The Option Investor Newsletter Sunday 03-14-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: What a Week! Futures Market: See Note Index Trader Wrap: CORRECTION COURSE Editor's Plays: Tough Call Market Sentiment: Speed Bump or a Rebound? Ask the Analyst: Option expiration and Max Pain 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 03-12 WE 03-05 WE 02-27 WE 02-20 DOW 10240.08 -355.47 10595.5 + 11.63 10583.9 - 35.11 - 8.82 Nasdaq 1984.73 - 62.90 2047.63 + 17.81 2029.82 - 8.11 - 15.63 S&P-100 549.92 - 18.53 568.45 + 3.91 564.54 - 0.33 - 1.05 S&P-500 1120.57 - 36.29 1156.86 + 11.91 1144.95 + 0.84 - 1.70 W5000 10968.18 -346.24 11314.4 +141.50 11172.9 + 29.34 - 30.42 SOX 485.10 - 19.15 504.25 + 1.99 502.26 - 7.99 - 0.80 RUT 582.84 - 16.70 599.54 + 13.98 585.56 + 5.67 - 5.25 TRAN 2863.09 - 29.98 2893.07 - 9.12 2902.19 + 10.01 - 24.38 VIX 18.30 + 3.82 14.48 - 0.09 14.57 - 1.47 + 0.46 VXO 18.72 + 3.92 14.80 + 0.04 14.76 - 1.49 + 0.62 VXN 25.30 + 3.22 22.08 - 0.79 22.87 - 1.25 - 0.02 TRIN 0.44 1.40 1.26 1.29 Put/Call 1.05 0.79 0.73 0.86 ****************************************************************** What a Week! by Jim Brown Last Sunday we were jubilant that the Dow managed to close up on Friday and right at 10600 after the disappointing Jobs report. This Sunday we are just thankful we did not break Dow 10000 again. Definitely not the kind of week we have seen in 2004. Actually it has been 19 months since we have seen a week this bad. Dow Chart - Daily Dow Chart - 5 min Nasdaq Chart - Daily The lack of any materially negative economic reports and the lack of any new terrorist news resulted in a strong rebound from grossly oversold conditions. We will need a couple more days of trading to find out if this was the end of the correction or just an oversold bounce but nobody was heard complaining on Friday. The economics we ignored included the Business Inventories that rose only +0.1% and less than estimates of +0.3%. This was widely expected to miss the estimates after the weak Wholesale Trade report. The inventory to sales ratio remained at record lows at 1.33 and it is only a matter of time before inventories have to be replenished. Growth in most components slowed with only Manufacturers posting a minor gain. Sales were still increasing only at a slower rate. Should inventory levels not pickup quickly the GDP for Q1 could see a sizeable drop. The Current Account balance increased due to strong income flows into the US during the 4Q. This was surprising and when taken as a percentage of GDP it has shows gains, a decrease in the outstanding liability, for three quarters. Both imports and exports improved during the quarter. No complaints here. The most surprising report was the Consumer Sentiment which was inline with estimates at 94.1 and only slightly off the February levels. Considering the falling sentiment/confidence levels for all of February a flat report showing a firming of sentiment was surprising. This may be the last positive sentiment report for several weeks. The polling was done for this before the Intel guidance, weak Jobs report, the terrorist attack in Spain and the stock market correction. Once consumers are polled after those events there could be a significant change. In Friday's report the present conditions component was 105.7 and up from 103.6 in February. This was probably a result of the strong market and the hype over strong jobs expectations two weeks ago. The expectations component fell to 86.6 from 88.5 which was probably related to the increased economy bashing in the presidential campaign. The constant reference to jobs being lost from outsourcing probably weighed on workers minds. As the quarter progresses tax refunds and bonuses should help offset some of the negatives. The rebound on Friday sent many traders home breathing easier. The Dow rebounded +111 points and the Nasdaq +41. Nice gains but if you looked at the header to this article you noticed some very bearish numbers for the week. The Dow lost -355 and the Nasdaq -63 and that is after the gains from Friday. Needless to say it was a very bad week but in reality it was just normal. I know it was painful to everyone who was long but we were due for a drop. It had been 19 months since we had seen a -5% correction and there was plenty of cash waiting on the sidelines for an entry point. I am going to review both the potential for a continued rebound and a continued drop today and some of the reasons the drop occurred. Despite our personal biases we always need to be aware of things happening in the market. First the market has a tendency to celebrate anniversaries of turning points with another turning point. It seems that prior painful memories tend to resurface in trader's subconscious minds. Actually even pleasant memories tend to haunt the markets. For instance, March 12th-2003 was the turning point in the markets and marked the low for all of 2003. We have literally moved almost straight up since that day. March 10th-2000 was the absolute high point for the Nasdaq at 5132. March-11th 2002 was also the high for all of 2002. I could stop there and rest my case for a potential market anniversary event in March of 2004 but it would have been pure speculation and posses no technical justification. To apply justification we add the historical fact based on research done by Ned Davis that cyclical bull markets tend to last about 12-15 months and tend to rebound about 50% from the bear market lows. This may or may not be a cyclical bull market but either way the tendency to correct at those levels even if only temporary remains the same. Obviously time frames are always vague depending on sentiment, earnings, interest rates, current events, etc. The most critical factor is the +50% gain off the lows. From the October low at 768 and the March low at 788 I was using the +50% target for my cautions of a January dip at 1175. A +50% gain from each low would have produced 1152-1182 as a target. I settled on 1175 which was the double top resistance high in March-2002. Notice how those March dates continue to appear? We reached 1155 in January. It took six weeks from the Jan-26th 1155 high to push only +8 points higher to the 1163 high on March-5th. In retrospect I missed the eventual high by 12 points. The extreme bullish sentiment in January simply refused to capitulate but that is not the focus of this commentary. The problem as I see it today is where are we in the grand scheme of things. Are we going back up or back down? SPX Chart - Weekly The argument for a rebound to the highs is based on earnings, interest rates and the current economic recovery. I heard again on Friday that First Call is now expecting earnings for the first quarter to be in the +15% to +17% range. Their current hard estimate is +14.9% and rising. This would tend to suggest stocks should continue to go up as long as earnings continue to climb. The Fed is on hold and mortgage interest rates are plunging to lows not seen since last year. This is good for home and auto sales and could bring another round of refinancing and that money eventually finds its way into the economy. Tax checks are starting to flow and the economy is continuing to recover, maybe. All I need to do is break into a rendition of "Happy days are here again" to solidify this warm fuzzy feeling. However, and you knew there was a however, we all know the market discounts future events 6-9 months out. Stock prices today are based on those expectations of Oct-Dec conditions. If we look into the future we see much stronger comparisons for earnings. Remember the blowout Q3 and Q4 in 2003? Unless this recovery catches fire and I mean roaring fire really quick the earnings comparisons for Q3 and Q4 for this year are going to start shrinking. Instead of +15% growth it could drop to single digits and that would really sour sentiment. We are also reaching the point where the dollar cannot continue to go down. Eventually the strong dollar will begin to reassert itself and that will hurt earnings. For instance over half of Oracle's growth in database sales for last qtr was from gains in currency translation. License revenue grew +13% and currency gains accounted for +7% of the total revenue and +8% of the new software growth. What will happen when the dollar begins to strengthen again? Weaker earnings for most multinational companies. We also have the already questionable recovery. Almost every economic report continues to show growth but the pace of growth continues to slow. This is troubling quite a few analysts. The lack of job creation is also a problem. I know it is a lagging indicator. I got the memo. But, even lagging indicators eventually have to confirm and jobs are the weakest of our current indicators. The current debate on outsourcing is bringing the problem more to the forefront than ever before. Are we in a growing recovery or has it already peaked? The massive explosion in the bond market over the last week and the drop in yields was far in excess of what should have been expected from the weak jobs report. There is a real undercurrent in the analyst community that suggests there are more problems in the system than anyone expected. There are moves underway to find the change in the current environment that is consuming jobs. The fear is that what worked before may not be working now and nobody knows why. The inordinate rise in bonds has spooked economists, politicians and stock and currency traders alike. Can you have too much of a good thing? Evidently you can if nobody knows why it is happening. The terrorist attack in Spain and the bogus claim of responsibility by the Al Qaeda cell may have had a serious impact on our already spooked markets but that has passed. The terror war may eventually return to our soil but the real war that will impact our markets is the political one. The battle will be waged on the airwaves and the outcome is far from clear. The surveys made public early last week may have had more impact on the markets than people realize. Projections that Bush had lost his commanding lead and was running a dead heat or possibly even behind Kerry threw institutions into a tizzy. The potential for a change in power and a repeal of the tax incentives caused a sudden rethinking of strategy. The previously unthinkable after Bush had soared to enormous satisfaction ratings had now become possible. Historically the fourth year of a presidential term is a positive year for the markets. The party in power uses every means at their disposal to remain in power. That includes tax cuts, social security increases, big jumps in spending including doling out pork projects like manna from heaven. Also, historically the first two years of a second term have spawned many of the worst bear markets on record. Specifically 1929, 1937, 1957, 1969, 1973, 1977 and 1981. You can't give away the candy store in an election year without paying for it eventually. Taxes get raised, budgets cut and all the unpopular work gets done. During a second term the president does not have to worry about getting himself reelected but tries to clean up conditions quickly so his party's successor has a chance of victory. So where does all this confusing and conflicting information leave us? Are we going back up or back down? Wouldn't we all like to know? Unfortunately there is no clear answer. The market "should" rebound into the April earnings cycle because the earnings growth is still expanding. It "should" begin to decline into the summer as the earnings comparisons become harder and the election mud slinging heats up. "Sell in May and go away" has been a market maxim since before I was born. This puts investors on the sideline during the summer doldrums and safe from any inadvertent market moving campaign comments. When politicians are running for office nothing is safe. Drug companies could be hit by controls. Energy companies, health care services, defense, no one is safe from attack if it will score more votes. The problem would be easier to solve if the recovery would simply catch fire. A roaring economy covers many sins. The deficit would slow, taxes would flow, employment would rise and workers would consume goods. Unfortunately the recovery is still missing in action on many fronts. We saw what $365B in tax rebates and the lowest mortgage rates in 45 years did for the economy in Q3-2003 but nobody expects any more miracles in 2004. I think all of this leaves us with a negative bias after April unless we get a major economic surprise. That means any rebound next week may only be temporary. According to the Stock Traders Almanac next week is bullish with a triple witching options expiration on Friday. That is great news because we need to rebuild trader confidence if we are going to have any April earnings run. Our mid quarter update cycle is nearly over and next week will begin the warning cycle. So far there have been very few early confessions and hopefully this trend will continue. Technically the Dow has resistance at 10300, 10450 and much stronger resistance at 10600. The 10600 level was the center of the recent trading range and it is highly doubtful we will exceed that level any time soon in our weakened condition. That means the Dow could be forced to define a new trading range with 10500-10600 on the upside and 10000 on the downside. Right now we are still oversold despite the +111 point gain and we are probably going to move higher next week. How high is a matter of debate. Where the Dow just suddenly fell out of its range the Nasdaq has been trending down since late January. This suggests a different type of problem. The Dow contains materials stocks, financials, consumer cyclicals, techs and manufacturing stocks. All solid blue chip companies and places where funds can park money in times of uncertainty. The Nasdaq has a different problem. In times