The Option Investor Newsletter Sunday 02-29-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Battle Lines Drawn Futures Market: CRB Rallies Index Trader Wrap: A MIXED MARKET Editor's Plays: Bubblemania Market Sentiment: Is it over yet? Ask the Analyst: It's head and shoulders above them all 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 02-27 WE 02-20 WE 02-13 WE 02-06 DOW 10583.92 - 35.11 10619.0 - 8.82 10627.8 + 34.82 +104.96 Nasdaq 2029.82 - 8.11 2037.93 - 15.63 2053.56 - 10.45 - 2.14 S&P-100 564.54 - 0.33 564.87 - 1.05 565.92 - 0.14 + 5.75 S&P-500 1144.95 + 0.84 1144.11 - 1.70 1145.81 + 3.05 + 11.63 W5000 11172.92 + 29.34 11143.6 - 30.42 11174.0 + 44.60 +100.20 RUT 585.56 + 5.67 579.89 - 5.25 585.14 + 1.07 + 3.31 SOX 502.26 - 7.99 510.25 - 0.80 511.05 - 8.30 + 5.43 TRAN 2902.19 + 10.01 2892.18 - 24.38 2916.56 + 22.20 + 8.40 VIX 14.57 - 1.47 16.04 + 0.46 15.58 - 0.41 - 0.64 VXO 14.76 - 1.49 16.25 + 0.62 15.63 - 0.35 - 1.07 VXN 22.87 - 1.25 24.12 - 0.02 24.14 - 0.49 - 0.43 TRIN 1.26 1.29 1.19 0.62 Put/Call 0.73 0.86 0.76 0.62 ****************************************************************** Battle Lines Drawn by Jim Brown The Dow changed sides from offense to defense several times on Friday with several strong moves in each direction but the end result was a +3 point gain and a close at almost exactly the same level that it started the week. The battle line continues to be 10600 and the Dow crossed that line six times on Friday. The Nasdaq rallied to 2045 before failing just below the 50ma resistance at 2050 and closed near the top of the weekly range. These indexes are fighting a perfect consolidation battle and the battle lines did not change all week. Dow Charts - Daily Wilshire-5000 Chart - Daily Nasdaq Chart - Converging Support/Resistance Friday was a busy day for economic reports and it was a grand slam for the bulls. The GDP revision led the day off with a upward revision instead of a reduction in the Q4 estimates. The Q4 GDP estimate rose to +4.1% and well over the +3.6% estimates. This was a very positive revision with exports up +21% and business investment up +9.6%. Inventories rose for the first time in three quarters with a $14.9B gain. The inflation pressures appeared to have eased with the PCE Price Index up only +0.7% while the purchase price index rose at a +1.1% rate. This was a strong revision for the GDP and it caught everyone by surprise. Also beating consensus estimates was the Chicago PMI at 63.6. This was down slightly from January's 65.9 which was a nine year high. An easing of the index had been expected from that high. The component with the biggest surprise was the jobs numbers with employment rising to 54.8 and the highest level in five years. This was also the first time over 50 since August 2003. Inventories rose to 46.5 from 37.4. All the other components eased only slightly off the January highs. Again, this was also a very strong report and a confirmation of the recovery in progress. The NY-NAPM broke out to a new high at 267.2. This is the highest level since Sept-2001 and has now posted gains for six consecutive months. The business conditions index has jumped +17.6% since November and suggests business is booming in the New York area. The financial services sector in NY reported bonuses were +20% higher than the prior year and the state comptroller said they were going to receive an extra $57 million in taxes from these bonuses that they had not expected. A little bull market never hurt anybody. Rounding out the economic menu for Friday was the revised Consumer Sentiment, which rose slightly from the advance level. The sentiment rose to 94.4 and over consensus estimates of 94.0 but this was down significantly from the January number at 103.8. Traders were relieved it was revised up instead of down given the fall in the various other sentiment/confidence indicators over the last two weeks. The preliminary February reading was only 93.1 so the gain was appreciated. The Dow displayed multiple personalities on Friday with a sprint out of the gate to 10650 and a +60 point gain. This lasted about 90 minutes before a serious sell program sent the index to the lows of the day at 10563. This nearly -90 point drop from the highs took less than 30 min and left everyone in a state of uneasiness. After about an hour at the lows the bargain hunters bought the dip and took us back to 10633 for a +70 point rebound. Unfortunately the gains did not hold and an end of day bout of profit taking knocked it back under 10600 to end the day with only a +3 point gain. Four major moves and a 90 point range and we ended with only a +3 point gain. This is typical consolidation type activity and it is more prevalent toward the end of the consolidation period. This shows the sellers are still lurking overhead but the buyers are becoming stronger to be able to test the upper boundary of the range. The 50ma moved up to 10513 and remains the first level of real support. Initial horizontal support is currently 10575 and 10550. These are very narrow ranges and they are rising slowly. Nothing here rules out another retest of the lower support but despite the flat close the overall bullishness is increasing. If you look at the difference in the Wilshire chart and the Dow chart at the top of this article you will see a definite uptick in the Wilshire that is not seen in the Dow. This is purely the impact of UTX, BA, MMM and GE for the week that gave the impression of more market weakness than really existed. Compare the charts, you will be surprised. The Nasdaq rallied back to the highs of the week at 2045 on the opening bounce and fought valiantly to hold its gains. Unfortunately the morning sell program was tech weighted and the damage was severe. The Nasdaq was knocked for a -25 point intraday loss and back to 2018 before the recovery began. The Nasdaq struggled back to close -3 for the day but remained at the high end of the weekly range. This was the sixth week of losses for the Nasdaq but I am betting the string ends here. We have seen four straight days of uptrend on this index and we are starting to see articles on positive April earnings expectations. Nasdaq 2000 remains strong support and the 100ma has risen to 1991. This makes the 1990-2000 level even more formidable as support. The Nasdaq chart today was very exciting to annotate. (You can tell I have no life) The converging support and resistance lines are predicting an explosive move very soon. The strongest index for the day actually started off as the weaker index. The Russell lagged the big cap indexes until after the morning sell off then led the charge back from the depths. The Russell closed up +1.70 at 585 and at the high for the week. This is a very strong showing especially when the SOX lost -7.58 (-1.48%). This is major divergence and the Russell close at 585 is only a little more than -10 points from the February highs. The Russell is well over its 50ma and now over the 10ma which had been near term resistance. Were it not for the SOX I would advocate buying the Russell at the open on Monday. Russell-2000 Chart - Daily The SOX was the weakest index on Friday and contrary to the other indexes it closed near its lows. This is very disconcerting to me and I could not really find any specific reason. Considering the SOX was up nearly +5% from its Monday's lows it could have been simply profit taking. Next Thursday Intel will provide its mid quarter update and expectations are for some improved guidance based on comments from Intel execs over the last couple weeks. This makes it even more puzzling why the chip stocks should sell off on Friday. Intel is expected to affirm its higher capex spending and that should help the chip equipment makers. Also, considering Monday and Tuesday are normally bullish from month end cash inflows there could be even more reason to buy Friday's dip. I am still unconvinced and will want to see upward motion before taking the positions. SOX Index Chart - Daily Helping techs on Friday was news from IDC that SUNW was seeing gains in its sector and had seen +21% server growth from the previous year. According to IDC SUNW gained +15.5% in units and +3.1% in market share. Marvel announced a profit in the 4Q compared to a prior loss and announced a 2:1 split. The stock gained +7% for the day. Oracle continued to fall as comments about suing the Justice Dept on the PSFT acquisition continued to surface. They also extended the tender offer period in light of the Justice delay. Come on Larry, rein in that ego and go sailing or something. The lawyers don't need your money. Rounding out the stock news Autodesk jumped +11% on much stronger than expected earnings and raised guidance. ADSK jumped nearly +3 to $29. UTX finally posted a winning day with a +2.23 gain after a week of heavy losses. UTX used the 100ma at 89.25 as a springboard to launch the rebound. Bargain hunters were waiting with money in hand for that level to be hit. Dow component CAT offset the gains in UTX with a -2.20 drop (-16 Dow points) after announcing an acquisition. Mutual funds are continuing to see massive inflows of cash according to ICI. In January stock funds had $43.7B in cash inflows despite the continuing fund scandals. This was the third highest monthly inflow since records have been kept. The highest was $55B in Feb-2000 and right at the top in the market. In the last week alone nearly $3B flowed into stock funds. There is currently over $4 trillion invested in stock funds. The calendar next week starts out with a killer on Monday morning. The ISM for February is expected to drop slightly to 62.0 from the 63.6 two year high in January. This is the key report for the beginning of the week and is the key indicator of the current economy. This will help confirm the recovery is still on track and help quiet some of the concerns from several weak reports recently. The middle of the week has several reports that will be watched but are not really critical including the ISM Services, Beige Book, Productivity and Factory Orders. The Beige Book would be my pick for the most critical of that bunch and it comes out on Wednesday. The next biggest report for the week is the Employment Report for February that comes out on Friday. Currently the estimates are for a gain of +128,000 jobs but nobody knows where those jobs are coming from. The Employment report is done by survey in the week which contains the 12th of the month. (Wonder who figured that out?) The Jobless Claims for that week in February were -344K and the prior week was -368K. This suggests we were not seeing a booming job market when the survey was taken. We will get a lot more in the way of analysis as the report draws near but I would suspect we could see some caution in the market as the week winds down. I am still in buy the dip mode and when the markets exploded out of the gate on Friday I thought maybe I had been too patient trying to wait for some stocks to come to me. This is where I have really mixed emotions. I want to see the market ease back to its highs but I would really like to see the Dow hit the 50ma first. The longer we go without a cursory touch the more likely the gains will be muted. We are still in a consolidation mode but the increased volatility suggests we could see another breakout attempt soon. That attempt could still be in either direction. For Monday I expect the ISM to be positive. From the lack of a material rally into the month end I may be the only one on the planet that feels that way. This is good in a way as it means the expectations are not already baked into the cake. A good ISM on Monday along with some decent month end cash flows into funds could help provide a boost to the first three days of the week. The Intel update on Thursday should provide a little advance worry and weakness but a positive update Thursday night and a neutral to positive Jobs report on Friday could produce a relief rally to close the week. Obviously, there is a lot of speculation in this paragraph but that is the way I see it today. Check back with me on Tuesday night and see if the picture changed. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** CRB Rallies Jonathan Levinson The US Dollar Index declined as the CRB rallied to new multidecade highs. Gold and treasuries advanced and equities were mixed. The daily downphase in ES, YM and NQ were slowed by an early bounce off bear wedge breaks on ES and NQ in a wide- ranging session that finished very close to where it opened. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. Chart of the US Dollar Index The US Dollar Index jumped overnight and then fell for the duration of Friday's session, bouncing from a low above 87.20 to settle in the 87.30 area. The upphase we've been following on the daily USD futures remains intact, as does the apparently corrective uptrend off the low, with Friday's action causing only a slight twitch on the daily Macd. Commodities advanced again, with the CRB adding 1.35 to close at 274.73 on strength in platinum, heating and crude oil (closed above 36), breaking above yesterday's 20 year high. Daily chart of April gold April gold bounced to a high of 398.50 Friday but former support acted as resistance. Gold settled back to close higher by 1.10 at 396.70. The daily candle gave us a higher low and higher high, confirming the bullish hammer from Thursday as a potential reversal of the recent downtrend, but so long as the oscillator downphase continues, goldbugs have only hope and 388-90 support on which to base their hopes. For the day, HUI added .78% to close at 224.81, and XAU rose .70% to close at 99.76. Daily chart of the ten year note yield Ten year treasuries had a stellar day, with ten year note yields (TNX) breaking below both price confluence and trendline support at 4% to close lower by 6.2 bps at 3.98%, a 1.53% decline for the day. The bullish signals on the daily cycle oscillators failed, and next support is at 3.92%. Playing a bounce (shorting ten year treasury bonds) at that level looks as obvious to me as it did in January, which makes wary. The technical cause for concern is that the whole formation for the past 6 months could be a descending triangle, which would mandate a break of 3.92% eventually. On a fundamental basis, it's difficult to imagine 10-yr rates below 3.9%, but the chart pattern forces us to consider the possibility. Daily NQ candles The NQ assumed a downside leadership role on Friday, replacing the YM which had been the weaker of its peers during previous sessions. For day, NQ lost 3.50 to close at 1472, a .24% decline. The higher high and equal low did not impact either the current downleg or the daily cycle downphase, but it did reaffirm the broken support line at 1482. Support remains 1440-1444, followed by 1460. Resistance is at 1482, 1486.50 (Friday's high) and 1492. 30 minute 20 day chart of the NQ The NQ broke decisively lower from its bear wedge and once again put in an early 30 minute cycle bottom. The lower Bollinger band support was violated, and that was the clearest warning sign for bears that the move would not deliver to its fullest. Nevertheless, the pattern of higher oscillator lows was broken, and the afternoon bounce was insufficient to regain the apex of the wedge. So long as the daily cycle downphase continues, bulls should be wary of buying anything but sharp dips, while bears can continue to short spikes. But overall, the persistence of support is making it look like the current daily cycle downphase (previous chart) won't be delivering more than a move to the 1440 area. Daily ES candles The ES added 2 to close at 1145.25, the strongest of the equity contracts. The high printed at 1152, within the 1151-1153 I've been discussing here. The low was fractionally higher at 1140.50, and the slightly positive Macd twitch I mentioned on Thursday is now a slight positive stochastic twitch as well. The upper regression channel line continues to provide support, and the downward price trend isn't looking nearly as promising as it did even on Thursday. If that upper regression line doesn't break on Monday, bears are going to be left holding a damaged daily cycle downphase from a higher price and oscillator low. 20 day 30 minute chart of the ES The afternoon bounce off the wedge breakout on the 30 minute chart penetrated back into the apex but failed at the upper resistance line, breaking back below at the cash close. As on the NQ, the 30 minute cycle trend of higher oscillator lows was broken, but not with the same authority. So long as the daily cycle remains down, then we should be seeing the reverse here- lower 30 minute cycle highs instead of higher lows. Resistance at 1151-53 is key before a move to the 1158-60 area, and the daily cycle downphase is in danger of aborting. 1134 remains the bear wedge target, but so far the ES bulls show no sign of allowing even a return, let alone a test of that level. 150-tick ES A short cycle downphase commenced in the final hour of trading on Friday, and delivered most of its punch by the close. Direction is almost perfectly up for grabs here for Monday morning. Look for support at 1142 and resistance at 1146.50, followed by 1148. Daily YM candles YM closed at 10584, an 11 point gain. It remains weaker than ES on a cycle basis, but a higher low and higher high printed Friday, and like the ES, another positive day could brighten the picture considerably. Resistance is at 10604, 10625 and 10650. Support is at 10570, 10550 and 10530. 20 day 30 minute chart of the YM The bear wedge on ES and NQ is a rough flag formation on YM, and the pattern of higher 30 minute cycle lows did not get violated on Friday. An interesting divergence, but as can be seen on the daily chart, YM continues to trade in lockstep with ES. The US Dollar Index declined Friday and commodities, which had moved higher all week against a rising dollar, advanced again. Equities remain decoupled from the move in the dollar and have been so for the first week I can remember in many months. Treasuries advanced against the weak dollar, which conforms to the pattern we've come to expect. Only equities and commodities have diverged, both bullishly so. Traders should continue to wait for a reliable pattern to emerge here and stay focused on their individual charts in the meantime. With commodities at 20+ year highs and equities not falling on a rising dollar, it's possible to imagine a secondary rally kicking off as foreigners chase what they hope to be a currency appreciation in the beaten dollar. I don't expect that to occur, but we've learned to keep an open mind to all possibilities. ******************** INDEX TRADER SUMMARY ******************** A MIXED MARKET By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – The market is more mixed than is suggested by the fact that the Dow Jones has now been up for 3 straight months. If we judge the market by what many individual investors and traders look at, the Nasdaq market, the market has been falling significantly from its January peak. At best right now I see the Dow going sideways, the S&P 100 and 500 drifting moderately lower and the Nasdaq being vulnerable to falling another 100 points (from recent lows around 2000) to perhaps the 1900 area in terms of the Composite. This mixed picture will likely continue until there is pick up in the creation of new jobs as this would mark a substantial pick up in the pace of the economic expansion from what has seen so far in this recovery. FRIDAY'S TRADING ACTIVITY – Friday was a bit rough unless you like a choppy sea. The positive spin on things that buoyed the blue chip averages was set by economic reports, especially the Gross Domestic Product figure or GDP, which came in at a better than expected 4.1% figure, well under the 8.2% growth reported for Q4 of course, but expectations are always what drives the market that day. The ever-popular game of figuring the consumer penchant for spending, got a bullish spin with the University of Michigan's latest tealeaf survey. The U of M consumer sentiment index ran up to 93.5 in late-February from 93.1 from earlier this month. Of course, the bearish pundits could point to the fact that all this is WELL under the 103.8 number reported in January. Throw in any indication of a pick up in the beleagured manufacturing sector and Friday was bound to have more of a positive tone than negative. The Chicago Purchasing Managers Index, one of those that get looked at, was reported at 63.5 percent versus 65.9% in January - that figure was a multiyear high. The key thing is that readings over 50 are defined as marking economic expansion. The Dow at 10,583 was down about 1% on the week, but up slightly on the month. The S&P 500 Index (SPX) was roughly unchanged on the day at 1145. The Nasdaq was down about 3 points Friday, putting it down only one tenth of one percent on the week with its close at 2029 but this also puts this segment of the market down some 6 weeks straight. Pulling down the Nasdaq was the semiconductor sector as per usual, with a still-anemic earnings picture gleaned from a forecast from one chip stock (Novellus) and an under-expectations