The Option Investor Newsletter Wednesday 03-03-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Stocks Churn Ahead of Intel and Jobs Report Futures Wrap: See Note Index Trader Wrap: Some slippage, with SOX weakness Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 03-03-2004 High Low Volume Advance/Decline DJIA 10593.11 + 1.63 10610.00 10550.14 1.62 bln 1433/1379 NASDAQ 2033.36 - 6.29 2039.31 2020.29 1.79 bln 1506/1535 S&P 100 566.51 + 0.65 567.37 563.45 Totals 2939/2914 S&P 500 1151.03 + 1.93 1152.44 1143.78 RUS 2000 591.32 + 0.26 592.93 585.58 DJ TRANS 2887.96 - 8.94 2896.45 2865.09 VIX 14.55 - 0.31 15.27 14.47 VXO 14.61 + 0.01 15.46 14.60 VXN 23.09 + 0.67 23.48 22.75 Total Volume 3,760M Total UpVol 1,685M Total DnVol 1,994M 52wk Highs 436 52wk Lows 23 TRIN 0.98 PUT/CALL 0.71 ******************************************************************* Stocks Churn Ahead of Intel and Jobs Report by James Brown A slight majority of stocks turned around early morning weakness on Wednesday to close mildly higher as major indices ended the session near unchanged. Uninspiring economic news coupled with caution ahead of Intel's mid-quarter update on Thursday night and the jobs report on Friday morning kept stocks in neutral. Meanwhile the media coverage of the Walt Disney shareholder vote to keep embattled CEO Michael Eisner reached a frenzied state. Global markets were generally lower lead by a 277-point decline in the Chinese Hang Seng index. The U.S. dollar continued its gains against the euro while trading close to unchanged versus the yen. Crude oil futures slipped 86 cents to $35.80 a barrel after the U.S. Department of Energy and the American Petroleum Institute reported a rise last week in crude oil supplies of 1.6 to 2.0 million barrels compared to previous estimates for a decline. Gold slipped $1.10 to $392.70 an ounce and copper futures plummeted 5.1% to $1.301 a pound, erasing last week's gains. Market internals for the U.S. exchanges were mixed. Advancing stocks just edged past decliners by a narrow margin on the NYSE while the A/D line was virtually even on the NASDAQ. Overall volume was soft but down volume outweighed up volume on both exchanges. The volatility indices traded higher on the early morning weakness but reversed course as stocks pared their losses. The Dow Jones Industrial Average closed up 1.63 points to 10,593 and traded in a relatively tight 60-point range. The index held support at the 10,550 level and its 50-dma once again. The S&P 500 followed the Dow with a 1.93-point gain to 1,151, regaining all of this morning's losses and holding above support at its 40- dma. The tech-heavy NASDAQ was hampered by selling in the semiconductor sector but only lost 6 points to close at 2033. Trading in the NASDAQ Composite was limited to a 19-point range. Insurance, biotechs and bank stocks were the strongest sectors while investors rotated out of chips, Internets, networking and hardware issues. Chart of the DJIA: Chart of the NASDAQ: The major economic reports out this morning were the Institute for Supply Management's non-manufacturing index (or services index) and the Fed's Beige Book report. The January ISM services index came in at 65.7, a record high. Economists were expecting a drop to 63 percent in February. The actual number was 60.8, a bullish reading but worse than expected. Readings over 50 indicate expansion and growth and February's 60.8 marks the 11th consecutive month of growth for the services index. On Monday investors were encouraged by a better than expected reading in the manufacturing sector's employment index. Today's services employment component slipped from 53.4 in January to 52.7 in February, which bolsters the very cautious enthusiasm for this Friday's employment report. The Federal Reserve's Beige Book report, which reports on economic conditions from the Fed's 12 regional districts, was largely ignored. The report was positive and suggested that employment was improving albeit slowly. Expectations for a strong Q1 GDP number are still alive but no one seems to be expecting any blow out job number gains. Speaking of jobs Disney CEO Michael Eisner may be in for a