The Option Investor Newsletter Thursday 01-22-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Volume Still Strong Futures Markets: Flat Squeeze Index Trader Wrap: See Note Market Sentiment: Looking Tired Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-22-2004 High Low Volume Advance/Decline DJIA 10623.18 - 0.44 10660.88 10607.40 2.27 bln 1683/1558 NASDAQ 2119.01 - 23.40 2152.12 2119.01 2.36 bln 1216/2013 S&P 100 566.21 - 2.43 569.84 565.71 Totals 2899/3571 S&P 500 1143.94 - 3.68 1150.51 1143.01 W5000 11164.78 - 37.80 11232.92 11160.00 RUS 2000 591.73 - 5.75 600.61 591.53 DJ TRANS 3080.32 + 16.70 3090.07 3063.73 VIX 14.71 + 0.37 14.87 14.01 VXO (VIX-O)15.01 + 0.58 15.34 14.39 VXN 21.74 + 1.03 21.78 20.42 Total Volume 4,953M Total UpVol 1,642M Total DnVol 3,218M Total Adv 3339 Total Dcl 4007 52wk Highs 1040 52wk Lows 8 TRIN 1.52 NAZTRIN 1.41 PUT/CALL 0.92 ************************************************************ Volume Still Strong Volume on Thursday was nearly five billion across all markets and stretched the string of high volume days to 13. Declining volume was unfortunately the highest since Sept-24th and twice the up volume. Still the Dow held its ground and clung to its 52-week highs. The Nasdaq saw some profit taking in front of Microsoft earnings but even that was muted. Dow Chart Nasdaq Chart The economics were about as mixed as the markets. The Jobless Claims fell -1,000 to 341,000 and pushed the four-week average to a new post-recession low of 345,000. Analysts had wanted to see a little bigger drop in claims but had hedged their bets with a consensus estimate of 349,000. Obviously they were pleased as the numbers show a consistent improvement although very slow decrease. Continued claims under 350K have in the past led to an increase in jobs by about +150K per month. With the Nonfarm Payrolls due out in two weeks hopes are going to be running high. Those claims may be about to increase according to the Monthly Mass Layoffs which came in today at 1,929. These layoffs will cut 192,633 workers and was up substantially from the 1,438 and 138,543 workers from last month. This is a December number and I suggested last month we could see an increase at year end and into January as companies trim the sails going into the new year. Manufacturing still accounted for the majority of the cuts with 34% of the total. This is a trend that should continue as long as jobs continue to be outsourced overseas. There have been several high profile comments recently that suggest the "lost" jobs from December's Jobs report will be found. Fed President Bob McTeer said he was shocked and went on record that he felt they would be found in the January report. Treasury Secretary John Snow echoed those exact comments this week that the report "must" be in error and the inaccuracies will be corrected and the lost jobs found by January's report. This is just a sample of the posturing we are seeing and it suggests the jobs will be found regardless of whether they exist of not. It is an election year. With the economics mixed the markets were left to trade on stock news. The biggest news of the morning was news of a massive layoff by Eastman Kodak. They are cutting -15,000 workers over the next three years as they close plants and reduce manufacturing square footage by about one third. The company is moving out of traditional film and into the digital camera market. Investors liked the announcement and pushed the stock up +10% to $31.02 and a six month high. This helped the Dow overcome weakness from INTC, T, DD, KO and Boeing. EK gained +3.49 and the next largest Dow gainer was CAT at +0.60. Lucent was the target of some serious selling on volume of more than 200 million shares after Smith Barney cut them to a sell. Smith Barney said traditional wireline suppliers had seen their stocks rise well above fundamentals in the last month and were due for a correction. The analyst said capex spending in the sector would likely be flat with declining spending in the switched circuit markets being offset by increases in VOIP equipment and routers. AT&T complicated the picture for the telecom sector when it announced earnings that were soft from weak customer demand and heavy pricing pressure. AT&T said it saw further sales declines for 2004. Revenues dropped -12.8% as long distance continued to be eroded by consumers switching to LD free cell phones and VOIP. Consumer revenues fell -18.9%. T fell -$.85 cents on the news and below its $21 support level to rest on the 50 DMA at 20.39. After the close the 800lb gorilla announced earnings and the futures market dropped sharply. Microsoft reported earnings of 34 cents and beat estimates by +4 cents but nobody seemed to care. After hours investors keyed on the 14 cent headline number and recoiled from the 20 cent charge for stock based compensation. This charge was well over any estimates at nearly 60% of gross earnings. Other problems appeared to be a drop in subscription revenue and a lower unearned revenue number. Revenue was up slightly over the prior quarter and Microsoft said PC demand continued to exceed expectations. They also said they were seeing early signs of an IT recovery. They guided slightly up for the current quarter which is normally unheard of. Despite the good guidance the number crunchers panicked and the stock sold off slightly in after hours trading. From the action in the futures you would have thought they had missed their numbers with the S&P futures dropping -4.00 on the news. This was a severe over reaction to the -50 cent drop in the stock. Part of that futures drop was attributed to some guidance from other reporting techs. KLAC beat the street by +3 cents and guided higher for the current quarter. They said orders were up +50% from the prior quarter and felt they were in the early stages of a sustainable upturn. They felt the orders for the 1Q would increase by +15%. They beat the street and raised guidance but the stock fell over -$1.00 in after hours trading. MCHP announced earnings inline with estimates and guided higher for the current quarter. They said their book-to-bill ratio was 1.26 and raised their dividend. They said sales of microcontrollers were at record levels. The stock was trading down over -$1 in after hours. MCHP was one of the three stocks rated five stars on Wednesday by S&P. (INTC and TXN) They suggested each had the potential for another +25% gain. MSCC beat estimates by +2 cents and raised guidance. Income increased +50% over the fourth quarter and margins increased substantially. Book to bill was only +1.06 and sales only increased +4%. While it appeared great for the company investors were not as impressed. The stock was trading down in after hours. GNSS beat the street's estimates of +3 cents with a huge jump to +8 cents profit. Sales were up +17% over the prior quarter with gross margins increasing to 39.6%. Great news but they had the misfortune of guiding inline with estimates and the stock traded down in after hours. AMGN accidentally released their earning on their website just before the market closed and dropped substantially due to missing estimates by -2 cents. They closed at $61.47 and well off their $63.46 intraday high. The earnings miss was due to rising expenses and higher marketing costs to fend off new competition from Abbot on Enbrel. Corning posted earnings inline with estimates but the big news was surging demand for LCD display panels used in PCs and laptops. GLW said it expected to sell out of its LCD glass despite boosting output to meet demand. This was the second consecutive quarterly profit in more than two years. You guessed it, GLW traded down in after hours. Volume is strong, tech earnings are great and guidance is mostly positive but techs are retreating. Good earnings are being met with selling more often than not. PC sales are now projected to be double digits through June (per MSFT) and chip companies are trending flat to down. Small caps have been on a roll but sold off -5.75 today. Seeing a trend here? This is normal post earnings depression like we have not seen since the Internet bubble. We had a massive earnings run on extremely optimistic expectations and those have generally been met. Investors are simply taking their profits. This is not the end of the world but it may be the end of the vertical gains without any new catalyst. Russell Chart S&P Chart The markets are very extended and several critical points have been reached. The Dow hit 10660 today and within 13 points of the 2002 resistance highs at 10673. The S&P hit 1150.51 and only -1.50 points away from a +50% rebound off the Oct-2002 lows. 1160 is the 50% retracement of the drop from the Jan-2000 highs. 