The Option Investor Newsletter Wednesday 12-17-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: The Home Stretch Futures Wrap: Scam Week Index Trader Wrap: Watch out for this tomorrow! Traders Corner: CPTI Position Adjustment Alert Traders Corner: The Rally That Never Was? Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 12-17-2003 High Low Volume Advance/Decline DJIA 10145.26 + 15.70 10146.38 10094.75 1.70 bln 1658/1141 NASDAQ 1921.33 - 2.96 1926.00 1910.24 1.48 bln 1379/1688 S&P 100 535.20 + 0.45 535.20 532.65 Totals 3037/2829 S&P 500 1076.48 + 1.35 1076.54 1071.14 RUS 2000 538.72 + 0.98 539.08 533.10 DJ TRANS 2966.30 - 0.98 2970.97 2924.52 VIX 15.58 - 0.35 16.27 15.52 VXO 15.35 - 0.35 16.20 14.97 VXN 25.12 - 1.03 26.61 25.12 Total Volume 3,518M Total UpVol 1,731M Total DnVol 1,742M 52wk Highs 408 52wk Lows 35 TRIN 1.13 PUT/CALL 0.69 ******************************************************************* The Home Stretch by James Brown There are only 8 1/2 trading days left in 2003 and the DJIA looks determined to finish strong. After a decent, triple-digit CPI- fueled rally on Tuesday the Dow managed to etch yet another new 19-month high. Struggling to keep up is the NASDAQ. The tech- heavy NASDAQ, which has strongly outpaced the Industrials all year, seems tired. Investors are selling into strength and taking gains as they approach year's end. However, don't count the NASDAQ out just yet. There are still plenty of investors willing to buy the dip and we saw that again today as the NASDAQ overcame a 35-point decline by the closing bell. Jim's comments yesterday about fund managers rotating our smaller cap stocks and into large cap, more liquid equities is playing out before our eyes. Yet another drop in the U.S. dollar and the re-emergence of SARS has put global markets on the defensive. The Japanese NIKKEI fell 178 points to close at 10,092. The Hong Kong Hang Seng followed suit with a 67-point drop to 12,193. European markets were generally lower but the British FTSE out performed the group with a 21-point gain to 4354. The German DAX lost 18 points to close at 3847. U.S. stocks were a mixed bag. After Tuesday's big gain it would be normal to see some profit taking. Add to the mix this Friday's quadruple-witching expiration and I'm surprised we didn't see more volatility. The pockets of selling that did show up today were relatively shallow. Hardest hit was the semiconductor sector after yesterday's downgrade from Merrill Lynch. Internet stocks and networking stocks also took a step back. Airlines stocks paused again after the SARS news came out yesterday. Wednesday's best performers were the homebuilders, after new mortgage data showed an increase in applications. Retail stocks also produced a strong bounce after two days of declines. Gold stocks marched higher as gold futures added another $4.30 to close at $412.70 an ounce. Defense stocks were strong again and oil issues gushed higher with crude oil hitting new highs at $33.39 a barrel. Market internals continued to paint a mixed picture. Bulls lead the way on the NYSE with advancers out numbering decliners 16 to 11 and up volume outweighing down volume 931 million to 741 million shares. The profit taking in the NASDAQ was easy to see with declining stocks pushing past advancers almost 17 to 14 and new highs evaporating to a lowly 78. Down volume of 907 million significantly overshadowed up volume at 550 million. Chart of the DJIA: Chart of the NASDAQ: We had several stocks making headlines today. There were widespread expectations for Wall Street brokers to turn in a strong quarter and Bear Stearns and Lehman Brothers did not disappoint. Bear Stearns (BSC) reported net income of $2.19 per share, well above estimates of $1.81. Revenues jumped almost 36% to $1.53 billion, besting the $1.38 billion estimate. Lehman brothers (LEH) also turned in a strong performance. Earnings were $1.71 a share compared to estimates of $1.57. Outstanding results in its bond trading activities and underwriting lead to a 49% jump in revenues at $2.3 billion for the quarter. Investors will get to hear from Goldman Sachs (GS) and Morgan Stanley (MWD) tomorrow. Estimates are $1.54 for GS and $0.90 for MWD. Overall 2003 has been an impressive year for the securities industry. Profits are expected to be the second best on record, above the 1999 levels at $16.3 billion. Contributing to the impressive results for the major brokers has been a flood of IPO activity. Today alone we had four IPOs. The biggest IPO of the year was China Life (LFC). LFC is the biggest Chinese insurance company; of course it doesn't hurt being run by the government. The IPO brought in $3 billion with an IPO price of $18.68. By the close of business LFC had added more than $5 settling at $23.72. Orbitz.com, the online travel destination, went public today. The Orbitz.com (ORBZ) IPO, while highly anticipated, failed to deliver. The company priced about 12 million shares at $26 for the open today. The stock soared to $30.75 intraday but actually closed for a loss at $24.98. It was not the most glamorous first day of trading. Struggling for their own time in the spotlight were IPOs for Universal Technical Institute (UTI) and Falcon Financial Investment Trust (FLCN). UTI is an Arizona-based training college for automotive-related repair and refinishing. FLCN services loans to auto dealers. Investors were also eager to hear from consumer electronic giants Best Buy (BBY) and rival Circuit City (CC). BBY's results matched consensus estimates at 37 cents a share on revenue growth of 18% to $6.03 billion. In contrast CC's results continue to deteriorate. Net income was actually a net loss of 12 cents a share, worse than the estimate for a 7-cent loss. This was the second earnings miss in a row for CC and the stock lost another 6.6% to close just above the $10 level of support. Without a doubt CC is losing the fight to BBY, who continues to steal market share. Looking ahead to tomorrow's forecast we can probably expect more of the same. The strength in the DJIA and S&P 500 is likely to continue while the NASDAQ should continue to churn above the 1880 level. Stocks are likely to gravitate toward their nearest option strikes as the markets prepare for Friday's expiration. Investors will also get to mull through a few economic reports. Tomorrow brings the index of leading economic indicators. Estimates are for a 0.3 percent rise in November on top of October's 0.4 percent jump. The Philly Fed Index will be revealed tomorrow as well. Economists are looking for a decline to 25.0 in December from November's 25.9. Last but not least is the initial jobless claims, which are expected to decline. ***************************** 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 WRAP ************ Scam Week Jonathan Levinson Options expiration week lived up to its reputation this week, with prices racing this way, then that, and in the end accomplishing mostly obfuscation as they raced to close at their highs. Treasuries rose, breaking resistance, gold and silver rose, and the US Dollar Index broke to new bear market lows below 88. The VIX and VXO printed new lows for the year, and those were very low indeed, with the VXO touching 14.97 before my very eyes, the lowest print I have ever seen for that indicator. 