The Option Investor Newsletter Wednesday 02-11-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: The Picture Has Brightened Futures Wrap: Fed-Sponsored Binary Dollar Trade Index Trader Wrap: Let's make a deal Traders Corner: What's In Your Toolbox? Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 02-11-2004 High Low Volume Advance/Decline DJIA 10737.70 +123.85 10746.88 10572.59 2.12 bln 1923/ 911 NASDAQ 2089.66 + 14.33 2089.66 2064.77 2.00 bln 1853/1238 S&P 100 572.39 + 6.04 573.20 565.01 Totals 3776/2149 S&P 500 1157.76 + 12.22 1158.89 1142.33 RUS 2000 597.07 + 4.24 597.08 590.14 DJ TRANS 2951.93 + 30.07 2951.97 2910.47 VIX 15.39 - 0.55 16.16 15.26 VXO 14.88 - 0.67 16.26 14.80 VXN 23.53 - 0.97 24.77 23.40 Total Volume 4,721M Total UpVol 3,298M Total DnVol 1,358M 52wk Highs 858 52wk Lows 5 TRIN 0.57 PUT/CALL 0.68 ******************************************************************* The Picture Has Brightened by James Brown "...the picture has brightened." sums up the day and Greenspan's perspective on the U.S. economy. The excerpt was part of Federal Reserve Chairman Alan Greenspan's official comments before congress in day one of a two-day semiannual meeting. Alan's positive speech sent the markets soaring while broker-dealers and media stocks traded higher on the $66 billion Disney takeover bid by cable-giant Comcast. The one-two punch of Greenspan's speech and the Disney bid sent the markets to new highs. The Dow Jones Industrials added 123 points to close above resistance at 10,700 and hit levels not seen since June 2001. The S&P 500 also broke out to a new one- year high above January's resistance near 1155. The NASDAQ lagged behind with a 14-point gain but it closed over minor resistance at 2075 and the index looks poised to take another swing at the 2150 level. Overall the rally was very widespread. Every major sector closed higher except for the HMO index, which fell 2%. Investors were pouring money into broker-dealers, homebuilders, gold and mining, semiconductors and retail stocks. Market internals were naturally bullish with advancers outrunning decliners by more than 2-to-1 on the NYSE and 3-to-2 on the NASDAQ. New highs exploded to 665 between the two exchanges. Up volume was four times down volume on the NYSE and more than twice down volume on the NASDAQ. Traders want to see rallies support by strong volume and we got that today with more than 4 billion shares trading between the two exchanges. Chart of the DJIA: Chart of the NASDAQ: Chart of the S&P 500: The new closing high for the DJIA is very bullish. This breaks the major resistance near 10,700 from March 2002 and paves the way for the Dow to run towards its next overhead barrier in the 10,900-11,000 range. The NASDAQ also looks good. The move through resistance in the 2050-2075 range has set us up for a run toward overhead resistance at 2150. Today's close puts the NASDAQ above all its major moving averages on both its daily and weekly chart save for the 21-dma. The S&P 500 has followed the Dow's lead and broken through to a new one-year high above January's resistance. Overhead resistance on the SPX is virtually nonexistent between here and the 1175 level dating back to December 2001-March 2002. This week the markets have been exceptionally Greenspan-centric. Monday and Tuesday the markets traded cautiously ahead of his appearance for fear of what he might say. Today they soared higher on his bullish comments for the economy and a reiteration of the Fed's plan to be patient. When commenting on how the situation has changed from his last visit to congress Alan said, "Since then, the picture has brightened. The gross domestic product expanded vigorously over the second half of 2003 while productivity surged, prices remained stable, and financial conditions improved further. Overall, the economy has made impressive gains in output and real incomes; however, progress in creating jobs has been limited." More importantly Alan followed up with, "Looking forward, the prospects are good for sustained expansion of the U.S. economy." That's exactly what the markets want to hear from him. Alan also commented on the "growing confidence of business executives in the durability of the expansion" and the "favorable financial conditions" that lead to a turnaround in business spending. Of course Greenspan couldn't dodge the jobs question, mainly where are they? His response was that "stunning increases in productivity" had been a surprise and allowed businesses to meet increasing demand "without stepping up hiring". However, he quickly pointed out that "employment will begin to grow more quickly before long as output continues to expand." Essentially he believes that productivity increases are going to become harder and harder to squeeze out and as the expansion continues managers will become more confident in its "durability" and "firms will surely once again add to their payrolls." Following his appearance there is always a lot of discussion as the markets dissect his comments and I heard some analysts suggesting that the U.S. could produce between 2 million and 3 million jobs by the end of the year. Speaking of jobs some believe that Disney's CEO Mike Eisner's job may be on the line. The big story today was an unsolicited $66 billion all-stock bid by Comcast cable (CMCSA) to buy Disney (DIS). Evidently Comcast's CEO Brian Roberts had pitched the idea of a merger to Eisner earlier this week but Mike turned him down. In response Comcast decided to take it to the Disney shareholders and Board of directors by making it public. The $54 billion deal, plus $12 billion in assume debt, offers 0.78 shares of Comcast's Class A stock for each share of Disney stock. Should the deal go through it would form the largest media company on the planet, eclipsing media titan Time-Warner's $40 billion in revenues and $79 billion market cap. What really makes this interesting is not only the timing of the bid but Wall Street's reaction to it. Based on yesterday's prices the Comcast offer values Disney at $26.47 a share, almost a 10% premium from Tuesday's close. Yet shares of DISNEY shot up 14.6% to 27.60, which means Wall Street believes there may be a bidding war between Comcast and other media giants looking to buy up Disney's brand and assets. A few of the companies considered as potential buyers are Viacom, News