of uncertainty traders tend to flee highly volatile tech stocks and move to safety. This is why the Nasdaq typically leads any drop and has deeper corrections. The percentage drop from the highs for the year on the Nasdaq is twice the Dow percentage and right at -10%. The Nasdaq has resistance at 2000, which is also the 100dma and again at 2030 to 2060. With the downtrend in progress since Jan-27th it is going to be tough to get back over 2050. That level was the price magnet for the two weeks prior to the current drop and is now strong resistance. The Nasdaq also has strong support at 1900 and heavy congestion between 1900 and 2000. This suggests the Nasdaq could also be locked into a new range from 1900-2050. I know this commentary probably angered some readers and bored others but it is the kind of fact summary that we all need to consider. I would like to think we will reach new highs before May and nothing would please me more. Unfortunately the current market environment is not suggesting that will happen. The drop this week was not unreasonable in its depth as all indexes dropped approx -3.5%. Just a normal correction and one that should be over. What shocked investors was the dramatic way it dropped. This also suggests that investors are worried. Instead of a calm decline the drop was sudden and sharp with signs of panic. For me the strongest indication of strength on Friday came from the Russell. The little index that thought it could roared back up the hill and posted a +14 point, +2.47% gain. This was a monstrous move when put into perspective. The Dow gained +1.10%, Wilshire +1.35% and Nasdaq +2.10%. The Russell was the motivating factor behind the Nasdaq gain. The closing Russell sprint added +5 points to the Nasdaq in the last 8 min of trading. The Russell was the ONLY index to not break its bullish uptrend support for the week. Russell-2000 Chart - Daily The rebound on Friday came on very strong internals with up volume 6:1 over down volume and advancers 5:2 over decliners. Traders would have been cheering at the close were it not for the very low volume of only 3.7B shares. This is not what builds investor confidence. The drop on Thursday was on very strong volume of over 5B shares and 4:1 down volume to up. Everything was in place for the rebound but that vital volume component. My theory is weekend related. With the renewed terror risk I feel investors were willing to wait until Monday to avoid weekend event risk. That makes Monday a critical day for the bulls. We must rally on strong volume and strong internals to rebuild confidence in the market. That may be a tall order for the Dow with resistance just overhead at 10300. It fought 10225 all day and was only able to break back above its 100dma at that level in the last ten minutes of trading as shorts covered into the close. The Nasdaq has about 20 points of free space before running into resistance at 2000 and only if it can open in positive territory and over resistance at 1980. We could win back a lot of traders with a blast out of the gate and a push back to 10350/2000 or higher on Monday. Conversely if we are unable to push higher then Friday will be seen as a simple oversold relief rally and the overhead pressure will begin to build again. The economic reports on Monday are neutral and should provide bullish confirmation with the Housing Index and Industrial Production. Marginally weak numbers should not be seen as negative to the market. The NY Empire State Manufacturing Survey has been on a steady uptrend and one of the few reports consistently gaining strength. The February number was a record high so any pullback will just be seen as a pause and any higher number is a new record. Not much risk there. Next week is going to be critical to the market for the rest of the quarter and the base for any April earnings run. We must have a couple of good days beginning with Monday or traders will begin rethinking their plans with many electing to take profits and leave early for the summer. Normal profit taking does not cause alarm but extreme uncertainty does. With our uncertainty quotient growing daily we need a booster shot of confidence to get us over the hump. The inoculations will begin at the bell on Monday. Enter Very Passively, Exit Very Aggressively! Jim Brown ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 ************** FUTURES MARKET ************** 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 ******************** CORRECTION COURSE By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – We may have seen the lows on Thurday/Friday for the correction that snowballed last week - it was a decent rally, especially coming after the terrorist bombing in Madrid on Thursday with 200 people dead and many times that injured, many seriously. This event of course hit European markets pretty hard ahead of the New York opening on Friday. Last week's sharp sell-off arrived last just after I was starting to think that the indices could break out to the upside because stocks did at least keep rebounding after the S&P and Dow Industrials failed to exceed highs hit repeatedly in the same area. Market action ahead may be choppy and not substantially down or up from Friday's close, until we get nearer to the releases of Q1 earnings in April - we may get some "warnings" on earnings in the coming week and they will be a focus for buying or selling interest. Specifics on the indices are seen below along with select stock index charts. The Federal Reserve Open Market Committee meets Tuesday, and bond and stock investors will also be looking at any statements from them that could relate to any possible change in their interest- rate stance. FRIDAY'S TRADING ACTIVITY – The Dow lost 355.47 points on the week, which was a 3.4 percent decline. The Nasdaq Composite lost 62.9 points on the week, or 3.1% for the week. The S&P 500 (SPX), while rebounding nearly 14 points on Friday, had a loss for the week of 36 points and this also represented a decline of 3.1 percent. On the NYSE advancers outnumbered decliners by nearly 3 to 1 - ditto the Nasdaq. The University of Michigan on Friday said its consumer sentiment index fell to 94.1 in March, from 94.4 in February. This number was close to expectations of 94.4. On Thursday the Labor Department reported a decline in weekly jobless claims and this set a bit of a positive tone for the end of the week also. Airlines, semiconductors, brokers, oil services and Internet stocks were among the best performing sectors. Gold and health care were losing sectors. Disney (DIS), which had suffered a steady decline in its share price, after CEO Michael Eisner's negative press with shareholders and their withholding of support, rebounded to above 26, up nearly 5%. This action helped the Dow 30 and the S&P blue chip indices. Helping out the Nasdaq, was an analyst upgrade of Dell (DELL) Computer. The stock ran up 3.5 percent to just over $33 after upgrades at Morgan Stanley and J.P. Morgan. OTHER MARKETS - The 10-year T note was down 15/32 at 102, ending at a yield of 3.76%. Potential bond buyers were not buying as many Treasury issues given yield under 4% and selling was the result by week's end. The 10-year was higher on the week however. Federal Chairman Greenspan said Friday that U.S. job creation has been "badly lagging," but he also expressed some optimism that hiring would pick up soon. Lagging job growth has of course been a key factor behind current record low interest rates. In late-day New York trading on Friday, the dollar was up over a percent against the euro, trading at 1.22. There was talk among Forex traders that the euro's decline of over 6 cents (dipping below 1.23)after it hit an all-time high of $1.29 in Feb, has led to continued profit taking buying by holders of short dollar/long euro positions. Some of the "hedge funds" as well as other speculators who held large long euro positions have pulled some money out of the euro. MY INDEX OUTLOOKS – Nasdaq Composite (COMP) Index – Daily: Last week, a close over 2060 - above the 21-day moving average - was needed to suggest a renewed uptrend. Instead, the rally failed right in this area and reversed to the downside, suggesting that the Composite might again fall to the area of the lower envelope line set at 3.5% under the 21-day moving average. At 1950 and in the area of my lower envelope line, COMPX again was oversold and would have some likelihood of a rebound - this is what happened: a final dip under 1950 and then a rally followed. The rally appeared seemed to be more than than short- covering type buying, as there was decent upside follow through on Friday as buyers showed up. As I've been saying for awhile, the Nasdaq Composite might get to as low as 1900 but that is a "worst-case" downside projection. In general, I would now favor buying Nasdaq options with the Composite in the 1950-1900 zone. Resistance in COMPX can be assumed again in the area of the 21- day moving average, currently intersecting in the 2030 area. A close above 2030 is needed to suggest that this index might be poised to get back up to 2060-2070, where I would take on bearish option plays. I doubt that there is going to be sustained upside follow in the coming week or two, given the ease with which sellers took stocks down last week. Buying interest appears cautionary and not yet wholehearted as tech businesses await a better economic rebound than has been seen to date. Nasdaq 100 (NDX) Index – Daily & Hourly: A noteworthy technical event in the Nasdaq 100 or NDX, was that it fell to the lower end of its projected hourly downtrend channel and then rebounded. The channel lines are outlined in the chart on the right below. Support is suggested by this trend channel as in the 1400-1405 area, with resistance at 1460, where the red (down) arrow is seen. I suggest call purchases around 1400 if there is another dip - if so, I also suggest exiting on a close below 1380. Index puts look favorable when the NDX is at or above 1460, with a suggested exit point being an Index close above 1480. As with the Nasdaq Composite, a dip under the lower envelope line I've been using, set at 3 percent under the 21-day moving average, gave a good idea of where this index was both oversold and in a price area where the Index could snap back (see the daily chart, left below). The other tendency we often see with the hourly chart is that upside reversals often occur when both the stochastic models, set at "length (number of periods) 5 and 21, fall to the lower extremes. The last time both got into overbought territory and turned down, there was a decline of some 90 points from the time when both lined up at or under their the lower extremes of the green level lines - see lower most indicators, above right. Nasdaq 100 (NDX) Index – Daily: The daily chart in a bit more detail and with a downtrend channel outlined is shown below. There were a couple of key technical events - one, when the index broke under its uptrend line and then could not get back above this line. Two, the same break and subsequent failure to get back above the 50-day moving average. NDX fell under this average and it was then the exact point marking the top of intraday rallies - before a next wave of selling came in, taking the Nas 100 index down again. The top of the daily chart downtrend channel, intersecting currently in the 1470 area, is the key resistance in my estimation. If you are holding long calls bought near 1400, I suggest taking at least partial profits around 1470, if reached. According to the 14-day RSI Indicator, the NDX Index got as oversold as it has been in some months, with a reading under 35 toward the end of the week. Readings in this area may not always reflect major potential for a trend reversal but it does suggest an "oversold" market and one that is ripe for taking profits held on puts. Nasdaq 100 tracking Stock (AMEX:QQQ)– Hourly: We didn't see the close over 37-37.50 that might have suggested some upside follow through to the last rally attempt prior to last week's declines. Instead, the Nas 100 tracking stock fell to the lower boundary of its downtrend channel, which was also suggested as a downside trading objective in QQQ - at 35-35.50 specifically. This area offered an opportunity to both exit short stock positions and puts and a place to do some buying of the stock anticipating a tradable rally. I indicated last week that a fall to below support at 36.25 suggested downside potential to the lower end of the channel, at 35-34.75. This same prior support point is now likely to define a first important resistance are. Above 36.25, expect resistance and selling interest around 36.75. Hopefully, those short the stock made a decent profit on my last week comment to cover shorts and buy back the stock beginning at 35.25 - I wasn't sure the Q's would get to 35 even - WRONG! S&P 500 Index (SPX) – Daily chart: The S&P 500 dipped to well under my lower envelope line set at 2% under the 21-day moving average - often I also use a 3 percent setting which marked the exact lows on Thursday and Friday. In a strong uptrend, such as we have seen in recent months, declines tend to stop at a envelope setting that is not as wide as 3%, but more like 2 percent. I tend to use a tighter setting until there is a decline that is back to a "normal" envelope range of 3 percent above or below a 21-day moving average of the S&P 500 (SPX) close. The envelope lines, as seen in the chart below at TWO percent, will be reset (to 3%) on my chart for the future. The other Indicator worth mentioning here is my custom indicator that plots daily call to daily put volume, as seen on the lower portion of the chart above. The readings of this Indicator are suggesting a current or recent bearish extreme in market "sentiment" - one that is extreme to a point where it often precedes an upside reversal or the opposite of what traders expect. The magenta line is a 5-day moving average of the daily ratio number. With put volume approaching an extreme relative to daily equities call volume, traders are about as bearish as they will tend to get. Once everyone gets that bearish, the market is often then setting up for a reversal to the upside as much of the selling gets done, such that a relatively small amount of buying can drive stocks back up. S&P 100 Index (OEX) – Daily chart: The S&P 100 or OEX Index broke the 561-562 support I was seeing on the charts and this event triggered more selling and the snowball effect (and with buyers retreating to the sidelines) took over last week. I made mention last week that technical support might develop in the 558 area, assuming 566 was penetrated. Well, how about 448 instead?! The market decline took on significant downside momentum and the slide was more than I bargained for. I also take a look here at the common 38, 50 and 62% retracments - the OEX has not quite retraced half or 50% of its last major upswing. 