quarterly revenue figure from another (Altera). OTHER MARKETS - The dollar turned down based on trader expectations that the U.S. Administration will not try to stem the generally falling greenback. This led the Euro to close in New York trading at 1.248 - however, this figure while quite strong in terms of the past two years, but which can also be seen as a fall off from the highs in the 1.29 area earlier in the month. Of course, profits are tempting to take if you have been a Euro bull, a dollar bear. The bond market benefited from the still-pervasive perceptions among bond holders that U.S. inflation will continue to be low. It was noteworthy for the 10-year Treasury bond to close up nearly half a point to yield only 3.98%, with 4% being a benchmark figure. This yield marked its lowest for recent weeks. MY INDEX OUTLOOKS – S&P 100 Index (OEX) – Daily chart: The pattern that is noticable in the S&P 100 (OEX) trading is the upward sloping lines connecting the relative highs and lows of last trading. A next move looks lower to me than what was seen recently. I think a good likelihood is for a downswing ahead that carries back to the support suggested in the area of the dashed green line around 558 - which is also near the intersection of the 50- day moving average currently. The 50-day average being a measure of possible support and buying interest also. R notes the current "line" of resistance. My trading playbook with the OEX is to continue to hold puts, looking for at least one move to the bottom of my expected near- term trading range as suggested by the upper and lower (dashed) level lines I've put in on the chart above. It would take a close above 572 to cause me to exit being short (long puts) in this market. As measured by the 14-day stochastic, this market has declining momentum and not yet what could be said was an "oversold" condition. OEX – Hourly: It becomes even clearer on the Hourly chart of OEX where the conflicting trends are overlapping. An uptrend is defined as succeeding series of higher (new) highs and, after the market drops back, lows that stop above the prior low of significance. By that definition and as measured by this period we are looking at on the hourly chart, the OEX remains in an uptrend until there is a lower low or to below the point of its last low around 561. If there is an hourly low under 561, the short-term trend turns down. What looks increasingly likely to me is a decline in OEX to the lower end of a downtrend channel that may be emerging. Down toward what is marked as the support area: 560 - 558. The resistance zone at 570-572 becomes clearer (as to where it is) by use of the hourly chart and is noted on the chart. The two stochastic model pairs I use, mostly on hourly charts, is where "length" is set to 21 for the slower moving one and just at 5 for the faster moving one which is the topmost. When each lines up above the red overbought line or drops to the green oversold line, the direction of prices has often reversed and that counter-trend has continued for a duration of 3-10 trading sessions. On this basis, price momentum ought to be on balance lower for the next 2-3 days or over the course of the coming week. Dow Industrials (INDU) Daily & Hourly (DJ Index-DJX): The Dow presents a picture of blue chips fairly valued in the opinion of money managers - bids were not aggressive any longer on the drive above 10700. ON the other hand, as we were seeing last week, there is underlying support or buying that is coming in when the market falls. However, it also seems that given the broken hourly uptrend, a downside objective for the Dow Index is to around 104.60, as marked by the "X" on the right hand hourly chart above. This area between 104.50 and 105.0 is where the best buying interest will likely surface again unless there is big new perceived negative, like a poor job growth number or some other such shock. The Dow has a tendency more than the other indices to go into a relatively narrow trading range after the kind of strong advance seen in Dec.-Jan. Level lines through the lows and highs makes a rectangular pattern often. The significance of it then lies in which direction prices take after its sideways crawl: above or below the lines forming the "box". In which case trade in the direction of this breakout type move. Nasdaq Composite (COMP) Index – Daily & Hourly: While the trend may be more sideways in the S&P segment of the market, it's clearly down over the past two months as measured by the Nasdaq Composite index. The pattern of a sharp selloff after the last advance to the 2100 area, well under the 2150 peak, has made for a bearish looking chart. The break of the 50-day average does so also. The key now for the bulls is whether there is a close above 2150- 2160. I think the bears will be in charge for a while longer and there will be at least one decline to 1900-1925 area. Nasdaq Composite (COMP) Index – Daily: Another way to see how the trend in the COMPX has gone since its intermediate rally peak in January is to look at price action within a moving average envelope. The center moving average (magenta line) is 21-days. When this index gets well above this closing average to the extent that is 5-6% higher (red upper line in the chart below), a reversal of trend often follows. Use of the Moving Average Envelope Indicator was discussed in my last week's Trader's Corner column, at - http://www.OptionInvestor.com/traderscorner/tc_022604_2.asp If subsequent rallies start to fail in the area of the moving average, I first look for at least a move to the lower envelope line (set at 3 and half percent under). The percent figure will change over time, but slowly. What frequently happens in situations like what is being suggested by the Moving Average Envelope study above, is that prices continue to fall, but not steeply - this causes the fall to seemingly "hug" the line. Over time I look for a decline, possibly to as low as the 1900 area, the region where the last major rally began. Nasdaq 100 tracking Stock (AMEX:QQQ)– Daily: Last week's price action in QQQ took the stock to below its daily uptrend price channel as is outlined below. What was the lower "support" trendline now may mark the opposite - an area of selling interest/resistance. This view suggests that key resistance is at 37 currently. As long as the Q's stay under 37, I assess downside potential to be 35-35.50. The noteworthy thing about the volume trend here is how it jumped on the struggling rally attempts of last week. This jump in trading volume suggests active liquidation. If there will still a solid uptrend going on, we would expect to see these kinds of volume spikes when the market was rallying strongly. Nasdaq 100 tracking Stock (AMEX:QQQ)– Hourly: The hourly chart below presents what I think is the bearish downtrend channel that QQQ may continue in for the next week or so. The lower end of this channel intersects currently in the 35.5-35 area which is my downside objective for short positions in the stock. Conversely and in terms of my short exit point, that is at the upper boundary as noted by the red arrow. My current stop or exit point for short positions is at 37.7. If there is fall to the 36 area, lower to 37.1. Take profits at or under 35.5, if reached. 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 ************** Bubblemania I do not understand the current bounce in Genentech stock. DNA was trading at $36 when the first talk of an approval of their cancer drug was first discussed in May. This gave them a market cap of $18B. The resulting approval fever pushed them steadily upward to $95 as the short interest grew. At $95 they had gained +$30 billion in market cap for a drug that had not yet been approved. The spike on the approval from $95 to $110 added nearly another $10 billion to the cap and pushed it to $57B. +$40 billion in additional market cap on the approval of a drug that has been expected for nearly a year. If they made $1 billion a year in pure profit it would take decades to justify the jump. Let's review the facts. The drug, Avastin, has been shown to increase the lifespan of colorectal cancer patients by five months. The drug is VERY expensive and runs about $44,000 per patient. Obviously not everyone is going to rush to the doctor and beg for the drug until the insurance companies decide if they are going to pay or not. What is five more months of life worth if you know you are already terminal? I doubt anyone can put a price on that until it happens to them but without insurance companies footing the bill it would be a mute question for most people. Analysts are predicting Avastin to become a blockbuster drug with global sales of $1.6-$1.8 billion by 2008. The generous consensus for this year is $300 million. Even Genetech management continues to stress restraint in terms of revenue and profit for the next couple of years. The hope is that it will eventually be prescribed for other cancers like breast and lung cancer. The company stresses that several years of testing will be needed before any benefit can be determined. DNA suggested that earnings "might" increase by 20% once the drug is accepted and in general circulation. At current prices that puts DNA at something in the range of 90-100 PE based on forward earnings. Pretty steep but what is an eventual cure for cancer worth? Even if it does migrate into other cancer applications it could be 2007-2008 before DNA sees any benefit from the sales. Considering that the stock has gone from $36 to $110 in a year it would appear that we have a very overpriced stock in the SHORT TERM. I have no argument that DNA could move higher eventually as they do have some more drugs in the pipeline over the next several years. I only suggest that the short covering has gotten out of hand and DNA may need to rest before going higher. The official short interest is only about 5% of the float but that 5% has been really hammered over the last two days. Volume on Friday was 14 million shares and the YTD average is 2.5 million per day. Assuming the same number on Thursday that is 28 million shares and I would bet the majority of those were traded several times a day. Why? Because 61% of the shares outstanding are held by insiders. I doubt they could sell them on the spur of the moment due to reporting guidelines. That is 319 million shares. According to Multex 42.39% are owned by institutions. That is 221.8 million shares. (I know the numbers don't add up but bear with me.)The total of the insiders and institutional ownership shows to be 540 million shares and there are only 523 million outstanding. Obviously there has been some changes to the holdings that have not made the record books yet. The bottom line? There are very few shares available to trade. Thus the monster short squeeze. This is where we come in. If you were an institution and your $36 stock was suddenly trading for $110 the odds are very good you would do the math then take your money and run. Insiders are probably scrambling to unload shares as soon as possible as well. We have had two days of craziness and everyone who was short got killed and everybody that wanted to day trade it has gotten their chance. The decision by institutions to sell was probably made on Friday and the orders will start going out on Monday. That will be five days after the announcement and everyone will have had a chance to cool off. I would also bet there will be a huge amount of new interest in shorting the stock once the slightest weakness is seen. Granted, with very little stock in the real float there is still a chance for another spike but I am counting on the excitement being over soon. I am looking for a swift drop to something under $100 and a quick exit. Because of the volatility involved and the high prices I am going to use March options. If you are uncomfortable with the short fuse then drop down a strike and play Aprils. Buy March-$105 PUT DNA-OA closing price $2.40 or Buy April-$100 PUT DNA-PT closing price $2.35 Obviously the prices are the same but you lose $5 in the strike and gain four weeks in time. It is your call. I would maintain a 50% stop loss on the options and I would look for one last bounce on Monday morning to enter your position. If no bounce then bite the bullet and go for it. I mentioned this play in my wrap on Thursday night and in the Monitor on Friday and some readers emailed me they got in at $109 on Friday. Good job! There is still plenty of profit left for the rest of us but congratulations are still in order. I am not going to set a target on this below $100 but let your conscience be your guide. If we do get a steady decline there is no reason to bail but once we hit $100 I would set a stop to lock in a nice profit. A patient trader might target a touch of the 50dma for an exit. If disaster strikes and DNA moves over $110 I would abandon the plan until weakness appears and I would bet it is only a matter of time. DNA Chart **************** MARKET SENTIMENT **************** Is it over yet? - J. Brown The month of February finally comes to a close as the broader indices struggle with another week of consolidation above support. That's a good thing right? Well we hope so. The fact that the DJIA and the S&P 500 have been consolidating gains in a sideways manner might be interpreted as a lack of sellers. No one wants to sell because they believe stocks will go up again and the consolidation this month has really been caused by buyers taking a breather. Sounds reasonable, right? The NASDAQ has had a tougher time with its own consolidation but then it out performed both the DJIA and the SPX so there is a lot more profit taking to occur. In reality the NASDAQ is holding up pretty well. We still haven't seen a 10% pull back from its highs and given the bounce from its low under 2000 this past week it may be a while yet before we do see such a correction. Fundamentally this was a pretty bullish week for stocks. Greenspan offered some very positive comments about the economy and Q4 GDP estimates came in at +4.1% on Friday, above estimates. The Gartner group raised their sales estimates for semiconductors to +23% this year and investors are probably starting to look towards April earnings even though the Q4 earnings season just ended. Market internals were also bullish on Friday with advancing stocks outpacing decliners 18 to 9 on the NYSE and almost 17 to 14 on the NASDAQ. Volume numbers were mixed with up volume doing better than down on the NYSE and vice versa on the NASDAQ. Looking across the various sector-specific indices we witnessed a number of them putting in short-term bottoms this past week. More encouraging were the number of new highs. Oil stocks, oil services, utilities, homebuilders and healthcare all saw their indices hit new highs. Also strong were banks, biotech and retail stocks. Now that February is over investors will be looking at March's historical trends. According to the Stock Trader's Almanac March appears to be somewhat volatile with the first half of the month more bullish than the second half. However, the Dow has managed to close higher in March five out of the last six years. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7416 Current : 10583 Moving Averages: (Simple) 10-dma: 10624 50-dma: 10513 200-dma: 9659 S&P 500 ($SPX) 52-week High: 1158 52-week Low : 788 Current : 1144 Moving Averages: (Simple) 10-dma: 1145 50-dma: 1128 200-dma: 1040 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 946 Current : 1470 Moving Averages: (Simple) 10-dma: 1480 50-dma: 1489 200-dma: 1357 ----------------------------------------------------------------- The VXO and VIX managed an intraday reversal both all three are still pointing lower. These low readings suggest very little fear in the markets or in other words investors are very bullish. CBOE Market Volatility Index (VIX) = 14.55 -0.25 CBOE Mkt Volatility old VIX (VXO) = 14.76 +0.11 Nasdaq Volatility Index (VXN) = 22.84 -0.26 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.72 624,138 448,697 Equity Only 0.59 528,027 313,869 OEX 1.38 19,559 26,998 QQQ 3.74 6,810 25,436 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 76.0 + 0 Bull Confirmed NASDAQ-100 61.0 + 0 Bear Confirmed Dow Indust. 86.7 + 0 Bull Confirmed S&P 500 85.6 + 0 Bull Confirmed S&P 100 87.0 + 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: 1.12 10-dma: 1.12 21-dma: 1.03 55-dma: 1.00 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 1849 1677 Decliners 969 1391 New Highs 206 116 New Lows 5 4 Up Volume 1052M 846M Down Vol. 728M 969M Total Vol. 1807M 1840M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 02/24/04 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 commercial traders. They remain hedged either direction. Small traders haven't made many changes either and remain bullish. Commercials Long Short Net % Of OI 02/03/04 411,920 414,596 (2,676) (0.3%) 02/10/04 412,217 414,044 (1,827) (0.2%) 02/17/04 416,148 415,278 870 0.0% 02/24/04 417,490 416,502 988 0.0% 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 02/03/04 141,465 81,926 59,539 26.7% 02/10/04 143,496 80,362 63,134 28.2% 02/17/04 141,533 84,227 57,306 25.3% 02/24/04 141,559 85,171 56,388 24.9% 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 We're seeing a lot more action in the e-minis than the large contracts above. Commercial traders are bearish but have become slightly less so over the last week. As is typical the small traders moved the opposite direction and while bullish became less so. Commercials Long Short Net % Of OI 02/03/04 280,519 346,042 (65,523) (10.5%) 02/10/04 297,601 356,630 (59,029) ( 9.0%) 02/17/04 296,313 371,703 (75,390) (11.3%) 02/24/04 320,425 387,255 (66,830) ( 9.4%) 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 02/03/04 133,293 55,476 77,817 41.2% 02/10/04 110,480 58,428 52,052 30.8% 02/17/04 144,014 64,391 79,623 38.2% 02/24/04 129,894 63,524 66,370 34.3% 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 for the commercial traders in the NDX futures this week but we are seeing a change in the small traders' positions. There appears to be a bullish reversal with a large shift from shorts to longs. Of course a contrarian will note that the small trader is normally wrong so this could be a bearish development for the markets. Commercials Long Short Net % of OI 02/03/04 43,600 41,441 2,159 2.5% 02/10/04 44,406 40,439 3,967 4.7% 02/17/04 46,104 40,385 5,719 6.6% 02/24/04 47,266 40,452 6,814 7.8% 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 02/03/04 8,907 13,729 (4,822) (21.3%) 02/10/04 9,906 13,018 (3,112) (13.6%) 02/17/04 9,630 12,338 (2,708) (12.3%) 02/24/04 12,388 7,310 5,078 25.8% 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 Hmm... commercial traders have become more bullish on the Dow in the last week. Not much change from the little guys. Commercials Long Short Net % of OI 02/03/04 17,765 9,619 8,146 29.7% 02/10/04 21,764 11,974 9,790 29.0% 02/17/04 24,451 12,907 11,544 30.9% 02/24/04 27,176 13,918 13,258 32.3% 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 02/03/04 6,352 13,113 (6,761) (34.7%) 02/10/04 6,267 14,220 (7,953) (38.8%) 02/17/04 6,768 15,623 (8,855) (39.5%) 02/24/04 6,509 14,919 (8,410) (39.2%) 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 *************** It's head and shoulders above them all I'm relatively new to technical analysis and have been reading some books. I'd like to say that I think all of the analysts at your company do a great job when explaining various technical aspects of the market, and the added education is worth the price of subscription. The books that I've read haven't gone into the great detail as to how or why a head and shoulders pattern is formed. You've been pointing out a POTENTIAL head and shoulders top formation in the SOX. Does your using the word "potential" mean you're not sure? Do you, or do any of your fellow analysts know, why the head and shoulders top pattern forms? Is the conventional horizontal neckline pattern more reliable than the ascending neckline? Many times, I see comments in the market monitor regarding intra- day head and shoulder patterns, where these patterns seem to have a 50/50 chance of ever playing out to their objective, if not actually negating the pattern altogether. Is this pattern really that reliable? Answers: I've read some books, or chapters in books, regarding the head and shoulders TOP and the REVERSE head and shoulders pattern. I will say that I have my own thoughts on why the pattern is created, but it is very simplistic and is directly related to supply and demand, where the ownership of the stock "turns over" to bullish (reverse h/s pattern) or bearish (h/s top) hands, where an eventual price objective for the security is already known, based on the eventual fundamentals. That's right.... fundamentals. The reason I have my own thoughts, which I will try and explain in some detail, is that my readings on this topic, when back tested, seem to have mixed findings. Sometimes what one analysts says it typical plays out, while at the same time, what an analyst feels is a "must" for the pattern to