tougher fight than he thought to keep his. Today was Disney's annual shareholder meeting where investors voted to re-elect Eisner. Since Eisner was running unopposed for the top spot at Disney dissidents seeking his removal made their voices known by "withholding" their votes. Of the 1.779 billion votes cast about 771.7 million or 43% of the vote elected to oust Eisner. This was an unprecedented occurrence and will likely force the Board of Directors to reconsider their support for Eisner. Adding to the pressure to remove Eisner, who has lead Disney for 20 years, was a statement from California's CalPERS pension fund who asked Michael to step down by the end of the year. Comcast Corp (CMCSA), who issued an unsolicited bid to buy Disney a couple of weeks ago, wasted no time and quickly issued a statement telling the Disney board and shareholders that Disney's management should meet with Comcast to reconsider their "generous" proposal. Disney (DIS), a Dow component, lost 11 cents on the session to close at $26.65. Another Dow component doomed to suffer the spotlight tomorrow is Intel Corp (INTC). Intel will hold their mid-quarter update Thursday after the closing bell. Earlier this week on Monday a J.P.Morgan analyst downgraded INTC due to slower notebook sales and product delays. JPM also suspects that Intel will not raise guidance tomorrow for the first time in almost a year. Setting the tone was Xilinx's mid-quarter update on Tuesday night. Xilinx, another semiconductor maker, only narrowed their guidance to the top of their previous range and investors punished the stock with a 3.99% loss today. If Intel fails to raise guidance or somehow inspire investors again Friday could be a very tough session for tech stocks. Caution ahead of tomorrow's meeting drove both Intel and the SOX semiconductor index to a 1.89% loss. Intel and the sector are likely to trade sideways to down tomorrow and this could be a wet blanket on any attempted bounce in the NASDAQ tomorrow. I'm not expecting a lot of excitement tomorrow. We do have a few economic reports but nothing too inspiring. The January Factory Orders report is expected to dip 0.6% from December's 1.1% gain. The Q4 productivity numbers are forecasted to rise 2.7%, which would confirm an earlier preliminary reading. The weekly initial jobless claims are expected to drop 5,000 to 345,000 this week. The real focus will remain on Intel's report Thursday night and the Jobs report Friday morning. Estimates are for unemployment to remain unchanged at 5.6% while the non-farms payroll report is expected to show a gain of 125,000 new jobs in February. I would hesitate to initiate new bullish positions, especially in tech stocks until after the Jobs report. ************ FUTURES WRAP ************ Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ******************** INDEX TRADER SUMMARY ******************** Some slippage, with SOX weakness A rather positive Fed Beige Book report found the major indices recovering from early session weakness, as continued signs of economic growth, which wasn't too hot, helped waylay some fears that the Fed would be quick to raise its fed funds rate. Still, today's trade, especially in the tech-heavy NASDAQ-100 Index (NDX.X) 1,466.09 -0.49% certainly has our mid-August historical test showing DIVERGENCE from the past, which at a minimum would suggest any recovery for technology stocks in the near-term will be more modest. Market Snapshot / Internals - 03/03/04 Close The major indices finished mixed, and the A/D line at both the NYSE and NASDAQ was just about even. While the 5-day NH/NL ratios at both the NYSE and NASDAQ are above the 10-day NH/NL average ratios, the NYSE 10-day average ratio slipped back to 96.4%, while the NASDAQ NH/NL 10-day ratio continues to edge lower at 92.5%. Nothing major from these indicators, but not showing much bullish leadership. U.S. Market Watch - 03/03/04 Close Many of the equity sectors have seen rebounds the past 5-days. In BLUE I've highlighted the NYSE Composite ($NYA.X) where we see the 20-day % Net stronger than the NASDAQ Composite ($COMPX) 20- day % net. When I look at the 5-day % net, I begin to understand