1173 is the 2002 resistance highs. Getting crowded over 1150. The Russell 2000 hit 600.61 today and while that is still -14 points from the all time high in March 2000 it has been the unofficial target for over a month. The Nasdaq has failed at 2150 four times now and despite great earnings is threatening to retest 2100. While these technicals tests are critical they are all just signs of a tired earnings run. The Nasdaq had no trouble breaking 2000 and the Dow is now well over 10000 on the strength of these expectations. It should not be surprising to see some profit taking and consolidation once those expectations were met. Distribution or consolidation? Ask me again in a month. The very strong volume patterns suggest we are seeing some distribution at critical market levels. The down volume is increasing but we are not yet seeing any real selling imbalances. The new highs were over 1000 again for the fourth consecutive today and showing no signs of retreat. Until those numbers decline substantially we are just consolidating. The last time they were below 800 on the new 52-week highs was the week before Christmas. While there is still significant resistance above us there is also significant support below. The Nasdaq spend most of the last two weeks fighting to get over 2100 and stay there and it is going to take a lot more selling than we saw today to fall below the 2085 level that we saw during that fight. Should that level fail the 50 dma is right at 2000 and that has been support since March. The Dow has successfully defended 10500 numerous times and 10400 more than once. The 50 dma is currently at 10100 and that is more than -500 points away from today's close. The S&P has very strong support at 1115-1120 and is well above the 50 dma at 1085. What all this gibberish means is that we could see several days of selling without any serious harm. The problem as I see it now is the lack of a motivating factor. Earnings are coming in as expected and more than 50% of the S&P will have reported by tomorrow. There should be no more big upside surprises. The Fed meets on Tuesday and the odds are good they will begin to condition the markets for a rate hike. Nobody expects a hike before the elections but they will likely begin to set the stage. This could put pressure on the markets through Wednesday. I believe we will see a gap down on Friday that will be bought by traders looking for an entry point. That bounce could fade by days end and leave us range bound through the Fed meeting which ends on Wednesday. Once any reaction to the Fed meeting is over I would look for a ramp into the Jobs report on Jan-6th. We have been virtually assured that it will show positive job gains. Potholes or stepping stones into that Jobs report will be the GDP due out next Friday and the ISM on Monday the 2nd. The big challenge will be the GDP. The official estimate is for +4.5% growth for the 4Q. The whisper number is already +6.5%. This is a prime opportunity for a disappointment. With the recent earnings and sales increases for the 4Q I suspect it will be over 4.5% but not as high as the whisper. Since the Fed will undoubtedly have the GDP numbers during their meeting any overly strong number will influence their rate stance. It is a catch-22. An inline number will be seen as pleasing to the Fed but disappointing by traders. A blowout number could cause a Fed reaction which would disappoint traders. The best possible number would be something just over 5% so the Fed is pleased but not scared and traders can be pleased but not ecstatic. Friday is going to be a tossup and a chance for traders to begin positioning themselves for one more week of very intensive earnings followed by a week of intensive economics. After that it is time to coast until the April earnings run begins. Now, that chapter in this investing saga will be very interesting as we get to see if this months guidance lived up to the hype. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Flat Squeeze Jonathan Levinson In what will prove to have been either distribution at the highs or consolidation of recent gains, the indices went net nowhere on high volume, the NQ dropping slightly and the YM advancing, while gold and the dollar declined against gains in treasuries. 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. Daily chart of the US Dollar Index The US Dollar Index got battered last night with Europe's open, diving to the 85.60 level before bouncing to the 85.80's, where it spent the better part of the day. The slide from its dead cat bounce last week continues, but gold continued to trade listlessly while silver jumped. The CRB advanced .42 to 269.67, led by cocoa, silver and coffee futures. Natural gas led the decliners on a smaller than expected drop in inventories announced today. Daily chart of February gold February gold made it as high as 413.50 before retreating, spending most of the session around 410-411 and closing at 410.10, with a low of 408.30. The daily cycle downphase continues to play out, while lower rising channel support holds. March silver did much better, gaining 2.4% to close at 6.355. The miners were down as well, XAU -1.94% and HUI -1.27%, and this is the second day of side-by-side losses in gold and the US Dollar. Daily chart of the ten year note yield Treasuries had a fine day, with the ten year note yield declining 1.68%, a 6.8 basis point move to close at 3.969%. 3.9% is double bottom support, and given the shape of the daily cycle oscillators, I expect that support to hold. However, I note that the Fed drained an eye-popping 19.5B via open market ops, and yet bonds were bid higher. In light of that, I'd be inclined to view my cute little horizontal line on the yield chart with, say, a grain of salt. If a 19.5 billion dollar liquidity drain couldn't keep bonds from rising over 1% today, I doubt if a double bottom on a daily yield chart will either. Daily NQ candles The NQ was again the weakest link, dropping .84% or 13 points to close at 1534. The move was mostly sideways, but the broken rising channel trendline held back the advance, just as the primary rising channel supported the decline. This was sufficient to give bears a daily cycle downphase, with the Macd one support level away from printing a confirming cross. The session low was 1532.50, right on the daily trendline and just north of price confluence. Any further selling would have very bearish implications for the daily cycle, which has been looking for a downphase for months now on the NQ. 30 minute 20 day chart of the NQ MSFT announced earnings after the bell and let the dogs out, with the NQ down 11 at 1523.50 as of this writing. A 30 minute cycle downphase was aborting as of the cash close (when this chart was generated) and reconfirmed 1530 as first support, with key confluence, trendline and fibonacci support below at 1518. A break below that level would qualify the current NQ weakness as more than just a bullish reprieve, and would be the first sign of trouble, signaling a test of 1496 and 1477 support. Given the very fragile state of the daily cycle oscillators, that should be sufficient to support a bearish stance for the coming weeks. Daily ES candles ES lost 2.25 points to close at 1143.75, a small move to complete a small day. 1141 was the print as of this writing, again no breach in the bullish armor but coming ever closer to that lower rising channel support line. This line has been broken and is now resistance on NQ. 1139-40 is first support, followed by 1130, 1121 and then 1115. 