542 would be a 50% retracement - if this area is reached I think it offers a high potential trade in terms of (further downside) risk relative to (upside) reward potential. Dow Industrials (INDU) Daily: The sideways pattern outlined by the two dashed level lines in the Dow chart below, called a "line" or "rectangle" pattern, most often suggests that the market is consolidating for a new move up. Sometimes, this pattern precedes a downside break however, and a sharp and quick downside move, as happened last week. The decline then stopped at the Dow's uptrend line - funny how that happens so often! I now look for what was support, at the lower end of the box, to now offer resistance assuming a rally takes the Dow 30 back up to the 10400 area (at the red arrow). I lean right now to exiting calls around 1040, at least in the way it looks to me now and before seeing further market action in the week ahead. As noted in this column last week: "A decisive downside penetration below 10400 gives me a downside objective to around 10200 to 10100." Not a bad prediction as it turned out. I hope some of our OIN subscribers used this downside objective as the likely right area to exit puts and even do some call buying. I continue to favor buying calls in this same zone - 10200-10100. I doubt that we will see 10,000 in the Dow anytime soon. Good Trading Success! *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ************** Editor's Plays ************** Tough Call I have not had so much trouble picking a play for this article in months. I looked at hundreds of charts and option montages to no avail. The problem is my market view today. After researching and writing wraps for about eight hours Friday night I was more confused than when I started. I think the strong internals on Friday were bullish but we had the light volume qualification to deal with. We also had an irrational move in the Russell futures at the close and a +2.71% gain for the day. This was about double the gains on the bigger indexes. I am concerned that Friday bullishness could see some profit taking at the open on Monday. ANY profit taking at the open on Monday could sour the bullish sentiment. Also, the NDX and the Compx are only 20 points below strong resistance on each index. This suggests any opening bounce could meet stiff resistance just about the time it reaches a decent gain. Already winded from the sprint they may not have enough energy left to break those levels. A failure to break them could lead to another round of declines. So how do you pick a stock play under these conditions? The volatility has spiked multiple points and option premiums are very high. I looked at home builders for instance with the idea that they would benefit from low interest rates and from the NAHB Housing Index to be announced on Monday. Unfortunately premiums were out of sight. I hate to pay $3 for an option $5 OTM a couple months away. With the current overhead resistance on all the indexes it will be hard for any stock to continue to out perform. I looked at selling puts to capture the high premium and decided it was too risky given the overhead resistance in the market. I looked at selling some credit spreads and passed due to the low risk-reward ratio. I looked at numerous combinations and the high premiums negated any potential profit. The problem is my view that the Dow will have trouble moving much over 10300 and the Nasdaq moving much over 2000. I could be wrong and we will blast over those levels in a heartbeat at Monday's open. Unfortunately my bias is preventing me from recommending most plays for that reason and option premiums restrict the others. I looked at some cheap option lottery plays for expiration week except cheap options are few and far between. Those that were cheap had stocks going nowhere. GE, MSFT, INTC, etc. I looked at the QQQ, DJX and Russell Ishares and could not get comfortable with the risk/reward ratio. Sometimes cash is the best position but I could not believe I could not find a play for expiration week. I like things like MMM, UTX and EBAY on their recent pullbacks but their options are grossly expensive. I like GE at $30.50 and the 200dma but I would like to make sure the new stock is all digested first. With GE at $30.60 the Mar-$30 calls are only 85 cents and they are already 60 cents ITM. If they stock was already in the market GE could bounce a buck easily. I am just not convinced. I like MMM at its 200 dma but why is it continuing to go down? Enquiring minds want to know. I have been trying to get into EBAY for two months. The stock only pulled back -$3 last week and already bounced back +$2. I should just shut up and buy it at $69 but it has failed to hold over $70 for two months. What's up with that? The stock has huge relative strength but can't move up. Pass again. I finally settled on an old favorite that is 36 cents from an all time high despite the market crash. Symantec. SYMC dropped from $45 to $41 last week and rebounded back to $44.64 at Friday's close. This stock is stronger than Arnold and I am just ticked I did not have an alarm set when it dipped. Surprisingly the options are not that expensive. The April $45 ATM call is only $1.75. That is less than the stock gained on Friday. This may not be your choice for a rocky market play but it was the only one I would place my money on. I am thinking the April option simply to get us past any potential rebound over the next week. If you would rather go longer term I would look at the July $50 call for $1.55. Remember, I am anticipating some market weakness ahead. I want a stock that will shake it off and keep on moving like it did this week. I want to take a quick profit and run to the sidelines. Buy the April $45 Call SYQ-DI, currently $1.75. Target price = $2.75 Stop loss = $1.00 Risk = 75 cents Keep your fingers crossed! Symantec Chart **************** MARKET SENTIMENT **************** Speed Bump or a Rebound? - J. Brown Ouch! After last week the bulls are probably thinking they need a vacation. After all they've been running for almost a year straight - granted they've grown a little tired the last few weeks. It was encouraging to see the markets do some heavy lifting on Friday but the volume numbers were a little disappointing. Sharp, brief sell-offs are common characteristics of a bull market correction and there are plenty of investors who have been waiting on the sidelines to jump in. The question now is whether or not the correction is over and Friday's rally is a new short-term bottom? Or is Friday just an oversold bounce in what could be a new change in the trend (think of it as a speed bump on the way down). Historically the week of triple-witching options expiration in March tends to be a bullish one. Considering the market's still oversold condition from last week's sell-off a continuation of the bounce is probably a good bet. Unfortunately, that bounce may be muted on Monday and Tuesday morning as we wait for the FOMC announcement at Tuesday's meeting. No one expects Alan & Co to move interest rates but if and how they change the wording of their statement will be major news for the next three sessions. Next week also brings a number of economic reports but potentially overshadowing them is the onset of the corporate confession cycle or earnings warning season. Yet this time we might actually see a bullish affect. We've already heard three or four corporations issue positive pre-announcements last week. It would be great to hear more positive upside guidance, which could jump start an early earnings run for the April reporting season. At least that's what my optimistic side is looking for. We will hear from a number of the broker-dealers this week who report earnings head of the crowd. Lehman Brothers, Bear Stearns and Morgan Stanley will all announce and odds are they'll crush expectations again. This should have a positive influence on investor sentiment. Speaking of investor sentiment we noticed some pretty big moves in the COT data (look below). Commercial traders or institutional traders have been slowly turning bullish on the NASDAQ 100 for weeks but this latest report hit extremes not seen since June 2002. This is good news because the commercial traders are normally right while the small trader tends to be wrong. Also noteworthy is the new bearish extremes in the Dow Jones futures by the small traders. Using the same logic this is a contrarian bullish indicator suggesting a bullish move for the Dow. Unfortunately, this COT report is from March 9th and before the last two sessions of the steep sell-off and before the Thursday terrorist bombings in Spain. I would certainly wait to see how these numbers change in next week's report before adding too much weight to them but they do add a little bit of encouragement for the bulls. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7416 Current : 10241 Moving Averages: (Simple) 10-dma: 10469 50-dma: 10547 200-dma: 9760 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 760 Current : 1120 Moving Averages: (Simple) 10-dma: 1140 50-dma: 1137 200-dma: 1050 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 946 Current : 1431 Moving Averages: (Simple) 10-dma: 1451 50-dma: 1492 200-dma: 1372 ----------------------------------------------------------------- Volatility indices dropped strongly on Friday given the broad- based bounce but this week's market decline produced a surge in volatility that broke the previous multi-month trends. While I'd expect volatility to slowly drift lower it may not return toward its previous lows very soon. CBOE Market Volatility Index (VIX) = 18.30 -2.37 CBOE Mkt Volatility old VIX (VXO) = 18.72 -2.99 Nasdaq Volatility Index (VXN) = 25.30 -1.28 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.05 758,249 795,143 Equity Only 0.82 563,698 463,767 OEX 1.31 54,825 71,831 QQQ 2.54 57,289 145,699 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.5 + 0 Bull Confirmed NASDAQ-100 43.0 + 0 Bear Confirmed Dow Indust. 80.0 + 0 Bull Correction S&P 500 79.4 + 0 Bull Correction S&P 100 84.0 + 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: 1.93 10-dma: 1.49 21-dma: 1.29 55-dma: 1.08 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 2114 2327 Decliners 732 736 New Highs 83 74 New Lows 17 14 Up Volume 1454M 1376M Down Vol. 207M 287M Total Vol. 1679M 1680M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 03/09/04 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 Commercial traders are committing new money to both long and short positions but they are turning more and more bearish in the large S&P contracts. Small traders are holding relatively steady. Commercials Long Short Net % Of OI 02/17/04 416,148 415,278 870 0.0% 02/24/04 417,490 416,502 988 0.0% 03/02/04 411,932 418,936 (7,004) (0.1%) 03/09/04 418,394 433,237 (14,843) (1.7%) 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 02/17/04 141,533 84,227 57,306 25.3% 02/24/04 141,559 85,171 56,388 24.9% 03/02/04 148,383 84,135 64,248 27.6% 03/09/04 155,947 88,317 67,630 27.7% 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 Wow! We really saw some money come into the e-mini's this week. Commercial traders added nearly 90K new long contracts and more than 90K new short contracts. They remain net bearish on the S&P. Small traders also added more to their positions but remain net bullish. Commercials Long Short Net % Of OI 02/17/04 296,313 371,703 (75,390) (11.3%) 02/24/04 320,425 387,255 (66,830) ( 9.4%) 03/02/04 344,805 395,112 (50,307) ( 6.8%) 03/09/04 431,623 485,268 (53,645) ( 5.9%) 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 02/17/04 144,014 64,391 79,623 38.2% 02/24/04 129,894 63,524 66,370 34.3% 03/02/04 119,382 67,453 51,929 27.8% 03/09/04 135,233 76,558 58,675 27.7% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders have slowly been turning more and more bullish on the NASDAQ 100 over the last few weeks. As of March 9th, they hit new extremes surpassing they're last bullish peak dating back to June 11th, 2002. Unfortunately, this reading is before the steep Wednesday-Thursday sell-off this week and before the Thursday morning terror attack in Spain. We'll have to wait until next week to see how commercial traders, or "smart money", reacts to the last few sessions. Small traders have also turned more bullish but they're not hitting extreme readings. Commercials Long Short Net % of OI 02/17/04 46,104 40,385 5,719 6.6% 02/24/04 47,266 40,452 6,814 7.8% 03/02/04 49,959 41,059 8,900 9.8% 03/09/04 57,368 46,082 11,286 10.9% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 11,286 - 03/12/04 Small Traders Long Short Net % of OI 02/17/04 9,630 12,338 (2,708) (12.3%) 02/24/04 12,388 7,310 5,078 25.8% 03/02/04 11,605 7,128 4,477 23.9% 03/09/04 15,533 8,070 7,463 31.6% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders or institutions have been slowly growing more and more bullish on the Dow over the last few weeks. Again, this latest data is before the Wednesday-Thursday sell-off and the Thursday terror event but it is encouraging. In contrast small traders have turned more bearish and actually hit a new extreme in their bearishness, surpassing last December's readings. This is a contrarian bullish indicator since small traders tend to be wrong. Yet I would hesitate to draw too many conclusions until we see next week's data and investor reaction to the terrorist attacks. Commercials Long Short Net % of OI 02/17/04 24,451 12,907 11,544 30.9% 02/24/04 27,176 13,918 13,258 32.3% 03/02/04 27,594 14,166 13,428 32.2% 03/09/04 26,867 12,845 14,022 35.3% 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 02/17/04 6,768 15,623 (8,855) (39.5%) 02/24/04 6,509 14,919 (8,410) (39.2%) 03/02/04 6,898 15,874 (8,976) (39.4%) 03/09/04 7,053 19,159 (12,106) (46.2%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** *************** ASK THE ANALYST *************** Option expiration and Max Pain I received several questions this week regarding Max Pain theory, which is a theory, based on mathematics and the never-ending goal of an option market maker to make as much money for himself as possible as option expiration nears, while at the same time trying to make life as difficult and as unprofitable for options traders. I shouldn't beat on market makers. They need to make a living too, and I've never met a good trader that didn't have profit in mind. It's OK to want to make a profit, and I really wouldn't hold it against anyone. So what is Max Pain theory? In simplistic form, the theory itself is based on the thought that a security that trades options, usually with high open interest, might gravitate toward a mathematically derived average price as option expiration nears. The Max Pain is really somewhat of a mid-point, or the average price if you were to add up all the current option open interest for a particular month at all the various strike prices. Believe me when I say that that is the "simplistic" version, or explanation, as it is much more complex, where it would really take a book of text to be able to explain fully. Let's take a look at the NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.51, where the current month Max Pain has been calculated at approximately $36.00, or the $36.00 strike. Remember last week's article on the bullish % sector bell curve? Think of Max Pain as somewhat of a bell curve, where the top of the curve, is really the mid-point, or point of equilibrium for a given point in time. QQQ March Option Contracts - Sorted by Open Interest Here's a look at a QCharts option chain of the QQQ, where I've sorted by Open Interest, for the current month March option contracts. We can see that there is greater amount of interest in the March 37 calls and puts, March 36 puts, and March 35 puts, where open interest begins to drop off from there. Before we go further with this article, let me say that there are MANY dynamics in the marketplace that can influence price action, but as we near an option expiration, price action in an underlying security can be INFLUENCED near-term, simply from what takes place in the derivatives market, whether it be futures expiration, or options expiration. See the column "NetSinceOpen%" in the above table? That's the percentage gain/loss found in various option contracts during Friday's trade. Even though the current Max Pain level for the QQQ is calculated at $36.00, the mindset of a trader/investor could be.... "Who has the greatest amount of profit risk, from current level of trade?" Don't just think about RISK from the perspective of an investor, but also that of the MARKET MAKER. Thursday evening, the QQQ closed at $34.87, and investors holding the March $35 puts (QQQOI) long were holding an in the money contract. One day later (Friday) they're holding an out the money contract, where if the QQQ closes ABOVE $35.00, the option would be worthless. Thursday evening, the QQQ closed at $34.87, and a MARKET MAKER (it could be your or I that sold a put option short, but a market maker probably has a greater amount of capital to work with than you or I) holding a March $35 put short position, who is OBLIGATED to buy the QQQ at $35.00 should it close at or below that price level on Friday, March 19, 2004 was holding a potentially losing position. Potentially losing position, because we really don't KNOW what his/her average price of premiums received has been, during market making activities. The price range for the March $35 put contract has been $0.05 to $12.90. QQQ March $35 Put (QQQOI) Chart - Monthly Intervals If looking at things from the perspective of the MARKET MAKER, what would we be trying to do with the QQQ right now? For the past three months, since December's quarterly expiration, the March $35 put has traded between $0.10 and $1.15, where 668,999 contracts have traded hands since January 1, 2004, yet open interest at Thursday evening's close was 232,361. While I can't say for certain, the above chart gives the perspective that a MARKET MAKER that has been selling these options to market participants that have been BUYING them, has probably SOLD an average PREMIUM of $0.60, and should the QQQ close above $35.00, all that premium is then a profit, where the MARKET MAKER's break-even is a QQQ close of $35.40 ($36 - $0.60 = $36.40). I use the QQQ put as an example, but you can begin to make similar observations as it relates to other option contracts, with HIGH open interest, where those option strikes CLOSEST to current QQQ level of trade has a high degree of PROFIT RISK. I could also discuss the PROFIT RISK for the MARKET MAKER in the QQQ $35 calls, but note that the open interest in those calls is about 1/2 that of the offsetting $35 puts. If YOU were a MARKET MAKER, where is YOUR attention focused? Right now, you're most likely FOCUSED on where the open interest in your book is, and you're trying to keep as much premium profit as possible. Now that we have a feel for gain/loss on a daily basis, start looking at those options, based on a QQQ trading at $35.51, where the LONG position has the greatest PROFIT RISK. Think PROFIT turning to $0.00. Remember, when YOU or I BUY an option, we've already factored in what we could LOSE, so when we think of "max pain," I think it best to think of those options with the GREATEST PROFIT, where as option expiration nears, those profits could erode quickly (that's RISK) should price action in the underlying security suddenly move against the option position. Do you begin to see what can take place as option expiration nears? Remember that the clock is ticking as it relates to March expiration. If you as a MARKET MAKER can "manipulate" or begin to INFLUENCE price action near-term, to try and achieve MAX PROFITABILITY for your book, then YOUR risk window is just 5- days. If successful, then the MARKET MAKER can also inflict Max Pain on the general public, which tends to BUY LONG call and put options. To fully comprehend, or tabulate Max Pain you can begin to see how complex it becomes, as you really need to fully review and think through the process of average price paid for the various contracts that are currently CLOSE to the price of the underlying security. One observation that traders have made over time is that Max Pain levels aren't always accurate as to where the underlying security actually closes on option expiration. Why is that? Besides stating the obvious that some type of major event (earnings, geopolitical, etc) took place, which impacted price of the underlying security, Max Pain theory can be inaccurate, or unreliable, when considering that the derivatives, which the theory is based upon, may have been heavily used by an institution(s) to hedge a large position underlying bullish position, or to actually PURCHASE a position at a specified strike price, at some future point in time. This is more apt to be present in individual stocks than indices, but here is why Max Pain theory can be very unreliable. Pretend for a moment that the QQQ is actually a company's stock, and you find that Max Pain for March expiration is $36.00. Let's also pretend that QQQ trades average daily volume of 5 million shares per day. A year ago, a large hedge fund began accumulating QQQ shares, from $24 to $30 over several months, with full intention of selling that position in March of 2004 at $36.00. When the position exceeded the hedge funds price objective at $37, the hedge fund manager purchased March $36.00 puts for $0.30 per contract in order to put a floor of profit under the position to protect those gains. And here is how a trader (like you and I) that RELIES TOO HEAVILY on Max Pain theory working, can get in big trouble if they have relied heavily on the theory working as if price will gravitate toward the Max Pain level. Put yourself in the shoes of the hedge fund manager with the now largely profitable QQQ position and you're ready to sell at your stated objective of $36. Maybe you wished you had sold at $38, but things were looking very promising at that price level, and it wasn't time to reallocate your assets. Still you can't complain considering the current profits you have amassed. But wait! There might still be opportunity. A hedge fund manager is out to make a profit just like the next guy. What if the QQQ is trading $35.51 the day BEFORE, or the day OF expiration, and YOU, the hedge fund manager are holding 50,000 March $36 puts, which covers your 5,000,000 underlying share position? Hey! As the hedge fund manager, you might decide to let go of your position in the public market, and utilize your large long position in the underlying QQQ to see and exponential price gain be created in your March $36 puts! This type of scenario is where Max Pain theory can be very unreliable, where the mathematical theory that just because there is a lot of open interest around the $36.00 level would have the QQQ closing at or near $36. The above scenario of a large position suddenly being liquidated on or around expiration, in order to actually further profit from the option position is not all that uncommon. A hedge fund could actually INFLUENCE other market participants to sell their bullish positions in the underlying stock, or get market participants to suddenly, and with aggression, begin buying put options, selling in the money call options where PROFIT RISK was found, if a sudden downward move is seen in the QQQ. Do you see where the VOLATILITY sometimes found around, or near option expiration can be found? Do you see where a trader that has relied HEAVILY on Max Pain theory actually coming to fruition can be harmed if the actual Max Pain theory level is not achieved, but actually works against the trader's best laid plans? That's just one scenario where you could see a Max Pain theory of $36 see a downside move. Even with a stock trading at $35.51 in to expiration, with a Max Pain of $36, doesn't mean the stock can jump to $36.50 as expiration nears. A scenario here would be that of a hedge fund manager decided in January, when the QQQ was trading above $36, that he/she going to buy the QQQ at $35 in March, should the QQQ pull back to that level or lower, but wasn't willing, or didn't have the capital at the time to begin building the bullish position. So instead, decided to sell naked (short) the QQQ March $35 puts (QQQOI) for $0.30 per contract, and sold 50,000 contracts, taking in $15,000.00 in premium. If you were the hedge fund manager and had already determined that you were a buyer of QQQ at $35.00, it might not be beyond your ability to MANIPULATE things to your liking and come into the market and begin buying your QQQ position up to $35.30 (you're going to buy it anyway from the naked put sale which OBLIGATED you to buy it at $35.00 less the $0.30 premium received) and once you filled your position, perhaps influencing market participants to drive price higher, you've not only kept the naked put premium, but the stock and your underlying position is now working well within your favor. What can be helpful to know about Max Pain levels is to simply have an observation of where there is derivative interest that surrounds a particular price level, which can help a trader or even an investor understand where they might look for a security to gravitate toward into expiration, but also understand, or be prepared when considering entering or exiting a position, how EXTREME PRICE VOLATILITY can be created. Remember that Max Pain theory is based on the options market, which is a derivative, where that very derivative allows for high amount of leverage. Its when that leverage suddenly unwinds that an underlying security's PRICE action can become just so volatile. If you don't see how this can be, you must once again put yourself in the shoes of an options MARKET MAKER. Take the last scenario as the example. If you the market maker have sold short the to market the March $35 puts and the March $36 puts, you're happy that QQQ price action is above $35 and moving higher. But what are you going to do with about the March $35 calls, or more importantly the March $36 calls when suddenly, your book is short 169,323 contracts at an average premium received of $0.50 and the QQQ is trading $36.50? There are a lot of things you can do. You can try and get long 16,932,000 shares of the underlying position, as you being NAKED the $36 calls has you OBLIGATED to deliver 16.9 million shares should the QQQ close above the $36 strike on expiration. Again, if this were a stock, and not the QQQ which does trade with a high degree of liquidity, getting long (buying) 16.9 million shares the day of, or a couple of days before expiration could be a big problem, where suddenly, you the MARKET MAKER is actually driving price action in the market. Heck, suddenly, you're selling in the money March PUTS at $37, $38 because you know the more underlying stock you're buying to fulfill your OBLIGATIONS in the $35 and $36 calls is going to most likely have YOU, and other market participants driving price higher! Here you can see how this high degree of leverage, which surrounds a specific strike price, can suddenly bring a great amount of price volatility to the underlying security, if price moves "too far" away from the Max Pain level. I know this topic is rather complex. Max Pain isn't a simple, or cut and dried mathematical theory, that can be thought of as being highly reliable. Max Pain levels can work to perfection, and they can blow up where extreme price volatility away from the gravitation point is found, should the unwinding of the derivatives market take place. The lesson to be learned is to try and understand how the Max Pain level is derived, and how it can serve as a gravitational point toward an option expiration. The other lesson to be learned is the implications of making big bets into an option expiration, if you aren't aware of how, or why, price volatility of securities can be created should a large derivative trade suddenly unwind. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- BTH Blyth Inc. Mon, Mar 15 Before the Bell 0.75 CTAS Cintas Corporation Mon, Mar 15 After the Bell 0.39 DG Dollar General Corp. Mon, Mar 15 -----N/A----- 0.34 IMCL ImClone Systems Inc Mon, Mar 15 -----N/A----- -0.32 L Liberty Media Group Mon, Mar 15 -----N/A----- 0.05 SRV Service Corp Intl Mon, Mar 15 Before the Bell 0.06 THC Tenet Healthcare Mon, Mar 15 After the Bell 0.02 UCOMA UnitedGlobalCom, Inc. Mon, Mar 15 Before the Bell -0.02 URS URS Corp. Mon, Mar 15 After the Bell 0.23 ------------------------- TUESDAY ------------------------------ ANPI Angiotech Pharm Tue, Mar 16 After the Bell -0.05 CLL Celltech Group PLC Tue, Mar 16 02:00 am ET N/A FDS FactSet Research Sys Tue, Mar 16 -----N/A----- 0.41 GIS General Mills, Inc. Tue, Mar 16 Before the Bell 0.66 KBH KB Home Tue, Mar 16 After the Bell 1.60 LEH LEHMAN BROS HLDGS INC Tue, Mar 16 -----N/A----- 1.64 LEN Lennar Corporation Tue, Mar 16 After the Bell 0.83 ROST Ross Stores, Inc. Tue, Mar 16 08:00 am ET 0.48 SCHL Scholastic Tue, Mar 16 After the Bell 0.01 ------------------------ WEDNESDAY ----------------------------- BF BASF Wed, Mar 17 01:30 am ET N/A BSC Bear Stearns Wed, Mar 17 Before the Bell 2.00 BMET Biomet, Inc. Wed, Mar 17 Before the Bell 0.33 DRI Darden Restaurants Wed, Mar 17 After the Bell 0.45 ERJ Embraer-Empresa Bras Wed, Mar 17 After the Bell 0.34 FDX FedEx Wed, Mar 17 Before the Bell 0.67 GPN Global Payments Inc. Wed, Mar 17 After the Bell 0.40 MLHR Herman Miller Wed, Mar 17 After the Bell 0.11 JBL Jabil Wed, Mar 17 After the Bell 0.22 SQM Sociedad Quimica Wed, Mar 17 Before the Bell N/A TIBX TIBCO Software Wed, Mar 17 After the Bell 0.03 V Vivendi Universal Wed, Mar 17 -----N/A----- N/A WOR Worthington Ind Wed, Mar 17 Before the Bell 0.16 ------------------------- THUSDAY ----------------------------- COMS 3Com Corp Thu, Mar 18 After the Bell -0.13 ADBE Adobe Systems Thu, Mar 18 After the Bell 0.40 AAA Altana AG Thu, Mar 18 -----N/A----- N/A BKS Barnes&Noble Thu, Mar 18 Before the Bell 1.65 BAY Bayer Thu, Mar 18 Before the Bell N/A CGA Corus Group plc Thu, Mar 18 Before the Bell N/A ERF Enerplus Res Fund Thu, Mar 18 -----N/A----- N/A KMRT Kmart Thu, Mar 18 -----N/A----- N/A NKE Nike Thu, Mar 18 After the Bell 0.69 PFP Prem Farnell Plc (ADR)Thu, Mar 18 Before the Bell N/A SLR Solectron Thu, Mar 18 After the Bell -0.02 TEK Tektronix Inc. Thu, Mar 18 After the Bell 0.25 WSM Williams-Sonoma Thu, Mar 18 Before the Bell 0.84 WGO Winnebago Thu, Mar 18 Before the Bell 0.46 ------------------------- FRIDAY ------------------------------- CLC CLARCOR Inc. Fri, Mar 19 -----N/A----- 0.45 PAYX Paychex Fri, Mar 19 Before the Bell 0.21 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable CTX Centex Corporation 2:1 Mar 12th Mar 15th BRL Barr Pharmaceuticals 3:2 Mar 15th Mar 16th ATVI Activision, Inc 3:2 Mar 15th Mar 16th CEC CEC Entertainment Inc 3:2 Mar 15th Mar 16th CLZR Candela Corp 2:1 Mar 16th Mar 17th DCOM Dime 3:2 Mar 16th Mar 17th GWR Genesee & Wyoming Inc 3:2 Mar 18th Mar 19th XTO XTO Energy Inc 5:4 Mar 18th Mar 19th HBHC Hancock 2:1 Mar 18th Mar 19th DCI Donaldson Company, Inc 2:1 Mar 19th Mar 22nd NIHD NII Holdings, Inc 3:1 Mar 22nd Mar 23rd ASFI Asta Funding Inc 2:1 Mar 23rd Mar 24th COCO Corinthian Colleges Inc 2:1 Mar 23rd Mar 24th RJF Raymond James Financial 3:2 Mar 24th Mar 25th AMSG AmSurg Corp 3:2 Mar 24th Mar 25th SCHN Schnitzer Steel Ind, Inc 3:2 Mar 25th Mar 26th WGA Wells-Gardner Elect Corp 21:20 Mar 26th Mar 29th HOV Hovnanian Ent, Inc 2:1 Mar 26th Mar 29th MVL Marvel Enterprises 3:2 Mar 26th Mar 29th -------------------------- Economic Reports This Week -------------------------- Wall Street's main focus this week will be Tuesday's FOMC meeting but the week is riddled with economic reports that could move the market in absence of any major headlines. Earnings warning season is almost upon us. ============================================================== -For- ---------------- Monday, 03/15/04 ---------------- NY Empire State Index(BB) Mar Forecast: 38.9 Previous: 42.05 Industrial Production(DM) Feb Forecast: 0.4% Previous: 0.8% Capacity Utilization (DM) Feb Forecast: 76.4% Previous: 76.2% ----------------- Tuesday, 03/16/04 ----------------- Housing Starts (BB) Feb Forecast: 1930K Previous: 1903K Building Permits (BB) Feb Forecast: 1903K Previous: 1920K FOMC Meeting ------------------- Wednesday, 03/17/04 ------------------- CPI (BB) Feb Forecast: 0.3% Previous: 0.5% Core CPI (BB) Feb Forecast: 0.1% Previous: 0.2% Greenspan speaks to banking community. ------------------ Thursday, 03/18/04 ------------------ Initial Claims (BB) 03/13 Forecast: N/A Previous: 341K Leading Indicators (DM) Feb Forecast: 0.1% Previous: 0.5% Philadelphia Fed (DM) Mar Forecast: 29.5 Previous: 31.4 SEMI Book-to-Bill report ---------------- Friday, 03/19/04 ---------------- Wall Street is looking for both the January and February PPI reports to be released soon. Both have been delayed and they are tentatively on the schedule for this Friday. Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 03-14-2004 Sunday 2 of 5 In Section Two: Watch List: From A to Z Dropped Calls: None Dropped Puts: MMM *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ********** Watch List ********** From A to Z ___________________________________________________________________ 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 Co - ASD - close: 109.43 change: +0.56 WHAT TO WATCH: We've had ASD on the watch list before but take extra note of today's entry. The stock hit new all-time highs on Tuesday, yes Tuesday while the market was sinking. Shares did pull back intraday and eventually bottomed on Friday morning. Traders stepped in to buy the dip when ASD touched its rising 40- dma. The stock hasn't broke its 40-dma since last summer and it rarely pulls back this far before investors jump in. We feel this is a great bullish entry point for a rebound back to the $115 level and beyond. Chart= --- Imclone Systems - IMCL - close: 46.51 change: +1.22 WHAT TO WATCH: Shares of IMCL, the biotech stock that's probably more famous for its connection to the Martha Stewart case than its Erbitux treatment, is due to report earnings on Monday. The stock weathered the recent market weakness very well, which probably indicates that investors have high hopes for this quarter's earnings numbers. The stock is currently trading near two-year highs just under resistance in the $49-50 range. Monday should be volatile with its pre-open earnings report so look for a breakout over $50.00 or a breakdown under $44.00. Chart= --- Quest Diagnostic - DGX - close $81.80 change: +0.98 WHAT TO WATCH: The consolidation in shares of DGX appears to be coming to an end soon. There is a narrowing pattern of higher lows and lower highs (a.k.a. a pennant), which just so happens to be consolidating near its rising 50-dma and the bottom of its wide rising channel. We would look for a move over the $83.00 level (maybe 83.50) as a bullish entry point. There is some resistance near $86.00 but the top of the channel is significantly higher. Chart= --- M D C Holdings - MCD - close: 69.60 change: +2.00 WHAT TO WATCH: MDC is another homebuilder that is really out performing the market. Shares recently broke out above resistance at $65.00 and the pull back to $67 on Wednesday- Thursday this last week looks like a bullish entry point. We would target a move to the $75 level although its P&F chart suggests a $78 price target. Chart= --- Zale Corp - ZLC - close: 60.25 change: +1.88 WHAT TO WATCH: Market sell-off? Correction? What are you talking about? Shares of ZLC are hitting new all-time highs and they barely dipped through most of this week's weakness. The breakout over the $60.00 looks like an entry point. We'd target a move to the $64-65 region. However, take note of its P&F chart. The bullish triangle breakout on its P&F chart (not shown) is one of the most bullish patterns you can play. Yet at the same time ZLC has already met its bullish price target of $58 while it has not yet satisfied the average gain from the bullish triangle breakout formation. We'd suggest a relatively tight stop loss. Chart= *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ************************** 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 ^^^^ 3M Company - MMM - close: 76.22 change: +0.87 stop: 77.00 With Thursday's breakdown near the $75 level, MMM was close enough to our final target of $74, that it only made sense to aggressively tighten our stop to $77, just over Thursday's intraday high. MMM tested the $75 level again on Friday morning before rebounding steadily throughout the day, ending very near its high and over the $76 level. The risk of a further advance early next week that would take out our stop now seems to outweigh the potential for a continued decline down to the 200-dma. Therefore, it makes sense to just book our gains here and let MMM do as it pleases. This play took much longer than we expected and it highlights the importance of buying plenty of time in the current market environment. Use any weakness on Monday to exit at a more favorable level. Picked on February 15th at $79.68 Change since picked: -3.46 Earnings Date 1/20/04 (confirmed) Average Daily Volume = 2.83 mln 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. *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ********** 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 03-14-2004 Sunday 3 of 5 In Section Three: Current Calls: AET, ATH, CFC, EBAY, RNR New Calls: JNPR, LXK, TARO Current Put Plays: CHIR, ETN, IVGN, UTX New Puts: None *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ****************** CURRENT CALL PLAYS ****************** Aetna Inc. - AET - close: 84.42 change: +4.77 stop: 79.95*new* 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: AET has become a symbol of strength. The stock managed to weather the market volatility by holding steady above support at the $80 level for most of March. It was not until Thursday's market decline, spurred by the terrorist bombings in Spain, that AET began to show weakness and closed under the $80 level but held support at its 21-dma. Fortunately for shareholders AET issued a positive preannouncement before the bell on Friday. The company raised its Q1 earnings guidance from $1.50-1.55 a share to $1.68-1.73 a share citing stronger trends in membership growth and margins. This is above Thomson's consensus estimates at $1.53 a share. AET also raised its full year guidance from $6.25-6.35 to $6.60-6.75 for 2004. Investors rewarded the stock with a 5.98% gain on Friday hitting new all-time highs. There was no afternoon fade and shares closed near their high for the session. AET may be near our initial target price of $85.00 that doesn't mean the play is over. Short-term traders can start planning their exits on a move to $85.00 but there is still a chance to play AET if the stock dips next week to fill the gap from Friday. We'd look for a dip to the $82.00 region as an entry point. If AET doesn't dip then we'd probably avoid new positions at this time. We are going to raise our stop loss to $79.95. Suggested Options: We like the April 80's. ! Alert - March Options EXPIRE this Friday! BUY CALL APR 80*AET-DP OI= 726 at $5.70 SL=3.25 BUY CALL APR 85 AET-DQ OI=3576 at $2.35 SL=1.15 Annotated Chart: Picked on February 29 at $80.79 Change since picked: + 3.63 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- Anthem, Inc. - ATH - close: 87.88 change: +1.15 stop: 85.70 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 looks like we got a reprieve on our ATH play, as the stock responded favorably to the broad market rebound on Friday, popping the stock back over the 10-dma ($87.30, where it spent the entire day in a very tight range. Friday's price action is not what we would have liked to have seen, as if the stock is still strong, it should have been able to build on its early gains like the rest of the market did. Instead, ATH gapped over up to just under $88 and after the initial volatility subsided, was never able to get back to that level. Until we see further price strength, it is hard to justify new entry points. A solid rebound from the 10-dma on Monday could be used for entry, but our preference would be to enter on a push through Friday's $88.30 intraday high, preferably on stronger volume. ATH really shouldn't be able to trade below Thursday's $86.61 intraday low if the stock truly has upside potential, so our $85.70 stop should be safe, especially since it is now below the 20-dma ($85.73). Suggested Options: Shorter Term: The March $85 Call will offer short-term traders the best return on an immediate move, but with March options expiring next week, the better choice for is the April $85 strike. Longer Term: Aggressive longer-term traders can use the April $90 Call, while those traders looking for more insulation against time decay will want to use the June $90 strike. Our preferred option is the April $90 strike, which is near the money and should provide sufficient time for the play to move in our favor. ! Alert - March options expire next week! BUY CALL MAR-85 ATH-CQ OI=6251 at $3.40 SL=1.75 BUY CALL APR-85 ATH-DQ OI=2591 at $4.60 SL=2.75 BUY CALL APR-90*ATH-DR OI=1241 at $1.85 SL=0.90 BUY CALL JUN-90 ATH-FR OI=1245 at $3.70 SL=2.25 Annotated Chart of ATH: Picked on February 26th at $85.37 Change since picked: +2.51 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.44 mln Chart = --- Countrywide Financial - CFC - cls: 93.37 chg: +1.45 stop: 90.00 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: It was not the best week performance-wise for CFC but the pull back is offering traders another chance at an entry point. A week ago Friday CFC gapped higher on the weak jobs report and the subsequent rally in the bond market (and drop in mortgage rates). Shares have since filled the gap while weathering the market's recent sell-off. The good news is that CFC was able to hold support above the $90.00 level. We're bullish on the mortgage lenders given the sharp drop in rates and the expectation that the Fed will remain on hold for the next several months if not the rest of the year. CFC recently announced strong February lending numbers and we expect that March will be similar. Our target remains the $100 level and we'll leave our stop loss at $90.00. Suggested Options: Our favorite strikes 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. ! Alert - March Options EXPIRE this Friday! BUY CALL APR 90*CFC-DR OI= 666 at $6.30 SL=3.85 BUY CALL APR 95 CFC-DS OI= 1088 at $3.60 SL=1.85 Annotated Chart: Picked on February 24 at $91.63 Change since picked: + 1.74 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 2.3 million Chart = --- eBay Inc - EBAY - close: 69.13 chg: +1.69 stop: 66.50 Company Description: eBay is The World's Online Marketplace.. Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. Through an array of services, such as its payment solution provider PayPal, eBay is enabling global e- commerce for an ever growing online community. (source: company press release) Why We Like It: Kudos to the brave traders who bought the dip to EBAY's 50-dma. Thursday's sell-off in the markets was pretty demoralizing and in Thursday's update we suggested more aggressive traders use the dip as an entry point but that the rest of us are probably better off waiting for EBAY to trade back above the $70 mark. Hopefully we'll see the Internet powerhouse back above the $70 level soon. The stock has been flexing its relative-strength muscles and weathered the recent decline pretty well. Its technicals are mixed but its P&F chart remains bullish (and pointing toward a $97 price target). We're certainly encouraged by EBAY's bounce above the 50-dma, which is actually another new higher low and we're still targeting a move to $77.50. No change in our stop loss. Suggested Options: Short-term traders should probably choose from the April or July strikes but July seems a ways off yet. We're going to select the April 70's although the April 65's look pretty tempting too! ! Alert - March Options EXPIRE this Friday! BUY CALL APR 65.00 XBA-DM OI=17693 at $5.20 SL=3.00 BUY CALL APR 67.50 XBA-DU OI= 7854 at $3.60 SL=1.80 BUY CALL APR 70.00 XBA-DN OI=16674 at $2.30 SL=1.15 BUY CALL APR 72.50 XBA-DV OI= 5714 at $1.30 SL=0.65 Annotated Chart: Picked on March 09 at $ 70.05 Change since picked: - 0.92 Earnings Date 04/20/04 (unconfirmed) Average Daily Volume: 7.0 million Chart = --- Renaissancere Ltd - RNR - close: 53.86 chg: +0.01 stop: 52.00 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: Psst! Someone tell RNR that the market rallied on Friday. We were pretty impressed with RNR's relative strength through most of last week. The stock held support at the $53.50 level despite painful drops in the major averages and the IUX insurance index. Unfortunately, RNR failed to rally on Friday with the rest of the market. Its technical picture is mixed with the MACD turning bearish and its shorter-term oscillators like the RSI and stochastics hinting at bullish moves. We hesitate to recommend new bullish positions because the stock is stuck halfway between our entry and exit points. Should RNR pull back then traders may want to consider initiating positions on a bounce above the $52.00 level. Hopefully the 52.50 region since our stop loss is at $52.00. Maybe the rebound in the IUX, if it continues, can reawaken the bulls in RNR. Suggested Options: RNR is pretty close to our planned exit point so we're not suggesting new entries at this time. ! Alert - March Options EXPIRE this Friday! Annotated chart: Picked on February 15 at $50.83 Change since picked: + 2.03 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = ************** NEW CALL PLAYS ************** Juniper Networks - JNPR - close: 25.81 chg: +1.20 stop: 23.64 Company Description: Juniper Networks transforms the business of networking by converting a commodity -- bandwidth -- into a dependable, secure and highly valuable corporate asset. Founded in 1996 to meet the stringent demands of service providers, Juniper Networks is now relied upon by the world's leading network operators, government agencies, research and education institutions, and information- intensive enterprises as the foundation for uncompromising networks. The Infranet Initiative uses Juniper Networks MINT (Model for Infranet Transformation) as its underlying framework. Juniper Networks is headquartered in Sunnyvale, California. (source: company press release) Why We Like It: We've had our eye on JNPR for a long time. Ever since the stock gapped higher on its impressive January earnings report we've been watching it for the right entry point. We think this may be it. The pull back to $24.00 (actually 23.64) has essentially filled the gap from January. However, what's really impressive is JNPR's relative strength this last week. When the markets were falling on Tuesday, Wednesday, Thursday shares of JNPR were inching higher. When the markets rebounded on Friday JNPR broke out above its descending trendline of resistance, the $25.00 level and its simple 50-dma. Boosting the stock and the sector were positive comments from S&P. On Wednesday a Reuters article mentioned the recent credit upgrades by Standard & Poor's for Lucent and Alcatel as signs of a new (bullish) beginning for the telecom/networking sector. Short-term technicals on JNPR are bullish and its MACD is close to painting a new buy signal. We like the stock at current levels and plan to target a move back to $30.00. We'll initiate the play with a stop loss under the recent low. Suggested Options: Short-term traders can choose the April or July options. We're going to suggest the April 22.50s as our favorite but the 25's look good too. BUY CALL APR 22.50*JUX-DX OI= 5228 at $4.10 SL=2.05 BUY CALL APR 25.00 JUX-DE OI=30231 at $2.50 SL=1.25 BUY CALL JUL 25.00 JUX-GE OI=11815 at $3.80 SL=1.75 Annotated chart: Picked on March 14 at $ 25.81 Change since picked: + 0.00 Earnings Date 04/21/04 (unconfirmed) Average Daily Volume: 15.7 million Chart = --- Lexmark Intl. - LXK - close: 85.77 change: +3.92 stop: 80.75 Company Description: Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Why we like it: If there was any doubt as to who is the leader in the computer printer industry, the price action of LXK should remove any doubt. After breaking out to new all-time highs last fall, the stock has been steadily working its way higher, regularly using the 50-dma (now at $81.72) as key support, just before launching to new highs. Following its January earnings report, the stock launched to new highs again, hitting an intraday peak of $86.72. After a few weeks of consolidation, LXK succumbed to some orderly profit taking, which led price down to the 50-dma once again. The stock has been climbing along that average for the past few weeks and then rocketed higher on Friday to the tune of 4.78% on volume well over double the daily average. LXK couldn't break its all-time high, but it looks very close to doing so and another bullish day in the broad market just might provide the necessary boost. Taking a quick look at the PnF chart shows just how constructive the chart pattern has been over the past several months. Each pullback finds solid support right at the bullish support line, with the most recent test being the rebound from the 50-dma last week. Friday's rally generated a double top Buy signal, that carries with it a vertical price target of $97. But the real clincher will come with a trade at $87, which will deliver a triple top Buy signal. We want to wait for that level to be traded before jumping into the play, so we're going to set an entry trigger at that level. Due to the strength of the chart pattern, our preferred entry strategy will be on the initial breakout. More conservative traders may be able to gain a better entry on a subsequent pullback to test support at former resistance near $85. Place stops initially at $80.75, just under last Tuesday's intraday low and the 50-dma. Suggested Options: Shorter Term: The March $85 Call will offer short-term traders the best return on an immediate move, but with March options expiring next week, the more prudent choice would be the April $85 Call. Longer Term: Aggressive longer-term traders can use the April $90 Call, while the more conservative approach will be to use the April $85 strike. Traders looking for even more insulation against time decay will want to focus on the July 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. ! Alert - March options expire next week! BUY CALL MAR-85 LXK-CQ OI=1123 at $1.80 SL=1.00 BUY CALL APR-85*LXK-DQ OI=1214 at $3.40 SL=1.75 BUY CALL APR-90 LXK-DR OI=1428 at $1.25 SL=0.60 BUY CALL JUL-90 LXK-CQ OI=1125 at $4.10 SL=2.50 Annotated Chart of LXK: Picked on March 14th at $85.77 Change since picked: +0.00 Earnings Date 4/19/04 (unconfirmed) Average Daily Volume = 912 K Chart = --- Taro Pharma. - TARO - close: 61.85 chg: +1.06 stop: 59.00 Company Description: Taro is a multinational, science-based pharmaceutical company dedicated to meeting the needs of its customers through the discovery, development, manufacturing and marketing of the highest quality healthcare products. (source: company press release) Why We Like It: The market-wide sell-off this last week was pretty sharp but it hit the Drug sector exceptionally hard. The DRG index fell very sharply before finding support at its simple 200-dma. We feel that the move here is overdone and offers traders a chance to capture a good chunk of the oversold bounce in the next couple of weeks. What attracted us to TARO was its relative strength to its peer group. Yes, it did slide lower with the rest of the drug sector but the slide wasn't that sharp. Plus, investors stepped in to buy the dip at $59.00. This is very close to its January 2003 low, which also happens to be near its simple 200- dma, which also happens to be at its rising P&F chart support line. With all of this support for the stock and its high volume rebound TARO could be a leader in a group that looks ready to bounce back. Technically TARO looks good short-term. Its RSI and Stochastics are bullish. We'll probably see its MACD catch up soon enough. We're obviously expecting a bounce from the P&F support line. Unfortunately, TARO does have some overhead resistance. It still has to deal with the simple 50-dma just overhead and there is a descending trendline from the December and February highs that could come into play near the $65 level. Short-term traders may want to target an early exit near $65.00. We're going to look for a move in the $66-68 range. Our initial stop is $59.00. Suggested Options: Short-term traders can use the April and July options. Our favorite is the April 60's. BUY CALL APR 60*QTT-DL OI= 204 at $4.10 SL=2.05 BUY CALL APR 65 QTT-DM OI= 280 at $1.55 SL=0.80 BUY CALL JUL 65 QTT-GM OI= 123 at $3.80 SL=1.90 Annotated chart: Picked on March 14 at $ 61.85 Change since picked: + 0.00 Earnings Date 02/17/04 (confirmed) Average Daily Volume: 284 thousand Chart = *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ***************** CURRENT PUT PLAYS ***************** Chiron Corp - CHIR - close: 47.77 chg: +0.27 stop: 49.40*new* 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: It has been a painfully slow decline for CHIR but the stock is moving in the right direction. Traders are still using the simple 10-dma as the pressure point to sell the stock and when the occasional rally surfaces they use the simple 21-dma. We're going to lower our stop loss from above round-number psychological support at $50.00 to just above the 21-dma at $49.40. If you can handle the extra risk the better stop is probably above the $50 mark. If you're losing enthusiasm for CHIR check out its weekly chart. It shows the breakdown under the $50.00 mark with more clarity than the daily chart. We're a little disappointed that CHIR didn't fall faster this last week with the BTK dropping along with the broader-market indices. Now that the BTK has stalled at support near its own 50-dma we'd expect a bounce in the group. This will probably take CHIR back toward its own 10 or 21-dma's. Another failed rally under $49 is probably a decent entry point. We're still targeting a move to the $45-44 levels. Suggested Options: We're going to select the April 50 puts as our favorite. ! Alert - March Options EXPIRE this Friday! BUY PUT APR 50.00*CIQ-PJ OI=2489 at $3.20 SL=1.60 BUY