work, never presents itself, but the security will actually play out the pattern. I haven't polled my fellow analysts, but would welcome their response, should they wish to write an article, expressing their thoughts and experiences on this subject. Let me also tackle the question of the ascending neckline of a head and shoulders top pattern, or descending neckline of a reverse head and shoulders bottom pattern, being more or less powerful than a conventional horizontal neckline. It has been my experience that the HORIZONTAL neckline pattern is more powerful, or reliable, than the ascending/descending neckline patterns. This is based on past experience, but may also be a factor of trend. For example. The POTENTIAL head/shoulder top formation I've discussed that is developing in the Semiconductor Index (SOX.X) chart, shows an ascending neckline. This is an UPWARD trending neckline, and for that very reason, the upward trend depicts some type of bullishness associated with the chart, as the pattern is POTENTIALLY being developed. Semiconductor Index (SOX.X) - Daily Intervals Here is a chart of the SOX.X, which we've shown in the OptionInvestor.com Index Trader Wraps. I've marked in BLUE what appears to be a left shoulder (12/01/03), head (01/12/04) and right shoulder (02/19/04) developing, in a POTENTIAL head shoulder top pattern, with an ascending neckline in GREEN. Conventional retracement has been taken from a relative low of 468.20 (12/16/03) and high of 560.68 (01/12/04), where the 80.9% retracement of 485.86 suspiciously marks an almost exact midpoint of where a neckline and head would be identified, where the midpoint needs to be observed in order to calculated the downside price objective of the pattern. Take general not of the dates on the above chart, as we're going to use them later on in this article. POTENTIAL versus CONFIRMED: Why do I use the term POTENTIAL instead of a word like CONFIRMED? Look at the above chart, and now I want to focus on the RED 50% retracement. After a technician has calculated a price objective of the head and shoulder top pattern, sometimes it is helpful to see if the pattern "makes sense" or is in play. In my opinion, a head and shoulders top pattern is ONLY CONFIRMED or stands GREATER PROBABILITY of being in play, when the NECKLINE is BROKEN. It is this thought, based on past observation, where I feel the HORIZONTAL neckline pattern is more reliable than the ascending neckline patter. Focus on the RED 50% retracement and see if THIS MAKES SENSE. Semiconductor Index (SOX.X) - Daily Intervals Based on the head and shoulder top price objective calculation, one technique I've discussed with retracement is to simply attach retracement at the HEAD of the pattern, and pull the other end of retracement to its objective. By default, the 50% retracement level should mark the neckline. After all, the price objective is derived by calculating the DIFFERENCE between the neckline and the head, then adding that difference to the neckline to establish the pattern's price objective. Has the SOX.X been showing some technical trade that "makes sense" to this retracement? Certainly there are point of inflection, where the MARKET has been buying and selling this group of stocks. Both of the shoulder areas show VERY suspicious price resistance at the 19.1% retracement level (make not of this... 19.1% at shoulder, 19.1% at shoulder, 19.1% at shoulder). The above chart would currently have the pattern being CONFIRMED on a SOX.X violation of the 486 level. Do you also see how the ascending upward trend may also be finding some bullish support? While a BEARISH trader may certainly feel, based on observation that the head/shoulder top pattern is confirmed based on the obvious head/shoulder formations observed, greater conviction among BEARS would build toward the pattern on a break below 486. At the same time, BULLS may then be showing less conviction toward further price rise, should they admit defeat and begin assessing downside risk to the 412 pattern objective. What have we done so far? We've looked at our security from the OUTSIDE. Just like a doctor will look at you if aren't feeling that well. A good doctor always looks, or tries to make observations of the INSIDE of his/her patient, before further diagnosing the health, or sickness of the patient. Now I want you to focus on the above chart's 468.80 level, or 61.8% retracement. This is the 12/16/03 relative low. Let's look at the INSIDE of the patient, and Dorsey/Wright and Associates' Semiconductor Bullish % (BPSEMI) chart, which is currently in "bear confirmed" status. It is saying that the internals aren't that healthy of late. Remember.... 12/16/03. Semiconductor Bullish % Chart - 2% box size Once we analyze the OUTSIDE or the SOX.X itself, we want to always look at the internals, or the bullish % indicator. Dorsey/Wright and Associates has established a Semiconductor Bullish % (BPSEMI) where they've thrown a bunch of semiconductor- related stocks into a basket, and tabulated the number of stocks that currently have a buy signal still associated with the point and figure chart. I've tried to associate some of the price inflection points of the SOX.X, with the various bullish % readings. A trader/investor that begins to feel a head/shoulder top formation is in play on the SOX, could very well be on the right track as it relates to the SOX. The internals have been VERY bullish with readings above 70%, which are considered to be longer-term "overbought" readings, where a current head/shoulder top price objective of 412 isn't that outlandish, and could well be achieved should the bullish % fall to an "oversold" bullish % level of 30% or lower, as the Semiconductor Bullish % (BPSEMI) did in August (blue 8) of 2002, October (blue A) of 2002, and February (blue 2) and March (blue 3) of 2003. Note: When trying to make ANY type of price comparisons with ANY bullish % indicator, it is STRONGLY ADVISED to only do so on shorter-term basis of 2 or 3 months. It SHOULD NOT BE the analysis that a current bullish % decline to 30%, would equate to a SOX price of 265 or 285 as found in February/March of 2003. Hmmm... February/March 2003 the bullish % reversed up like a rocket on fire, and now shows a topping pattern. What can I do to further analyze this observation? Semiconductor Index (SOX.X) Chart - Daily Intervals Here's a different look at the SOX, where I've now placed a retracement bracket from the February/March 2003 lows to recent high. Suspicion is once again raised at 50% of that range is 409.61, which is pretty darned close to the head/should top objective we've calculated. I've outlined a bearish trading plan for the Semiconductor HOLDRs (AMEX:SMH) $40.90, where very similar to the SOX, the SMH shows a head/shoulder top formation. Since we've been looking at a SOX chart, I've simply used SOX price levels to outline the plan. One note I've also made in the POTENTIAL head/shoulder top pattern that developed in late 2002. Think about the Semiconductor Bullish % (BPSEM) and how "oversold" it was in February/March of 2003. Did that pattern make sense as it relates to who (bulls or bears) having the greater degree of risk? Probably not, and why that pattern failed, and failed miserably. One important lesson when trading head/shoulder patterns is to FOLLOW THE DARNED TECHNICALS! Too many traders become "convinced" the pattern will play out, and they continue to let a right shoulder, or a second right shoulder grow higher. Pretty soon it becomes what I call a "hunch back" h/s pattern, where the trader lets it grow to the ear. Next thing you know, an excuse is made that its normal for shoulders to be up to your hairline. Then as the pattern continue to fail, it becomes normal for us all to be walking around like orangutans with our right arms in the air. One word on head and shoulder patterns. I'll let Stan Weinstien's comments speak for me on this. In Mr. Weinstein's book "Secrets for Profiting in Bull and Bear Markets," he states that "Novice technicians usually imagine them on every other page of a chart book, just as a first-year medical student often worries that he has contracted every disease that he studies." This is where I would then make some comment as to the observing of intra-day or shorter-term head/shoulder patterns. I put VERY LITTLE WEIGHT in the probability of success in these patterns. While they can be used to try and determine a shorter-term price objective, they would probably not be as reliable as a head/shoulder pattern found on a DAILY, a WEEKLY or MONTHLY time interval. The REASON I believe indices, but more likely individual stocks can reach objectives found in the head/shoulder pattern is because there is enough time for traders to get on the WRONG SIDE of the trade, where when the NECKLINE IS BROKEN, the realization that the bull (head shoulder top) or bear (reverse head and shoulder bottom) then sets in, and the trade unfolds in the direction of the break. When trading shorter-term h/s patterns, there may not always be enough stock that has gotten on the wrong side of the trade, to really make much of a difference. Allow me to show a reverse head and shoulders pattern that I had profiled in shares of Apache Corp. (NYSE:APA) back in December of 2001. I'm also going to use the QCharts Float Turnover Channel tool I showed in last weekend's Index Trader Wrap. This should drive home the "turnover" or WRONG SIDE OF THE TRADE thought process. The power of the head/shoulder pattern comes from us as traders being on the RIGHT SIDE of the trade, when the other side realizes their mistake, and caves into our correct analysis. Apache Corporation (APA) - 12/28/01 breakout We worked hard back in December of 2001 analyzing shares of Apache Corporation (NYSE:APA). Not only with our bar charts, but also the point and figure charts. There were so many things its chart kept telling us, that this stock wanted to make a major longer-term bullish move higher. To drive home my thoughts of why the head/shoulder pattern can be so powerful is the thought of getting supply/demand, where the more successful outcomes of the pattern has either bulls or bears being on the WRONG SIDE of the trade, when the pattern begins to unfold at the neckline. That's when one side realizes their mistake, while the other side builds conviction toward their correct analysis (fundamental and technical) and begins driving the stock toward the pattern's objective. Using the QCharts public float turnover channel tool, you see how the entire public float was owned between $17.38 and $25.22 when the neckline of the reverse head and shoulder pattern was broken, and the pattern was confirmed? Now, one thing I MUCH PREFER in regards to trading the head/shoulder pattern with individual stocks, rather than an index, is that I can monitor VOLUME, where VOLUME tells us about interest among market participants. If you've ever read a book on technical analysis, some analysts say to look for volume patterns at the shoulders and the head. There is skepticism among many analysts that there is a volume pattern that shows up consistently at the head and shoulders. I agree, as my observations also show little consistency. However, most analysts agree that when the break of the neckline is found, a more bullish unfolding of the pattern finds VOLUME INCREASING at the breakout. Now... lets turn on the volume, and follow Apache's (APA) progress. I'm also going to leave my public float indicator on. Apache Corporation (APA) - Pattern tests When trading a head/shoulder pattern, tests should continually be applied. It is difficult for a trader to see a pattern begin to unfold, especially early in a session, and have to try and make a determination as to what the day's or follow day's VOLUME is going to equate to. The above chart of APA would have shown no real sign that there was great interest among market participants when APA broke above its neckline, and generated the triple-top buy signal on its current point and figure chart. Whether you are trading a reverse head and shoulder pattern like that shown in APA, or the head and shoulder top pattern in the SOX, the trend will usually be your friend. The bulk of the time (I have to scientific evidence) the trend from the head to the right shoulder should hold support, but it is not uncommon on a light volume breakout, or even heavy volume breakout, which does seen an near-term pullback, come back to the first right shoulder. A trader/investor that trades the head/shoulder pattern should always be prepared to assess near-term risk in their trade back to the first right shoulder. If this create some type of trader/investor remorse when considering this potential risk, then MITTIGATE that risk by trading a SMALLER position when the neckline is broken. A trader/investor that has spent time analyzing the trade setup should still participate in the break of the neckline, just in case the stock really makes a powerful move on the break. Well, I've got to get this into our HTML department, or they are going to strangle me, but the trader had quite a few questions, which I think I've covered them all. Good questions, and a pattern that technicians like to trade. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- FRO Frontline Ltd. Mon, Mar 1 -----N/A----- 1.05 HOV Hovnanian Enterprises Mon, Mar 1 After the Bell 1.74 HBC HSBC Holdings plc Mon, Mar 1 Before the Bell N/A KGC Kinross Gold Mon, Mar 1 -----N/A----- 0.03 PSO Pearson plc Mon, Mar 1 Before the Bell N/A STHLY Stet Hellas Telecomm Mon, Mar 1 -----N/A----- N/A TLD TDC A/S Mon, Mar 1 -----N/A----- N/A ------------------------- TUESDAY ------------------------------ ALO Alpharma Tue, Mar 2 After the Bell 0.29 BNS Bank of Nova Scotia Tue, Mar 2 Before the Bell N/A BIIB Biogen Idec Inc. Tue, Mar 2 After the Bell 0.32 BJ BJ's Wholesale Club Tue, Mar 2 Before the Bell 0.65 CVC Cablevision Sys Corp. Tue, Mar 2 Before the Bell -0.45 CRHCY CRH plc Tue, Mar 2 Before the Bell N/A FL Foot Locker, Inc. Tue, Mar 2 -----N/A----- 0.45 GMST Gemstar-TV Guide Intl Tue, Mar 2 After the Bell -0.02 HSIC Henry Schein Tue, Mar 2 Before the Bell 0.78 MVL Marvel Enterprises Tue, Mar 2 Before the Bell 0.17 PSUN Pac Sunwear CaliforniaTue, Mar 2 After the Bell 0.42 PLL Pall Corp. Tue, Mar 2 After the Bell 0.30 PETM PetsMart Tue, Mar 2 -----N/A----- 0.37 COO The Cooper Companies Tue, Mar 2 -----N/A----- 0.53 ------------------------ WEDNESDAY ----------------------------- ABV AmBev Wed, Mar 3 -----N/A----- 0.58 AZO AutoZone Inc. Wed, Mar 3 Before the Bell 1.00 BVF Biovail Corporation Wed, Mar 3 Before the Bell 0.29 CHS Chico's FAS Wed, Mar 3 After the Bell 0.28 COST Costco Wholesale Corp Wed, Mar 3 -----N/A----- 0.47 EDP Elec de Portugal, S.A Wed, Mar 3 During the Market N/A GLH Gallaher Group PLC Wed, Mar 3 Before the Bell 1.89 HOTT Hot Topic Wed, Mar 3 After the Bell 0.44 LFL LAN Chile Wed, Mar 3 -----N/A----- 0.34 MIK Michaels Stores Wed, Mar 3 After the Bell 1.32 KWK Quicksilver Resources Wed, Mar 3 After the Bell 0.26 SKS Saks Incorporated Wed, Mar 3 Before the Bell 0.68 TLM Talisman Energy Wed, Mar 3 -----N/A----- 0.64 TS TENARIS S A Wed, Mar 3 -----N/A----- 0.41 TOY Toys R Us Wed, Mar 3 Before the Bell 1.05 ------------------------- THUSDAY ----------------------------- AMI ALARIS Medical, Inc. Thu, Mar 4 Before the Bell 0.18 CZN Citizens Comm Co. Thu, Mar 4 Before the Bell 0.09 DLM Del Monte Foods Thu, Mar 4 -----N/A----- 0.26 HAVS Havas Advertising Thu, Mar 4 Before the Bell N/A KWD Kellwood Company Thu, Mar 4 After the Bell 0.46 MBG Mandalay Resort Group Thu, Mar 4 After the Bell 0.31 MDZ MDS Inc. Thu, Mar 4 Before the Bell N/A NTLI NTL INC Thu, Mar 4 Before the Bell -2.55 PBY Pep Boys Thu, Mar 4 Before the Bell 0.04 PKZ PETROKAZAKHSTAN INC Thu, Mar 4 During the Market 1.28 PT Portugal Telecom SGPS Thu, Mar 4 Before the Bell N/A REXMY REXAM PLC Thu, Mar 4 Before the Bell 1.46 SPLS Staples, Inc. Thu, Mar 4 Before the Bell 0.41 SZE Suez SA Thu, Mar 4 -----N/A----- N/A SBL Symbol Technologies Thu, Mar 4 After the Bell 0.09 UPL Ultra Petroleum Corp Thu, Mar 4 Before the Bell 0.16 VRX Valeant Pharm Intl Thu, Mar 4 Before the Bell 0.20 HLTH WebMD Thu, Mar 4 After the Bell 0.09 ------------------------- FRIDAY ------------------------------- BFR BBVA Banco Frances Fri, Mar 5 -----N/A----- N/A SHR Schering AG Fri, Mar 5 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable AME AMETEK Inc 2:1 Feb 27th Mar 1st HCP Hlth Care Prop Investors 2:1 Mar 1st Mar 2nd SJW SJW Corp 3:1 Mar 1st Mar 2nd FWFC Washington FinancialCorp 5:4 Mar 1st Mar 2nd AVP Avon Products Inc 2:1 Mar 1st Mar 2nd HCSG Healthcare Services 3:2 Mar 1st Mar 2nd BFCF BFC Financial Corp 5:4 Mar 1st Mar 2nd POG Patina Oil & Gas Corp 2:1 Mar 3rd Mar 4th TRMB Trimble 3:2 Mar 4th Mar 5th CLFC Center Financial Corp 2:1 Mar 5th Mar 8th WGO Winnebago 2:1 Mar 5th Mar 8th SSNC SS&C Technologies, Inc 3:2 Mar 5th Mar 8th VAPH Vaso Active Pharma, Inc 3:1 Mar 5th Mar 8th PII Polaris Industries Inc 2:1 Mar 8th Mar 9th LWAY Lifeway Foods, Inc 2:1 Mar 8th Mar 9th MPX Marine Products Corp 3:2 Mar 10th Mar 11th FIC Fair Isaac Corp 3:2 Mar 10th Mar 11th EXC Exelon Corp 2:1 Mar 10th Mar 11th HWFG Harrington West Finl Grp 6:5 Mar 11th Mar 12th CTX Centex Corporation 2:1 Mar 12th Mar 13th -------------------------- Economic Reports This Week -------------------------- Q4 Earnings are finally slowing to a crawl but investors are more focused on economic news. This week we have a boatload of reports throughout the week. ============================================================== -For- ---------------- Monday, 03/01/04 ---------------- Personal Income (BB) Jan Forecast: 0.5% Previous: 0.2% Personal Spending (BB) Jan Forecast: 0.4% Previous: 0.4% Construction Spending (DM) Jan Forecast: 0.3% Previous: 0.4% ISM Index (DM) Feb Forecast: 62.0 Previous: 63.6 ----------------- Tuesday, 03/02/04 ----------------- Auto Sales (NA) Feb Forecast: 5.6M Previous: 5.2M Truck Sales (NA) Feb Forecast: 8.0M Previous: 7.8M ------------------- Wednesday, 03/03/04 ------------------- ISM Services (DM) Feb Forecast: 64.0 Previous: 65.7 Fed's Being Book (DM) ------------------ Thursday, 03/04/04 ------------------ Initial Claims (BB) 02/28 Forecast: N/A Previous: 350K Productivity-Rev. (BB) Q4 Forecast: 2.6% Previous: 2.7% Factory Orders (DM) Jan Forecast: 1.1% Previous: 1.1% ---------------- Friday, 03/05/04 ---------------- Nonfarm Payrolls (BB) Feb Forecast: 135K Previous: 112K Unemployment Rate (BB) Feb Forecast: 5.6% Previous: 5.6% Hourly Earnings (BB) Feb Forecast: 0.2% Previous: 0.1% Average Workweek (BB) Feb Forecast: 33.8 Previous: 33.7 Consumer Credit (DM) Jan Forecast: $5.5B Previous: $6.6B 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. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. 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The Option Investor Newsletter Sunday 02-29-2004 Sunday 2 of 5 In Section Two: Watch List: More Stocks to Watch Dropped Calls: None Dropped Puts: IR ************************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 ********** More Stocks to Watch ___________________________________________________________________ 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. ___________________________________________________________________ American Standard Companies - ASD - close: 108.96 change: +0.89 WHAT TO WATCH: The bullish trend continues for ASD with a steady stream of higher lows. The stock is approaching overhead resistance in the $110-111 range and bulls will be watching for a breakout. Keep in mind that ASD recently announced a 3-for-1 split but it needs to be approved at the annual shareholder meeting due in May. Chart= --- Netease.com - NTES - close: 53.03 change: +1.87 WHAT TO WATCH: We've been following NTES in the MarketMonitor and mentioned that traders should watch it for a breakout above the $52.00 level of short-term resistance. That breakout occurred on Friday with rising volume the last couple of sessions and the stock looks ready for its next leg higher. NTES may still have resistance at the $54 mark, which some traders may interpret as the bottom of its gap down in October. Once into the gap it will probably try and test the $60.00 level. Chart= --- AutoZone - AZO - close: 89.70 change: -0.85 WHAT TO WATCH: AZO remains stuck inside its sideways trading range from $88 to $91.50. Technicals are offering a mixed picture but patient traders may want to watch it for a breakout over $91.50-92.00. More aggressive traders can try and time an entry off the bottom of the current range at $88.00. Chart= --- Quest Diagnostic - DGX - close: 82.87 change: +0.72 WHAT TO WATCH: DGX has essentially filled the gap from January and is bouncing from this support, bolstered by its rising 40- dma. We are not the only ones who noticed the rebound as DGX is up four days in a row. Technicals are turning positive and the stock looks ready to test overhead resistance at $86.00. We'd watch it for another dip, this time to $81.00. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- WFMI $77.31 +0.57 - Whole Foods continues its rebound from the $74 level. This could be a bullish play for aggressive traders. PRX $62.39 +1.48 - PRX is still trying to put in a bottom near its 200-dma and the $60.00 level. Friday's attempt to break the 50-dma was thwarted but the stock may try again. LEN $49.45 +1.69 - Lennar is another homebuilder with a strong three-day trend. It has broken its three-month trend of lower highs and is approaching resistance at $50-51. BWA $90.20 -0.75 - Borg Warner has been under performing for two weeks and Friday is closed at support of $90.00 but under its 50- dma. Given the trend bears may want to watch it for a breakdown under $90 and target the $85 level. ************************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 ^^^^^ None PUTS ^^^^ Ingersoll-Rand - IR - close: 66.48 chg: +0.53 stop: 68.00 We're going to cut our losses early on IR. The stock did fail under its 50-dma on Friday as we expected it to but the rising volume on the rebound is too intimidating. We initially added IR on a breakdown below very long-term support (its rising trendline of higher lows). The stock quickly recouped its losses the very next day making it look like a bear trap. If IR trades back below the $64.00 level we'll consider new bearish positions again. Picked on February 24 at $64.72 Change since picked: + 1.76 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 1.0 million Chart = *********** 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. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************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 ************************************************************** ********** 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 02-29-2004 Sunday 3 of 5 In Section Three: Current Calls: AHC, ATH, DHI, PD, QCOM, RJR, RNR, RYL, SLB, UNH New Calls: AET, CFC Current Put Plays: CHIR, CTSH, MMM, WGO New Puts: None ************************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 - cls: 64.35 chng: +2.03 stop: 60.75*new* 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: With the price of crude oil breaking out on Friday, the Oil sectors followed suit, with the OSX index reaching almost to the $108 level. But those moves paled in comparison to AHC's stellar 3.25% breakout, with the stock easily soaring over the $64 level and holding most of its gains into the close. That brings the stock right up to our first target, and the close over the 200- week moving average looks strongly bullish. Prospects for a move to $68 and then possibly into the low $70s look good from here. But given the magnitude of Friday's move, a bit of consolidation seems in order. For traders that entered down near $60, harvesting some gains near current levels would be a wise move. There should now be strong support in the $61-62 area, so we're raising our stop to $60.75, just above last week's intraday lows. Look for a pullback near the $62 level to provide a solid point for fresh entries, but we would not suggest new momentum entries at this time. Suggested Options: Shorter Term: The March $65 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 April $70 Call, while traders looking for more immediate movement will want to use the April $65 strike. Our preferred option is the April $65 strike, which is at the money and should provide sufficient time for the play to move in our favor. BUY CALL MAR-60 AHC-CL OI= 979 at $4.60 SL=2.75 BUY CALL MAR-65 AHC-CM OI= 332 at $1.05 SL=0.50 BUY CALL APR-65*AHC-DM OI= 95 at $1.80 SL=0.75 BUY CALL APR-70 AHC-DN OI= 20 at $0.50 SL=2.25 Annotated Chart of AHC: Picked on February 10th at $59.53 Change since picked: +4.82 Earnings Date 1/28/04 (confirmed) Average Daily Volume = 945 K Chart = --- Anthem, Inc. - ATH - close: 85.95 change: +0.58 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: It looked like ATH just might stall out heading into the weekend, with the stock unable to make any appreciable progress and actually dipping back under the $85 level. As it turned out, that was just an entry point, as the bulls bought the dip and then drove the stock as high as $86.60 before a slight pullback at the end of the day. Driving Friday's bullish action was news that Federal regulators approved the merger with WLP. This certainly looks like a more convincing breakout than the one a couple weeks ago, and the rising volume is just one piece of that picture of strength. Traders that took the breakout entry on Friday appear to have gotten a good deal and pullbacks into the $84-85 area should now be met with solid buying interest. With the stock once again closing at all time highs, a push above Friday's high still looks like an acceptable momentum entry. We'll raise our stop up to $82 this weekend, which is just under the 30-dma ($82.02) and will look to raise it again early next week if the bullish action continues. Suggested Options: Shorter Term: The March $85 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 April $90 Call, while more conservative traders will want to use the April $85 strike. Our preferred option is the April $85 strike, which is at the money and should provide sufficient time for the play to move in our favor. BUY CALL MAR-85 ATH-CQ OI=6473 at $2.45 SL=1.25 BUY CALL MAR-90 ATH-CR OI=1510 at $0.50 SL=0.25 BUY CALL APR-85*ATH-DQ OI= 132 at $3.80 SL=2.25 BUY CALL APR-90 ATH-DR OI= 24 at $1.50 SL=0.75 Annotated Chart of ATH: Picked on February 26th at $85.37 Change since picked: +0.58 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.43 mln Chart = --- D.R.Horton - DHI - close: 31.79 chg: +0.84 stop: 29.25*new* 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 home construction sector has been revived after the new home sales numbers came in stronger than expected. Given the current low interest rate environment, which translates into low mortgage rates and the upcoming spring-summer home shopping season investors are once again looking for some P/E expansion. We like DHI because it has been a relative strength leader in the group. Shares pulled back to toward the $29.00-29.50 level as expected earlier this week, which presented traders with another chance to buy the dip. Now that we've seen a successful rebound from that low we're going to raise our stop loss to $29.25. 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. BUY CALL MAR 25 DHI-CE OI= 238 at $7.00 SL=4.25 BUY CALL MAR 30 DHI-CF OI=1881 at $2.35 SL=1.15 BUY CALL MAY 30*DHI-EF OI= 733 at $3.30 SL=1.65 BUY CALL MAY 35 DHI-EG OI= 562 at $1.05 SL=0.50 Annotated Chart: Picked on February 08 at $30.00 Change since picked: + 1.76 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 2.4 million Chart = --- Phelps Dodge - PD - close: 86.26 chg: +1.07 stop: 79.99 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: Score another one for the technical traders out there who bought the pull back to $80.00 last week. PD bounced off old resistance of $80.00 as support and has not looked back. Another strong week for copper prices certainly didn't hurt the stock either. PD should continue to see buying interest since the improving U.S. and global economies (especially China) has ramped up demand for copper even as supply struggles to catch up. Of course this doesn't mean we won't see pullbacks in the stock price, like we saw two weeks ago, but PD is likely to see traders continue to buy the dips until there is a significant correction in copper prices. Fortunately, this may not happen for a while. Contributing to PD's bullish Friday performance was news that copper production in Chile, the largest producer on the planet, fell 1.8% from year-ago levels (Reuters). Estimates from one Chilean producer are for a decline in production through the first half of 2004 before conditions improve after June. We were a little concerned on Thursday night after PD announced late in the evening a correction to its Q4 earnings. The company had to restate earnings for an extra $9.3 million in taxes or about 10 cents a share. Fortunately, investors shrugged off this news and sent PD to a new all-time closing high on Friday. The stock is up more than $5 from our entry price and it's probably time that short-term traders begin to consider taking profits. New positions might be considered on a pull back to $83-84. We will probably consider exiting around $88-89 since $90 is likely to be short-term resistance. Then we can re-enter on a pull back. Suggested Options: We like the March and April strikes. We're going to adjust our recommended strike from the March 80s to the April 85s. BUY CALL MAR 80 PD-CP OI=3223 at $7.10 SL=4.50 BUY CALL MAR 85 PD-CQ OI=2025 at $3.60 SL=1.80 BUY CALL APR 80 PD-DP OI=1147 at $8.80 SL=5.50 BUY CALL APR 85*PD-DQ OI=1879 at $5.40 SL=3.20 BUY CALL APR 90 PD-DR OI=1700 at $3.10 SL=1.50 Annotated Chart: Picked on February 11 at $80.51 Change since picked: + 5.75 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 1.6 million Chart = --- Qualcomm, Inc. - QCOM - close: 63.09 change: -0.61 stop: 60.50 Company Description: Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. Why we like it: Friday's early rally attempt was just enough for QCOM to eclipse Thursday's closing highs, but with the rest of the market, particularly the NASDAQ under pressure for much of the day, the stock just couldn't build on those early gains. In light of the lack of strength in the rest of the market, QCOM actually performed quite well, closing above $63 again and it won't take much to push the stock above its recent highs. Pullbacks into the $61-62 area still look attractive for new entries, and aggressive traders can still chase the stock higher on a breakout over the $64 level. The rising 10-dma (now at $61.17) should help to reinforce that $61-62 support level as next week progresses, and we expect to see QCOM squeeze up towards our $67- 68 target. Maintain stops at $60.50, just under last week's intraday lows. Suggested Options: Shorter Term: The March $60 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the March $65 Call, while the more conservative approach will be to use the April strikes due to the greater time until expiration. Our preferred option is the April $65 strike, as it should provide sufficient time for the play to move in our favor. BUY CALL MAR-60 AAO-CL OI=10412 at $4.10 SL=2.50 BUY CALL MAR-65 AAO-CM OI=10974 at $1.15 SL=0.60 BUY CALL APR-65*AAO-DM OI=10605 at $2.25 SL=1.00 BUY CALL APR-70 AAO-DN OI= 2413 at $0.80 SL=0.40 Annotated Chart of QCOM: Picked on February 17th at $59.55 Change since picked: +3.54 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 8.72 mln Chart = --- RJ Reynolds Tobacco - RJR - cls: 61.73 chg: +0.45 stop: 57.50 Company Description: R.J. Reynolds Tobacco Holdings, Inc. is the parent company of R.J. Reynolds Tobacco Company and Santa Fe Natural Tobacco Company, Inc. R.J. Reynolds Tobacco Company is the second-largest tobacco company in the United States, manufacturing about one of every four cigarettes sold in the United States. Reynolds Tobacco's product line includes four of the nation's 10 best- selling cigarette brands: Camel, Winston, Salem and Doral. Santa Fe Natural Tobacco Company, Inc. manufactures Natural American Spirit cigarettes and other tobacco products, and markets them both nationally and internationally. (source: company press release) Why We Like It: We initially added RJR to the play list as a defensive play since investors may see it as a safe haven should the rest of the market begin to sell-off. The breakout over $60.00 was our trigger to go long after nearly three months of consolidation under this level. Unfortunately, the rally was halted soon after the breakout due to more litigation news. Investors seem a little cautious over the upcoming trial in September where government prosecutors plan to take MO and the rest of the tobacco industry to court in an effort to seek $280 billion (with a B) in damages over 50 years of fraudulent advertising. Actually, the remaining charge in that case is racketeering. Closer to home for RJR was a recent ruling in California where an appeals court affirmed a lower court's ruling that RJR had indeed targeted children in their ad campaigns. However, the appeals court said the $20 million fine needed to be recalculated. That means it could go either direction and prosecutors are obviously going to try for a higher penalty. This pending decision has probably raised the risk level for bullish positions in RJR and traders may want to reconsider their positions. We're going to keep the play open for a few more days and see what happens but interested traders may want to check out larger rival MO. Shares of MO produced a similar breakout to RJR's but has been a lot stronger throughout last week. However, investors should note that MO is quickly approaching overhead resistance at its all- time highs near $59. Suggested Options: Looking over the March, April and May options we like the 55 and 60 strikes but our favorite is the March 55's. BUY CALL MAR 55 RJR-CK OI= 219 at $7.10 SL=4.00 BUY CALL MAR 60 RJR-CL OI=2672 at $2.30 SL=1.15 BUY CALL MAY 55 RJR-EK OI= 667 at $7.50 SL=4.10 BUY CALL MAY 60 RJR-EL OI=3047 at $3.90 SL=1.85 Annotated Chart: Picked on February 20 at $60.51 Change since picked: + 1.17 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 699 thousand Chart = --- Renaissancere Ltd - RNR - close: 52.95 chg: +0.90 stop: 49.99*new* 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 initially added RNR to the call list because we were bullish on the insurance sector. RNR had pulled back to support at its 40-dma and the $50.00 level and was just beginning to bounce. We saw a quick pop higher but then shares consolidated again as the IUX insurance index pulled back in some long overdue profit taking. The IUX is still in consolidation mode but is beginning to hint that it may be over and we could see another move higher soon. Fortunately, we don't have to wait for RNR to follow the sector's lead as the stock has already taken off with a strong move in just the last two sessions. To be honest we cannot identify what caused the gap higher on Friday but the move has produced a new bullish buy signal in RNR's MACD indicator. Traders looking for new entries might try a bounce from the $52.00 mark since RNR is likely to pull back and fill the gap from Friday morning. Conservative traders may want to inch up their stop to $50.75, just under the recent consolidation but we're going to raise ours to $49.99. 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= 19 at $3.30 SL=1.65 BUY CALL APR 45 RNR-DI OI=100 at $8.20 SL=5.75 BUY CALL APR 50*RNR-DJ OI=210 at $3.60 SL=1.80 BUY CALL APR 55 RNR-DK OI= 54 at $0.90 SL= -- Annotated chart: Picked on February 15 at $50.83 Change since picked: + 2.12 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = --- Ryland Group - RYL - close: 85.72 chg: +1.76 stop: 79.95*new* Company Description: With headquarters in Southern California, Ryland is one of the nation's largest homebuilders and a leading mortgage-finance company. The Company currently operates in 27 markets across the country and has built more than 215,000 homes and financed over 185,000 mortgages since its founding in 1967. (source: company press release) Why We Like It: The homebuilding sector has been revived again with the better than expected new home sales numbers this morning. Economists were looking for a dip to 1.06 million units and sales actually came in a 1.11 million, a smaller than expected pull back. Combine the strong home sales figures with Greenspan's comments yesterday that the economy looks good and has moved into a "vigorous expansion" and together investors have a favorable outlook for homebuilders. We like several stocks in the group. Ryland, Centex (CTX), Beazer (BZH) and more all look like strong bullish candidates. We're choosing RYL for its bullish close over the 50-dma and filling the gap from early January. Furthermore RYL's P&F chart has produced a strong bullish breakout and points to a $97 price target. We're going to target a move to the old highs between $92-94 but honestly we'd be happy with a rally to $90.00. The breakout over $83 looks like a decent entry point but if RYL offers a dip back to $83 we'd probably take it. WEEKEND UPDATE: So far so good. RYL added another 2% on Friday and confirmed the bullish breakout over the 50-dma from Thursday. Its P&F chart looks even more bullish now. Dips to $83-84 are still possible entries. We're going to raise our stop loss to $79.95. Suggested Options: Short-term traders can choose from the March or April strikes. We like the April 85's but the April 80's may work on a dip. BUY CALL MAR 80 RYL-CP OI= 1441 at $7.10 SL=4.65 BUY CALL MAR 85 RYL-CQ OI= 2791 at $3.60 SL=1.80 BUY CALL APR 80 RYL-DP OI= 738 at $8.40 SL=5.25 BUY CALL APR 85*RYL-DQ OI= 349 at $5.30 SL=3.00 BUY CALL APR 90 RYL-DR OI= 971 at $3.10 SL=1.65 Annotated Chart: Picked on February 24 at $83.96 Change since picked: + 1.76 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 746 thousand Chart = --- Schlumberger Ltd - SLB - close: 64.49 change: -0.27 stop: 60.40 Company Description: Schlumberger Limited is an oilfield services company that supplies technology, project management and information solutions that aim to optimize performance for customers working in the international oil and gas industry. The company is comprised of two primary business units. Schlumberger Oilfield Services supplies a wide range of products and services that support core industrial operational processes. WesternGeco, jointly owned with Baker Hughes, is a large seismic company that provides advanced acquisition and data processing surveys. Why we like it: Given the strength in the price of crude oil, the failure of our SLB to break out on Friday was a bit disappointing. While it was encouraging to see the early dip bought near the 10-dma ($63.86), the stock appears like it may need to consolidate for a bit before resuming its upward trek. That makes dips near support near $63 - reinforced by the 20-dma ($63.01) look good for initiating new positions. The rally attempt in the Oil Service index (OSX.X) was a bit anemic as well, with the rally attempt turned back just below the $108 level. That lack of sector strength can perhaps explain SLB's inability to put in a stronger performance on Friday. A further pullback to stronger support in the $61.50-62.00 is still possible and would make for an even better entry on a test of 30-dma ($61.35) support similar to that seen in mid-January. For traders preferring a momentum entry, the line in the sand appears to be $65.10, just over Thursday's intraday high. Keep stops set at $60.50, just under the early February lows. Suggested Options: Shorter Term: The March $65 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 April $70 Call, while the more conservative approach will be to use the April $65 strike. Our preferred option is the April $65 strike, which is at the money and should provide sufficient time for the play to move in our favor. BUY CALL MAR-65 SLB-CM OI=4763 at $1.35 SL=0.60 BUY CALL MAR-70 SLB-CN OI=2393 at $0.25 SL=0.00 BUY CALL APR-65*SLB-DM OI= 390 at $2.10 SL=1.00 BUY CALL APR-70 SLB-DN OI= 361 at $0.65 SL=0.30 Annotated Chart of SLB: Picked on February 24th at $64.47 Change since picked: +0.02 Earnings Date 1/23/04 (confirmed) Average Daily Volume = 3.68 mln Chart = --- UnitedHealth Group - UNH - close: 62.00 change: +0.02 stop: 58.00 Company Description: UnitedHealth Group Inc. provides health and well-being products serving more than 48 million Americans. The company's revenues are derived from premium revenues on risk-based products, fees from management, administrative and consulting services and investment and other income. UNH conducts its business primarily through operating divisions in four business segments: Uniprise; Health Care Services, which includes UnitedHealthcare, Ovations and AmeriChoice businesses; Specialized Care Services, and Ingenix. Why we like it: Aside from Thursday's brief dip near the bottom of the rising channel at $60.50, UNH had a pretty quiet week. The stock continues to wedge up under resistance (now at $62.30) in preparation for the next breakout, while the pattern of higher lows continues to confirm support along the bottom of the rising channel. Pullback entries near the bottom of the channel ($60.60) and the 20-dma ($60.48) make the most sense ahead of the breakout. But when UNH pushes through that resistance level, breakout entries will be the order of the day. Momentum traders will want to see a push over $62.50 before playing. One factor that hints that a breakout is only a matter of time is the fact that the HMO index broke out to a new all-time high again on Friday, closing solidly above the $900 level. But the dip if it is offered, but don't be afraid of buying strength in UNH, as long as the sector remains strong. Maintain stops at $58 until the breakout arrives. Suggested Options: Shorter Term: The March $60 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the March $65 Call, while the more conservative approach will be to use the April strikes due to the greater time until expiration. Our preferred option is the