that while the NYSE, or stronger broad market average has been trying to anchor itself, the 1.39% rise in the COMPX gives the impression we're seeing more of a relief bounce at this point, and not a lot of bullish leadership. Pivot Analysis Matrix - The S&P 500 Index (SPX.X) and its tracker SPY came close to testing their WEEKLY Pivots, but buyers were present just above those levels. This can really become a focal point of "market support", where if violated, this support strength would be further signal for weakness. Note the S&P Banks (BIX.X) has also not tested its WEEKLY/MONTHLY Pivots. S&P 500 Index (SPX.X) - Daily Intervals While we don't cover every sector in our pivot matrix, it becomes rather evident that the S&P Banks Index (BIX.X) and more regional banks, along with financials are providing stability for the SPX above its WEEKLY Pivot of 1,143.68. S&P 100 Index (OEX.X) Chart - Daily Intervals I would be somewhat surprised if the OEX traded either side of 565-569 ahead of tomorrow's mid-quarter update from Intel (NASDAQ:INTC) $29.04 -1.89%, where I would expect a rather sideways "wait and see" type of trade from technology (outside of biotech). Trader and investors will monitor the banks/financials, as that looks to be the leadership group with greater weighting among the OEX/SPX. Dow Industrials (INDU) Chart - Daily Intervals I've placed two similar trends (dashed green and red) on the INDU chart as done with the OEX chart. Tonight's a good time to take a snapshot of the price weighted INDU components, as the INDU's close is right at correlative WEEKLY and MONTHLY pivots. Imagine the INDU as if it were an inchworm, where the higher PRICED stocks are the "head" and the lower priced stocks are at the "tail," and those in the middle are the thorax. What's going on? Dow 30 Components - Sorted by PRICE I placed some green (strength) and red (weakness) arrows at the 5-day percentage change columns, where most of the near-term strength has come from the tail, while the head, or larger price weighted components have been doing little, as if trying to grab hold, and let the tail inch its way higher. The percentage gainers and losers in the thorax section would look to be about a dead heat. This gives me the observation that the inchworm is coiling or compressing, just as the Dow's bar chart looks. What we can do with the above table, is use it as a benchmark in time, and should the INDU break out of its range, we'll hopefully be able to see if the HEAD leads a higher move, but more importantly, if the HEAD loses its grip, which I think would make for a sharper decline. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals Large-cap NASDAQ (non financial) really showed outward DIVERGENCE to my mid-April benchmark test in today's trade, where after a gap lower open of $36.51, the was able to fill that gap back to the upside intra-day, but that was it. Closing breadth was negative with 27 advancers and 73 decliners. Intel's (INTC) mid- quarter update may become very important for technology stocks in the near-term if any bullishness above the downward trend is to occur in coming weeks. The $36.00 level remains a rather strong support level for the QQQQ after the big break higher in late- December, where I wouldn't think the QQQ would just collapse, but I'm not seeing much sign of leadership from the more heavily weighted components, or tech-based sectors to provide a big live above $37.50. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************************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. 