corp., Time-Warner and even Microsoft since the software company is still sitting on a $50 billion pile of cash and has expressed an interest in the media business. Right now Viacom seems to be the most viable alternative to Comcast who will probably end up raising its bid. A combined Comcast-Disney business has immediately raised some antitrust concerns. Such a media conglomerate would own ABC, Disney Channel, E! entertainment, the Golf channel, ESPN sports network, Disney's film studio, Disney's Touchstone movie studio, Disney's theme parks, cruise ship business, the most enviable portfolio of cartoons and movies on top of a cable business with 21 million homes, and 5 million high-speed Internet customers. The merger news completely overshadowed earnings reports from both Disney and Comcast. DIS reported earnings of 33 cents a share, which was a dramatic improvement from last year's 2 cents and above current estimates at 23 cents a share. Revenues soared past analysts' estimates to $8.5 billion for the quarter. Meanwhile Comcast reported earnings of 17 cents a share, where were also dramatically better than last year's loss of 7 cents and well above current estimates for a net profit of 3 cents per share. Comcast's revenues jumped more than 58% to $4.74 billion. Another major earnings report out today was Dow component Coca- Cola Co (KO). KO reported before the opening bell with 38 cents a share, but minus one-time charges their EPS was 46 cents, or 2 cents above the estimates. Revenues surpassed the estimate but investors sold the news as analysts comments turned negative over a drop in operating income and an 8% jump in expenses. Also noteworthy was an earnings pre-announcement from Hewlett-Packard (HPQ). Speculation had been growing over HPQ's earnings but the company wasn't due to report until next week on Feb. 19th. We don't know whether HPQ management got tired of the rumors or whether they wanted to steal some of Dell's thunder but they pre- announced an hour before today's close. For the quarter ending January 31st HPQ will report earnings of 35 cents a share, which is in line with estimates on revenues of $19.5 billion. The news quickly took the wind out of the stock and shares fell steadily into the close. Tomorrow should be interesting. The new highs on the Dow and the SPX above January's resistance could spark another round of short covering and inspire bulls who had been waiting for another dip to finally jump on board for fear they'll miss the train. We'll also hear the latest weekly jobless claims, the January retail sales figures, business inventories and the Treasury budget numbers. However, eclipsing them all will be Alan Greenspan's second appearance, this time before the senate. As Jim mentioned in the monitor today the Q&A section is likely to be tougher and this is still a wild card event should he stumble and issue the wrong comment. Personally, after today's speech I feel that any Greenspan-risk has sunk considerably. That leaves us with just Dell's earnings report after the close. Let's hope Michael Dell has some positive comments for us! ************ FUTURES WRAP ************ Fed-Sponsored Binary Dollar Trade Jonathan Levinson Fed Chairman Greenspan testified before Congress today, and we were treated to some big market moves for a change. The headlines were far sunnier than the Chairman's actual words, but as traders, movement is our primary focus. The US Dollar Index was sold aggressively, bonds, precious metals, the CRB and equities all rallied, with the YM and ES reaching new rally highs. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. Chart of the US Dollar Index The US Dollar Index is perilously close to the year lows of 84.80, having touched 85.10 this afternoon. The daily cycle downphase appears to be gathering steam, and a break of that level could see a run on stops of prior longs. Predictably, gold, silver and foreign currencies all rallied strongly. The CRB added 1.46 to close at 263.04, led by copper, silver and lean hog futures. Daily chart of April gold April gold and March silver had a day as good as the US Dollar Index' was bad. Gold walked higher in a mostly straight line, stopping at a high of 412.70, low of 406. The daily cycle upphase is still young, and next support is currently at 414, followed by 420 and then 428. Trendline support is now 402, with Fibonacci support at 406 having held today. April gold closed higher by 1.25% at 412.30, silver +3.12% at 6.60, HUI +2.89% at 238.68 and XAU +2.95% at 104.32. Daily chart of the ten year note yield The Fed replaced 5B in expiring repos with 5.75B for a small 750M net addition. The 16B 5-yr note auction generated a respectable 2.87 bid-to-cover ratio, and Al Green survived yet another grilling from Bernie Sanders and Ron Paul. Bonds caught a wave of bids, with ten year note yields (TNX) diving 8.1 bps to close at 4.021% for a 1.97% move on the day. The spike lower took out 4% before the TNX bounced back, and the 4.02% level has become confluence over the past 6 months. Yesterday's rise in the yield was indeed corrective, and the daily cycle downphase reasserted itself with a vengeance. Below 3.98%, support is at 3.92%. Daily NQ candles The NQ had a good day today, rising 1.00% to close at 1512.50, a 15 point gain. The bullish cross completed and first resistance was cleared, though the confirming cross on the daily Macd has not yet occurred. We've been discussing 1518-1520 resistance, and the NQ set its session high at 1516.50. That notwithstanding, it was clearly the bulls' day today, and with the daily cycle upphase looking good, the daily chart looks most likely to print some consolidation above 1505-1508 support, followed by the next attempt to clear 1520. 30 minute 20 day chart of the NQ Within the context of the bullish daily chart, the 30 minute chart is slightly less so. The higher 300-minute stochastic low that printed today confirmed the daily cycle upturn, but the stochastic appears to be topping as of the cash close from a lower cycle high against the higher price high for a bearish divergence. That's the most bearish thing I see here. 1518 resistance remains unchallenged and should provide stiff resistance, but bulls had a good day. Another higher 30 minute cycle low should provide a higher base from which to launch the assault on 1518-20, while a lower oscillator low and a break of support at 1502-1506 and 1492 below that would change the picture. Bears need to see a strong violation of the daily cycle uptrend, and a break below 1482 would be the level likely to accomplish that. Daily ES candles ES gained 1.05% or 12 points to close at 1155.25, setting a new rally high and giving us a bullish kiss on the daily Macd as the stochastic cross strengthened. I've added a daily trendline to line up with the early downphase abort, and on this basis 1134 is current upphase support. Immediate support is 1151, 1149 and 1145. 