April $60 strike, which is in the money and should provide sufficient time for the play to move in our favor. BUY CALL MAR-60 UHB-CL OI=3541 at $2.70 SL=1.25 BUY CALL MAR-65 UHB-CM OI= 969 at $0.30 SL=0.00 BUY CALL APR-60*UHB-DL OI= 158 at $3.50 SL=1.75 BUY CALL APR-65 UHB-DM OI= 290 at $0.90 SL=0.40 Annotated Chart of UNH: Picked on February 24th at $61.92 Change since picked: +0.08 Earnings Date 1/22/04 (confirmed) Average Daily Volume = 2.52 mln Chart = ************** NEW CALL PLAYS ************** Aetna Inc. - AET - close: 80.79 change: +1.07 stop: 77.50 Company Description: Aetna is one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, serving approximately 13.0 million medical members, 10.9 million dental members, 7.4 million pharmacy members and 12.3 million group insurance customers, as of December 31, 2003. The company has expansive nationwide networks of more than 600,000 health care services providers, including over 362,000 primary care and specialist physicians and 3,626 hospitals. (source: company press release) Why We Like It: Don't look at the weekly chart for AET as it may give you vertigo. Of course it is hard to deny the relative strength here when the broader market indicts have been generally flat. Driving the move in AET was its Feb. 12th earnings report. The company turned in $1.32 per share, 14 cents better than expected on revenues much higher than estimated. Plus AET raised its full year estimates to $6.25-6.35 compared to Reuters consensus numbers at $5.77 for the year. Shares of AET immediately shot higher to the $80.00 region in just a few days and managed to maintain its gains while consolidating in a tight $78-80 trading range. Once its 10-dma caught up to it traders used it as a spring board to launch the stock higher and AET broke out over resistance at $80.00 on Friday with better than average volume. We like the breakout and believe AET can trade toward $85 or better. Its P&F chart points t an $89 price target. We're going to start the play with a stop loss at $77.50. Keep your ears open for any news on March 4th where AET will present at the Lehman Brothers Global Healthcare conference. Suggested Options: Short-term traders can use the March or April calls. We like the April 80's. BUY CALL MAR 75 AET-CO OI=3624 at $6.20 SL=4.00 BUY CALL MAR 80 AET-CP OI=2241 at $2.25 SL=1.10 BUY CALL MAR 85 AET-CQ OI= 136 at $0.45 SL= -- BUY CALL APR 80*AET-DP OI= 589 at $3.50 SL=1.75 BUY CALL APR 85 AET-DQ OI= 101 at $1.30 SL=0.65 Annotated Chart: Picked on February 29 at $80.79 Change since picked: + 0.00 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- Countrywide Financial - CFC - cls: 91.63 chg: +3.56 stop: 86.99 Company Description: Founded in 1969, Countrywide Financial Corporation is a member of the S&P 500, Forbes 500 and Fortune 500. Through its family of companies, Countrywide provides mortgage banking and diversified financial services in domestic and international markets. (source: company press release) Why We Like It: There seems to be no stopping shares of CFC. Consumers continue to buy homes given the historically low mortgage rates and the refinancing boom has been declared dead more times than we can remember but it continues to find new life. Given the trend in the 10-year bond we could see another round of lower mortgages just in time for spring and summer, which is the prime home buying season. We like the bullish breakout over the $90.00 level for CFC and there's an old market maxim that says stocks that break $90.00 (going higher) tend to hit $100. Technicians will note that the breakout was fueled by better than average volume and its P&F chart is pointing toward a $115 price target. We're going to target the $100 level and initiate the play with a stop loss at $86.99. Suggested Options: Short-term traders can choose from March and April calls. Our favorites are the April 90's. Be careful. There are some odd option symbols floating around due to CFC's recent stock split. Be sure you check the correct symbols with your broker. BUY CALL MAR 90 CFC-CR OI=6229 at $3.70 SL=1.85 BUY CALL MAR 95 CFC-CS OI=2383 at $1.40 SL=0.70 BUY CALL APR 90*CFC-DR OI= 508 at $5.50 SL=3.25 BUY CALL APR 95 CFC-DS OI= 138 at $2.95 SL=1.50 Annotated Chart: Picked on February 24 at $91.63 Change since picked: + 0.00 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 2.3 million 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 ***************** Chiron Corp - CHIR - close: 48.91 chg: -0.40 stop: 51.50 Company Description: Chiron Corporation, headquartered in Emeryville, California, is a global pharmaceutical company that leverages a diverse business model to develop and commercialize high-value products that make a difference in people's lives. The company has a strategic focus on cancer and infectious disease. Chiron applies its advanced understanding of the biology of cancer and infectious disease to develop products from its platforms in proteins, small molecules and vaccines. The company commercializes its products through three business units: BioPharmaceuticals, Vaccines and Blood Testing. (source: company press release) Why We Like It: We really like the bearish technical breakdown in CHIR shares below support at $50.00 and its 200-dma. Adding to the bearish environment is a breakdown in CHIR's P&F chart as well pointing to a $44 price target. CHIR is seriously under performing the biotech index and the weakness on Friday suggests the stock is ready for its next leg lower. Contributing to that weakness on Friday was an article stating that the government is going to review its 14-year old agreement with CHIR that gave the company so much control over Hepatitis research (-Associated Press). The article states that scientists have been complaining for years that CHIR has been hindering their work. While it is unknown when or what kind of decision, if any, is made after the Feds review their agreement with CHIR but we all know that the markets hate uncertainty. We're targeting a move to the $45-44 range with a stop at $51.50. More conservative traders might be able to make the trade with a stop closer to $50.00, especially now that the simple 10-dma has crossed both the 200-dma and the $50 level and should act as short-term overhead resistance. Suggested Options: Short-term traders can choose from the March or April strikes but we're going to select the April 50 puts as our favorite. BUY PUT MAR 50.00 CIQ-OJ OI=5726 at $1.95 SL=1.00 BUY PUT MAR 47.50 CIQ-OT OI=1154 at $0.75 SL= -- BUY PUT MAR 45.00 CIQ-OI OI= 493 at $0.25 SL= -- BUY PUT APR 50.00*CIQ-PJ OI=3074 at $2.65 SL=1.30 BUY PUT APR 47.50 CIQ-PT OI=2462 at $1.45 SL=0.75 BUY PUT APR 45.00 CIQ-PI OI= 232 at $0.75 SL= -- Annotated Chart: Picked on February 24 at $49.11 Change since picked: - 0.20 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.7 million Chart = --- Cognizant Tech. - CTSH - cls: 47.27 chng: -0.72 stop: 50.50 Company Description: Cognizant Technology Solutions Corporation delivers full lifecycle solutions to complex software development and maintenance problems that companies face as they transition to e- business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. Among CTSH's prominent clients are ACNielsen Corporation, ADP, Inc., Brinker Int'l, Computer Sciences, The Dun & Bradstreet Corporation, First Data Corporation and Nielsen Media Research. Why we like it: As mentioned on Thursday, the rebound in shares of CTSH off of the 100-dma ($47.22) was looking a bit anemic and Friday's price action seems to bear that out. We've seen the 10-dma ($48.51) act as solid resistance on several occasions over the past month and once again it served its desired function, with price being rejected near that level and then declining to end right at the low of the day. That leaves price sandwiched between the 10-dma as resistance and the 100-dma as support, and it seems likely that something will have to give soon, with just over $1 of separation between the two averages. Based on the recent price action, we're still expecting a breakdown, but are reticent to suggest entries on the breakdown due to the strong support that has been seen near the $46 level. Failed bounces in the $48-49 area still look like the best entry strategy ahead of the break below the recent lows near $46. The only way breakdown entries should be considered is on a drop through $46 on expanding volume, not the anemic levels seen over the past several days. Maintain stops at $50.50, which is still above the 50-dma ($49.87) and now above the 20da ($50.46). Suggested Options: Aggressive short-term traders can use the March 45 Put, while those with a more conservative approach will want to use the March 50 put. Aggressive traders looking for more insulation against time decay will want to utilize the April strike. Our preferred option is the April 45 strike, as it provides more time until expiration. BUY PUT MAR-50 UPU-OJ OI= 381 at $3.80 SL=2.25 BUY PUT MAR-45 UPU-OI OI=1662 at $1.20 SL=0.60 BUY PUT APR-45*UPU-PI OI= 812 at $2.40 SL=1.25 Annotated Chart of CTSH: Picked on February 19th at $47.49 Change since picked: -0.22 Earnings Date 2/10/04 (confirmed) Average Daily Volume = 1.30 mln Chart = --- 3M Company - MMM - close: 78.02 change: -0.16 stop: 81.50 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: Breaking under the 100-dma ($79.81) seems to have been the directional key for shares of MMM, as once that support gave way, the stock gave up some significant ground into the end of the week. Of course it is encouraging that the drop of the past few days has come on rising volume, but at the same time, Friday's afternoon rebound from the just above $77.50 leaves a bit of uncertainty on the table. This was the site of the lows from early February, and we could see a double bottom form here, just as easily as our expected breakdown. Oscillators are clearly voting in the bears' favor, but that doesn't mean they can't turn up on a solid bounce from support. This is why we've been suggesting that momentum traders will need to see the break below $77.50 (or even $77, which will generate that elusive PnF Sell signal) before jumping into the play. Up until now, the best entries have been found on failed bounces below the 30-dma ($80.35) and now the 100-dma looms overhead as a likely resistance point. Traders looking to enter on a failed bounce will now want to target a rollover near the $80 level. We're going to leave our stop in place at $81.50 until the PnF Sell signal arrives, but more conservative traders may want to use a tighter stop at $80.75, just over Tuesday's intraday peak. 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 is currently in the money. Aggressive traders looking for more insulation against time decay will want to use the April strike. BUY PUT MAR-80*MMM-OP OI=3982 at $2.60 SL=1.25 BUY PUT MAR-75 MMM-OO OI=5202 at $0.50 SL=0.25 BUY PUT APR-75 MMM-PO OI=3033 at $1.15 SL=0.60 Annotated Chart of MMM: Picked on February 15th at $79.68 Change since picked: -1.66 Earnings Date 1/20/04 (confirmed) Average Daily Volume = 2.73 mln Chart = --- Winnebago - WGO - close: 66.79 chg: +1.47 stop: 68.66*new* Company Description: Winnebago Industries, Inc. is the leading manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. The Company builds quality motor homes under the Winnebago, Itasca, Rialta and Ultimate brand names with state-of-the-art computer-aided design and manufacturing systems on automotive-styled assembly lines. The Company's common stock is listed on the New York, Chicago and Pacific Stock Exchanges and traded under the symbol WGO. (source: company press release) Why We Like It: We initially added WGO several days ago on its technical breakdown below support near $69.00 and its 50-dma. Shares quickly fell lower and hits $64.00 before finally bouncing. After three days of sideways churning WGO managed a strong early morning rally on Friday with no discernable catalyst to fuel the surge higher. Whatever caused the rebound appears to have run out of steam and WGO is once again presenting bears with an entry point on this new failed rally under $69.00. We're targeting a move to $60-62. Given the rollover Friday afternoon we're going to lower our stop loss to $68.66. FYI: don't forget that WGO has a 2-for-1 split on March 8th. Suggested Options: We would choose from the March of April puts at the 70 or 65 strikes. Our favorite is the April 65's. BUY PUT MAR 70 WGO-ON OI= 373 at $4.60 SL=2.30 BUY PUT MAR 65 WGO-OM OI= 327 at $1.65 SL=0.85 BUY PUT APR 70 WGO-PN OI= 172 at $5.60 SL=3.20 BUY PUT APR 65*WGO-PM OI= 965 at $2.70 SL=1.35 Annotated chart: Picked on February 22 at $68.13 Change since picked: - 1.34 Earnings Date 12/17/03 (confirmed) Average Daily Volume: 276 thousand Chart = ************* NEW PUT PLAYS ************* None ************************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 02-29-2004 Sunday 4 of 5 In Section Four: Leaps: What's Going On At The Fed? Traders Corner: Who Does A Bull Call When A Bull Calls? ************************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 ***** What's Going On At The Fed? By Mark Phillips mphillips@OptionInvestor.com I can't ever remember seeing such a parade of propagandists in my entire trading career. It seems every day one or more of the Fed heads are out on the speaking circuit, parroting some bit of pabulum such as the economy is strong, jobs don't matter as productivity is wonderful, interest rates will stay low until the end of time, inflation is benign, quack, quack quack... The Fed has been busy jawboning the markets for close to a year, since before the bond traders called Greenspan's bluff about using "unconventional means" to keep rates low and sent bonds tumbling last June. We've all heard the same sound-bites over and over so many times, I'm actually surprised that Greenspan and his cronies are able to move the markets at all anymore. But the game seems to be changing and we're starting to see the gloves come off in some of the recent comments from the Fed Chief. It's almost as though he's breathing a huge sigh of relief, knowing that he's pumped enough stimulus into the economy to last through the election this fall and that he'll be able to retire with his halo intact, at least in the eyes of the sheeple. Knowing that he's managed to stave off the day of reckoning long enough to shuffle off the stage riding high, it seems he's taking advantage of his position and using it to point out the things that are sever problems that the politicians must address or 'suffer the consequences'. It seems to be a way of positioning himself such that when things do go awry, he can say, "Don't look at me. I told you what needed to be fixed and you didn't take care of it." Let's talk specifics, shall we? Last week, Fed Governor Bies was out on the speaking circuit and her chosen topic was the issue of Housing and whether on not it is a bubble. Her position was nothing new, claiming it was not. Big surprise, huh? But her rationale is specious. First off, she said housing couldn't be a bubble because it hasn't become inflated to the degree the NASDAQ did in early 2000. What?!? Just because it hasn't lived up to the scale of the greatest speculative bubble of modern times, it's not a bubble at all? If I had used logic like that in my critical thinking class, I would have been flunked on the spot! But it is the next line in her prepared remarks that truly caught my attention. The other reason she says we don't have a housing bubble is because the financial industry has been so much more disciplined about its lending practices. With that one, I just lost it and busted up laughing. At that point it became clear that she was so full of it that her eyes had turned brown! More disciplined?!? Hello? Interest only mortgages? When before now have those been widely available? And they are the majority of what is being pushed in the refi industry. Speaking separately, Greenspan actually told Congress that it was a good idea for consumers to use adjustable mortgages. Maybe for now, but once rates begin to rise, a lot of people will be in deep trouble if they get locked into an adjustable rate that starts rising. This is one of the worst pieces of direct advice I've heard out of the Fed head. The only possible explanation I can come up with is that he knows the Housing bubble is real and wants to add a bit more air to it (stimulating more borrowing by encouraging adjustable loans), so that it can't deflate before he exits the public stage at the end of the year. This ties in with some very interesting comments made by Greenspan during his first day of testimony last week. All we've been hearing for months and months is how there isn't a Housing bubble and while highly leveraged, FNM and FRE are not in any way poised to cause an upset to the mortgage market. Greenie threw his hat in the ring by stating that FNM and FRE pose a credible threat to the financial system and they need to lighten up on their leveraged exposure. With these two GSEs responsible for roughly 70% of all mortgage debt and Greenspan's admonishment that they've gotten too highly leveraged, I have a hard time seeing how he isn't warning us about at least a mortgage debt bubble. It is kind of like telling us, "There's no housing bubble", while at the same time winking frantically and then later pulling us aside from our peers and whispering in furtive tones, "Watch out, there really is a housing bubble and here's where the weakest link is". Finally, in his second day of testimony, Greenspan admonished Congress for their profligate spending and warned them that the budget deficit needs to be brought under control. He then attacked one of the budgetary sacred cows and recommended cutting Social Security benefits. But he did so in such a way as to be politically expedient, stating that benefits should only be reduced for future retirees. To me, that is a warning to the Baby Boomers that they're going to need to set aside more money on their own if they hope to have a comfortable retirement in the years ahead. I believe that is a tacit approval of President Bush's plans of privatizing Social Security, something he has been reticent to do in the past. There were other examples of inanity from the Fed last week, but I am limited by time and space and can't cover them all. Taken together, this seems like a concerted and coordinated effort to keep the housing bubble and the reinflated bubble in equities growing long enough for Greenspan to manage a graceful exit at the end of his current term. Money is still being injected into the economy at an astounding rate - in order to continue the inflation of the housing, debt and equity bubbles - with M3 currently growing at a $1.2 trillion annual rate! In light of all this credit growth, it is amazing how strongly the dollar rebounded last week and I have a hard time viewing it an anything more than a much-needed oversold bounce. As I've stated before, I look for the Dollar index (DX00Y) to break to new lows later this week and I have my eye on the 74 level, which is the current price target from the very bearish PnF chart. Despite all of these profound statements last week and some less than inspiring economic reports, the broad market barely flinched, confined to a fairly narrow range. The DOW barely exceeded a 100 point range for the entire week! The S&P 500 was similarly rangebound, hovering near the 1145 level throughout the week, as the NASDAQ bounced from and then hovered just above key support near 2000. Complacency among market participants hit new highs as the VIX dropped to new decade lows at 13.80 on Friday. Inflation is still officially being called benign, but as I've stated on numerous occasions, that is only because the of the way the data is massaged. Looking at the CRB index continues soaring to new highs. This is because the cost of virtually every basic commodity is soaring to highs not seen in many moons. Just one example among many is the price of copper, which has soared to $1.34, a pretty amazing rise from its base near $0.80 last summer. How about soybeans? This agricultural staple has soared from near $5.00 last summer to $9.37 and a new high on Friday. Inflation is rampant but currently disguised, as I pointed out in last week's discussion of the recent CPI report. The price of virtually everything that isn't an importable manufactured product is soaring, rising on the sea of Fed- generated liquidity. It isn't that things are necessarily becoming more expensive. It is just that the dollar is becoming much cheaper in the open market and as it falls, products denominated in that currency continue to rise in price. That is the classic definition of inflation -- your money is worth less and less and subsequently buys less and less. And we can expect the Fed to keep re-filling the punchbowl as long as the music keeps playing. So that means the status quo should continue for a while longer, quite possibly right through the election. That means we can expect the bullish trends in virtually everything to continue, with the bearish trend in the dollar to resume once this