20 day 30 minute chart of the ES A 30 minute cycle downphase succeeded in inflicting very little damage on the ES, and the upphase had tentatively commenced as of the cash close. The MSFT selloff could undo that signal, but it remains the case that the 30 minute oscillator, which tends not to trend, is in bounce territory. Nothing less than a break of the rising channel in the 1137-40 area is required to suggest a trending move on this timeframe. Until the uptrend fails, ES will continue to look bullish. More realistic would be a weak bounce here to fail from a lower high. This would confirm the onset of an overdue daily cycle downphase, and set us up for a more vigorous test of 1130 and 1115 support. 100-tick ES The aimless, gentle decline left the short cycle oscillators perfectly chopped up and unreadable. Daily YM candles The YM was the only index to close green, although only slightly so, leaving a doji star within the rising daily channel. The daily cycle downphase continues to flop along aimlessly, and clearly this weakness is merely corrective so far. 20 day 30 minute chart of the YM For the second consecutive session, we've seen the intermarket relationships making little sense and diverging sharply from the last recognizable pattern. Today we had a weak dollar, mixed-to- weak equities, weak gold, strong silver and strong bonds. I'm assuming that this is merely a stall at some kind of turning point, and I intend to wait until a directional move restores some semblance of clarity. I don't expect gold and the dollar to trade in lockstep for long, and with volatility so low, it's wise not to set ones mind firmly on any particular outlook. We need to wait for the market to give us a cue. ************************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 ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_012204_1.asp ************************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 ************************************************************** **************** MARKET SENTIMENT **************** Looking Tired - J. Brown The rallies in the major indices are truly starting to look tired. For the last three or four days we've done nothing but go sideways as investors try and digest the deluge of earnings news. If the markets can rally tomorrow they may be able to stretch the winning streak to nine weeks in a row, a feat not seen since 1989 (on the S&P). However, that all depends on how investors choose to interpret Microsoft's mixed earnings news that came out tonight after the closing bell. The market's exhaustion is becoming more apparent in its internals. The NYSE saw a very narrow race in the A/D line but advancing stocks nosed past decliners 1443 to 1419. The NASDAQ, which saw the brunt of the selling today, watched losers beat up winners almost 20 to 11. Down volume overpowered up volume on both exchanges and total volume was heavy yet again. As a matter of fact some of the discussion among traders is how all this heavy volume smells like distribution (smart money taking profits and selling their winners to retail investors). Despite the weakness today the major averages are still in a strong up trend. The question is whether or not investors are once again ready to buy the dip or wait for a pull back in hopes of a better entry point. One sector really seeing a lot of profit taking is the disk drives sector. The DDX has fallen strongly for two days in a row after STX offered its earnings warning mid-week. The group looks poised for more weakness tomorrow and the DDX doesn't have any support until the 130 level. The GHA hardware index has also fallen under profit taking and the index broke support at 260 today while its MACD indicator suggest a sell signal will appear very soon. The Internets and software stocks have held up better than their hardware-related cousins. However, everyone is watching the semiconductors. The SOX could be in bull flag consolidation but the index looks poised for more weakness tomorrow and its MACD also looks pretty weak. Not surprising is the pull back in the NWX networking index. The whole group has been white-hot since the new year and was way overdue for a bit of selling. Another group that's been super strong was the broker-dealers but the XBD finally felt some profit taking today as well. Hmm... I'm also noticing what could be short-term double-tops in the DRG drug index and the OIX oil index. There's no correlation between the two other than a similar chart pattern. We'll see if there's any follow through on today's failed rallies. The best performing sector today was the XAL airlines index. The XAL added 4% after AMR, the world's largest airline, jumped almost 16% on a better than expected earnings report. Also notable today was the failed rally in the XAU gold & silver index. The entire group posted an oversold bounce earlier in the week but that bounce might be failing. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10660 52-week Low : 7416 Current : 10623 Moving Averages: (Simple) 10-dma: 10543 50-dma: 10129 200-dma: 9400 S&P 500 ($SPX) 52-week High: 1150 52-week Low : 788 Current : 1143 Moving Averages: (Simple) 10-dma: 1133 50-dma: 1085 200-dma: 1010 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 795 Current : 1530 Moving Averages: (Simple) 10-dma: 1536 50-dma: 1448 200-dma: 1307 ----------------------------------------------------------------- As expected the volatility indices bounced today but not by much as the selling was mild across most of the market indices. CBOE Market Volatility Index (VIX) = 14.71 +0.37 CBOE Mkt Volatility old VIX (VXO) = 15.12 +0.69 Nasdaq Volatility Index (VXN) = 21.74 +1.03 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.92 886,395 812,495 Equity Only 0.74 783,191 581,852 OEX 1.50 14,300 24,419 QQQ 10.51 23,329 245,232 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 78.4 + 1 Bull Confirmed NASDAQ-100 80.0 - 1 Bull Confirmed Dow Indust. 93.3 + 6 Bull Confirmed S&P 500 88.6 + 1 Bull Confirmed S&P 100 87.0 + 2 Bull Confirmed 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: 1.00 10-dma: 1.06 21-dma: 0.97 55-dma: 1.05 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 1443 1138 Decliners 1420 1960 New Highs 320 290 New Lows 7 5 Up Volume 846M 681M Down Vol. 1369M 1589M Total Vol. 2228M 2332M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 01/13/04 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 We don't have much more to report on for commercial traders this week other than slightly increased positions on both sides of the fence. Small traders followed suit. Commercials Long Short Net % Of OI 12/16/03 448,103 460,670 12,567 1.4% 12/22/03 400,066 405,240 (5,174) (0.6%) 01/06/04 403,721 408,729 (5,008) (0.6%) 01/13/04 405,558 411,361 (5,803) (0.7%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 12/16/03 172,947 113,704 59,243 20.7% 12/22/03 147,537 81,596 65,941 28.8% 01/06/04 142,844 83,518 59,326 26.2 01/13/04 149,057 90,571 58,486 24.4% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 The e-minis are seeing more action than the full contracts represented above. Commercial traders added more than 20K contracts to both longs and shorts but they remain net bearish. Small traders were more enthusiastic with a large increase in long positions, outpacing the increase in short positions. Contrarians might view this as a bearish development. Commercials Long Short Net % Of OI 12/16/03 330,273 361,316 (31,043) (4.5%) 12/22/03 128,801 213,021 (84,220) (24.6%) 01/06/04 175,489 240,865 (65,376) (15.7%) 01/13/04 196,858 263,845 (66,987) (14.5%) 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 12/16/03 177,193 73,694 103,499 41.3% 12/22/03 125,248 43,482 81,766 48.5% 01/06/04 139,433 51,909 87,524 45.7% 01/13/04 191,241 62,711 128,530 50.6% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Ho-hum...commercial traders are still asleep at the wheel in the NDX futures. Meanwhile small traders have reduced their outstanding shorts. Commercials Long Short Net % of OI 12/16/03 61,343 73,153 (11,810) ( 8.8% 12/22/03 40,277 36,452 3,825 5.0% 01/06/04 42,892 37,801 5,091 6.3% 01/13/04 41,829 38,547 3,282 4.1% 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 12/16/03 28,676 15,197 13,479 30.7% 12/22/03 22,656 14,544 8,112 21.8% 01/06/04 8,035 17,911 ( 9,876) (38.1%) 01/13/04 9,705 12,539 ( 2,834) (12.7%) 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 isn't much to report in the DJ futures either. It looks like commercials are just shuffling money around but the net result was a slightly more bullish stance on the Dow. In mirror-like precision small traders have slowly become more bearihs. Commercials Long Short Net % of OI 12/16/03 23,509 13,880 9,629 25.8% 12/22/03 14,088 9,998 4,090 17.0% 01/06/04 15,697 9,497 6,200 24.6% 01/13/04 16,501 8,724 7,777 30.8% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 12/16/03 9,497 19,633 (10,136) (34.8%) 12/22/03 6,915 8,983 ( 2,068) (13.0%) 01/06/04 5,713 8,105 ( 2,392) (17.3%) 01/13/04 6,496 9,970 ( 3,474) (21.1%) Most bearish reading of the year: (10,136) - 12/16/03 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************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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The Option Investor Newsletter Thursday 01-22-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: GILD Dropped Puts: NONE Call Play Updates: AMGN, APOL, DGX, ESRX, GENZ, MBI, MWD, MXIM, STJ New Calls Plays: HSIC Put Play Updates: ADBE New Put Plays: QLGC **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Gilead Sciences - GILD - cls: 65.20 chng: -0.17 stop: 62.50 It took the patience of a saint and a full month to get the job done, but GILD finally hit our lower target at $66 on Wednesday, right at the top of that September gap. We were expecting some resistance to be found there and sure enough it was with the stock pulling back today. Normally, we might be tempted to hold on through the ensuing consolidation and play for another leg higher to the $68-70 area. But with earnings only a week away, it seems unlikely that the stock will be able to mount another strong leg up ahead of that report. With strong gains already accrued, we're choosing to take the money and run. More aggressive traders can certainly hold for a rally into earnings next week, but we would suggest that stops should be trailed just behind the 10-dma, at the lowest. Picked on December 21st at $59.40 Change since picked: +5.80 Earnings Date 1/29/04 (confirmed) Average Daily Volume = 3.70 mln Chart = 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 UPDATES - CALLS ******************** Amazon.com - AMZN - close: 57.18 chg: +0.98 stop: 53.50*new* Not a bad day for shares of AMZN. The stock managed to out perform the major averages and its peers in the INX internet index. AMZN popped higher at the open after EBAY's strong earnings numbers last night but faded like many stocks today. Fortunately, investors bought the dip and AMZN produced a slow drift higher through most of the session. We only have a couple of trading days left before AMZN's Jan. 27th earnings announcement. We would not suggest new bullish positions at this time and current players should watch their risk. We are raising our stop loss to $53.50. Picked on January 14 at $55.01 Change since picked: + 2.17 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 10 million Chart = --- Apollo Group - APOL - close: 72.78 change: -1.82 stop: 71.00 The market gives and the market takes away. APOL was looking strong earlier in the week, as it marched through the $75 level, but today's big drop certainly gives us cause for concern. This could just be the pullback to test support in the $72.50-73.00 area, or it could be the start of a more significant decline. With the break of the 10-dma ($73.00) today and the daily Stochastics starting to turn bearish, we need to be on our toes. A rebound from above the $72 level can be used for a fresh entry into the play, but if that support gives way, then odds are strong we'll see a test of the 20-dma ($71.22) as the next level of support. Maintain stops at $71. Picked on January 13th at $72.63 Change since picked: +0.15 Earnings Date 3/18/04 (unconfirmed) Average Daily Volume = 1.91 mln Chart = --- Quest Diagnostic - DGX - close: 78.42 chg: +0.58 stop: 76.60 *new* The chase continues for shares of DGX. We're both surprised and encouraged by the constant march higher. Traders appear to be buying every dip in anticipation of DGX's Jan. 27th earnings report. Due to the short time left before its announcement we would not suggest any new bullish positions. As a matter of fact we're raising our stop loss to a tight $76.60 (yesterday's low). This is tighter than we would normally play it but we don't want to give back too much of DGX's recent run and it could see some minor profit taking ahead of the weekend tomorrow. In Tuesday's newsletter and in the monitor the last two sessions we've suggested that traders actually consider taking profits at current levels above $77.50. We're also sticking by our plan to exit the stock should DGX trade at $79.95, assuming we aren't stopped out first. Picked on December 30 at $72.95 Change since picked: + 5.47 Earnings Date 01/27/03 (confirmed) Average Daily Volume: 836 thousand Chart = --- Express Scripts - ESRX - cls: 68.82 chng: +0.30 stop: 64.00*new* Despite the pullback from its intraday highs today, ESRX is continuing its steady march higher. Today's close over $68.50 marks the start of our expected move into the gap left behind in late July, and opens the door for a continued rally to the top of that gap just below $72. Of course, with daily Stochastics already extended into overbought territory, it may be time for a bit of consolidation before making that upward move. With former resistance near $66 solidly broken, a pullback near that level would make for a very nice entry point, as we see old resistance act as support. Both the 10-dma ($66.56) and 20-dma ($66.05) have now risen to the point that they can reinforce that expected support level. Due to the way the stock continues to pull back from its intraday forays into higher territory, momentum entries don't seem to be the best choice. More aggressive traders can consider intraday dips into the $67.50-68.00 area as viable entries as well. Note that we're raising our stop to $64 tonight, which is just below the 50-dma ($64.02). Picked on January 13th at $68.32 Change since picked: +0.50 Earnings Date 2/24/04 (confirmed) Average Daily Volume = 1.24 mln Chart = --- Genzyme Corp. - GENZ - close: 55.18 change: +0.04 stop: 51.00 Biotechnology bulls were treated to a real roller-coaster ride over the past couple days, as the BTK index pushed to a new high yesterday and then reversed just about half of that gain today. The ride was more adrenaline-filled for traders in GENZ though, as the stock soared higher following yesterday's new recent high, tapping the $57 level before commencing on a complete retracement of the morning's gains, ending right back near the $55 level. Now we'll get to see if the breakout over $55 transformed that level to support or if there will be a deeper pullback. With daily Stochastics starting to roll over already and today's gravestone doji candlestick looking bearish, it looks like