to hold onto its gains after hitting a new all-time high on Thursday's rally. A bounce from $105 might be worth a short-term trade higher. Should the markets see a stronger pull back then the $100-102 levels offer support for ETN. Chart= --- Eli Lilly - LLY - close: 72.19 change: +0.39 WHAT TO WATCH: We've been keeping our eyes on LLY for a little while. The drug giant continues to edge higher, bouncing off the bottom of its rising channel. Now the stock is approaching its recent high. We would not be surprised to see a little bit of profit taking and bullish traders can look for another bounce above the $70 level. Chart= --- PACCAR - PCAR - close: 81.88 change: -0.31 WHAT TO WATCH: We continue to put PCAR on the watch list. It's getting closer and closer to breaking out above resistance in the 82.50-82.75 range. The company just recently announced a 3-for-2 stock split effective on February 5th. Bulls might want to target PCAR's old highs near $87 first. Chart= --- Mid Atlantic Medical - MME - close: 61.79 change: +0.45 WHAT TO WATCH: MME is a health insurance stock that has broken out above resistance at $60 and has now come back to retest it as support. The bounce looks like a bullish entry point. Our first target would be $65 but since MME is at all-time highs there is no telling how far it can run. Chart= --- Juniper Networks - JNPR - close: 17.50 change: -0.40 WHAT TO WATCH: JNPR recently broke its rising channel and 50-dma but shares found support near the $17.00 region. The stock market rally on Thursday lifted JNPR back toward the $18 region but it failed to follow through on Friday. Bears might want to keep an eye on JNPR for a breakdown back through the $17.00 mark and then consider short positions with a target near its 200-dma at $14.00. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- TASR $87.45 -2.81 - The meteoric rise of TASER Intl continues and aggressive traders might want to watch it for a bounce or a breakdown at $85 and/or $80. SNV $28.13 +0.04 - Regional banking stock SNV has been able to maintain its rising channel and currently shares are trying to bounce off the bottom of this channel near its 50-dma an d support near $28. GYI $48.76 +4.75 - GYI pre-announced stronger earnings and the stock soared on Friday with huge volume. Look for some profit taking before considering any new bullish positions. ************************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: ********************* Qualcomm, Inc. - QCOM - cls: 51.00 chng: +0.86 stop: 48.00*new* 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 ^^^^ None *********** 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. 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The Option Investor Newsletter Sunday 12-14-2003 Sunday 3 of 5 In Section Three: Current Calls: BCR, QLTI, QCOM, SNDK, UTX New Calls: None Current Put Plays: AVID, KSS, NSM, XL New Puts: FD ************************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 ****************** C R Bard - BCR - close: 78.69 change: +0.26 stop: 76.49 Company Description: C.R. Bard, Inc., (www.crbard.com) headquartered in Murray Hill, N.J., is a leading multinational developer, manufacturer, and marketer of innovative, life-enhancing medical technologies in the fields of vascular, urology, oncology, and surgical specialty products. (source: company press release) Why We Like It: The bullish play in medical device maker BCR is only about one week old since we opened it with a trigger at $78.01. The stock shot higher last Monday to trade through our trigger on decent volume. In the last few sessions we've seen it fail at the $80 level once but retested the $77.50 mark as support and investors bought the dip. Several market pundits believe the bull market will narrow in 2004 as investors turn to companies with a higher quality of earnings. BCR should be a good candidate and we think investors will continue to buy the dip considering BCR's strong earnings and sales growth. We would have liked to have seen BCR breakout to a new high this past week like the Industrials and the S&P 500. If BCR can not break through the 80.00-80.50 region this will begin to look like a bearish double-top pattern. Momentum traders may want to wait for BCR to trade above 80.51 before considering new entry points. We're going to leave our stop loss at $76.49 but more conservative traders might want to use 77.49. Split fans will note that BCR has not split its stock since 1988. Shares are well over there previous split price and the company could announce one at any time. Suggested Option: There is only 1 week left for December options so our preference will be the January strikes. Our favorite is the January 75 call. ! Alert - December options expire on Friday! BUY CALL JAN 75*BCR-AO OI=120 at $4.60 SL=2.30 BUY CALL JAN 80 BCR-AP OI=772 at $1.50 SL=0.75 Annotated Chart: Picked on December 08 at $78.01 Change since picked: + 0.67 Earnings Date 10/15/03 (confirmed) Average Daily Volume: 322 thousand Chart = --- QLT Inc - QLTI - close: 19.05 chg: -0.03 stop: 17.49 Company Description: QLT Inc. is a global pharmaceutical company specializing in the discovery, development and commercialization of innovative therapies to treat cancer, eye diseases and niche areas for which treatments can be marketed by a specialty sales force. Combining expertise in ophthalmology, oncology and photodynamic therapy, QLT has commercialized two products to date, including Visudyne therapy, which is the most successfully launched ophthalmology product ever. (source: company press release) Why We Like It: It has been a very volatile week for biotech-pharmaceutical stock QLTI. We added the stock last week after a very high-volume breakout above the $18 level. Actually, we added it after it pulled back a bit to consolidate some gains and find support at previous resistance of $18.00. The last few sessions have seen QLTI surge to the $20 mark, which cued additional profit taking but the $18 level held again. The strong bounce on Thursday was encouraging but there was no follow through on Friday. This probably shouldn't come as a surprise since the NASDAQ spent much of Friday underwater and the BTK biotech index closed higher with only a fractional gain. Not that we expect any news soon but there hasn't been any additional news on their Visudyne treatment or its progress towards an FDA approval here in the U.S. We're going to keep our stop loss at $17.49 for now. Traders can choose to buy dips toward $18 or wait for another rally past the $20 mark Suggested Options: Our preference is for the January calls. Our favorite is the January 17.50 strike. ! Alert - December options expire on Friday! BUY CALL JAN*17.50 QTL-AW OI=409 at $2.40 SL=1.20 BUY CALL JAN 20.00 QTL-AD OI=397 at $1.00 SL=0.50 Annotated Chart: Picked on December 07 at $18.86 Change since picked: + 0.18 Earnings Date 10/23/03 (confirmed) Average Daily Volume: 1.1 million Chart = --- Qualcomm, Inc. - QCOM - cls: 51.00 chng: +0.86 stop: 48.00*new* Company Description: Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. Why we like it: Proving that Thursday's breakout over $50 wasn't a fluke, QCOM tacked on another 1.7% on Friday to end at another 52-week high. Closing right at the top of its rising channel, the stock is looking quite strong, with buying volume once again running above the ADV. While there's the risk of a rejection from the top of its channel, a breakout over $51.25 could see some strong follow- through and aggressive traders can use such a move for initiating new momentum-based positions. Those with a more cautious approach can look for a pullback into the $49-50 area to enter on the rebound. There's the possibility of some resistance in the $52.50-53.00 area, but after that the bulls will be aiming for strong resistance near $55. As one of the stronger stocks in the NASDAQ, any continued rebound in that index should be led by QCOM. The midline of the channel ($48.25) should offer strong support on any pullback, so it should be safe to raise our stop to $48 this weekend. Suggested Options: Shorter Term: The January 50 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. While we've listed the December $50 strike, with expiration in just one week, that option should only be considered by very aggressive traders. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 55 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 looking for more insulation from time decay will want to use the April 55 Call. Our preferred option is the January $50 strike. ! Alert - December options expire this week! BUY CALL DEC-50 AAQ-LJ OI=10457 at $1.45 SL=0.75 BUY CALL JAN-50*AAQ-AJ OI=20278 at $2.60 SL=1.25 BUY CALL JAN-55 AAQ-AK OI= 9236 at $0.70 SL=0.35 BUY CALL APR-55 AAQ-DK OI=13719 at $2.40 SL=1.25 Annotated Chart of QCOM: Picked on December 11th at $50.14 Change since picked: +0.86 Earnings Date 2/04/04 (unconfirmed) Average Daily Volume = 9.22 mln --- Sandisk Corp - SNDK - close: 62.28 chg: -0.72 stop: 59.50 Company Description: SanDisk, the world's largest supplier of flash memory data storage card products, designs, manufactures and markets industry-standard, solid-state data, digital imaging and audio storage products using its patented, high density flash memory and controller technology. SanDisk is based in Sunnyvale, Calif. (source: company press release) Why We Like It: (Thursday's Original Write up) It has been a pretty amazing year for SNDK. Actually, we can just count the last eight and a half months. SNDK's earnings announcement in mid-April ignited a huge run. The company's net income of 33 cents a share had beat estimates by 15 cents with revenues up more than 88%. SNDK did it again in July with earnings of 52 cents, beating by 21 cents. They did it again in October when revenues soared 99% and the company beat estimates by 15 cents with net income hitting 60 cents a share. At the same time they guided higher for full year revenues and for Q4 results. Yes, it's been an incredible year because demand for their flash memory cards, useful for digital cameras, mp3 players and more has been white hot. Suddenly in December there were new concerns that demand for flash memory might begin to cool. Growth was still expected to be strong and certainly enviable compared to other tech sectors but just maybe the build up in supply could be a sign that sales were slowing. SNDK had been such a big winner in 2003 that the stock was hit with massive profit taking. The company tried to stem the tide by reaffirming their October projections but the selling didn't stop until SNDK hit the $60 region. The $59-60 level had been overhead resistance on the way up. Now it has become support on the way down. Coincidentally it also happens to be the 38.2% retracement level from the April to November run. We're going to speculate that today's bounce might have a bit farther to go. The trend in SNDK may have changed but nothing moves in a straight line. The stock dropped 20 points in a very quick time period and it could easily see a bounce back to the $70 level, which should now be resistance. This is an aggressive play on an oversold bounce but it allows us to limit our risk by placing a stop near the recent lows. Our first target is $70 and we'll use a stop loss at $59.50. ! Weekend Update: There is nothing new to report on our new call SNDK. Shares slipped back slightly on Friday but tech stocks were generally weak most of the session. Traders might get a chance to buy another bounce from the $60 level if the NASDAQ and hardware sectors slip again on Monday. Suggested Options: We like the January calls and our favorite is the JAN-60 strike. ! Alert - December options expire on Friday! BUY CALL JAN 60*SWQ-AL OI= 4111 at $5.90 SL=3.85 BUY CALL JAN 65 SWQ-AM OI= 5762 at $3.30 SL=1.60 BUY CALL APR 65 SWQ-DM OI= 1059 at $6.90 SL=4.90 Annotated Chart: Picked on December 11 at $63.00 Change since picked: - 0.72 Earnings Date 01/14/04 (unconfirmed) Average Daily Volume: 3.8 million Chart = --- United Tech. - UTX - cls: 91.60 chng: +2.33 stop: 89.75*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: Leading the DOW higher on Friday, UTX tacked on an amazing 2.6% to set a new all-time high. After peeking over the $92 level, the