PUT APR 47.50 CIQ-PT OI=2475 at $1.65 SL=0.85 BUY PUT APR 45.00 CIQ-PI OI= 255 at $0.75 SL= -- Annotated Chart: Picked on February 24 at $49.11 Change since picked: - 1.34 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.7 million Chart = ---- Eaton Corp. - ETN - close: 56.05 change: +1.23 stop: 58.50 Company Description: Eaton Corporation is a global diversified industrial manufacturer with businesses in fluid power systems, electrical power quality, distribution and control, automotive engine air management and fuel economy and intelligent truck systems for fuel economy and safety. The principal markets for the company's Fluid Power, Automotive and Truck segments are original equipment manufacturers and after market customers of heavy-, medium- and light-duty trucks, passenger cars, off-highway vehicles, industrial equipment, and aerospace products and systems. The principal markets for the company's Industrial and Commercial Controls segment are industrial, construction, commercial, automotive and government customers. Why we like it: Playing right into our hands, ETN staged a nice rebound on Friday, following Thursday's sharp selloff that violated the 100- dma for the first time since last April. We were actually hoping for an oversold rebound to give us a better entry point before the slide continues down towards our target at the 200-dma ($49.27). Looking at the daily chart, we can see that there should be strong resistance at the $56-57 area, with initial resistance provided by the top of the gap from early January that last week's selling frenzy sliced through like a hot knife through butter. That resistance will be reinforced by the falling 10-dma ($57.81), which has now strongly broken the 50-dma ($58.52) and should be strong resistance on successive rally attempts. Our chosen entry strategy is on a failed rally in the $56-57 area and from the looks of Friday's bounce, we could see that satisfied ahead of Tuesday's FOMC meeting. More conservative traders may want to wait until after the post-FOMC volatility to settle out before playing. Momentum traders will need to see price break under $54.75 before taking a position. We initially placed our stop at $58.50 and in retrospect, that seems a bit too close. So we're going to raise it to $58.75 this weekend so that the 50-dma and resistance at Thursday's morning high ($58.70) can provide some protection. Suggested Options: Aggressive short-term traders can use the March 55 Put, but with March options expiring next Friday, time decay will be a problem. Those with a more conservative approach will want to use the April 55 put. Aggressive traders looking for more insulation against time decay will want to utilize the April 52 strike. Our preferred option is the April 55 strike, as it is currently at the money and should provide ample time for the play to move in our favor. ! Alert - March options expire next week! BUY PUT MAR-55 ETN-OK OI= 660 at $0.45 SL=0.20 BUY PUT APR-55*ETN-PK OI= 113 at $1.45 SL=0.75 BUY PUT APR-52 ETN-PX OI= 74 at $0.75 SL=0.40 Annotated Chart of ETN: Picked on March 11th at $54.82 Change since picked: +1.23 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 1.14 mln --- Invitrogen - IVGN - close: 69.20 chg: +1.94 stop: 71.01 Company Description: Invitrogen Corp. provides products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. The company provides essential life science technologies for disease research, drug discovery and commercial bio-production. Invitrogen's own research and development efforts are focused on breakthrough innovation in all major areas of biological discovery including functional genomics, proteomics, bio-informatics and cell biology -- placing Invitrogen's products in nearly every major laboratory in the world. Founded in 1987, Invitrogen has headquarters in Carlsbad, Calif., and conducts business in more than 70 countries around the world. The company globally employs approximately 3,000 scientists and other professionals. (source: company press release) Why We Like It: (Original Update from Thursday) The trend changed for IVGN in mid-February. Actually it was February 12th, the day of its earnings report. The stock enjoyed a great pre-earnings run up boosted by gains in the broader market. IVGN beat earnings by 2 cents and announced a debt offering of $450 million in convertible notes due 2024 to payoff their notes due in 2007. Something didn't sit well with investors. It was either the normal post-earnings depression or the debt sale or something else but shares of IVGN couldn't turn around. There was a brief bounce at its simple 50-dma but the bounce was rather flat. In the last four sessions we've seen IVGN break support at its simple 100-dma and the psychological and historical support at $70.00 on better than average volume. Considering the stock's run from March of last year there is still plenty of profit on the table and IVGN looks vulnerable toward its December lows near $63.00 and quite possibly its simple 200-dma near $60.00. Its P&F chart is on a sell signal that points to the $63.00 level so we'll make that our initial target. We'll start the play with a stop loss at $71.01 but more conservative traders can probably use a tighter stop just north of $70. We would open positions at current levels but failed rallies under $69.50 will also work. WEEKEND UPDATE: The IVGN rebound on Friday looks more like an oversold bounce than anything else. Shares failed to close over its simple 100- dma and failed to close over round-number psychological support/resistance at $70.00. Look for a roll over under the $70 mark to initiate new positions. Suggested Options: We would suggest the April of May puts. Our favorite would be the April 70's. BUY PUT APR 70*IUV-PN OI= 176 at $4.00 SL=2.00 BUY PUT APR 65 IUV-PM OI= 401 at $1.85 SL=0.95 BUY PUT APR 60 IUV-PL OI= 132 at $0.80 SL= -- BUY PUT MAY 70 IUV-QN OI=1047 at $5.20 SL=3.20 BUY PUT MAY 65 IUV-QM OI= 731 at $3.00 SL=1.50 Annotated Charts: Picked on March 11 at $ 67.26 Change since picked: + 1.94 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 910 thousand Chart = --- United Technologies - UTX - cls: 87.35 chg: +1.72 stop: 89.51 Company Description: Based in Hartford, Conn., United Technologies Corp. provides high technology products and support services to the commercial building and the aerospace industries through its seven companies: Otis Elevator, Carrier heating and air conditioning, Chubb security, UTC Power, Pratt & Whitney jet engines, Hamilton Sundstrand aerospace systems and Sikorsky helicopters. (source: company press release) Why We Like It: Uh-oh! UTX didn't quite make it to our target of $83.50 near its simple 200-dma. The market rebound on Friday was impressive, albeit on low volume, and with the Dow up 111 points UTX couldn't help but rally with it. We believe that UTX still looks bearish and there's been a definite change in the trend. Yet the stock is so short-term oversold it could rebound to its simple 10-dma near $89.25 before rolling over again. That's almost $2.00 from the current level. It's up to the trader on whether or not they want to endure that kind of volatility in their options or whether they want to exit now and look for another failed rally near $89 as another entry point. As a newsletter we're not designed to just jump in an out so quickly but you the reader can. Unfortunately, that does involve more broker fees for each trade. Now we could be overly cautious here and if UTX doesn't break above the $88 level we'll feel more secure. Suggested Options: Short-term traders can probably benefit using the April or May strikes. Our choice is the April 90's. BUY PUT APR 85 UTX-PQ OI= 900 at $1.70 SL=0.85 BUY PUT APR 90*UTX-PR OI= 605 at $4.20 SL=1.99 BUY PUT APR 95 UTX-PS OI= 99 at $8.20 SL=5.35 BUY PUT MAY 90 UTX-QR OI=1181 at $5.30 SL=3.25 BUY PUT MAY 85 UTX-QQ OI=2103 at $2.80 SL=1.35 Annotated chart: Picked on March 09 at $ 88.75 Change since picked: - 1.40 Earnings Date 01/20/04 (confirmed) Average Daily Volume: 2.3 million Chart = ************* NEW PUT PLAYS ************* None *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ********** 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 03-14-2004 Sunday 4 of 5 In Section Four: Leaps: Fear Makes A Cameo Appearance *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ***** LEAPS ***** Fear Makes A Cameo Appearance By Mark Phillips mphillips@OptionInvestor.com Wow, that was an exciting week! I had to actually check the date and make sure I hadn't traveled back in time. We haven't seen that kind of strong directional movement in the broad market since the launch of the bottom last March. We haven't seen that kind of action on the downside since January of 2003. I obviously wasn't the only one surprised by the extent of the moves, as that fact is clearly borne out by the sharp rise in the volatility indices. At the close on Thursday, the VIX ended over 20 for the first time since early October and the VXO (old VIX) ended over 21. Just in case we might have gotten excited and thought wide range days were here to stay, volatility collapsed on Friday, completely erasing the rise in fear on Thursday. But it was nice just the same to see fear make a cameo appearance, if only for a brief moment in time. Please understand, I don't root for the market to fall -- I really couldn't care less whether it rises or falls -- but I do care about what last week's price action suggests. Namely that the "bullish, buy everything on any dip" spell has been broken. It may be a bit pollyannish of me, but it is my hope that this broken spell will mean a return to normal range action in the equity markets, which provide more frequent opportunities for capable traders. But we're focused on the longer-term picture here in LEAPS-land, so why don't we take a picture at the big picture and see what we can learn. One final note on the VIX/VXO action from the past two days. Note that Friday's drop in the fear indices completely erased the panicky rise from Thursday. What's interesting about it is that the price rise in the DOW/SPX/OEX did NOT recoup all of Thursday's losses. To me that is an indication that last week's spike in volatility may be a fluke, rather than the beginning of a return to normalcy. As the saying goes, one day does not make a trend and the real answer will be provided by price action we can't yet see. But let's leave our discussion of the volatility moves last week with a suspicious attitude. Until we see a SUSTAINED move over the 20-22 area, I think it's safe to say that nothing has really changed. On the candle charts, last week was painful and we now have confirmed Sell signals on the weekly charts, with both MACD and Stochastics in clear bearish alignment on the DOW, S&P 500, S&P 100, NASDAQ Composite and NASDAQ-100. There was some serious technical damage done too, with the DOW breaking its 100-dma and the NASDAQ Composite breaking under 2000. Interestingly, the S&P 500 found support at its 100-dma and the S&P 100 bounced exactly on its 100-dma. Despite the strong rebound on Friday, strong support is still well below Friday's bounce point. For the DOW, strong support isn't seen until the 9800 level, with the 200-dma (9760) rising to reinforce that level. On the S&P 500, corresponding strong support is at 1070 with the 200-dma down at 1050. On the sister S&P index, the OEX eyes $525-530 as key support, with the 200-dma at $523. Strong support is much closer for the NASDAQ indices, which makes sense given that they've been declining longer than the DOW or S&Ps. For the COMPX, strong support looks like 1900, with the 200-dma at 1876 and for the NDX, support looks strong in the 1360-1380 area, with the 200-dma right in the middle at 1372. In short, last week was a painful (but much needed) correction to the still ongoing cyclical bull market and there's nothing to suggest that picture has changed. We'd need to see those support levels listed above violated and then provide resistance on subsequent rally attempts to play requiem for the bull. At least that's my subjective view. Now let's turn to a less biased judge, the PnF charts to see if I'm standing in quicksand. First up is the DOW and its PnF chart put in a big Sell signal last week. Taking the vertical count off that decline produces a downside target of 9500, which is right at the bullish support line. That means that even after hitting a low just over 10,100 on Thursday, the DOW can fall another 600 points before the PnF chart will change its bullish view. The Bullish Percent chart has a similarly sanguine view, with the drop to 80% still deep in overbought territory and the status still Bull Correction. Next up is the S&P 500, which shows a very different picture. Because of the different nature of its price rise from late last year, this market is still on a strong PnF Buy signal and it would currently take a break below -- drumroll, please -- 1010 to give us a fresh Sell signal. Clearly that could change depending on the nature of the near-term consolidation, but there's nothing to worry about in terms of the big picture. That view is reinforced by the BP chart, which is also in bull correction deep in overbought territory at 79.40%. Turning to the NASDAQ-100, we see a different picture, which is what we should expect, given that it has seen a more protracted and deeper pullback than the other indices. It's pertinent PnF Sell signal came back in late February when price first fell under the 1460 level. That Sell signal corresponded to a bearish price target of 1390, which at the time was right at the bullish support line. With the passage of time and several price reversals, the bullish support line at 1420 was actually broken on Thursday's decline, but the 1390 price objective is still valid. Clearly this is the weakest of the indices we've looked at and the BP