a more significant pullback is in store. The most logical place for the buyers to step back in will be on a dip and rebound from the $52- 53 area. Recall that $52 was strong resistance before last week's breakout and $53 had been the base of this week's consolidation before yesterday's breakout over $55. We know now that there will be a fair amount of supply coming in as GENZ works its way through the $57-58 resistance area in preparation for a run at the $60-61 zone. For that reason, our inclination is still to focus on entries on pullbacks, rather than breakouts. Maintain stops at $51. Picked on January 20th at $53.00 Change since picked: +2.18 Earnings Date 2/19/04 (unconfirmed) Average Daily Volume = 2.81 mln Chart = --- MBIA Inc. - MBI - close: 63.07 chg: -0.23 stop: 59.99*new* In the last two sessions shares of MBI have gone...nowhere! We're right back to Tuesday's close at $63.07. While we're not terribly excited about its performance it has held up considering today's pull back across most market sectors. The current trend of higher lows appears to be coiling for a breakout above the 63.50 mark. If we don't see this move occur in the next couple of trading days we may close MBI and look for something that is moving. We are going to raise our stop loss to 59.99. Picked on January 20 at $62.93 Change since picked: + 0.14 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 572 thousand Chart = --- Morgan Stanley - MWD - close: 59.86 chg: -0.82 stop: 56.75 We see a similar pattern in MWD (as to MBI). The stock has gone sideways and is within a couple of cents of Tuesday's closing price. This sideways consolidation isn't necessarily bad for investors and it gives MWD time to digest its breakout above resistance at $59.00. Only if MWD breaks down below $59.00 would we begin to worry. Actually, traders might want to keep an eye on MWD for a dip back to the $59.00 level as a potential entry point. The XBD broker-dealer index just posted its first decline in six days and we could see a little bit of follow through on the profit taking. Picked on January 15 at $59.81 Change since picked: + 0.05 Earnings Date 03/18/04 (unconfirmed) Average Daily Volume: 3.8 million Chart = --- Maxim Integrated - MXIM - cls: 56.62 chg: -0.04 stop: 51.89 *new* Uh-oh! We were okay with the SOX churning sideways as investors digested Intel's earnings news but now the sector index appears to be headed lower. RFMD's uninspired guidance for next quarter didn't help chip stocks any and we could see more profit taking in the group. MXIM is also pulling back but has held support at $52.60 for two days in a row. Traders might want to wait for MXIM to trade back above the 54.25 level before considering new entries, especially with its technical oscillators turning bearish. The good news is that even if the chip sector and MXIM pull back it will probably set us up for another bullish entry point. Two days ago S&P released a 52-page report detailing why they feel semiconductor stocks are poised to gain 20-25% over the next 12 months. Here's an excerpt, "Key factors driving semiconductor growth, according to the analysts, include surging demand from Asia, as outsourced manufacturing spurs prosperity in that region; improving corporate profits in the U.S., which are leading to increased IT investment; under-investment in semiconductor manufacturing capacity, which has led to high capacity utilization rates and, ultimately, pricing power; and high operating leverage at chipmakers, resulting from three years of cost reductions." We are going to raise our stop loss to 51.89 or breakeven. Picked on January 06 at $51.89 Change since picked: + 1.73 Earnings Date 02/05/04 (confirmed) Average Daily Volume: 5.4 million Chart = --- Saint Jude Medical - STJ - cls: 66.38 chg: -0.12 stop: 62.75*new* The volume-powered breakout from its cup-and-handle pattern continues for STJ. The stock actually hit a new high this morning before slipping back in very minor profit taking. The good news here is that traders bought the dip to $66.00 late in the afternoon. We are anticipating a lack of sellers between now and STJ's earnings report on Jan. 28th but we're going to raise our stop loss just in case. Our new stop is $62.75 but more conservative traders might want ton consider something closer to $64.00. Keep in mind that if the major indices decide to show any serious weakness the vast majority of stocks, including STJ will likely follow. Always play with a stop. In addition, there aren't many trading days left between now and STJ's earnings report so we are not suggesting any new bullish positions. Picked on January 12 at $64.01 Change since picked: + 2.37 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.4 million Chart = ************** NEW CALL PLAYS ************** Henry Schein - HSIC - close: 70.65 chg: +1.15 stop: 67.00 Company Description: Henry Schein, Inc. is the largest distributor of healthcare products and services to office-based practitioners in the combined North American and European markets. Recognized for its excellent customer service and low prices, the Company's four business groups--Dental, Medical, International and Technology-- serve more than 400,000 customers worldwide, including dental practices and laboratories, physician practices and veterinary clinics, as well as government and other institutions. The Company's sales reached a record $3.1 billion for the twelve months ended September 27, 2003. With a presence in 14 countries, Henry Schein's International Group posted sales of over $500 million for the same period. The Company operates through a centralized and automated distribution network, which provides customers in more than 125 countries with a comprehensive selection of over 90,000 national and Henry Schein private-brand products. (source: company press release) Why We Like It: HSIC turned out to be a big performer for investors in 2003. Shares rallied from their February '03 lows near $35 to end the year near $66. Now it looks like the stock is ready for its next leg higher. HSIC did have some recent news when the company announced a $328 million acquisition for a handful of European dental product distributors. Fortunately, from the bullish reaction in the stock price, Wall Street appears to agree with HSIC's management that there is little risk in the acquisition that will be immediately accretive to earnings. However, we will note that Bank of America did recently downgrade the stock from "buy" to "hold" based on valuation claiming it was near their $70 price target. Coincidentally HSIC's current point-and-figure price target is $70 and that target has been met. Technically this raises the risk level for the play. The vertical price objectives forecasted by P&F analysis are not always met and can be exceeded but P&F fans should be extra cautious here. Chart readers will also notice that HSIC appears to be breaking out of a mult-week consolidation. We do like the bullish breakout over the $70 level on a day where the major averages were lower. HSIC's MACD is in a bullish buy signal while its other oscillators are also pointing higher. Our first target is the $75 mark but we believe HSIC can actually trade beyond this level. We'll start the play with a stop loss at $67.00, just under its simple 50-dma at 67.36. On a side note...HSIC does not appear to have any sort of stock split history but shares are at an all-time high. Suggested Options: Traders have plenty of options to choose from. HSIC has February, March, April and July strikes. We're prone to use the February and March calls. Our favorite would be the March 70s but there is no open interest. The April 70s will have to work. BUY CALL FEB 65 HQE-BM OI= 35 at $6.20 SL=4.00 BUY CALL FEB 70 HQE-BN OI=590 at $2.40 SL=1.20 BUY CALL MAR 65 HQE-CM OI= 0 at $6.70 SL=4.30 BUY CALL MAR 70 HQE-CN OI= 0 at $3.10 SL=1.65 BUY CALL MAR 75 HQE-CO