The Option Investor Newsletter Sunday 02-15-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Now Entering The Catalyst Void Futures Market: Dollar Rallies, Equities and Metals Reverse Index Trader Wrap: Oh Dell, my Bell Editor's Plays: Too Good Too Be True Market Sentiment: Look at the time! Ask the Analyst: Inside buying and selling Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 02-13 WE 02-06 WE 01-30 WE 01-23 DOW 10627.85 + 34.82 10593.0 +104.96 10488.1 - 80.22 - 32.22 Nasdaq 2053.56 - 10.45 2064.01 - 2.14 2066.15 - 57.72 - 16.59 S&P-100 565.92 - 0.14 566.06 + 5.75 560.31 - 5.10 + 0.69 S&P-500 1145.81 + 3.05 1142.76 + 11.63 1131.13 - 10.42 + 1.72 W5000 11174.00 + 44.60 11129.4 +100.20 11029.2 -127.58 + 40.74 RUT 585.14 + 1.07 584.07 + 3.31 580.76 - 15.38 + 5.73 TRAN 2916.56 + 22.20 2894.36 + 8.40 2885.96 -186.99 + 36.66 VIX 15.58 - 0.41 15.99 - 0.64 16.63 + 1.79 - 0.16 VXO 15.63 - 0.35 15.98 - 1.07 17.05 + 2.18 - 0.40 VXN 24.14 - 0.49 24.63 - 0.43 25.06 + 3.79 + 1.03 TRIN 1.19 0.62 1.00 1.15 Put/Call 0.76 0.62 0.81 0.77 ****************************************************************** Now Entering The Catalyst Void by Jim Brown With earnings basically over for the 4Q we are entering the period in the earnings cycle where there is a lack of a catalyst to move stocks forward. The economic calendar will heat up next week and there is a greater risk of a disappointment than a positive surprise. As we enter this void traders will be watching recent support levels very carefully. Dow Chart - Daily Nasdaq Chart - Daily Economically Friday the 13th lived up to its superstitious reputation. The December Balance of Trade reversed its gains from last month and despite the declining dollar exports fell and imports rebounded strongly from the November drop. The December exports to China were the second highest on record at $3.3 billion. Imports from the EU were the highest on record at +$23.1 billion. One positive sign was the $20.1 billion in imports of high technology products. This was the highest level since Nov-2000. This suggests there was a real pickup in business spending or at least ordering in the last quarter. Considering more and more of our consumer goods are now produced overseas there is little chance of the trade balance reverting any time soon. The majority of the imports were autos and parts, oil and related products and the high tech equipment. All high dollar items. The Import and Export Prices rose substantially for January but the majority of the volatility was again oil and beef. Prices jumped +1.3% and well over the +0.5% expected. This was the largest monthly increase in nearly a year. Commodity prices are also rising as global demand continues to increase. The biggest shock of the day was the Consumer Sentiment which fell to 93.1 from 103.8 in January. I say it was a big shock unless you have been reading my commentary. I have reported twice in the last week that we could have a negative surprise based on other survey information. Both components fell with expectations falling to 88.4 from 100.1 and present conditions falling to 100.4 from 109.5. This is a serious drop in the sentiment BUT it is only a retracement of the +11 point jump in January. We are right back in the December range of 92.6. The spike to 103.8 was simply a spike caused mostly by the unreasonable expectations for a big Jobs number in January. When those jobs failed to appear the miss was so large most consumers suddenly felt maybe the future was not so bright. There is also the election impact. Now that the democrats are blasting the airwaves with how bad jobs and the economy have been under Bush those voters are feeling depressed. It is not a slam against democrats, just a fact that negative campaigns produce negative feelings of well being. This report should not be seen as a market negative. The January numbers were wrong and they have been corrected with the initial February survey. The markets used the economic numbers as an excuse for profit taking but despite all the whining coming from the talking heads on TV it was not that bad. We had a couple of sell programs at 10:20 and 10:30 and a sudden drop at 12:20 when news of a fire alarm at a Senate building hit the airwaves. Contrary to the commentator's rhetoric it was not a bad day. The Dow did fall to 10600 support but was immediately bought and was in no danger into the close. The Nasdaq dropped to support at 2050 and quickly rebounded and held above that level for the rest of the day. The Nasdaq closed exactly -100 points off the high of the year but nowhere near any critical support. This was the fourth consecutive weeks of losses for the Nasdaq but it is still within 100 points of the highs. Sounds better when you say it that way. The Dow Closed up for the week and stretched its winning streak to 10 of the last 12 weeks. The S&P has closed up 11 of the last 12 weeks. All of this just emphasizes the sideways consolidation phase we are in. That may sound strange when you remember the Dow and S&P closed at a new two-year highs on Wednesday. Need further proof we are moving sideways? The S&P is only trading up +25 points from its January-5th close at 1121. The Dow is only +90 points above its 10540 close on Jan-5th. The trend is definitely up but we have spent almost as many days under 10540 as above it over the last three weeks. February is known as a consolidation month and is historically the 3rd weakest month of the year. Given those historical norms we are having a great month. However, we are entering the catalyst void. This is kind of like the Bermuda Triangle of the earnings cycle. Strange things can and do happen for no apparent reason. Next week we have a flurry of economic reports and very few major earnings to provide excitement. The major reporters are WMT, TGT, AMAT, HPQ and Deere (DE). Nobody expects any surprises from WMT or TGT and HPQ already pre announced. That leaves AMAT as the only real tech poster child to announce next week and they are assumed to be doing great. This sets up a potential for negative surprises but it is a very small risk. The real risk comes on the economic side but it is still hard to paint a high risk picture. On Tuesday we will get the NY Empire State manufacturing Survey, Industrial Production and the Housing Index. Not much to worry about there. Wednesday has a bunch of reports but none critical. Thursday will be a key day with Jobless Claims, PPI and the Philly Fed Survey. With Jobless Claims up over 350K for the two weeks with weather getting the blame it will be crucial to see a drop this week. If claims are over 350K again it will be tough to sell the weather excuse. The PPI could show signs of inflation with rising commodity prices and the Philly Fed will be read with hopes last months monster spike is not retraced like the sentiment numbers. Friday is almost an after thought with only the CPI on the economic schedule. We have a flurry of reports but nothing really critical as long as the positive trend continues. Should a couple weaken slightly they will probably be ignored but in a weak void of excitement each could take on a life of their own. Next week is also option expiration and other than the two sell programs on Friday we really have not seen any normal increase in volatility. This may be the first month since November that the markets are not significantly higher for the option cycle. This could dampen the option related explosions we saw in Dec/Jan. Those that rolled out to the next month to avoid big losses may finally escape the pain. This could suggest a negative bias for the week compared to the prior two months expirations. Odds are we will continue our consolidation and with that in mind the Dow does not appear to be in any danger. It is above support at 10600 and well above stronger support at 10450. That is a lot of points to churn given the current bullish sentiment and patient Fed. The 50 dma has risen to 10392 and in position to provide even stronger support to the 10450 level by the end of the week. The Nasdaq is more of a problem. The morning drop on Friday knocked the Nasdaq below its comfort range support for the week at 2060. The current 2050 support level is more psychological than physical but the 50 dma has risen to just below the current level at 2032. The Nasdaq is in danger of retesting that 50 dma support on even minimal selling. The last test took us down to just below 2020 and left 2000 untouched. Worst case the 2000-2020 level should provide significant support. This leaves the Nasdaq with a possible range between 2000 and the highs for the week near 2100. Should we continue to consolidate in this range I am sure nobody would complain. The biggest losers on Friday were the SOX and the Russell. The SOX dropped -1.58% on Friday to close at 511 but that is well off last weeks lows of 493. The biggest hit to the sector came on a downgrade from BAC on Intel and the chip equipment stocks. They said they lowered estimates on Intel based on weaker than expected notebook PC demand. Based on their own channel checks they expect Q1 notebook shipments to drop -12.9%. Long term they still suggest using any weakness in Intel as a buying opportunity and predicted very strong performance for Intel in the second half. Still the SOX was knocked for a loss with the knee jerk reaction to the downgrade. Intel's mid quarter update is scheduled for March-4th. The drop in the SOX was likely a one day event in front of the holiday weekend. It is still well above support at 495. Semiconductor Index - Daily Russell-2000 - Daily The Russell also dropped -1.28% to 585 but is still much better off than the SOX. The Russell came very close to its recent high at 601 on Wednesday and well over its 565 support low last week. I suspect the drop on Friday was simply profit taking in the high risk stocks before the weekend. In reality the majority of the profit taking on Friday was probably related to event risk over the long weekend. We had flights cancelled on Friday, evacuations of Senate offices and a post office closed because of a white powder. It is a wonder the selling was not any worse. The internals were negative but no worse than any normal profit taking day. In short there is nothing to suggest that Friday's drop was anything more than just a normal market cycle. We are still in buy the dip mode until something changes and I see nothing on the immediate horizon to make me change that opinion. I expect some increased volatility next week due to option expiration but nothing serious. However, the really big moves normally come when you least expect them so keep those stops in place! Enter Very Passively, Exit Very Aggressively! Jim Brown ********************* HPQ Earnings Play ********************* For those that took the HPQ earnings play on Tuesday night you know by now that the rules changed. The Greenspan rally sent HPQ soaring to $25 by noon Wednesday and our 40 cent option more than doubled with Dell's earnings coming out on Thursday and HPQ not due until next week. That is where the plan fell apart. For no particular reason HPQ suddenly pre-announced earnings during market hours at 2:30 Wednesday afternoon. Huh? In what was clearly a ploy to steal some of Dell's thunder they totally ruined any earnings strategy by any option trader playing their earnings cycle. Our play was immediately busted and the option values collapsed along with their stock price. Thank you Hewlett Packard! Remember to check Dell's offerings the next time you buy a computer printer. ************** FUTURES MARKET ************** Dollar Rallies, Equities and Metals Reverse Jonathan Levinson The US Dollar Index broke to multiyear lows with the release of negative economic data Friday morning, then reversed powerfully to close above Thursday's high. Metals and equities did the same thing in reverse, while treasuries and the CRB advanced fractionally. 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 Friday saw some dramatic moves in the US Dollar Index, with an upside surprise in the balance of trades data released at 8:30AM and a downside surprise in the 9:45(ish) preliminary Michigan Sentiment report. The Dollar Index got slammed to a new low for the move below former support of 84.80, but was bought back up to engulf yesterday's range, resulting in an upside key reversal. The daily print was a bullish doji hammer, and the only fly in ointment is the daily cycle downphase still in progress. The bounce remains corrective, even though the intraday action was certainly impulsive to the upside. The US Dollar Index closed at 85.53 and the CRB added .13 to close at 264.85 led by heating oil, crude oil and sugar futures. The bounce was sufficiently strong and sudden to reek of intervention, but the source was not as glaringly evident as usual. As CBS Marketwatch reported, "Rumors swirled through the markets that the European Central Bank or another European national bank had sold euros to drive the single currency lower. Gary Noone, a currency analyst at MMS in London, cited speculation that German banks were acting on behalf of the Bundesbank or European Central Bank. "I'm confident it was not the ECB," said Marc Chandler, an analyst at HSBC in New York. He said large traders sold as much as 1 billion euros through a German bank, thus fueling the rumors. The move had all the trademarks of central bank intervention, another analyst said. "This is way greater than any profit-taking when the currency drops 1 cent in less than 15 minutes," said Ashraf Laidi, chief currency analyst at MG Financial in New York." Either way, support under the US Dollar Index held on Friday. Whether it proves to be a significant bottom or merely the site of the latest deadcat bounce remains to be seen. Daily chart of April gold April gold and March silver both finished lower Friday after rocketing on the dollar weakness in the morning. The moves were key outside reversals for the metals, with Thursday's prints engulfed by the wide ranging declines. Gold printed a high of 418, silver at 6.73, lows of 407.10 and 6.465. Gold closed lower by 2.10 or .51% at 411, silver -.03 at 6.47. The daily cycle upphase in gold remains intact, and resistance remains 414, followed by 418-420, support at 407, 402 and 398. For the day, the XAU dropped .37% to 102.16, and the HUI lost .55% to close at 234.07. Daily chart of the ten year note yield The Fed announced a generous 8.5B in 5-day repos against no expiries on Friday, for a net addition in that amount. Perhaps assisted by that respectable amount of intervention money, treasuries advanced slightly, with ten year note yields (TNX) declining 1 basis point to 4.048%, a .25% move. The daily cycle downphase on the yield continues, but Friday's doji candle printed a higher low against Thursday's, which was higher than Wednesday. With support approaching above 3.92%, treasury bulls will need to pour on the steam if they wish to see that level seriously tested. Daily NQ candles The NQ got clocked for 13 or .87% to finish at 1487.50. It was a wide-ranging day in which the NQ tested its 50 day EMA and printed a low at 1479, one point below 1480 support. The move coincided with a 30 minute cycle downphase that bottomed toward the end of the session, and engulfed the week's prior prints with the lowest spike seen since last Friday. This occurred following the morning's spike to a lower high at 1512.50 as equities advanced against the falling dollar following the 9:45 Michigan Sentiment release. The daily cycle upphase faltered, with the Macd actually undrawing its prior buy signal, but the 10 day stochastic remains in a tentative upphase. Support below 1480 is 1460, with resistance at 1492, 1496, 1505, 1512 and 1518. The daily cycle bounce from last Friday's low set up a secondary rising trendline connecting the lows since Decemeber. A break below that level would establish the trendline as a possible hunchback head and shoulders, with this week's candles forming the right shoulder. The downside projection is complicated by the steep upward slope of the neckline but would be roughly 100 points below the break. 30 minute 20 day chart of the NQ The 30 minute NQ delivered a steep selloff following the bearish divergence discussed throughout the week. The string of sub-.55 put to call readings from Thursday continued for the first half hour on Friday with a .48 print, but that was last sub-.60 reading we saw for the day. Leveraged dip-buyers got crushed as the NQ took out a week's worth of lows and stayed there. That said, the 30 minute cycle put in a tentative bottom at a higher low, which should be enough to preserve the daily cycle upphase. But the violation of the lows that had held all week meant that only those who went long last Friday stayed in the green, and in my view, that qualifies this as one very difficult market to trade. So long as the rising trendline here remains intact, bulls should be OK, but beneath that, 1476 and then 1460 is all that remains between them and a test of the rising daily channel support line. Daily ES candles ES lost 5.50 or .48% to close at 1145.50, bouncing from a low of 1142 and failing at a high of 1156.75. As with the NQ, Friday's high was below that of Thursday, but the low did not violate the week's floor, retracing only Wednesday's gains. The Macd did not reverse its buy signal, but another down day on Tuesday would change that. With rising trendline support approaching within the ongoing daily cycle upphase, Friday's selling did not do significant technical damage and appears merely corrective. 1130-1136 is a confluence zone we remember too well from the prior week, and it's going to take some serious commitment from bears to bring it into the crosshairs. Resistance is at 1148- 1150, followed by 1154. 20 day 30 minute chart of the ES The weakness evident in the NQ is mostly absent from the ES. The selling on Friday was dramatic, but the overall pattern looks less ominous than it does on the NQ. With the 30 minute cycle bottoming at the close from a higher low, it will take a whipsaw on Tuesday to change the current picture of a corrective pullback within the as-yet unchallenged daily upphase. 150-tick ES Friday afternoon was a long study in boredom punctuated by brief bouts of fear. The rise from the intraday low felt corrective, like a bear flag, but it kept going. The chop was sufficient to confuse the intraday oscillators, and no clear reading is evident on this short cycle intraday timeframe. Note how the red channel is near the middle of the wider orange channel- just a sideways drift above the bottom of the 30 minute channel printed just after noon. Daily YM candles YM dropped 59 points or .55% to finish at 10627, resting right on the upper rising channel trendline. The Dow Transports closed lower by 1.14% at 2916.56, mirroring the strength in crude oil futures. Despite this weakness, the daily cycle upphase remains unchallenged and the selling appears so far corrective. 20 day 30 minute chart of the YM Same picture on the 30 minute YM: the index closed on rising support with a buy signal to provide comfort to bulls for the weekend. A break of that trendline must then run a gauntlet of confluence support below, but would be a clear sign of unexpected trouble for the bulls so far only hinted at by the weakness in the $TRAN. This week saw big moves in the US Dollar Index, metals and equities. Until Friday, the picture was bearish for the former and bullish for the latter. In all cases, the oscillators tell us that Friday's reversals were merely corrective, despite their apparent impulsiveness. Any continuation of Friday's moves when trading resumes on Tuesday would indicate that there was more to Friday's action that so far meets the eye, and we'll be watching the next support levels for metals and equities, resistance for the dollar. See you there. ******************** INDEX TRADER SUMMARY ******************** Oh Dell, my Bell By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – One reason cited for the Friday drop was the fall in the Consumer Sentiment numbers. While the link between this survey and actual consumer spending is weak, when a market has a sustained run like we've had - getting "overbought" – such negatives now provide reasons to book some profits and raise some cash. The Trade Deficit jump rained on the market too – a bigger than expected rise in imports and exports fell. Only the healthcare sector kept chugging along. Nasdaq finished the week with slight losses and the S&P (500) slightly higher. The Nasdaq 100 (NDX) looks vulnerable to falling under key support at 1450 and the Composite (COMPX) under 2000-2010. SPX support around 1120 and Dow 10,400 seem more likely to hold – there is however, a possible double top formed in the S&P 100 (OEX) and 500 (SPX). The potential for further declines looks greater than for a move to new highs. FRIDAY'S TRADING ACTIVITY – ImClone Systems was in the spotlight Friday, after the FDA approved its drug for the treatment of colon cancer. Shares of the stock (IMCL) were up sharply, ending at 43.79, a gain of nearly 40%. This after the stock was off sharply on Thursday, as the market reacted to a rumor of an FDA turndown for this drug. Ironically of course, this is the company that saw a sharp drop in their stock last year after it was known that the Food and Drug Administration indicted inadequate testing of IMCL's Erbitux drug – inside knowledge of this led to selling of a block of stock by the company founder and an alleged tip off to Martha Stewart. I doubt Martha is smiling about the irony of this. Dell was the even bigger stock story - the corp. of the hour - as their earnings came in better than expected, giving a boost to the market early. Dell's (DELL) Q4 revenues were up 8% and their earnings better than expected because of it. DELL finished at 34.55, up nearly 3%. Since we know that our economic recovery hangs on the consumer and the market fears any possible slow down in the longtime consumer spending strength is running up a lot of consumer debt, the only area that can take up the slack (of a consumer retrenchment) is business spending. And spending on computers and the like is a potential biggie. When the University of Michigan sentiment numbers showed a softening as reported during the session on Friday it was met by immediate selling. The U of M index fell sharply, to 93.1 from 103.8 in January, reversing most of the prior month's big increase in reported optimism. Consumers indicated that they were much more pessimistic about job growth in the future than the month before. The backdrop to this period was the DEMS bashing of the Administration's record in this area. Meanwhile, this week, the President was promising that there will be millions of new jobs created this year. Non-farm payroll growth is going to have to really ramp up from the 100,000 – 150,000 range to meet this expectation. This looks to be the number to watch in the future, bar none. So, says Chairman Greenspan too. Not just from my lowly perch on the scene here. Can Dell Computer and other manufacturers increase their output without taking on new workers? – up to a point they can. This has been the rub, the cleverness shown by business in getting more output without hiring – and, gasp, having to pay those health care benefits and all the rest. There is plenty to give the market pause here for the next few weeks and months, mostly on jobs and including the political – the threat of losing a very business friendly Administration. Another fly in the ointment is trade and the weakness of the dollar. The Euro is now getting close to $1.30, which would be an all-time high for Euroland. I don't think the market cares that much about this dollar weakness. The Administration doesn't give it much play in what they are staying up nights worrying about. But, there is some awareness that our trade deficits can't be out of sight and also be a good underpinning for stocks and a sustained advance in U.S. Equities. Of course, in Euro terms for example, stocks are pretty cheap. A major problem with our record spending on imports comes if prices of foreign goods start running up. On Friday the Labor Dept. reported the biggest jump in import prices in nearly a year. The deficit numbers themselves are staggering – the Commerce Dept. reported that the U.S. Trade deficit widened to $42.5 billion in December, well above the expectation for less than 40 billion. What's the deficit mean to us, to the market? Probably not much, IF the job growth picks up and we continue to get some pick up in earnings, especially tech. While these trends get clearer in the next few weeks, the trend can get choppy as the indices do some backing and filling – and, the technical picture suggests an overbought market as mentioned. OTHER MARKETS – The long bond (30 year Treasury) was 5/32nds higher to close at 106 23/32 to yield 4.92%. The 10-year Note over the week traded at prices that meant yields between 3.99 and 4.1%. No wonder the stock market is looking attractive, as annual equities appreciation is looking more like it's back for now to at least the long-term historical average of 10%. There was selling in the Euro in the early going in New York, and it fell a half percent against the dollar to close at 1.2744 – this after getting back to its all-time high around 1.29. Hey, those traders like to take profits too! The greenback was up against the yen, to close at 105.47. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily & Weekly charts: THE BIGGER PICTURE – Someone asked me what it means when someone says that an index is getting "overbought". It's a technical term without a precise meaning but there are some guidelines as to how to measure it. First, I need say that it's a relative term. Depends on the kinds of market. At the 90's peak, the market was quite overbought for a long time – so what! You couldn't short Index puts just on an arbitrary thing like a stochastic being above 90 or RSI above 80. However, based on the following kinds of factors, we can say that the market is more vulnerable to a correction or price drop. And, the market is a game of probabilities so to speak. (By the way, e-mail to me with questions related to such technical stuff – technical analysis – are used for possible answer in my Trader's Corner article) 200-day moving average The S&P is trading 10% above its 200-day moving average currently and it tends not to stay that far above this average. Either the index drops back, OR the Index goes sideways long enough for the Average to come closer. In an uptrend 5-6% is more common – such as would be the case if SPX was trading around 1090-1100. Oscillator type (technical) Indicators – When for example the 14-day RSI gets above 75-80, the market is said to be in an overbought situation and more likely to fall. Better is to use the longer term weekly RSI, as on the lower chart. On a 13-week timeframe, this market has come pretty far, without too much of a pullback. When you see this AND the Index is back up to an important prior peak – or series of peaks such as you see above (dashed level line) – it's possible trouble for the bulls. Some other technical patterns suggesting we may not get much higher soon is the possible double top and that the last high was on less "relative strength" – that is, the daily Relative Strength Index (RSI - upper chart) was at a lower level then it’s prior peak, contrary to what was happening with prices. S&P 100 Index (OEX) – Daily charts: The double top that has formed so far, was what I anticipated for this Index based on the bearish/price RSI divergence that had developed, the aforementioned overbought situation and my sentiment indicator – equities calls to puts daily volume ratio that got pretty extreme at the first price peak. See this on the left hand side. I look would for further weakness now if there is one or, better, a couple of consecutive closes below the 21-day moving average as seen on the right hand chart. The OEX's 21-day average is at 565 currently. The Indexes tend to trade within envelope lines or percentages above or below a moving average. When there is second drive to a top that lacks follow through AND the index then retreats to below the average (center line), there is usually a further drop – sometimes back to the lower envelope line. However, I always also look at the trend – in a strong uptrend, the surprises, and extreme moves, tend to come on the upside. OEX support looks to be in the 557 area. Given the double top, and the line of resistance above, I expect a retreat to lower support. If so, a drop to 560 or below, would break the steep up trendline. If in puts at 570 and above per my last commentary, I suggest staying put – no PUN intended. However, a new closing high would be my stop out/exit/liquidation/get-me-out trigger. OEX – Hourly: ON THE OTHER HAND – Taking a closer view of things, as in the hourly chart below, I've noted before the good tendency for reversals when both the 5 and 21-hour stochastics BOTH get to extremes – as noted by use of the arrows on the lower portion of the chart. There is also a bit different support (up) trendline that comes by use of the hourly chart – suggesting support just above 560. After the long weekend, based on the two stochastic models and especially if there is a further dip to the trendline but now below it, look for a 1-2 day rebound. The key factor will be if there is a new high made above 573. If there is a new daily closing high, a double top is no longer suggested. Stay tuned. If I wanted to hold positions, I would be in some puts, but looking to buy calls a bit lower (e.g., to 562) looking for a bounce in the short-term and trading the 1-3 day price swings. Nasdaq Composite Index (COMPX) – Daily & Hourly: The Composite (COMPX) turned lower even below the resistance I was anticipating in the 2100 area. Showing less strength than the S&P Indexes, it turned after forming an hourly down trendline drawn from the recent top. The small rebound that was then traced out off the Friday low, has the appearance of a bear flag or a pause, maybe about midway, in a downswing. A second downswing should carry back to around 2010. As with the S&P, the hourly oversold, suggests there may be some rally attempt first. Key resistance comes into play at the hourly down trendline currently intersecting around 2080. Absent a close above this level, the short-term trend is down. Nasdaq 100 (NDX) – Hourly: The hourly NDX chart is another way of looking at the same pattern as described above. Downside potential is to 1460 next. QQQ – Daily & Hourly: The Q's are in danger of breaking down below its uptrend channel that it has traced out since the August low – see the daily chart below. Meanwhile the shorter-term trend as shown in the hourly chart at on the upper chart is down. Downside potential is the lower trend channel boundary, currently intersecting around 37.7 at the green up arrow shown. If the lower trendline on the daily chart is not penetrated, especially on a closing basis, the up trend remains intact. The volume trend is still bullish – QQQ is not at an overbought extreme. More market action is needed to resolve this pattern. This resolution should be soon based on last week's minor reversal pattern of the move to a new (weekly) high followed by a new low for the week – but the lower trendline break has yet to come. Stay tuned. Good Trading Success! ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ************** Editor's Plays ************** Too Good Too Be True After two weeks of winning plays the streak was broken with last weeks MHK put play. We should have played calls instead. The change of the accounting period that sent MHK to just below $80 last Friday continued to provide lift and MHK soared to over $84 on Thursday. This was well over the suggested $80 drop point. Fortunately it was a quick and relatively painless exit that came at the open on Monday. MHK gapped up to $81.50 Monday morning and thus officially negating the play. I know a couple brave souls did think it was just a better entry and charged in at the higher level. That idea was shattered on the Wednesday bounce. Cheap Option Earnings Play AMAT announces earnings after the close on Wednesday and after the SOX dip on Friday I feel AMAT is primed to make a decent move regardless of what they announce. They gave guidance last quarter for an expected +20% order growth and revenue of $1.2-$1.3 billion. I was looking for an inexpensive stock with cheap options that was exactly between two option strikes. AMAT closed on Friday at $21.82. The March $22.50 call is only 95 cents and the March $20 put is only 55 cents. While I do not expect AMAT to disappoint, we all know how companies can report good earnings and still get trashed by traders. I am suggesting a potential March 20/22.50 strangle for $1.50 or a straight long call using the April option. If AMAT does not disappoint it still may not gain ground immediately. It is trading just above support at 21.25 and expectations for the chip sector are low. The market is expecting a rally into the April earnings cycle and that will not happen without chip stocks leading the way. AMAT is well off its highs and could rebound into a leadership position with positive earnings guidance. Aggressive Traders: Every play is always a risk and this one is no different. The primary option would be the March 22.50 call with the 22.50 put as insurance. That insurance put is well out of the money and you have to decide if you want to take the risk without the insurance or not. Buy March-$22.50 Call ANQ-CX currently $0.95 Buy March-$20.00 Put ANQ-OD currently $0.55 Conservative Traders: More conservative traders may want to use April options at $1.30 for the call and $0.80 for the put. If you use April options I would probably skip the put in favor of a simple stop loss in case things went bad. The time value will prevent a material drop in the price on the earnings announcement assuming they do not declare bankruptcy. Buy April $22.50 Call ANQ-DX currently $1.30 The April call will be the recommended option for this play. Our target would be an optimistic bounce to the January levels back near $24.50. I would sell the call on any dip below $21.00. AMAT Chart - Daily ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Look at the time! - J. Brown Wow! Would you believe it? February is half over and we're already six weeks into the new year. And what an eventful year it has been. On Wednesday the Dow Jones Industrials, the S&P 500 and the Wilshire 5000 index all hit new highs, surpassing January's peak. Not bad for a February, which is typically the third worst month of the year for stocks. We've just survived a very eventful Q4 earnings season, the two-day FOMC meeting, Greenspan's appearances before congress and a wardrobe malfunction during the Super Bowl. The only thing more surprising was the Comcast bid to buy Disney. Well that and the strength in this market. It seems like the market has become immune to headlines of "white powder" and other potential threats showing up in Washington post offices and congressional buildings. Not to mention air travel cancellations based on terrorist data. It's amazing how fast we adjust. Speaking of adjusting it looks like consumers have altered their confidence levels from irrationally exuberant in January back down to just really confident with the disappointing February Michigan sentiment numbers. Now if we could only get this growing economy to produce some jobs the forecast would look pretty bright. In the mean time Wall Street will have to settle with a strong corporate profit outlook, low interest rates, a federal reserve promising to be "patient" and a declining dollar that is benefiting multinational corporations based in the U.S. Sounds pretty good doesn't it? The only bad news seems to be a market rally that is finally looking a little tired (again), at least in a few indices. The NASDAQ and the Russell 2000 both produced lower highs on the Thursday-Friday decline this week. Joining them were nearly all the tech indices (Disk drives, hardware, software, internets, semiconductors) also producing lower highs. Throwing a shadow across the technical picture was the Dow Transports index, which is failing under its 50-dma after last week's big bounce. One of the recent winners, the drug sector, experienced some decent profit taking too. However, this last week was not without its bright spots. Oil service stocks continued to soar and natural gas issued rode their coattails. Hitting new highs were the DFI defense index and the IUX insurance index. Also noteworthy is the RLX retail index, which has maintained its recent gains and is approaching four-year highs. Next will bring a basketful of economic reports but the headline numbers will be the PPI on Thursday and the CPI on Friday. Plus, we still have earnings from retail titan Wal-Mart (WMT) on February 19th and semiconductor equipment giant Applied Materials (AMAT) on February 18th. Both companies have significant influence on their sectors and will affect investor confidence. Last week the second largest chip equipment maker Tokyo Electron quadrupled its estimates. I don't believe AMAT, the largest equipment maker, can produce similar guidance but they should have positive comments given the strength in the chip business. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10746 52-week Low : 7416 Current : 10627 Moving Averages: (Simple) 10-dma: 10581 50-dma: 10392 200-dma: 9577 S&P 500 ($SPX) 52-week High: 1158 52-week Low : 788 Current : 1145 Moving Averages: (Simple) 10-dma: 1141 50-dma: 1113 200-dma: 1030 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 795 Current : 1484 Moving Averages: (Simple) 10-dma: 1489 50-dma: 1476 200-dma: 1341 ----------------------------------------------------------------- Friday produced a decent bounce in the VXO but these indices remain low and are still no help in suggesting a change in direction. CBOE Market Volatility Index (VIX) = 15.58 +0.27 CBOE Mkt Volatility old VIX (VXO) = 15.63 +0.73 Nasdaq Volatility Index (VXN) = 24.14 +0.61 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 766,143 582,099 Equity Only 1.71 632,241 370,129 OEX 0.85 37,220 43,539 QQQ 2.78 27,000 75,155 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 77.2 + 0 Bull Confirmed NASDAQ-100 69.0 + 0 Bear Alert Dow Indust. 86.7 + 0 Bull Confirmed S&P 500 88.2 + 0 Bull Confirmed S&P 100 89.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.04 10-dma: 1.00 21-dma: 0.96 55-dma: 0.98 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1029 1013 Decliners 1813 2048 New Highs 311 158 New Lows 9 2 Up Volume 517M 481M Down Vol. 1077M 1260M Total Vol. 1619M 1753M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 02/10/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 No change for the Commercial traders. Small Traders have grown slightly more bullish. Commercials Long Short Net % Of OI 01/23/04 422,135 407,626 14,509 1.7% 01/27/04 417,089 410,930 6,159 0.7% 02/03/04 411,920 414,596 (2,676) (0.3%) 02/10/04 412,217 414,044 (1,827) (0.2%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 01/23/04 141,107 100,090 41,017 17.0% 01/27/04 143,089 87,828 55,261 23.9% 02/03/04 141,465 81,926 59,539 26.7% 02/10/04 143,496 80,362 63,134 28.2% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Commercials are starting to put some money to work and we're seeing another jump in contracts for both longs and shorts. Small traders have pared back their longs a bit and put some of that money on the short side. Commercials Long Short Net % Of OI 01/23/04 233,867 307,122 (73,255) (13.5%) 01/27/04 291,166 334,618 (43,452) ( 6.9%) 02/03/04 280,519 346,042 (65,523) (10.5%) 02/10/04 297,601 356,630 (59,029) ( 9.0%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 01/23/04 187,270 57,196 130,074 53.2% 01/27/04 154,485 60,556 93,929 43.7% 02/03/04 133,293 55,476 77,817 41.2% 02/10/04 110,480 58,428 52,052 30.8% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Not much change from the Commercial traders but they are a tiny bit more bullish here. Small Traders have significantly bumped up their long positions. Commercials Long Short Net % of OI 01/23/04 42,823 39,442 3,381 4.1% 01/27/04 43,704 40,951 2,753 3.3% 02/03/04 43,600 41,441 2,159 2.5% 02/10/04 44,406 40,439 3,967 4.7% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 01/23/04 9,180 11,371 (2,191) (10.7%) 01/27/04 10,137 10,715 ( 578) ( 2.8%) 02/03/04 8,907 13,729 (4,822) (21.3%) 02/10/04 9,906 13,018 (3,112) (13.6%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Not much change this week for Commercials. Small traders are slightly more bearish on the Dow. Commercials Long Short Net % of OI 01/23/04 16,403 9,252 7,151 27.9% 01/27/04 16,536 8,404 8,162 32.7% 02/03/04 17,765 9,619 8,146 29.7% 02/10/04 21,764 11,974 9,790 29.0% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 01/23/04 6,068 10,183 (4,115) (25.3%) 01/27/04 7,240 12,372 (5,132) (26.2%) 02/03/04 6,352 13,113 (6,761) (34.7%) 02/10/04 6,267 14,220 (7,953) (38.8%) Most bearish reading of the year: (10,136) - 12/16/03 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** Inside buying and selling Is insider buying or selling a good clue as to a stock's future price direction? I received a couple of questions regarding the buying or selling of stock by "insiders," which you and I would associate with corporate heads (CEO, COO, CFO or Directors), where their buying or selling of company stock may be a hint as to the future direction (up or down) the stock may be headed. The questions were largely in regards to an intra-day update at OptionInvestor.com regarding Winn Dixie Stores' (NYSE:WIN) $6.57 -0.3% Director John Dasburg purchasing 100,000 shares of WIN stock at a price range from $5.75-$5.90. Is this a sign that this troubled grocery retailer is about to see its stock turn around after its shares traded an all-time low of $5.69 this month (February 2004)? Let me first say that the reason I profiled a LEAPS call option play was that WIN's point and figure chart had achieved its bearish vertical count of $6.00. While we know that stocks can always exceed below a bearish vertical count, and sometimes not achieve the bearish vertical count, I thought these types of technicals, along with a sizeable insider purchase might be worth a small portion of an investor's capital. Mr. Dasburg seemed to think it was worth a $585,000.00 investment. I don't know what Mr. Dasburg's financial net worth is, and I wouldn't argue with another investor that the $585,000.00 investment Mr. Dasburg made might be considered "pocket change" to him, but I do believe that insider buying says that there is some type of confidence, that a profit will eventually be realized. I'm tempted to call Mr. Dasburg and ask him if he is a follower of point and figure charting. Perhaps Mr. Dasburg doesn't really have knowledge that Winn Dixie's stock fortunes are going to take a turn for the better, but feels the stock has fulfilled its longer-term destiny. Let me also say that over the years, it has been my observation that insider BUYING is more telling to a stock's future price direction than insider SELLING is. The reasons for this type of logic are rather simple. People usually buy stocks because they think will eventually generate a profit. While it has been argued that anytime an insider buys their company stock, it is based on some type of knowledge that the public (you and I) may not be privy too. It is for this reason that the Securities Exchange Commission put laws in place where insiders must file their buy/sell stock transactions. Why do insiders sell stock? There are two reasons I can think of. One is that they believe they have some type of factual knowledge, which may negatively impact price direction. A second reason is that the insider has too much of his/her financial net worth exposed to the company's stock, and for reasons of diversification, sells a portion of the stock in order to diversify their financial wealth. Enough with my logic. While I looked for current scientific evidence, or statistics on insider activity, I was unable to find any current data, which might give us a statistical probability of how accurate insider buying or selling is, when trying to predict the future direction of a stock's price. I did find a rather interesting 1993 study conducted by Aswath Damodaran and Crocker H. Liu from the Stern School of Business, New York University, where their research concluded that there is substantial evidence that insider trading is present around corporate announcements and that this insider trading is motivated by private information. If you are interested in reading this 41-page document, you can do so by copying the following link to an open browser. http://www.rfs.oupjournals.org/cgi/reprint/6/1/79.pdf In brief, the researches used data on equity real estate investment trusts (EREITs) and real estate operating companies, which offered the researches a rather clever, and unique set of data to truly test the hypothesis that insider information was influencing the buy/sell decisions of insiders. The reason ERIETs were used was that these ERIETs oftentimes used outside appraisers to revalue the properties that they own. Hmmmm.... if YOU were a director or officer of a EREIT and found out your portfolio of real estate holding rose or