20 day 30 minute chart of the ES The possible bearish oscillator divergence on the NQ is absent on the ES. That said, the oscillators appear to be trying to top in overbought territory, and one would expect some consolidation within the young daily cycle upphase before the next push higher. Provided that 1134 holds, which appears likely from here, all should be well for the bulls, though a move below 1145 would likely pause the daily cycle upphase. The bottom of the next 30 minute cycle downphase will be very instructive- a higher low confirms the bullish scenario, while a break below the mid 1140's would be a different story. 150-tick ES The 150 tick ES chart shows the short cycle oscillators in a weak downphase as of the close. The wide (orange) Keltner channel approximates the 30 minute cycle we follow on the previous chart, and is currently flat at what is likely a top for that cycle. Any break below 1154 would turn the channel lower and should kick off the 30 min cycle downphase. Daily YM candles YM gained 119 or 1.12% to close at 10702, a new rally high. We have bullish crosses on the Macd and 10-day stochastic, and last Friday's low was indeed the daily cycle bottom. 10500 is now uptrend support. 20 day 30 minute chart of the YM We've been discussing the binary dollar trade, and today was yet another example of that. The bearish dollar continues to be bullish for everything else, be it British pounds, US treasuries, equities or commodities. The kicker will be the day that might never come, when Asian central banks decide that they've bought their fill of US debt. Rising rates would bolster the value of US Dollars, which is another way of saying that they would depress the price of assets valued in those dollars. Until that happens, however, bulls need only buy cycle bottoms and ride the rockets higher. For tomorrow, I expect to see some sort of consolidation (read pullback) attributable to the toppy 30 minute cycle, but unless they break the listed support levels, the daily cycle should continue to lift equities higher. See you there! ******************** INDEX TRADER SUMMARY ******************** Let's make a deal A hostile $66 billion bid by Comcast (NASDAQ:CMCSA) $31.23 -7.95% to buy Walt Disney Company (NYSE:DIS) $27.60 +14.61%, where both companies reported quarterly earnings that beat Wall Street's estimates, ignited further hopes that more mega merger deals might fuel profits for the brokers, where the AMEX Securities Broker Dealer Index ($XBD.X) 730.49 +3.88% lead a broad market gains. While Comcast executives do not view their bid as hostile, and would be good for Disney in that it gives the entertainment behemoth the pairing with the nation's biggest cable provider and premium distributor of content, the timing of Comcast's offer comes as dissident ex-Disney board member Roy Disney has been saying that Disney has lost direction under current CEO Michael Eisner. Comcast says that Disney shareholders won't be the only beneficiary of combined synergies, and that a Comcast/Disney merger allows Comcast to fulfill one of its prime objectives, which is to obtain broader expertise in producing and programming of entertainment and other media offerings, which could piggyback some of Comcast's digital cable offerings. While Comcast was explaining potential synergies of the deal, Fed Chairman Alan Greenspan was preaching patience in front of the House Financial Services Committee, saying the U.S. economy is expanding at a healthy clip, but with inflation still low, the Federal Reserve can be patient before raising interest rates. The U.S. Dollar fell on Greenspan's comments with the U.S. Dollar Index (dx00y) 85.08 -0.88% falling 0.76 points and nearing its 4- year low set in January of 84.97. The interpretation taken away from the dollar's decline is that with the rising budget deficit, it will most likely take a rate-tightening Fed to see dollar firming. While Greenspan warned that the growing federal budget deficit doesn't come without some downside risks for the economy, Greenspan commented that that to date, the dollars decline has been orderly and is in line with historical dollar trends. The reaction from the bond market was equally bullish for Treasuries as for stocks, with the benchmark 10-year YIELD ($TNX.X) falling 8.1 basis points to 4.021%. U.S. Market Watch - 02/11/04 In PINK I've marked some of those asset classes or sectors that seemed to find a more major response to some of today's news. The decline in the dollar gave further lift to gold equities as the AMEX Gold Bugs Index ($HUI.X0 238.68 +2.89% has now recouped all of its recent month's declines, while homebuilders as represented by the Dow Jones Home Construction Index (DJUSHB) 599.03 +3% continue to trade benefit from the thought of lower mortgage rates, which are tied to Treasury YIELDS. I do believe, based on observation, that thoughts of renewed merger activity, which often comes in a healthy stock, found strong interest among the larger brokers with investment banking arms. Broker/Dealer Index (XBD.X) components Lehman Brother (NYSE:LEH) $86.89 +7.21%, Morgan Stanley (NYSE:MWD) $59.86 +5.05%, Bear Stearns (NYSE:BSC) $87.05 +5.01%, Goldman Sachs (NYSE:GS) $107.09 +4.8% and Merrill Lynch (NYSE:MER) $60.91 +4.65% all found healthy percentage gains in today's trade. I thought Citigroup (NYSE:C) $49.74 +1.67%, which owns Smith Barney had been overlooked in today's session, and traders looking for new bullish exposure to the financials should trade long at $49.57, stop $48.25 and target $52.00 for Citigroup (C) near-term. Market Snapshot / Internals - 02/11/04 Close After two days of anemic volume, traders seemed more active today where brisk volumes were found at both the NYSE and NASDAQ. A/D breadth at the NYSE had advancer