OI= 0 at $1.05 SL= -- BUY CALL APR 70*HQE-DN OI=550 at $3.80 SL=2.00 BUY CALL APR 75 HQE-DO OI=134 at $1.55 SL=0.75 Annotated Chart Picked on January 22 at $70.65 Change since picked: + 0.00 Earnings Date 03/04/04 (unconfirmed) Average Daily Volume: 334 thousand Chart = ************************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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Adobe Systems - ADBE - close: 37.30 change: -1.23 stop: 40.00 Was that the reversal we've been waiting for? It certainly feels like it, with ADBE having now reversed the strong rally of last week and falling back under the 200-dma ($37.52). Daily Stochastics are now tipping over without having made it into overbought territory (another sign of weakness) and the 50-dma ($39.71) has now dropped below $40, which will make it that much harder for the bulls to take a run at our stop. The first proof of real weakness will come in the form of a breakdown under $36, which will take out the early January lows and set the stage for a drop to the $34 area. Depending on how much selling pressure develops on the way to that objective, ADBE might have a real shot at stronger support in the $30-31 area. Should that level be reached, we would gladly close the play for a tidy gain. Maintain stops at $40. Picked on January 11th at $37.12 Change since picked: -0.18 Earnings Date 3/11/04 (unconfirmed) Average Daily Volume = 3.38 mln Chart = ************* NEW PUT PLAYS ************* QLogic Corp. - QLGC - close: 45.25 change: -1.49 stop: 48.50 Why we like it: One of the early reporters, QLGC issued its earnings release back on January 14th. The headline number of 39 cents per share beat consensus estimates by 2 pennies, but with revenues a bit on the light side, investors were clearly disappointed. The stock was already looking a bit weak just above the $50 level before the report, and the reactionary selling created a drop at the open the next day that didn't find support until the $46 level was touched. As would be expected, a bounce ensued, but over the past couple days, that bounce has been weakening and failed in spectacular fashion today, with a break below $46 and close at the low of the day. The supply-demand dynamic has now shifted solidly in the bears favor, as demonstrated by the PnF chart. Currently on a Sell signal with a bearish price target of $40, it looks like there is enough downside in the stock to make for a winning play. QLGC bottomed just above $41 in late July, so there is the potential for support to be found there again. But looking at the longer-term chart, we can see that $40 appears to be a more significant support level, making it the logical choice for our exit target. Should we see a rebound attempt from here, then a rollover below $47 will be the ideal entry point. On the other hand, momentum traders will want to enter the play on a drop below today's intraday low. With price so far below all the moving averages, we can't expect them to offer any help in terms of support or resistance levels. Following today's breakdown out of the post-earnings consolidation pattern, the stock shouldn't be able to break back above the top of that consolidation pattern near $48.25, so we're initially setting our stop at $48.50. Conservative traders may want to harvest some gains on signs of a rebound from the $41 level, while more aggressive traders will want to aim for our target in the $39-40 area. Suggested Options: Aggressive short-term traders can use the February 42 Put, while those with a more conservative approach will want to use the February 45 put. We've also listed March strikes for those traders desiring greater insulation from time decay. Our preferred option is the March 45 strike, as it is currently at the money and provides more time until expiration. BUY PUT FEB-45 QLC-NI OI=5358 at $1.95 SL=1.00 BUY PUT FEB-42 QLC-NV OI=1916 at $0.95 SL=0.50 BUY PUT MAR-45*QLC-OI OI= 194 at $2.65 SL=1.25 BUY PUT MAR-42 QLC-OV OI= 354 at $1.65 SL=0.75 Annotated Chart of QLGC: Picked on January 22nd at $45.25 Change since picked: +0.00 Earnings Date 4/14/04 (unconfirmed) Average Daily Volume = 3.84 mln Chart = ************************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 ************************************************************** ********** 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 Thursday 01-22-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Another Mixed Bag Traders Corner: Ignorance May Be Bliss, But It’s No Excuse For Losses Options 101: The Light Finally Goes On ********** WATCH LIST ********** Another Mixed Bag ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ Broadcom Corp - BRCM - close: 38.83 change: -1.05 WHAT TO WATCH: The recent profit taking in the semiconductor sector has hit BRCM a bit harder than its peers. Shares have failed at the $42.50 level and have now broken support at $40.00. The descent might stall at what should be support near $37.50, especially as investors step back to hear from BRCM at its Jan. 27th earnings report. Chart= --- Allergan - AGN - close: 82.81 change: +0.90 WHAT TO WATCH: It looks like early January news that the anti- trust lawsuit against AGN was dismissed has fueled a strong rally. Shares have rocketed from $75 to break major resistance in the 81-82 region. This is a major bullish breakout on AGN's point-and-figure chart and is sure to attract some attention. Watch out for AGN's earnings report near Jan. 28th. Chart= --- RJ Reynolds Tobacco - RJR - close: 59.93 change: +1.33 WHAT TO WATCH: Can bulls smoke out a breakout in RJR? The stock was in a non-stop rally from September to December but stopped dead at resistance of $60.00. Now shares have consolidated for almost six weeks and look poised to breakout again before its Jan. 27th earnings report. Will traders sell the news or chase a 6.48% dividend yield? Chart= --- Best Buy Co - BBY - close: 52.88 change: -0.77 WHAT TO WATCH: We strongly considered adding BBY to the OI play list as a put tonight. The stock just can't get any momentum going and its 40-dma has been a lid on the stock price. Its MACD indicator is about to roll over under the zero line and aggressive bears could open positions now with a stop just above current resistance near 55. We would target a move to its 200- dma currently near 47.50. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- DE $66.40 +0.53 - Deere Co looks ready for its next leg higher. Shares have consolidated their recent gains, bounced from support near its rising 50-dma and traders bought the dip today at $66.00. JNJ $53.05 +0.49 - JNJ has seen a post-earnings rally push the stock price up and through resistance at 52.00-52.50 as well as its 200-dma. Its weekly chart looks even better crossing above its weekly 50 & 200-moving averages. CSC $45.61 +0.71 - CSC looks ready for another breakout of its own. The stock has been consolidating the last two weeks and just broke back above the $45 level. Earnings are in February. NEM $42.80 -1.20 - The oversold bounce in NEM appears to be faltering under the $45 level and now completely rolled over. If you're not scared of a spike in gold this looks like a bearish entry point. KSS $43.68 +0.28 - Once again KSS has returned to the top of its descending channel. The stock appears to be failing at the $44 mark and this looks like an entry point for new bearish positions. ************************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 ************** Ignorance May Be Bliss, But It’s No Excuse For Losses By Mike Parnos, Investing With Attitude Is it better to have profited and lost than to never to have profited at all? During the tech bubble many traders had the good fortune (and that’s what it likely was) to make a chunk of money. They could do no wrong – then! Even monkeys threw darts at the stock pages and doubled their money. Unfortunately, the investors and monkeys