The Option Investor Newsletter Wednesday 01-28-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Stocks Plunge on Fed Announcement Futures Wrap: The Dollar Reflates Index Trader Wrap: Has the Fed turned the clock back? Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 01-28-2004 High Low Volume Advance/Decline DJIA 10468.37 -141.55 10658.43 10437.78 2.29 bln 740/2166 NASDAQ 2077.37 - 38.67 2128.00 2073.15 2.30 bln 840/2263 S&P 100 559.49 - 7.66 569.55 558.27 Totals 1580/4429 S&P 500 1128.48 - 15.57 1149.14 1126.50 RUS 2000 583.91 - 11.26 598.46 582.84 DJ TRANS 2967.68 - 73.54 3044.87 2964.88 VIX 16.78 + 1.43 40.13 15.29 VXO 17.10 + 1.78 17.11 15.24 VXN 25.16 + 2.13 25.21 22.83 Total Volume 5,145M Total UpVol 1,040M Total DnVol 3,963M 52wk Highs 636 52wk Lows 12 TRIN 1.39 PUT/CALL 0.85 ******************************************************************* Stocks Plunge on Fed Announcement by James Brown With just a few choice words the FOMC was able to do what the bears have been unable to accomplish - put the bulls on the run. Stocks traded mostly higher earlier in the session, despite some disappointing economic news until the Fed's decision on interest rates sparked a very widespread sell-off. The Dow's 141-point (1.33%) drop was the worst one-day decline in three months for the index. The NASDAQ plunged 1.82% and the S&P 500 fell 1.36%. Generally positive earnings news helped lift stocks early on but by the end of the session only one sector remained in the green. That was the utilities index, which added 1.16%. Odds are investors fled to these higher-dividend yield issues as a safe haven. The heaviest selling showed up in homebuilders and airlines but natural gas stocks, broker-dealers, networking, hardware, retail and gold issues all fell sharply. Overseas markets were mixed. European stocks were mostly higher while Asian exchanges posted losses. The Chinese Hang Seng index dropped 330 points or 2.4% to close at 13,431. There didn't appear to be any news on the decline but I suspect it was a reaction to the resurgence of Avian flu, a deadly strain that Thailand recently admitted to hiding its own recent outbreak. Investors fear that the outbreak, now in six Asian countries, will affect air travel to the region and the XAL airline index dropped 5.25%. Compounding the XAL's losses were negative comments from Goldman Sachs who downgraded JetBlue Airways (JBLU) to an "under perform". JBLU is expected to announce earnings tomorrow morning before the bell. Estimates are for 17 cents a share. Market internals for the U.S. stock markets were probably the most bearish we've seen in quite some time. Declining stocks outnumbered advancers 3-to-1 on the NYSE and 11-to-4 on the NASDAQ. Down volume was more than three times up volume on both exchanges. The volatility indices spiked higher with the VXO (old VIX) gaining 11.6% to 17.1 and the new VIX jumping 9.3% to 16.78. These are still low readings but they are setting the stage for a bearish move in the markets. Prior to the Fed's afternoon decision on interest rates investors were greeted with a disappointing durable goods order report. Estimates had been for a 2% rise in December to offset a 2.3% drop in November. Unfortunately durable goods orders were unchanged last month. Wall Street also had to digest a drop in new home sales. The Commerce Department reported this morning that December's new home sales slipped 5% to a seasonally adjusted rate of 1.06 million units. This is still a very healthy rate and pushed the number of new homes sold in 2003 to 1.085 million, a new record. Yet it was a disappointment and sent the homebuilders to early losses. Now we get to the real reason the markets sold off. The Federal Reserve's two-day meeting ended today and the Fed governors voted unanimously to keep the fed funds rate at 1 percent, the lowest level since 1958. No one actually expected a change in rates and the focus was on the Fed's bias. Would they keep the "considerable period" language or not? The answer was no. Jim called it in last night's wrap. With upside and downside risks "roughly equal" and the markets soaring to new 2 1/2 year highs the FOMC opted to change their bias to "can be patient" with its accommodative stance. The full text of the Fed's statement follows: The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent. The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that output is expanding briskly. Although new hiring remains subdued, other indicators suggest an improvement in the labor market. Increases in core consumer prices are muted and expected to remain low. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation. No one knows what sort of time frame "patient" equates to but the market assumes it's shorter than the previous "considerable period". The reaction was immediate. Bond prices plummeted. The yield on the 10-year note shot from 4.08 percent to 4.199 percent. The U.S. dollar rose against the yen and the euro and gold jumped $4.50 to close at $414.60 an ounce. Investors immediately hit the sell button and stocks plunged. The previous losses in the homebuilders grew worse by the close. The move in bonds will push mortgage rates higher, which in turn will slow home sales during an already seasonally slow period (no one likes to go house hunting in the snow). Analysts reaction to the new language was all over the board. Some felt it was a monumental change; others described it as a baby step toward inching rates higher. Odds that the Fed might hike interest rates in June or August this year spiked higher but there are still plenty of pundits who feel the Fed won't move until next year. Any time Greenspan speaks the markets analyze every word for some sign of change in the Fed's monetary policy. We'll get to here from him again next month with his February 11th appearance before the House Financial Services Committee, on February 12th in front of the Senate Banking Committee and again on February 25th before the