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 got shellacked today, breaking below 88 and staying there as the euro broke to new record highs above 1.24. The CRB rose back above 261 on strength in natural gas, heating oil and platinum futures, adding 2.09 to close at 261.40. Daily chart of February gold February gold continues to prove that bearish rising wedges can be very rewarding for bulls who aren't afraid of heights. Gold printed anew high at 413.90 today, not challenging the upper rising trendline but also managing to confound the daily cycle oscillators again. The HUI gained 3.37 to close at 235.69, XAU added 1.33 to close at 106.06, and March silver gained 7.9 cents to close at 5.724. Daily chart of the ten year note yield Ten year bonds had a big day today, with the yield dropping 4.5 bps to close at 4.189%, below the secondary wedge support line we've been monitoring. The move brought further confirmation to the daily cycle downphase in progress, and sets up resistance at 4.2%. Next support is at lower Bollinger band support at 4.115%. For the time being, extreme dollar weakness appears to be bullish not just for gold, but also for US treasuries. Daily NQ candles A trader for whom I have great respect marveled at the VXO print of 14.97, asked how the view was from 14,000 feet, and said that he'd let that indicator speak for itself. Well, the VXO closed at 15.35, the QQV at 23.7, the VXN at 25.12. The Nasdaq indices did what most traders expected, which was to trade very weakly. It went nowhere, barely crossing the finish line for its 2.5 point or .18% gain. It's options volatility measures are very low, but they're not even close to the pedal-to-the-metal, 100 mph stereo-blaring beer-can-between-the-knees glory-run that the Dow and SPX are taking. With that off my chest, I can review the day's progress. The NQ closed at 1407, depicting perfect confusion with a doji star. This kind of wide-ranging action is typical of scam week, and we can see that the NQ is being parked somewhere near the 1400 level for options expiry purposes. Whether they hold it here until Friday or not remains to be seen, but such is the tendency of op- ex trading. The end of day blast higher caused the slightly twitch in the daily cycle downphase, and not much else. 30 minute 20 day chart of the NQ The 30 minute NQ shows today's listless trading, even including the end of day buying spree. That ramp higher, led by the YM, caused the 30 minute cycle downphase to abort midway through its run, and a preliminary buy signal was printed. The NQ will need to follow through tomorrow in order to convert this into an upphase, and judging from the rejection below 1410, the NQ should have trouble doing so. 1415, and 1425-30 remain strong resistance overhead, and the daily cycle downphase should weather any move that fails below that upper resistance level. Daily ES candles The ES behaved far more bullishly than the NQ, going out at its session high with a bullish hammer on the daily candle chart. The move left off right on upper rising trendline resistance, and a move past the 1077-78 resistance area should do it. The daily cycle downphase is still intact, with the 10 day stochastic still on a sell signal. That will change if the bulls can take and keep 1078 tomorrow. The session high was 1076.75, with an overnight high of 1077 as of 5:30 EST. 20 day 30 minute chart of the ES The ES' 3 point gain was more technically significant than nything else, as it crossed the 1074 resistance level from yesterday. It also converted the 30 minute cycle downphase to an upphase. If 1078 falls, then we're looking at a trending move higher, and a push to the Saddam highs should be in the cards. 150-tick ES The ES went out at spectacularly oversold levels on the intraday oscillators, ad the word "trending" again comes to mind. My Keltner settings are pretty generous, and in this case portend an immediate reversal. So, incidentally, do the closing VXO and VIX prints. If the bulls can hold this up, then it's not unreasonable to expect the rally to carry all the way to the new year. The cycles don't currently favor that scenario, but it's getting closer than I expected up until about 3PM today. Daily YM candles That small bullish hammer understates the sound and fury of the short covering after the cash close. Whether it's sector rotation or just good old fashioned manipulation of the arithmetically-weighted Dow, I won't attempt to guess. But, once again, the YM is going higher, with 34 points added today. 20 day 30 minute chart of the YM The YM was trading 10133 as of this writing. The support and resistance zones are depicted by the trendlines and Bollinger bands. The have gone beyond prudent or even technical trading, as the sub-15 VXO attests. If this proves to be sustainable, then the case for a new cyclical as well as secular bull market will gain a strong piece of evidence. The history of the past 7 years demonstrates that we should be at a significant top, with sentiment and volatility way over the deep end of bullish optimism. Like in March, 2000, traders need to be patient, careful and calm. Buy the top if you wish, but keep a tight, active stop entered under it. Bears, there are a great many points to capture below, and rushing to pick the top is high risk trading. If you do it, be aware, underleverage, and enter your stops when you enter the trade. See you tomorrow. ******************** INDEX TRADER SUMMARY ******************** Watch out for this tomorrow! All session, I had this peaceful, yet uneasy feeling about my recently bearish profile in the NASDAQ-100 Tracking Stock (AMEX:QQQ) $34.91 +0.17%, as this QQQ bear (me) smells what could be an option expiration trap, which I want all traders to be on the lookout for tomorrow, as this QQQ bear's hide doesn't want to end up on the wall. The peaceful feeling cam as the QQQ didn't come as close to testing its DAILY R1 of $35.11, where I had profiled bearish stops to be placed just above. Another bit of peaceful tranquility was NASDAQ internals were once again weak, as at no point in the session, did advancers ever outnumber decliners. In a moment, I'll explain where I get the uneasy feeling from. While I say this is a feeling, this feeling is based on one observation, which doesn't make sense. Actually it does make sense in the broader scope of things, and