stock pulle3d back just slightly into the close, but with volume that more than doubled the ADV, UTX looks like it may have the strength to continue even higher. Driving the strength on Friday was enthusiasm over the company's comments after the close on Thursday that it expects double-digit earnings and revenue growth in 2004. Of course it didn't hurt that Prudential came out on Friday morning with an upgrade from Neutral to Overweight. Our initial profit target was for a move into the $91-92 area and that was clearly achieved on Friday. On that basis, conservative traders should have harvested gains into that strength. We actually considered dropping the play this weekend, as it is up nearly $8 from where we initiated coverage. But based on its strength and the good news, we decided to aggressively tighten the stop to $89.75 (just under Friday's low) and see how much more gas is in the tank with the DOW posting its 2nd consecutive close over 10,000. We're not interested in opening new positions at this altitude, as the potential reward doesn't justify the risk. At this point, we're just attempting to squeeze a bit more profit out of the play. Let's keep a tight stop on the play and see if UTX can reach the $95 level heading into the holidays. If that level is reached next week, we'll close the play without question. Suggested Options: Given the strong rally already in the past couple weeks and UTX's proximity to the top of the channel, we are not recommending new positions at this time. ! Alert - December options expire this week! Annotated Chart of UTX: Picked on November 23rd at $83.90 Change since picked: +7.70 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 1.84 mln ************** NEW CALL PLAYS ************** None ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Avid Technology - AVID - close: 47.09 change: -0.45 stop: 50.25 Company Description: Avid Technology, Inc. develops, markets, sells and supports a wide range of software and hardware for digital media production, management and distribution. Digital media are video, audio or graphic elements in which the image, sound or picture is recorded and stored as digital values, as opposed to analog, or tape- based, signals. The company's range of product and service offerings enable customers to make, manage and move media. Why we like it: After satisfying our entry trigger with its breakdown under $47 on Tuesday, AVID gave momentum traders hope that it would just keep on falling. But with support appearing in the NASDAQ, bargain hunters appeared right at the key $45 support level on Thursday, sending the stock right back up to resistance in the $47.50-48.00 area. Had the bulls managed to follow through with more buying on Friday, we might be looking at a drop this weekend. But price stalled right at $48 on Friday and the stock fell back to end just barely above that initial breakdown trigger. Speaking of last week's breakdown, it delivered the PnF Sell signal we were looking for, and that has the vertical count pointing to a downside target of $34. While that's below our target for this play, it does reinforce the stock's bearishness. The 10-dma ($48.68) is falling to reinforce that resistance and rollover entries below that moving average offer a favorable risk to reward ratio with our stop set at $50.25, just over the 20-dma ($49.95) and 30-dma ($50.18). Based on the strong rebound from support last week, we're less enthusiastic about breakdown entries from here. Once below $45, there's potential support also at $44 and than again at $42 on the way to a test of the 200-dma just over the $40 level. Suggested Options: Aggressive short-term traders can use the December 50 Put, while those with a more conservative approach will want to use the January 45 put. Our preferred option is the January 45 strike, as it provides more time until expiration. ! Alert - December options expire this week! BUY PUT DEC-50 AQI-XJ OI=610 at $3.50 SL=1.75 BUY PUT JAN-50 AQI-MJ OI=189 at $4.90 SL=3.00 BUY PUT JAN-45*AQI-MI OI=557 at $2.45 SL=1.25 Annotated Chart of AVID: Picked on December 7th at $48.46 Change since picked: -1.37 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 637 K --- Kohl's Corp. - KSS - close: 45.01 change: -0.69 stop: 46.75*new* 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: It is hard to find a Retail stock that looks less healthy than KSS does, as it is currently testing its lows from October of 2002. Of course, it does help that the Retail index (RLX.X) had a pretty bearish week, actually breaking and closing below the 100-dma ($364) on Wednesday. KSS has been in a consistent downtrend since early November, finding consistent resistance at the 10-dma (now at $46.40). The $44 level is important support due to it being the low of the October plunge last year, so the potential exists for a reversal at any time. But even with the strength in the overall market lat in the week, the stock just continued to trade weakly, ending at its lowest closing level since September of 2001. It is that 2001 low near $42 that is our eventual target for the play and it looks like the stock just might hit it early next week. We're a bit hesitant to recommend new positions on weakness, but another failed bounce under the 10-dma might do the trick for aggressive traders. Lower stops to $46.75, which is just above Thursday's intraday high and the 10- dma. If the $42 level is reached next week, we're recommending an exit from the play, which we'll follow up with a drop. Suggested Options: Aggressive short-term traders can use the January 40 Put, while those with a more conservative approach will want to use the January 45 put. Our preferred option is the January 45 strike, as it is currently at the money. ! Alert - December options expire this week! BUY PUT DEC-45 KSS-XI OI= 4469 at $0.50 SL=0.25 BUY PUT JAN-45*KSS-MI OI= 9007 at $1.40 SL=0.75 BUY PUT JAN-40 KSS-XJ OI=10290 at $3.10 SL=1.50 Annotated Chart of KSS: Picked on November 18th at $48.75 Change since picked: -3.74 Earnings Date 2/12/04 (unconfirmed) Average Daily Volume = 4.34 mln --- National Semiconductor - NSM - cls: 39.57 chng: -0.38 stop: 42.00 Company Description: National Semiconductor Corporation designs, develops, manufactures and markets an array of semiconductor products, including a line of analog, mixed-signal and other integrated circuits (ICs). These products address a variety of markets and applications, including amplifiers, personal computers, power management, local and wide area networks (LANs and WANs), flat panel and cathode ray tube displays and imaging and wireless communications. The Company's operations are organized in five groups: the Analog Group, the Displays Group, the Information Appliance and Wireless Group, the Wired Communications Group and the Custom Solutions Group. Why we like it: Last week's plunge in the Semiconductor stocks was too good for the bulls to pass up and once again they bought the dip. The SOX rebounded from just above the key $475 support level and by week's end was resting just below the $500 level, which should now begin to act as resistance. Tuesday's convincing breakdown below $40 support and the 50-dma was another dip-buying entry for the bulls, but something seems amiss in the rebound. Rather than following through to the upside on Friday, NSM found stiff resistance at the 50-dma (now at $40.38) and the stock spent most of the day languishing below that critical level. There wasn't any follow-through to the downside, but the failure to move higher hints that perhaps this resistance level will hold. Helping to paint this bearish picture is the PnF chart, which issued a Sell signal on Tuesday with the intraday trade below $38. The vertical count now points to a downside target of $30, although that may be a bit far down for the purposes of our play. More realistically, NSM should first break the $36 level and then work its way down to a test of major support at $32. The best approach for new entries is to target a rollover from resistance near the 50-dma, as it allows us to tightly control risk with our $42 stop. Monitor the SOX for signs of weakness before playing. Suggested Options: Aggressive short-term traders can use the January 35 Put, while those with a more conservative approach will want to use the January 40 put. Our preferred option is the January 40 strike, as it is at the money and provides ample time until expiration. While we've listed a December strike, it is not the preferred strike due to the proximity of December expiration. ! Alert - December options expire this week! BUY PUT DEC-40 NSM-XH OI=5442 at $1.30 SL=0.60 BUY PUT JAN-40*NSM-MH OI=2180 at $2.55 SL=1.25 BUY PUT JAN-35 NSM-MG OI=1278 at $0.80 SL=0.40 Annotated Chart of NSM: Picked on December 9th at $38.70 Change since picked: +0.87 Earnings Date 3/04/04 (unconfirmed) Average Daily Volume = 4.10 mln ---- XL Capital - XL - close: 73.35 change: +0.55 stop: 75.51 Company Description: XL Capital Ltd, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products to industrial, commercial and professional service firms, insurance companies, and other enterprises on a worldwide basis. As of September 30, 2003, XL Capital Ltd had consolidated assets of approximately $39.6 billion and consolidated shareholders' equity of approximately $7.4 billion. (source: company press release) Why We Like It: It has been a rough couple of quarters for XL. Shares have been stuck in a downtrend since June. Shares were hammered even harder in mid-October when the company issued an earnings warning. The stock did manage to rebound back to the $75 level and tried to fill the gap but was turned back by its simple 200- dma. The very next day XL warned again. Estimates for 2004 had been $9.28 a share. Now they are 9.05 to 9.25. Selling has brought it back under its simple 50-dma and the stock looks vulnerable to retest its lows near 67.50, especially with its MACD rolling over back into a sell signal. Shares of XL have found temporary support at $72 while the IUX insurance index breaks out to a new high. We're encouraged by XL's relative weakness compared to its peers and the general market. However, more conservative traders may want to wait on initiating new plays until XL breaks the $72 mark. More aggressive players can try shorting the stock if it fails at its 50-dma, just overhead. If XL surprises us and breaks above is 50-dma it still has resistance at $75 and this might offer another aggressive entry point. Suggested Options We like the January puts. Our favorite is the January 75s. ! Alert - December options expire on Friday! BUY PUT JAN 75*XL-MO OI=1766 at $3.20 SL=1.60 BUY PUT JAN 70 XL-MN OI=3903 at $1.05 SL=0.55 Annotated Chart: Picked on December 09 at $72.60 Change since picked: + 0.65 Earnings Date 01/28/04 (unconfirmed) Average Daily Volume: 1.2 million Chart = ************* NEW PUT PLAYS ************* Federated Dept. Stores - FD - cls: 45.41 chg: -1.57 stop: 47.51 Company Description: Federated, with corporate offices in Cincinnati and New York, is one of the nation's leading department store retailers, with annual sales of more than $15.4 billion. Federated operates more than 460 stores in 34 states, Guam and Puerto Rico under the names of Macy's, Bloomingdale's, Bon-Macy's, Burdines, Goldsmith's-Macy's, Lazarus-Macy's and Rich's-Macy's. The company also operates macys.com and Bloomingdale's By Mail. (source: company press release) Why We Like It: Bears have several reasons to drool over FD. The stock is incredibly overbought on a longer-term time line. Shares have been in a non-stop rally and more than doubled from their spring lows. Propelling shares higher the last few months has been surging expectations that this holiday season would be the best in four years. Now, suddenly, those expectations are being challenged. FD announced November same-store sales that were down 0.1%. That's certainly not the kind of growth investors were looking for. Once this same-store sales news for November came out shares of FD, which had been struggling with the $50 resistance level for three weeks, finally began to fail. The stock dropped on strong volume for three days in a row and bounced from the $45 level after breaking its simple 50-dma. The $45 mark is a strong support resistance level and it is a natural place to buy the dip. Unfortunately, no one appears to be buying. FD has now failed several days in a row under the $47.50 mark and Friday's high-volume drop looks ominous. Our plan is to use a TRIGGER at $44.95. If and only if FD trades at $44.95 or lower we'll open the play with a stop loss at 47.51. Our first target is the $40 level. Suggested Options: Traders have both January and February strikes to choose from. Our favorite is the January 47.50. BUY PUT JAN 40.00 FD-MH OI= 796 at $0.55 SL= -- BUY PUT JAN 42.50 FD-MV OI=1783 at $0.95 SL=0.45 BUY PUT JAN 45.00 FD-MI OI= 666 at $1.70 SL=0.90 BUY PUT JAN 47.50*FD-MW OI= 187 at $3.00 SL=1.55 Annotated Chart: Picked on December xx at $xx.xx <-- see trigger Change since picked: + 0.00 Earnings Date 11/12/03 (confirmed) Average Daily Volume: 1.7 million Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. 