House Budget Committee. The Fed decision was obviously the big story today but there were plenty of stock-specific stories making headlines as well. Tenet Healthcare (THC) was one of them. Shares of THC dropped 18% to $13.18 after warning that its Q4 and full year numbers would be below estimates. THC also announced it would be selling 27 of its 96 hospitals in a massive restructuring program. Volume was extremely high at 37 million shares compared to the average 3.5 million. The company was already suffering investor flight due to a government probe into its billing practices. Dow components making the news were PG, DD and MO. Procter and Gamble (PG) reported its December quarter earnings, which were slightly ahead of estimates but issued less than inspiring comments for the current quarter. DuPont (DD) reported earnings last night and beat estimates by 4 cents on revenues that surpassed expectations. The company guided slightly higher for the current quarter and ended the day as the Dow's best performer. Altria Group (MO) also bucked the downtrend today coming in right behind DD as the second best performer in the Dow after reporting earnings that were in-line. MO's revenues did beat consensus estimates and shares added 1.18% but I suspect the gain was investors fleeing to high-dividend yielding stocks as a safe haven. One of today's biggest topics was the MyDoom virus. The MyDoom virus, also known as Novarg or Shimgapi has suddenly ballooned into the worst virus (or worm) attack to date surpassing the SoBig virus last year. Some reports suggest that 1 in 9 emails over the last couple of days were infected with the virus and the clean up costs could top $250 million as corporations scramble to unclog and protect their networks. The MyDoom story is interesting because infected computers are left with a trojan, which is set to direct Denial of Service attacks against the SCO Corp. You may remember SCO for its ongoing litigation against IBM and any one else selling servers with the Linux software. SCO claims that Linux uses copyrighted code from the UNIX operating system of which SCO holds significant rights to. Widespread virus attacks like these tend to draw attention to Symantec (SYMC) and Network Associates (NETA), both of which recently hit new relative highs. Chart of the DJIA: Chart of the NASDAQ: Looking over the action in the major indices one has to wonder if this is the beginning of the long overdue correction everyone has been waiting for. The change in the Fed's language is a great "excuse" to start taking more money off the table, which wouldn't be a bad thing. A 5% pull back from the Dow's recent highs would not even bring it back to the 10,000 mark. A similar drop in the NASDAQ would still leave it above the 2000 level. Technical traders will point to the Dow's close under the 10,500 level and its close under the 21-dma, where the index bounced on Jan. 13th, as a short-term bearish development. The NASDAQ looks even worse with its close under 2100. The reality is any sort of significant pull back will be healthy for us. There is still plenty of money sitting on the sidelines just waiting for the right "dip" and a pull back to 10K or 2K might be just what these investors are looking for. Tomorrow will bring even more earnings announcements but we'll also hear the latest weekly jobless claims numbers. Economists are expecting 341,000 claims, which is almost unchanged from last week. We'll also get the Employment Cost Index tomorrow and Friday brings the University of Michigan Sentiment index for January, the Chicago Purchasing Manager's Index and the all important fourth-quarter GDP number. If the economic data remains positive investors should continue to be there waiting for the next dip. ************ FUTURES WRAP ************ The Dollar Reflates Jonathan Levinson The Fed surprised us with a net 5.5B addition via its morning open market operations, departing from its usual "No action" call for the day of an FOMC announcement. The absence of wildly inflationary promises for a change resulted in immediate selloffs in equities, treasuries, metals, the CRB and foreign currencies as the USD rose. 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. Chart of the US Dollar Index I've zoomed in on the 10 minute chart to show the intraday action in the US Dollar Index today. The rising dollar coincided with pullbacks in all other primary asset classes valued in US Dollars. The CRB declined 3.04 to close at 263.95, led lower by cotton, cocoa, soybean and coffee futures. Daily chart of February gold Gold opened higher and drifted to new highs at 415 ahead of the announcement, only to reverse after 2:15 when which the very notion of inflation risk was entertained by the Fed. With Globex feeds intermittently failing throughout the remainder of the session, gold and silver futures returned to negative territory, but falling far less dramatically than equities, bonds and the gold mining indices. Please note that Prophetcharts delivered the correct candle for today, but in the wrong color- it should be red instead of the green in which it appears on the daily chart. The morning strength and lack of serious decline brought us closer to a buy signal at the bottom of the daily cycle downphase, the bounce coinciding with lower rising trendline support in the 404-5 area. For the day, February gold dropped .30 to close at 409.70, March silver -.045 to close at 6.50, XAU dropped 2.72% to close at 96.28 and HUI lost 2.89% to close at 219.39. Daily chart of the ten year note yield It was not the day to have tight stops on short plays in treasuries as bonds painted a better than 20 bp range for the day. Ten year note yields gained 1.62% or 11.2 basis points to close at 4.199%, closing above immediate resistance as the daily cycle upphase in the yield reasserted itself. This occurred despite a respectable 9B overnight repo replacing 3.5B expiring. 