thus the uneasy feeling for my QQQ short. Let's take a quick look at today's Market Snapshot / Internals, and you tell me if it makes sense that we would see this type of internal weakening early in the session (especially NASDAQ) flat to lower price action throughout the day, but see the various market volatility indices VIX.X -2.19%, VXN.X -3.9% and VXO.X - 2.22% trade what I consider to be notably lower in percentage terms. I'm going to follow up on the VIX.X, VXN.X and VXO.X in a minute, but today's trade looks to me as being HEAVILY influenced by this weeks option expiration, where institutions may have really started to make some adjustments ahead of tomorrow's expiration. Market Snapshot / Internals - 12/17/03 Close The major indices were rather range-bound throughout today's session, and traded lower for the better part of the day, up until about the last two hours of trade. I do not monitor the VIX.X or the VXN.X all that closely, but with Tuesday's trade and nearly 1% decline in the broader NASDAQ Composite Bullish % ($BPCOMPQ), I checked the NASDAQ-100 Market Volatility Index (VXN.X) 25.12 -3.93%, fully expecting it to at least be unchanged or higher, ESPECIALLY when the NASDAQ advance/decline was as weak as it was today. What? And this is where the BEARISH side of me thought. Oh goodness. All the small retail traders (you and I) are in the options market buying calls on thought that at some point the Q's are going to rebound and play catch up to the other major indices. Hah! They'll learn their lesson. You want to be SHORT this garbage. But then.... I turned the table and became a bull. Garbage? Are you calling the INDU, SPX, OEX, NYSE garbage? Maybe you'd better not have such a peaceful feeling about things, stick your nose up in the air and sniff around a bit. Why, make that HOW in the world do the various market volatility indicators decline. The quick and easy answer is.. either put selling, or call buying outnumbering put buying and call selling. Then I thought... why would ANYONE be pressed to buy calls, or sell puts in such a flat trade and rather weak market internals? Because they have to!!!! I didn't give last night's comment about "Max Pain" in the SPX being 1,025 a second thought, but suddenly, today's market volatility, compared with today's internals and price action becomes very suspicious. By the way... SPX "max pain" moved up to 1,030 with Tuesday's trade. Who is the larger seller of calls and puts? INSTITUTIONS. Gosh! The SPX is trading new 52-week highs at 1,076. While the seller of puts/calls at an average of 1,030 is in good shape on the put side, what about the other part of the equation where the INSTITUTION is nearing a delivery date, but may not have the goods to deliver? The goods that may be lacking for an institution would most likely be INDU, SPX, OEX stocks, where the nearing expiration creates a more hurried effort to get the mass amount of options positions squared up. Remember, a December contract is for December delivery and with the INDU/SPX/OEX at 52-week highs, the INSTITUTION that has been selling calls, may well have some buying to do in order to make the December delivery. So where does the QQQ come into play? It's in check. No trouble here for the bear as it isn't as close to its highs as the other major indices ahead of expiration. Right? That's right. But the uneasy side of me becomes alert to the potential that what the INSTITUION may at a loss in on the INDU/SPX/OEX doesn't have them then trying to make up on in a bullish trade with the QQQ. Remember, the VXN.X fell today as call buyers and put sellers outnumbers call sellers and put buyers. NASDAQ-100 Market Volatility Index (VXN.X) - Daily Intervals I've benchmarked the 11/20/03 relative low in the QQQ, where the QQQ traded just below the $34.00 for 4 sessions (11/18-11/21) and where despite a spike lower in price for the QQQ on 12/20/03 to a session low of $34.13, the VXN.X wasn't nearly as high. What has me alert to some near-term volatility, ESPECIALLY in the QQQ is today's decline, when really, the QQQ when nowhere. What this has be ALERT to, is that while today's trade was QUIET in the QQQ, the VXN.X fell. A quick note as to today's OPTION volume ahead of DECEMBER EXPIRATION, has the QQQ Jan. $35 put (QQQMI) trading 34,292 contract, QQQ Dec. $35 put (QQQXI) trading 31,398 and QQQ Dec. $35 call (QQQLI) trading 16,796 contracts. These were the three most actively trade options contracts in the QQQ today. The DECLINING VXN.X suggests SELLING of puts (outnumbering the buying of puts), and the BUYING of calls (outnumbering the selling of calls). All a QQQ BEAR needs to be alert to tomorrow is that INSTITUTIONS didn't set themselves up to BUY the underlying QQQ, where the SELLING of the $35 puts has its premium evaporating quickly (a day or two into DECEMBER EXPIRATION), which would also benefit the DECEMBER CALL side of the trade. Where's a QQQ have his/her stop? Pivot Matrix - Tomorrow's DAILY R1 is $35.08, and WEEKLY Pivot is $35.11, so I still like the BEARISH stop just above $35.11. This should "take care" of any type of massive unfolding to the upside, should a Triple Witching expiration actually be in play. You would be CORRECT in thinking .... "but Jeff, if the QQQ falls to your target of $34.11, where QQQ max pain is $34, the above mentioned put/call observations would also pay off for a BEARISH trade, if buying the PUTS and selling the call). The potential flaw with this is that the VXN.X fell today, thus my uneasy feeling at tonight's close. While tomorrow morning's economic data is "key" and may present the catalyst for the move, I think the "key" is really the QQQ $35.11 holding as a resistance point. If you're an INDU/SPX/OEX trader I would strongly suggest keeping an eye on the QQQ also. Understand how option expiration may be in play, and how the QQQ lagging, in itself, is currently alerting you (if your bullish the INDU/SPX/OEX, you in a leader) that the tail is weak, and trying to pull your trade lower. A SNAP back higher in the QQQ, should be expected to send your INDU/SPX/OEX trade higher still. My main point with all of the above, it to try and prepare trader for what could be a very volatile session tomorrow. Even as a QQQ bear, I point out the potential negative of my bearish QQQ trade, based on some of today's VXN.X observations. If you should read something like... "these economic numbers stink, and with the QQQ at $35.50 you should be shorting the heck out of it," then just be cognizant of what impact option expiration may be having on the major indices trade over the next two days. If I were to enter a BULLISH trade tomorrow, it would have to be in the QQQ, but ABOVE $35.15, and it would be SHORT-TERM oriented. Remember that the bullish % are alerter to weakness. How long? I'm not certain, but my