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The Option Investor Newsletter Wednesday 03-03-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: RNR Dropped Calls: None Dropped Puts: None Spreads, Combinations & Premium-Selling Plays: A Flat Ball Doesn't Bounce Very High! Watch List: Homes, Medical, Telecom, Copper ************************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 ket Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** RNR (call) - raise stop from 50.84 to 52.00 ************* DROPPED CALLS ************* None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ************ DROPPED PUTS ************ None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* A Flat Ball Doesn't Bounce Very High! By Ray Cummins Stocks recovered from early losses Wednesday but the rebound was lackluster as the major equity averages ended near the previous day's levels on light volume. The Dow Jones Industrials Average climbed 1 point to 10,593 amid renewed weakness in Alcoa (NYSE:AA), General Motors (NYSE:GM), Merck (NYSE:MRK), International Business Machines (NYSE:IBM)), Hewlett-Packard (NYSE:HPQ) and Walt Disney (NYSE:DIS). Intel (NASDAQ:INTC) was among the NASDAQ's biggest bears, leading the technology index 6 points lower to 2,033. The S&P 500 index was up 1 point at 1,151 on strength in retail, waste management, and medical equipment shares. In the broader market, decliners edged past advancers on inactive volume of 1.33 billion shares. Market breadth was roughly even on the NASDAQ, where 1.79 billion shares were crossed. U.S. bond prices continued their recent slump on expectations of higher rates. The yield on the benchmark 10-year Treasury note fell 3/32, with its yield rising to 4.05%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ UPCOMING EVENTS - CHANGES TO NEWSLETTER CONTENT ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ They say "nothing lasts forever" and that statement was never more accurate than with regard to finance and publishing. But, despite the psychological comfort of a repetitious cycle, sometimes change is a "good" thing. I truly hope that is the case with the current situation at the OIN, where we have decided to make some major adjustments to the content in this portion of the newsletter. Obviously, the primary catalyst for the changes is the readership, whose desires were made very clear after our recent request for "favorite" strategies. In addition, the editors of each section have identified areas they think need improvement or modification, and there are also some personnel issues to contend with such as time limitations due to "life events" among members of the staff. With that in mind, we will no longer be offering covered-calls on a weekly basis, but rather once-a-month, which is really the best timeframe for our (in-the-money) approach to the strategy. The Spreads & Combos editor will now focus on vertical spreads and "premium-selling" positions in both the Wednesday and Saturday editions, however neutral-outlook debit straddles will also be added to the bi-weekly content as market conditions permit. The summaries for the core strategies will slowly be combined (credit spreads this week) thus providing more-timely observations with regard to position exits and adjustments. In the future, we hope to publish "supplemental play" data to replace some of the omitted strategies, such as calendar spreads and synthetic positions, and further augment the current number of candidates for combination plays. Among the new (and recurring) additions will be monthly credit spreads on the OEX and SPX, and some longer-term plays in all categories. One final adjustment will occur in April, when the "Premium-Selling" section moves to Tuesday afternoon, thus providing candidates for Wednesday's market session. Your thoughts are always valued as they guide our policy decisions and determine our subject matter. Please don't hesitate to send your comments and suggestions to: Questions & comments on spreads/combos to Contact Support ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 03/02/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield IDCC MAR 20 19.55 26.75 0.45 6.66% 2.30% LSCP MAR 17 17.10 24.70 0.40 6.20% 2.34% PCLN MAR 22 21.70 22.47 0.77 7.56% 3.69% * AMLN MAR 20 19.55 24.22 0.45 6.42% 2.30% ATRX MAR 22 22.05 26.95 0.45 6.79% 2.04% BRCM MAR 37 36.95 42.01 0.55 4.29% 1.49% IDCC MAR 22 22.10 26.75 0.40 5.88% 1.81% OSTK MAR 20 19.35 31.89 0.65 10.25% 3.36% NEOL MAR 17 16.95 20.72 0.55 10.48% 3.24% RMBS MAR 30 28.90 31.95 1.10 10.64% 3.81% SMTC MAR 22 22.15 24.08 0.35 4.58% 1.58% ADEX MAR 20 19.55 21.70 0.45 8.22% 2.30% ALXN MAR 20 19.70 24.20 0.30 6.05% 1.52% APPX MAR 30 29.70 36.41 0.30 4.59% 1.01% ATRX MAR 22 22.20 26.95 0.30 6.03% 1.35% MRVL MAR 37 37.10 44.74 0.40 4.40% 1.08% NEOL MAR 17 17.30 20.72 0.20 5.25% 1.16% OSTK MAR 20 19.70 31.89 0.30 6.70% 1.52% SEPR MAR 17 17.25 45.71 0.25 5.37% 1.45% Priceline.com (NASDAQ:PCLN) was a candidate for "early exit" during last week's slump. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AAII MAR 25 25.40 9.87 0.40 7.47% 1.57% CMTL MAR 35 35.45 28.35 0.45 7.46% 1.27% FLML MAR 35 35.35 25.38 0.35 6.02% 0.99% MHS MAR 35 35.45 31.87 0.45 4.40% 1.27% CECO MAR 55 55.50 50.45 0.50 4.96% 0.90% ECLG MAR 22 22.85 19.15 0.35 10.15% 1.53% ESI MAR 50 50.30 36.52 0.30 4.96% 0.60% PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status CERN 46.09 47.55 MAR 35 40 0.60 39.40 0.60 Open DNA 98.25 105.25 MAR 85 90 0.70 89.30 0.70 Open ESRX 70.58 74.41 MAR 60 65 0.65 64.35 0.65 Open NBR 46.97 47.48 MAR 40 42 0.25 42.25 0.25 Open BSX 41.94 42.20 MAR 35 37 0.25 37.25 0.25 Open CEC 51.62 55.35 MAR 45 50 0.55 49.45 0.55 Open ONXX 36.80 38.08 MAR 30 35 0.55 34.45 0.55 Open OSTK 29.27 31.89 MAR 22 25 0.30 24.70 0.30 Open RYL 85.72 87.64 MAR 75 80 0.50 79.50 0.50 Open GS 107.09 106.40 MAR 95 100 0.65 99.35 0.65 Open MSTR 64.78 62.85 MAR 50 55 0.55 54.45 0.55 Open MICC 22.06 22.09 MAR 17 19 0.12 18.63 0.12 Open VIP 83.25 86.80 MAR 70 75 0.65 74.35 0.65 Open GDT 69.79 68.71 MAR 60 65 0.65 64.35 0.65 Open MTH 71.09 77.40 MAR 60 65 0.70 64.30 0.70 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Synopsys (NASDAQ:SNPS) has previously been closed to limit losses. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status CYBX 27.04 24.65 MAR 35 30 0.65 30.65 0.65 Open SOHU 29.05 28.93 MAR 40 35 0.60 35.60 0.60 Open KLAC 54.24 53.50 MAR 65 60 0.60 60.60 0.60 Open IACI 31.92 32.18 MAR 37 35 0.30 35.30 0.30 Open NVLS 33.26 31.94 MAR 40 37 0.30 37.80 0.30 Open BBBY 40.62 40.97 MAR 45 42 0.30 42.80 0.30 Open OSIP 31.39 35.40 MAR 40 35 0.55 35.55 0.15 Closed LLTC 40.03 39.61 MAR 45 42 0.25 42.75 0.25 Open PIXR 65.76 67.05 MAR 75 70 0.55 70.55 0.55 Open SFNT 37.96 38.15 MAR 45 40 0.60 40.60 0.60 Open MGAM 19.32 24.52 MAR 25 22 0.25 22.75 (1.77) Closed UTEK 26.28 24.94 MAR 35 30 0.60 30.60 0.60 Open AMZN 44.87 42.01 MAR 55 50 0.50 50.50 0.50 Open CTAS 42.77 44.14 MAR 50 45 0.60 45.60 0.60 Open CCU 43.44 43.61 MAR 50 45 0.60 45.60 0.60 Open ICOS 37.53 38.46 MAR 45 40 0.50 40.50 0.50 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss Conservative traders should have closed the bearish positions in Multimedia Gaming (NASDAQ:MGAM) and OSI Pharma (NASDAQ:OSIP) when the underlying issues moved above their respective sold calls. Cintas (NASDAQ:CTAS) and Icos (NASDAQ:ICOS) are now on the "watch" list. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ADEX - ADE Corporation $23.01 *** A Big Day! *** ADE Corporation (NASDAQ:ADEX) is engaged in the design, building, marketing and service of production metrology and inspection systems for the semiconductor wafer, semiconductor device, magnetic data storage and optics manufacturing industries. The company's products have evolved from single instruments used in offline engineering analysis to full, 100% inline, automated metrology solutions throughout the wafer, semiconductor device and hard disk drive manufacturing processes. Its systems analyze and report product quality at critical manufacturing process steps, sort wafers and disks and provide manufacturers with certification data upon which they rely to manage processes and accept incoming material. Semiconductor wafer, device and magnetic data storage manufacturers use the firm's systems to improve yield and capital productivity. ADEX - ADE Corporation $23.01 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 QDE OX 86 0.70 21.80 14.2% 3.2% SELL PUT APR 20 QDE PD 15 0.55 19.45 5.6% 2.8% * SELL PUT APR 22.5 QDE PX 0 1.50 21.00 10.2% 7.1% __________________________________________________________________ ALXN - Alexion $24.54 *** Near 2-Year Highs! *** 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 - Alexion $24.54 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 XQN OX 10 0.45 22.05 10.4% 2.0% * SELL PUT APR 20 XQN PD 0 0.30 19.70 3.7% 1.5% TS SELL PUT APR 22.5 XQN PX 11 0.90 21.60 7.2% 