4.3% is the next resistance on the way to the descending trendline at 4.34%. Provided that Bernanke and Fukui-san don't swing into action during the coming hours, I see no reason for those levels not to be tested. Daily NQ candles The NQ dropped 26.50 points to close at 1493.50, a 1.74% drop. A second black, or in this case, red crow followed yesterday's bearish engulfing as sellers finally did some actual damage on the NQ. The 1515-20 confluence zone was broken with authority as the NQ overshot 1492 support, reaching a session low of 1489. The daily cycle downphase extended, with 1500 broken on a closing basis. The 22 day EMA turned down for the first time since early December. Bollinger support lines up with the 61.8% Fibonacci support line at 1460, just north of rising trendline support in the 1430 area. 30 minute 20 day chart of the NQ The NQ put in a lower high on the 30 minute cycle oscillator, the first sign of trouble ahead of the FOMC announcement. We had been looking for some kind of surprise that would provoke the Fed to add a 9B overnight repo on the day of its announcement, and the lower NQ cycle high on this key timeframe was the second clue of brewing trouble. The break below 1515 was major, setting up a head and shoulders-esque breakdown targeting the mid-1460's assuming a 1515 neckline. A bounce from here would have stiff resistance at 1515-20, but could print a bullish oscillator divergence if it actually occurs, due to the price getting so far ahead of the oscillator on the decline. That said, the cycle still points straight down on both the daily and 30 minute timeframes, setting up an optimal environment for bears. 1482 is the next support, followed by 1460. Daily ES candles ES lost 13.25 points or 1.16% to close at 1129.25 but reaching as low as 1124.75. Next major support is between 1115-18, a key support but whose equivalent on the NQ broke today. The daily cycle oscillators printed actual sell signals, the first since mid December, and the rising trendline broke for the first time since November. Resistance is now at former support at 1130. 20 day 30 minute chart of the ES Again, we see the same damage as on the NQ chart, but the head and shoulders-type interpretation is not as evident. 1115 seems a long way down, and has been firm support and was prior resistance. I expect a move to that level to bottom the 30 minute cycle oscillators and would expect at least a pause, if not a bounce. The wildcard is the impact of the new daily cycle downphase, which is a factor that had been absent for the past month and a half. A weak bounce from 1115, failing at or before 1130, would be as significant a victory for bears as the failure to breach 1149 was today. 150-tick ES I've left the volume-by-price lines on to demonstrate the beautiful liquidation that took place at 1146, where a huge number of shares were unloaded prior to the drop. The short cycle oscillators are looking for an upphase here, but the bigger issue will be the synchronous daily and 30 minute cycle downphases commenced today. Daily YM candles YM dropped 1.154 or 123 points, closing at 10467. Nothing else to add, as YM resembles ES here. Support at the rising trendline is next at 10360. 20 day 30 minute chart of the YM The Fed's announcement was bullish as potentially bullish for the dollar as it was bearish for bonds, and the market didn't wait to check for certain. The binary trade of dollar vs. everything reversed today as the pattern that gave us the 2003 rally ran in reverse, with stronger dollar, weaker everything else. How far this trend carries remains to be seen, but given the extension on most of our charts, the current correction has potential to run very far indeed. That's excessive, however, because there's plenty of support for equities, commodities, bonds and other assets built up, just as there is resistance for the dollar. And so, as ever, trade what you see. ******************** INDEX TRADER SUMMARY ******************** Has the Fed turned the clock back? Today marks one of the first days since January 2001, when the Fed's tone toward interest rates showed modest shift. The thought of the fed funds rate staying at 45-year lows was tweaked from fed funds staying at 1% as on December 9, 2003 the Fed said "...the Committee believes that policy accommodation can be maintained for a considerable period" to today's "...the Committee believes that it can be patient in removing its policy accommodation." In essence, the Fed has seen something in the last month-and-a- half, which has it believing the economy may now be growing at a pace of longer-term sustainability, to begin preparing market participants for higher interest rates. In what may be viewed as Mr. Greenspan and fellow Fed members turning back the hands of time, today might well be similar to that of May 1998. Just prior to the second leg of a powerful bull market. Tonight I want to quickly revisit this topic, which we discussed back on August 31, 2003 in our Ask the Analyst column titled "Gold and the Fed. Too loose, too tight, or just right?" Here's the chart of the S&P 500 Index (SPX.X) 1,128.48 -1.36% from that Ask the Analyst column. At that time (08/31/2003) the SPX was trading 1,008.01. Gold was trading at $375.70 and closed its regular session at $414.60. As I type, spot gold has just opened for tomorrow's trade at $409.40. S&P 500 (SPX.X) - Monthly Intervals (08/31/03 Ask Analyst) I wanted to quickly revisit the August 31, 2003 Ask the Analyst column, with special attention to the May 1998 Fed meeting, when the Fed hinted of tightening. You and I have questions about the future. What impact will today's Fed comments have on market in the future? While history is no guarantee of the future, it may help serve as a guide. In May of 1998, the Fed hinted at tightening, but actually ended up cutting rates 1/4 point, before it started a pattern of rate hikes. While I (Jeff Bailey) don't think the Fed will be cutting rates, anytime soon, there is still the uncertainty that the economy is currently