outnumbering decliners by a more healthy 2:1 margin, when compared to NASDAQ's 3:2 breadth. In last night's Index Trader Wrap we noted that the NASDAQ's 5- day NH/NL ratio had edged above its 10-day NH/NL ratio, and today's trade found the NYSE 5-day ratio (96.8%) moving above its 10-day ratio (96.2%). This suggests shorter-term bullish leadership at both the NYSE and NASDAQ is taking hold. Pivot Analysis Matrix The INDU, SPX, OEX saw a resurgence in buying today and all traded above their WEEKLY R1s, MONTHLY R1s and WEEKLY R2s. The QQQ's, which tend to overdo things a little, relative to the NDX, did see trade at their WEEKLY R1s. There were some casualties among the NASDAQ-100 Components, with Garmin Ltd. (NASDAQ:GRMN) $46.82 -10.13% and Comcast (CMCSA) $31.23 -7.95% hit lower. While these two companies are not heavily weighted components in the NDX/QQQ, larger weighted components Microsoft (NASDAQ:MSFT) $27.15 +0.48% (8.32% weight), Intel (NASDAQ:INTC) $30.99 +1.47% (5.78% weight), Cisco Systems (NASDAQ:CSCO) $24.24 -2.17% (5.03% weight) and Qualcomm (NASDAQ:QCOM) $59.38 +2.22% (4.64% weight) gives the look that "big tech" wasn't a major focus among buyers in today's rather bullish session. Dow Industrials (INDU) Chart - Daily Intervals "Good gravy" is a term my grandmother used to use instead of "good Lord," or "holy ....," which was likely what many a bear was saying today. The Dow Industrials simply erupted today and looks to have some formidable momentum building to 10,800. S&P 500 Index (SPX.X) Chart - Daily Intervals I've "cloned" or simply copied a prior bullish trend we had on the SPX chart to try and visualize a bullish channel, similar perhaps to the regression channel on the INDU chart. While DAILY levels in the pivot matrix do give some additional level to work with as the SPX breaks above WEEKLY R2, 1,165 may be viewed as bullish resistance. S&P 100 Index (OEX.X) Chart - Daily Intervals While the INDU and SPX traded new 52-week highs today, the OEX couldn't quite make it above its MONTHLY R1. An intra-day look of the OEX shows that at 11:00 AM EST, the OEX made a bold move above the MONTHLY 38.2% retracement level of 566.60 and sprinted directly to 570.25, came back within the 568.86 to 569.18 zone (for about 5-minutes) then worked its way higher to the close. I would have to view support being rather firm at 566.60, as this really seemed to be a decisive point for bullish buying today. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals One trade to be cognizant of I think is the "beta trade" where any institutional bulls that had moved money to the sidelines now see the INDU and SPX making new highs, and may now feel pressured to try and get back in on the move, with the feeling they aren't "chasing" the markets. With the NDX/QQQ lagging the move higher, I think bulls look for a bullish entry back near $37.25, then a reversal back above $37.43 for a "sling shot" type move above the $37.70 level. A correlative upside move might be found with the OEX breaking to new highs. INDU, SPX and OEX traders should also be keeping an eye on the NDX/QQQ to see if the weaker index is following and perhaps confirming the renewed bullishness. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** What's In Your Toolbox? by Mark Phillips mphillips@OptionInvestor.com Trading is no different from any other profession, in that we need to utilize the appropriate tools of the trade. Of course we need a chunk of cash in our brokerage account. We also need a broker that provides good service for the type of trading we do. Attractive commission prices are good, but as many of you know, good fills are at least as important. What good would it do you to save $10 on your commission, only to lose $200 because of a lousy fill in a fast moving market? Additionally, we need a reliable and accurate data provider so we have good data on which to base our trading decisions. To process that data we need a workstation appropriate to our trading approach. A long-term trader/investor can get by with a less sophisticated workstation than an agile day-trader, and there are different levels of equipment needs spread between these two extremes. For all except for the most aggressive short-term traders, a fast PC with a 17-inch monitor and a reliable internet connection is probably sufficient for all of the research and data processing necessary on a daily basis. But that is really only the first step. All it does is bring the information to you and allow you to efficiently place trades. Where the rubber meets the road is in the set of tools you use to decide which trade to take (what security and which direction), when to place the trade and when to exit the trade (either for a profit or loss). The tools you use for this aspect of the process depend on the types of trades you like to place, what your trading bias is (what you expect from the market), and what strategies and analysis tools you have found to be effective in the past. And therein lies the core of what I'd like to talk about today. We've all seen the disclaimers from brokers, advisory services, mutual funds and company prospectuses that state, "Past performance is no guarantee of future results". A trading strategy will only remain successful so long as the market conditions under which past successes occurred remains in force. If we fail to recognize the change in market conditions, we will be applying rules and decision-making processes that do not apply to the current market. Remember the runaway bull market of late 1999 and early 2000? Simple bullish strategies prevailed and we could consistently profit either by buying the dips or jumping onto breakout moves to profit wildly. Those of us that prospered in that market developed a set of tools that allowed us to profit from the current market conditions. A run into earnings was nearly as certain as the fact that the sun would rise tomorrow and split runs were equally lucrative. In essence we could look for bullish chart patterns, buy the breakout or a dip and pocket juicy profits as the stock rocketed to new highs. Then came the early stage of the bursting of the dot-com bubble and market conditions changed dramatically. Those bullish strategies of a few months before yielded only busted plays. Many traders who failed to recognize the change in market conditions