4.2% __________________________________________________________________ KMRT - Kmart Corporation $32.68 *** Technical Break-Out? *** Kmart Corporation (NASDAQ:KMRT) is a discount retailer and a general merchandise retailer. The firm operates in the general merchandise retailing industry through 1,829 Kmart discount stores with locations in all 50 states, Puerto Rico, the United States Virgin Islands and Guam, as of January 29, 2003, and through its e-commerce shopping site, www.kmart.com. In May 2003, the company emerged from Chapter 11 protection. KMRT - Kmart Corporation $32.68 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 30 KTQ OF 1959 0.35 29.65 6.2% 1.2% * SELL PUT APR 30 KTQ PF 0 1.10 28.90 6.6% 3.8% __________________________________________________________________ NEOL - NeoPharm $20.66 *** Pure Premium-Selling! *** NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. The firm has built its drug portfolio based on its novel proprietary technology platforms, the proprietary NeoLipid liposomal drug delivery system and a tumor-targeting toxin platform. NeoPharm has several promising compounds in various stages of development. The company's lead compound is IL13-PE38, a tumor-targeting toxin being developed as a treatment for glioblastoma multiforme, a deadly form of brain cancer. NEOL - NeoPharm $20.66 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 17.5 UOE OW 254 0.20 17.30 7.2% 1.2% SELL PUT MAR 20 UOE OD 65 0.75 19.25 17.1% 3.9% SELL PUT APR 15 UOE PC 2710 0.45 14.55 6.8% 3.1% * __________________________________________________________________ OSTK - Overstock.com $32.42 *** Up, Up & Away! *** 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 $32.42 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 25 QKT OE 2139 0.35 24.65 9.7% 1.4% * SELL PUT MAR 30 QKT OF 890 1.25 28.75 20.1% 4.3% SELL PUT APR 22.5 QKT PX 277 0.50 22.00 4.9% 2.3% __________________________________________________________________ PBY - Pep Boys $23.98 *** Entry Point? *** Pep Boys -- Manny, Moe & Jack (NYSE:PBY) is engaged primarily in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores. The company operated its stores in 36 states and Puerto Rico and its primary operating unit is its Supercenter format. Its operates over 600 Supercenters and one Service and Tire Center, having an aggregate of 6,527 service bays, as well as 12 non-service/non-tire format Pep Boys Express stores. The Supercenters serve "do-it-yourself" (retail) and "do-it-for-me" (service labor, installed merchandise and tires) customers. PBY - Pep Boys $23.98 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 PBY OX 1041 0.35 22.15 7.9% 1.6% * SELL PUT APR 22.5 PBY PX 62 0.80 21.70 6.2% 3.7% __________________________________________________________________ PKZ - PetroKazakhstan $27.65 *** Another "All-Time" High! *** PetroKazakhstan (NYSE:PKZ), formerly Hurricane Hydrocarbons, is an integrated, international energy group engaged in the exploration for, development and production of oil and gas, the refining of oil and the sale of oil and refined products. For 2003, production averaged 151,349 barrels of oil per day (bopd), an increase of 11% over 2002. During 2003, the firm completed a large number of key projects, drilled five appraisal wells and hydraulically fracture stimulated one additional well. Further fracture stimulation is planned on two other wells in 2004. PKZ - PetroKazakhstan $27.65 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 25 PKZ OE 668 0.40 24.60 8.6% 1.6% * SELL PUT APR 25 PKZ PE 120 0.70 24.30 5.3% 2.9% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ APOL - Apollo Group $77.82 *** Uptrend Intact! *** Apollo Group (NASDAQ:APOL) provides higher education to working adults. The company operates through its subsidiaries, The University of Phoenix, Institute for Professional Development, The College for Financial Planning Institutes Corporation and Western International University. The company offers its many programs and services at over 65 campuses and more than 100 learning centers in the United States, Puerto Rico and Vancouver, British Columbia. APOL - Apollo Group $77.82 PLAY (conservative - bullish/credit