fell, might it not influence your buy/sell decisions? There would be little that I (Jeff Bailey) could say at this point to change any investor's mind regarding the importance or unimportance of insider buying and selling. For me, its just one of those "nice to know" investment tools, which may heighten a trader's, or investor's, bullish/bearish senses. Once alert to any unusual or notable insider activity, I would strongly suggest a trader/investor begin establishing support/resistance level, or taking notes as to bullish or bearish vertical counts, which may then become the building blocks for developing bullish (insider buying) or bearish (insider selling) scenarios. The thought behind establishing a resistance level in relation to insider buying is for the scenario ... if this insider knows something bullish about the future, thus the reason they're buying, the stock should break above resistance. The thought behind the establishing of a support level in relation to insider buying is for the scenario ... if this insider knows something bearish about the future, thus the reason they're selling, the stock should break below support. In the case of Winn Dixie (NYSE:WIN) it was the insider buying so near an all-time low (not a widely followed investment philosophy unless the buyer is really convinced more new lows will be found), which just happened to coincide with a bearish vertical count that caught my attention. How illegal is insider buying or selling? This is a great question, and one not easily answered. For me, I tend to think that it is rather hard to prove the illegality of insider trading, unless the insider activity is so blatantly obvious as it relates to the insider's past buying/selling habits, where the activity took place just prior to a rather large directional move in the stock's price. It is more often that insiders are charged with illegal insider trading when the insider has been selling prior to, or during a large decline, where the investing public eventually lost money, where monies are thought to not have been lost, if all had the same information. It is rare that an insider (officer or director of a company) is charged with illegal insider trading, when the stock price appreciates. I think this is rather unfair to the bearish investor/trader as I would think they should also be privy to any "insider information" that might harm their account. However, there seems to be little sympathy for bears that lose money. Where can you find recent filings of insider activity on a stock. You can get FREE insider buy/sell information at Yahoo's! finance section. http://finance.yahoo.com/ Once there, type in a stock symbol at the top of that page and press "Go" Once that page appears, look to the far left column of the page, go down to the "Ownership" section and click the "Insider Transaction" link. Hey! I see Mr. Auriana picked up another 5,000 shares of MEDIWARE (NASDAQ:MEDW) $14.30 +0.71% at $13.25 on January 26, 2004. That was just below his October 28, 2003 purchase of 5,000 shares from $14.00-$14.10. It was in a 12/07/03 Ask the Analyst column titled "Generating New Trading Ideas" that we discovered Mr. Auriana was a MEDIWARE director, where we used the SEC insider information to track Mr. Auriana's historical purchases. Jeff Bailey ************* COMING EVENTS ************* Symbol Co Date Comment ------------------------- MONDAY ------------------------------- NHY Norsk Hydro Mon, Feb 16 -----N/A----- SNY Sanofi Synthelabo Mon, Feb 16 -----N/A----- ------------------------- TUESDAY ------------------------------ ANF Abercrombie & Fitch CoTue, Feb 17 After the Bell A Agilent Technologies Tue, Feb 17 After the Bell AHM Amersham Tue, Feb 17 Before the Bell ACGL Arch Capital Group Tue, Feb 17 After the Bell ARW Arrow Electronics Tue, Feb 17 -----N/A----- BLDP Ballard Power Systems Tue, Feb 17 Before the Bell ITU Banco Itau Holding FinTue, Feb 17 -----N/A----- BRG BG Group Tue, Feb 17 Before the Bell COG Cabot Oil & Gas Corp Tue, Feb 17 After the Bell CNT CENTERPOINT PPTYS TR Tue, Feb 17 After the Bell CCRT CompuCredit Tue, Feb 17 After the Bell CMLS Cumulus Media Inc. Tue, Feb 17 After the Bell DE Deere & Co Tue, Feb 17 Before the Bell DDR DVLP DIVERSIFIED RLTY Tue, Feb 17 After the Bell DCEL Dobson Communications Tue, Feb 17 After the Bell FRT Fedl Rlty Inv Trust Tue, Feb 17 Before the Bell FHCC First Health Group Tue, Feb 17 -----N/A----- GPC Genuine Parts Tue, Feb 17 Before the Bell GLG Glamis Gold Ltd Tue, Feb 17 -----N/A----- GG Goldcorp Tue, Feb 17 After the Bell IMY Grupo IMSA, S.A. Tue, Feb 17 -----N/A----- HC Hanover Compressor Tue, Feb 17 Before the Bell IPXL Impax Laboratories Tue, Feb 17 Before the Bell KEG Key Energy Services Tue, Feb 17 -----N/A----- LPNT LifePoint Hospitals Tue, Feb 17 After the Bell MLS Mills Corp Tue, Feb 17 Before the Bell NFP National Finl Part Tue, Feb 17 After the Bell NTES Netease.com Inc Tue, Feb 17 After the Bell NTAP Network Appliance Tue, Feb 17 After the Bell OMC Omnicom Group Tue, Feb 17 Before the Bell QGENF Qiagen N.V. Tue, Feb 17 -----N/A----- RRI Reliant Resources Tue, Feb 17 Before the Bell RTRSY Reuters Group Tue, Feb 17 Before the Bell ROL Rollins, Inc. Tue, Feb 17 Before the Bell SKE Spinnaker Exploration Tue, Feb 17 Before the Bell TI Telecom Italia Tue, Feb 17 -----N/A----- TEVA Teva Pharmaceutical Tue, Feb 17 Before the Bell TRW TRW Auto Tue, Feb 17 Before the Bell UAG Un Auto Group Tue, Feb 17 -----N/A----- VAL Valspar Tue, Feb 17 Before the Bell YCC Yankee Candle Tue, Feb 17 After the Bell ZLC Zale Corp Tue, Feb 17 Before the Bell ------------------------ WEDNESDAY ----------------------------- ADCT ADC Wed, Feb 18 After the Bell AAP Advance Auto Parts Wed, Feb 18 After the Bell ALD Allied Capital Corp Wed, Feb 18 Before the Bell AMT American Tower Corp. Wed, Feb 18 Before the Bell AMAT Applied Materials Wed, Feb 18 -----N/A----- AHG Apria Healthcare GroupWed, Feb 18 -----N/A----- BHP BHP Billiton Ltd Wed, Feb 18 After the Bell VNT C. A. Nacl Tele de VenWed, Feb 18 After the Bell CSG Cadbury Schweppes Wed, Feb 18 Before the Bell CDX Catellus Development Wed, Feb 18 After the Bell CEC CEC Entertainment Wed, Feb 18 -----N/A----- CCI Crown Castle Intl Wed, Feb 18 After the Bell ELN Elan Corp, PLC Wed, Feb 18 Before the Bell EQY Equity One Wed, Feb 18 After the Bell EVG Evergreen Resources Wed, Feb 18 After the Bell INTU Intuit Wed, Feb 18 After the Bell JNY Jones Apparel Group Wed, Feb 18 Before the Bell KOSP Kos Pharmaceuticals Wed, Feb 18 Before the Bell LFG LandAmerica Finl GroupWed, Feb 18 After the Bell MGM Metro-Goldwyn-Mayer Wed, Feb 18 -----N/A----- OVTI Omnivision Tech Wed, Feb 18 After the Bell ROP Roper Industries Wed, Feb 18 After the Bell TEX Terex Corp Wed, Feb 18 After the Bell TBI Tom Brown Wed, Feb 18 After the Bell UNT Unit Wed, Feb 18 Before the Bell UHS Universal Health Serv Wed, Feb 18 After the Bell WCN Waste Connections Wed, Feb 18 After the Bell WRC Westport Resources Wed, Feb 18 Before the Bell WON Westwood One Wed, Feb 18 Before the Bell ------------------------- THUSDAY ----------------------------- ABB ABB Thu, Feb 19 -----N/A----- AMCR Amcor Limited Thu, Feb 19 -----N/A----- ANT Anteon Intl Corp Thu, Feb 19 Before the Bell BEAS BEA Systems Thu, Feb 19 After the Bell CBRL CBRL Group Thu, Feb 19 Before the Bell CHTR Charter Comm Thu, Feb 19 Before the Bell CIEN CIENA Corp Thu, Feb 19 Before the Bell CDE Coeur d'Alene Mines Thu, Feb 19 Before the Bell CTV CommScope Thu, Feb 19 After the Bell CEI Crescent Real Estate Thu, Feb 19 Before the Bell DADE Dade Behring Thu, Feb 19 After the Bell DCX DaimlerChrysler Thu, Feb 19 Before the Bell DEO Diageo PLC Thu, Feb 19 Before the Bell ELAB Eon Labs Thu, Feb 19 Before the Bell FE FirstEnergy Thu, Feb 19 -----N/A----- GENZ Genzyme Corp Thu, Feb 19 Before the Bell GTM GULFTERRA ENERGY PART Thu, Feb 19 Before the Bell HAN Hanson plc Thu, Feb 19 -----N/A----- HCC HCC Insurance HoldingsThu, Feb 19 After the Bell HPQ Hewlett-Packard Thu, Feb 19 After the Bell HRL Hormel Foods Corp Thu, Feb 19 Before the Bell IVX Ivax Thu, Feb 19 -----N/A----- KG King Pharmaceuticals Thu, Feb 19 Before the Bell NXTL Nextel Communications Thu, Feb 19 Before the Bell JWN Nordstrom Thu, Feb 19 After the Bell PNRA Panera Bread Thu, Feb 19 Before the Bell PDCO Patterson Dental Thu, Feb 19 Before the Bell PCG PG&E Corp Thu, Feb 19 Before the Bell PHCC PRIORITY HEALTHCARE Thu, Feb 19 Before the Bell Q Qwest Communications Thu, Feb 19 Before the Bell RSH RadioShack Corp Thu, Feb 19 Before the Bell RUK Reed Elsevier NV/Plc. Thu, Feb 19 -----N/A----- POOL SCP Pool Corp Thu, Feb 19 Before the Bell SLVN Sylvan Learning Sys Thu, Feb 19 Before the Bell TGT Target Corp Thu, Feb 19 Before the Bell TARO Taro Pharmaceutical Thu, Feb 19 -----N/A----- TEM Telefonica Moviles Thu, Feb 19 Before the Bell TP TPG NV Thu, Feb 19 Before the Bell USPI Un Surgical Part Intl Thu, Feb 19 After the Bell UVN Univision Comm Thu, Feb 19 After the Bell VCI Valassis Comm Thu, Feb 19 Before the Bell WMT Wal-Mart Stores Inc. Thu, Feb 19 Before the Bell WRE Wash Rl Est Inv Trst Thu, Feb 19 After the Bell WGR Western Gas Resources Thu, Feb 19 Before the Bell WMB Williams Companies IncThu, Feb 19 Before the Bell YRK York Intl Corp. Thu, Feb 19 Before the Bell ------------------------- FRIDAY ------------------------------- KNBWY Kirin Brewery Co Fri, Feb 20 -----N/A----- ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable NYB New York Community Bancorp4:3 Feb 17th Feb 18th SBGA Summit Bank Corp 3:2 Feb 17th Feb 18th BMS Bemis Co 2:1 Feb 17th Feb 18th MOG.A N/A 3:2 Feb 17th Feb 18th OVTI OmniVision Technologies 2:1 Feb 17th Feb 18th SNDK SanDisk Corp 2:1 Feb 18th Feb 19th CCBI Commercial Capital Bancorp4:3 Feb 20th Feb 23rd SLFI Sterling Finl Corp 5:4 Feb 20th Feb 23rd NATI National Instruments 3:2 Feb 20th Feb 23rd ACV Alberto-Culver Co 3:2 Feb 20th Feb 23rd AMG Affliated Managers Group 3:2 Feb 24th Feb 25th SAFM Sanderson Farms, Inc 3:2 Feb 26th Feb 27th ETN Eaton Corp 2:1 Feb 27th Mar 1st CNI Canadian National Railway 3:2 Feb 27th Mar 1st AME AMETEK Inc 2:1 Feb 27th Mar 1st -------------------------- Economic Reports This Week -------------------------- We still have a few earnings laggards but many on Wall Street consider earnings season over. Markets are closed on Monday. We'll have a number of economic reports to keep our interest throughout the week. ============================================================== -For- ---------------- Monday, 02/16/04 ---------------- -Markets Closed for President's Day- ----------------- Tuesday, 02/17/04 ----------------- NY Empire State Index (BB) Feb Forecast: 36.4 Previous: 39.2 Industrial Production (DM) Jan Forecast: 0.7% Previous: 0.1% Capacity Utilization (DM) Jan Forecast: 76.2% Previous: 75.8% ------------------- Wednesday, 02/18/04 ------------------- Housing Starts (BB) Jan Forecast: 2.000M Previous: 2.088M Building Permits (BB) Jan Forecast: 1.910M Previous: 1.953M ------------------ Thursday, 02/19/04 ------------------ Initial Claims (BB) 02/14 Forecast: N/A Previous: N/A PPI (BB) Jan Forecast: 0.3% Previous: 0.3% Core PPI (BB) Jan Forecast: 0.1% Previous: -0.1% Leading Indicators (DM) Jan Forecast: 0.5% Previous: 0.2% Philadelphia Fed (DM) Feb Forecast: 35.0 Previous: 38.8 Semi Book-to-Bill report ---------------- Friday, 02/20/04 ---------------- CPI (BB) Jan Forecast: 0.3% Previous: 0.2% Core CPI (BB) Jan Forecast: 0.1% Previous: 0.1% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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The Option Investor Newsletter Sunday 02-15-2004 Sunday 2 of 5 In Section Two: Watch List: A Well Rounded List Dropped Calls: ABK, TEVA Dropped Puts: None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** A Well Rounded List ___________________________________________________________________ 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. ___________________________________________________________________ Legg Mason - LM - close: 92.32 change: -0.72 WHAT TO WATCH: We're feeling pretty bullish on LM, which has helped lead the XBD broker-dealer index to new highs. The recent profit taking may be an entry point for new bullish positions. However, patient traders can wait for a deeper pull back toward the $90 level. A bounce from $90 would be a great entry on LM's next run at the $100 mark. Chart= --- Sealed Air Corp - SEE - close: 47.48 change: -1.22 WHAT TO WATCH: Ouch! The 2.5% drop on Friday not only cements SEE's position under its 200-dma but it also breaks through minor support at the $48.00 level. The longer-term bullish trend has clearly been broken and SEE's P&F chart is pointing toward a $41 price target. Bears can use Friday's drop as an entry point. The $41 P&F target coincides with support from June 2003. Chart= --- Netease.com - NTES - close: 40.83 change: -1.21 WHAT TO WATCH: Keep an eye on NTES this week. The company reports earnings after the close on Feb. 17th. Estimates are for 32 cents a share. The stock has been suffering lately with a couple of failed rallies under its 200-dma. Fortunately, it has also found support at $40.00, although this level looks vulnerable at the moment. Traders might consider capturing any post-earnings movement with a straddle at the $40 strikes but being a volatile Chinese Internet stock it could be an expensive strategy. Bears can wait for a breakdown under the $40 mark and target a drop to the $35 level. Take note of its P&F chart, which shows support near $38. Chart= --- Intel Corp - INTC - close: 30.14 change: -0.60 WHAT TO WATCH: Intel dropped 1.95% on Friday after Bank of America lowered their earnings estimates for the company. INTC has been testing support near $29.75 and a breakdown here would be very bad indeed for the semiconductor sector. Bears can look for a break under 29.75 and target a move to the 200-dma. Bulls need to be patient and look for INTC to trade back above the 31.50 level. Chart= --- OmniVision Technologies - OVTI - close: 48.53 change: +0.66 WHAT TO WATCH: OVTI, a maker of chips for camera phones, appears to have found a bottom at its 200-dma. Its MACD has just produced a new buy signal and a move over the 50.25-50.50 level might look like a bullish entry point. However, OVTI has earnings on Wednesday as well as a 2-for-1 stock split that takes affect on Wednesday. Also watch for P&F chart resistance near $52. Chart= --- UTStarcom Inc - UTSI - close: 33.73 change: -0.56 WHAT TO WATCH: This maker of IP switching solutions has seen its stock struggle this week under its 200-dma. The stock looks ready to test its September-October support near $31.00. A breakdown under this level and it could drop to $27.50. Technicals are mostly negative but volume has been light the last few sessions. Chart= --- Donaldson Co Inc - DCI - close: 50.60 change: -3.75 WHAT TO WATCH: Friday was not a good day for DCI shareholders. The company issued an earnings earning and the stock dropped 6.89% while breaking its 200-dma. Fortunately, the sell-off stalled just above its $50.00 level but this support may not hold. Traders have two alternatives here. DCI might produce a dead cat bounce. Look for a failed rally under $52.00 to consider new bearish positions. The alternative is to look for a drop under the $50 mark. DCI's P&F chart has produced an ugly bearish signal suggesting a $40 price target. Chart= ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Ambac Financial Group - ABK - close: 76.03 chg: -0.32 stop: 71.99 We're calling it quits on ABK. The stock is stuck in a consolidation pattern while the IUX insurance index has been hitting new highs. Fortunately, we can close ABK with a small move in our favor. We are still bullish on the insurance sector and suggest readers check out the new call on RNR. Picked on February 1 at $74.77 Change since picked: + 1.26 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 476 thousand Chart = --- Teva Pharmaceutical - TEVA - cls: 65.92 chng: -0.04 stop: 63.00 Despite moving consistently in the right direction, our TEVA play has been rather disappointing. The problem is that it just didn't move far enough fast enough to make it profitable ahead of earnings. The company is due to report its quarterly results on Tuesday and with Monday being a holiday, logic dictates that we drop the play this weekend. TEVA has been slowly eating away at the $66 resistance level over the past week, so any push above that level early on Tuesday can be used to achieve a more favorable exit. Picked on February 3rd at $64.66 Change since picked: +1.26 Earnings Date 2/17/04 (unconfirmed) Average Daily Volume = 2.62 mln Chart = PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. 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The Option Investor Newsletter Sunday 02-15-2004 Sunday 3 of 5 In Section Three: Current Calls: AHC, APOL, ATH, CDWC, DHR, DHI, GD, ESRX, IBM, PD New Calls: RNR Current Put Plays: AVID New Puts: MMM, SINA ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ****************** CURRENT CALL PLAYS ****************** Amerada Hess Corp. - AHC - close: 60.34 change: -0.28 stop: 57.00 Company Description: Amerada Hess Corporation explores for, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Equatorial Guinea, Gabon, Indonesia, Thailand, Azerbaijan, Algeria, Malaysia, Colombia and other countries. The company also manufactures, purchases, transports, trades and markets refined petroleum and other energy products. It owns 50% of a refinery joint venture in the United States Virgin Islands, as well as another refining facility, terminals and retail gasoline stations located on the east coast of the United States. Why we like it: In light of the weakness in the overall market on Friday, AHC actually held up fairly well. A part of the reason for that strength has to do with the fact that both the OIX and OSX indices held their ground fairly well, due in large part to the fact that Crude Oil continued its bullish climb, ending the session just below $35 per barrel. After last week's breakout over the $59 level, AHC showed a fair amount of follow-through, reaching almost to $61 before running into resistance. With historical resistance in the $61-62 area, we can now expect a mild pullback, which should set us up for new entries, so long as support is found at old resistance. A mild pullback should find support in the $58.75-59.00 area, while a deeper pullback could see AHC testing the $57.50-58.00 area. A solid rebound from either of these areas looks good for new entries, although we'd prefer to not see the stock much below $58, as we want to see support holding at the 20- dma ($57.85). Maintain stops at $57. Suggested Options: Shorter Term: With February options expiring next week, the March $60 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the May $65 Call, while traders looking for more immediate movement will want to use the May $60 strike. Our preferred option is the March $60 strike, which is at the money and should provide sufficient time for the play to move in our favor. ! Alert - February options expire next week! BUY CALL FEB-60 AHC-BL OI=2198 at $0.95 SL=0.50 BUY CALL MAR-60*AHC-CL OI= 567 at $1.95 SL=1.00 BUY CALL MAY-60 AHC-EL OI= 736 at $3.10 SL=1.50 BUY CALL MAY-65 AHC-EM OI= 294 at $1.25 SL=0.60 Annotated Chart of AHC: Picked on February 10th at $59.53 Change since picked: +0.81 Earnings Date 1/28/04 (confirmed) Average Daily Volume = 1.07 mln Chart = --- Apollo Group - APOL - close: 77.37 change: -1.09 stop: 73.50 Company Description: The Apollo Group provides higher education to working adults. The company operates through its subsidiaries, The University of Phoenix, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation and Western International University, Inc. APOL offers its programs and services at 58 campuses and 102 learning centers in 36 states, Puerto Rico, and Vancouver, British Columbia. Why we like it: In a valiant attempt to keep the bullish trend running hard, buyers ramped APOL all the way to $79.50 this morning, but the stock fell back to the $78 level almost as quickly as it rose. a big part of the weakness was probably due to the disappointing economic data that kept the market under pressure all the way to the closing bell. We've been wondering when APOL would begin its next round of profit taking that would bring it back down to support for another solid entry opportunity and it looks like that correction is underway. While there is some mild support at $77 and then again at $76, the first logical bounce point appears to be $75. That was the site of the previous high, which is currently reinforced by the 20-dma ($75.07) and a rebound from that area looks like a solid entry point. As noted previously, APOL is a bit extended up here and with daily Stochastics now dipping out of overbought territory, we would not recommend buying into strength early next week. Maintain stops at $73.50, which is solidly below the 30-dma ($73.96). Suggested Options: Shorter Term: The March $75 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. With February options expiring next week, there isn't enough time for February options to appreciate against the spectre of time decay. Longer Term: Aggressive longer-term traders can use the March $80 Call, while traders looking at a longer time horizon will want to use the May $80 strike. Our preferred option is the March $75 strike, which is both in the money and should provide sufficient time for the play to move in our favor. ! Alert - February options expire next week! BUY CALL FEB-75 OAQ-BO OI=1261 at $3.00 SL=1.50 BUY CALL MAR-75*OAQ-CO OI= 303 at $4.40 SL=2.75 BUY CALL MAR-80 OAQ-CP OI= 354 at $1.80 SL=0.90 BUY CALL MAY-80 OAQ-EP OI= 659 at $3.80 SL=2.25 Annotated Chart of APOL: Picked on February 1st at $77.44 Change since picked: -0.07 Earnings Date 12/18/03 (confirmed) Average Daily Volume = 1.75 mln Chart = --- Anthem, Inc. - ATH - close: 84.20 change: -0.33 stop: 81.00 Company Description: Anthem is a health benefits company serving over 7 million members, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado and Nevada. The company owns the exclusive right to market its products and services using the Blue Cross Blue Shield (BCBS) names in these states under license agreements with the Blue Cross Blue Shield Association. ATH's product portfolio includes a diversified mix of managed care products, including health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans, as well as traditional indemnity products. The company's managed care plans and products are designed to encourage providers and members to select cost-effective healthcare by utilizing the full range of its medical management services. Why we like it: Early strength in the