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The Option Investor Newsletter Sunday 12-14-2003 Sunday 4 of 5 In Section Four: Leaps: Bittersweet Victory Traders Corner: Waxing Philosophical To Put A Shine On Your Trading ************************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 ***** Bittersweet Victory By Mark Phillips mphillips@OptionInvestor.com In January, I penned an article where I called for the NASDAQ to be the best performing index for the year. From its starting point in January, the COMPX advanced more than 48% to its peak at 2000 just over a week ago. By comparison, the DOW gained just 20% from January 2nd to Friday's closing high of 10042 and the SPX tacked on 22% in the same period of time. Clearly, my call at the beginning of the year for the NASDAQ to be the best performer to the upside proved to be right on target. So I must be feeling pretty smug about all those QQQ LEAP Calls, right? Well, no. Not exactly. Now, I did manage to get some favorable entries off the bottom back in March, but like most everyone else, I expected the rally to stall and fail much earlier than what actually happened. So in August, with the bullish percents already buried deep in overbought territory, the VXN (NASDAQ Volatility index) launching from near all-time lows and the QQQ breaking below the bottom of the ascending channel and the 50-dma, it was a no-brainer to pull the plug on a winning trade. Technically, it was the right decision and from a money management and discipline standpoint it was definitely the right decision. So why am I reviewing it here? Because of the emotions that cloud the judgment even when it was a winning trade and it has already been closed. It comes down to something that I believe is endemic to male traders -- for some reason (I think it is related to testosterone), it doesn't really apply to the women in our profession. Sure, we're all playing in this arena to make money, but for some reason, us guys get all tied up about BEING RIGHT. I think that's the most dangerous part of our psychological makeup in this profession. If we're in a losing trade, we don't want to get out because it would be admitting that we were wrong. Not only that, but we have the nagging fear that as soon as we exit the trade, the stock/index will turn around and go in our favor, thus making us wrong twice -- once on the entry and once on the exit. Nothing feels better to us guys than entering a bullish position right at the low and riding it up and exiting (due to dumb luck) right at the high. We feel like we're on top of the trading world and invincible. It is a great lie, because it allows us to delude ourselves into thinking that it was our great trading prowess that enabled us to make those perfect decisions and we're looking for the next opportunity to repeat the process. The problem is that this wonderfully fulfilling experience was a fluke. We've all had the experience at least once and I think it is the recollection of that experience that clouds our judgment in the trenches on a daily basis. So let's come back to the QQQ. For the sake of simplicity, let's say that my entry came in the $25 area and the exit came near $30 following both the 50-dma and channel breaks. That's a net movement of about $6 and close to a 25% move. Clearly that's nothing to be ashamed of...except, the QQQ went on gain ANOTHER $6 from my exit point to its highs. "I left half the profits on the table! How could I be so stupid?" Have you ever had conversations like that with yourself? Or is it just me? No matter. Over the years, I have become far more disciplined about my trading and I don't issue nearly as much self-recrimination for what I label missed "coulda, woulda, shoulda" profits. But every once in awhile a trade like this is still sticking its tongue out at me, several months after my exit, saying "Ha Ha, We Gotcha!" Back in September, I noted with the breakout over 9500, the DOW would more than likely make a move up to the 9800 and then 10,000 levels. I was right and entering on a rebound from the late- September lows produced a nice return if held through to last Friday's close. But I didn't make one red cent off of that move. Why? Because at the time, everything technical told me that a bullish position on that index was too risky. The same culprits were at work here -- bullish percent, VIX, major overhead resistance. So I sat on the sidelines waiting for the next likely level to take a bearish stance. Too bad. The two things the bulls had going for them was sentiment and liquidity -- and it was all they needed. I made the decision to stay out of the bullish side of both of those trades from August on forward due to some very valid technical reasons. Intuitively, I "knew" both markets were headed higher because of the overwhelming bullish sentiment, but my technical view told me that there was too much risk involved and I stood aside. As I sit here I am intellectually perfectly content with those decisions, but emotionally, I'm still playing the "what if" game. So I share these stories with all of you in hopes that you'll all understand that the frustration with not perfectly timing both ends of the trade is normal and common (at least for us guys). But more importantly, it should not be dwelled upon, as the time can be much better spent focusing on new trades that actually have the potential to make money. I'm not saying that all trades shouldn't be critically reviewed. It is just that once that review process is over, we need to put it out of our mind. I haven't mentioned the SPX here yet, but it has also achieved its overall objective. The 1068 level was the line in the sand for this index, as that is the 38% retracement of the entire bear market decline. Price stalled very near that level for more than a week before finally popping a bit higher at the end of the week. Reinforcing that level is the 50% retracement of the entire range for 2002, right there at 1073, just one point under Friday's close. I know what you're thinking -- "Nice history and psychology lesson Mark. But what does that have to do with making money for the rest of the year?" Nothing. But it does have a bearing on what we do for the remainder of the year and what our expectations are. I got an interesting email from a reader as I was writing this column on Saturday that bears directly on this issue. I won't share the actual text of it here, but basically the reader is wondering what the trading prospects are for the remainder of the year. I'm sure he isn't the only one with this question as we all ponder the appropriate balance of time spent between financial and family pursuits. Of course, I already have a bias on this topic, which you are probably all too familiar with if you saw my article from just before the Thanksgiving holiday. If you missed it, feel free to check it out at the following link Pick Your Battles http://www.OptionInvestor.com/traderscorner/tc_112603_2.asp The long and the short of it (all puns intended) is that next week is really the last useful trading week of the year. And even that one will be obscured by the options expiration shenanigans. I remember when op-ex week offered some stellar trading opportunities. Not any more though, as that week tends to be the most difficult to trade of the entire month! After that, we can expect the pros to begin filtering out on December 23rd and we shouldn't expect them to reappear in any significant numbers until the Monday after New Years. Does that mean that we can't or shouldn't trade during the intervening time? No, we just need to understand that price action is likely to be more erratic and difficult to trade. And expectations for significant directional moves should be kept in check. The funds worked long and hard to get the major indices where they are and with bonuses riding on it, we can expect them to have a vested interest in holding the markets near their highs heading into the end of the year. At the same time, there is unlikely to be enough volume or a sufficient catalyst to send them markedly higher either. The result is that we're likely to see fewer solid trade setups from 12/22/03-1/2/04. I won't argue that the POTENTIAL exists from strong moves on every day during that period, but we each have to weigh the benefits of that activity against the opportunity cost of time that could be better spent on other activities such as with family, friends or charity. I think you can accurately infer that I'll personally be placing a much greater emphasis on non-trading activities beginning on 12/24, and it will remain on a low priority until January 5th, at which point I'll be ready to hit the new year at full strength. With that as our backdrop of what I expect over the near term, let's dive in and look at our plays. Portfolio: WMT - While last week didn't have much to offer in the way of price action, it's hard to be disappointed in the continued deterioration in WMT. The stock of the largest Retailer in the world just continues to look weak and the weakening Retail index (RLX.X) certainly isn't helping. That provides quite the contrast to the rest of the market, don't you think? So far, WMT is holding above the $52 support level, but with the price action looking weak, I still think a breakdown is to be expected. It's too late to contemplate new positions, and those with open trades should be looking to harvest any gains that exist on a foray into the $48-50 target zone. I'm trimming the risk somewhat on the play by lowering our stop to $55, which is above what should be strong resistance near $54.50, reinforced by the 20-dma, now at $54.21. SBUX - It was a pretty safe bet that SBUX wasn't going to be an exciting play, given the way the stock has been trading for the past year, so there's really nothing to be disappointed about yet. Over the past couple weeks, SBUX has been drifting sideways and is once again testing the bottom of the more aggressive rising channel. Can it rebound and charge to new highs before the end of the year? Or are we set for a bit of profit taking? Honestly, I don't know, but I wouldn't be surprised at a slightly deeper pullback, maybe to the $30 area, which will find strong historical support, as well as support from the midline of the longer-term rising channel, as well as the 100-dma ($29.59). Needless to say, I would view such a dip as a solid entry point. For now, we'll maintain our stop at $27. Watch List: QQQ - It seems like forever that we've had QQQ on the Watch List, waiting for a viable entry point. Last week, we narrowly avoided an entry on the breakdown, but not this week. QQQ finally makes the move to the Portfolio. See below for details. SMH - Alright, it is still aggressive, but it is high time that we put our money where our mouth is on the Semiconductor stocks. With a lower high on the last rally attempt and the strong selloff last week, the SMH is ripe to offer us up a solid play. Let's reactivate it and look for one more failed rally attempt to let us into the play. I still have no interest in chasing a breakdown move lower, but a rollover in the $42-43 area should offer a solid risk-reward ratio. The bottom of the broken short-term channel is at $42 and should offer some resistance, reinforced by the rolling 30-dma ($42.52). Normally, I'd say we should