generating job growth. From a longer-term perspective, today's hint from the Fed that is is now leaning more toward a rate hike (probably 25-basis points at most) a trader and investor might begin thinking the SPX is at a similar level today as it was in May 1998, when the Fed began hinting of a rate hike. Certainly times are different. There are different dynamics in play, but today's trade was all about a response to the Fed. Let's quickly take a look at the above chart, but "cleaned up" (not all those notes) and get a clearer perspective. S&P 500 Index (SPX.X) Chart - Monthly Intervals (01/28/04) The above chart is to simply give us a perspective of what type of "cycle" we might expect in the coming MONTHS and allow traders and investors to begin thinking accordingly, where tests can be applied going forward. I will say this. While there is disagreement from gold bulls that there are different dynamics in play today than there was in 1998, and that we can't use "gold $400" as a level for the Fed to be basing interest rate decisions on, I (Jeff Bailey) and perhaps you can perhaps use gold's current price level above $400 to at least make some sense of today's slight change in wording found in it brief statement. For those interested in the FOMC archive (dating back to 1996) you can view all of the Fed's statements and minutes from these meetings at this http://www.federalreserve.gov/fomc/default.htm#2004 It is an EXCELLENT way to take a historical tour of the U.S. economy. Let's quickly take a look at today's internals. Today's trade was rather quiet, up until 02:15 PM EST. I will explain why I think the MARKETS were SURPRISED by today's Fed statement. It's not just price action in the major indices either. Market Snapshot / Internals - 01/28/04 Close Maybe NASDAQ traders got an early release of today's FOMC statement before traders on the NYSE did, as the NASDAQ's A/D line turned in favor of decliners at 12:00 PM EST. Hopefully you know that I'm kidding about NASDAQ traders getting any advanced knowledge. One sign of SURPRISE, and an unpleasant one for Treasury bulls was the jump in YIELDS just after the FOMC announcement at 02:15 PM EST. While the 10-year YIELD did edge up from its 12:10 PM EST low YIELD of 4.027% into the 02:00 hour, a sharp round of selling, as if bond bulls were SURPRISED took place. Gold traders may also have been surprised. Fellow analyst Jonathan Levinson is constantly updating traders in the Futures Monitor as to currency and gold prices. Gold was trading a session high just prior to the FOMC announcement. At 02:20:37 PM EST, just 5-minutes after the FOMC announcement Jonathan wrote, "I can't get Globex quotes on gold or silver, but watching the tankage in the Canadian dollar futures, euros and swiss francs right now, it can't be pretty." Currency traders in the dollar may also have been surprised. The U.S. Dollar Index (dx00y) 87.29 +1.17% jumped from 86.29 to 86.87, or +0.67% in just 5-minutes! I made comment in the Market Monitor at 01:57:13, "Not that this will help with trader response to FOMC announcement, but if the BIX.X 356.35 +0.7% offers any clues at this point, it would be that the Fed language is going to remain "foreseeable future." I followed that comment at 14:06:15 (8-minute before the FOMC announcement) with this intra-day chart of the S&P 100 Index (OEX.X). S&P 100 Index (OEX.X) - 10-minute intervals (02:00 PM EST) Banks, which tend to benefit from a low interest rate environment had broken above their MONTHLY R2 for the first time this month and were trading new 52-week highs! But the OEX wouldn't go, or follow above its WEEKLY R1. Both the S&P Banks (BIX.X) 348.11 -1.62% and S&P 100 Index (OEX.X) 559.49 -1.35% went, as did just about everything else. South! As if SURPRISED! OK... maybe the OEX not able to make a move above WEEKLY R1 and MONTHLY R2 was a sign that market participants weren't overly certain of what kind of phrasing the Fed was going to use, or what type of response MARKET participants were going to give, but the intra-day action of Treasuries, currencies, gold, banks and broader equities certainly had the look of an unpleasant surprise. Pivot Analysis Matrix - In PINK. I've highlighted today's lows in the SPX and QQQ, and also their WEEKLY S2s. Two levels stick out in my mind as it relates to notes I've made (especially in the Market Monitor) in recent weeks regarding suspicious option volume. On days with either the VIX.X 16.78 +9.3% or VXN.X +9.24% traded lower (usually associated with call buying), most active options on these days were the QQQ $37 puts (as if selling the $37 puts) and SPX 1,125 puts (as if selling the 1,125). At the time of those observations, I made the comments that the activity in those options, in relation to a lower trade found in the VIX.X and VXN.X suggested there might be a near-term "floor" of support where institutions were selling those puts, with intention to buy these levels. I should add. When making the QQQ $37 put observation, there was also high volume levels found in the QQQ $38 puts. At these times, different month expiration trade was found, but the cost of buying the $38 puts was equal to that of selling the near- month $37 put. If a trader were to trade off of this relationship, then a current range from $37-$38 would be suggested for the QQQ. I thought Jim Brown made a good comment late this afternoon (Jim always makes good comments) when warning bears to not be overly aggressive with shorting, and to well expect volatility. Look at tomorrow's DAILY S2-R2 range, which certainly suggests the potential for volatility. I've "X-d out" the WEEKLY Pivots in the INDU, SPX and OEX. Intra-day trade showed these major indices cutting down through these levels like a hot knife through butter. I would currently look for the WEEKLY Pivots to be a near-term level of resistance. I did see some intra-day stability at the NDX/QQQ WEEKLY S1 and MONTHLY R1 for about 20-minutes. I profiled a QQQ bullish trade