Healthcare index (HMO.X) on Friday lent enough strength to our ATH play to push it through $85 and activate our entry trigger. Unfortunately, the stock couldn't hold altitude and fell back to consolidate for the remainder of the day near $84. Friday's price action doesn't change anything on the play -- ATH looks strong and poised to break out over $85 resistance. It just didn't succeed with the breakout on Friday. But now that our trigger has been activated, we can look to buy this pullback to support. There's a slight chance of a real rebound from the $84 level, but more realistically, ATH will probably have to pull back to strong support in the $82.50-83.00 area before continuing higher. Traders that would prefer to enter on strength should now wait until the stock pushes above Friday's $85.25 high (preferably on strong volume) before playing. Maintain stops at $81. Suggested Options: Shorter Term: The February $85 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. But with February expiration next Friday, the better choice appears to be the March $85 call Longer Term: Aggressive longer-term traders can use the March $90 Call, while traders looking for more insulation against time decay will want to use the June $90 strike. Our preferred option is the March $85 strike, which is at the money and should provide sufficient time for the play to move in our favor. ! Alert - February options expire next week! BUY CALL FEB-85 ATH-BQ OI=1631 at $0.75 SL=0.30 BUY CALL MAR-85*ATH-CQ OI=3117 at $2.60 SL=1.30 BUY CALL MAR-90 ATH-CR OI=1441 at $0.85 SL=0.40 BUY CALL JUN-90 ATH-FR OI= 122 at $2.65 SL=1.25 Annotated Chart of ATH: Picked on February 12th at $84.53 Change since picked: -0.33 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.54 mln Chart = --- CDW Corp. - CDWC - close: 67.29 change: -1.32 stop: 64.00 Company Description: CDW Corporation is a direct marketer of multi-brand computers and related technology products and services in the United States. The company offers multi-brand computers and related technology products, including hardware and peripherals, software, networking and communication products and accessories, for use with microcomputers based on a variety of operating platforms, including Microsoft, Apple, Linux, Novel, Oracle and others. CDWC offers more than 80,000 products that include a range of product types from manufacturers including Cisco, Hewlett-Packard, IBM, Intel, Microsoft, Sony and Toshiba. With this selection of products, the company can provide its customers with fully integrated, multi-branded technology solutions and the convenience of one-stop shopping. Why we like it: That doesn't look good at all, now does it? After holding near the $69 level for most of the week, shares of CDWC got smacked lower on Friday, losing nearly 2% on very light volume. If the stock breaks below the $67 level and violates the 30-dma ($66.79), we can expect a further decline down to test the $64 support level, which will likely coincide with the 50-dma. Fortunately, we initiated coverage of CDWC with an entry trigger of $70.25. Since that trigger was never activated, the play is more of an academic exercise right now. We need to see price over that trigger before considering entries into the play and if the $67 level breaks, then it is a safe bet that we'll have to drop the play, perhaps early next week. We'll stick with it for now, optimistically looking for a rebound from above $67 and then the breakout over $70 that we were expecting. Wait for the breakout over our trigger before initiating new positions. Suggested Options: Shorter Term: The February $70 Call will offer short-term traders the best return on an immediate move, as it will be at the money when the play is triggered. But with February options expiring next week the better choice is the March $70 Call. Longer Term: Aggressive longer-term traders can use the March $75 Call, while the more conservative approach will be to use the March $70 strike or even the April $75 strike. Our preferred option is the March $70 strike, which will be at the money when the play is triggered and should provide sufficient time for the play to move in our favor. ! Alert - February options expire next week! BUY CALL FEB-70 DWQ-BN OI=920 at $0.40 SL=0.00 BUY CALL MAR-70*DWQ-CN OI=440 at $1.70 SL=0.80 BUY CALL MAR-75 DWQ-CO OI=262 at $0.60 SL=0.30 BUY CALL APR-75 DWQ-DO OI= 82 at $1.15 SL=0.60 Annotated Chart of CDWC: Picked on February 8th at $69.13 Change since picked: -1.84 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 1.36 mln Chart = --- Danaher Corp - DHR - close: 92.44 cls: -1.89 stop: 89.85 *new* Company Description: Danaher, a leading industrial company, designs, manufactures, and markets innovative products, services and technologies with strong brand names and significant market positions. Driven by strong core values and a foundation provided by the Danaher Business System, Danaher's associates are pursuing a focused strategy aimed at creating a premier global enterprise. (source: company website) Why We Like It: A number of market pundits are still preaching that cyclicals are a good place to be with the Fed promising to be "patient". We still like the bullish trend in DHR but the weakness on Friday suggests it may see another test of its 50-dma. We would probably wait for the pull back and signs of a bounce before initiating any new positions, especially with DHR's technical oscillators rolling over (hinting at a pull back towards $90). If you prefer an alternative entry point would be to wait for a breakout over the $95.00 level. We are going to raise our stop to $89.85, just under the bottom of its rising channel and under its 50-dma. Suggested Options: Short-term traders can choose the March options and longer-term players might want to look at June or Septembers. Our preferred strikes would be the March calls with the March 90s as our favorite. ! Caution - February options EXPIRE on Friday! BUY CALL MAR 90*DHR-CR OI= 914 at $4.70 SL=2.35 BUY CALL MAR 95 DHR-CS OI= 989 at $1.95 SL=1.00 Annotated Chart: Picked on January 30 at $91.01 Change since picked: + 1.43 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 841 thousand Chart = --- D.R.Horton - DHI - close: 30.45 chg: -0.34 stop: 27.99 Company Description: Founded in 1978, D.R. Horton, Inc. is engaged in the construction and sale of high quality homes designed principally for the entry-level and first time move-up markets. D.R. Horton currently builds and sells homes in 20 states and 47 markets, with a geographic presence in the Midwest, Mid-Atlantic, Southeast, Southwest and Western regions of the United States. The Company also provides mortgage financing and title services for homebuyers through its mortgage and title subsidiaries. (source: company press release) Why We Like It: The market pull back on Friday is giving bulls another chance to pick an entry in DHI near the $30.00 level. Homebuilders should out perform the broader markets if investors come to believe that the Fed truly will be patient before raising rates again. The spring-summer home buying season is only a couple of months away and industry watchers are expecting another big year, especially with mortgage rates still near historic lows. We're starting to hear some analysts suggest the recent weakness in homebuilders as a buying opportunity for these relatively "cheap" growth stocks. DHI is only trading at nine times its estimated 2004 earnings and that leaves a lot of room for P/E expansion. In other news Standard & Poors raised its credit rating on DHI from "BB" to "BB+". In their press release S&P said, "The upgrade acknowledges Horton's commitment to an organic growth strategy and lower leverage levels over the past year, which has materially improved the company's financial profile. This well- diversified national homebuilder's above-average margins improved over the past year as well, and efforts to strengthen inventory turns continue." Suggested Options: Our preference is for the March and May calls. You may notice some odd option symbols as a result of the recent 3:2 stock split. We're going to pick the May 30s as our favorite. ! Caution - February options EXPIRE on Friday! BUY CALL MAR 25 DHI-CE OI= 177 at $5.70 SL=3.50 BUY CALL MAR 30 DHI-CF OI=1319 at $1.70 SL=0.85 BUY CALL MAY 30*DHI-EF OI= 759 at $2.65 SL=1.35 BUY CALL MAY 35 DHI-EG OI= 148 at $0.85 SL= -- Annotated Chart: Picked on February 08 at $30.00 Change since picked: + 0.45 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 2.4 million Chart = --- General Dynamics - GD - close: 95.94 chg: -0.28 stop: 92.00 Company Description: General Dynamics, headquartered in Falls Church, Va., employs approximately 67,600 people worldwide and had 2003 revenue of $16.6 billion. The company has leading market positions in land and amphibious combat systems, mission critical information systems and technologies, shipbuilding and marine systems, and business aviation. (source: company press release) Why We Like It: We're not going to give up yet. It's only been a week and we've seen GD spend it consolidating sideways while the broader markets shot higher only to come back down. Defense stocks have been investment winners this year as the market predicts that any future budget will see an increase in defense spending and wisely so given the White House's recent budget proposal. GD, as one of the lead defense contractors, will certainly see their share of a fatter defense budget. We like the stock at current levels, especially now that it has already retested previous resistance at $94 as new support. No change in our stop loss and our first target is $100 with a secondary target at $109-110. Currently GD's P&F chart is projecting at $125 price target. Suggested Options: Our preference is the March or May calls. We normally don't pick OTM calls as our favorite but we're going to bet on the May 100s. ! Caution - February options EXPIRE on Friday! BUY CALL MAR 90 GD-CR OI= 57 at $6.90 SL=5.00 BUY CALL MAR 95 GD-CS OI= 697 at $3.20 SL=1.85 BUY CALL MAR 100 GD-CT OI= 229 at $1.05 SL=0.60 BUY CALL MAY 95 GD-ES OI=1003 at $4.70 SL=2.70 BUY CALL MAY 100*GD-ET OI=1014 at $2.45 SL=1.25 Annotated Chart: Picked on February 08 at $96.88 Change since picked: - 0.94 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Express Scripts - ESRX - cls: 70.58 chng: +1.44 stop: 67.50*new* Company Description: Express Scripts provides health care management and administration services on behalf of clients that include health maintenance organizations, health insurers, third-party administrators, employers and union-sponsored benefit plans. The company's fully integrated pharmacy benefit management services include network claims processing, mail pharmacy services, benefit design consultation, drug utilization review, formulary management, disease management, medical information management services and informed decision counseling services through its Express Health Line division. Why we like it: It has been a nip and tuck battle between support and resistance, but it looks like the bulls are finally going to win. After more than 3 weeks of bouncing between $68 support and $71 resistance, ESRX caught a big bounce on Friday, in complete defiance of the broad market weakness. That 2% gain came on volume slightly ahead of the ADV and pushed the stock to its best close since late July. There is definitely some stiff resistance coming into play in the $71-72 area, but we're looking for the stock to really break out ahead of earnings, currently scheduled for February 24th. Hopefully, we've seen the last trip down to the $68 support level and the next move will be a solid breakout over that $71-72 resistance area. Should we get another dip back near the $68 level, it should still provide a viable entry into the play. Remember, our final target for the play is $75, which would be a retest of the June and July highs. Raise stops slightly to $67.50, which is below the 30-dma ($67.80), as well as the intraday lows of the past 2 weeks. Suggested Options: Shorter Term: With February options expiring next week, the March $70 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the March $75 Call. Our preferred option is the March $70 strike, which is just slightly out of the money and should provide sufficient time for the play to move in our favor. ! Alert - February options expire next week! BUY CALL FEB-70 XTQ-BN OI=3866 at $1.80 SL=0.90 BUY CALL MAR-70*XTQ-CN OI= 898 at $3.80 SL=2.25 BUY CALL MAR-75 XTQ-CO OI= 372 at $1.50 SL=0.75 Annotated Chart of ESRX: Picked on January 13th at $68.32 Change since picked: +2.26 Earnings Date 2/24/04 (confirmed) Average Daily Volume = 991 K Chart = --- Int'l Bus. Machines - IBM - cls: 99.71 chng: +0.41 stp: 96.50 Company Description: International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. Why we like it: Can you believe IBM still hasn't been able to break out over $100? Sure there have been a couple brief forays over that level, but the stock has been unable to sustain a bullish move and that's frustrating. But on the positive side, there's really been no discernible weakness either, as the stock continues to find solid support just above $98. That's a pretty tight range and with the intraday lows gradually moving higher, it feels like we're setting up for a breakout, and soon. Of course, we'll need to have market strength to support that breakout, and that certainly wasn't the environment found on Friday as investors were jittery ahead of the long weekend. In light of that weakness, it was encouraging to see Big Blue finish the day in the green, even if just fractionally. Dips and rebounds from above the $98 level still look good for new entry points, while momentum traders will still need to wait for a breakout over $100.50 before playing. Suggested Options: Shorter Term: The February $100 Call will offer short-term traders the best return on an immediate move, although with February options expiring next week, the better choice is the March $100 Call. Longer Term: Aggressive longer-term traders can use the April $105 Call, while the more conservative approach will be to use the April $100 strike. Our preferred option is the March $100 strike, which is currently at the money and should provide sufficient time for the play to move in our favor. ! Alert - February options expire next week! BUY CALL FEB-100 IBM-BT OI=27631 at $0.80 SL=0.40 BUY CALL MAR- 95 IBM-CS OI= 2547 at $5.70 SL=3.50 BUY CALL MAR-100*IBM-CT OI=13845 at $2.20 SL=1.00 BUY CALL APR-100 IBM-DT OI=20916 at $3.20 SL=1.50 BUY CALL APR-105 IBM-DA OI= 9337 at $1.30 SL=0.75 Annotated Chart of IBM: Picked on February 1st at $99.23 Change since picked: +0.48 Earnings Date 4/15/04 (unconfirmed) Average Daily Volume = 5.48 mln Chart = --- Phelps Dodge - PD - close: 81.87 chg: -2.38 stop: 78.00 Company Description: Phelps Dodge Corp. is the world's second-largest producer of copper, a world leader in the production of molybdenum, the largest producer of molybdenum-based chemicals and continuous- cast copper rod, and among the leading producers of magnet wire and carbon black. The company and its two divisions, Phelps Dodge Mining Co. and Phelps Dodge Industries, employ more than 13,000 people in 27 countries. (source: company press release) Why We Like It: Copper is at multi-year highs and demand is outstripping supply as the global economy heats up again. The goods news is that copper demand is expected to grow over the next two years keeping commodity prices for the metal strong, which translates into a better bottom line for PD. The rise in copper helped PD recently produce its first net profit since 2000 and rumors are growing that the company may reintroduce a cash dividend. Investors like PD because it's the second largest copper producer in the world and shares are very liquid compared to the stocks for many of its peers. We were triggered on February 11th when PD trade through our entry price at $80.51. PD quickly shot up to $86.51 on another spike in copper prices but the stock turned lower on profit taking. PD may see a retest of previous resistance at $80.00 as new support. We would suggest a bounce from $80 as a new entry point for bullish positions. Point-and-figure chart fans will note that PD's new vertical count points to a $115 price target. Suggested Options: We like the March and April strikes. If PD sees a dip the $75's would be a good play. We're going to suggest the March 80's. ! Caution - February options EXPIRE on Friday! BUY CALL MAR 80 PD-CP OI=1195 at $5.10 SL=2.90 BUY CALL MAR 85 PD-CQ OI= 863 at $2.60 SL=1.35 BUY CALL APR 80 PD-DP OI=1111 at $6.30 SL=4.00 BUY CALL APR 85 PD-DQ OI=1654 at $3.80 SL=1.90 Annotated Chart: Picked on February 11 at $80.51 Change since picked: + 1.36 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 1.6 million Chart = ************** NEW CALL PLAYS ************** Renaissancere Ltd - RNR - close: 50.83 chg: +0.74 stop: 49.50 Company Description: RenaissanceRe Holdings Ltd. is a global provider of reinsurance and insurance. The Company's business primarily consists of four business units: (1) Catastrophe Reinsurance; (2) Specialty Reinsurance; (3) Individual Risk business, which includes primary insurance and quota share reinsurance, and (4) Renaissance Underwriting Managers, which manages the Company's Property Catastrophe Joint Ventures, its Business Development Joint Ventures, and its Structured Reinsurance Products. (source: company press release) Why We Like It: We're bullish on the insurance sector, a group that has been consistently hitting new highs, and as a result we're closing the ABK call play and suggesting a new one in RNR. RNR should be attractive to investors because the company guided higher on earnings and said they expect a 20% ROI for 2004 back in early December. This is above their peer group's performance and management is showing they can deliver. Their recent earnings announcement in early February reported net income 31 cents above street estimates of $1.82. Revenues soared 30% to $351.8 million for the quarter. We also like RNR because shares are bouncing from support at $50.00 four weeks of consolidation. Most of its technical oscillators are bullish and its P&F chart points to a $69.00 price target. The recent bounce from support also allows for a tight stop to keep risk at a minimum. Our first target is the $55-56 region. We'll start the play with a stop loss at 49.50. Suggested Options: Option trading is a little light on RNR especially in the March strikes. We're going to suggest the April 50s as our favorite. BUY CALL MAR 50 RNR-CJ OI= 5 at $1.90 SL=1.00 BUY CALL APR 45 RNR-DI OI= 90 at $6.50 SL=4.00 BUY CALL APR 50 RNR-DJ OI=120 at $2.70 SL=1.35 BUY CALL APR 55 RNR-DK OI= 20 at $0.45 SL= -- Annotated chart: Picked on February 15 at $50.83 Change since picked: + 0.00 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Avid Technology - AVID - close: 41.25 chg: -0.23 stop: 45.50 Company Description: Avid Technology, Inc. is the world leader in digital nonlinear media creation, management and distribution solutions, enabling film, video, audio, animation, games, and broadcast news professionals to work more efficiently, productively and creatively. For more information about the company's Oscar., Grammy., and Emmy. award-winning products and services, please visit: www.avid.com. (source: company press release) Why We Like It: So far so good. We originally added AVID to the list after shares reacted negatively to its recent earnings report. The very high-volume sell-off broke through multiple levels of support including its 200-dma while also producing a very bearish P&F chart forecasting a price target in the mid-twenties. Shares of AVID have continued to falter and now we're seeing the simple 10-dma act as overhead pressure. The new short-term trend of lower lows is also good news for bears. Take note, AVID is approaching what could be support at the $40 level and the stock could see a bounce although we probably wouldn't expect a bounce higher than the 42-43 level and conservative traders can adjust their stops accordingly. Our current target is the $38 region. In the news, AVID announced that its VP and CFO will present at the Roth Capital Partners Growth Stock Conference on Tuesday, Feb. 17th. Suggested Options: February strikes don't have much time left so we're going to suggest the March or June puts. Our favorite is the March 45s. ! Caution - February options EXPIRE on Friday! BUY PUT MAR 45*AQI-OI OI=2196 at $5.40 SL=3.00 BUY PUT MAR 40 AQI-OH OI=3201 at $2.50 SL=1.25 BUY PUT JUN 45 AQI-RI OI= 649 at $7.50 SL=4.25 BUY PUT JUN 40 AQI-RH OI= 318 at $4.80 SL=2.65 Annotated chart: Picked on February 04 at $42.87 Change since picked: - 1.62 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 612 thousand Chart = ************* NEW PUT PLAYS ************* 3M Company - MMM - close: 79.68 change: -1.30 stop: 82.50 Company Description: Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Why we like it: Investors sold shares of MMM hard after their earnings report on January 20th an that started a downtrend from which the stock has not been able to escape. The first rebound took the stock back over the 50-dma, but strong selling pressure pushed the stock back below that average and all the way down to the $78 level before the next bounce commenced. That rebound stalled out last Thursday near the $81.50 level and MMM rolled over again, this time below the 50-dma (currently $82.14). With large cap stocks feeling the brunt of the selling pressure on Friday in response to the disappointing Consumer Sentiment reading, and MMM shed 1.6% on rising volume. That decline pushed the daily Stochastics down out of overbought territory and it looks like the stock is headed for new recent lows. Clearly initial support will be found near $78 and then there's potential support at $76. But we're looking for a more substantial decline down to the strong support near $73, also the site of the 200-dma ($72.83). MMM has yet to issue a PnF sell signal, but will do so on a trade at $77. That lack of a current sell signal makes this a more aggressive trade, but once that signal is issued, we'll have a tentative price target of $72, which lines up nicely with our $73 target for the play. We aren't going to use a trigger on the play, as entries near current levels or even on a slight bounce into the $80-81 area look favorable. More conservative traders will want to wait for the break under $77 before playing. Since we're playing aggressively here and not using an entry trigger, we are going to use a fairly tight stop at $82.50, which is just above the top of the most recent rebound, as well as the 50-dma. Suggested