target a rebound back near the $44 highs for entry, but I just don't think we'll be able to get there. The clincher for me is the weekly Stochastics (10,5,3), which are finally starting to tip over out of overbought. This could be the beginning of a major move lower. There will be a lot of support to overcome on the way down, first at $38, then $36 and $34. I suspect that may be the bottom of the move, as by that time, the 200-dma ($32.62) will likely have risen near that level. To summarize, SMH is back on active status with a $42-43 entry target. NEM - Now that's profit taking! NEM and the rest of the gold stocks have been needing to do this for several weeks and it was encouraging to see. However, I don't think that's the end of it. There's been a lot of gains built into this sector over the past several months, and the vast majority of it has been driven by weakness in the dollar. Everyone seems to be focused on that dollar weakness/gold strength and that tells me that we're due for a bit of a reversal. Look for an actual rebound in the dollar to help bring gold back down into the $375-380 area, which ought to correspond with NEM coming down into the $40 area. It may seem aggressive for an entry target, but if we can get it, it ought to be a position worth holding onto. DJX - The only way this could have played out any better would have been if our entry on Tuesday had seen the DJX holding onto the $100 level at the close. But I have to say that it looks like we got a great entry into this play that we've been following for so long. See below for details on the new Portfolio play. QCOM - What can I say? We just barely missed the entry into QCOM and now the stock appears to have built up a head of steam. Next stop appears to be $55 and maybe even $60. But with price right at the top of the rising channel, there's no way to justify taking a position here. We'll have to simply hope for a pullback to the bottom of the channel to give us an entry point. Until that happens, the safest choice is for us to remain on the sidelines. AIG - Did I actually list AIG as a PUT play? Based on the price action the past couple days, I'm having some serious second thoughts. The stock came right up to the $60 area on Tuesday and Wednesday but didn't show enough weakness to justify taking an entry. Thank goodness!! Thursday's move blasted the stock up to the $61 level and on Friday AIG broke out with conviction, clearing the 2-year descending trendline. This looks like a significant reversal of trend, so I'm going to place AIG on hold this weekend to keep everyone safe. If AIG continues its bullish move and breaks above $65, then we'll definitely be dropping the play due to a break of the stock's consistent trend of lower highs over the past 3 years. Radar Screen: GENZ - As I mentioned last week, there's just something that doesn't feel right about a bearish play on GNEZ right here. The weekly Stochastics have now turned clearly bullish, and last week we got another rebound from the 200-dma. Despite my pledge to put it on the Watch List this weekend, I just don't feel right about doing it yet. I want to see what price action develops up near the bottom of that broken channel (now at $51) and strong historical resistance at $52. Let's wait a bit longer. MEL - Deespite what looked like an attractive setup a few weeks back, I no longer think MEL is worth considering as a bearish long-term play. While the stock remains under its bearish resistance line on the PnF chart, it is on a Buy signal (I don't know why I missed that before) with a price target of $60. This just doesn't seem like a high odds candidate right now, so I'm going to remove it from the Radar Screen this weekend. EK - I like what I see here, as EK seems to be drifting lower in a bull flag pattern. Why do I like that in a bearish play candidate? Because a bullish resolution might be just the ticket to get the stock back up into the $27 area, where we want to consider it for new bearish entry points. If we can get that entry, then we ought to be in good shape to play it down to the $20 level and below next year. There's till plenty of time, but I think we'll move EK onto the Watch List between now and the end of the year. HD - I stumbled across this one last week and it looks like we could be setting up a nice bearish play. HD has been trading in a broad descending channel since early 2000 and the rally of the past year has just managed to raise the price back near the top of the channel. That would be one thing on its own, but the weekly chart is also giving us some bearish Stochastics divergence. Couple that with a housing sector that has been running hard for months and HD's lack of participation and I think we've got a winner on our hands. Near-term, HD needs to bounce back from its recent selloff down near the 200-dma. Look for the stock to make progress back up towards the $36-37 area, at which point we can actually contemplate a bearish play setup. Once HD does roll over from the top of its channel, we'll be looking for drop to at least the midline of that channel in the $26-27 area. SNDK - Due to its dominance in the flash memory market, especially as it pertains to consumer electronics, SNDK had an amazing run this year, vaulting from $15 to $85 in less than 7 months. That trend was bound to break and some negative comments from INTC a couple weeks ago seem to have done the trick. Right now, SNDK is trying to bounce from the $60 area, but I think we could see a break still lower early next year. SNDK still has a great product and business, and that makes the stock attractive on a deep pullback. I've got my eye on potential support near the 200-dma ($48.88) and I think a bullish entry taken there should do quite well in 2004. Closing Thoughts: With expiration week right in front of us, I think we can effectively say that 2003 is over in terms of meaningful trade opportunities. The winning trade for the year was to go long the NASDAQ in March and hold on through all the gyrations that brought us here. I didn't manage to do that myself, but my hat's off to any of you that did. I would recommend using the next week to finalize any trading activity that needs to be handled before the end of year -- namely for tax purposes. The funds managed to achieve their upside goals for the major indices and I expect to see a pretty firm holding action right into the ball drop on New Year's Eve. Technicals really aren't going to matter much over the next couple weeks, at least in terms of the big picture. The markets are still grossly overextended and likely to remain that way until January. Save your strength, because we're probably going to need it once 2004 gets rolling! 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 $ 4.80 +10.42% $27.00 '06 $ 30 WSP-AF $ 6.40 $ 6.60 + 3.13% $27.00 Puts: WMT 10/03/03 '05 $ 55 ZWT-MK $ 5.10 $ 6.20 +21.15% $ 56.50 '06 $ 55 WWT-MK $ 7.20 $ 7.70 6.94% $ 56.50 DJX 12/09/03 '04 $ 96 YDK-XR $ 5.70 $ 5.20 - 8.77% $104.00 '05 $ 96 ZDK-RR $ 7.10 $ 6.70 - 5.63% $104.00 QQQ 12/09/03 '05 $ 32 ZWQ-MF $ 2.65 $ 2.30 -13.21% $ 38.00 '06 $ 32 WD -MF $ 3.70 $ 3.40 - 8.11% $ 38.00 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 $45 JAN-2005 $ 45 ZLU-AI CC JAN-2005 $ 40 ZLU-AH JAN-2006 $ 45 WLU-AI CC JAN-2006 $ 40 WLU-AH PUTS: SMH 08/24/03 $42-43 JAN-2005 $ 40 ZTO-MH JAN-2006 $ 40 YRH-MH AIG 11/30/03 HOLD JAN-2005 $ 60 ZAF-ML JAN-2006 $ 60 WAP-ML New Portfolio Plays DJX - Dow Jones Industrials $99.23 **Put Play** After what seemed an eternity, the DOW finally reached its 10,000 target last week, with the first touch coming on Tuesday. That gave us the entry point we were looking for, and the DJX relaxed down to $99.23 at the close. As noted above, I have little expectation for significant weakness between now and the end of the year. Too many people want to see 2003 go out on a high note. The week immediately in front of us has good chances of seeing the DJX go out very near the $100 level as the market makers will jockey to pin the index to that round number. We've got a much longer-term focus here and the action we're looking to take advantage of should appear early next year. Just to be perfectly clear, we're not looking for a major decline, just a solid drop back to major support in the $90-92 area. Should a major drop ensue, then we'll take that in stride, but let's keep our expectations in check for now and let the price action dictate our expectations. The bullish percent for the DOW remains up in overbought territory at 80%, still refusing to give a bearish signal. The VIX remains mired near multi-year lows just above 16 and the weekly Stochastics are still hovering near overbought, just as they have been since late April. All conditions are poised to give us a nice downside play and now the waiting game begins. Look for an upside bias into the end of the year and take advantage of any strength to gain a more favorable entry point in the $100-102 area. In order to give the play some room before the downside gets underway, we're using a wide stop at $104, which should be safe, as it is above strong resistance in the 103.00- 103.50 area. BUY LEAP DEC-2004 $96 YDK-XR $5.70 BUY LEAP JUN-2005 $96 ZDK-RR $7.10 QQQ - NASDAQ-100 Trust $34.43 **Put Play** After just avoiding an entry a week ago, I thought we'd get the higher entry this week, as the NASDAQ looked poised for a bounce near the FOMC meeting. Unfortunately, that bounce never really appeared and following the FOMC (non)decision, price fell below our lower trigger at $35.00, satisfying that lower trigger. Things look to be lined up nicely in our favor nonetheless, as weekly Stochastics are in the midst of a grudging decline, the VXN volatility index is still quite low and the NASDAQ-100 bullish percent is still in Bear Confirmed status. Adding to the bearish picture is the fact that the QQQ rolled over near the bottom of the rising channel that defined the upward trend since March. That said, it wouldn't surprise me to see the bulls take one more run at the highs near $36, with a possible foray slightly above that level before any bearish action really gets moving. I would view a near-term move back above $36 as simply a better entry point ahead of the weakness we're expecting after the first of the year. The first concrete sign that the bears are gaining strength will be when we see the QQQ finally penetrate its 100-dma, currently at $33.81 and close below that point. In order to give this play some room to move, we're going to use a wide and aggressive stop at $38, which should keep us out harm's way until the decline begins in earnest. More conservative traders can use a slightly tighter stop at $37. BUY LEAP JAN-2005 $32 ZWQ-MF $2.65 BUY LEAP JAN-2006 $32 WD -MF $3.70 New Watchlist Plays None 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 ************** Waxing Philosophical To Put A Shine On Your Trading By Mike Parnos, Investing With Attitude Recently I have been waxing philosophical. No, it's not something that puts a shine on your Toyota. It, hopefully, is how one learns new habits – and, potentially, gets rid of old ones. Mr. Miyagi taught the Karate Kid with "wax on, wax off." Well, lately I've been doing my fair share of waxing. I've been reading. It's a lost art. We now get most of our information from electronic sources -- the boob tube or the Internet. It's easy. It's too easy. So, we have a tendency to overlook a whole world of information they manage to conveniently hide in books. I discovered a noted psychologist who has an interesting take on life – and, coincidentally, it holds true to one's trading life. He states, "If what you are choosing is not working, that tells you that those things are worthy of change. If your priority is winning, be willing to 'move your position.'" "If what you're doing is not working, change it. Measure your thinking and behavior by that simple yardstick. Is it working or not working? What have you got to lose? You can always go back to your old way of doing things." Who wrote this? These simple truths were espoused by good old Dr. Phil in his book "Life Strategies." A lot of people don't care for his "in your face" approach. However, I appreciate it. I don't shrink from constructive criticism (and I get my share). As a matter of fact, I welcome it. Regular readers of this column know I'm not shy about giving advice – trading or otherwise. And I'm pretty straightforward. We are creatures of habit. Certain behaviors become ingrained in our lives. Another universal truth is that change is scary for most people. There is a comfort level with the status quo – even if it includes negative behaviors. Why? Because they are predictable – and there is a degree of security in predictability. I've noticed a groundswell (I like that word) of traders who are emigrating from swing trading and day trading to CPTI trading philosophies. I'm getting a lot of emails and phone calls. OI readers want to become CPTI students and private students. They're willing putting aside (at least temporarily) old unsuccessful trading habits and explore what we do here rather successfully. I applaud open minds. I applaud change. It's daring. It's exciting. It's taking a giant step into the unknown. It makes sense – and, in our case, usually makes a nice profit. It worked for the Karate Kid, why not us? Wax on . . . _____________________________________________________________ This Month's Quickies I only came up with a few "hypothetical" quickie trades for this option cycle. It seems the market wants to trend up – which is not conducive for our style of trading. There will be a pullback, but to narrow it down to happening this upcoming week is bit ludicrous. Therefore, I suggest that you take extreme care and consider that any one-week trades should be done with pure risk capital. ______________________________________________________________ Quickie Position #1 – SOX Iron Condor (Semiconductor Index) – 496.15 Sell 10 contracts of SOX Dec. 520 calls Buy 10 contracts of SOX Dec. 530 calls Credit: $.70 Sell 10 contracts of SOX Dec. 475 puts Buy 10 contracts of SOX Dec. 465 puts Credit: $1.00 Total net credit of $1.70 ($1,700). Maximum profit range is 475 to 520. Safety range is 473.30 to 521.70. Quickie Position #2 – RUT Iron Condor (Russell 2000 Small Cap Index) – 547.59 Sell 10 contracts of RUT Dec. 560 calls Buy 10 contracts of RUT Dec. 570 calls Credit: $.60 Sell 10 contracts of RUT Dec. 530 puts Buy 10 contracts of RUT Dec. 520 puts Credit: $.60 Total net credit of $1.20 (1,200). Maximum profit range is 530 to 560. Safety range is 528.80 to 561.20. Quickie Position #3 – S&P 500 – SPX – Iron Condor – 1074.14 Sell 6 contracts of SPX Dec. 1090 calls Buy 6 contracts of SPX Dec. 1105 calls Credit: $1.20 Sell 6 contracts of SPX Dec. 1055 puts Buy 6 contracts of SPX Dec. 1040 puts Credit: $1.10 Total net credit of $2.30 ($1,380). Maximum profit range is 1055 to 1090. Safety range is 1052.70 to 1092.30. Quickie Position #4 – QQQ – Cheap Lottery Straddle -- $35.24 Let's position ourselves to take advantage of any extreme market move that may take place this week. We'll risk $250. We could double or triple our money. Stranger things have happened. Buy 10 contracts of Dec. QQQ $34 puts @ $.10 Buy 10 contracts of Dec. QQQ $36 calls @ $.15 Total debit: $.25 ($250) __________________________________________________________ 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 time erosion. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you a trader. And make sure you know the intricacies of a strategy before you trade. _____________________________________________________________ DECEMBER CPTI PORTFOLIO POSITIONS SPX Iron Condor – 1074.14 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 1085. Max profit potential of $2,330. BBH -- Baby Iron Condor - $130.56 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 – 531.78 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). NDX Iron Condor – 1417.27 Here's an index we haven't traded before. The NDX mirrors the NASDAQ 100 stocks, just like the QQQs. We sold six December NDX 1325 puts and buy the December NDX 1300 puts, taking in about $1.70. Then, we sold six December NDX 1525 calls and buy the December 1550 calls for a credit of about $1.00. Total credit: $2.70. Maximum profit range of 1325 to 1525. _____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $35.24 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 @ $35.24 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. ______________________________________________________________ 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 12-14-2003 Sunday 5 of 5 In Section Five: Covered Calls: A Conservative Approach To Covered-Calls Naked Puts: Success With Stops Spreads/Straddles/Combos: Santa Claus Rally In Progress! Updated In The Site Tonight: Market Posture: Bear-Humbug ************************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: A Conservative Approach To Covered-Calls By Mark Wnetrzak One of our readers asked about our profit and loss goals for the candidates in this section. Attn: markw@OptionInvestor.com Subject: Goals for your picks Hi Mark, Several times throughout your discussions you mention the goal is for 3-5% or 4-6% etc yield, and 10-15% downside protection using the ITM call. Yet for the picks of Nov 30, some don't meet that criteria. Actually they do if we consider a margin account, but not an un-margined account. If you have the time, would you mind commenting on what makes you select a particular candidate that is outside of the more conservative criteria. Thanks, Frank Hello Frank, In his book, "Options: As A Strategic Investment," Lawrence McMillan, the "guru" of option trading strategies, suggests looking for a minimum return of just 1% (2% with margin) per month, with downside protection of at least 10%, because it will force one to choose "in-the-money" covered-calls. At the OIN, we agree with McMillan's conservative strategy (selling ITM covered-calls) and we use a two-pronged approach to find a variety of candidates to supplement your search for profitable trading positions: technical scans and option scans. I personally sort through hundreds of charts each week looking for technically strong stocks with favorable option premiums. I then evaluate several "over-priced" option lists, looking for stocks with favorable technical patterns. Our primary goal in this section is to provide positions that make acceptable returns while still receiving an above-average amount of downside protection, market permitting. As with all recommendations, it remains up to each individual to perform due diligence, thoroughly research any issue, and make sure that it fits their personal risk-reward tolerance. In short, we simply try to provide the best candidates the market has to offer and when there aren't enough technically favorable stocks with 4-6% (ITM covered-call) yields to complete the section, we will publish slightly more conservative positions. Best Regards, Mark W. OIN SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield ARIA 7.70 7.65 DEC 7.50 0.80 0.60* 7.6% NEOL 18.32 17.50 DEC 17.50 1.40 0.58 7.4% GSS 5.90 7.00 DEC 5.00 1.25 0.35* 6.5% PAAS 12.57 12.60 DEC 12.50 0.70 0.63* 5.8% IBIS 16.12 15.40 DEC 15.00 1.45 0.33* 4.9% MOBE 11.19 10.10 DEC 10.00 1.60 0.41* 4.6% ISSI 16.33 16.25 DEC 15.00 1.90 0.57* 4.3% MMR 16.30 17.95 DEC 15.00 2.00 0.70* 4.3% CLHB 6.12 7.84 DEC 5.00 1.35 0.23* 4.2% INSP 24.39 24.95 DEC 22.50 2.70 0.81* 4.1% IBIS 16.25 15.40 DEC 15.00 1.65 0.40* 4.0% ESPR 22.21 22.90 DEC 20.00 2.90 0.69* 3.9% CANI 14.05 13.00 DEC 12.50 1.95 0.40* 3.6% IM 15.06 15.70 DEC 15.00 0.30 0.24* 3.5% TLAB 8.08 8.02 DEC 7.50 0.80 0.22* 3.3% SLNK 20.61 19.39 DEC 20.00 1.25 0.03 0.2% NTPA 15.30 14.00 DEC 15.00 1.30 0.00 0.0% IMMU 5.35 4.40 DEC 5.00 0.60 -0.35 0.0% AVII 4.99 4.22 DEC 5.00 0.40 -0.37 0.0% NTIQ 12.53 13.08 JAN 12.50 0.85 0.82* 5.1% MYGN 12.76 12.75 JAN 12.50 0.95 0.69* 4.2% XING 10.66 9.23 JAN 10.00 1.35 -0.08 0.0% * Stock price is above the sold striking price. Comments: The Dow Jones 30 and the S&P 500 are leading the market to the best levels of the year but the NASDAQ stubbornly refused to climb to a 2003 high. Next week should be interesting with the mixed technical signals and options expiration. Several stocks in the "model" portfolio above have tested their 50-day MAs, which could be offering a second chance to exit or adjust the positions. Then again, any rebound could be the start of a new leg up. Isn't trading fun! Both Kmart (NASDAQ:KMRT) and Ixia (NASDAQ:XXIA) are shown closed as both stocks continued to act horridly this week, moving below near-term support (50-day MA). Avi Biopharma (NASDAQ:AVII) has also broken its previous support level near $4.50, which doesn't bode well for the future. We will show the position closed, in the name of money management. Mobility Electronics (NASDAQ:MOBE) looks a tad distasteful as the stock broke through its 50-day MA, and the current rebound appears to be a bit listless. We will show the position closed next week as a move towards the 150-day MA near $7.50 could be forthcoming. As always, this is not an all-inclusive list but rather a few simple examples of one person's money-management techniques. Positions Previously Closed: Brocade (NASDAQ:BRCD), Kmart (NASDAQ:KMRT), Ixia (NASDAQ:XXIA) and TiVo (NASDAQ:TIVO). 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 WIND 7.48 JAN 7.50 QWV AU 0.50 2 6.98 35 6.2% CE 13.50 JAN 12.50 CE AV 1.80 20502 11.70 35 5.9% TKTX 15.35 JAN 15.00 UFT AC 1.25 367 14.10 35 5.5% VTS 10.05 JAN 10.00 VTS AB 0.55 1008 9.50 35 4.6% MYGN 12.75 JAN 12.50 GSQ AV 0.85 102 11.90 35 4.4% EMBT 15.98 JAN 15.00 MBQ AC 1.65 0 14.33 35 4.1% CNH 15.27 JAN 15.00 CNH AC 0.95 28 14.32 35 4.1% 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). ***** WIND - Wind River $7.48 *** What's Up? *** Wind River Systems (NASDAQ:WIND) is a supplier of embedded software and services for embedded systems. These systems consists of a microprocessor, or a series of microprocessors, and related software, and is used to control, monitor or assist the operation of electronic devices, equipment and machinery. Embedded systems are used in diverse products such as digital imaging products, auto braking systems, Internet routers, jet fighter control panels and factory automation devices. The company's products help customers to enhance product performance, standardize designs across projects, reduce research and development costs and shorten product development cycles. The stock rallied sharply on Thursday and Friday on increasing volume which suggests further upside potential. The stock appears to be forming a long-term "rounded bottom" pattern and a move through near-term resistance near $8 would be bullish. Investors can use this position to target-shoot an entry point closer to technical support. JAN-7.50 QWV AU LB=0.50 OI=2 CB=6.98 DE=35 TY=6.2% ***** CE - Concord $13.50 *** First Data Christmas Present? *** Concord EFS (NYSE:CE) is an electronic transaction processor that provides the technology and network systems that make payments and other financial transactions fast, efficient and secure. The company is organized in two business segments: network services and payment services. The network services segment provides ATM processing, debit card processing and coast-to-coast debit network access principally for financial institutions. The payment services segment provides POS processing, settlement and related services, with specialized systems focusing on supermarkets, major retailers, gas stations, convenience stores, restaurants and trucking companies. First Data (NYSE:FDC) appears to be close to a settlement with U.S. antitrust authorities that would clear the way for its purchase of rival Concord. Obviously traders have begun to position themselves for a quick resolution and investors can use this position to speculate on the outcome. JAN-12.50 CE AV LB=1.80 OI=20502 CB=11.70 DE=35 TY=5.9% ***** TKTX - Transkaryotic $15.35 *** New Drug Speculation *** Transkaryotic Therapies (NASDAQ:TKTX) is a biopharmaceutical company developing therapeutics for the treatment of rare genetic diseases caused by protein deficiencies. TKT has received approval to market and sell Replagal (agalsidase alfa), an enzyme replacement therapy for the long-term treatment of patients with Fabry disease, in 25 countries, principally in Europe. Among the products the company has developed or is developing are