thinking is that in January, we might see a pretty good pullback in the major indices. This would make some sense where some of this years gains are booked early in the year, and taxes on those gains aren't paid until April 2005. S&P 100 Index Chart (OEX.X) - Daily Interval Institutions that have been selling calls against the OEX may indeed have to be buying calls today and even selling some puts as December delivery comes at tomorrow's close. It at least makes sense that the VXO.X is falling as it relates to OEX price action. Today's range was narrow, but I've added the DAILY S2 and DAILY R2 on the OEX chart to depict what could be the day's range. First sign of any type of weakness is marked at 531.00. S&P 500 Index (SPX.X) Chart - Daily Intervals Today's trade in the SPX may also hint of computer buying. Despite weak internals for the better part of the session, the SPX traded 1,071.14 twice, at different hours as if computers were simply saying.... I need to get squared up before expiration. I need to get squared up before expiration. I need to get squared up before expiration. Dow Industrials (INDU) Chart - Daily Intervals While it may be "scary" to be short the QQQ, I'd find it more friegtening to be short the INDU/SPX/OEX with no overhead supply, where at least there might be a bull eager to sell strength. First sign of any weakness I can find in the INDU would be back below 10,075 (deduct 10 points and 10,065). NASDAQ-100 Tracking Stock (AMEX:QQQ) Chart - Daily Intervals Disparity between QQQ and other major indices has been noted. It is the similarity in the VXN.X and other volatility indices that has me alert that a short-term pop back higher, simply due to option expiration may be at hand. The only way I know how to protect is stick with the levels. DAILY R1 moves slightly lower to $35.08, and again correlates with MONTHLY Pivot of $35.11, thus a level I think bears continue to hold convictions, but protect against potential expiration volatility. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** CPTI Position Adjustment Alert By Mike Parnos, Investing With Attitude Original Position: OEX Credit Spread Boogie – 535.20 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). Position Adjustment: Today we closed out the December OEX 520/545 bear-call spread (two contracts) for $15.60 ($3,120). We rolled out to five contracts of the OEX January 535/505 bull-put spread for a credit of $6.70 ($3,400). New maintenance: $15,000. ______________________________________________________________ Original Position: QQQ ITM Strangle – Ongoing Long Term -- $34.91 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. Position Adjustment: Today we bought back our 10 contracts of the December $34 puts for $.05. We will wait to sell the January $34 puts. ______________________________________________________________ Tomorrow's Column Tomorrow I'll go into more depth about the above moves and we'll take a look and see how or if the quickie trades worked out. ______________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************** TRADERS CORNER ************** The Rally That Never Was? by Mark Phillips mphillips@OptionInvestor.com As I mentioned a couple weeks ago in my LEAPS column, I've been spending a lot of time going through some unusual relative strength charts lately. At the core of my motivation is disbelief in the rally we've been "enjoying" for the past several months. You see, on a big-picture view, what we've been witnessing is both bonds and stocks rising over the past few months, while at the same time the U.S. Dollar has been drilling down to new multi-year lows. The logic is pretty simple -- if the dollar is falling, then assets denominated in that weakening currency will increase in price, even if the VALUE of that asset remains the same or falls. The $64,000 question is whether the rally in the US equity markets is entirely attributable to currency weakness, or if it is only part of the equation. Put another way, is the rally in the DOW reflecting a true increase in value, or is it just showing that the DOW is strengthening against its underlying currency, the dollar. I fumbled around a bit, trying to find the right symbols with which to make the appropriate comparisons -- should I use the Euro, the South African Rand, the Yen, or the Australian Dollar? Or should I just bypass all of the fiat paper currencies and go straight for the real money benchmark - GOLD? While I believe that gold is the best representation of true value, in the end, I settled on using the South African Rand, mainly because of the strong bias in that economy towards tangible assets (gold and diamonds), but also because of the unfamiliarity of the currency, minimizing my tendency to apply a bias to the charts because of a lack of a preconceived idea of the strength/weakness of the currency. So let's start with a chart of the DOW relative to the Rand ($ZAR) and see what it tells us. Weekly Chart of the DOW vs. South African Rand First off, we need to ignore the vertical scale. I don't know what the value of the Rand is and it doesn't matter. What the chart tells me is that the DOW is still quite weak against this currency. As we can see from the chart below (showing the DOW relative to the price of gold), the DOW vs. Rand chart is a good representation of what the DOW has done in terms of real value. Weekly Chart of the DOW vs. Gold All right, now that brings everyone up to speed with the material we covered a couple weeks ago. Now let's apply this observation to something new. There's been a lot of buzz about DOW stocks breaking to new all-time highs recently. Two of the names that have captured my attention are UTX and CAT, both of which have strongly broken out recently. You can pull up a weekly chart of either stock on your workstation and confirm for yourself that indeed they are both in blue sky territory. But let's remove the currency effect and see what we're left with. Weekly Chart of UTX vs. South African Rand That certainly isn't the picture of strength we see when we pull up a UTX chart, now is it? A bullish resolution of this sideways consolidation is certainly possible, but we shouldn't confuse the price action in UTX with that of a strong bull market. Weekly Chart of CAT vs. South African Rand CAT definitely looks better, having broken out above horizontal resistance in July, but since then it has been mired in a sideways move as well. Even a breakout over that 550 level still has a ways to go to the highs from the spring of 2002 and that is nowhere near new all-time highs now, is it? Now let's look at something a bit different. Retail stocks have been getting clubbed lately and WMT is the poster child for the Retail sector, good or bad. After rolling over up near the $60 level, it has been one step lower after another, with the