Options: Aggressive short-term traders can use the March 75 Put, while those with a more conservative approach will want to use the March 80 put. Our preferred option is the March 80 strike, as it provides more time until expiration. Note that with February expiration occurring next week, we have not listed any February strikes due to the rapid pace of time decay. BUY PUT MAR-80*MMM-OP OI=2523 at $2.35 SL=1.25 BUY PUT MAR-75 MMM-OO OI=2693 at $0.70 SL=0.30 Annotated Chart of MMM: Picked on February 15th at $79.68 Change since picked: +0.00 Earnings Date 1/20/04 (confirmed) Average Daily Volume = 2.76 mln Chart = --- Sina Corp - SINA - close: 40.45 change: -0.65 stop: 41.35 Company description: SINA Corporation (FKA: SINA.com) is a leading online media company and value-added information service ("VAS") provider for China and for global Chinese communities. With a branded network of localized web sites targeting Greater China and overseas Chinese, SINA operates three major business lines including SINA.com (online media and entertainment service), SINA Online (consumer fee-based online and wireless VAS) and SINA.net (small and medium-sized enterprises VAS), providing an array of services including online portals, premium email, wireless short messaging, virtual ISP, search, classified information, online games, e-commerce, e-learning and enterprise e-solutions. (source: company press release) Why We Like It: Right off the bat let us state that this is a little aggressive. SINA and the rest of the Chinese Internet stocks tend to be volatile and that can be painful to your trading account as well as your stomach. If you can't stand a lot of ups and downs look elsewhere. Now having said that shares of SINA have actually been pretty tame lately. That's probably bad news for bulls because SINA reported pretty strong earnings on Feb. 4th and the stock barely reacted. The short-term trend of lower highs is pushing SINA towards a breakdown under its 50-dma. The P&F chart is pointing to a $35 price target and we agree. Yet we're NOT going to open this play until SINA trades through our TRIGGER at $39.35, which happens to be where its 50-dma is sitting. If we are triggered we'll use a stop loss at $41.35. Suggested Options: Short-term traders can look over the March contracts, longer-term players can choose from Junes. Our favorite is the March 40 put. Remember, SINA needs to trade $39.35 first! BUY PUT MAR-40 NOQ-OH OI=3206 at $2.90 SL=1.50 BUY PUT MAR 35 NOQ-OG OI=6444 at $1.20 SL=0.60 Annotated Chart: Picked on February xx at $xx.xx Change since picked: + 0.00 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 238 thousand Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-15-2004 Sunday 4 of 5 In Section Four: Leaps: Emperor Greenspan Traders Corner: By Request - The Return Of The Quickie ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ***** LEAPS ***** Emperor Greenspan By Mark Phillips mphillips@OptionInvestor.com In watching Greenspan's testimony before Congress last week, I was struck by the similarity of what is happening now to stories I heard in grade school. We all heard tell of the way the sadistic Emperor Nero fiddled as Rome burned. Well, we're watching a similar conflagration in the fiscal bedrock of this country. The Bush administration and the Greenspan Fed have joined forces to destroy the one thing that has enabled the United States to prosper so strongly these past many years -- a strong dollar. The process has been so artfully crafted, it really is impressive. On one hand, we have officials from the Bush administration lie to us and tell us that the United States still has a strong dollar policy, which we later find out has nothing to do with the fiscal strength of the dollar, because the definition has been changed to something touchy-feely and meaningless about how other countries "feel" about the dollar. Well, guess what guys. If you take a look at the currency markets, I think its pretty clear that the international market thinks the dollar is in trouble, and rightly so. Treasury Secretary Snow continues to repeat that the U.S. has a strong dollar policy, while in the fine print telling us that the term "strong dollar policy" has been redefined. Will somebody please tell me how that isn't a blatant lie, both to the American people and to the global community? The other piece of the puzzle is the Greenspan Fed, printing dollars as fast as the press can turn them out and issuing the promise that interest rates can remain at multi-decade lows for a long time, more than likely into 2005. That promise implicitly guarantees that the dollar will continue to weaken throughout the remainder of this year. The great indignity is that the Maestro tells us that the weakening dollar is not a problem, while at the same time telling us that inflation is virtually non-existent and parroting the line that the lack of growth in employment is not a concern either. With the Euro once again testing its all-time highs near $1.29, the British Pound at 11-year highs near $1.89 and the U.S. Dollar trading near 10-year lows against the Canadian dollar, it is clear that the Currency Markets have figured out the game. There's already talk of the Euro rising into the $1.35-1.40 range later this year and rumblings of currency interventions by the European Central Banks to stem the fall of the dollar against their currencies. How well has that worked in Japan? After buying hundreds of billions of dollars to help hold its own currency down against the greenback, the dollar has fallen more than 22% against the Yen since late 2001 and remains pinned to critical support. If that support near 105 Yen/Dollar gives way, we could easily see a continued slide towards the 1995 lows near 80 Yen/Dollar. Not only would that be very bad for the Japanese export-driven economy, it would implicitly mean the dollar would have weakened significantly. Let's face it, if the dollar is weakening, then it will continue to cost more in dollars to buy the items that we all need to support our lifestyles. Manufactured products are not becoming more expensive due to Asia's continue export of deflation through cheap production of all the widgets we buy, due to extremely cheap labor costs. That dynamic will cause the domestic manufacturing industry to continue to atrophy. As those jobs continue to migrate overseas, it will leave greater numbers of Americans either chronically unemployed or under-employed, working for lower wages in jobs that are below their level of expertise. With 70% of our GDP produced through individual consumers' expenditures, and employment failing to expand at anything close to the 250-300K new monthly jobs needed to signal sustainable economic expansion, it is only a matter of time before consumer spending once again begins to contract and we head back into a recessionary environment. If the dollar's slide is not arrested before that point, we'll also be confronted with an inflationary problem, that while masked due to the way important items such as housing, energy, health care and food (all significantly higher in price over the past year) are excluded from the official government statistics, is very real right now. Of course, central to this very issue is the issue of the U.S. government's twin deficits -- trade and budget, each of which are pushing the $500 billion annual level, and that's without factoring in increased costs for our activities in Iraq and Afghanistan. The budget deficit must be funded by selling bonds, which are increasingly being absorbed by foreigners. What happens when those foreigners determine that they've got enough U.S. debt, which is continuing to decrease in value as the dollar continues to fall? I'll let you ponder that one on your own, but it isn't an answer that will make Uncle Alan very happy. The trade deficit only exacerbates this problem, as it erodes confidence in the underlying currency if there is a chronic excessively large imbalance. The key level cited where this becomes a problem is at 5% of GDP. Well, with total GDP coming in at a $10.6 trillion annual pace and based on the final GDP figure of $489 billion for 2003, that puts the trade deficit at 4.6% of GDP. We're right there up against the 5% barrier, but not over it yet. But with the trade deficit projected to continue growing (rising energy costs and greater amounts of cheap imported manufactured goods aren't going to help), any slowdown or contraction will put as at or potentially over the magic 5% barrier. As we've noted in the past, the rise in the U.S. equity markets since last April has been nothing more than a direct effect of the dollar weakening. Price the DOW or S&P 500 in terms of the Euro (or any one of a dozen foreign currencies), gold or even crude oil and the market has been flat to down since tax day last year. While this illusion of rising stocks has fooled most in the U.S., it hasn't been lost on foreign investors, as their investments have not risen at all in terms of their local currency. Should the U.S. markets turn south, we can expect those foreign investors to make a hasty retreat, rather than suffer the double indignity of a loss on the equity position, as well as a continued loss due to the unfavorable exchange rate from holding dollar-denominated assets. As we've discussed in the past, the bull market in gold is so far confined to the U.S. market, as the rise in gold has simply been a reflection of the decline in the dollar. Gold has not broken above important resistance against most foreign currencies. But let's look forward a bit and ask what will happen if other countries join Japan's effort to try to hold their local currencies down against the falling dollar. The way this is implemented is through printing up excess currency (the Euro in terms of the European Union) with which to buy dollars. In theory, this increases the supply of their own currency and decreases the supply of dollars in the open market. The problem with the theory is that when countries engage in this form of currency manipulation, they are doing it to make their own exports more affordable on the open market. With the United States still the consumer for the rest of the world, everyone will be vying for our consumer dollars. It doesn't take a great imagination to see where we quickly devolve into an environment where everyone is trying to devalue their currency against the dollar so as to stimulate their own exports. While it would likely achieve the desired near-term effect, it has a much more significant long-term effect. What is the one and only form of currency that can't be devalued by printing up more? If you guessed gold, then pat yourself on the back. If more and more of the fiat currencies are being printed against a relatively fixed amount of global gold, then there's no alternative but for gold to rise. That is the dynamic we've seen over the past couple years, with gold rising in terms of dollars but not really gaining any traction against other currencies. When gold does break out to new highs against the Canadian dollar, the Aussie dollar, the Euro and the Pound, it will be in response to this process of competitive devaluations and we'll know that the next leg of the gold bull market is underway. That will be the phase that will see significant appreciation against all major currencies and I expect we will see the 1980 highs in the price of gold exceeded. If I could give investors one piece of advice for the long term, it would be to accumulate gold and gold stocks whenever weakness appears on profit taking like we saw during the month of January. This is not a trade, it is a long-term investment, one that I suspect will continue to appreciate through the end of the current decade. We do long-term trading here in the LEAPS column, but the time horizon I'm speaking of above is even longer than the 2-3 year time horizon that LEAPS allow us to capitalize on. So why have I spent so much time discussing such a long-term picture today instead of focusing on what is currently happening in the equity market? There are a couple of reasons. The first is that nobody else seems to be giving much attention to this long-term view that I think is very important for us to understand. It gives us a view of the overall landscape so that we can put the current equity rally in its proper context -- that of a bear-market rally (a powerful one to be sure, but still a bear-market rally), which will end with the bear coming back with a vengeance. It could be next month, 6 months from now or next year, but I have no doubt he'll be back and I expect him to be in a very nasty mood when he returns. For now, we continue to play the game as the near-term market action dictates. That means for the most part, we have to give the nod to the bulls. The VIX remains anemic near the 15 level and bullish percent readings are still pegged to the ceiling. Every dip is still being aggressively bought and we can expect last week's new high in the DOW to give the bulls renewed enthusiasm to continue pressing towards a retest of the all-time highs near 11,700. That said, the action in the DOW Transports over the past few weeks is a big warning flag, at least if you happen to follow Dow Theory. What we have from last week's failed rally is a new high for the DOW, but a much lower high in the Transports -- that's a classic non-confirmation of the Dow's new high and it potentially has bearish implications. The other warning sign is the continued loss of leadership by the Semiconductor stocks, with the SOX rolling over near $530 last week and breaking back under the 50- dma. This bodes well for our bearish play on the SMH, especially with bearish Stochastics divergence on the weekly chart. And guess what. If the SOX is unable to get over its 2002 highs near $640 before really rolling over, we'll have strong bearish divergence on the monthly chart as well. There are some slight hints of developing weakness, but for the most part the market is still quite healthy and bullish. That means we can selectively play the downside, but the bulk of our efforts must continue to be directed to the long side until such time as we have more evidence that the sellers are starting to throw their weight around, creating important technical breakdowns, a rising VIX, bearish bullish percent readings and a deterioration of the incessantly and excessively bullish market sentiment. Portfolio: SBUX - Like the Energizer Bunny, SBUX just keeps going and going. It's starting to sound like a broken record, but the stock notched a new all-time high again last Wednesday at $37.40. Those of you that are nervous enough to harvest gains near the $37 level have gotten ample opportunity to do so, and I'm going to quit mentioning it. Our objective now is for a run at $40, which will be our final target for the play if it is reached before our stop is triggered. Speaking of our stop, I just can't see the logic in keeping a loose stop on the play anymore. If SBUX starts to retrace, I think we want to be taken out early. So I'm raising the stop to $35.00 this weekend, which is at the bottom of the late January gap and below all of the intraday lows since then. SMH - Considering the strength of the rebound in the SMH a week ago Friday, last week's action in the Semiconductor sector has me feeling a bit better. The SMH just barely managed to hang onto the 50-dma as tenuous support throughout most of the week, with price vacillating around the $42 level. It looked like that support was failing early in the day, but the afternoon rebound had price moving back near both the 50-dma and $42 at the close. At the same time, daily Stochastics moved into overbought and are now turning bearish. Also, the bearish cross we were looking for on the weekly Stochastics has arrived and that means we finally have confirmed bearish divergence. That's right, this play just might work out after all. We'll have to see what unfolds in the shortened week ahead, but I think we may have seen the highs for this cycle and it should only be a matter of time before the $40 support gives way and we can target lower levels from there. Maintain stops at $46 for now. NEM - Just like clockwork, fears of interest rate hikes in the near term gave us a bounce in the dollar, which was just the ticket to cause a vicious bout of selling in the precious metals sector. But Easy Al's testimony before Congress last week put things back in perspective. The dollar is weak and that's ok. Interest rates are going to stay low for a long while and we can expect further weakness from the dollar. Gold bugs rejoiced and gold rebounded solidly above $400 and gold stocks are looking better once again. Dollar manipulation gave us our entry point and now we're headed back up. It may not be a straight path, but it does appear we're on the way. After trading down very near the $40 support level, NEM surged as high as $45.75 before being stalled at the 50-dma. If you missed your entry point on the dip near $40, any return trip to $42 or below looks good for entries. Note that weekly Stochastics have nearly reached oversold, and when they turn upwards, it will be time for the gold bulls to party again. Remember, we have VERY strong support in the $38-40 area, with the 200-dma rising to reinforce that support, currently at $38.91. Maintain stops at $37. Watch List: QCOM - With the rebound in the NASDAQ -- weak as it is -- it comes as no great surprise to see QCOM rebounding back towards the $60 resistance level. This leaves us in the same position we've been in for weeks. QCOM looks strong, but is also bumping up against some strong resistance after a powerful run off the late-November lows. Risk seems to difficult to manage here, so rather than take the chance, we'll still patiently wait for that elusive pullback to support in the $53-54 area, which is just below the 50-dma. Maybe if we're lucky we can get a pullback just under the 50-dma (like what happened in late November) before the next upward leg gets underway. HD - As expected, HD kept creeping higher last week and Wednesday's broad market surge was enough to push the stock up into our targeted entry zone. Finally, HD moves into the Portfolio. SNDK - If that's all the bounce the bulls can give to SNDK, then I'd say it's a safe bet we're going to see lower levels ahead before the real buying opportunity shows up. Of course, if I had seen the initial breakdown coming, we'd be enjoying a nice bearish play right now. But since se missed that, buying the bottom of this decline looks not only viable, but like a very attractive play on a risk-reward basis. Price action is stalling below the 10-dma near $53 and unless buyers can get the stock over the 200- dma ($57.46) and soon, I suspect a break to new recent lows. Of course, that $25 PnF price target is still in the back of my mind, but I think we'll see support hold at a higher level than that. The 2 most likely targets are the 62% retracement of last year's gains near $43.75 and then the 75% retracement, which comes in near $35. I favor an entry at the lower level, as it is right at the bottom of the $35-40 consolidation area where I tried to buy the stock on the way up the first time. Maybe the second time's a charm? At any rate, we'll leave the play on hold for now, but that gives you an idea of the action points we'll be watching for. CHK - Uh-oh! Is this train going to leave the station without us? Despite a lack of a rebound in the price of Natural Gas, CHK has put in an impressive rebound off the $11.75 level, after just missing our entry point. In hindsight, I probably should have just said "good enough" and taken the entry late last week, but I didn't. Looking at the weekly Stochastics, we can see the first hint of perhaps a short-cycle bullish reversal and if gas prices start to recover, shares of CHK could really get moving to the upside. Let's look for one more downward cycle to let us into the play. I'll loosen up the entry point a bit to $11.50-12.00, as that area ought to hold as firm support now, especially with the 200-dma now solidly over $11.00. MLNM - What was that I said last week about having to re-evaluate if MLNM broke out over the December highs? Well, it's time to take that second look because the stock followed through on Wednesday's rally with a strong breakout on Thursday to end above $19.50 for the first time since the first half of 2002. Not only is this a solid breakout (on heavy volume), but it represents a breakout of the bullish triangle that has been building for close to a year. In short, this breakout looks significant. Once again, being a bit too stingy with the entry point cost us, as now we've got to target a pullback to a higher level. I like the $18 level as firm support now, as it is the top of the broken triangle. Just to be on the safe side, let's use an entry zone of $18.00-18.50. Note that with the higher entry point, we've also raised the strike prices, both for the long position and the protective put. Radar Screen: WMB - As expected, there's not a lot to report on WMB this week. Price is just barely holding above the 100-dma, but with bearish Stochastics divergence clearly in place on the weekly chart and weekly Stochastics now in an established downswing, we need to exercise patience. The most likely entry will come near the $9 level, which coincides nicely with the 200-dma. My primary hesitation in adding WMB to the Watch List with an actual entry target is the unknown influence of this Stochastics downstroke. We don't know how far it will carry, so it makes more sense to wait until it begins to bottom in/near oversold territory. LUV - The Transports finally bounced last week, but we can't really call that slight upward wiggle in shares so LUV to be a rebound, can we? As if to drive the point home, Friday's sharp drop pushed the daily Stochastics back into a bearish descent and the weekly hasn't even hinted at an emergence from oversold territory. With major support in the $11.50-12.00 area and the current vertical count on the PnF chart pointing to the $10 level, we're clearly early for a bottom-fishing expedition. But a bit more downside will make the prospects for a bullish play look very attractive. APA - I guess it figures as soon as I start eyeing some Natural gas plays that the stocks in question catch a strong bounce. I still really like shares of APA as a long-term bullish play, but not at current levels. The stock has had an impressive run from the lows in November 2002 and I think we're due for a bit more downside before a buyable bottom will be in place. The 38% retracement from the 11/02 lows, strong support and the 200-dma all line up in the $35 area and that looks like a good