therapeutics for the treatment of rare diseases, such as Iduronate-2-Sulfatase (I2S) for Hunter Syndrome and Glucocerebrosidase (GCB) for Gaucher Disease. Other products include gene-activated versions of proteins such as Dynepo for annemia related to chronic renal failure, gene-activated granulocyte colony stimulating factor (GA-GCSF), gene-activated follicle-stimulating hormone (GA-FSH) and gene-activated human growth gormone (GA-hGH), as well as gene therapy products such as Factor VIII gene therapy for Hemophilia A. The current technical outlook for Transkaryotic is recovering and our position offers excellent reward potential at the risk of owning the issue at a favorable cost basis. Due diligence is a must! JAN-15.00 UFT AC LB=1.25 OI=367 CB=14.10 DE=35 TY=5.5% ***** VTS - Veritas $10.05 *** Oil Service Sector *** Veritas DGC (NYSE:VTS) provides integrated geophysical services to the petroleum industry worldwide. Their customers include national and independent oil and gas companies that utilize geophysical technologies to identify new areas where subsurface conditions are favorable for the production of hydrocarbons, determine the size and structure of previously identified oil and gas fields and optimize development and production of hydrocarbon reserves. The company acquires, processes and interprets geophysical data and produces geophysical surveys that are either two-dimensional (2-D) or three-dimensional (3-D) images of the subsurface geology in the survey area. Veritas also produces four-dimensional (4-D) surveys that record fluid movement in the reservoir. In addition, it uses geophysical data for reservoir characterization to enable its customers to maximize their recovery of oil and natural gas. Oil service companies have rallied in recent weeks and this position offers investors a reasonable entry point in Veritas at the risk of owning the stock near $9.50. JAN-10.00 VTS AB LB=0.55 OI=1008 CB=9.50 DE=35 TY=4.6% ***** MYGN - Myriad Genetics $12.75 *** Bottom Fishing *** Myriad Genetics (NASDAQ:MYGN) is a biopharmaceutical company focused on the development of novel therapeutic products and the development and marketing of predictive medicine products. The company's researchers have made important discoveries in the fields of cancer, Alzheimer's disease, viral diseases (such as HIV), depression and obesity. These discoveries point to novel disease pathways that may pave the way for the development of new drugs. Flurizan (MPC-7869), their lead therapeutic candidate for prostate cancer, is in a large, multi-center clinical trial. Myriad is also conducting a Phase I clinical trial for the evaluation of MPC-7869 for Alzheimer's disease. MYGN has been forging a Stage I base for almost a year and this position offers speculators a method to profit from the current lateral trend. JAN-12.50 GSQ AV LB=0.85 OI=102 CB=11.90 DE=35 TY=4.4% ***** EMBT - Embarcadero $15.98 *** Next Leg Up? *** Embarcadero Technologies (NASDAQ:EMBT) provides software products that enable organizations to effectively manage their database infrastructure and manage the underlying data housed within that infrastructure. The company's database administration, enterprise data architecture, enterprise data integration and performance management products offer customers comprehensive solutions for managing the database life cycle, which is the process of creating, optimizing and managing the databases that support critical business applications. By simplifying management of the database life cycle, Embarcadero's products allow their customers to ensure the availability, performance and reliability of their critical business applications and extract maximum value from their corporate data. Shares of Embarcadero continue to rally and once again have made a new 52-week high. Traders who have a bullish outlook for the company can speculate on the future value of its shares with this position. JAN-15.00 MBQ AC LB=1.65 OI=0 CB=14.33 DE=35 TY=4.1% ***** CNH - CNH Global $15.27 *** Pure Speculation *** CNH Global (NYSE:CNH) is primarily engaged in the engineering, manufacturing, marketing and distribution of agricultural and construction equipment. The Company markets its products globally through its Case, Case IH, New Holland, Steyr, Fiat Kobelco, FiatAllis, Kobelco and O&K brand names. CNH makes its products in 45 facilities throughout the world and distributes them in over 160 countries through an extensive network of dealers and distributors. The company also offers financial services products, including retail. CNH is controlled by Fiat Netherlands Holding, a wholly owned subsidiary of Fiat S.p.A., which owned approximately 85% of the outstanding common shares of CNH as of December 31, 2002. CNH is another stock that has been recovering since its March low and speculators who believe the upside activity will continue can profit from that outcome with this position. JAN-15.00 CNH AC LB=0.95 OI=28 CB=14.32 DE=35 TY=4.1% ***** ***************** 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 IDBE 13.10 JAN 12.50 QQ AV 1.40 238 11.70 35 5.9% LTXX 15.24 JAN 15.00 UXT AC 1.20 35 14.04 35 5.9% INGP 5.18 JAN 5.00 UAU AA 0.45 11 4.73 35 5.0% CBST 12.61 JAN 12.50 UTU AV 0.75 2132 11.86 35 4.7% DNDN 8.17 JAN 7.50 UKO AU 1.05 676 7.12 35 4.6% RHAT 13.46 JAN 12.50 RCV AV 1.55 619 11.91 35 4.3% OIIM 21.75 JAN 20.00 XQQ AD 2.70 25 19.05 35 4.3% NTIQ 13.08 JAN 12.50 CDJ AV 1.15 1947 11.93 35 4.2% GNSS 17.01 JAN 15.00 QFE AC 2.65 68 14.36 35 3.9% ***************** NAKED PUT SECTION ***************** Options 101: Success With Stops By Ray Cummins A new reader wants to know about the use of trading stops with options. Attn: questions@OptionInvestor.com Subject: Using Trading Stops Greetings, I just started reading your newsletter and I am learning a lot about option trading and the different charting methods for forecasting stock movements. Up until now, I have been trading in an online practice portfolio (no $$$) but I am almost ready to "sink or swim." One question I have is about stop orders. There seems to be some major differences between the stop and stop limit order and I just wanted to be sure I understood them correctly. Could you please explain how they work. Also which is more commonly used with options, a mental stop or mechanical stop? Thanks for your help! SW Hello SW, Learning to correctly manage portfolio positions; maximizing gains while limiting losses, is one of the most important aspects of successful trading. The first thing a trader should realize is that they should never enter a position without a pre-planned exit strategy. The reason for this approach is simple: the most common reason for losing money in the options market is failing to close a position in a timely manner, regardless of whether the action is to limit losses or lock-in gains. A surprising number of traders achieve excellent profits, but end up giving most (or all) of the gains back because they don't develop a sensible plan to manage each position. The majority of market professionals utilize limit orders in conjunction with profit targets and protective stops to curb losses, but the retail trader is far less proficient in this practice. Using sell-stops eliminates the risk of emotional or reaction-based judgments in difficult situations and removes human nature from the equation. A mechanical and disciplined method for achieving profit is the key to consistent success and allowing the market to make the exit decision is much more precise than relying on our complex human intuition. There are two common types of stop orders: STOP ORDER (most traders use this for a closing order) An option stop order is an order to buy or sell option contracts when the market for a particular contract reaches a specified price, called the stop price. A stop order to "buy" becomes a market order when the option contract trades or is bid at or above the stop price. A stop order to "sell" becomes a market order when the contract trades or is offered at or below the stop price. STOP-LIMIT ORDER (many traders use this for an opening order) An option stop-limit order is an order to buy or sell option contracts at a specified price or better, after a given stop price has been reached or exceeded. A stop-limit order to "buy" becomes a limit order when the option contract trades or is bid at or above the stop-limit price. A stop-limit order to "sell" becomes a limit order when the contract trades or is offered at or below the stop-limit price. An option stop-limit order is a combination of a stop order and a limit order. Stop-limit orders that have been triggered and converted into limit orders will execute if the option is thereafter offered at or below the ask price for buy orders or at or above the bid price for sell orders. In simple terms: If you use a STOP order and the underlying issue trades at or below your stop loss, the order will become a market order. This is not the case with a stop-limit order. If you use a stop-limit order and the issue moves too quickly to trade at the limit price, the order will not be executed. As far as the use of manual versus mechanical exit orders, they both have merit in certain situations and it is very important to have all the necessary tools to manage your portfolio effectively. That should include the ability to place trading stops on options and also stops on stocks, which will trigger option-closing orders. With regard to a "generally accepted" method for closing plays, I believe the overwhelming number of traders use mechanical systems on a regular basis, however there are many short-term strategies that are better suited to manual order executions. Keep in mind these techniques require continuous monitoring of the position to make sure the entry/exit trades are executed in a timely manner. 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 RMBS 29.30 30.66 DEC 25.00 0.40 0.40* 3.5% 11.1% RMBS 30.00 30.66 DEC 25.00 0.55 0.55* 3.3% 10.6% MMR 18.95 17.95 DEC 17.50 0.30 0.30* 3.8% 10.1% RDWR 26.84 27.51 DEC 25.00 0.60 0.60* 3.6% 9.2% RDWR 23.46 27.51 DEC 20.00 0.65 0.65* 2.9% 8.6% QLTI 18.86 19.05 DEC 17.50 0.25 0.25* 3.1% 8.4% USNA 34.39 32.25 DEC 30.00 0.35 0.35* 2.6% 7.8% SANM 11.11 11.52 DEC 10.00 0.25 0.25* 2.8% 7.6% APPX 32.62 33.71 DEC 25.00 0.45 0.45* 2.0% 7.0% APPX 32.29 33.71 DEC 25.00 0.55 0.55* 2.0% 6.8% AEIS 26.30 25.34 DEC 22.50 0.45 0.45* 2.2% 6.8% NTE 36.99 36.00 DEC 22.50 0.35 0.35* 2.3% 6.5% SWIR 18.75 15.50 DEC 15.00 0.30 0.30* 1.8% 6.4% ALTR 23.93 22.51 DEC 22.50 0.50 0.50* 2.5% 6.3% ONXX 27.63 27.14 DEC 25.00 0.25 0.25* 2.2% 6.3% DIGE 38.50 36.10 DEC 35.00 0.35 0.35* 2.2% 6.2% MEDI 27.04 28.01 DEC 25.00 0.25 0.25* 2.2% 6.0% FFIV 25.07 24.15 DEC 22.50 0.55 0.55* 2.2% 6.0% XMSR 22.10 24.47 DEC 17.50 0.25 0.25* 1.6% 5.8% APPX 36.04 33.71 DEC 30.00 0.35 0.35* 1.7% 5.8% PDII 25.97 26.47 DEC 22.50 0.45 0.45* 1.8% 5.3% MGAM 42.90 37.25 DEC 35.00 0.45 0.45* 1.4% 5.0% NPSP 29.26 32.64 DEC 25.00 0.35 0.35* 1.5% 4.9% FLEX 16.00 14.37 DEC 15.00 0.30 -0.33 0.0% 0.0% * Stock price is above the sold striking price. Comments: Investors received their Christmas bonus this week as the "Santa Claus" rally delivered sharp gains with many stocks hitting 2003 highs. The market appears to be comfortably established in a new trading range but with share values so inflated, there is certain to be some year-end selling in less than outstanding issues. One of the stocks in that category now is Flextronics (NASDAQ:FLEX), and our bullish position became an "early-exit" victim when the issue closed well below the sold (put) strike at $15 on Wednesday. A similar situation exists with Sierra Wireless (NASDAQ:SWIR) and that position was likely closed by conservative traders during the mid-week slump. Altera (NASDAQ:ALTR), American Pharmaceutical (NASDAQ:APPX); $30 strike, Digene (NASDAQ:DIGE), Multimedia Games (NASDAQ:MGAM), and Usana Health Sciences (NASDAQ:USNA) are on the "watch" list. Previously Closed Positions: ADE Corporation (NASDAQ:ADEX) and eCollege.com (NASDAQ:ECLG) 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 SOV 23.70 JAN 22.50 SOV MX 0.90 1454 21.60 35 3.6% 8.5% SLXP 21.50 JAN 20.00 PQN MD 0.60 1 19.40 35 2.7% 6.8% NPSP 32.64 JAN 30.00 QKK MF 0.80 54 29.20 35 2.4% 6.2% BLTI 14.01 JAN 12.50 