spread): BUY PUT APR-65.00 OAQ-PM OI=573 ASK=$0.35 SELL PUT APR-70.00 OAQ-PN OI=272 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.70-$0.75 POTENTIAL PROFIT(max)=16% B/E=$69.30 __________________________________________________________________ S - Sears, Roebuck & Co. $48.35 *** Consolidation Complete? *** Sears, Roebuck & Co. (NYSE:S) is a multi-line retail chain that offers an array of merchandise and related services. The company is organized into four principal business segments: retail and related services, credit and financial products, corporate and other and Sears Canada. The company has 872 full-line stores and over 1,300 specialty stores spread across the United States. It conducts similar retail, credit and corporate operations in Canada through Sears Canada. In 2002, Sears acquired Lands' End, Inc., a Headquartered in Dodgeville, Wisconsin, Lands' End is was direct merchant of traditionally styled casual clothing for men, women and children, accessories, footwear, home products and soft luggage. S - Sears, Roebuck & Co. $48.35 PLAY (conservative - bullish/credit spread): BUY PUT APR-42.50 S-PT OI=1768 ASK=$0.30 SELL PUT APR-45.00 S-PI OI=1966 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$44.65 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ISSI - Integrated Silicon $16.40 *** In A Trading Range? *** Integrated Silicon Solution (NASDAQ:ISSI) designs, develops and markets memory products for networking, Internet infrastructure, telecommunications, wireless products, handheld devices, computer peripherals and automotive electronics. Its products incorporate circuit design and advanced process technology. The company's high-speed and low-power SRAMs, low- to medium-density DRAMs and its family of electrically erasable programmable ROMs enable designers to meet demanding connectivity, portability and bandwidth requirements. In addition, ISSI provides multi-chip packages combining Flash and SRAM (MCP), Bluetooth wireless chipsets and parallel search processors or content addressable memories (CAM) in development. ISSI - Integrated Silicon $16.40 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 17.5 IUH CW 933 0.35 17.85 11.5% 2.0% * SELL CALL APR 20 IUH DD 0 0.25 20.25 4.9% 1.2% TS SELL CALL APR 17.5 IUH DW 73 0.85 18.35 9.3% 4.6% __________________________________________________________________ SEAC - SeaChange Intl. $15.62 *** Sell-Off Underway! *** SeaChange International (NASDAQ:SEAC) is a developer, manufacturer and marketer video storage servers that automate the management and distribution of long-form video streams, such as movies or other feature presentations, and short-form video streams, such as advertisements. The company sells its products and services to cable system operators, telecommunications companies and broadcast television companies. Using its systems, the company's customers can increase their revenues by offering additional services, such as video-on-demand and subscription video-on-demand programming, both of which allow subscribers to watch content at any time with pause, rewind and fast forward features. SEAC - SeaChange Intl. $15.62 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 17.5 UEG CW 281 0.20 17.70 8.3% 1.1% SELL CALL APR 20 UEG DD 531 0.40 20.40 7.8% 2.0% * SELL CALL APR 17.5 UEG DW 733 0.90 18.40 11.8% 4.9% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ DISH - EchoStar $35.50 *** Next Leg Down? *** EchoStar Communications (NASDAQ:DISH) operates through two major business units, the DISH Network and EchoStar Technologies. The DISH Network offers a direct broadcast satellite subscription TV service across the United States with millions of DISH Network subscribers. EchoStar Technologies Corporation is engaged in the design, development, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network and the design, development and distribution of similar equipment for a range of international satellite service providers. DISH - EchoStar $35.50 PLAY (conservative - bearish/credit spread): BUY CALL APR-42.50 UAB-DT OI=66 ASK=$0.30 SELL CALL APR-40.00 UAB-DH OI=403 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$40.30 __________________________________________________________________ NVLS - Novellus Systems $31.15 *** Chip Sector Slump! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $31.15 PLAY (conservative - bearish/credit spread): BUY CALL APR-37.50 NLQ-DU OI=2367 ASK=$0.30 SELL CALL APR-35.00 NLQ-DG OI=1610 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$35.35 ********** Watch List ********** ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ Hovnanian Enterprises - HOV - close: 84.70 change: +0.27 WHAT TO WATCH: We remain bullish on the homebuilders and believe the group offers a lot of potential. Traders bought the dip today in many of the well-known names. We like HOV because the stock still has room to catch up to its peers as they all trade towards their December highs or make new all-time highs. Volume has been strong in the HOV rally these last several sessions (not including today). If you expect short-term weakness then look for another dip to consider entries. We think the stock is a good candidate for a run toward the $90 level. Chart= --- Varian Medical Systems - VAR - close: 86.19 change: +1.59 WHAT TO WATCH: VAR is breaking out to new highs over resistance at $86.00 after the FDA gave them clearance today for a tumor imaging system. The move higher in shares of VAR comes after five weeks of consolidation in the $80-86 range. Its technicals are turning positive and its P&F chart just produced a new bullish buy signal. We'd consider new longs here with a stop under $82. More conservative traders may want to consider stops under the 21-dma, where VAR has found support the last three sessions (near $83.50). Chart= --- Telephone & Data Systems - TDS - close: 74.04 change: -0.39 WHAT TO WATCH: TDS, better known as TDS Telecom, has seen its stock trend steadily higher from its March 2003 low. TDS paused to consolidate sideways above $60.00 form October-December and 2004 started the rally again. Thus the stock is very long-term overbought but traders continue to buy the dips. We think TDS is a good candidate for a move toward the $79-80 level, which was support back in 2000 and 2002. Chart= --- Phelps Dodge - PD - close: 84.80 change: -2.85 WHAT TO WATCH: Shares of PD have fallen for two sessions in a row on profit taking after making a nice run from $80 to $90 in a six day period. Today's profit taking was spurred by a 5% drop in copper futures. We've expressed interest in catching a pull back to the $85 or 10-dma as a potential entry point for new bullish positions but given the sharp drop in copper today we're now concerned that PD could have farther to fall. Nimble traders might want to try and scalp a move down toward the $80 level but it's not recommended. We're going to be patient and look for PD to pull back toward its simple 50-dma again as a potential bullish entry point. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- OCR $46.60 +0.51 - Traders bought the dip to $45.50 on Wednesday and OCR looks ready to make new highs. Take caution, its P&F target has been achieved. CBSS $42.23 +0.26 - The banking sector continues to show strength and shares of CBSS set another new all-time high. OHP $48.45 +0.54 - The bounce from its 50-dma looks tempting but Oxford Health has resistance at the $50.00 mark. Aggressive traders can evaluate positions now with a stop under the $45 level. BWA $90.49 -0.58 - BWA was on our Radar screen this weekend and we continue to watch it for a breakdown under the $90.00 mark. Shares pierced this level today but managed a rebound back above this round-number support-resistance level. Take note - its MACD is suggesting the stock is short-term oversold and overdue for a larger bounce. BGP $24.41 +0.16 - BGP is trying to breakout above multi-year resistance at $24.50. COH $42.47 +0.35 - The breakout over resistance at $40.00 was fueled by strong volume. Looks tempting. DST $45.39 +0.24 - The bullish breakout over resistance at $44.00 was impressive and traders bought the dip today toward the 44.50 level. There is little resistance between here and the $50 mark. ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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