stock now sitting right on its rising trendline from the July 2002 lows. Or is it? Weekly Chart of WMT vs. South African Rand Put in terms of a real currency, we can see that WMT broke major support in early November and just recently plunged to new bear market lows? You won't hear that on CNBC! So how do you take this knowledge and put it to good use from this point forward? If there's a stock you think looks strong, turn the tables a bit and view it in terms of different currencies. If it looks strong against those other currencies, then you probably have a real instance of strength. If not, then you'll know the risks you are dealing with. For reference, all of the charts above were generated using the SharpCharts feature on www.stockcharts.com. You can recreate all this neat stuff on your own and verify that I'm not "pulling a fast one". The format for the WMT/RAND chart is "WMT:$ZAR". Some other important data you'll find useful are the symbols for a few other currencies: Canadian Dollar = $CDW Japanese Yen = $XJY Australian Dollar = $XAD South African Rand = $ZAR Swiss Franc = $XSF British Pound = $XBP Look at this as another tool to put in the arsenal. I can't take credit, as most of the brain power on this one came from my good friend Rick. If you find this is useful, then drop me a line and I'll pass the good word on to him. Of course the downside is that will just motivate him to print up the bill for services rendered! GRIN This little process of discovery has once again driven the point home that I've got some of the smartest readers on the planet! Have fun!! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. 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The Option Investor Newsletter Wednesday 12-17-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Put - CTSH Spreads, Combinations & Premium-Selling Plays: A Mostly Merry Holiday Season Watch List: Generally Bearish Candidates Market Posture: Nothing Going ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* Cognizant Tech. - CTSH - close: 42.70 change: -2.18 stop: 47.25 -Company Description- Cognizant Technology Solutions Corporation delivers full lifecycle solutions to complex software development and maintenance problems that companies face as they transition to e- business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. Among CTSH's prominent clients are ACNielsen Corporation, ADP, Inc., Brinker Int'l, Computer Sciences, The Dun & Bradstreet Corporation, First Data Corporation and Nielsen Media Research. - Most Recent Update (Tuesday, Dec. 16, 2003) - Technology stocks have been losing their appeal with investors throughout the month of December, as the larger, industrial- related stocks gain favor into the end of the year. This was clearly shown during Monday's sharp reversal from the highs, with the declines led by Semiconductor and Software stocks. While the Software index (GSO.X) managed a solid rebound on Tuesday, the same can't be said for our new bearish play, CTSH. The stock broke down out of its ascending channel last week and just in classic textbook fashion, yesterday's early rally was turned back right at the bottom of that broken channel. CTSH continued to be quite weak today, losing 4.85% after breaking below the 50-dma ($44.60) for the first time since early June. There wasn't any material news to explain Tuesday's plunge, but it does seem that it is significant, as volume surged over 3 million shares, easily tripling the ADV. Today's breakdown was not just a violation of the 50-dma, but also a break below what has been strong support at $44.50 over the past several weeks (with only one violation in late November). Today's trade at $43 generated a P&F Sell signal (the first since May), which gives a tentative bearish price target of $36, which just happens to line up with strong historical support on the daily chart. While CTSH could continue to fall from here, a more likely scenario will be a bounce that then fails below the 50- dma. Traders willing to wait for the bounce will want to enter on the rollover when that rebound fails. Aggressive momentum traders can enter on a break below $42, as the stock takes out today's low. Next support is likely to appear near $40, reinforced by the rising 100-dma ($39.53), and we can expect a near-term bounce when that level is reached. Intelligent stop placement is a bit tricky, given the fact that the stock has fallen more than $4 from yesterday's intraday high. We'll set our initial stop at $47.25 (just above yesterday's high). That level really shouldn't be challenged though and more conservative traders can use a stop at $46.40, just above the intraday highs from last Thursday and Friday, as well as the 20-dma ($45.79). The downside target will be for a decline to that strong support at $36. - Play of the Day Comments - The GSO software index actually managed to close in the green today while its tech-related peers the GHA, INX, SOX and NWX indices did not. This makes CTSH's weakness even more appealing as a bear. The broken channel has been confirmed with today's drop but traders might want to be patient when judging an entry point. The stock is approaching likely support at $40.00. Considering the three days of declines the stock is short-term oversold. Look for a bounce/failed rally under $43.00 as a new entry point for bearish positions. More aggressive traders can chase a breakdown under $40 if no bounce occurs. - 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 already. ! Alert - December options expire this week! BUY PUT JAN-45*UPU-MI OI=1806 at $4.80 SL=2.50 BUY PUT JAN-40 UPU-MH OI= 967 at $1.95 SL=1.00 Annotated Chart: Picked on December 16th at $42.70 Change since picked: -1.68 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 986 K Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* A Mostly Merry Holiday Season By Ray Cummins Stocks struggled to a mixed close Wednesday with the technology segment limiting the market's gains amid weakness in chip and networking shares. The NASDAQ rebounded from an early 35-point drop, closing only 2 points lower at 1,921. In contrast, the Dow Jones Industrial Average closed the day 15 points higher at 10,145 with Home Depot (NYSE:HD), Boeing (NYSE:BA) and Wal-Mart (NYSE:WMT) among the best performers on the blue-chip average. The broader market S&P 500 index ended up 1 point at 1,076 amid gains in integrated oil and retail companies. Advancers outpaced decliners 3 to 2 on the New York Stock Exchange with trading volume of 1.4 billion shares. On the NASDAQ, losers outnumbered winners 6 to 5 on volume of nearly 1.5 billion shares. In the bond market, the 10-year note was up 7/32 to end the session at 100 17/32. Its yield closed at 4.18%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 12/16/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AMAT