watched like deer in headlights as their once-infallible set of tools produced one losing trade after another. After the precipitous drop in the spring of 2000, die-hard bulls continued to apply these broken tools and strategies as the markets rose in agony throughout the summer. They were easy pickings for bearish traders who had recognized that the bull market would be a long time returning. Along came Labor Day of 2000 and with the rapidly slowing economy, the tables were suddenly reversed. Momentum trading was working again, but to the downside. Selling into the rallies or selling the breakdowns worked equally well. The tools that had worked in the runaway bull market were applicable again, but they had to be applied upside down. This runaway bear market really chewed up quite a bit of chart space before the decline finally halted in October 2002, and once again the tone of the market changed. It took several months as traders were poised on pins and needles through the Iraq conflict. But once they could see that it would be short-lived and have minimal impact on the economy, the dip buyers became bolder and bolder. Since March of last year, very little other than long strategies has been working, but it hasn't been a momentum market. No, things are very different than 1999/2000, as the persistent rise has been halting and erratic. But the net result is the same, with the market gradually working its way higher. The past couple months have seen market conditions change once again as both economic reports and earnings are looking decidedly stronger. That fueled a major breakout in early December and with Easy Al offering more placating words again today, it looks like the bulls are off to the races again. The key dynamic that has been at play recently is that every dip can be bought - seemingly with impunity -- as there is no real selling pressure. But we haven't yet returned to the heady momentum trading days of years past. It is a market truism that markets fluctuate. But a less well-understood corollary is that successful trading techniques fluctuate as well. Determining when to use what strategy is at the very heart of long-term trading success. Here's a quick test you can do to see if my observations hold any merit. Scan through some of your favorite charts and look for charts that have shown coiling action in recent months. It doesn't matter whether they have coiled for a breakout or a breakdown. When the stock finally poked through resistance or dipped below support, did it result in a runaway move, or was it a head-fake that resulted in a reversal? Now look at the same charts with your favorite oscillator displayed. Is it just me, or does it look like stocks are starting to trade off of overbought and oversold levels once again? But more importantly, I've noticed both stocks and the major indices adhering more rigidly to important moving averages than we've seen in recent years. One good example is the recent rebound of the NASDAQ Composite off its 50-dma and the Semiconductor index off its 100-dma. Now when we can get both the moving averages and the oscillators in agreement, wouldn't you agree that makes for a higher-odds trade? Add in Fibonacci retracements and a couple other tools and we can see how Technical Analysis is worth its weight in gold. Trading is a dynamic profession and one that is fraught with peril for those that become complacent. If the tools you are using to trade are proving successful, then keep up the good work. But always keep a watchful eye on the big picture. When you start to notice that your winning trades are not coming as easily, it could be an early warning that the underlying market conditions are starting to change and that it is time to re-evaluate what is in your toolbox. On the other hand, if your trading strategies are not performing as you would like, take a good look at the underlying market conditions. If you are applying momentum-based trading strategies in a rangebound market or rangebound strategies in a runaway market, you are likely to be disappointed with the results -- to put it mildly. And woe be to any of us (I'm as guilty as anyone) that let their market bias get in the way of what the charts are telling us. If these shortcomings apply to you and your recent trading results, then perhaps it is time to take a trip to the hardware store and acquire some new tools. At the very minimum, some of those tools may need to be sharpened, cleaned or tuned up. As for me, I'll be in the power-tool aisle! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. 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The Option Investor Newsletter Wednesday 02-11-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: APOL, PD, TEVA Dropped Calls: None Dropped Puts: None Spreads, Combinations & Premium-Selling Plays: Greenspan Sends Stocks Higher! Watch List: Homebuilders & Broker-dealers ************************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 ***************** APOL - Call Play Raise stop from $71.00 to $73.50 --- PD - Call Play raise stop from 75.99 to 78.00 --- TEVA - Call Play Raise stop from $61.00 to $62.00 ************* DROPPED CALLS ************* 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 ************************************************************** ************ 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 ********************************************* Greenspan Sends Stocks Higher! By Ray Cummins Investors saw nothing but "green" Wednesday after the Fed Chief said he saw "no urgency" in raising interest rates. Blue-chips were also boosted by a $66 billion bid for Walt Disney (NYSE:DIS) from Comcast (NYSE:CMCSA) and the Dow Jones Industrial Average closed up 123 points to 10,737. The NASDAQ Composite was 14 points higher at 2,089, with wireless stocks among the better performers. The broader the S&P 500 Index added 12 points to end at 1,157 as aluminum, brokerage, steel, health care, oil & gas, casino, gold, and homebuilding shares saw renewed buying pressure. Advancing stocks outpaced decliners 7 to 3 on the New York Stock Exchange and 3 to 2 on the technology exchange. Over 1.7 billion shares changed hands on the Big Board while volume was nearly 2.2 billion shares on the NASDAQ. The bond market responded boldly to Chairman Greenspan's comments with the 10-year note up 24/32 