current oversold bounce runs its course. The game will eventually change, but determining when and due to what catalyst is a level of prognostication that sadly I lack. My approach is to continue playing the game as it is currently structured, but when the music stops, I'm going to make sure I can find a seat. I'm sure by now you've gotten the picture that I see some ominous storm clouds brewing, but for right now they are far enough in the distance that they won't affect our current bullish picnic. We'll stick with the trend playing the long side where appropriate and the short side where we're given an opportunity, but always keeping one ear tuned to listen for the sound of approaching thunder. Let's now take a few minutes and peruse our play lists, as there are some significant changes there. Portfolio: SMH - There are many things that can be said about the Semiconductor stocks right here, but accusing them of strength would not be high on that list. It looks like a pending breakdown could be looming on the horizon, with lower highs and support continuing to be tested near $40 on the SMH. Of course there's still some work to be done to generate a PnF Sell signal, as that will require a trade at $38. That development will carry with it a bearish price target of $30 and we'll really be off to the races. But until then, SMH is still caught in limbo, stuck below resistance (first at $43, then at $44-45), but unable to break support (first at $40 and then $38). Failed bounces under the $43 level still look acceptable for entering the play, especially now that weekly Stochastics are firmly bearish, having left behind clear bearish divergence. We'll keep our stop at $46 until we finally get a firm break under $40 on a closing basis and then we'll tighten that stop to $44, just over the most recent peak. NEM - The bargain hunters were out in force last week, at least in terms of the U.S. Dollar. There was another powerful rebound in the Dollar index (DX00Y), bringing it right back to the 88 resistance level. What's interesting is that both gold and gold stocks held their ground rather well, with NEM simply consolidating all week between the $42 and $44 levels. NEM is above its 200-dma ($39.70) and strong support in the $38-40 area, the XAU index is above its 200-dma ($92.09) and strong support in the $90-92 area and gold (GC04J) is above its 200-dma ($379.46) and strong support near $380. As long as those levels hold as support and the DX00Y fails to break out over $92, then the bullish gold/bearish dollar trend remains intact. Traders still looking for entry into the play (or to add to current positions) should use any dip near $40 to get on board. Maintain stops at $37, solidly below major support. HD - Last week it looked like we were finally going to get the breakdown from HD's bear-flag pattern, but the buyers did their duty and stepped up to buy support right at the bottom of the pattern and Friday's price action saw the stock once again testing resistance near $37. The upper channel line that we've been watching has now dropped to the $37.50 level, so we're setting up for an important test on that front. And weekly Stochastics are still reluctantly creeping higher, but looking like they could tip over any day now. A rollover in the $37-38 area still looks like an excellent entry into the play. Don't forget your insurance put though, just in case HD heads a bit higher before heading back down, as we expect MLNM - We probably could have gotten a bit better entry on MLNM if we had only waited a bit longer, but there's no use crying about it. The stock is still holding solidly above both the 100-dma and the rising trendline of support. Friday's strong selling volume does cause some concern, but it may just be telling us that more patient traders are finally going to get a shot at an entry near the rising trendline, currently just under $17. This is the right area to be establishing bullish positions in anticipation of positive product announcements later in the year driving price into the mid-$20s. Watch List: SNDK - There's just nothing to get excited about in terms of our SNDK watch list play. Price action remains weak and the 50-dma just crossed below the 200-dma for the first time in almost a year. I still feel like this will be a winner of a play once the stock finds bottom, but at this point, it looks like we'll need to see it trading down near $20 before an entry will make sense. Weekly Stochastics have reached oversold territory, but so far are showing no sign of turning up yet. Leaving this potential play on Hold is the only reasonable choice. CHK - Don't you think getting within 5 cents is close enough for an entry? I do and CHK transitioned to the Portfolio on last Tuesday's dip to just above the $12 level. Radar Screen: WMB - It was another interesting week for WMB, as traders continued to favor the Sell side early in the week and then switched to bargain hunting mode in the later half of the week, pushing price back over the $9 level and the 200-dma by week's end. While we could see this level hold as support before a resumption of the bullish trend due to the bullish natural gas picture, I think we're still premature to be cuing up an order. Weekly Stochastics are still heading down towards oversold territory and we ought to wait for them to bottom and price to reach a plateau (hopefully near $8) before officially adding the stock to our Watch List. APA - So much for our bargain of an entry point on APA. Rather than pulling back towards strong support, the stock reversed course at the 100-dma again and shot up through the 50-dma. It looks like a test of the $43 resistance level will occur in the near term and our prospects for a viable play look dim. I have no desire to chase the stock higher, but we'll keep it here on the Radar Screen for another week, just in case we do see another selloff down near the bottom of the long-term channel and the 200- dma. GM - You may think I'm crazy -- maybe I am -- but I'm starting to have bearish thoughts about GM again. The stock had quite the bullish run over the past year, and the last euphoric push came following the company's pronouncement that its pension plan shortfall would no longer be a problem. But there's still the problem of the fact that the majority of the company's income is generated from finance activities, not producing vehicles. Technically, things are looking bearish again, as the stock rolled over from the $55 level, right at the top of its 4-year declining channel. Hmmm...sounds a bit similar to our HD play, don't you think? Weekly Stochastics are already in full bearish decline, so we'll want to look for a push back near the $53 area and then enter on the rollover. This week's note is just a heads up for what we're looking for and GM is likely to find its way to the Watch List next weekend. TYC - Alright, I know we're late to this party, but TYC looks like it still may have a ways to run and it's hard to argue with the steady and deliberate price action as the stock has been working its way higher in a rising channel for almost a year now. Dips near the bottom of the channel have proved to be solid entry points, and that means we'll be wanting to look for a pullback near the $26 level to let us in. The PnF chart is currently off the scales bullish, with a tentative price target of - get this - $63! There's no way I can believe the stock is going that high without a major correction along the way, but I can see $35 as being a reasonable near-term target and a rally to strong resistance near $42 seems like a good level on which to set our sights. I'll be adding TYC to the Watch List next weekend, despite the fact that weekly oscillators are still looking extended and the stock's valuation is rich. Closing Thoughts: I'm sure your getting as tired of reading about the lack of meaningful change in the overall market as I am about writing about it, but when the DOW can trade in a 350 point range for 2 months and spend an entire week in a range of little more than 100 points, it's clear that the market is just marking time. Earnings are over and that means we have until April before the fun and games begin anew. I can't envision just what will shake up the insane levels of complacency, but when the sea is this calm, I can't help but wonder what storm is brewing just over the horizon. It is definitely an environment in which to play with caution. Have a great week! Mark LEAPS Portfolio Current Open Plays LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: SNDK 12/21/03 HOLD JAN-2005 $ 20 XWS-AD CC JAN-2005 $ 17 XWS-AQ JAN-2006 $ 20 YSD-AD CC JAN-2006 $ 17 YSD-AQ PP JUL-2004 $ 17 SWQ-SQ LUV 02/29/04 $12.50 JAN-2005 $ 15 ZUV-AC CC JAN-2005 $ 12 ZUV-AV JAN-2006 $ 15 WUV-AC CC JAN-2006 $ 12 WUV-AV PP JUN-2004 $ 12 LUV-RV PUTS: None New Portfolio Plays CHK - Chesapeake Energy $12.22 **Call Play** Considering that weekly Stochastics are in full bearish decline, shares of CHK have been holding up very well in recent weeks and it all boils down to the fundamental picture. Natural gas is historically expensive and it doesn't look to get any less expensive in the near future. Demand is going up as its use for power generation is virtually mandated in order to keep the air clean. At the same time, available supplies are dropping, as it becomes harder and harder to find the gas at cost effective rates. That's a gift to companies like CHK, which is heavily involved in the production of this fuel source throughout the mid-continent section of the United States. With natural gas prices once again on the move to the upside, it won't be long before CHK's price once again rejoins the bullish party. Last week's dip to just above the $12 level may be the best we see for an entry into the play, and the rally into the end of the week certainly looks encouraging. Of course, first we'll need to see the stock move back over the 50-dma near $13 and then do battle with the bottom of the broken channel near $13.50. Only then will the stock be in position to challenge the December highs near $14 and make its way higher towards the $20 level. We'd actually be happy with the return seen on that move, but the PnF chart has an even more aggressive bullish price target of $25. To be fair, we pushed the entry a bit last week, with the dip on Tuesday only hitting a low of $12.05, but that seemed close enough for a stock that seems to be building a new base here, before charging higher along with the rest of the very strong sector. Note that we're using an April protective put here and setting a fairly wide stop at $9. It would take a trade at that level to create a PnF Sell signal and change the current bullish picture. BUY LEAP JAN-2005 $12 XHV-AV $ 1.50 BUY LEAP JAN-2006 $12 WZY-AV $ 2.25 BUY PUT APR-2004 $10 CHK-SB $ 0.25 **Protective Put** New Watchlist Plays LUV - Southwest Airlines $13.81 **Call Play** Despite an encouraging rebound in the Dow Transports from a slightly higher low last week, the Airline index (XAL.X) is still looking sickly, losing ground again on Friday and likely to threaten its 200-dma support again in the near future. So what am I doing adding a bullish play on discount airline LUV, you ask? Simply put, the company has one of the tightest ships in the industry and is one of the few carriers that understands passengers are to be treated as clients, not hostages. But aside from that fact, LUV is rapidly approaching the $12 area, which has been very strong support for the past few years. Taking a longer- term view of the XAL index, we can see that the decline of the past few months is not as bad as it might look in the near term. After rallying from the $25 area to as high as $70 from last March through October, the index has yet to even fall to its 38% retracement. In other words, this is a very mild pullback from the 180% rally last year. So odds are good that the XAL will find solid support perhaps at the 200-dma, but definitely by the time it reaches that 38% retracement. LUV looks like a good way to play that rebound, as its weekly Stochastics are well buried in oversold territory already and the stock is fast approaching that firm support near $12. If LUV holds true to form, we can expect a rally to get underway sometime in the April-May timeframe in anticipation of improving business during the peak travel season this summer. All we have to do now is hope for the current downtrend to continue down to our entry target at $12.50 before the rebound gets underway. Note that we're suggesting the use of a protective put (using June expiration) to guard against the outside chance that LUV doesn't hold support near the $12 level. We'll place our stop at $10.50, just below the lows of the past several years. Bear in mind that this is an aggressive play setup, as LUV's PnF chart is very bearish right now and currently projects a downside target of $9. But I'm reminded of a very similar chart pattern in mid-2002 that forecasted a downside target of only $1, and then the stock found support near $11 before working its way back up towards the $20 level late last year. I'm betting on a repeat performance of that pattern and I'm willing to play for a slightly less ambitious goal and look for a rally back into the $18-19 area later this year. BUY LEAP JAN-2005 $15 ZUV-AC BUY LEAP JAN-2005 $12 ZUV-AV **Covered Call** BUY LEAP JAN-2006 $15 WUV-AC BUY LEAP JAN-2006 $12 WUV-AV **Covered Call** BUY Put JUL-2004 $12 LUV-RV **Insurance Put** Drops QCOM $63.09 It's time to pull the plug on QCOM. The stock has performed beautifully since we began watching it back in November, just barely missing our desired entry point on more than one occasion and it is now more than $20 higher. With our expected goal for the stock coming up in less than $5 at the $67-68 area, there's no longer sufficient upside to make the play viable for new longs. While we're dropping coverage this weekend, it doesn't imply a lack of faith in the stock, just an inability to make it into a viable long-term play at this level. SBUX $38.95 How does the saying go -- "Close enough for government work"? That's how I feel about SBUX. As strong as the rally was in the prior week, shares of the coffee chain jumped again on Tuesday, continuing higher on Wednesday and hitting an intraday high of $39.68 before pulling back to close just under the $39 level. We've been talking for weeks about taking a targeted exit at $40, and I'm not going to quibble about 32 cents. Our play was officially closed at the end of the day on Wednesday for a nice triple digit gain. Technically, SBUX still looks like it might make another upward thrust, as last Thursday's drop due to the company stating the obvious -- that they wouldn't be able to repeat last month's strong 32% sales growth -- only caused a drop back to the top of the bullish channel that the stock broke out of in the middle of January. Well, Duh! The stock hasn't seen a serious pullback since last April when the stock was trading near $23 and it's getting a bit frothy here, if you'll pardon the pun. The technical concern here is that the stock has been building a pattern of bearish divergence in terms of Stochastics and MACD on its daily chart for the past few weeks and Thursday's drop may be signaling that the jig is up. Traders willing to hold on for a potential run up to actually hit that $40 target are welcome to try, but please keep a firm stop in place. We'd still recommend a stop at $36.50, as that is below both Thursday's intraday low, as well as the 30-dma. ************************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 ************** Who Does A Bull Call When A Bull Calls? By Mike Parnos, Investing With Attitude When you hear the words “bull” and “call,” what do you think? It depends if you live on a farm or if you trade options. If you live on a farm AND trade options, it can probably get pretty confusing. The best advice I can give you is to be careful where you walk – although uneducated option traders have been known to step in it on a regular basis. There are a number of option strategies that we, at the CPTI, don’t use very often. However, we should know about them and have them in our trading arsenal – just in case. _________________________________________________________________ The Bull Call Spread Today we’re going to examine a strategy called a “Bull-Call Spread.” No, it’s not a new sandwich spread. It’s a strategy involving two options, in close proximity, working together to limit risk and to position one for profitability. Bull-Call Basics The word “bull” means you have a bullish outlook. The word “call” simply means we’re going to be using calls to establish the position. A Bull-Call Spread consists of the purchase of a call and the sale of another call at a higher strike price, both with the same expiration month. I want to emphasize that the example below is just that, and only that – an example. I picked IMCL because the numbers happen to provide a good demonstration of how bull-call spreads works – and because it’s Martha Stewart’s favorite. There are a few different theories about the placement of Bull- Call spreads. First, let’s examine the more bullish scenario. Example #1 IMCL is trading at $41.98. We’ve done our research due diligence and believe IMCL stock will appreciate about 15% in the next few months. How do we take advantage of this prognostication? We don’t have a large trading account. Maybe we’re being frugal (or cheap), but it’s good money management skills that will keep you in the game. Can we find a blue-light special that will enable us to participate in IMCL’s projected move up? Where there’s an option, there’s a way! IMCL Option Chain – Trading @ $41.98 Stock Exp. Strike Bid Ask IMCL April $35 8.00 8.10 IMCL April $40 4.40 4.50 IMCL April $45 1.85 1.95 IMCL April $50 0.75 0.85 Buy 1 contract of IMCL April $45 call for $1.95 ($195) Sell 1 contract of IMCL April $50 call for $.75 ($75) Total debit: $1.20 ($120) What Have We Done? We purchased the right to buy $100 shares of IMCL at $45. Then, to reduce our costs, we sold the $50 call, obligating us to sell 100 shares at $50. That’s fine because our research tells us that IMCL will probably not go much higher than $50. If we thought IMCL had the potential to go much higher, we wouldn’t have sold the $50 call. So, our investment of $120 enables us to control 100 shares of IMCL (a $4,200 value) for two months. We’ve positioned ourselves to make nice money if IMCL moves up and, most of all, we’ve defined our risk. Positives & Negatives In the above scenario, the amount of potential profit is $380. That is calculated by taking the difference between the strike prices $5.00 ($45-$50) and subtracting the cost of putting on the trade $120). On the positive side of the ledger is the fact that our risk reward ratio is 1:3. We’re risking $120 with the potential to make $380. Potentially, that’s a return of 316%. Also, our risk is defined. The very most we could lose on the trade is $120 – even if IMCL goes to zero. We won’t need sleeping pills for this trade. On the negative side of the ledger is the fact that our profit potential is capped. When we sold the $45 call, we limited the amount we can make on the trade to $380. That’s the price we pay for being frugal. It’s a business decision. Also on the negative side is that IMCL is going to have to make a substantial move up (10%+) before we participate in any profits. Show Me The Money! When do the profits begin? First, we have to determine our breakeven point? $46.20. This is calculated by taking the strike price of the long call ($45) and adding the cost of the trade ($1.20). Easy enough. When Do You Exit? The options in a bull-call spread will achieve their maximum value at expiration. For the first weeks of the trade, even if IMCL moves, the value of the spread will only participate to a point. That’s why, if the opportunity presents itself, it’s a good idea to exit the trade if you can take 75% of the profit. It doesn’t make sense to hold on, risking $75% while you waiting for the last 25%. If IMCL goes the wrong direction, you should have a predetermined exit point. You will need to sell your long call and have to buy back the short call. With only $1.20 invested in the trade, you can be patient. However, let me reiterate that good money management skills are essential. Example #2 In the above example, IMCL would have to move in a particular direction for us to be profitable. Many traders, who aren’t good at picking a direction (like me!), look for ways to construct a more neutral scenario that improve one’s chance of success. We can use a Bull-Call spread by adjusting the strike prices. IMCL trading at $41.98 Buy 1 contract IMCL April $35 call for $8.10 Sell 1 contract IMCL April $40 call for $4.40 Total debit: $3.70 What’s The Difference? The most important difference is in what is (or isn’t) required of the stock. To collect the maximum profit, IMCL will have to finish above $40. With IMCL trading at $41.98, it’s already over $40. Both the long and short calls are already in the money. The percentages of success have increased dramatically. IMCL can move up, stay the same, or even move down $1.98 and we’d still make our maximum profit. The outlook for IMCL only needs to be neutral to bullish and we still have a bit of a cushion if we’re wrong. The tradeoff is in the amount of risk and the amount of profit. The risk has increased to $3.70 and the amount of profit has been reduced to $1.30. Is it worth the added risk to make a smaller reward? Calculating The Return Is $1.30 a good profit? Get out your abacus and divide the risk ($3.70) into the profit ($1.30). $1.30 is a 35% return on your risk. Not too shabby. _________________________________________________________________ MARCH CPTI POSITIONS Position #1 – OEX (S&P 100 Index) Iron Condor – 564.54 We sold 12 OEX March 595 calls and bought 12 OEX March 605 calls (Bear Call Spread). Then we sold 12 OEX March 540 puts and bought 12 OEX March 530 puts (Bull Put Spread). The total net credit was $1.20 ($1,440). Maximum profit range: 540 – 595. Maintenance: $12,000. Position #2 – RUT (Small Cap Index) Iron Condor – 585.56 We sold 8 RUT March 610 calls and bought 8 RUT March 620 calls (Bear Call Spread). Then we sold 8 RUT March 550 puts and buy 8 RUT March 540 puts (Bull Put Spread). The total net credit was $2.75 ($2,200). Maximum profit range: 550 - 610. Maintenance: $8,000. Position $3 – MNX (Mini-NDX Index) Iron Condor - $147.04 We sold 20 MNX March $157.50 calls and bought 20 MNX March $160 calls (Bear Call Spread). Then we sold 20 MNX March $142.50 puts and bought 20 MNX March $140.00 puts (Bull Put Spread). The total net credit was $.90 ($1,800). Maximum profit range: $142.50 - $157.50. Maintenance: $5,000 less $1,800 = $3,200. Position #4 – BBH (Biotech Index) - Siamese Condor - $147.90 We sold 10 BBH March $145 calls and sell 10 BBH March $145 puts for a credit of about $6.95. Then we bought 10 BBH March $160 calls and buy 10 BBH March $130 puts for a debit of about $.70. The total net credit is $6.25 ($6,250). Our profit (safety) range is $138.75 to $151.25. These are also our bailout points. The closer BBH finishes to $145, the more money we will make. ______________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.57 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 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 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 – 564.54 In my 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. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-29-2004 Sunday 5 of 5 In Section Five: Covered Calls: Trading The Trend Naked Puts: Strategy Selection Spreads/Straddles/Combos: No Inspiration For Stock Buyers! ************************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: Trading The Trend By Mark Wnetrzak Trading with the trend increases the probability of success in almost every situation because by definition, a "trend" is more likely to continue than to change. In most cases, the trend is simply the general direction of the market and the bias of any financial instrument will usually persist until something occurs to change the balance of supply and demand. When a stock price moves above a recent channel or trading range, it's an indication the character of the trend has changed and successful traders go with the momentum of the issue, not against it. Those who trade in the direction of the primary trend are following the market, rather than trying to predict it and the probability of profit is much higher when you participate in positions that benefit from the underlying issue's prevailing tendency. Most investors have heard the saying "The trend is your friend" and using the trend to your advantage is certainly one of the tried and true market principles. This is a common approach utilized by the majority of successful traders in the industry and there are numerous advantages to systems that profit from simply following the primary direction of the underlying issue. One of the most important aspects is the virtually effortless placement of profit targets and stop limits, which eliminate the human elements of subjective judgment and emotion in determining the future movement of the market. Trading with the trend means you will participate in liquid markets because volume generally coincides with any definitive movement in a financial instrument. The amount of trading activity is also an important component of technical analysis and where there is high volume, there will be stronger, more obvious trends. Of course, active markets usually provide better opportunities for traders because the increased liquidity produces timely executions of orders and the technical signals are much more accurate. Defining primary trends and trading in the appropriate direction is relatively easy, however it can be difficult to time the exit for maximum return. In addition, entering on the correct side of the prevailing trend is important but if you don't know how to close the play with a profit, there is little point in initiating the trade. Exploiting each portfolio position for the greatest possible gain is a critical element of any profitable trading plan and the technique must be mastered for consistent success. If you take profits too quickly on each trade, it will be difficult to achieve long-term prosperity because the small capital gains will rarely exceed the portfolio's overall losses. A popular adage suggests you should "let your profits run" and that maxim holds true in almost every financial endeavor. One way to ensure that outcome is identify the price levels that will signal a change in trend, giving you precise entry and exit points for each position. In most cases, you should close any play in which the underlying trend changes significantly, thus protecting current gains and minimizing losses. To be successful, a trader must be disciplined and act according to the predetermined plan regardless of whether it "feels" right. Unfortunately, losses are an inescapable part of trading and even simple "trend-following" strategies endure a sizable percentage of losing positions. That's why it is so important to limit the size of the these losses; so you will have adequate funds to capitalize on the major trends when they occur. Professional investors know that taking losses is a necessary element of trading in the stock market, however they are able to remove the biggest obstacles to consistent returns (ego and other emotions) by adhering to profit targets and stop-limits. These traders also have confidence in a systematic approach to profiting in the market and they evaluate their performance based on many positions over an extended period of time. In short, they know the formula for successful trading: a proven, well-defined strategy; the discipline to implement it correctly and in a timely manner; and the patience to allow it to profit over the long-term. 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 KERX 12.62 13.73 MAR 12.50 1.30 1.18* 9.3% NFLD 10.65 11.37 MAR 10.00 1.25 0.60* 6.9% ASIA 7.80 7.55 MAR 7.50 0.90 0.60* 6.3% MWY 5.04 4.85 MAR 5.00 0.50 0.31 6.1% NEOL 20.08 21.02 MAR 17.50 3.60 1.02* 5.5% NEOL 20.04 21.02 MAR 17.50 3.30 0.76* 4.9% GMST 7.67 7.24 MAR 7.50 0.80 0.37 4.8% TIBX 7.95 8.02 MAR 7.50 0.90 0.45* 4.6% CRYP 16.38 16.68 MAR 15.00 2.00 0.62* 3.9% CNET 10.72 9.92 MAR 10.00 1.30 0.50 3.8% WEBM 10.66 10.60 MAR 10.00 1.00 0.34* 3.8% OSTK 23.63 29.27 MAR 20.00 4.30 0.67* 3.8% SKX 11.38 12.61 MAR 10.00 1.75 0.37* 3.4% BVSN 8.67 8.11 MAR 7.50 1.40 0.23* 3.4% PMSI 5.72 5.39 MAR 5.00 0.90 0.18* 3.3% MWY 5.53 4.85 MAR 5.00 0.80 0.12 2.8% VICL 7.60 7.14 MAR 7.50 0.55 0.09 1.4% * Stock price is above the sold strike price. Editor's Comments: Major Averages Tread Water! The Major Averages continue to consolidate with the DJ-30 and the S&P-500 moving lateral while the NASDAQ trends lower. Are we forming a "top" or basing for the next leg higher? As always, next week should offer some clues. As for the covered-call portfolio, most issues are holding there own though a few may require some close monitoring over the next couple weeks. The following stocks could pull back towards their longer-term support areas though overall the charts depict bullish signals: Gemstar-tv Guide (NASDAQ:GMST), Tibco Software (NASDAQ:TIBX), Cnet Networks (NASDAQ:CNET), Broadvision (NASDAQ:BVSN), Prime Medical (NASDAQ:PMSI), and Vical (NASDAQ:VICL). Investors were not pleased with Midway Games' (NYSE:MWY) earnings report this week and the stock has dropped right to the January high on heavy volume. A move towards $4.00 appears probable as the stock continues to churn in a Stage I base. We will show the position closed if the 50-day MA (~ $4.50) fails to hold. Note: I will be on vacation for the next couple weeks. Positions Previously Closed: None ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 OPWV 15.16 MAR 15.00 UMN CC 0.80 1403 14.36 21 6.5% SKIL 10.01 MAR 10.00 QAG CB 0.40 167 9.61 21 5.9% IIJIE 5.36 MAR 5.00 IQD CA 0.55 292 4.81 21 5.7% ULBI 23.00 MAR 22.50 BMQ CX 1.35 300 21.65 21 5.7% BRCD 6.96 MAR 7.00 BQB CJ 0.25 14514 6.71 21 5.4% FORM 20.25 MAR 20.00 AFU CD 0.85 601 19.40 21 4.5% NOVN 23.36 MAR 22.50 NPQ CX 1.45 56 21.91 21 3.9% 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). __________________________________________________________________ OPWV - Openwave $15.16 *** Consolidation Phase *** Openwave Systems (NASDAQ:OPWV) is the leading independent provider of open software products and services for the communications industry. Openwave's breadth of products, including mobile phone software, multimedia messaging software (MMS), email, location and mobile gateways, along with its worldwide expertise enable its customers to deliver innovative and differentiated data services. The company also has a professional services group that supports its products. Openwave's customers are communication service providers, including wireless and wireline operators, and handset manufacturers worldwide. Openwave is another issue "riding the wave" of the wireless rally. The stock appears to be successfully testing its 50-day MA and traders who foresee more upside activity in the group should consider this position. MAR-15.00 UMN CC LB=0.80 OI=1403 CB=14.36 DE=21 TY=6.5% __________________________________________________________________ SKIL - SkillSoft $10.01 *** Upgrade = Rally *** SkillSoft (NASDAQ:SKIL) is a global provider of comprehensive, multi-modal e-learning content and software products for business and IT professionals. Multi-modal learning (MML) solutions offer tools to support and enhance the speed and effectiveness of both formal and informal learning processes. MML solutions integrate the company's in-depth courseware, learning management platform technology and support services to meet customers' learning needs. SkillSoft focuses on meeting the business skills and IT learning needs of professionals in Global 5000 organizations through a range of content-centered, e-learning solutions. The integration of its e-learning offerings delivers a comprehensive MML solution that includes major content modalities such as Business Skills Library, IT Skills and Certification Library, Online Mentoring and Books24x7 Referenceware. Banc of America Securities upgraded SkillSoft to a "buy" from "neutral" on Tuesday which helped push the stock up to another new 52-week high. Our outlook is also bullish, due to the technical strength and this position offers a reasonable cost basis in the issue. MAR-10.00 QAG CB LB=0.40 OI=167 CB=9.61 DE=21 TY=5.9% __________________________________________________________________ IIJIE - Internet Initiative $5.36 *** Cheap Speculation! *** Internet Initiative Japan (NASDAQ:IIJIE) offers a range of Internet access and network solutions to its customers in Japan. Its main services are access services, systems integration services and value-added services, which includes data center services. The company's access services range from low-cost, dial-up access to high-speed access through dedicated lines for both individual and corporate customers. Its systems integration services are tailored to customers' requirements and it sells a significant amount of network-related equipment to its these customers as part of its provision of total network solutions. The company's value-added services include a variety of data storage and management options for corporate customers, as well as network security and other services. IIJIE has been forging a Stage I base for the last 6 months with a support area near $4. Traders who believe the lateral trend will continue can use this position to profit from that outcome. MAR-5.00 IQD CA LB=0.55 OI=292 CB=4.81 DE=21 TY=5.7% __________________________________________________________________ ULBI - Ultralife Batteries $23.00 *** On The Move! *** Ultralife Batteries (NASDAQ:ULBI) develops, manufactures and markets a range of standard and customized lithium primary (non-rechargeable), lithium ion and lithium polymer rechargeable batteries for use in various applications. ULBI has focused on manufacturing a family of lithium primary batteries for military, industrial and consumer applications. Ultralife also supplies rechargeable lithium ion and lithium polymer batteries for use in portable electronic applications. Ultralife Batteries has enjoyed investor favor with positive earnings, several new contracts, and investment banker upgrades. The stock continues to surge higher supported by high volume and this position offers potential investors who believe the rally will continue a method to target-shoot a conservative entry point in the issue. MAR-22.50 BMQ CX LB=1.35 OI=300 CB=21.65 DE=21 TY=5.7% __________________________________________________________________ BRCD - Brocade $6.96 *** Bottom Fishing *** Brocade Communications Systems (NASDAQ:BRCD) develops, markets, sells and supports data storage networking products and services. Brocade offers a line of intelligent storage networking products and SAN management software that enables companies to implement highly available, scalable, manageable and secure environments for data storage applications. Their products and services are marketed, sold and supported worldwide to end users through distribution partners, including OEM partners, value-added distributors, systems integrators and VARs. Brocade is a stock that has been forging a Stage I base for about a year and this position offers a conservative method for investors to speculate on the company's future. Target-shooting a lower net debit in the position should is a viable way to lower the cost basis and increase the potential yield. MAR-7.00 BQB CJ LB=0.25 OI=14514 CB=6.71 DE=21 TY=5.4% __________________________________________________________________ FORM - FormFactor $20.25 *** Bottom Fishing: Part II *** FormFactor (NASDAQ:FORM) is engaged in the design, development, manufacture, sale and support of precision, high-performance, advanced semiconductor wafer probe cards. The company's wafer probing solutions are driving wafer-level economies of scale in semiconductor test, delivering the advanced performance and efficiency needed to accommodate more complex, higher-pin-count, finer-pitch, higher-density devices. FormFactor introduced its first wafer probe card based on the MicroSpring interconnect technology in 1995. It has established subsidiaries in Japan, Korea and Germany that provide local design support, service and sales. The company has sales offices in the U.S., Germany, Japan and Korea and has distributors and representatives in other locations throughout Asia and Europe. FormFactor is once again entering an area of historical support and appears to be bracing for a rally as the stock has edged above its 50-day MA. Traders can speculate on the near-term performance of the issue with this position. MAR-20.00 AFU CD LB=0.85 OI=601 CB=19.40 DE=21 TY=4.5% __________________________________________________________________ NOVN - Noven $23.36 *** Earnings Rally! *** Noven Pharmaceuticals (NASDAQ:NOVN) is engaged in the development and manufacture of advanced transdermal drug delivery products and technologies and prescription transdermal products. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. The company's first major product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle in the United States and Canada, and under the brand name Menorest in Europe and other markets. Noven's second-generation estrogen patch was launched in the United States under the brand name Vivelle-Dot. Noven also developed a dual estrogen/progestin transdermal patch for the treatment of menopausal symptoms, which is marketed under the brand name CombiPatch in the U.S. and under the brand name Estalis in Europe and certain other markets. Noven rallied strongly this week after the company announced better-than-expected quarterly earnings and a drug partnership with Endo Pharmaceuticals (NASDAQ:ENDP). Traders who believe the rally will continue can profit from that outcome with this position. MAR-22.50 NPQ CX LB=1.45 OI=56 CB=21.91 DE=21 TY=3.9% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 EMIS 7.54 MAR 7.50 MTQ CU 0.45 443 7.09 21 8.4% AKAM 15.08 MAR 15.00 UMU CC 0.90 3036 14.18 21 8.4% UAIR 5.09 MAR 5.00 UWS CA 0.35 301 4.74 21 7.9% PAAS 17.67 MAR 17.50 USP CW 1.05 2181 16.62 21 7.7% AVCI 20.51 MAR 20.00 UQE CD 1.45 131 19.06 21 7.1% NTPA 13.19 MAR 12.50 NQD CV 1.25 951 11.94 21 6.8% MVIS 10.09 MAR 10.00 QMV CB 0.50 527 9.59 21 6.2% PPCO 16.69 MAR 15.00 OGQ CC 2.10 210 14.59 21 4.1% NKTR 19.05 MAR 17.50 QNX CW 2.00 4349 17.05 21 3.8% IBIS 14.49 MAR 12.50 UIB CV 2.30 267 12.19 21 3.7% ADEX 21.80 MAR 20.00 QDE CD 2.30 355 19.50 21 3.7% INGN 8.52 MAR 7.50 IUZ CU 1.20 128 7.32 21 3.6% ********** NAKED-PUTS ********** Options 101: Strategy Selection By Ray Cummins Few traders sell LEAPS on a regular basis but those who have a bullish market outlook and excess portfolio collateral should consider the naked-put strategy with long-term options. Put writing allows the trader to collect a premium (the price of the option) for accepting the obligation to buy a stock at a specific price. Traders who use the strategy understand that it can complement a conservative stock portfolio because it offers a great method for generating profits: collecting premium with the sale of out-of-the money options at the risk of acquiring a stock at a reduced cost basis. Long-term Equity AnticiPation Securities, or LEAPS, are options with a much longer outlook than traditional equity derivatives. Stock-related LEAPS may be call or put options, meaning that the owner has the right to purchase (or sell) shares of the stock at a given price on or before a specific date. Since LEAPS offer expiration dates up to three years in the future, strategies involving the sale of LEAPS differ very little from those using shorter-term options. LEAPS can be sold against collateral or other positions just like short-term options and the standard margin requirements are similar. The obvious difference is that a trader who sells LEAPS will take in a substantial premium when compared to shorter-term options, thus he will have a much larger return on investment with respect to the collateral requirement. The larger premium is due to the length of contract and it also produces a significantly lower break-even price for the overall position. The idea of a larger option premium and a lower cost basis seems like a great combination, but there is a catch. Recall that the most significant theoretical difference in LEAPS is the slow rate of time decay. These long-term options retain time-value premium even when they are substantially in- or out-of-the-money and this unique characteristic will severely affect a traders ability to adjust or roll-down (or out) of a position because the option is relatively expensive to buy back. With that in mind, it's very important to consider the potential downside in a specific issue when it is a candidate for a long-term "naked" put. If there is little chance of a severe decline, and the stock would fit well in your portfolio, it is probably a good prospect for a "naked" LEAPS put. In all cases, it is crucial to compare the difference in annualized returns generated from the sale of LEAPS, versus those which can be earned from repeatedly writing shorter-term options. Then you can decide if the (relatively) large initial reward justifies the potential risk of such a long-term position. 