DEC 22 22.05 21.32 (0.73) 0.00% 2.04% EYE DEC 20 19.65 22.64 0.35 5.21% 1.78% ICOS DEC 35 34.55 41.19 0.45 3.81% 1.30% NVLS DEC 40 39.20 39.26 0.06 0.35% 2.04% PHTN DEC 35 34.25 35.65 0.75 5.41% 2.19% PMCS DEC 17 17.10 19.03 0.40 6.88% 2.34% ANPI DEC 40 39.05 45.81 0.95 7.86% 2.43% APPX DEC 25 24.55 33.15 0.45 6.28% 1.83% EASI DEC 42 42.68 55.00 0.70 4.74% 1.64% GPRO DEC 25 24.65 31.19 0.35 4.88% 1.42% INSP DEC 22 21.85 24.08 0.65 8.33% 2.97% MGAM DEC 35 34.60 39.76 0.40 4.33% 1.16% NEM DEC 42 41.60 46.13 0.90 5.61% 2.16% NVLS DEC 37 36.95 39.26 0.55 4.49% 1.49% PHS DEC 50 49.40 64.75 0.60 3.91% 1.21% UTSI DEC 30 29.65 36.86 0.35 3.83% 1.18% APPX DEC 30 29.50 33.15 0.50 7.22% 1.69% BRCM DEC 32 32.10 32.52 0.40 4.65% 1.25% EASI DEC 47 46.08 55.00 0.55 4.75% 1.19% GPRO DEC 30 29.60 31.19 0.40 5.21% 1.35% PHTN DEC 35 34.60 35.65 0.40 4.79% 1.16% BRCM DEC 32 32.25 32.52 0.25 4.27% 0.78% EASI DEC 50 49.45 55.00 0.55 6.30% 1.11% FCS DEC 22 22.25 23.08 0.25 6.38% 1.12% MICC DEC 65 64.35 65.51 0.65 6.05% 1.01% ONXX DEC 25 24.65 26.79 0.35 7.96% 1.42% RMBS DEC 25 24.60 30.05 0.40 10.03% 1.63% TELK DEC 20 19.75 21.16 0.25 6.66% 1.27% AMHC DEC 45 44.70 47.16 0.30 6.08% 0.67% FRX DEC 55 54.70 59.67 0.30 4.89% 0.55% NPSP DEC 30 29.75 31.27 0.25 7.44% 0.84% NTLI DEC 60 59.65 66.20 0.35 5.72% 0.59% ONXX JAN 22 22.00 26.79 0.50 5.66% 2.27% QCOM JAN 45 44.25 49.79 0.75 3.64% 1.69% RMBS JAN 20 19.50 30.05 0.50 6.56% 2.56% The recent sell-off made a number of positions "early-exit" candidates and many of the issues in the portfolio are on the "watch" list until Friday (options expiration). Kmart's (NASDAQ:KMRT) quarterly earnings announcement was a week ago and the sharp drop in the stock price, below the sold (put) strike at $30, forced an early exit in the position for a small loss. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield IACI DEC 37 35.90 31.04 0.40 3.22% 1.11% WEBX DEC 25 25.30 17.97 0.30 5.79% 1.19% MERQ DEC 50 50.40 46.58 0.40 3.21% 0.79% SEPR DEC 27 27.75 23.54 0.25 5.36% 0.90% TTWO DEC 40 40.40 29.20 0.40 5.84% 0.99% CVTX DEC 25 25.40 13.38 0.40 13.63% 1.57% TTWO DEC 37 37.95 29.20 0.45 6.65% 1.19% CERN DEC 50 50.30 37.73 0.30 6.08% 0.60% CVTX DEC 25 25.45 13.38 0.45 21.60% 1.77% HYSL DEC 35 35.40 29.70 0.40 6.95% 1.13% AZO DEC 85 85.35 80.88 0.35 4.27% 0.41% MRVL DEC 40 40.75 36.69 0.75 5.26% 1.84% TTWO DEC 32 32.75 29.20 0.25 11.67% 0.76% Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status BRCM 34.62 32.52 DEC 28 30 0.25 29.75 0.25 Open? BRL 81.14 72.95 DEC 70 75 0.50 74.50 (1.55) Closed TOL 38.27 39.68 DEC 30 35 0.55 34.45 0.55 Open TARO 68.59 67.32 DEC 60 65 0.45 64.55 0.45 Open TECD 36.13 37.47 DEC 30 35 0.60 34.40 0.60 Open HAR 71.90 69.50 DEC 63 65 0.25 64.75 0.25 Open SCHN 49.98 55.19 DEC 40 45 0.55 44.45 0.55 Open NBIX 53.83 53.50 JAN 45 50 0.70 49.30 0.70 Open NE 37.01 36.56 JAN 33 35 0.30 34.70 0.30 Open WGO 60.60 60.38 JAN 50 55 0.50 54.50 0.50 Open Barr Labs (NYSE:BRL) slumped last week after the #1 generic drug maker Teva (NASDAQ:TEVA) and Andrx (NASDAQ:ADRX) said they would team up to market birth-control pills in the United States. The news led Lehman Brothers and J.P. Morgan to downgrade BRL shares however the decline was orderly, allowing for an exit well above the sold strike price and for a much smaller than published loss. KLA-Tencor (NASDAQ:KLAC), which is currently profitable, Michael's (NYSE:MIK), and the Semiconductor Hldrs (SMH) position, have been closed early to limit losses. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status HDI 45.17 46.11 DEC 50 47 0.25 47.75 $0.25 Open AMGN 58.14 60.38 DEC 65 60 0.65 60.65 $0.27 Open SNPS 29.57 33.44 DEC 35 32 0.25 32.75 ($0.69) Closed AMZN 51.51 49.50 DEC 60 55 0.55 55.55 $0.55 Open ERTS 42.27 44.47 DEC 47 45 0.25 45.25 $0.25 Open COF 55.30 56.50 JAN 65 60 0.65 60.65 $0.65 Open POWI 31.41 33.10 JAN 40 35 0.75 35.75 $0.75 Open SRCL 44.20 44.95 DEC 50 45 0.45 45.45 $0.45 Open? The bearish position in Noble (NYSE:NE) was a casualty of the recent surge in oil service shares but fortunately, we recouped the "early-exit" loss with a bullish synthetic position (12/7/03 Spreads/Combos). The bear-call spread in Symantec (NASDAQ:SYMC), although now profitable, has previously been closed to limit potential losses. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** FARO - FARO Technologies $21.93 *** Entry Point? *** FARO Technologies (NASDAQ:FARO) designs, develops, markets and supports portable, software-driven, 3-D measurement systems used in a broad range of manufacturing and industrial applications. The firm's principal products are the Faro-Arm Control Station and Control Station Pro (articulated measuring devices), the Faro Laser Tracker and Laser Control Station and their companion Soft Check Tool and CAM2 software, respectively, which provide for computer-aided design (CAD)-based inspection and factory-level statistical process control. Faro's products bring precision measurement, quality inspection and specification conformance capabilities, integrated with CAD software, to the factory floor. FARO - FARO Technologies $21.93 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 17.5 QEJ MW 0 0.45 17.05 9.1% 2.6% * SELL PUT JAN 20 QEJ MD 16 1.30 18.70 15.7% 7.0% ************** FLML - Flamel Technologies $26.10 *** Bottom-Fishing Only! *** Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company engaged mainly in the development of two polymer-based delivery technologies for medical applications. The company's Micro-pump technology is a multi-particulate technology for oral ingestion of small molecule drugs with applications in controlled release, tastemasking and bioavailability enhancement. The company has three major products based on its Micropump technology: Asacard, a controlled-release formulation of aspirin for the treatment of cardiovascular disease; Metformin XL, a controlled-release form of Metformin that is in development for use for the treatment of Type II diabetes, and Genvir, a controlled-release acyclovir for the treatment of genital herpes. In addition, FLML has developed new herbicide delivery systems and has patented a biomaterial, ColCys. FLML - Flamel Technologies $26.10 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 20 FLU MD 179 0.30 19.70 5.3% 1.5% * SELL PUT JAN 22.5 FLU MX 159 0.90 21.60 11.4% 4.2% ************** FRX - Forest Labs $60.05 *** Rally Mode! *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. The company's many products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. Principal products include Celexa, an SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, a once-daily diltiazem for the treatment of hypertension and angina; and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Labs $60.