in the market monitor at $37.40, and while the QQQ struggled to $35.58, sellers overcame buyers, I was stopped out at $37.25 and the QQQ fell directly to its WEEKLY S2. The slicing through of the WEEKLY Pivots in the INDU/SPX/OEX is not to say there wasn't buying taking place, but after the FOMC announcement, I could not reset my buy and sell program premium alert levels fast enough. You can probably see from the intra- day internals the BIG increase in volume from 02:00 PM EST to the close, and institutions were active. My main points here are for new entries, (long or short) keep your position size small. If you want to trade larger sized positions, then follow with tighter stops. S&P 100 Index (OEX.X) Chart - Daily Intervals The MONTHLY interval chart of the SPX shown earlier doesn't look like as much selling took place as a daily interval bar chart of the OEX does. Intra-day trade had the appearance of a "garage sale" where everything was sold, and it didn't matter at what price. I would have to view the WEEKLY Pivot as resistance as stock bought at 561 by computers will most likely find some of it being sold back at the WEEKLY Pivot. Should the OEX fall much below the WEEKLY S2 and rising 21-day SMA, then a trade lower to 553 is not out of the question. Dow Industrials (INDU) Chart - Daily Intervals I did not want to scare investors or traders into thinking that the major indices will fall 22.4%, like that period noted in the second chart of tonight's wrap. However, a 7% to 15% decline would be considered a "normal" correction for a major index after a big bull run. I personally, believe that while a 10% correction at some point is in order, the amount of bullishness these markets have shown in the past couple of months, where the bullish % charts have remained so overbought, yet bullish, will have the major indices higher by year's end than witnessed earlier this week. Still, I would not want to be "too wrong" and show bullish complacency. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals The Q's saw heavy volume today, nearly equaling the 112.3 million shares found on January 21, the day after the QQQ traded its recent 52-week high of $39.00. I make note that the Q's have fallen 5.1% from that peak high. While the QQQ looks near-term "oversold" it is an index of momentum. Bulls can pick away, but I'd use a tight stop. In recent months, the Q's have tended to move in equal $1 increments, and I would suggest $0.25 stops from an entry point if at all possible. With the Q's once again piercing below the upward trend from the March lows, I've placed a conventional downward trend from the recent high, where I would begin to deem $37.97 as a more formidable level of resistance. Jeff Bailey ************************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 01-28-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: APOL Dropped Puts: None Spreads, Combinations & Premium-Selling Plays: Finally...A "Reality" Check! Watch List: Fading Fast ************************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 ************* Apollo Group - APOL - close: 71.30 change: -1.27 stop: 71.00 Yesterday's reversal in APOL made us nervous, as it came following a rejection from the $74 level, representing the first lower high since the early December selloff. It turns out our concerns were well founded, as the stock gapped lower today, falling below $72 support and trading weakly throughout the day. The bearish market action following the FOMC announcement put the finishing touches on the play, driving APOL below our $71 stop. Clearly the uptrend has now been broken and it's time to move on. Remaining long positions should be sold into any rebound tomorrow morning. Picked on January 13th at $72.63 Change since picked: -1.33 Earnings Date 3/18/04 (unconfirmed) Average Daily Volume = 1.83 mln ************************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 ************************************************************** ************ 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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Finally...A "Reality" Check! By Ray Cummins The major equity averages plunged Wednesday as mediocre economic data and some "inflationary" comments by the FOMC conspired to put investors in a selling mood. As expected, the Open Market Committee left rates unchanged, with the federal funds rate targeted at 1.00%. However, the statement that "policy accommodation can be maintained for a considerable period" was amended to "the committee believes that it can be patient in removing its policy accommodation." After the news, stocks took a dive with the Dow falling 141 points to 10,468 on weakness in Hewlett Packard (NYSE:HPQ), Alcoa (NYSE:AA) and Home Depot (NYSE:HD). Despite some surprising relative strength in chip shares, the NASDAQ Composite fell 38 points to 2,077. The Standard & Poor's 500 Index slid 15 points to 1,128 as airline, homebuilder, oil service, and retail issues moved lower. In the broader market, decliners outpaced advancers by a 2 to 1 margin on volume of 1.51 billion, while technology losers paced winners by a slightly higher ratio on volume of 1.92 billion. U.S. bonds were initially boosted by the weaker-than-expected economic data but retreated after the FOMC's decision. The benchmark 10-year Treasury note fell 29/32 while its yield, which moves inversely to price, climbed to 4.19%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 01/27/03 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 SEPR FEB 20 19.60 27.60 0.40 21.62% 2.04% CECO FEB 40 39.30 50.48 0.70 5.04% 1.78% ERES FEB 27 27.00 35.97 0.50 5.07% 1.85% MICC FEB 65 64.05 78.03 0.95 4.10% 1.48% NTES FEB 40 38.90 47.43 1.10 7.39% 2.83% RMBS FEB 25 24.50 31.80 0.50 5.60% 2.04% SEPR FEB 22 21.90 27.60 0.60 7.02% 2.74% SINA FEB 40 38.75 47.21 1.25 7.89% 3.23% SOHU FEB 30 29.30 37.89 0.70 6.72% 2.39% APPX FEB 35 34.35 36.25 0.65 5.65% 1.89% CRDN FEB 40 39.05 45.07 0.95 