place to stake a position. For now, we wait, but APA could easily make it onto the Watch List over the next couple weeks, depending on how quickly that weekly Stochastics makes it back to oversold territory. Closing Thoughts: As you can see by my commentary above, I really see no significant change in the investing landscape. The bulls are continuing to buy the dips and we can't discount the importance of last week's new high in the DOW. We are almost out of catalysts until the next round of earnings pre-announcements arrives, but I just don't see what is going to change the overall bullish trend in price and sentiment that has prevailed over the past year. Steady as she goes, and we'll continue to pick our plays very carefully. Admin Notes: Believe it or not, I finally finished the modifications to the LEAPS Portfolio and I think you'll like the result. Unfortunately, I just wasn't able to squeeze in a column showing the percentage return, like we have always shown in the past. I'm not sure if this is critical or not, so I'll leave it up to you. Take a look at the new format and drop me a line with your likes, dislikes and suggestions. That's the only way it's going to get better! I'm hoping that the new Portfolio playlist is rather self- explanatory, but I recognize that I may be too close to things and need a fresh perspective. So I'll start with a quick primer on what we're looking at. As you can see, we still have the Calls on the top and the Puts on the bottom, with a block of data for each open play. You can see fields for Symbol, Date Entered, Entry Price, which are the selected LEAPS, along with their price at entry and the current price of each LEAP. What's new (as shown on the NEM and HD plays is that we've included the use of insurance options as we've been discussing for the past several weeks. That's where the final row and final column in each block of data come in. The final row shows the symbol used for the insurance put on the call plays (we'll use an insurance call on the put plays), along with its price at entry, current price and change since the position was opened. The final column takes into account the change in the insurance option and combines that value with the change in the price of the LEAPS to produce a true total gain or loss for the position. Note that negative numbers are shown in parenthesis, rather than with a minus sign. So on the NEM play below, you can see the Change w/ Insurance column for the 2005 LEAP shows a loss of $0.10, displayed as ($0.10). I'm sure there are things that will need to be clarified as we move forward, but this should be a good starting point. As I said before, don't hesitate to drop me a line if you have any questions. Have a great week! Mark LEAPS Portfolio Current Open Plays LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: QCOM 11/16/03 $53-54 JAN-2005 $ 55 ZLU-AK CC JAN-2005 $ 50 ZLU-AJ JAN-2006 $ 55 WLU-AK CC JAN-2006 $ 50 WLU-AJ PP APR-2004 $ 50 AAO-PJ SNDK 12/21/03 HOLD JAN-2005 $ 45 XWS-AK CC JAN-2005 $ 40 XWS-AJ JAN-2006 $ 45 YSD-AK CC JAN-2006 $ 40 YSD-AJ CHK 02/01/04 $11.50-12.00 JAN-2005 $ 12 XHV-AV CC JAN-2005 $ 10 XHV-AB JAN-2006 $ 12 WZY-AV CC JAN-2006 $ 10 WZY-AB PP APR-2004 $ 10 CHK-SB MLNM 02/01/04 $18.00-18.50 JAN-2005 $ 20 XVX-AD CC JAN-2005 $ 17 XVX-AW JAN-2006 $ 20 YDA-AD CC JAN-2006 $ 17 YDA-AW PP MAY-2004 $ 17 QMN-QW PUTS: None New Portfolio Plays HD - The Home Depot $36.17 **Put Play** It really seemed like HD was never going to gain enough altitude to allow us into this bearish play, but Wednesday's euphoric ramp on the heels of Greenspan's testimony before Congress did the trick. The stock rallied up to $37.01 and then dropped back fractionally to close at $36.83. Sure it was a bit on the aggressive side, entering so close to the day's high, but the stock satisfied our criteria for an entry in the $37-38 area and with our new approach of buying insurance options, we can take positions with greater confidence. What happens if HD just blasts off from here and hits $45? We're protected by our short-term call. In this case we're using the May $40 call, which cost us a whopping $0.55. Alright, let's recap why we like this play. HD has been a chronic under-performer over the past year, and all the rally from its early 2003 lows has served to accomplish is push the stock back up to the top of its multi-year descending channel, currently just a few pennies below $38. HD has ceased to be a growth stock and this can be seen in the slowing revenue growth and narrowing profit margins. LOW has become the growth stock in the sector, but both companies are ceasing to be growth stocks as they near market saturation. That means in addition to pressure from the technical side, HD will be under pressure from the fundamental side, as valuations naturally compress. Weekly Stochastics produced bearish divergence between the May and November peaks and the way things are going, even if HD did managed to briefly poke above the November highs to touch $38, we're probably going to be confronted a second instance of bearish divergence. For the past 2 months, the stock has been gradually drifting higher in what looks an awful lot like a bear flag. What we want to see is a break down out of that pattern and then a break below the $33 support from December and then continuation down to the $31 level. This is a pivotal level for two reasons. First, a trade at $31 will create a new PnF Sell signal and open the door to lower levels. But the other important aspect of the $31 level is that it is the 38% retracement off the January 2003 low. It will likely provide initial support, but if broken, it will make possible a decline to the 50% ($29) and 62% ($27) levels. But we should wait for some favorable price action to unfold before putting too much effort into prognosticating how far it can fall. The numbers above simply give us a rough roadmap. HD has given us our desired entry point and now we wait for gravity to take over. We'll set a fairly liberal stop on the play, as we don't want to choke it off prematurely. Set initial stops at $41, which is well above the top of the channel, solidly above the 200-week moving average ($39.80) and above next major historical resistance in the $40.50 area. Simply put, if our stop is taken out, then we'll know there's something very wrong. BUY LEAP JAN-2005 $35 ZHD-MG $2.95 BUY LEAP JAN-2006 $35 WHD-MG $4.50 BUY CALL MAY-2004 $40 HD -EH $0.55 **Protective Call** New Watchlist Plays None Drops None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** By Request - The Return Of The Quickie By Mike Parnos, Investing With Attitude What a Valentine’s Day! The market hasn’t sent us any Valentines – at least not lately. Maybe ours got lost in the mail. No flowers or candy either. Well, it’s a fickle love-hate relationship with the market – depending on the closing prices of the day and the positions held. Of course, without a willing partner, the position possibilities are rather limited. The Good News & The Bad News We haven’t done quickies in a while. So, I’ve scoured the landscape and come up with a few potential (and, of course, hypothetical) positions that could possibly put a few bucks in our hypothetical pockets. The good news is that there are only four trading days left to expiration. The bad news is that the prices below will be less accurate because of the additional day of time erosion. The suggestions below are based on the belief that the market will churn over the next week and, hopefully, end up right back where they started. If you don’t believe that, then these trades are not for you. _____________________________________________________________ FEBRUARY QUICKIES SPX – Iron Condor – 1145.81 Sell 10 Feb. SPX 1130 puts and buy 10 1120 puts for a credit of about $.70. Sell 10 Feb. SPX 1160 calls and buy 10 1170 calls for a credit of about $.90. Net credit of about $1.60. Max. profit range of 1130 to 1160 = 30 points. There are only three trading days left for the SPX – plus the dreaded Friday morning opening calculation. RMBS – Iron Condor – 25.53 Sell 10 Feb. RMBS $20 puts and buy 10 $15 puts for a credit of about $.50. Sell 10 Feb. RMBS $30 calls and buy 10 $35 calls for a credit of about $.50. Net credit of about $1.00. Max profit range of $20 to $30 = $10. As a result of RMBS tanking earlier last week, there is still a lot of premium in the options. CELG – Siamese Condor -- $40.18 Sell 10 Feb. CELG $40 puts and 10 $40 calls for a credit of about $1.95. Buy 10 Feb. CELG $30 puts and 10 $50 calls for a debit of $.10. Net credit of about $1.85. Profit range of $38.15 to $41.85. The closer CELG finishes to $40, the more we make. Bailout points are the same as the profit range. The market makes could play a role here by keeping CELG near the $40 strike. IBM – Siamese Condor -- $99.71 Sell 10 Feb. IBM $100 puts and 10 $100 calls for a credit of about $1.70 Buy 10 Feb. IBM $90 puts and 10 $110 calls for a debit of $.10. Net credit of about $1.60. Profit range (and bailout points) of $98.40 and $101.60. The closer IBM finishes to $100, the more we make. Hopefully, the market makers will help us out here and keep IBM near $100. _____________________________________________________________ QQQ ITM Strangle Adjustment As I wrote in Thursday’s column, on Friday we were ready to roll out the $36 puts. We got lucky. We bought back the February $36 put for a dime in the morning, as planned. But then, the QQQs started to move down and we were able to sell the March $37 put for $1.05. The result was a credit of $.95 – as opposed to an anticipated credit of $.80. The rollout of the Feb. $34 call was another story. The market has, in recent days, dipped down and popped back up during the course of the day. On Friday, the range was relatively small, so we settled for buying back the Feb. $34 call for $3.00 and selling the March $34 call for $3.20 – resulting in a credit of $.20. Our total credit for the March rollout was $1.15 ($1,150). The only problem is that we now have a $3.00 difference between the $37 put and the $34 call. At some point, it would be wise to narrow that to one or two dollars. If you choose to do it this month, you could roll the Feb. $34 calls to the March $35 calls at a cost of about $.65. That would leave you with a net credit of $.30 for the March rollout. ______________________________________________________________ Those Friendly Reminders February is a five-week option cycle. The premiums quoted on the above educational trades are based on Friday's closing bid/ask prices. On Tuesday the premiums will likely be different due to market movement and/or the additional three days of time erosion. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you’re a trader. And make sure you thoroughly know the intricacies of a strategy before you trade. The money you save may be your own. __________________________________________________________ FEBRUARY CPTI POSITIONS Position #1 -- OEX – Credit Spread Boogie – 565.92 With the market trending, let's not fight the tape. We're going to establish a bull put spread, take in some premium, and ride the wave into shore. We sold 3 OEX February 565 puts, and bought 3 OEX February 540 puts for a total credit of $6.80 (x 3 contracts = $2,040). This strategy requires $25 x 3 contracts = $7,500. We're only trading three contracts because, if the market reverses significantly, it might become necessary to close the bull put spread and establish a bear call spread that may be wider and would require more contracts. We need to preserve our money for a potential maintenance requirement. Position #2 – MNX (mini NDX index) – Iron Condor – 148.45 This index seems substantially safer than the highly volatile NDX. We going put on an Iron Condor with limited exposure. Because the market is trending, we skewed the strike prices slightly so that we have a little more cushion on the upside. The market turned down and that “skew” might come back to bit us in the ass, but the market popped up off the 50-day MA. We sold 10 MNX February 165 calls and bought 10 MNX February 170 calls for a net credit of $.40 x 10 contracts = $400. Then we sold 20 MNX February 150 puts and bought 20 MNX February 147.50 puts for a net credit of $.50 x 20 contracts = $1,000. Our total credit of $1,400. Our maximum profit range is 150 to 165. Our exposure is only $3,600 ($5,000 less $1,400). Maximum profit: $1,400. Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $102.16 This is a low risk and relatively safe play with a wide range. We sold 10 XAU February 90 puts and bought 10 XAU February 85 puts for a net credit of about $.70 (x 10 contracts = $700). Then we sold 10 XAU February 110 calls and bought 10 XAU February 115 calls for a net credit of about $.45 (x 10 contracts = $450). Our maximum profit range is $90 to $110 – a 20-point range. Our exposure is $3,850 ($5,000 less $1,150). Maximum profit: $1,150. Position #4 – OSX (Oil Service Sector Index) - $105.82 We reduced our potential income by expanding our safety range. We sold 10 OSX February 105 calls and bought 10 OSX February 110 calls for a net credit of about $.45. Then we sold 10 OSX February 90 puts and bought 10 OSX February 85 puts for a net credit of about $.75. Our total net credit of about $1.20 (x 10 = $1,200). Our maximum profit range is 90 to 105 – a 15-point range. Our exposure is $3,800 ($5,000 less $1,200). Maximum profit: $1,200. OSX has violated our short $105 call. The bear call spread could now be closed for $1.70 – resulting in a loss of $1.00 ($1,000). For our CPTI portfolio, I’m going to hang on for a little while longer and give the OSX a chance to come back down. If anyone is actually in the trade, it might be wiser to take your loss at this point – or roll out (see suggestions below). Remember, the CPTI portfolio is playing with “hypothetical” dollars. What are some possible adjustments for OSX? At this writing, if you believe OSX will stall at this level or pull back, you could: a) close the Feb. $105/$110 call spread for $1.70 and sell a March $105/$110 call spread for $2.00. That would buy another month of time and put another $.25 in your pocket. b) close the Feb. $105/$110 call spread for $1.70 and put on a new March Iron Condor of March $110/$115 BCS and $100/$95 BPS for a total credit of about $1.90. That would give you some upside room and an additional $.25 of premium for your pocket. _____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.94 We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the 2005 QQQ $29 calls for a total debit of $14,300. We're going to make money by selling near term puts and calls every month. Here's what we've done so far: October: Oct. $33 puts and Oct. $34 calls – credit of $1,900. November: Nov. $34 puts and calls – credit of $1,150. December: Dec. $34 puts and calls – credit of $1,500. January: Jan. $34 puts and calls – credit of $850. February: Feb. $34 calls and $36 puts – credit of $750. March: Mar. $34 calls and $37 puts – credit of $1,150. Total credit: $7,300. Note: We haven't included any of the proceeds from this long term QQQ ITM Strangle in our profit calculations. It's a bonus! And it's a great cash flow generating strategy. ZERO-PLUS Strategy. OEX – 565.92 In the Feb. 8th column, I outlined a strategy based on an initial investment of $100,000. $74,000 was spent on zero coupon bonds that will mature in seven years at a value of $100,000. In essence, that guarantees the principal $100,000 investment. We are trading the remaining $26,000 to generate a “risk free” return on the original investment. We bought 3 OEX Jan. 2006 540 calls at a cost of $24,300. Then we sold 3 OEX March 2004 585 calls for a credit of $930. We also put on a bull put spread, selling three OEX March 535 puts an buying three OEX March 525 puts for a credit of $330. Our total credit is $1,260. Our current cash position is $2,960 ($1,260 plus the unused $1,700). This one is going to drag on for seven years, so get comfortable. We’re going to make some money. ________________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page and click on "Traders Corner." They're waiting for you 24/7. _________________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _________________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Sunday 02-15-2004 Sunday 5 of 5 In Section Five: Covered Calls: A System For Success! Naked Puts: Learning The Trade Spreads/Straddles/Combos: Another Dip In The Road To Recovery ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************* COVERED CALLS ************* Trading Basics: A System For Success! By Mark Wnetrzak When it comes to trading, emotion is a "capital killer" that can only be conquered by a systematic approach to position management. In trading more than any other vocation, we rely heavily on our instincts, either through unrealistic goals or expectations, based on our previous experiences. Rather than reasoning in the present, we often rely on acquired associations (the past) or idealistic perceptions (the future) to help make difficult judgments. With that in mind, it's easy to see why the ability to remain focused on the present, evaluating each play based on its current merits and assessing the trade as it unfolds, is one of the most difficult skills for a person to develop. Before a trader can learn to make timely and effective adjustments, he must understand his personality and know his individual faults and limitations. The stock market has a unique way of reflecting the fundamental emotions and character of humans and in addition to offering great financial rewards, it can also help us to know ourselves better. Before entering a position, you must recognize the anxiety it might produce and be prepared to base your trading decisions on sound ideas rather than impulses or "gut" reactions. Taking the emotion out of trading can be very difficult, however it is achievable if you have the discipline to develop and follow a trading plan. Just as a business plan describes in detail the establishment and development of a potential venture, a trading plan outlines the proposed structure for participation in the financial markets. In most venues, there are two primary requirements of a trading plan: a method of price prediction which signals if and when to initiate a position and a money management system which prescribes the maximum amount of portfolio capital to risk on any one trade. Strategies that involve stocks or options must also specify when to take profits and cut losses, and include a means to correctly position trading stops. Since the optimal management of winning plays is the key to success in any probabilities-based strategy, special attention must be given to techniques that protect gains once they are achieved. While adhering to the parameters of the trading plan is paramount to consistent profits, the system must also remain flexible in the sense that it should be constantly evaluated so as to improve its overall performance. Some of the basic guidelines for developing such a plan include: 1. Learn to limit losses and your profits will grow. The science of successful trading is less dependent on making profits, but rather on avoiding losses. The need to restrict draw-downs and prevent losing plays from significantly eroding capital should be a dominant theme in any type of trading. To reduce losses, most traders prefer to use a specific plan with pre-determined exits. Stop-loss orders can be used to remove urgent decision-making from the equation and "trailing" stops can be utilized to follow a position into greater profits while protecting for unexpected reversals. In addition, not only must losses be limited, but all positions must be reviewed regularly to ensure that the total portfolio risk is kept to a practical minimum. 2. Know your limits before you open any position! Just as setting stops on each individual trade is an absolute must, a "maximum allowable loss" must be considered when managing portfolio positions. The rule is simple: Never trade with more money than you can reasonably afford to lose and always maintain adequate cash reserves. When assessing position size and cash or collateral requirements, ensure that funds for active trades are not co-mingled with capital for other functions. It is also very important to set a "loss limit" at the beginning of each month or option expiration period. When this level is reached, trading should be halted for the duration of that period. Of course, if your losses are consistently higher than your gains, stop trading! Step back and take a few days off. When you are ready to try again, evaluate your current trading strategies and review the most recent plays (to learn from your mistakes), then move on. When you begin to make money, put some of the profits in a small reserve account, just in case there are unexpected developments in the future. 3. Know your strategy, its advantages and weaknesses and only use techniques that fit your trading style and portfolio outlook. You can't make good decisions without knowing the mechanics of a specific technique and the best traders are those who are acutely aware of the shortcomings of their particular approach. Focus on positions whose trading characteristics match your ability and risk-reward attitude. Don't use complex or advanced methods simply because they are intriguing. In addition, if the strategy is not appropriate for your financial condition, it should be avoided, regardless of how attractive it appears. Obviously every strategy has risk. The key is to develop an arsenal of profitable methods, use only those that fit the market outlook, and manage each play for maximum potential. 4. Learn the art of patience: timing is the key to success! The opening trade is of particular importance. It deserves your best analysis and judgment and it is vital to assess all potential trades well in advance. In the case of stocks, the issue should be one you want to own and the price must be technically favorable with minimal downside risk. Correctly timing the initial purchase requires a thorough knowledge of charting techniques and market trends. The entire process is something a trader must completely understand because a successful exit is by and large the product of a proper entry. Those who are guilty of "over-trading" should assess their past results in this careless practice whenever they are tempted to participate in such activities. Trade Wisely! ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF PREVIOUS CANDIDATES The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield MXT 5.89 5.90 FEB 5.00 1.05 0.16* 7.2% ZIXI 10.93 12.91 FEB 10.00 1.80 0.87* 6.9% CNET 10.75 10.24 FEB 10.00 1.15 0.40* 6.0% TKLC 20.35 19.94 FEB 20.00 1.20 0.79 6.0% NEOL 18.73 20.08 FEB 17.50 1.70 0.47* 5.9% SIRI 3.15 2.96 FEB 2.50 0.80 0.15* 5.7% AFFX 31.23 32.65 FEB 30.00 2.35 1.12* 5.6% VXGN 10.92 10.42 FEB 10.00 1.40 0.48* 5.5% ALVR 13.09 14.16 FEB 12.50 1.45 0.86* 5.4% AKSY 10.87 10.02 FEB 10.00 1.10 0.23* 5.1% ZIXI 14.67 12.91 FEB 12.50 2.70 0.53* 4.8% NANO 20.14 19.59 FEB 17.50 3.20 0.56* 4.8% IPXL 18.90 22.22 FEB 17.50 1.95 0.55* 4.7% NEOL 19.10 20.08 FEB 17.50 2.30 0.70* 4.5% TIVO 10.75 11.25 FEB 10.00 1.05 0.30* 4.5% CREE 20.49 24.00 FEB 20.00 1.65 1.16* 4.5% GSF 27.77 29.09 FEB 27.50 1.35 1.08* 4.4% PAAS 16.10 17.55 FEB 15.00 1.95 0.85* 4.4% CHINA 11.05 11.40 FEB 10.00 1.60 0.55* 4.2% NANX 12.39 11.85 FEB 10.00 2.90 0.51* 3.9% CLTK 8.54 8.27 FEB 7.50 1.35 0.31* 3.9% ATSN 10.90 10.67 FEB 10.00 1.30 0.40* 3.7% SEAC 18.40 19.46 FEB 17.50 1.75 0.85* 3.7% WEBM 10.93 10.69 FEB 10.00 1.25 0.32* 3.6% LTXX 19.12 16.80 FEB 17.50 2.45 0.13 0.7% SCMR 5.63 4.76 FEB 5.00 0.80 -0.07 0.0% DDS 17.53 17.00 FEB 17.50 0.45 -0.08 0.0% ACLS 12.60 11.75 FEB 12.50 0.65 -0.20 0.0% ASIA 7.80 7.78 MAR 7.50 0.90 0.60* 6.3% TIBX 7.95 8.08 MAR 7.50 0.90 0.45* 4.6% CNET 10.72 10.24 MAR 10.00 1.30 0.58* 4.5% * Stock price is above the sold strike price. Editor's Comments: A Key Moment For The Major Averages? Both the DJ-30 and S&P-500 could be forming a double-top while the NASDAQ continues to flounder above its 50-day MA. With one week left in the February options series, it's time to evaluate your current positions and act accordingly. Sycamore Networks (NASDAQ:SCMR) disappointed investors with their earnings this week and will be shown closed next week. Both Dillard's (NYSE: DDS) and Axcelis Tech (NASDAQ:ACLS) will be on the early-exit watch-list as well as the $12.50 position for Zix (NASDAQ:ZIXI). (It just depends on whether you want to chance owning the stock after expiration.) Previously Closed: Centillum Communications (NASDAQ:CTLM), Ceina (NASDAQ:CIEN), and Adaptec (NASDAQ:ADPT) -- which has rebounded nicely for those still looking to exit. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW COVERED-CALL CANDIDATES Sequenced by Target Yield (monthly basis) __________________________________________________________________ Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield KERX 12.62 MAR 12.50 QKY CV 1.30 13 11.32 34 9.3% MWY 5.04 MAR 5.00 MWY CA 0.50 578 4.54 34 9.1% GMST 7.67 MAR 7.50 QLF CU 0.80 2498 6.87 34 8.2% NEOL 20.08 MAR 17.50 UOE CW 3.60 381 16.48 34 5.5% CRYP 16.38 MAR 15.00 UFW CC 2.00 31 14.38 34 3.9% SKX 11.38 MAR 10.00 SKX CB 1.75 87 9.63 34 3.4% PMSI 5.72 MAR 5.00 POQ CA 0.90 128 4.82 34 3.3% Legend (for play description below) LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). __________________________________________________________________ KERX - Keryx $12.62 *** On The Move! *** Keryx Biopharmaceuticals (NASDAQ:KERX) is engaged in acquiring, developing and commercializing pharmaceutical products for the treatment of serious, life-threatening diseases, including cancer and diabetes. In August 2002, the company commenced a corporate restructuring and refocused its efforts mainly on the acquisition of additional clinical stage compounds and on the development of its lead compound, KRX-101, which has completed a European Phase II trial. Keryx has obtained a license to develop sulodexide (KRX-101) to treat diabetic nephropathy and other conditions. Keryx has been rocketing higher on extremely heavy volume since it announced in January that it had entered into an agreement to acquire ACCESS Oncology. The stock made another strong move on Friday, well above its announced private placement of about $32 million through the sale of shares of its common stock at $10 per share. Investors looking for a speculative drug stock can use this position to target-shoot an entry point in Keryx near $11. MAR-12.50 QKY CV LB=1.30 OI=13 CB=11.32 DE=34 TY=9.3% __________________________________________________________________ MWY - Midway Games $5.04 *** On The Mend? *** Midway Games (NYSE:MWY) develops and publishes interactive entertainment software. The company and its predecessors have published over 400 titles. It develops and publishes games for play on new-generation home videogame consoles and hand-held game platforms, including Sony's PlayStation 2, Microsoft's Xbox and Nintendo's GameCube and Game Boy Advance. Midway's titles include game genres such as action, adventure, driving, extreme sports, fighting, role-playing, sports and strategy. Mortal Kombat is the company's most profitable videogame franchise, with over 20 million units sold. Midway Games has also licensed two television and two film adaptations of Mortal Kombat and granted merchandising licenses for toys, clothing, comic books, strategy guides and other product lines. With earnings due on February 25, investors can use this position speculate on the strength of Midway Games' recent recovery. MAR-5.00 MWY CA LB=0.50 OI=578 CB=4.54 DE=34 TY=9.1% __________________________________________________________________ GMST - Gemstar-TV Guide $7.67 *** Comcast Deal! *** Gemstar-TV Guide International (GMST) develops, licenses, markets and distributes technologies, products and services targeted at the television guidance and home entertainment needs of consumers worldwide. Their businesses include technology and intellectual property development and licensing; interactive program guide products and services, and TV media and publishing properties. The company is organized into three principal business sectors: the Technology and Licensing Sector; the Interactive Platform Sector; and the Media and Services Sector. Gemstar-TV Guide's primary business strategy is to develop a comprehensive solution to the television guidance needs of consumers worldwide. Its electronic program guidance technologies are incorporated into television sets, VCRs, hard disk recorders, DVD recorders and cable and satellite television set-top boxes. Gemstar-TV Guide exploded higher on Wednesday after the company struck a licensing and development deal with Comcast (NASDAQ:CMCSA). We simply favor the bullish chart, which shows Gemstar-TV Guide breaking out of a trading range near $5 on heavy volume. A reasonable risk-reward scenario for investors who wouldn't mind owning the stock at a basis near $6.90. MAR-7.50 QLF CU LB=0.80 OI=2498 CB=6.87 DE=34 TY=8.2% __________________________________________________________________ NEOL - NeoPharm $20.08 *** Rally Mode! *** NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. The firm has built its drug portfolio based on its novel proprietary technology platforms, the proprietary NeoLipid liposomal drug delivery system and a tumor-targeting toxin platform. NeoPharm has several promising compounds in various stages of development. The company's lead compound is IL13-PE38, a tumor-targeting toxin being developed as a treatment for glioblastoma multiforme, a deadly form of brain cancer. NeoPharm has formed a trading channel over the last 10 months and the stock has now made another new 52-week high. Investors who believe the bullish trend will continue for another 5 weeks can speculate on that outcome with this position. MAR-17.50 UOE CW LB=3.60 OI=381 CB=16.48 DE=34 TY=5.5% __________________________________________________________________ CRYP - CryptoLogic $16.38 *** Internet Gaming Stock *** CryptoLogic (NASDAQ:CRYP) is an Internet software and services provider (ISP) with proprietary e-commerce enabling technology that permits financial transactions over the Internet. They are focused on providing proprietary software technology and related support services to the Internet gaming industry. Through its wholly owned subsidiary, WagerLogic, the company licenses and supports proprietary Internet-based software package to licensees worldwide. These licensees include a number of brand name and land-based gaming organizations in the United Kingdom that hold Internet gaming licenses issued by governments where their online operations are domiciled. Quarterly earnings are due on 2/26/04 and traders can use this position to speculate on the announcement. MAR-15.00 UFW CC LB=2.00 OI=31 CB=14.38 DE=34 TY=3.9% __________________________________________________________________ SKX - Skechers $11.38 *** New Board Member? *** Skechers U.S.A. (NYSE:SKX) designs and markets a collection of branded contemporary footwear for men, women and children, as well as a designer line for women branded separately. Their product line consists of over 1,500 styles that are organized in 11 distinct collections. Skechers pursues its retail store strategy through 3 integrated retail formats, the concept store, the factory outlet store and the warehouse outlet store. The Warehouse Outlet Stores enable the company to liquidate excess merchandise, discontinued lines and odd-size inventory. As of December 31, 2002, Skechers operated 34 concept stores, 34 factory outlet stores and 23 warehouse outlet stores in the United States. Did the stock really rally over $3 because of a new board member? Maybe. In any case, we simply favor the bullish break-out from a year-long base on heavy volume that suggests further upside potential. Reasonable speculation with a risk of owning SKX near a cost basis of $9.65. MAR-10.00 SKX CB LB=1.75 OI=87 CB=9.63 DE=34 TY=3.4% __________________________________________________________________ PMSI - Prime Medical $5.72 *** Bottom-Fishing *** Prime Medical Services (NASDAQ:PMSI) primarily operates in the segments of lithotripsy services, a non-invasive procedure for treating kidney stones, and manufacturing, which includes the design and manufacture of mobile trailers and coaches that transport high-technology medical devices and equipment designed for broadcasting and communications applications. The company's lithotripters performed approximately 33,400 procedures in the United States, in 2002, through a network of partnerships with physicians serving approximately 375 hospitals and surgery centers in 34 states. PMSI provides design and manufacturing services through its subsidiaries Calumet Coach, AK Specialty Vehicles, Frontline Communications, Smit Mobile Equipment and Winemiller Communications. Prime Medical has been forging a Stage I base for the last 10 months and recently moved above resistance around $5.50 on heavy volume. The company's earnings are due on February 24 and this position offers a favorable way to speculate on the outcome. Target-shooting a lower net-debit will lower the cost basis and improve the potential yield. MAR-5.00 POQ CA LB=0.90 OI=128 CB=4.82 DE=34 TY=3.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Supplemental Covered Calls ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) __________________________________________________________________ Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield NANO 19.59 MAR 17.50 QNK CW 3.10 35 16.49 34 5.5% SIRI 2.96 MAR 2.50 QXO CZ 0.60 11742 2.36 34 5.3% WEBM 10.69 MAR 10.00 UUW CB 1.20 90 9.49 34 4.8% MSO 11.68 MAR 10.00 MSO CB 2.15 1389 9.53 34 4.4% MERX 27.34 MAR 25.00 KXQ CE 3.40 121 23.94 34 4.0% PCLN 23.98 MAR 22.50 PUZ CX 2.40 1459 21.58 34 3.8% FHRX 17.10 MAR 15.00 FUF CC 2.70 1 14.40 34 3.7% IBIS 15.30 MAR 12.50 UIB CV 3.30 141 12.00 34 3.7% LAB 11.06 MAR 10.00 LAB CB 1.45 694 9.61 34 3.6% ARRS 10.84 MAR 10.00 AQC CB 1.20 305 9.64 34 3.3% SWIR 25.59 MAR 22.50 IYQ CX 3.90 224 21.69 34 3.3% ********** NAKED-PUTS ********** Options 101: Learning The Trade By Ray Cummins One of our new readers asked for a list of recommended books on the subject of conservative option trading strategies. Of the many publications I have reviewed personally, here are a few books that will help new traders improve their knowledge and skills in the most common techniques: Options as a Strategic Investment, 4th edition, by Larry McMillan. This is the bible of options trading, used by professional as well as retail participants, and it is the benchmark by which all other books on this subject are compared. The chapter on covered-writes provides a complete explanation of the "Total Return Concept," which is the foundation of our approach to the covered-write strategy here at the OIN. Stocks for Options Trading: Low-Risk, Low-Stress Strategies for Selling Stock Options -- Profitably, by Harvey Friedentag This book explains how to develop a successful investment plan by creating and utilizing covered-calls in a conservative stock-option portfolio. It is likely the only (recent) book completely devoted to the strategy of writing calls against long-term portfolio issues. LEAPS Strategies with Jon Najarian, by Jon Najarian Not one you would expect in this group, but Dr. J's book is an excellent source of information on the advantages of buying LEAPS as a substitute for stock ownership with the idea of writing "covered" calls for consistent, low risk profits in a conservative stock-option portfolio. Option Volatility and Pricing: Advanced Trading Strategies and Techniques, by Sheldon Natenberg. This is a must-read for serious option traders as it covers the concept of volatility and pricing theory in great detail. It is the other "bible" of professional traders and I have personally seen it at many of the trading desks on the CBOE floor. However, if you want to learn about many of the same concepts in a more user-friendly format, consider the next book. The Option Trader's Guide to Probability, Volatility, and Timing, by Jay Kaeppel. Another great book by one of the foremost volatility specialists, covering risk-reward analysis, exit-adjustment methods, and the most common mistakes made by inexperienced option traders. The book is an excellent resource for "premium sellers" as it explains the fundamentals of a statistical approach to option trading and provides some guidance on when to implement those strategies. Trading for a Living: Psychology, Trading Tactics, Money Management, by Dr. Alexander Elder One of the most popular and well-known books about trading, it covers three major areas that are key to success; psychology, trading tactics and money management. This material is essential to developing discipline when participating in the stock market and learning how to avoid the pitfalls of emotional trading. In addition to reading the widely published written materials on option trading, new subscribers should also review the strategy sections of the newsletter each week, as well as the back-issues on the website, and especially the past commentaries on the most popular techniques. It is also important to consider any other worthy trading publications in order to learn all you can about technical analysis, option pricing and the effects of volatility on common positions. I have written many narratives on the most successful methods used by professionals and those are posted in the website archives. Of course, there is also a plethora of great articles by other OIN researchers, covering almost every imaginable strategy used by retail traders. With these resources available, there is simply no reason for OIN readers to lack knowledge in the subject of derivatives. Good Luck! ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF PREVIOUS CANDIDATES The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield NGEN 12.59 10.93 FEB 10.00 0.30 0.30* 4.5% 15.4% LSCP 19.53 23.07 FEB 17.50 0.40 0.40* 5.1% 14.1% ADAT 16.80 16.94 FEB 12.50 0.40 0.40* 3.6% 11.6% NVDA 22.76 23.30 FEB 20.00 0.30 0.30* 3.3% 9.8% AMR 16.05 15.21 FEB 15.00 0.25 0.25* 3.7% 9.7% RMBS 31.16 25.53 FEB 25.00 0.45 0.45* 2.7% 9.7% ADAT 16.95 16.94 FEB 12.50 0.40 0.40* 3.0% 9.4% TER 26.77 25.82 FEB 25.00 0.40 0.40* 3.5% 9.3% SEPR 27.99 27.47 FEB 22.50 0.65 0.65* 2.7% 9.1% XING 12.80 11.79 FEB 10.00 0.35 0.35* 2.6% 8.7% IMCL 43.41 43.79 FEB 35.00 0.75 0.75* 2.4% 8.4% ASKJ 22.82 21.66 FEB 20.00 0.25 0.25* 2.8% 8.3% NEOL 18.26 20.08 FEB 15.00 0.40 0.40* 2.5% 8.1% INSP 34.15 34.80 FEB 30.00 0.55 0.55* 2.7% 7.9% OPWV 15.18 14.46 FEB 12.50 0.40 0.40* 2.4% 7.6% PMCS 23.80 21.19 FEB 20.00 0.50 0.50* 2.3% 7.2% AZR 23.35 22.19 FEB 22.50 0.60 0.29 2.9% 6.9% SEPR 27.25 27.47 FEB 22.50 0.65 0.65* 2.2% 6.9% ASKJ 23.83 21.66 FEB 20.00 0.60 0.60* 2.2% 6.9% SINA 45.69 40.45 FEB 35.00 0.45 0.45* 1.9% 6.8% MU 16.11 15.73 FEB 15.00 0.25 0.25* 2.5% 6.5% IDCC 24.36 25.93 FEB 20.00 0.25 0.25* 1.8% 6.4% BLTI 21.14 18.45 FEB 17.50 0.30 0.30* 1.9% 6.4% NKTR 17.12 18.31 FEB 15.00 0.45 0.45* 2.2% 6.3% IDCC 24.46 25.93 FEB 20.00 0.50 0.50* 1.9% 6.2% RMBS 34.60 25.53 FEB 25.00 0.50 0.50* 1.8% 6.0% ERICY 23.01 28.03 FEB 20.00 0.25 0.25* 1.8% 5.6% JNPR 22.00 26.65 FEB 20.00 0.55 0.55* 2.0% 5.4% AFFX 28.29 32.65 FEB 25.00 0.50 0.50* 1.8% 5.2% AFFX 28.40 32.65 FEB 25.00 0.40 0.40* 1.8% 5.2% RDWR 30.73 28.35 FEB 25.00 0.35 0.35* 1.3% 4.5% BLUD 23.52 22.16 FEB 22.50 0.25 -0.09 0.0% 0.0% SPRT 16.40 11.81 FEB 12.50 0.25 -0.44 0.0% 0.0% * Stock price is above the sold strike price. Editor's Comments: A Vote Of No Confidence! The major equity averages retreated Friday as consumer sentiment reportedly fell short of expectations in February. A number of other events conspired to drive stocks lower but in reality, the market was due for a pullback and investors simply used the opportunity to take some profits. That might also be a good idea for traders in many of the naked-put positions as there are no real catalysts for buying pressure expected in the coming weeks. Rambus (NASDAQ:RMBS), Immucor (NASDAQ:BLUD), Supportsoft (NASDAQ:SPRT), Teradyne (NYSE:TER), American Airlines (NYSE:AMR), AskJeeves.com (NASDAQ:ASKJ), PMC-Sierra (NASDAQ:PMCS), Biolase (NASDAQ:BLTI), Aztar (NYSE:AZR), Micron technology (NYSE:MU) and Nanogen (NASDAQ:NGEN) are now among the ranks of the "early-exit" candidates. Positions Previously Closed: Wireless Facilities (NASDAQ:WFII), United Therapeutics (NASDAQ:UTHR), Altiris (NASDAQ:ATRS), and Retek (NASDAQ:RETK). ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW NAKED-PUT CANDIDATES Sequenced by Maximum Yield (monthly basis) __________________________________________________________________ Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield ADAT 16.94 MAR 12.50 HAU OV 0.45 927 12.05 34 3.3% 10.5% IBIS 15.30 MAR 12.50 UIB OV 0.40 505 12.10 34 3.0% 9.6% LSCP 23.07 MAR 20.00 LXQ OD 0.60 78 19.40 34 2.8% 7.9% CRYP 16.38 MAR 12.50 UFW OV 0.30 0 12.20 34 2.2% 7.5% DNDN 14.49 MAR 12.50 UKO OV 0.30 1031 12.20 34 2.2% 6.5% AWE 11.82 MAR 11.00 AWE OM 0.30 25543 10.70 34 2.5% 6.4% WEBX 26.12 MAR 22.50 UWB OX 0.50 367 22.00 34 2.0% 6.1% Legend (for play descriptions below) LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). __________________________________________________________________ ADAT - Authentidate Holding $16.94 *** Entry Point? *** Authentidate Holding (NASDAQ:ADAT) develops security software technology, document imaging software products and systems integration services and products. The firm's products include DocStar document imaging software products, the Authentidate authentication and security software products and system integration services and products through its DJS Marketing Group subsidiary. AHC also offers, through the Trac Medical Solutions subsidiary, the CareCert Internet-based medical forms processing service. The company's subsidiary, DJS, is also an authorized sales and support provider for software products such as Microsoft Solutions and Lotus Notes. DJS sells computer hardware and provides software and integration services to businesses to meet their data management needs. Web security and digital document processing and certification are necessary services for almost all Internet users and this company has some unique solutions to those needs. The company announced earnings Friday and traders who have an optimistic outlook for ADAT can use the post-earnings drop (expected next week) to establish a cost basis near $12 in the issue. MAR-12.50 HAU OV LB=0.45 OI=927 CB=12.05 DE=34 TY=3.3% MY=10.5% __________________________________________________________________ IBIS - Ibis Technology $15.30 *** New Product Order! *** Ibis Technology (NASDAQ:IBIS) develops, manufactures and markets SIMOX-SOI implantation equipment and wafers for the worldwide semiconductor industry. SIMOX, or Separation by IMplantation of Oxygen, is a form of silicon-on-insulator (SOI) technology that creates an insulating barrier below the top surface of a silicon wafer. SIMOX-SOI products are well suited for many commercial applications, including servers and workstations, portable and desktop computers, wireless communications and battery-powered devices such as laptop computers, personal digital assistants, and mobile telephones, integrated optical components and harsh environment electronics. Last week, Ibis Technology announced a big order for its ion implanters and apparently, this order was a breakthrough for the company. The stock certainly reflects that attitude as it has moved to a new 2004 high on heavy volume. Investors who believe the bullish trend will continue can profit from that outcome with this position. MAR-12.50 UIB OV LB=0.40 OI=505 CB=12.10 DE=34 TY=3.0% MY=9.6% __________________________________________________________________ LSCP - Laserscope $23.07 *** Another Entry Point? *** 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. On Thursday, Laserscope announced strong fourth quarter revenues, driven by the "explosive growth of their urology product line and very solid domestic growth of their aesthetics products." Investors who like the outlook for this unique company can establish a (relatively) conservative cost basis in its stock with this position. MAR-20.00 LXQ OD LB=0.60 OI=78 CB=19.40 DE=34 TY=2.8% MY=7.9% __________________________________________________________________ CRYP - CryptoLogic $16.38 *** Internet Gaming Stock *** CryptoLogic (NASDAQ:CRYP) is an Internet software and services provider (ISP) with proprietary e-commerce enabling technology that permits financial transactions over the Internet. They are focused on providing proprietary software technology and related support services to the Internet gaming industry. Through its wholly owned subsidiary, WagerLogic, the company licenses and supports proprietary Internet-based software package to licensees worldwide. These licensees include a number of brand name and land-based gaming organizations in the United Kingdom that hold Internet gaming licenses issued by governments where their online operations are domiciled. Quarterly earnings are due on 2/26/04 and traders can use this position to speculate on the announcement. MAR-12.50 UFW OV LB=0.30 OI=0 CB=12.20 DE=34 TY=2.2% MY=7.5% __________________________________________________________________ DNDN - Dendreon $14.49 *** Drug Speculation! *** Dendreon Corporation (NASDAQ:DNDN) is dedicated to the discovery and development of