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 ADAT 16.94 15.89 MAR 12.50 0.45 0.45* 3.3% 10.5% IBIS 15.30 14.49 MAR 12.50 0.40 0.40* 3.0% 9.6% OVTI 29.70 28.25 MAR 25.00 0.60 0.60* 2.7% 8.4% BRKT 18.75 19.51 MAR 17.50 0.50 0.50* 3.2% 8.0% LSCP 23.07 23.90 MAR 20.00 0.60 0.60* 2.8% 7.9% CEGE 14.49 14.12 MAR 12.50 0.30 0.30* 2.7% 7.9% NKTR 18.47 19.05 MAR 15.00 0.30 0.30* 2.2% 7.7% CRYP 16.38 16.68 MAR 12.50 0.30 0.30* 2.2% 7.5% WEBX 25.25 25.57 MAR 22.50 0.50 0.50* 2.5% 6.9% DNDN 14.49 13.79 MAR 12.50 0.30 0.30* 2.2% 6.5% WEBX 26.12 25.57 MAR 22.50 0.50 0.50* 2.0% 6.1% RMBS 33.60 32.39 MAR 25.00 0.35 0.35* 1.5% 5.4% SERO 18.51 18.62 MAR 17.50 0.30 0.30* 1.9% 4.9% * Stock price is above the sold strike price. Editor's Comments: No Joy In Mudville! Even with mighty Greenspan at the bat, there was no "irrational exuberance" in the stock market this week. The major equity averages drifted lower Friday, in spite of some encouraging economic data, and that may be a sign of "things to come" as investors try to decide whether stocks are fairly valued at the current levels. Some analysts believe the market's upside is limited at this point and it's obvious that a major catalyst will be needed to provide any measure of renewed buying pressure. There are no specific issues to "watch" this week, but another round of downside activity in the technology segment would not be favorable for the majority of positions in the portfolio. Previously Closed Positions: None ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 MSO 14.53 MAR 10.00 MSO OB 0.25 2446 9.75 21 3.7% 11.5% NEOL 21.02 MAR 17.50 UOE OW 0.30 234 17.20 21 2.5% 8.4% ENZN 17.05 MAR 15.00 QYZ OC 0.25 286 14.75 21 2.5% 7.2% ATRX 27.08 MAR 22.50 OQF OX 0.25 69 22.25 21 1.6% 5.6% ALXN 22.87 MAR 20.00 XQN OD 0.25 70 19.75 21 1.8% 5.5% ENDP 24.27 MAR 22.50 IUK OX 0.30 22 22.20 21 2.0% 5.3% INSP 36.35 MAR 30.00 IOU OF 0.30 355 29.70 21 1.5% 5.1% 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). __________________________________________________________________ MSO - Martha Stewart Living $14.53 *** Litigation Speculation! *** Martha Stewart Living Omnimedia (NYSE:MSO) is an unique content and commerce company that creates "how-to" content and domestic merchandise for homemakers and other consumers. The company's products are generally sold under brand labels incorporating the Martha Stewart brand name, which it leverages across a range of media and retail outlets. MSO primarily focuses on the domestic arts, providing consumers with ideas, information, merchandise and other resources. Shares of Martha Stewart's company stock, which have slumped in the wake of her legal woes, soared this week after a judge threw out the government's securities fraud charge because prosecutors did not show enough evidence to support the accusation that Stewart misled investors. The securities fraud charge was the most serious allegation facing the home decorating maven and the only one related to her conduct as CEO of MSO. Traders who think the stock will continue to recover as the trial winds down should consider this position. MAR-10.00 MSO OB LB=0.25 OI=2446 CB=9.75 DE=21 TY=3.7% MY=11.5% __________________________________________________________________ NEOL - NeoPharm $21.02 *** Testing Recent Highs! *** 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 resumed its recent bullish activity in early February, after reaching an agreement with the FDA on the design of a Phase III study for a drug designed to battle recurring cancerous brain tumors. Now the stock is testing an area of resistance near a two-year high and traders who believe the outcome will be favorable should consider this position. MAR-17.50 UOE OW LB=0.30 OI=234 CB=17.20 DE=21 TY=2.5% MY=8.4% __________________________________________________________________ ENZN - Enzon Pharmaceuticals $17.05 *** New 52-Week High! *** Enzon Pharmaceuticals (NASDAQ:ENZN) is a biopharmaceutical firm dedicated to the discovery, development and commercialization of therapeutics to treat life-threatening diseases. The company works towards this goal on its own and through various strategic partnerships. Enzon currently markets four human therapeutic products through two specialized sales forces: ABELCET, ONCASPAR, ADAGEN, and DEPOCYT. It also receives royalties on sales of PEG -INTRON, an enhanced version of Schering-Plough's alpha-interferon 2a product, INTRON A, which uses Enzon's PEG technology, as well as a share of certain revenues received by Nektar Therapeutics (NASDAQ:NXTR) on sales of Hoffmann-La Roche's PEG-enhanced version of alpha-interferon 2b, PEGASYS. Shares of ENZN are in a strong bullish trend and traders who believe the momentum will continue in the near-term should consider this position. MAR-15.00 QYZ OC LB=0.25 OI=286 CB=14.75 DE=21 TY=2.5% MY=7.2% __________________________________________________________________ ATRX - Atrix Laboratories $27.08 *** Drug Speculation! *** Atrix Laboratories (NASDAQ:ATRX) is a specialty pharmaceutical company focused on advanced drug delivery. With five unique patented technologies, Atrix is currently developing a diverse portfolio of proprietary products, including oncology, pain management, and dermatology products. The firm also partners with large pharmaceutical and biotechnology companies to apply its proprietary technologies to new chemical entities or to extend the patent life of existing products. Atrix recently announced that the company has submitted a New Drug Application to the U.S. FDA for Eligard, a novel six-month sustained release product for hormone-sensitive advanced prostate cancer. The stock rallied on the news and traders who believe the upside activity will continue in the near-term should consider this position. MAR-22.50 OQF OX LB=0.25 OI=69 CB=22.25 DE=21 TY=1.6% MY=5.6% __________________________________________________________________ ALXN - Alexion $22.87 *** Entry Point? *** Alexion Pharmaceuticals (NASDAQ:ALXN) develops pharmaceutical products for the treatment of heart disease, inflammation, cancer and diseases of the immune system. The company's two lead product candidates are genetically altered antibodies that target specific diseases that arise when the human immune system induces undesired 1inflammation in the human body. Alexion's product candidates are designed to block components of the human immune system that cause undesired inflammation while allowing beneficial components of the immune system to remain functional. ALXN shares rallied in early February after the company announced that one of its experimental drugs significantly helped patients with a rare blood disease that destroys red blood cells and often causes fatal blood clots. The stock is trading near multi-year highs and investors who wouldn't mind owning the issue at a cost basis below $20 should consider this position. MAR-20.00 XQN OD LB=0.25 OI=70 CB=19.75 DE=21 TY=1.8% MY=5.5% __________________________________________________________________ ENDP - Endo Pharmaceuticals $24.27 *** A Big Day! *** Endo Pharmaceuticals (NASDAQ:ENDP) is a fully integrated specialty pharmaceutical company with market leadership in pain management products. The company researches, develops, produces and markets a broad product offering of branded and generic pharmaceuticals, meeting the needs of healthcare professionals and consumers alike. Endo Pharmaceuticals shares jumped higher Friday in sympathy with Noven Pharmaceuticals (NASDAQ:NOVN), which received an upgrade by Deutsche Bank after Endo agreed to license from Noven its U.S. and Canadian rights to the company's developmental transdermal fentanyl patch. The strong upside activity in the issue suggests further upside potential in the coming sessions. MAR-22.50 IUK OX LB=0.30 OI=22 CB=22.20 DE=21 TY=2.0% MY=5.3% __________________________________________________________________ INSP - InfoSpace $36.35 *** Favorable Earnings Outlook? *** InfoSpace (NASDAQ:INSP) develops and delivers a wireless and Internet platform of software and application services to a range of customers that span each of its wireline, merchant and wireless business units. Many of the company's products and application services are offered to its customers, which, in turn, offer these products and application services to their customers as their own solutions. InfoSpace also provides its services across multiple platforms, including personal computers and non-PC devices. INSP has been "on the move" since late January, when the company posted fourth-quarter results that were well above expectations and issued a positive first-quarter outlook. The company also enjoyed its second-straight profitable quarter after an extensive period of losses and investors were pleased with the news. The stock appears to be comfortably established in a new bullish trend with near-term support above the cost basis in this position. MAR-30.00 IOU OF LB=0.30 OI=355 CB=29.70 DE=21 TY=1.5% MY=5.1% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 OSTK 29.27 MAR 25.00 QKT OE 0.70 1273 24.30 21 4.2% 12.5% BRLI 18.94 MAR 15.00 BJQ OC 0.30 0 14.70 21 3.0% 10.6% MICC 22.39 MAR 21.25 CQD OS 0.55 72 20.70 21 3.8% 9.5% ARIA 10.52 MAR 10.00 UAQ OB 0.25 146 9.75 21 3.7% 9.2% NFLX 34.40 MAR 30.00 QNQ OF 0.60 12247 29.40 21 3.0% 8.7% SHFL 41.68 MAR 40.00 SFQ OH 0.70 1186 39.30 21 2.6% 6.5% ERES 30.94 MAR 26.63 DBO OT 0.35 48 26.28 21 1.9% 6.0% OVTI 28.25 MAR 25.00 UCM OE 0.35 3663 24.65 21 2.1% 6.0% SWIR 27.39 MAR 22.50 IYQ OX 0.25 172 22.25 21 1.6% 5.7% PCLN 23.02 MAR 20.00 PUZ OD 0.20 1290 19.80 21 1.5% 4.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER IN SECTION ONE ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************ SPREADS/STRADDLES/COMBOS ************************ No Inspiration For Stock Buyers! By Ray Cummins Another round of positive economic reports did little to motivate investors as technology issues kept a lid on upside activity in the broader equity markets. The Dow industrial average finished 3 points higher at 10,583 on strength in defense and aviation companies Boeing (NYSE:BA) and United Technologies (NYSE:UTX). Meanwhile, the technology-laden NASDAQ Composite Index shed 2 points to 2,029 amid weakness in biotech and semiconductor issues. Standard & Poor's 500 Index closed unchanged as gains in homebuilding, casino gaming, food distributor, defense, and department store shares were unable to keep the major market sectors in positive territory. Trading was moderate, with 1.5 billion shares changing hands on the New York Stock Exchange while 1.9 billion shares were traded on the NASDAQ. Advancers outnumbered decliners 2 to 1 on the NYSE and 6 to 5 on the technology exchange. U.S. bond prices moved higher with the benchmark 10-year note up 15/32, while its yield fell to 3.98%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 02/28/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 CERN 46.09 44.76 MAR 35 40 0.60 39.40 0.60 Open DNA 98.25 107.89 MAR 85 90 0.70 89.30 0.70 Open ESRX 70.58 72.99 MAR 60 65 0.65 64.35 0.65 Open NBR 46.97 47.35 MAR 40 43 0.25 42.25 0.25 Open BSX 41.94 40.85 MAR 35 38 0.25 37.25 0.25 Open CEC 51.62 54.57 MAR 45 50 0.55 49.45 0.55 Open SNPS 35.57 29.62 MAR 30 33 0.35 32.15 (1.45) Closed LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Synopsys (NASDAQ:SNPS) was the big surprise this week, plunging over $5 after the firm issued a mediocre profit outlook and said it would acquire Monolithic System Technology (NASDAQ:MOSY) for almost double its current market value. Monday's sharp sell-off was certainly ominous but traders who ignored the bearish signal were left with few alternatives after the "gap-down" opening on Tuesday. The loss posted in the summary reflects the cost of closing the position at the end of that session (2/24/04). CALL-CREDIT SPREADS Symbol Pick Last Month LC SC Credit CB G/L Status CYBX 27.04 24.37 MAR 35 30 0.65 30.65 0.65 Open SOHU 29.05 28.12 MAR 40 35 0.60 35.60 0.60 Open KLAC 54.24 52.71 MAR 65 60 0.60 60.60 0.60 Open IACI 31.92 32.57 MAR 38 35 0.30 35.30 0.30 Open NVLS 33.26 32.15 MAR 40 38 0.30 37.80 0.30 Open BBBY 40.62 40.93 MAR 45 43 0.30 42.80 0.30 Open OSIP 31.39 32.74 MAR 40 35 0.55 35.55 0.55 Open NBIX 51.95 55.60 MAR 60 55 0.75 55.75 0.15 Closed LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Neurocrine Biosciences (NASDAQ:NBIX) rallied unexpectedly Friday after the company announced it had acquired Wyeth's (NYSE:WYE) interest in their experimental insomnia drug, indiplon, for $95 million. The bullish trend reversal suggests an "early exit" in the position. OSI pharmaceuticals (NASDAQ:OSIP) is now on the "watch" list. CALL-DEBIT SPREADS Symbol Pick Last Month LC SC Debit B/E G/L Status KSS 48.64 51.50 MAR 40 45 4.45 44.45 0.55 Open SPF 49.75 52.31 MAR 40 45 4.45 44.45 0.55 Open AA 37.01 37.47 MAR 32 35 2.25 34.75 0.25 Open OVTI 29.70 28.25 MAR 20 25 4.50 24.50 0.50 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT-DEBIT SPREADS Symbol Pick Last Month LP SP Debit B/E G/L Status AMKR 15.92 15.32 MAR 20 17 2.20 17.80 0.30 Open IMDC 46.97 47.90 MAR 55 50 4.40 50.60 0.60 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss Inamed (NASDAQ:IMDC) is on the "watch" list after Friday morning's upside activity. SYNTHETIC (BULLISH) Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status NEOL 20.08 22.01 APR 25 17 0.20 0.50 Open? Neopharma (NASDAQ:NEOL) has previously offered a favorable "early exit" profit for conservative option traders. CALENDAR & DIAGONAL SPREADS Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status AMHC 27.08 28.09 MAY-30C MAR-30C 0.80 1.00 Open? ABGX 15.60 14.71 APR-17C MAR-17C 0.40 0.30 Open MEDI 25.14 25.69 JUN-20C MAR-25C 4.35 4.25 Open SEPR 28.29 28.31 JUL-25C MAR-30C 4.40 4.25 Open American Healthways (NASDAQ:AMHC) has already offered a favorable "early-exit" opportunity for conservative traders. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status MATK 65.74 59.46 MAR 65 65 9.40 9.00 Open? BSC 84.10 87.84 MAR 85 85 5.25 6.10 Open? FRX 74.49 75.48 MAR 75 75 6.50 6.30 Open? HOV 74.99 80.69 MAR 75 75 7.00 7.60 Open TTWO 32.03 31.30 MAR 32 32 3.20 3.00 Open SNP 40.74 41.57 APR 40 40 5.70 5.70 Open Traders with straddles expiring in March should consider initiating an "early-exit" strategy in the next two weeks to preserve existing capital. 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. __________________________________________________________________ ONXX - Onyx Pharmaceuticals $36.80 *** Next Leg Up? *** Onyx Pharmaceuticals (NASDAQ:ONXX) is engaged in the discovery and development of novel cancer therapies utilizing two primary technology platforms, small molecules that inhibit the proteins involved in excess growth signaling, and therapeutic viruses that selectively replicate in cells with cancer-causing genetic mutations. The firm is developing a new small molecule compound, BAY 43-9006, in collaboration with Bayer Pharmaceuticals. Using its proprietary virus technology, the company is also developing ONYX-411, a second-generation product that targets cancers with abnormal function of the retinoblastoma tumor-suppressor gene, and is developing Armed Therapeutic Virus products. ONXX - Onyx Pharmaceuticals $36.80 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-30.00 OIQ-OF OI=562 ASK=$0.10 SELL PUT MAR-35.00 OIQ-OG OI=546 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$34.45 __________________________________________________________________ OSTK - Overstock.com $29.27 *** Rally Mode! *** Overstock.com (NASDAQ:OSTK) is an online "closeout" retailer offering discount, brand-name merchandise for sale primarily over the Internet. The company's merchandise offerings include bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods and designer accessories. Overstock offers its customers an opportunity to shop for bargains conveniently, while offering an alternative inventory liquidation distribution channel to its suppliers. The company typically offers around 5,000 non-media products and over 100,000 media products (books, CDs, DVDs, video cassettes and video games) in seven departments on its Websites, www.overstock.com, www.overstockb2b.com and www.worldstock.com. OSTK - Overstock.com $29.27 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-22.50 QKT-OX OI=1091 ASK=$0.40 SELL PUT MAR-25.00 QKT-OE OI=1273 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$24.70 __________________________________________________________________ RYL - The Ryland Group $85.72 *** On The Rebound! *** The Ryland Group (NYSE:RYL) is a homebuilder and mortgage-finance company. The firm has built more than 200,000 homes during its 35-year history. Ryland homes are available in hundreds of new communities in various markets across the U.S. In addition, the Ryland Mortgage company has provided mortgage financing and other related services for thousands of homebuyers. The firm's various operations span all the significant aspects of the home-buying process, from design, construction and sale to mortgage financing, title insurance, settlement, escrow and homeowners insurance. RYL - The Ryland Group $85.72 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-75.00 RYL-OO OI=1006 ASK=$0.35 SELL PUT MAR-80.00 RYL-OP OI=1378 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$79.40 __________________________________________________________________ LLTC - Linear Technology $40.03 *** In A Trading Range? *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. LLTC - Linear Technology $40.03 PLAY (conservative - bearish/credit spread): BUY CALL MAR-45.00 LLQ-CI OI=2423 ASK=$0.10 SELL CALL MAR-42.50 LLQ-CV OI=3486 BID=$0.30 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$42.75 __________________________________________________________________ PIXR - Pixar $65.76 *** Merger Speculation Fading? *** Pixar (NASDAQ:PIXR) is a digital animation studio with the creative, technical and production capabilities to create a new generation of animated feature films and related products. The firm's objective is to create, develop and produce computer-animated feature films with a three-dimensional appearance. Since its inception, Pixar has created and produced a number of full-length animated feature films, Toy Story, A Bug's Life, Toy Story 2, Monsters, Inc., and Finding Nemo, most of which were marketed and distributed by The Walt Disney Company. PIXR - Pixar $65.76 PLAY (less conservative - bearish/credit spread): BUY CALL MAR-75.00 PQJ-CO OI=220 ASK=$0.20 SELL CALL MAR-70.00 PQJ-CN OI=4762 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$70.55 __________________________________________________________________ SFNT - SafeNet $37.96 *** Near A Trading-Range Top? *** SafeNet (NASDAQ:SFNT) designs, manufactures and markets network security technology and systems. The firm operates through two security business units, the Embedded Security division and the Enterprise Security division. The Embedded Security division is comprised of hardware, chips, software and intellectual property designed and manufactured in the United States and Europe for sale to companies that will embed SafeNet's products into their products for ultimate sale to end users. The Enterprise Security division includes hardware, software and network security systems designed and manufactured in the United States for direct sales to end users. SFNT - SafeNet $37.96 PLAY (less conservative - bearish/credit spread): BUY CALL MAR-45.00 UUI-OI OI=778 ASK=$0.25 SELL CALL MAR-40.00 UUI-OH OI=1335 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$40.55 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ MRVL - Marvell Technology $45.75 *** Solid Earnings! *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. MRVL - Marvell Technology $45.75 PLAY (conservative - bullish/debit spread): BUY CALL MAR-40.00 UVH-CH OI=2258 ASK=$5.90 SELL CALL MAR-42.50 UVH-CT OI=4419 BID=$3.70 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$42.25 __________________________________________________________________ IMCL - ImClone Systems $42.15 *** Erbitux Excitement Easing? *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidate, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL - ImClone Systems $42.15 PLAY (less conservative - bearish/debit spread): BUY PUT MAR-50.00 QCI-OJ OI=1109 ASK=$7.90 SELL PUT MAR-45.00 QCI-OI OI=5109 BID=$3.50 INITIAL NET-DEBIT TARGET=$4.35-$4.40 POTENTIAL PROFIT(max)=14% B/E=$45.60 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ AMX - America Movil $35.66 *** A Reader's Play! *** America Movil, S.A. de C.V. (NYSE:AMX) is a provider of wireless communications services in Latin America. Through its Mexican subsidiary, Radiomovil Dipsa, S.A. de C.V., the company provides cellular telecommunications service in throughout Mexico, with a network covering approximately 34% of the geographical area of the country, including all major cities, and approximately 90% of Mexico's population. The company also has subsidiaries in the telecommunications sector in Brazil, Guatemala, Colombia, Ecuador, Argentina, the United States, Uruguay and Nicaragua. AMX - America Movil $35.66 PLAY (speculative - neutral/debit straddle): BUY CALL MAY-35.00 AMX-EG OI=1273 ASK=$2.20 BUY PUT MAY-35.00 AMX-QG OI=157 ASK=$1.55 INITIAL NET-DEBIT TARGET=3.50-$3.60 INITIAL TARGET PROFIT=$1.25-$2.10 __________________________________________________________________ CCMP - Cabot Microelectronics $44.55 *** Probability Play! *** Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels, smoothes, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $44.55 PLAY (speculative - neutral/debit straddle): BUY CALL APR-45.00 UKR-DI OI=961 ASK=$2.85 BUY PUT APR-45.00 UKR-PI OI=962 ASK=$3.30 INITIAL NET-DEBIT TARGET=5.85-$6.00 INITIAL TARGET PROFIT=$2.35-$3.25 ************************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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