have something else in common. They have the same level of investing skills – poor! Actually, the monkeys had an excuse. They never learned to read, write, add, subtract, use indoor plumbing – or watch CNBC. Before they knew it, the profits (and most of their original investments) disappeared. Easy come, not so easy go. I had a tough time breaking out the violins and listening to one sob story after another. When you hitch your wagon to a star, you have to know when to unhitch the wagon. Stars rise and fall. Whether you’re talking about Martha Stewart, Dennis Rodman, or Dennis Koslowski, it’s greed or ignorance or a combination of both that lead to their downfall. Ignorance is no excuse. We can control our destinies – IF we choose to. The market has gone up dramatically in the past year. Many investors are sitting on substantial gains. How many stock (or option) owners have protective puts in place? How many have stop losses in place? How many have handed his or her money over to someone else to handle? Maybe the market will go to the sky. Let them follow Jack up the beanstalk. It’s a long hard fall. In an upcoming column we’ll go over the concept protective puts and how they enable you to profit with little, if any, risk. _____________________________________________________________ Hi Mike, First, great job on the column! I have a question regarding ordering spreads. I'm fairly adept at buying & selling individual options, but fairly new to combos (my favorite so far is credit spreads). My broker (OptionsXpress) says that spreads ordered as combined limit credit/debit must go to the floor for manual execution, which can delay order fulfillment, especially if I try to come in between the bid & ask, which I normally do. Supposedly, individual orders fill automatically. That would mean legging into spreads, which then introduces the risk of the market going against me while getting the second order filled. What are your thoughts on ordering spreads via a credit/debit limit vs. legging in? Second - is there a rule of thumb about how far inside the bid/ask an order might get filled. I usually offer $.05-$.10 more than the bid on credit spreads and sometimes get filled, sometimes I don't. Thanks for your insight! Scott Hi Scott, Glad you're enjoying, and hopefully profiting from, my column. Spread orders can vary greatly. Normally, if I'm trading a stock that is offered on multiple option exchanges, I accept the best bid or the best ask and leg in. It should take all of a minute to execute both legs of the spread. OptionsXpress, PreferredTrade and ThinkOrSwim are particularly quick -- assuming you place the orders properly. If you put on a spread, both legs are submitted at the same time to one exchange. The problem is that it is rare that one exchange will have both the best bid and the best ask on a particular option. When you submit your credit (or debit) limit, you're probably looking at the best bid and ask and still trying to shave off another nickel or dime. The chance of that happening on a single exchange is not great. That may be why some of your spread orders don't get filled. Most (at least many) index options are only traded on one exchange. That is the best time to enter a spread order. The bid/ask spreads are often large and you can realistically expect to shave off 20-30% from each option spread. That doesn't mean you'll get filled instantly. The market makers may wait until the end of the day, but the chances are pretty good on getting filled -- especially if your spread consists of liquid options with decent open interest. The only rule of thumb is to not get too greedy. The market makers want your business, but they're not desperate for it. If you were selling a house for $100,000 and someone offered you $60,000, how would you feel? Not only would you reject the offer, but, you'd likely be insulted by the offer. You would be prejudiced against doing business with these same people who were trying to take advantage of you on principle alone. Mike _____________________________________________________________ Mike, I read with interest your positions for the QQQ ITM Strangle and the OEX Credit Spread Boogie. How does one calculate the margin required for these plays? Thanks. Davis Davis, QQQ: This position is simply two calendar spreads. They are debit spreads so there should be no margin requirements. The short near term options are covered by the long LEAPS options. OEX: The initial bull put spread has 25 points between the strike prices. The maintenance required will be $25 times the number of contracts you trade. If we trade three contracts, it would be 300 x $25 = $7,500. Let's say the position reversed and we had to establish a bear call spread. Perhaps it would be a 30-point spread. Plus, you might have to trade 7 of those contracts to replenish what was spent to close the bull put spread. We would calculate it like this: 30-point spread x 700 (7 contracts) =$21,000 in maintenance. Maintenance can take many forms. Obviously, it can be cash. But it can also be marginable stocks, CDs, Treasury Bills, Bonds, Mutual funds, etc. Check with your broker. Different brokers have different policies regarding forms of maintenance. On the same topic, broker maintenance policies will vary. That comes into play when dealing with our Iron Condors. Some brokers (the ones we especially like) hold maintenance for only one of the two credit spreads that make up the condor. Tying up maintenance for both sides of the Iron Condor is not an economical or sensible use of your available funds – particularly since there are viable alternatives readily available. ______________________________________________________________ NEW FEBRUARY CPTI POSITIONS Position #1 -- OEX – Credit Spread Boogie – 566.21 With the market trending, let's not fight the tape. We're going to establish a bull put spread, take in some premium, and ride the wave into shore. We sold 3 OEX February 565 puts, and bought 3 OEX February 540 puts for a total credit of $6.80 (x 3 contracts = $2,040). This strategy requires $25 x 3 contracts = $7,500. We're only trading three contracts because, if the market reverses significantly, it might become necessary to close the bull put spread and establish a bear call spread that may be wider and would require more contracts. We need to preserve our money for a potential maintenance requirement. Position #2 – MNX (mini NDX index) – Iron Condor – 153.04 This index seems substantially safer than the highly volatile NDX. We're going to put on an Iron Condor with limited exposure. Because the market is trending, we skewed the strike prices slightly so that we have a little more cushion on the upside. We sold 10 MNX February 165 calls and bought 10 MNX February 170 calls for a net credit of $.40 x 10 contracts = $400. Then we sold 20 MNX February 150 puts and bought 20 MNX February 147.50 puts for a net credit of $.50 x 20 contracts = $1,000. Our total credit of $1,400. Our maximum profit range is 150 to 165. Our exposure is only $3,600 ($5,000 less $1,400). Maximum profit: $1,400. Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $99.25 The XAU has been tempermental of late. This is a low risk and relatively safe play with a wide range. Maybe we can make a couple of bucks. We sold 10 XAU February 90 puts and bought 10 XAU February 85 puts for a net credit of about $.70 (x 10 contracts = $700). Then we sold 10 XAU February 110 calls and bought 10 XAU February 115 calls for a net credit of about $.45 (x 10 contracts = $450). Our maximum profit range is $90 to $110 – a 20-point range. Our exposure is $3,850 ($5,000 less $1,150). Maximum profit: $1,150. Position #4 – OSX (Oil Service Sector Index) - $98.88 We're being cautious again here. We're reducing our potential income by expanding our safety range. We sold 10 OSX February 105 calls and bought 10 OSX February 110 calls for a net credit of about $.45. Then we sold 10 OSX February 90 puts and bought 10 OSX February 85 puts for a net credit of about $.75. Our total net credit of about $1.20 (x 10 = $1,200). Our maximum profit range is 90 to 105 – a 15-point range. Our exposure is $3,800 ($5,000 less $1,200). Maximum profit: $1,200. _____________________________________________________________ ONGOING POSITION QQQ ITM Strangle – Ongoing Long Term -- $38.15 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: October: Oct. $33 puts and Oct. $34 calls – credit of $1,900. November: Nov. $34 puts and calls – credit of $1,150. December: Dec. $34 puts and calls – credit of $1,500. January: Jan. $34 puts and calls – credit of $850. February: Feb. $34 calls and $36 puts – credit of $750. Total credit: $6,150. Note: We haven't included any of the proceeds from this long term QQQ ITM Strangle in our profit calculations. It's a bonus! And it's a great cash flow generating strategy. ___________________________________________________________ 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. *********** OPTIONS 101 *********** The Light Finally Goes On by Mark Phillips mphillips@OptionInvestor.com Today's article will be a bit different, as I'm going to discuss a structural change to the way I'm implementing and tracking plays in the LEAPS column. If that isn't part of your trading focus, you can feel free to click away and you won't hurt my feelings in the least. I've intended to cover this material in both of the last two weeks in that column, but there just hasn't been either time or space to get to it on the weekend. So I'm taking advantage of this venue to try to explain (or at least begin the process) of what we're going to change and why. I don't mind telling you (and if you've been with me for awhile you already know) that the past year has been exceedingly frustrating to me in terms of the plays we've tracked in the LEAPS column. As a point of interest though, it isn't the losing plays that have caused my this frustration. No, it is the plays that we missed getting an entry point in and then watched as the stock has gone on to perform beautifully, but sadly with us on the sidelines. A significant contributor to this unfortunate dynamic has been my lack of confidence in the intermediate to long-term direction for the market. I see many factors that ought to lead to a significant slide, while at the same time the continued bullish price action suggests that playing the downside is a bit too risky. As a way to mitigate the risks of holding long-term positions in a market that has the potential to either continue on its upward trajectory or reverse sharply, I've been a bit too demanding in terms of the entry points I'm seeking. The result is that many of the plays we've listed in the Watch List over the past several months have never fulfilled their entry points and we've watched as large missed profits have accrued. Two of the biggest misses are NEM at $23-24 last spring and QCOM at $44 last November. Plays currently on the Watch List that may fall into this trap as well are HD, where we're looking for a failed bounce in the $37-38 area and SNDK, where we're hoping for a significant pullback to afford entry into the play. On the other side of my frustration are the large number of plays that we've actually put into the Portfolio, that simply haven't worked and price action has then proceeded to go against us until our protective stop is hit. These plays are frustrating as well, as each one results in a financial hit, not to mention a hit to our confidence. So the question becomes, how do we take the entries into the winning plays and mitigate the damage on the losing trades without getting an advance copy of tomorrow's newspaper? Put another way, what do we do to mitigate risk in any other aspect of our lives? We buy insurance! Insurance Reduces Stress Imagine owning a $500,000 house without insurance against fire, theft or any other potential hazard. How about driving your new SUV without insurance against collision and liability. Unthinkable isn't it? Without insurance, we'd all be constantly worrying about what could happen to these valuable assets. So why not take the same approach with our long-term investing. It doesn't matter whether our long-term position is a LEAP or a long/short position in the underlying stock, the approach will be the same. After initiating a long position, we buy a protective put, using a slightly out of the money strike with 2-4 months of time premium. The intent of this strategy is that we never need the insurance and the stock will move far enough in the intended direction to allow us to place a stop near break even, while at the same time selling the put for any residual value. It works the other way around as well. We can buy a LEAP Put as our main position, betting on a long-term downtrend in the stock. Then we buy a protective call to hedge against the risk that the play goes against us. In either of these situations, we're still going to suffer a loss. Think of the net loss on the position if forced to close it out due to an adverse move as the deductible we pay when involved in a vehicular accident. Would you rather pay the $500 deductible for rear-ending another vehicle, or the full cost of the damage, which can very easily rise into the $3000-4000 range. The answer is obvious. It is the same thing when we're using insurance on a long-term investment. The insurance option won't completely make up for the loss on the core position, but it will significantly reduce the damage. I don't know why it took me so long for the light to come on and for me to come to the realization that this is a strategy that ought to be routinely applied to our LEAPS investments, but it slowly dawned on my during and shortly after writing all my plays for the end of year stock picks. In order to be sufficiently protected when writing those plays so far in advance of the desired entry points, it was necessary to build some sort of insurance into those plays. I figure, if it can work there, then why not in our LEAPS trades? So from this point forward, I'll be changing the structure of our plays in the LEAPS column. Each bullish play will have a listed protective put and each bearish play will have a listed protective call. Purchase of this insurance policy will reduce the overall gain of each winning play, but I think the reduced damage on the losers will make the additional cost more than worthwhile. I haven't yet worked out the details of how I'll be displaying all the pertinent information in the playlists, but we'll find a way to cram it all in there in a legible format. As a side note, I think our bearish play on EK will make a good case study in the application of this strategy. Following better than expected earnings, the stock skyrocketed through our $31 stop today and we'll be dropping it this weekend. As part of that drop, I'll detail how the results would have been different if we had employed a protective call. I would have done that analysis and description tonight but I just didn't have time before my publication deadline. There are still many details to be worked out in the actual presentation of the minutia of each trade each week, but hopefully this gives you a heads up for the direction we're headed and over the next couple weeks, we can flesh out those details, answering questions as they come up. Probably my favorite part of adding this tool to our regular strategy is the fact that we can afford to be a little less stingy with our entry points, avoiding the emotional pain of missing trades that go on to perform beautifully. If we don't get the 'perfect' entry, it's alright because we're insured! Remember, questions are always welcome! Mark ************************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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