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 55 FHA MK 5671 0.75 54.25 3.7% 1.4% TS SELL PUT JAN 60 FHA ML 3406 2.25 57.75 8.4% 3.9% ************** MGAM - Multimedia Games $40.30 *** Next Leg Up? *** Multimedia Games (NASDAQ:MGAM) is the leading supplier of interactive electronic games and player stations to the rapidly growing Native American gaming market. The company's games are delivered through a telecommunications network that links its player stations with one another both within and among gaming facilities. Multimedia Games designs and develops networks, software and content that provide its customers with a range of gaming systems. The company's development and marketing efforts focus on Class II gaming systems and Class III video lottery systems for use by Native American tribes throughout the United States. MGAM - Multimedia Games $40.30 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 35 QMG MG 1339 0.75 34.25 6.5% 2.2% * SELL PUT JAN 40 QMG MH 153 2.30 37.70 12.6% 6.1% ************** MSTR - MicroStrategy $49.91 *** Consolidation Complete? *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via web, wireless, and voice. MSTR - MicroStrategy $49.91 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 40 EOU MH 184 0.35 39.65 3.3% 0.9% TS SELL PUT JAN 45 EOU MI 458 1.15 43.85 7.0% 2.6% * SELL PUT JAN 50 EOU MJ 302 3.00 47.00 12.8% 6.4% ************** NCEN - New Century Financial $37.95 *** Uptrend Intact! *** New Century Financial Corporation (NASDAQ:NCEN) is one of the nation's largest specialty mortgage companies, providing first and second mortgage products to borrowers nationwide through its operating subsidiaries. It offers mortgage products to borrowers who generally do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. New Century is committed to serving the communities in which it operates with fair and responsible lending practices. NCEN - New Century Financial $37.95 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 33.37 NWR MX 459 0.50 32.88 4.4% 1.5% * SELL PUT JAN 35 URE MG 538 0.85 34.15 6.4% 2.5% ************** NFLX - Netflix $50.49 *** The Rally Resumes! *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. NFLX - Netflix $50.49 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 40 QNQ MH 831 0.60 39.40 5.5% 1.5% * SELL PUT JAN 42.5 QNQ MT 310 1.00 41.50 7.4% 2.4% SELL PUT JAN 45 QNQ MI 612 1.65 43.35 9.9% 3.8% ************** PLMD - PolyMedica $25.38 *** More Bottom-Fishing! *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer medical products and services, conducting business through its Chronic Care, Professional Products and Consumer Healthcare segments. The company sells diabetes supplies and products, and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. Through its Professional Products segment, it provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease. It also markets, manufactures and distributes a broad line of prescription urological and suppository products. PolyMedica markets prescription oral medications not covered by Medicare to its existing customers through its Professional Products segment. PLMD - PolyMedica $25.38 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 20 PM MD 172 0.25 19.75 4.6% 1.3% * SELL PUT JAN 22.5 PM MX 527 0.80 21.70 9.7% 3.7% SELL PUT JAN 25 PM ME 170 1.75 23.25 14.9% 7.5% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** DNA - Genetech $91.20 *** New Multi-Year High! *** Genentech (NYSE:DNA) is a biotechnology firm using human genetic information to discover, develop, manufacture and commercialize biotherapeutics for significant unmet medical needs. The company manufactures and commercializes 10 biotechnology products directly in the United States. These include Herceptin, Rituxan, TNKase, Activase, Cathflo Activase, Nutropin Depot, Nutropin AQ, Nutropin human growth hormone, Protropin and Pulmozyme. The company also licenses several additional products to other companies and its product development efforts, including those of its collaborative partners, cover a wide range of medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders and inflammatory and immune problems. DNA - Genetech $91.20 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-80.00 DNA-MP OI=4341 ASK=$0.50 SELL PUT JAN-85.00 DNA-MQ OI=2731 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$84.35 ************** DIGE - Digene $38.47 *** Consolidation Complete? *** Digene (NASDAQ:DIGE) develops, manufactures and markets proprietary gene-based testing systems for screening, monitoring and diagnosis of human diseases. Its primary focus is in women's cancers and infectious diseases. The firm has applied its proprietary Hybrid Capture technology to develop a unique diagnostic test for human papillomavirus, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. In addition to its HPV Test, the company's product portfolio includes gene-based tests for detecting chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus. DIGE - Digene $38.47 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-30.00 QDG-MF OI=10 ASK=$0.40 SELL PUT JAN-35.00 QDG-MG OI=80 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.70-$0.80 POTENTIAL PROFIT(max)=16% B/E=$34.30 ************** MRO - Marathon Oil $31.06 *** Strong Sector! *** Marathon Oil (NYSE:MRO) is engaged in the worldwide exploration and production of oil and natural gas; the domestic refining, marketing and transportation of crude oil and petroleum products primarily through Marathon Ashland Petroleum, and other related businesses. Marathon Ashland is a consolidated subsidiary of the company that refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States. MRO - Marathon Oil $31.06 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-27.50 MRO-MY OI=569 ASK=$0.15 SELL PUT JAN-30.00 MRO-MF OI=1467 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$29.65 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** CECO - Career Education $37.85 *** Slumping Scholastic! *** Career Education Corporation (NASDAQ:CECO)) is the world's largest on-campus provider of private, for-profit postsecondary education and has a rapidly growing presence in online education. CEC's Colleges, Schools and Universities Group operates 51 campuses in the U.S., Canada, France, the United Kingdom and the United Arab Emirates and offers master's degree, bachelor's degree, associate degree and diploma programs in the career-oriented disciplines of visual communication & design technologies, information technology, business studies, culinary arts and health education. The Online Education Group's AIU Online Division offers master's degree, bachelor's degree and associate degree programs in information technology, business administration, visual communication and education. CECO - Career Education $37.85 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JAN 45 CUY AI 2,545 0.60 45.60 6.9% 1.3% * SELL CALL JAN 42.5 CUY AV 1,186 