BQF MV 0.30 159 12.20 35 2.1% 5.9% RMBS 30.66 JAN 20.00 BNQ MD 0.40 9912 19.60 35 1.8% 5.3% AAII 25.01 JAN 22.50 IUQ MX 0.45 0 22.05 35 1.8% 4.9% EMMS 27.17 JAN 25.00 QMJ ME 0.50 1000 24.50 35 1.8% 4.7% 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). ***** SOV - Sovereign Bancorp $23.70 *** A Big Day! *** Sovereign Bancorp (NYSE:SOV) is the parent company of Sovereign Bank, a financial institution with 525 community banking offices, approximately 1,000 automated teller machines and approximately 8,000 team members in Pennsylvania, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, Delaware and Massachusetts. Sovereign's primary business consists of attracting deposits from its network of community banking offices and originating small business and middle market commercial and asset-based loans, residential mortgage loans, home equity lines of credit and auto and consumer loans in the communities served by those offices. Sovereign also purchases portfolios of residential mortgage loans and other consumer loans throughout the United States. There is little news to explain the strong rally Friday in SOV shares but the stocks is a favorite among some institutional investors and extreme buying pressure suggests the possibility of an unexpected announcement. Traders can speculate on the reason for the recent upside activity with this position. JAN-22.50 SOV MX LB=0.90 OI=1454 CB=21.60 DE=35 TY=3.6% MY=8.5% ***** SLXP - Salix Pharmaceuticals $21.50 *** Technical Break-Out? *** Salix Pharmaceuticals (NASDAQ:SLXP) is a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a large variety of gastrointestinal diseases, which affect the digestive tract. The company identifies and acquires rights to products that have potential for regulatory approval or are already approved; then applies its regulatory, product development and sales/marketing expertise to commercialize these products, and uses its field sales force focused on high-prescribing U.S. gastroenterologists to sell its products. SLXP soared to a multi-year high Friday and the high trading volume suggests further upside potential. Traders can establish a cost basis near $20 in the issue with this position. JAN-20.00 PQN MD LB=0.60 OI=1 CB=19.40 DE=35 TY=2.7% MY=6.8% ***** NPSP - NPS Pharmaceuticals $32.64 *** Drug Sector Favorite! *** NPS Pharmaceuticals (NASDAQ:NPSP) is a biopharmaceutical company engaged in discovering, developing and commercializing small molecule drugs and recombinant proteins. The company's product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders. NPS Pharmaceuticals has three product candidates in active clinical development and several pre-clinical product candidates. Shares of NPSP are testing 2003 highs and the recent buying pressure suggests a successful outcome in the coming week. Traders who agree with a bullish outlook for the issue should consider this position. JAN-30.00 QKK MF LB=0.80 OI=54 CB=29.20 DE=35 TY=2.4% MY=6.2% ***** BLTI - Biolase $14.01 *** Speculation Only! *** BioLase Technology (NASDAQ:BLTI) is a medical technology company that designs, develops, manufactures and markets advanced dental, cosmetic and surgical lasers and related products. The company's principal products are water- and laser-based systems focused for use in dentistry. The company holds patents and has received clearances from the United States Food and Drug Administration for applications in other markets such as dermatology. BioLase Technology also manufactures accessories and disposable products for its water- and laser-based systems. Lots of speculation on this issues after some positive comments in IBD and investors say the company is a market leader with growing sales year over year and renewed institutional interest. The trend is bullish in the short-term and traders can profit from additional upside movement in the issue with this position. JAN-12.50 BQF MV LB=0.30 OI=159 CB=12.20 DE=35 TY=2.1% MY=5.9% ***** RMBS - Rambus $30.66 *** A New Multi-Year High! *** 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 RMBS spiked again in late November in the wake of a legal ruling involving Unocal (NYSE:UCL), which analysts say could lead to 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. JAN-20.00 BNQ MD LB=0.40 OI=9912 CB=19.60 DE=35 TY=1.8% MY=5.3% ***** AAII - AaiPharma $25.01 *** Up, Up And Away! *** AaiPharma (NASDAQ:AAII) is a science-based specialty pharmaceutical company that focuses on targeted therapeutic areas, to which the company markets a growing portfolio of established branded products and applies its technologies to increase the commercial potential of these products. At the same time, AaiPharma's R&D organization is developing a pipeline of products to position the company for near-term and long-term growth in its targeted therapeutic areas. In addition to developing and marketing its own line of proprietary pharmaceutical products, AaiPharma continues to provide contract pharmaceutical development services through its AAI International division. AaiPharma soared higher last week after the company said it expects revenue for 2004 to be in the range of $340 million to $355 million and earnings to be in the range of $1.45 to $1.52 per share. Analysts on average had expected profit of $1.31 per share and $314.1 million in revenue. The recent sharp rally will likely give way to a brief consolidation, pullback, thus readers should target a higher premium initially in the issue. JAN-22.50 IUQ MX LB=0.45 OI=0 CB=22.05 DE=35 TY=1.8% MY=4.9% ***** EMMS - Emmis Communications $27.17 *** Rally Mode! *** Emmis Communications (NASDAQ:EMMS) is a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. The company operates 18 FM radio stations and three AM radio stations in the United States that serve the radio markets of New York City, Los Angeles and Chicago, as well as Phoenix, St. Louis, Indianapolis and Terre Haute, Indiana. The firm also operates 16 television stations that serve geographically diverse mid-sized markets in the United States, and has a variety of television network affiliations. In addition to its domestic broadcasting properties, the company operates news and agriculture information radio networks in Indiana and publishes magazines. It also has a 59.5% interest in a national radio station in Hungary and owns 75% of one FM and one AM radio station in Buenos Aires, Argentina. EMMS has been one of the best performing stocks over the past two weeks and traders who wouldn't mind owning the issue should "target-shoot" a higher premium in this position, to allow for some consolidation from the recent rally. JAN-25.00 QMJ ME LB=0.50 OI=1000 CB=24.50 DE=35 TY=1.8% MY=4.7% ***** ***************** 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 ATRS 33.43 JAN 30.00 QJI MF 1.45 20 28.55 35 4.4% 11.1% RDWR 27.51 JAN 25.00 AUD ME 0.85 120 24.15 35 3.1% 7.9% ARTC 23.38 JAN 22.50 ARU MX 0.80 5 21.70 35 3.2% 7.5% ZGEN 15.30 JAN 15.00 GZU MC 0.55 0 14.45 35 3.3% 7.5% IBIS 15.40 JAN 12.50 UIB MV 0.30 39 12.20 35 2.1% 7.3% ATVI 15.70 JAN 15.00 AEZ MC 0.50 241 14.50 35 3.0% 7.1% AEIS 25.34 JAN 22.50 OEQ MX 0.65 30 21.85 35 2.6% 7.1% WYNN 27.61 JAN 25.00 UWY ME 0.70 500 24.30 35 2.5% 6.7% RIG 23.08 JAN 22.50 RIG MX 0.65 2324 21.85 35 2.6% 6.1% CPRT 15.65 JAN 15.00 KQJ MC 0.40 1055 14.60 35 2.4% 5.8% SEAC 14.84 JAN 12.50 UEG MV 0.25 36 12.25 35 1.8% 5.6% MEE 18.14 JAN 17.50 MEE MW 0.45 36 17.05 35 2.3% 5.5% TYC 25.47 JAN 25.00 TYC ME 0.65 19221 24.35 35 2.3% 5.4% SBGI 12.99 JAN 12.50 JQO MV 0.30 250 12.20 35 2.1% 5.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Santa Claus Rally In Progress! By Ray Cummins Blue-chip stocks finished the session at an 18-month high Friday as optimistic investors focused on a positive earnings outlook from Coca-Cola (NYSE:KO) while dismissing a slump in consumer confidence. The Dow Jones industrial average gained 34 points to close at 10,042, its highest level since May 24, 2002. The tech-laden NASDAQ composite index ended 6 points higher at 1,949, despite a slump in semiconductor shares. The broader Standard & Poor's 500 index added 2 points to close at 1,074 as basic materials, homebuilding, gold, and energy stocks moved higher. Advancing issues outpaced declining stocks by nearly 2 to 1 on the major exchanges. Over 1.4 billion shares were traded on the NASDAQ while the Big Board saw 1.2 billion shares change hands. For the week, the Dow rose 1.8% and the S&P 500 index gained 1.2%, while the NASDAQ earned honorable mention at 0.6%. Bonds were relatively unchanged with the yield on the 10-year note closing at 4.24%. ***************** 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 37.25 DEC 30 35 0.45 34.55 0.45 Open? ANPI 48.77 46.93 DEC 35 40 0.45 39.55 0.45 Open PFE 34.08 34.40 DEC 30 32 0.25 32.25 0.25 Open PHS 58.10 65.38 DEC 48 50 0.30 49.70 0.30 Open SII 39.07 40.25 DEC 35 37 0.45 37.05 0.45 Open IVGN 64.85 65.56 DEC 55 60 0.50 59.50 0.50 Open NTLI 58.96 68.80 DEC 45 50 0.45 49.55 0.45 Open NVLS 42.54 40.30 DEC 35 37 0.25 37.25 0.25 Open HOV 92.25 88.34 DEC 80 85 0.55 84.45 0.55 Open IMCL 39.29 40.45 DEC 30 35 0.55 34.45 0.55 Open MATK 60.74 58.77 DEC 50 55 0.45 54.55 0.45 Open MSTR 54.00 51.17 DEC 45 50 0.65 49.35 0.65 Closed CME 70.63 68.25 JAN 60 65 0.50 64.50 0.50 Open NCEN 39.62 38.12 JAN 30 32 0.45 32.93 0.45 Open SII 40.22 40.25 JAN 35 37 0.25 37.25 0.25 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Microstrategy (NASDAQ:MSTR) has been closed to preserve capital while Multimedia Games (NASDAQ:MGAM) remains on the "watch" list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status AIG 58.28 62.12 DEC 65 60 0.90 60.90 (1.22) Closed SNPS 30.85 34.27 DEC 37 35 0.25 35.25 0.25 Closed CCMP 54.16 49.24 DEC 65 60 0.50 60.50 0.50 Open KKD 41.85 37.15 DEC 50 45 0.60 45.60 0.60 Open SNPS 30.28 34.27 DEC 37 35 0.20 35.20 0.20 Open MRVL 38.90 38.46 DEC 45 42 0.30 42.80 0.30 Open MHK 72.08 68.75 DEC 80 75 0.45 75.45 0.45 Open TTWO 33.10 30.33 DEC 37 35 0.25 35.25 0.25 Open CECO 38.45 40.27 DEC 50 45 0.40 45.40 0.40 Open S 48.96 46.05 DEC 55 50 0.50 50.50 0.50 Open SNDK 64.35 62.28 DEC 75 70 0.60 70.60 0.60 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss On Thursday, American Int'l Group (NYSE:AIG) became a victim of the "Santa Claus" rally and the spread was closed early (for a smaller than published loss). Synopsis (NASDAQ:SNPS) has also reversed course and conservative traders should consider exiting the play. Bearish positions in Qualcomm (NASDAQ:QCOM), BJ Services (NYSE:BJS) and Intermune (NASDAQ:ITMN) have previously been closed to limit losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status VLO 44.00 45.11 DEC 37 40 2.20 39.70 0.30 Open ADRX 21.66 23.25 DEC 17 20 2.15 19.65 0.35 Open ELAB 48.17 52.90 DEC 40 45 4.50 44.50 0.50 Open ANPI 49.32 46.93 DEC 40 45 4.50 44.50 0.50 Open OSX 89.45 92.03 JAN 80 85 4.40 84.40 0.60 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Angiotech (NASDAQ:ANPI) is now on the "early exit" watch-list. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status CTMI 16.08 15.64 DEC 20 17 2.25 17.75 0.25 Open SYMC 32.42 33.21 JAN 37 35 2.15 35.35 0.35 Open Apria Healthcare (NYSE:AHG) has previously been closed for a small loss. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status IDCC 19.00 19.61 JAN 25 15 0.20 0.45 Open ELX 29.50 26.77 APR 35 25 0.10 0.00 Open? NE 36.09 37.14 JAN 37 35 0.10 0.50 Open? PTEN 31.34 31.94 JAN 32 30 (0.10) 0.50 Open Noble (NYSE:NE) achieved a favorable "early-exit" profit in less than one week. The recent rally in Emulex (NYSE:ELX) failed at resistance near $30 and conservative traders should have exited the position after Tuesday's close below the trading-range bottom near $26.50. 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 26.26 FEB-22C DEC-25C 1.40 2.10 Open CEPH 46.34 47.50 FEB-50C DEC-50C 1.30 1.60 Open OIH 58.73 60.65 JAN-60C DEC-60C 0.80 0.90 Open DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status MACR 20.22 18.63 DEC 20 20 2.20 3.00 Open? ATN 17.93 18.55 JAN 17 17 2.40 2.75 Open MYL 25.32 25.20 JAN 25 25 2.25 2.10 Open Macromedia (NASDAQ:MACR) achieved the initial profit target ($0.70) in only two weeks. 