7.15% 2.43% GPRO FEB 32 32.10 37.35 0.40 4.17% 1.25% KYPH FEB 25 24.45 29.95 0.55 6.84% 2.25% IMCL FEB 35 34.15 43.26 0.85 8.93% 2.49% OSIP FEB 30 29.60 35.86 0.40 4.67% 1.35% PCLN FEB 17 17.15 20.70 0.35 6.93% 2.04% SEPR FEB 22 22.05 27.60 0.45 7.00% 2.04% NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CYD FEB 35 35.45 22.89 0.45 6.36% 1.27% SNDK FEB 80 81.10 58.14 1.10 5.97% 1.36% ISIL FEB 30 30.50 25.23 0.50 6.00% 1.64% MCHP FEB 35 35.45 28.65 0.45 4.57% 1.27% UTSI FEB 40 40.95 35.18 0.95 8.23% 2.32% PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status COCO 60.73 64.50 FEB 55 55 0.65 54.35 0.65 Open KOSP 45.30 51.52 FEB 35 40 0.60 39.40 0.60 Open CEPH 54.65 54.94 FEB 45 50 0.65 49.35 0.65 Open NFLX 65.10 75.19 FEB 48 50 0.25 49.75 0.25 Open CFC 80.32 83.50 FEB 70 75 0.65 74.35 0.65 Open MDC 66.31 66.50 FEB 55 60 0.60 59.40 0.60 Open GILD 65.37 61.06 FEB 55 60 0.55 59.45 0.55 Open CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status ANF 24.90 25.86 FEB 30 27 0.30 27.80 0.30 Open MANH 27.00 27.84 FEB 35 30 0.50 30.50 0.50 Open ESV 27.45 29.50 FEB 35 30 0.45 30.45 0.45 Open NVLS 41.68 34.40 FEB 47 45 0.40 45.40 0.40 Open HTCH 32.45 30.28 FEB 40 35 0.60 35.60 0.60 Open ICST 27.60 26.00 FEB 35 30 0.50 30.50 0.50 Open The bearish spread in Checkfree (NASDAQ:CKFR) has previously been closed for a small loss. 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BRCM - Broadcom $41.63 *** Solid Earnings! *** Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated silicon solutions that enable broadband communications and the networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for all broadband communications markets. Their diverse product portfolio includes solutions for digital cable and satellite set-top boxes; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network processors; and SystemI/O(TM) server solutions. BRCM - Broadcom $41.63 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 37.5 RCQ NT 7325 0.50 37.00 5.1% 1.4% * SELL PUT FEB 40 RCQ NH 13687 1.05 38.95 8.6% 2.7% __________________________________________________________________ CLZR - Candela $26.06 *** Multi-Year High! *** Candela (NASDAQ:CLZR) develops, manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies. Founded near Boston in 1970, the company markets and services its products in over 60 countries from offices in the United States, Europe, Japan and other Asian locations. Candela established the aesthetic laser market 14 years ago, and currently has an installed base of over 6,000 lasers worldwide. CLZR - Candela $26.06 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 22.5 UKZ NX 122 0.30 22.20 5.5% 1.4% * SELL PUT FEB 25 UKZ NE 65 0.90 24.10 11.6% 3.7% __________________________________________________________________ DRIV - Digital River $25.44 *** Consolidation Complete? *** Digital River (NASDAQ:DRIV) is a provider of electronic commerce outsourcing solutions. As an application service provider, the company enables its clients to access its proprietary electronic commerce system over the Web. Their technology platform allows the company to provide a suite of electronic commerce services, including Web commerce development and hosting, transaction processing, fraud screening, digital delivery, integration to physical fulfillment and customer service. The firm also has analytical marketing and merchandising services to assist its clients in increasing page view traffic to, and sales through, their Web commerce systems. DRIV - Digital River $25.44 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 22.5 DQI NX 366 0.55 21.95 9.3% 2.5% * SELL PUT FEB 25 DQI NE 250 1.45 23.55 17.1% 6.2% __________________________________________________________________ NANO - Nanometrics $20.79 *** The "Nano" Craze! *** Nanometrics (NASDAQ:NANO) designs, manufactures, markets and supports the thin film metrology systems for the semiconductor, flat panel display and magnetic recording head industries. The company's measurement systems use microscope-based, non-contact spectroscopic reflectometry. Some of the firm's systems provide complementary spectroscopic ellipsometry to measure the thickness and optical characteristics of films on a variety of substrates. In addition, the firm has both integrated and standalone optical critical metrology systems to measure critical dimensions of the patterns on semiconductor wafers. The company also manufactures a line of optical overlay registration systems that are used to determine the alignment accuracy of successive layers of chip patterns on wafers in the photolithography process. NANO - Nanometrics $20.79 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 17.5 QNK NW 10 0.45 17.05 10.9% 2.6% * SELL PUT FEB 20 QNK ND 191 1.25 18.75 18.8% 6.7% __________________________________________________________________ NTAP - Network Appliance $22.70 *** Entry Point? *** Network Appliance (NASDAQ:NTAP) is a provider of enterprise network storage and data management solutions. NetApp network storage solutions and service offerings provide data-intensive enterprises with consolidated storage, improved data center operations, economical business continuance and efficient remote data access. The company's solutions meet the needs of archive, reference, departmental/remote office, business internal and business operations, and business-critical data with a common product architecture and data management methodology. NTAP - Network Appliance $22.70 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 20 NUL ND 1721 0.45 19.55 8.7% 2.3% * SELL PUT FEB 22.5 NUL NX 7965 1.30 21.20 16.9% 6.1% __________________________________________________________________ OSTK - Overstock.com $20.80 *** Favorable Earnings! *** Overstock.com (NASDAQ:OSTK) is an online "closeout" retailer offering discount, brand-name merchandise for sale primarily over the Internet. The company's merchandise offerings include bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods and designer