1.05 43.55 8.9% 2.4% ************** CRDN - Ceradyne $35.26 *** Defense Sector Retreat! *** Ceradyne (NASDAQ:CRDN) develops, manufactures and markets advanced technical ceramic products and components for industrial, defense, consumer, microwave communications and automotive applications. The company derives a portion of its revenues from its traditional products, which include lightweight-ceramic armor for military helicopters and microwave tube products. However, newer products developed or being developed by Ceradyne for defense, industrial and consumer applications represent an increasing share of its business. CRDN - Ceradyne $35.26 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JAN 45 AUE AI 282 0.40 45.40 5.3% 0.9% * SELL CALL JAN 40 AUE AH 435 1.25 41.25 11.6% 3.0% ************** PPDI - Pharmaceutical Product Dev. $25.16 *** Mediocre Outlook! *** Pharmaceutical Product Development (NASDAQ:PPDI) is a global provider of drug discovery and development services to drug and biotechnology companies. The firm offers therapeutic expertise, advanced technologies and extensive resources for both drug discovery and drug development. Its development services include preclinical programs and Phase 1 to Phase 4 clinical development. The company also has extensive clinical trial experience across various therapeutic areas that encompass various parts of the world, including regional, national and global studies. Also, the company offers post-market support services for drugs that have received approval for market use. PPDI - Pharmaceutical Product Dev. $25.16 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JAN 27 PJQ AY 352 0.30 27.80 3.7% 1.1% TS SELL CALL JAN 25 PJQ AE 354 1.15 26.15 9.9% 4.4% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** CTSH - Cognizant Technology $41.02 *** Sell-Off Underway! *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. CTSH - Cognizant Technology $41.02 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-50.00 UPU-AJ OI=1382 ASK=$0.25 SELL CALL JAN-45.00 UPU-AI OI=2360 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$45.60 ************** MERQ - Mercury Interactive $46.03 *** Revenge Play! *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help Global 2003 companies enhance the user experience by improving the performance, availability, reliability and scalability of their Web-based applications. Its many hosted services provide its customers with a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Its integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. The company also provides outsourced load testing and Web performance monitoring services that complement its software products. MERQ - Mercury Interactive $46.03 PLAY (moderately aggressive - bearish/credit spread): BUY CALL JAN-55.00 RQB-AK OI=3191 ASK=$0.30 SELL CALL JAN-50.00 RQB-AJ OI=2388 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.80-$0.90 POTENTIAL PROFIT(max)=19% B/E=$50.80 ************** MXIM - Maxim Integrated Prod. $47.10 *** Chip Sector Slump! *** Maxim Integrated Products (NASDAQ:MXIM) designs, develops, makes and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high-frequency design processes and capabilities that can be used in custom design. Maxim's products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, radio frequency circuits, fiber-optic transceivers, sensors and voltage references. The firm's unique products are sold to customers in various markets including automotive, communications, consumer, industrial control, instrumentation and data processing. MXIM - Maxim Integrated Prod. $47.10 PLAY (moderately aggressive - bearish/credit spread): BUY CALL JAN-55.00 XIQ-AK OI=3640 ASK=$0.20 SELL CALL JAN-50.00 XIQ-AJ OI=3418 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.80-$0.90 POTENTIAL PROFIT(max)=19% B/E=$50.80 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** Generally Bearish Candidates OmniVision Technologies - OVTI - close: 53.93 change: +0.23 WHAT TO WATCH: Wow! Shares of OVTI have shot up 400% from their 2003 lows. The recent top near $68 is an all-time high. Now that investors are beginning to take profits in tech issues we've seen OVTI drop back toward the $50 mark. A pull back toward $50 would be a 25% haircut from the top. While the stock is finding short-term support at $52 a test of the $50 level looks like a good bet. Traders can wait for a bounce and try to ride it back towards the $60 level or look for a breakdown and aim for the 200-dma near $40.00. Chart= --- Varian Semiconductor Equipment - VSEA - cls: 39.91 change: -0.77 WHAT TO WATCH: VSEA is another chip stock that bears watching. Shares have broken the long-term up trend from last spring. The close under psychological support at $40.00 looks like an entry point for a retest of the 200-dma approaching $35.00 but watch out for P&F support near $37.00. Chart= --- Graco Inc - GGG - close: 40.21 change: +0.16 WHAT TO WATCH: Pushing near to new all-time highs is GGG. The company recently raised their dividends and the stock powered back over the $40 level. If GGG can break the $40.50 mark, then bulls can chase the breakout. Otherwise, a dip back to the $39.00 area might be the best place to buy the bounce and then wait on the breakout to new highs. Chart= --- American Standard Co - ASD - close: 97.58 change: +0.18 WHAT TO WATCH: ASD produces an odd assortment of capital goods from air conditioning systems, to bathroom and kitchen fixtures, to vehicle control systems. Investors have been pushing the stock higher for months and now it looks primed for a stronger bout of profit taking. Watch for a breakdown under the 50-dma near $95.00. The easy target is $90 but ASD might actually hit hold resistance near $87.50. Chart= ************** MARKET POSTURE ************** Nothing Going by - Nich Sheldon Major Indexes were split pretty evenly today, albeit on weak volume, as 15 closed in the green and 12 closed in the red. The only index to lose more than one percent was the SOX Semiconductor Index, which dropped -1.07 percent. Today marked the fourth session in a row of declines for the index, and we suspect that the 450 range might be retested as we enter the new year. On a positive note, the RLX S&P Retail Index, recuperated from its breach of 360 yesterday, rebounding +2.13 percent by the closing bell. Traders should note that the RLX has closed over its simple 10-DMA for the first time since December 4th. The DJUSHB DJ US Home Construction Index tacked on nearly 2 percent on Wednesday, as well as closed over its 10-DMA for the first time in more than a week's worth of trading sessions. The OIX Oil Index, XAU Gold and Silver Index, and the DFI Defense Index all closed more than one percent higher on the day ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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