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. ***** CYBX - Cyberonics $32.70 *** Next Leg Up? *** Cyberonics (NASDAQ:CYBX) develops, manufactures and markets medical devices that provide vagus nerve stimulation (VNS) for the treatment of epilepsy and other debilitating neurological, psychiatric diseases and disorders. The firm's primary product, the Cyberonics VNS Therapy System, is an implantable medical device for the treatment of epilepsy, depression, Alzheimer's disease and other debilitating chronic disorders. The company has approval for the therapy's commercial distribution in the United States, Canada, Europe, Australia and other markets for the treatment of epilepsy, and for its commercial distribution as a treatment of depression in the European market and in Canada. VNS therapy is also being investigated as a treatment option for disorders such as obsessive-compulsive disorder, panic disorder and adult onset post-traumatic stress disorder. CYBX - Cyberonics $32.70 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-25.00 QAJ-ME OI=438 ASK=$0.25 SELL PUT JAN-30.00 QAJ-MF OI=111 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$29.50 ***** INTU - Intuit $52.16 *** New Trading Range? *** Intuit (NYSE:INTU) is a provider of business tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. INTU - Intuit $52.16 PLAY (conservative - bullish/credit spread): BUY PUT JAN-45.00 IQU-MI OI=2870 ASK=$0.35 SELL PUT JAN-47.50 IQU-MW OI=1618 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$47.25 ***** TRN - Trinity Industries $31.36 *** Industrial Shares Rally! *** Trinity Industries (NYSE:TRN) is engaged in the manufacture, sale and leasing of a variety of products and services for the transport, industrial, construction and energy sectors of the marketplace. The rail group manufactures and sells railcars and component parts. The construction products group manufactures and sells highway guardrail and safety products, concrete and aggregate, girders and beams. The inland barge group makes and sells barges and related products for inland waterway services. The industrial products group makes and sells container heads and pressure and non-pressure containers for the storage and transportation of liquefied gases and other liquid and dry products. The railcar leasing and management services group provides services such as fleet management and leasing. The company also has an all other segment that includes its captive insurance and transportation companies, structural towers and other peripheral businesses. TRN - Trinity Industries $31.36 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-25.00 TRN-ME OI=960 ASK=$0.25 SELL PUT JAN-30.00 TRN-MF OI=316 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.75-$0.80 POTENTIAL PROFIT(max)=18% B/E=$29.25 ***** CERN - Cerner $39.22 *** UK Contract Speculation! *** Cerner Corporation (NASDAQ:CERN) designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and consumers. The company's solutions give end users secure access to clinical, administrative and financial data in real-time. Consumers get the appropriate care information and educational resources via the Internet. The firm implements these solutions as stand-alone, combined or enterprise-wide systems. Cerner solutions can also be managed by the firm's clients or via an application outsourcing or hosting model. Cerner provides hosted solutions from its data center in Lee's Summit, Missouri. CERN - Cerner $39.22 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-50.00 CQN-AJ OI=1811 ASK=$0.40 SELL CALL JAN-45.00 CQN-AI OI=1711 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$45.55 ***** MDC - M.D.C. Holdings $64.06 *** Premium-Selling Only! *** M.D.C. Holdings (NYSE:MDC) is principally engaged in owning and managing subsidiary companies that build and sell homes under the name Richmond American Homes. The company also owns and manages HomeAmerican Mortgage Corporation, which originates mortgage loans primarily for MDC's home buyers. In addition, it provides title agency services through American Home Title and Escrow Company to MDC home buyers in Virginia, Maryland and Colorado and also offers third-party insurance products through American Home Insurance Agency, to the company's home buyers in all of its markets. MDC - M.D.C. Holdings $64.06 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-75.00 MDC-AO OI=35 ASK=$0.30 SELL CALL JAN-70.00 MDC-AN OI=84 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$70.60 ************* 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. ***** ACDO - Accredo Health $31.77 *** New Rally Underway? *** Accredo Health (NASDAQ:ACDO) provides specialty retail pharmacy services, clinical services, reimbursement services and delivery services, pursuant to agreements with biotech drug manufacturers, relating to the treatment of patients with certain costly chronic diseases. The firm addresses the needs of the manufacturers by providing specialized services that facilitate product launch and patient acceptance, including the collection of timely drug utilization and patient compliance information, patient education and monitoring through the use of written materials and telephonic consultation, reimbursement expertise and overnight drug delivery. ACDO has designed its specialty retail pharmacy services to focus primarily on biotechnology injectable drugs that are used on a recurring basis to treat chronic and potentially life threatening diseases, are expensive and require temperature control or other specialized handling as part of their distribution process. ACDO - Accredo Health $31.77 PLAY (less conservative - bullish/debit spread): BUY CALL JAN-25.00 DZU-AE OI=285 ASK=$7.00 SELL CALL JAN-30.00 DZU-AF OI=342 BID=$2.55 INITIAL NET-DEBIT TARGET=$4.35-$4.45 POTENTIAL PROFIT(max)=12% B/E=$29.45 ******************* DRIV - Digital River $25.01 *** Bottom-Fishing! *** Digital River (NASDAQ:DRIV) is a provider of electronic commerce outsourcing solutions. As an application service provider, the company enables its clients to access its proprietary electronic commerce system over the Internet. The company's technology plat- form allows it to provide a suite of electronic commerce services, including Web commerce development and hosting, transaction processing, fraud screening, digital delivery, integration to physical fulfillment and customer service. Digital River also provides analytical marketing and merchandising services to assist clients in increasing Web page view traffic to, and sales through, their Web commerce systems. DRIV - Digital River $25.01 BUY CALL JAN-20.00 DQI-AD OI=24 ASK=$5.30 SELL CALL JAN-22.50 DQI-AX OI=53 BID=$3.10 INITIAL NET-DEBIT TARGET=$2.10-$2.20 POTENTIAL PROFIT(max)=14% B/E=$22.20 ******************* 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. ***** CE - Concord $13.50 *** FDC/CE Merger Speculation *** Concord EFS (NYSE:CE) is an electronic transaction processor that provides the technology and network systems that make payments and other financial transactions fast, efficient and secure. The company is organized in two business segments: network services and payment services. The network services segment provides ATM processing, debit card processing and coast-to-coast debit network access principally for financial institutions. The payment services segment provides POS processing, settlement and related services, with specialized systems focusing on supermarkets, major retailers, gas stations, convenience stores, restaurants and trucking companies. CE - Concord $13.50 PLAY (very speculative - bullish/synthetic position): BUY CALL JAN-14.00 CE-AP OI=8750 ASK=$1.00 SELL PUT JAN-12.50 CE-MV OI=12863 BID=$0.80 INITIAL NET-DEBIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.75-$1.15 Note: This position is based on a potential merger approval that would value CE shares at approximately $15.70, based on First Data's (NYSE:FDC) current price. Please complete the necessary due-diligence before participating in this play. The minimum initial margin/collateral requirement for the sold option is approximately $530 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($12.50). ***** SHFL - Shuffle Master $32.93 *** Bet On A Gaming Stock! *** Shuffle Master (NASDAQ:SHFL)) develops, manufactures and markets automatic card shufflers for use with card-based table games. Shuffle Master also develops and markets table games and licenses these products to casinos. Table games include the Let It Ride basic game, the Let It Ride Bonus game and the Three Card Poker game. Shuffle Master develops and markets slot games and slot game operating systems for slot machines. Shuffle Master has actively marketed The Three Stooges, Let's Make A Deal, The Honeymooners, Press Your Luck, Hollywood, Spider-Man and Five Deck Pokergames. SHFL - Shuffle Master $32.93 PLAY (speculative - bullish/synthetic position): BUY CALL FEB-35.00 SFQ-BG OI=173 ASK=$1.40 SELL PUT FEB-30.00 SFQ-NF OI=579 BID=$1.00 INITIAL NET-DEBIT TARGET=$0.10-$0.20 INITIAL TARGET PROFIT=$1.20-$1.90 Note: Target a higher credit in this play initially, to allow for a brief consolidation in the issue. Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $1150 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($30.00). **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** EBAY - eBay $57.68 *** Cheap Speculation! *** eBay (NASDAQ:EBAY) is a web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. EBAY - eBay $57.68 PLAY (very speculative - bullish/calendar spread): BUY CALL JAN-60.00 XBA-AL OI=14859 ASK=$1.50 SELL CALL DEC-60.00 XBA-LL OI=21804 BID=$0.25 INITIAL NET DEBIT TARGET=$1.15-$1.20 INITIAL TARGET PROFIT=$0.55-$0.90 *********************** 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. ***** FCEL - FuelCell Energy $12.56 *** Earnings Speculation! *** FuelCell Energy (NASDAQ:FCEL), based in Danbury, Connecticut, is a world-recognized leader for development and commercialization of high efficiency fuel cells for electric power generation. The company's DFC technology eliminates external fuel processing to extract hydrogen from a hydrocarbon fuel. This results in a product whose cost, combined with high efficiency, simplicity and reliability, results in product advantages for stationary power generation. The company's quarterly earnings report is due on Tuesday, December 16, 2003. FCEL - FuelCell Energy $12.56 PLAY (very speculative - neutral/debit straddle): BUY CALL DEC-12.50 FQG-LS OI=284 ASK=$0.50 BUY PUT DEC-12.50 FQG-XS OI=333 ASK=$0.45 INITIAL NET-DEBIT TARGET=$0.80-$0.90 INITIAL TARGET PROFIT=$0.35-$0.80 ***** ************************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 *************************************************************** ************** MARKET POSTURE ************** Bear-Humbug by - Nich Sheldon Bullish traders said Bear-Hum-Bug, as bears tried with all their might to drag the Dow below 10,000. While bears succeeded in getting the Dow to drop below this psychological level, the dip didn't last for long. In fact, the Dow reached a new 52-week high by the closing bell. Today's action was bland at best, but the overall market direction was higher. A quick look at the indexes and we noticed that the INDU Dow Jones Industrial Average, SPX S&P 500 Index, OEX S&P 100 Index, OIX Oil Index, DFI Defense Index, and the IUX S&P Insurance index all closed at new 52-week highs. The INX CBOE Internet Index gained 4.42 percent on the day. Yesterday, the index produced a doji candlestick after recording six days of losses in a row. Today the index gapped higher from the open on stronger than usual volume. The GHA GSTI Hardware Index gapped higher at the open today, tacking on 2.64 percent by the close. The OSX Oil Service Sector Index added 2.49 percent, closing at 92.03. The index has not closed over 92 since August 28th, 2003. While the MACD is still urging a buy signal, we speculate that the OSX is resting right at hard resistance, and profit taking could occur by year-end. The SOX Semiconductor Index, DRG Pharmaceutical Index, RLX S&P Retail Index, NWX Networking Index, and the HMO Morgan Stanley Healthcare Index all reported fractional loses of less than half a percentage point on Friday. ********** 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
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