accessories. Overstock offers its customers an opportunity to shop for bargains conveniently, while offering an alternative inventory liquidation distribution channel to its suppliers. The company typically offers around 5,000 non-media products and over 100,000 media products (books, CDs, DVDs, video cassettes and video games) in seven departments on its Websites, www.overstock.com, www.overstockb2b.com and www.worldstock.com. OSTK - Overstock.com $20.80 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 17.5 QKT NW 1039 0.50 17.00 12.0% 2.9% * SELL PUT FEB 20 QKT ND 43 1.20 18.80 18.2% 6.4% __________________________________________________________________ SEPR - Sepracor $27.42 *** Drug Sector Favorite *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The firm's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to current products. SEPR - Sepracor $27.42 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 22.5 ERQ NX 2143 0.25 22.25 5.2% 1.1% * SELL PUT FEB 25 ERQ NE 2102 0.60 24.40 8.7% 2.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CVH - Coventry Health Care $64.46 *** 3-for-2 Split Coming! *** Coventry Health Care (NYSE:CVH) is a managed healthcare company. The firm operates health plans under the names Coventry Health Care, Coventry Health and Life, Carelink Health Plans, Group Health Plan, HealthAmerica, HealthAssurance, HealthCare USA, Southern Health and WellPath. Coventry operates a diversified portfolio of local market health plans serving 14 states, mainly in the Mid-Atlantic, Midwest and Southeast regions. The firm's health plans generally are located in small- to mid-sized cities. The company operates four regional service centers that perform claims processing, billing and collection, enrollment and customer service functions for its plans. These regional service centers enable Coventry to take advantage of economies of scale, implement standardized management practices at each of its health plans and capitalize on the benefits of integrated information technology. CVH - Coventry Health Care $64.46 PLAY (conservative - bullish/credit spread): BUY PUT FEB-55.00 CVH-NK OI=262 ASK=$0.20 SELL PUT FEB-60.00 CVH-NL OI=529 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$59.50 __________________________________________________________________ SII - Smith International $48.80 *** Rally Mode! *** Smith International (NYSE:SII) is a worldwide supplier of premium products and services to the oil-gas exploration and production industry, the petrochemical industry and other industrial markets. The company provides a range of technologically-advanced products and engineering services, including drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits, fishing services, drilling tools, underreamers, casing exit and multilateral systems, packers and liner hangers. The firm also offers supply-chain management solutions through an extensive network providing pipe, valve, tool, safety and other maintenance products. SII - Smith International $48.80 PLAY (conservative - bullish/credit spread): BUY PUT FEB-42.50 SII-NV OI=305 ASK=$0.25 SELL PUT FEB-45.00 SII-NI OI=1682 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$44.70 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AEIS - Advanced Energy $22.68 *** Sell-Off Underway! *** Advanced Energy Industries (NYSE:AEIS) designs, manufactures and supports a group of primary components and subsystems for vacuum process systems. The firm's core products are very complex power conversion and control systems. Its products also control the flow of gases into the process chambers and provide them with thermal control and sensing within the chamber. The company's customers use its products in plasma-based thin film processing equipment that is essential to the manufacture of semiconductors; compact discs, DVDs and other digital storage media; flat panel computer and television screens; coatings for architectural glass and optics, and power converters for advanced technology computer workstations and servers. AEIS - Advanced Energy $22.68 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 25 OEQ BE 38 0.55 25.55 10.0% 2.2% * SELL CALL FEB 22.5 OEQ BX 15 1.50 24.00 18.4% 6.3% __________________________________________________________________ ELX - Emulex $27.53 *** Mediocre Earnings? *** Emulex (NYSE:ELX) is a designer, developer and supplier of a line of storage networking host bus adapters and application specific computer chips that provide connectivity solutions for storage area networks, network-attached storage and redundant array of independent disks storage. HBAs are the basic data communication products that enable servers to connect to storage networks by offloading processing tasks as information is delivered and sent to the network. The company's products are based on internally developed ASIC and embedded firmware and software technology, and offer support for a wide variety of SAN protocols, configurations, system interfaces and operating systems. ELX - Emulex $27.53 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 30 UMQ BF 6506 0.45 30.45 6.6% 1.5% * SELL CALL FEB 27.5 UMQ BY 2735 1.25 28.75 13.4% 4.3% __________________________________________________________________ PHM - Pulte Homes $43.71 *** Bearish Sector! *** Pulte Homes (NYSE:PHM) is a holding company whose subsidiaries engage in the homebuilding and financial services businesses. The company's direct subsidiaries include Pulte Diversified Companies, Inc. (PDCI), Del Webb Corporation and others that are engaged in the homebuilding business. PDCI's operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation and other subsidiaries that are engaged in the homebuilding business. The company also has a mortgage banking company, Pulte Mortgage Corporation, which is a subsidiary of PHC. PHM - Pulte Homes $43.71 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 47.5 PHM BW 1300 0.50 48.00 4.7% 1.0% * SELL CALL FEB 45 PHM BI 2670 1.20 46.20 9.1% 