novel products for the treatment of diseases through its manipulation of the immune system. The firm product pipeline is focused on cancer and includes therapeutic vaccines, monoclonal antibodies and small-molecule product candidates. The product candidates most advanced in development are therapeutic vaccines to stimulate a patient's immunity for the treatment of cancer. Dendreon has a unique prostate cancer drug, Provenge, in late-stage trials (the final stage of human testing before seeking marketing approval) and investors are hoping it will be successful. Traders can use the inflated option premiums to participate in the drug speculation with a cost basis near $12. MAR-12.50 UKO OV LB=0.30 OI=1031 CB=12.20 DE=34 TY=2.2% MY=6.5% __________________________________________________________________ AWE - AT&T Wireless Services $11.82 *** Merger/Buy-Out? *** AT&T Wireless Services (NYSE:AWE) is a wireless communications service provider in the United States. The company provides wireless voice and data services over two separate, overlapping networks. One network uses time division multiple access (TDMA) as its signal transmission technology. AWE also provides voice and enhanced data services over a separate network that uses the signal transmission technology known as global system for mobile (GSM) communications and general packet radio service (GPRS). Cingular Wireless and Vodafone Group are vying for ownership of AWE and some traders say the buy-out price could be as high as $12.50 per share. AT&T Wireless is reviewing the bids and a decision could come as early as next week. Traders who believe the final offer will be $11 or more can profit from that outcome with this position. MAR-11.00 AWE OM LB=0.30 OI=25543 CB=10.70 DE=34 TY=2.5% MY=6.4% __________________________________________________________________ WEBX - WebEx Communications $26.12 *** Solid Earnings! *** WebEx (NASDAQ:WEBX) develops and sells services that allow users to conduct meetings and share software applications, documents, presentations and other content on the Internet using a standard Web browser. Integrated telephony and Web-based audio and video services are available using telephones, computer Web-cameras and microphones. The company's activities have been focused on continuing to enhance and market its WebEx Interactive Services and its WebEx Multimedia Switching Platform, developing and deploying new services, expanding its marketing organizations and deploying its global WebEx Media Tone Network. The company sells WebEx Meeting Center, WebEx Meeting Center Pro, WebEx Training Center, WebEx Support Center, WebEx OnStage and WebEx Enterprise Edition. It also provides a service called WebEx Business Exchange to existing customers. Earlier this month, WEBX raised its 2004 earnings and revenue guidance after posting a fivefold increase in fourth-quarter net income and topping Wall Street consensus estimates. Investor who favor the fundamental outlook for the company can use this position to establish a cost basis near $22 in the issue. MAR-22.50 UWB OX LB=0.50 OI=367 CB=22.00 DE=34 TY=2.0% MY=6.1% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Supplemental Naked Puts ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis) __________________________________________________________________ Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield SEPR 27.47 MAR 20.00 ERQ OD 0.85 4991 19.15 34 4.0% 12.0% GNTA 12.66 MAR 10.00 GJU OB 0.30 12676 9.70 34 2.8% 9.5% ZIXI 12.91 MAR 10.00 HQU OB 0.30 166 9.70 34 2.8% 9.3% SKX 11.38 MAR 10.00 SKX OB 0.35 208 9.65 34 3.2% 8.9% NEOL 20.08 MAR 15.00 UOE OC 0.40 450 14.60 34 2.5% 8.1% CLZR 22.75 MAR 20.00 UKZ OD 0.60 27 19.40 34 2.8% 7.7% OSTK 18.15 MAR 15.00 QKT OC 0.35 199 14.65 34 2.1% 7.0% KERX 12.62 MAR 10.00 QKY OB 0.20 25 9.80 34 1.8% 6.6% PAAS 17.55 MAR 15.00 USP OC 0.35 344 14.65 34 2.1% 6.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER IN SECTION ONE ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************ SPREADS/STRADDLES/COMBOS ************************ Another Dip In The Road To Recovery By Ray Cummins U.S. equities slumped Friday on concerns over rising unemployment claims and declining consumer confidence. The Dow Jones industrial average ended 66 points lower at 10,627, with shares of Walt Disney (NYSE:DIS) leading the retreat after a strong rally earlier in the week. Favorable earnings from Dell Computer (NASDAQ:DELL) did not curtail selling pressure in the NASDAQ, which finished 20 points lower at 2,053. The broader Standard & Poor's 500 Index slipped 6 points to 1,145, with some of the biggest losses seen in manufactured housing, recreational vehicles, radio broadcasting, office supply and pollution control companies. Trading activity was average, with 1.3 billion shares changing hands on the NYSE and 1.8 billion shares swapped on the NASDAQ. Decliners outnumbered advancers 5 to 3 on the Big Board and 2 to 1 on the technology exchange. Treasuries traded higher throughout the day, with the yield on the 10-year note falling to 4.04% as its price closed up 7/32. Note: U.S. stock markets are closed on Monday for Presidents Day. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 02/13/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 or to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management, nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ PUT-CREDIT SPREADS Symbol Pick Last Month LP SP Credit CB G/L Status OHP 46.69 47.20 FEB 40 42 0.30 42.20 0.30 Open NBR 44.11 46.97 FEB 37 40 0.30 39.70 0.30 Open BIIB 43.19 43.53 FEB 35 40 0.55 39.45 0.55 Open GENZ 54.26 55.38 FEB 47 50 0.30 49.70 0.30 Open AVE 73.00 78.59 FEB 65 70 0.45 69.55 0.45 Open CI 60.55 53.05 FEB 50 55 0.55 54.45 (1.40) Closed DNA 96.40 98.25 FEB 85 90 0.70 89.30 0.70 Open ADI 47.85 50.64 FEB 40 45 0.60 44.40 0.60 Open KOSP 51.00 56.89 FEB 40 45 0.50 44.50 0.50 Open MSTR 62.40 63.05 FEB 50 55 0.55 54.45 0.55 Open CFC 85.54 88.74 FEB 75 80 0.50 79.50 0.50 Open CERN 46.09 44.05 MAR 35 40 0.60 39.40 0.60 Open NFLX 38.32 35.54 FEB 33 35 0.27 34.73 0.27 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss The "watch-list" position in Cigna (NYSE:CI) was closed, for a smaller than published debit, when the issue moved below the sold (put) strike at $55.00, . Positions in Cabot Micro (NASDAQ:CCMP) and Lam Research (NASDAQ:LRCX) have previously been closed for small losses. CALL-CREDIT SPREADS Symbol Pick Last Month LC SC Credit CB G/L Status ADBE 37.12 38.53 FEB 45 40 0.55 40.55 0.55 Open ABT 43.25 44.31 FEB 47 45 0.25 45.25 0.25 Open POWI 32.05 28.55 FEB 40 35 0.75 35.75 0.75 Open SCHN 45.90 49.30 FEB 60 55 0.50 55.50 0.50 Open OVTI 51.10 48.53 FEB 65 60 0.50 60.50 0.50 Open VSEA 45.27 43.04 FEB 55 50 0.55 50.55 0.55 Open OVTI 48.48 48.53 FEB 60 55 0.60 55.60 0.60 Open CYBX 27.04 25.97 MAR 35 30 0.65 30.65 0.65 Open SOHU 29.05 28.72 MAR 40 35 0.60 35.60 0.60 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Bearish positions in Timberland (NYSE:TBL), Eli Lilly (NYSE:LLY) and Avocent (NASDAQ:AVCT), which is currently profitable, have previously been closed for small losses. Adobe (NASDAQ:ADBE) is on the "watch" list along with and Abbott Labs (NYSE:ABT). CALL-DEBIT SPREADS Symbol Pick Last Month LC SC Debit B/E G/L Status BRCM 36.78 38.63 FEB 30 32 2.20 32.30 0.30 Open CREE 25.85 24.00 FEB 20 22 2.20 22.20 0.30 Open? TEVA 61.75 65.92 FEB 55 60 4.45 59.45 0.55 Open INTU 50.37 48.41 FEB 45 47 2.20 47.20 0.30 Open? KSS 48.64 48.65 MAR 40 45 4.45 44.45 0.55 Open SPF 49.75 49.16 MAR 40 45 4.45 44.45 0.55 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Intuit (NASDAQ:INTU) and Cree Inc. (NASDAQ:CREE) are on the "watch" list. PUT-DEBIT SPREADS Symbol Pick Last Month LP SP Debit B/E G/L Status QLGC 47.16 44.04 FEB 55 50 4.20 55.80 0.80 Open NVLS 39.89 33.26 FEB 45 42 2.20 42.80 0.30 Open AVID 47.04 44.25 FEB 55 50 4.55 50.45 0.45 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss As noted last week, the position in Michael's Stores (NYSE:MIK) has been closed to limit potential losses. SYNTHETIC (BULLISH) Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status CEPH 52.50 57.20 FEB 60 45 0.10 1.00 Closed MXT 6.04 5.90 MAR 7 5 0.10 0.00 Open SKX 8.94 11.38 APR 10 7 (0.15) 2.30 Open? Skechers (NYSE:SKX) was a "big winner" this week for traders who chose to buy calls (or the stock). However, the issue did not offer the suggested debit, on a simultaneous order basis, before spiking 25% higher in a mid-week rally. Cephalon (NASDAQ:CEPH) was closed after moving to a recent low on heavy trading volume but on Friday, the issue rebounded to a 52-week high. Previous positions in United Therapeutics (NASDAQ:UTHR) and Visx (NYSE:EYE) achieved profitability, however they were eventually closed to limit potential losses. SYNTHETIC (BEARISH) Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Put Call Credit Value Status DD 42.72 44.46 MAR 40 45 0.00 0.00 Open Dupont (NYSE:DD) surprised almost everyone with a bullish profit report and subsequent rally. However, the overhead supply near the sold (call) strike at $45 is formidable and with any luck, the issue will remain below that price for two more weeks. CALENDAR & DIAGONAL SPREADS Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status FISV 38.28 38.90 MAR-35P FEB-35P 0.30 0.50 Closed AMHC 27.08 29.87 MAY-30C FEB-30C 1.25 1.90 Open? ABGX 15.60 16.04 APR-17C FEB-17C 0.60 0.75 Open SONS 8.54 5.82 JUL-10C FEB-10C 1.00 0.90 Closed MEDI 25.14 25.97 JUN-20C MAR-25C 4.35 4.25 Open Fiserve (NASDAQ:FISV) offered a viable "early-exit" profit for conservative traders when the issue fell below $36. The American Healthways (NASDAQ:AMHC) calendar spread is also profitable with over three months left in the position. The long (call) position in Sonus Networks (NASDAQ:SONS) was closed earlier in the week to preserve capital. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status MATK 65.74 63.57 MAR 65 65 9.40 9.00 Open BSC 84.10 85.44 MAR 85 85 5.25 6.10 Open FRX 74.49 74.56 MAR 75 75 6.50 6.30 Open LF 29.75 27.65 FEB 30 30 3.20 4.00 Open? MNST 25.13 23.40 FEB 25 25 2.60 2.70 Open XMSR 22.86 21.68 FEB 22 22 2.15 2.15 Open Leapfrog (NYSE:LF) provide a favorable early-exit profit during Wednesday's session. However, Monster Worldwide (NASDAQ:MNST) and XM Satellite Radio (NASDAQ:XMSR) were not as volatile as expected after their respective earnings announcements. New straddle plays in Nam Tai Electronics (NYSE:NTE) and Petrochina (NYSE:PTR) were not available due to pre-market volatility on the first trading day after the positions were offered. CREDIT STRANGLES No Open Positions Questions & comments on spreads/combos to Contact Support ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance, and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CREDIT SPREADS (BULLISH & BEARISH) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. __________________________________________________________________ DNA - Genetech $98.25 *** New Multi-Year High! *** Genentech (NYSE:DNA) is a biotechnology firm using human genetic information to discover, develop, manufacture and commercialize biotherapeutics for significant unmet medical needs. The company manufactures and commercializes 10 biotechnology products directly in the United States. These include Herceptin, Rituxan, TNKase, Activase, Cathflo Activase, Nutropin Depot, Nutropin AQ, Nutropin human growth hormone, Protropin and Pulmozyme. The company also licenses several additional products to other companies and its product development efforts, including those of its collaborative partners, cover a wide range of medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders and inflammatory and immune problems. DNA - Genetech $98.25 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-85.00 DNA-OQ OI=2918 ASK=$0.65 SELL PUT MAR-90.00 DNA-OR OI=3284 BID=$1.30 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$89.35 __________________________________________________________________ ESRX - Express Scripts $70.58 *** Next Leg Up? *** Express Scripts (NASDAQ:ESRX) is an independent pharmacy benefit manager (PBM), provides integrated PBM services including network pharmacy claims processing, mail pharmacy services, benefit design consultation, drug utilization review and formulary management. The company offers PBM services to clients in the United States and Canada. Some of the Company's largest clients included United HealthCare Insurance Company, which manages the AARP Pharmacy Service, Blue Cross Blue Shield of Massachusetts, Blue Shield of California, Mutual of Omaha, the State of Georgia, Mid Atlantic Medical Services, Group Health Incorporated, and the Department of Defense TRICARE Management Activity. ESRX - Express Scripts $70.58 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-60.00 XTQ-OL OI=219 ASK=$0.60 SELL PUT MAR-65.00 XTQ-OM OI=3454 BID=$1.20 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$64.35 __________________________________________________________________ NBR - Nabors Industries $46.97 *** Oil Service Rally! *** Nabors Industries (NYSE:NBR) operates in two primary business segments within the oilfield services industry, contract drilling and manufacturing and logistics. The company provides drilling, workover, well-servicing and related services on land and offshore in the lower 48 states of the United States (lower 48 states), Canada and Alaska, as well as international markets. The company also manufactures and leases (or sells) top drives, drilling instrumentation systems and rig-reporting software domestically and internationally, and provides oil rig construction, logistics services and marine transportation and support services in Alaska and the lower 48 states. NBR - Nabors Industries $46.97 PLAY (conservative - bullish/credit spread): BUY PUT MAR-40.00 NBR-OH OI=856 ASK=$0.25 SELL PUT MAR-42.50 NBR-OV OI=954 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$42.25 __________________________________________________________________ KLAC - KLA-Tencor $54.24 *** Chip Sector Slump! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC - KLA Tencor $54.24 PLAY (conservative - bearish/credit spread): BUY CALL MAR-65.00 KCQ-CM OI=2877 ASK=$0.20 SELL CALL MAR-60.00 KCQ-CL OI=6304 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$60.60 __________________________________________________________________ IACI - InterActiveCorp $31.92 *** In A Trading Range? *** InterActiveCorp (NASDAQ:IACI), formerly known as USA Interactive, is a multi-brand interactive commerce firm transacting business worldwide via the Internet, television and the telephone. Their portfolio of companies collectively enables direct-to-consumer transactions across many areas, including home shopping, tickets, personals, travel, teleservices and local services. During 2002, InterActiveCorp completed two major transactions that together transformed the company. The firm acquired a majority interest in Expedia.com and it accomplished the contribution of its entertainment businesses to Vivendi Universal Entertainment, a joint venture controlled by Vivendi Universal, S.A. The firm's business is organized into three groups: Electronic Retailing; Information and Services, and Travel Services. IACI - InterActiveCorp $31.92 PLAY (conservative - bearish/credit spread): BUY CALL MAR-37.50 QTH-CU OI=945 ASK=$0.20 SELL CALL MAR-35.00 QTH-CG OI=4568 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$35.25 __________________________________________________________________ NVLS - Novellus Systems $33.26 *** Second Time's A Charm! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $33.26 PLAY (conservative - bearish/credit spread): BUY CALL MAR-40.00 NLQ-CH OI=6140 ASK=$0.25 SELL CALL MAR-37.50 NLQ-CU OI=4060 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$37.75 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ DEBIT SPREADS (BULLISH & BEARISH) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. __________________________________________________________________ AA - Alcoa $37.01 *** Blue-Chip Play *** Alcoa (NYSE:AA) is a producer of primary aluminum, fabricated aluminum and alumina and is also active in technology, mining, refining, smelting, fabricating and recycling. Aluminum and alumina represent approximately two-thirds of the company's revenues. Its non-aluminum products include precision castings, fasteners, vinyl siding, consumer products, foodservice and flexible packaging, plastic closures, fiber-optic cables and electrical distribution systems for cars and trucks. Alcoa is a global company operating in 39 countries. North America is the largest regional market and Europe is also a significant market. Alcoa also has investments and activities in Asia and Latin America, with opportunities for growth in Brazil, China and Korea. AA - Alcoa $37.01 PLAY (conservative - bullish/debit spread): BUY CALL MAR-32.50 AA-CZ OI=857 ASK=$4.80 SELL CALL MAR-35.00 AA-CG OI=7257 BID=$2.55 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$34.75 __________________________________________________________________ AMKR - Amkor Technology $15.92 *** Consolidation Underway! *** Amkor Technology (NASDAQ:AMKR) is the global subcontractor of semiconductor packaging and test services. The firm provides a portfolio of packaging and test technologies and services; pursues the design and development of new package and test technologies; develops expertise in high-volume manufacturing, and diversifies its operational scope by establishing production capabilities in China, Japan and Taiwan, in addition to its many long-standing capabilities in Korea and the Philippines. The semiconductors that are packaged and tested for Amkor's customers ultimately become part of electric systems used in communications, computing, consumer, industrial, automotive and various military applications. AMKR - Amkor Technology $15.92 PLAY (conservative - bearish/debit spread): BUY PUT MAR-20.00 QEL-OD OI=566 ASK=$4.40 SELL PUT MAR-17.50 QEL-OW OI=706 BID=$2.15 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$17.75 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SYNTHETIC POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. __________________________________________________________________ NEOL - NeoPharm $20.08 *** Rally Mode! *** NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. The firm has built its drug portfolio based on its novel proprietary technology platforms, the proprietary NeoLipid liposomal drug delivery system and a tumor-targeting toxin platform. NeoPharm has several promising compounds in various stages of development. The company's lead compound is IL13-PE38, a tumor-targeting toxin being developed as a treatment for glioblastoma multiforme, a deadly form of brain cancer. NEOL - NeoPharm $20.08 PLAY (very speculative - bullish/synthetic position): BUY CALL APR-25.00 UOE-DE OI=1074 ASK=$1.60 SELL PUT APR-17.50 UOE-PW OI=250 BID=$1.70 INITIAL NET-CREDIT TARGET=$0.20-$0.25 INITIAL TARGET PROFIT=$0.95-$1.40 Note: Using options, this position is similar to being long in the stock. The minimum initial margin/collateral requirement for the sold (short) option is approximately $715 per contract. However, do not initiate this position if you can not afford to purchase the stock at the sold call strike price ($17.50). ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ STRADDLES AND STRANGLES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. __________________________________________________________________ CMOS - Credence Systems $12.75 *** Expiration-Week Earnings! *** Credence Systems (NASDAQ:CMOS) designs, manufactures, sells and services engineering validation test equipment, emission-based optical diagnostics and failure analysis products and automatic test equipment used for testing semiconductor integrated circuits. These hardware products are designed to test semiconductors at two stages of their lifecycle: first, at the prototype stage, and second, as they are produced in high volume. The company also develops, licenses and distributes software products that provide automation solutions in the IC design and test flow fields. Its software products enable design and test engineers to develop and troubleshoot production test programs prior to fabrication of the device prototype. Quarterly earnings are due 2/19/04. CMOS - Credence Systems $12.75 PLAY (very speculative - neutral/debit straddle): BUY CALL FEB-12.50 CQS-BV OI=1421 ASK=$0.70 BUY PUT FEB-12.50 CQS-NV OI=356 ASK=$0.40 INITIAL NET-DEBIT TARGET=0.95-$1.00 INITIAL TARGET PROFIT=$0.35-$0.60 __________________________________________________________________ NTES - NetEase.com $40.83 *** Expiration-Week Earnings! *** NetEase.com (NASDAQ:NTES) is a China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. The NetEase Web sites, operated by an affiliate, organize and provide access to 18 content channels through distribution arrangements with more than one hundred international and domestic content providers. In addition, the NetEase Internet sites offer a variety of products and services, including Instant Messaging (Popo), Dating, Love, Alumni and Personal Home Page. These products and services enable users to communicate about interests and areas of expertise. The company's quarterly earnings are due after the close on 2/17/04. NTES - NetEase.com $40.83 PLAY (very speculative - neutral/debit straddle): BUY CALL FEB-40.00 NQG-BH OI=1277 ASK=$2.40 BUY PUT FEB-40.00 NQG-NH OI=2258 ASK=$1.45 INITIAL NET-DEBIT TARGET=3.70-$3.75 INITIAL TARGET PROFIT=$1.10-$1.65 __________________________________________________________________ SRNA - Serena Software $22.12 *** Expiration-Week Earnings! *** Serena Software (NASDAQ:SRNA) is a provider of infrastructure software to manage change to enterprise applications. The firm's products and services are used to manage and control application change for organizations whose business operations are dependent on managing information technology. The company has developed highly effective solutions for managing software change that allow customers to improve their return on IT investments by improving application availability, accelerating time to the market and also increasing programmer productivity while reducing application development and IT infrastructure maintenance costs. Quarterly earnings are due 2/19/04. SRNA - Serena Software $22.12 PLAY (very speculative - neutral/debit straddle): BUY CALL FEB-22.50 NHU-BX OI=471 ASK=$0.35 BUY PUT FEB-22.50 NHU-NX OI=240 ASK=$0.65 INITIAL NET-DEBIT TARGET=0.90-$0.95 INITIAL TARGET PROFIT=$0.30-$0.50 __________________________________________________________________ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... 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