while its yield dropped to 4.02%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 02/10/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 27.44 0.40 21.62% 2.04% CECO FEB 40 39.30 54.48 0.70 5.04% 1.78% ERES FEB 27 27.00 32.81 0.50 5.07% 1.85% MICC FEB 65 64.05 76.00 0.95 4.10% 1.48% NTES FEB 40 38.90 43.00 1.10 7.39% 2.83% RMBS FEB 25 24.50 30.04 0.50 5.60% 2.04% SEPR FEB 22 21.90 27.44 0.60 7.02% 2.74% SINA FEB 40 38.75 42.42 1.25 7.89% 3.23% SOHU FEB 30 29.30 29.79 0.49 4.70% 2.39% * APPX FEB 35 34.35 35.46 0.65 5.65% 1.89% * CRDN FEB 40 39.05 38.94 (0.11) 0.00% 2.43% * GPRO FEB 32 32.10 37.64 0.40 4.17% 1.25% KYPH FEB 25 24.45 26.96 0.55 6.84% 2.25% IMCL FEB 35 34.15 41.16 0.85 8.93% 2.49% OSIP FEB 30 29.60 35.20 0.40 4.67% 1.35% PCLN FEB 17 17.15 21.40 0.35 6.93% 2.04% SEPR FEB 22 22.05 27.44 0.45 7.00% 2.04% BRCM FEB 37 37.00 40.35 0.50 5.08% 1.35% CLZR FEB 22 22.20 24.03 0.30 5.54% 1.35% * DRIV FEB 22 21.95 23.48 0.55 9.34% 2.51% * NANO FEB 17 17.05 19.37 0.45 10.87% 2.64% NTAP FEB 20 19.55 21.93 0.45 8.71% 2.30% OSTK FEB 17 17.00 18.65 0.50 11.98% 2.94% SEPR FEB 22 22.25 27.44 0.25 5.25% 1.12% ARO FEB 30 29.50 32.05 0.50 8.22% 1.69% ECLG FEB 17 17.20 21.86 0.30 8.93% 1.74% ERES FEB 30 29.75 32.81 0.25 5.33% 0.84% ERICY FEB 20 19.65 28.92 0.35 9.74% 1.78% JCP FEB 25 24.60 28.34 0.40 8.27% 1.63% LIN FEB 30 29.65 31.50 0.35 5.80% 1.18% WEBX FEB 22 22.25 26.37 0.25 5.90% 1.12% Positions in Sohu.com (NASDAQ:SOHU), Ceradyne (NASDAQ:CRDN) American Pharmaceutical Partners (NASDAQ:APPX), Digital River (NASDAQ:DRIV), and Candela (NASDAQ:CLZR) should have been closed by conservative traders. Overstock.com (NASDAQ:OSTK) remains on the "watch" list. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CYD FEB 35 35.45 22.25 0.45 6.36% 1.27% SNDK FEB 80 81.10 50.25 1.10 5.97% 1.36% ISIL FEB 30 30.50 25.10 0.50 6.00% 1.64% MCHP FEB 35 35.45 30.09 0.45 4.57% 1.27% UTSI FEB 40 40.95 35.03 0.95 8.23% 2.32% AEIS FEB 25 25.55 22.20 0.55 9.96% 2.15% ELX FEB 30 30.45 26.68 0.45 6.62% 1.48% PHM FEB 47 48.00 44.75 0.50 4.66% 1.04% MRVL FEB 42 42.90 43.21 (0.31) 0.00% 0.93% * NVLS FEB 35 35.25 32.82 0.25 4.75% 0.71% SSYS FEB 25 25.60 24.60 0.60 15.57% 2.34% * Marvell Technologies (NASDAQ:MRVL) and Stratasys (NASDAQ:SSYS) are early-exit candidates. PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status COCO 60.73 64.98 FEB 55 55 0.65 54.35 0.65 Open KOSP 45.30 55.45 FEB 35 40 0.60 39.40 0.60 Open CEPH 54.65 54.38 FEB 45 50 0.65 49.35 0.65 Open NFLX 65.10 72.80 FEB 48 50 0.25 49.75 0.25 Open CFC 80.32 87.70 FEB 70 75 0.65 74.35 0.65 Open MDC 66.31 65.63 FEB 55 60 0.60 59.40 0.60 Open CVH 42.54 42.31 FEB 37 40 0.36 39.64 0.36 Open SII 48.80 49.00 FEB 43 45 0.30 44.70 0.30 Open BA 43.56 43.77 FEB 40 43 0.30 42.20 0.30 Open MRK 48.94 48.40 FEB 45 48 0.25 47.25 0.25 Open Gilead Sciences (NASDAQ:GILD) has previously been closed for a small loss. Coventry Health Care (NYSE:CVH) remains on the "watch" list. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status ANF 24.90 27.33 FEB 30 27 0.30 27.80 0.30 Open? MANH 27.00 26.96 FEB 35 30 0.50 30.50 0.50 Open ESV 27.45 29.91 FEB 35 30 0.45 30.45 0.45 Open? NVLS 41.68 32.82 FEB 47 45 0.40 45.40 0.40 Open HTCH 32.45 28.57 FEB 40 35 0.60 35.60 0.60 Open ICST 27.60 27.14 FEB 35 30 0.50 30.50 0.50 Open BZH 92.40 98.88 FEB 105 100 0.55 100.55 0.55 Open? LEN 43.71 45.07 FEB 50 47 0.30 47.80 0.30 Open BHE 32.30 35.36 FEB 40 35 0.50 35.50 0.14 Closed OMG 27.59 31.67 FEB 35 30 0.50 30.50 (1.17) Closed OM Group (NYSE:OMG), Benchmark Electronics (NYSE:BHE), Beazer Homes (NYSE:BZH) and Ensco (NYSE:ESV) are candidates for early exit. Abercrombie & Fitch (NYSE:ANF) is on the "watch" list and any further upside movement would be cause for closure. Bearish spreads in Checkfree (NASDAQ:CKFR) and Kohl's (NYSE:KSS) have previously been closed for small losses. 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ DISH - EchoStar $39.28 *** New Merger Target? *** EchoStar Communications (NASDAQ:DISH) operates through two major business units, the DISH Network and EchoStar Technologies. The DISH Network offers a direct broadcast satellite subscription TV service across the United States with millions of DISH Network subscribers. EchoStar Technologies Corporation is engaged in the design, development, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network and the design, development and distribution of similar equipment for a range of international satellite service providers. DISH - EchoStar $39.28 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 UAB NU 850 0.25 37.25 6.0% 0.7% * SELL PUT MAR 35 UAB OG 4268 0.45 34.55 3.1% 1.3% TS SELL PUT MAR 37.5 UAB OU 1373 1.05 36.45 5.8% 2.9% __________________________________________________________________ IDCC - InterDigital Comm. $24.83 *** Entry Point? *** InterDigital Communications (NASDAQ:IDCC) specializes in the architecture, design and delivery of wireless technology and product platforms. Over the course of its corporate history, the company has amassed a substantial and significant library of digital wireless systems experience and know-how, and holds an extensive worldwide portfolio of patents in the wireless systems field. InterDigital markets its technologies and solutions primarily to wireless communications equipment producers and related suppliers. In addition, the company licenses its Time Division Multiple Access and Code Division Multiple Access patents to equipment manufacturers worldwide. IDCC - InterDigital Comm. $24.83 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 DAQ NX 1385 0.20 22.30 8.7% 0.9% SELL PUT MAR 20 DAQ OD 1737 0.45 19.55 6.7% 2.3% * SELL PUT MAR 22.5 DAQ OX 1165 0.95 21.55 9.1% 4.4% __________________________________________________________________ IMCL - ImClone Systems $43.10 *** Erbitux Speculation Only! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL - ImClone Systems $43.10 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 30 QCI NF 14386 0.45 29.55 16.8% 1.5% * SELL PUT FEB 35 QCI NG 19182 1.00 34.00 33.3% 2.9% SELL PUT FEB 40 QCI NH 12115 2.00 38.00 41.9% 5.3% __________________________________________________________________ LSCP - Laserscope $21.00 *** Next Leg Up? *** Laserscope (NASDAQ:LSCP) designs, manufactures, sells and services, on a worldwide basis an advanced line of medical laser systems and related energy devices for the medical office, outpatient surgical center and hospital markets. The firm pioneered development and commercialization of lasers and advanced fiber-optic devices for a variety of applications. The company's product portfolio consists of more than 150 medical laser systems and related energy delivery devices. The firm's primary medical markets include dermatology, aesthetic surgery and urology. Its secondary markets include ear, nose & throat surgery, general surgery, gynecology, photo-dynamic therapy and other surgical specialties. LSCP - Laserscope $21.00 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 LXQ ND 10 0.60 19.40 25.3% 3.1% SELL PUT MAR 17.5 LXQ OW 10 0.40 17.10 6.2% 2.3% * SELL PUT MAR 20 LXQ OD 23 1.30 18.70 12.3% 7.0% __________________________________________________________________ PCLN - Priceline.com $24.87 *** A Big Day! *** Priceline.com (NASDAQ:PCLN) offers products for sale in two major categories: a travel service that offers leisure airline tickets, hotel rooms, rental cars, packaged vacations and cruises; and a personal finance service that offers home mortgages, refinancing and home equity loans through an independent licensee. PCLN also owns travel Web sites Lowestfare.com and Rentalcars.com. The firm is part-owner of Internet travel service Travelweb. Priceline.com licenses its business model to independent licensees, including pricelinemortgage and certain international licensees. PCLN - Priceline.com $24.87 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 20 PUZ OD 637 0.20 19.80 3.1% 1.0% TS SELL PUT MAR 22.5 PUZ OX 30 0.80 21.70 7.8% 3.7% * SELL PUT MAR 25 PUZ OE 0 1.75 23.25 12.2% 7.5% __________________________________________________________________ SLAB - Silicon Laboratories $58.69 *** New Trading Range? *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells proprietary high-performance mixed-signal integrated circuits for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. The company's mixed-signal design engineers utilize standard complementary metal oxide semiconductor (CMOS) technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. SLAB - Silicon Laboratories $58.69 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 55 QFJ NK 493 0.40 54.60 6.7% 0.7% * SELL PUT MAR 50 QFJ OJ 292 0.60 49.40 3.2% 1.2% TS SELL PUT MAR 55 QFJ OK 461 1.70 53.30 6.5% 3.2% __________________________________________________________________ SONO - SonoSite $25.46 *** Premium-Selling Only! *** SonoSite (NASDAQ:SONO) is a provider of point-of-care, all-digital, high-performance, ultrasound imaging systems for use in a variety of clinical applications and settings. The company focuses on six market segments: radiology, obstetrics and gynecology, emergency medicine, surgery, cardiology and vascular medicine. SONO - SonoSite $25.46 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 UZS NX 45 0.30 22.20 13.5% 1.4% * SELL PUT FEB 25 UZS NE 35 0.95 24.05 30.1% 4.0% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ GS - Goldman Sachs $107.09 *** Strong Sector! *** The Goldman Sachs Group (NYSE:GS) is a global investment banking and securities firm that provides a range of services worldwide to a substantial and diversified client base. The firm operates offices in over 20 countries with activities are divided into two primary segments: Global Capital Markets, and Asset Management and Securities Services. The Global Capital Markets segment is made up of Investment Banking, Trading and Principal Investments. Goldman's Asset Management segment offers investment strategies and advice across all major asset classes: global equity; fixed income, including money market instruments; currency, as well as alternative investment products. The firm's Securities Services activities include brokerage, financing services and securities lending. GS - Goldman Sachs $107.09 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-95.00 GS-OS OI=3656 ASK=$0.50 SELL PUT MAR-100.00 GS-OT OI=1696 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$99.35 __________________________________________________________________ MSTR - MicroStrategy $64.78 *** New "All-Time" High! *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via web, wireless, and voice. MSTR - MicroStrategy $64.78 PLAY (conservative - bullish/credit spread): BUY PUT MAR-50.00 EOU-OJ OI=156 ASK=$0.55 SELL PUT MAR-55.00 EOU-OK OI=243 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$54.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AAII - aaiPharma $19.98 *** Inventory Concerns? *** aaiPharma (NASDAQ:AAII) is a science-based specialty drug company focused on the commercialization of various branded pharmaceutical products that it develops or acquires. The company has operations primarily in the United States and Europe. It has acquired three branded product lines since August 2001: the M.V.I. and Aquasol family of products, Brethine and the Darvon and Darvocet family of products. It is also developing its own proprietary products, as well as developing improvements and line extensions to its current products, by applying its scientific expertise and portfolio of proprietary and in-licensed drug-delivery technologies. AAII - aaiPharma $19.98 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 25 IUQ CE 747 0.40 25.40 7.5% 1.6% * SELL CALL MAR 23 IUQ CX 397 0.85 23.35 11.1% 3.6% __________________________________________________________________ GRMN - Garmin $46.82 *** Sell-Off In Progress! *** Garmin (NASDAQ:GRMN) is a global provider of unique navigation, communications and information devices, most of which utilize global positioning system (GPS) technology. The company designs, develops, manufactures and markets a diverse family of handheld, portable, and fixed GPS-enabled products and other navigation, communications and information products for the general aviation and consumer markets. Each of Garmin's GPS products utilizes its proprietary integrated circuit and receiver designs to collect, calculate and display location, direction, speed and other useful information in forms optimized for specific uses. GRMN - Garmin $46.82 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 50 GQR BJ 1062 0.45 50.45 9.5% 0.9% * SELL CALL MAR 55 GQR CK 217 0.40 55.40 3.0% 0.7% TS SELL CALL MAR 50 GQR CJ 39 1.40 51.40 6.8% 2.7% __________________________________________________________________ PHS - PacifiCare Health Systems $29.13 *** Sector Slump! *** PacifiCare Health Systems (NYSE:PHS) offers managed care and other health insurance products to employer groups and Medicare beneficiaries in eight western states and Guam. The company's commercial and senior plans include various health maintenance organizations (HMOs), preferred provider organizations (PPOs), and Medicare Supplement products. The firm also offers a variety of specialty managed care products and services that employees can purchase as a supplement to basic commercial and senior medical plans or as stand-alone products. These products include pharmacy benefit management (PBM), behavioral health services, group life and health insurance, dental and vision benefit plans. PHS - PacifiCare Health Systems $29.13 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 32.5 PHS BZ 7631 0.20 32.70 8.0% 0.6% * SELL CALL MAR 35 PHS CG 547 0.25 35.25 3.4% 0.7% TS SELL CALL MAR 32.5 PHS CZ 1097 0.65 33.15 6.0% 2.0% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MGAM - Multimedia Games $38.65 *** New Downtrend Underway? *** Multimedia Games (NASDAQ:MGAM) is the leading supplier of interactive electronic games and player stations to the rapidly growing Native American gaming market. The company's games are delivered through a telecommunications network that links its player stations with one another both within and among gaming facilities. Multimedia Games designs and develops networks, software and content that provide its customers with a range of gaming systems. The company's development and marketing efforts focus on Class II gaming systems and Class III video lottery systems for use by Native American tribes throughout the United States. MGAM - Multimedia Games $38.65 PLAY (conservative - bearish/credit spread): BUY CALL MAR-50.00 QMG-CJ OI=275 ASK=$0.25 SELL CALL MAR-45.00 QMG-CI OI=246 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$45.45 __________________________________________________________________ UTEK - Ultratech $26.28 *** In A Trading Range? *** Ultratech (NASDAQ:UTEK) develops, makes and sells photolithography equipment to help reduce the cost of ownership for manufacturers of integrated circuits, including advanced packaging processes and various nanotechnology components such as thin film head magnetic recording devices. The company supplies step-and-repeat systems based on one-to-one technology to customers located throughout North America, Europe, Japan and the rest of Asia. UTEK - Ultratech $26.28 PLAY (less conservative - bearish/credit spread): BUY CALL MAR-35.00 UQT-CG OI=21 ASK=$0.20 SELL CALL MAR-30.00 UQT-CF OI=45 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$30.60 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ********** Watch List ********** Homebuilders & Broker-dealers ___________________________________________________________________ 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. ___________________________________________________________________ Pulte Homes Inc - PHM - close: 46.55 change: +1.80 WHAT TO WATCH: Positive comments from Greenspan drove away investor fears over interest rates and homebuilders soared during the widespread market rally. PHM added more than 4% and broke out above price resistance at $46.00 and technical resistance at the descending trendline of lower highs. Volume was decent at 2.2 million shares. This looks like a bullish entry point for traders to try and capture any move toward the $50 level. Chart= --- Goldman Sachs - GS - close: 107.09 change: +4.91 WHAT TO WATCH: Smith Barney upgraded GS to a "buy" from a "hold" and raised its price target to $122, which helped launch a rally in the brokers. Boosting that rally was the Comcast-Disney merger (hostile bid) news. More M&A activity like this one and the JPM-ONE merger announced last month is big news for the broker-dealers who reel in tons of cash in the deal making. Wall Street is starting to believe that 2004 could unveil a number of deals. Look for a pull back to catch an entry point in GS. Chart= --- Maxim Integrated Products - MXIM - close: 54.33 change: +2.03 WHAT TO WATCH: The semiconductor index finally began to move higher today after two days of consolidation in the shadow of Friday's big rally. Enjoying a strong rebound with the SOX is MXIM. Like the SOX its MACD technical indicator has produced a new buy signal and shares are rushing back into its rising channel. We'd look for a bounce in MXIM from the $53.00 level as a potential bullish entry point. Chart= --- Caterpillar - CAT - close: 78.96 change: +2.40 WHAT TO WATCH: Economically sensitive stocks like CAT were bouncing strongly higher today on positive comments from Alan Greenspan before congress. The daily chart on CAT suggest a new bottom at the $76 level. We'd consider new bullish positions on a move above the $80 mark and its 50-dma. Target the $86 level. Chart= --- Legg Mason - LM - close: 92.79 change: +3.93 WHAT TO WATCH: LM is another broker-dealer that really out performed today with a big breakout over resistance at $90 with extremely strong volume. This looks like a bullish entry point to capture any move toward the $100 level. Patient traders can hope for a dip back toward $90 and buy the bounce but given LM's close at its high for the session it may not pull back any time soon. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- AMAT $22.30 +0.27 - AMAT managed a 1.22% gain today, under performing many of its peers in the SOX. AMAT remains under its 50-dma but the stock appears to have set a new bottom at the $21 level. Technicals are bullish. Earnings should be out on Feb. 18th. BZH $101.91 +3.03 - BZH is another homebuilder that looks very strong. We like the bullish breakout over the $100 level and believe this could be an entry point for a run back towards the $110 region. MER $60.91 +2.71 - MER managed to close near 2-year highs on very strong volume at 9.8 million shares. We could see a breakout tomorrow. LEH $86.89 +5.85 - LEH actually hit new all-time highs above the $86 level. We wouldn't chase it here. Look for a dip. PDCO $68.83 +1.65 - PDCO looks interesting. The consolidation appears to be ending but bulls need to see a breakout over the $70 level. ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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