2.6% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BZH - Beazer Homes $92.40 *** Homebuilders Slump! *** Beazer Homes USA (NYSE:BZH) designs, builds and markets single family homes in the following locations within the United States: Florida, Georgia, North Carolina, South Carolina, Tennessee, Arizona, California, Colorado, Nevada, Texas, Maryland, Virginia, New Jersey, and Pennsylvania. The company designs its homes to appeal primarily to entry-level and first time move-up homebuyers. The firm's objective is to provide its customers with homes that incorporate quality and value while trying to maximize its return on invested capital. Beazer's homebuilding and sales activities are conducted under the name of Beazer Homes except in Colorado (Sanford Homes) and Tennessee (Phillips Builders). BZH - Beazer Homes $92.40 PLAY (conservative - bearish/credit spread): BUY CALL FEB-105.00 BZH-BA OI=946 ASK=$0.25 SELL CALL FEB-100.00 BZH-BT OI=1085 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$100.55 __________________________________________________________________ KSS - Kohl's $42.67 *** Next Leg Down? *** Kohl's (NYSE:KSS) operates family-oriented, specialty department stores. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than traditional, full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Since 1992, the company has increased square footage an average of 22% per year, expanding from 79 stores located in the Midwest to a total of over 400 stores with a presence in six regions. Of the stores it operates, over 100 are take-over locations, which facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. KSS - Kohl's $42.67 PLAY (less conservative - bearish/credit spread): BUY CALL FEB-50.00 KSS-BJ OI=7645 ASK=$0.10 SELL CALL FEB-45.00 KSS-BI OI=6252 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$45.55 __________________________________________________________________ LEN - Lennar $43.71 *** A Big "Down" Day! *** Lennar (NYSE:LEN) is a homebuilder and a provider of residential financial services. The company's homebuilding operations include the sale and construction of single-family attached and detached homes as well as the purchase, development and sale of residential land directly and through its unconsolidated partnerships. The company's financial services operations provide mortgage financing, title insurance and closing services for both its homebuyers and others, resell the residential mortgage loans it originates in the secondary mortgage market and also provide Internet access, cable television and alarm monitoring services to residents of its many communities. LEN - Lennar $43.71 PLAY (conservative - bearish/credit spread): BUY CALL FEB-50.00 LEN-BJ OI=3836 ASK=$0.20 SELL CALL FEB-47.50 LEN-BW OI=6493 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$47.80 ------------------------------------------------------------------ SEE DISCLAIMER - SECTION 1 ------------------------------------------------------------------ ********** Watch List ********** Fading Fast ___________________________________________________________________ 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. ___________________________________________________________________ Whole Foods Market Inc - WFMI - close: 67.52 change: -1.28 WHAT TO WATCH: WFMI has been in a rising channel for months dating back to last July. The stock actually broke out through the upper edge of its channel in mid-January to peg its point & figure price target at $71. Now shares appear to be rolling over under the $70 level. Traders might want to consider a drop through its simple 50-dma or the $65 mark as a breakdown through support and a potential bearish entry. Earnings should be Feb. 11th. Chart= --- Gilead Sciences - GILD - close: 61.02 change: -0.04 WHAT TO WATCH: After a few days of consolidation it looks like GILD might be setting up for another bullish entry point. The stock faded back to price support at $60 and actually traded to $59.93 before investors bought the dip. GILD also has technical support at its 200-dma near 57.50 and its 50-dma above that. The real test will be after GILD's earnings report, which is due out tomorrow after the closing bell. Chart= --- CDW Corp - CDWC - close: 67.60 change: -1.56 WHAT TO WATCH: CDWC has enjoyed a very strong January trading from $58 to $70 over the course of the month. Now the rally looks tired and shares could be setting up for a fall. Yesterday CDWC produced a small failed rally at $70 and today's drop represents some follow through on the move but shares have stalled at their 10-dma. Aggressive traders could open bearish traders here with a target near 62.50, but watch out for possible support at $65. Chart= --- Barr Pharmaceuticals - BRL - close: 74.15 change: -1.80 WHAT TO WATCH: Previously known as Barr Labs, BRL has been unable to break through its 50-dma for the last several days. Now shares are rolling over and look set to test support at the $70 mark. Nimble traders might want to try scalping the move but watch out for possible support at $72.00, which represents the bottom of the recent gap. Its current p&f price target is $60. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- IBM $97.38 -1.42 - Yesterday we listed IBM on the watch list due to its bearish harami candlestick pattern. Today's drop confirms the pattern and we can expect additional weakness. The first line of support is its 10-dma but we'd wait for a bounce from the $95 level. CECO $47.10 -3.38 - Shares dropped 6.69% today, breaking its rising trend and creating a sell signal on its MACD. It might feel like a chase but this could be the beginning of a move to its 200-dma near $41. PDCO $65.88 -1.42 - PDCO appears to be reversing course and closing at the low of the day is not a good sign for tomorrow. Bearish traders might consider a move under support at $65 as an entry with a target of $60. ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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