chart bears that out, with a very clear bear confirmed status at 43%. Last week's drop in the bullish percent is currently testing the bullish support line, which has been in place since October of 2002. I can still make an argument for more downside in the NDX (and by association the COMPX), but you'll notice that price is still holding above both the PnF price objective and my own gauge of support in the 1360-1380 area. In all of that analysis, we can see nothing that tells us the end of the bull is nigh, except perhaps for the NDX breaking its bullish support line and being in bear confirmed status. But at 42%, the NDX is very close to oversold in a BP sense and with price still holding in a bullish pattern above the 200-dma, we could actually view this as a sort of bullish divergence. Despite the sharp increase in fear as measured by the volatility indices, we only witnessed a normal retracement in a dominant bull market. The bears FINALLY won a victory in what has been a very rough year for them. If they want to win the war, there is still a LOT of work to do. What this tells me is that we had a very healthy rebound in fear, which should eventually produce the next wall of worry for the bulls to climb. This pullback should be viewed as a gift by long- term traders. I don't think we've seen the bottom of this decline, but in the weeks ahead, we ought to be rewarded with some dynamite bullish entry points ahead of the next upward leg. I do not view last week's drop as an invitation to build long-term short positions. That time will come soon enough, but it is not upon us right now. Now it's time to delve into our list of plays and see what surprises last week's volatility provided. Due to the number of new plays this week, I've kept my rambling commentary to a minimum. Alright, let's go. Portfolio: SMH - Last week's meltdown across the entire market had the Semiconductor index falling right to critical support at $475, with the SMH matching that decline and testing key support at $38.50. Friday's rebound gave the bulls a reprieve, with support holding and the SMH recovering back towards the $40 level. Over the past couple months, SMH has been trading in a broad descending channel, with last week's rebound making perfect sense, as it commenced from the bottom of that channel. Turning to the PnF chart, we can see another reason for the rebound, as a trade at $38 would generate a fresh PnF Sell signal. For now, we remain in a bearish trend and we'll stick with it until that ceases to be the case or until we see a real meltdown to hit what should be solid support in the $34-35 area. Note that even after cracking $38, we'll have to contend with potential support at the 200-dma at $37.63. With the weekly Stochastics having made a lot of progress towards oversold territory, I'm not very enthusiastic about new entries into the play. We've taken our position and now we'll let the market prove whether we were correct or not. Lower stops to $42.50, which is just over both the top of the channel, and the 50-dma. NEM - As the dollar continues its recovery against foreign currencies, the price of gold has continued to languish just above $390 support. The more critical level is the 200-dma about $10 lower. At the same time, the XAU index continues to meander in its own trading range, which is just a bit over strong support in the $93-94 area, also the site of the 200-dma. NEM is working on its own consolidation in the $41-44 area, as the 200-dma continues to rise to meet price. Throughout the sector, price continues to hold just above support, as consolidation continues ahead of the next leg of the gold bull market. Dips into the $40-41 area still look attractive for new entries while we wait for the next bullish move to arrive. HD - After just kissing the top of its long-term descending channel, HD headed south all week, coming to rest at $36, which is now right at the bottom of the short-term rising channel, which I have so far interpreted as a bear flag. Something will have to give soon. Either HD will continue up in the rising channel and break out over the top of the long-term descending channel, or it will obey the longer-term channel and confirm my bear flag interpretation by breaking down below its 100-dma ($35.88) and taking aim at next support at the 200-dma. With this week's decline, we can see the weekly Stochastics hinting at a bearish rollover, so everything is still intact for a nice downside move. Now we just wait for it to unfold. Another rollover from the top of the declining channel (now at $37.25) still looks favorable for new entries. MLNM - It was a rough week in every sector of the market and Biotechs were not immune. In response to the sharp 4-day drop in the BTK index, MLNM declined back to strong support at the ascending trendline near $17, helping the stock to rebound off its lows to close back over both the trendline and the 100-dma. Traders that missed getting an entry on the last dip appear to be getting another chance here. Those with a more conservative approach may want to wait for a break back over near-term resistance at $17.80 before entering the fray. MLNM is still in a a broad consolidation that has been building for the past 3 months and it will take a breakout over $20 to turn the picture more bullish. But I do like the way the stock continues to bounce near $17, confirming that old resistance is new support. CHK - No sector was immune from the broad market selloff last week and Energy stocks declined with the rest. CHK rolled over after the prior week's test of the broken rising channel and then plunged back to its 100-dma where it found strong support for Friday's rebound that took it back up to the 50-dma. The stock appears to be building a new rising channel, just below the one that broke in late January. With weekly Stochastics turning a clean bullish reversal above oversold territory, the bullish case is very much intact technically and the fundamental picture remains as strong as ever with the front month Natural Gas contract once again breaking out to new highs. Successive dips near the bottom of the new channel (now at $12.50) look favorable for new entries if you missed your shot on the dip to $12 a couple weeks ago. Watch List: SNDK - Last week's broad-market selloff worked to our advantage, as it drove SNDK right down into the midst of our $25-26 entry zone early on Thursday, with a rebound to the top of that zone by the end of the day. That looked good for an entry and it was confirmed on Friday with the strong rally back over $27. SNDK moves to the Portfolio this weekend. LUV - Well, I may have jumped the gun, but I think this is good enough for an entry point. LUV's kiss of the $14 level and slight rebound on Tuesday satisfied our entry requirement, although more conservative traders will want to wait for the dip under that level to resolve itself with a fresh breakout above $14 before playing. LUV moves to the Portfolio this weekend as well. TYC - The bearish pressures last week were enough to drop TYC halfway to our goal, as the stock pulled back from the top of its rising channel to the midline near the 50-dma, hitting an intraday low of $27.69 on Thursday. But the bulls bought the dip too soon for our purposes and TYC rebounded nearly $1 on Friday. TYC should provide a better entry point before we're tempted into the play though and the $26 level looks as good as ever, as it is just above the bottom of the channel and the 100-dma. It's unlikely that the broad market will just rocket back to its highs and TYC should provide the entry we're looking for in the weeks ahead. Radar Screen: WMB - Alright now that's more encouraging! It looks like WMB is starting to roll over again on the weekly Stochastics and that probably means a solid break of the 200-dma and a test of stronger support down in the $6-7 area. I know what you're thinking..."Is He Nuts??" No, just patient. You see the February dip to $8.50 put WMB on a PnF Sell signal and now I want to see that bearish move run its course. The bearish price target right now is $5.50 and at this point I think it will be interesting and educational to see if the stock can actually get there. I'm in no hurry to buck the current trend as depicted by both the PnF chart and weekly Stochastics and you shouldn't be either. But once it has run its course, I like the prospects for WMB to make a move back over $11 and up to test strong resistance near $15. APA - Talk about your volatile price action! APA has been all over the map in the brief span of time we've been talking about it. First reversing back up from the 100-dma, the stock made it all the way up to set a fractionally higher all-time high and then headed back into the middle of that range last week. Proving they hadn't given up, the bulls staged an impressive rebound on Friday and it looks like we're headed back up. Of course, natural gas prices charging to new highs certainly haven't helped! I still feel that if we're going to play in this arena, we're going to need to see a larger pullback to strong support first. A test of the 200-dma down near $26 looks pretty attractive. The problem is that a trade at $36 would represent a new PnF Sell signal. What to do... Wait for now, but I'm thinking of adding APA to the Watch List next weekend, using an entry target at $37. GM - The selling party in the broad market last week smashed GM through its 100-dma, doing so on strongly increasing volume. This looks like the beginning stages of a major decline. But, and you knew there had to be a but, right? Weekly Stochastics are far below their last low, while price is well above their previous low. If you're thinking bullish divergence, you're on the right track. It isn't there yet, but we just might see price stabilize above the 200-dma and head right back to the top of the long-term descending channel. Let's see just what price action has in store in the weeks ahead and use that data to make an informed decision on what to do about GM. Closing Thoughts: I'll be honest -- I actually cheered for last week's meltdown in the broad market. Not because I wish bad things for the market, but because we were so ridiculously overdue for a meaningful correction in this year-long bull move. The market has provided scant opportunities to enter long-term plays over the past year, and last week was one of those rare opportunities. Is the market still overvalued? Absolutely! Is it likely to continue rising for much of 2004? I believe so. There are many factors to the overall action in the equity market that we've been discussing in recent weeks and those will each have their day in the sun over the coming months. For now, we need to keep our eye on the ball and take advantage of these buying opportunities when they come along. Have a great week! Mark LEAPS Portfolio Current Open Plays LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: TYC 03/07/04 $26-27 JAN-2005 $ 30 ZPA-AF CC JAN-2005 $ 25 ZPA-AE JAN-2006 $ 30 WPA-AF CC JAN-2006 $ 25 WPA-AE PP JUL-2004 $ 25 TYC-SE EBAY 03/14/04 $67 JAN-2005 $ 70 ZQX-AN CC JAN-2005 $ 65 ZQX-AM JAN-2006 $ 70 YEU-AN CC JAN-2006 $ 65 YEU-AM PP JUL-2004 $ 60 XBA-SL PUTS: None New Portfolio Plays LUV - Southwest Airlines $14.10 **Call Play** Helping to solidify bearish sentiment last week, the Dow Transports absolutely cratered, busting below $2800 before coming back with a vengeance on Friday. Throughout the volatile ride, the Airline index (XAL.X) fell through the 200-dma and hit a low of $54.55. This isn't the most favorable climate in which to be adding a bullish play on an Airline stock, but that's just what we've done. While the XAL still has some potential downside from here as demonstrated by the still-falling weekly Stochastics, LUV appears to be near an important floor, both in terms of price and weekly Stochastics which are trying to turn up after having been in oversold territory since late last year. We were looking for an entry on a touch of the $14 level and that condition was satisfied last Tuesday. That entry was a bit premature, as the stock continued to drop into Thursday's low of $13.45. The short- term descending channel is still intact and more conservative traders may want to wait for an upside break from this pattern (over $14.50) before taking the plunge. As noted previously, we're looking to pick a bottom in the stock of one of the better run Airline stocks ahead of the peak travel season, with an eye towards a rally back to the $18-20 area. That's not a very big move, but with the low premium required for LUV LEAPS, just a move into the middle of that target zone would be an easy double. Once above the top of the descending channel, LUV will have to contend with resistance at the 50-dma ($14.88) and then horizontal resistance near $16 before it can make a serious assault on the 200-dma (currently $16.80). We'll place our initial stop at $11, as a break below that level would have the stock setting new all- time lows and tell us that buying this dip was a bad idea. Near term protection is provided by the July put, which should keep us out of trouble until the upside gets underway. BUY LEAP JAN-2005 $15 ZUV-AC $ 1.35 BUY LEAP JAN-2006 $15 WUV-AC $ 2.50 BUY PUT JUN-2004 $12 LUV-RV $ 0.40 **Protective Put** SNDK - SanDisk Corporation $25.98 **Call Play** After hanging out on our Watch List for months, it's finally time to take our shot at SNDK, as it appears the downside may have finally been shaken out of the stock. The month of February saw strong support being built near the $24 level and the recent rally back up to the 200-dma actually looked pretty encouraging. Despite the price weakness last week, I'm very encouraged by the way SNDK performed. With the NASDAQ breaking to new lows for the year, SNDK held at a higher low and this has the feeling of bullish divergence, relative strength or whatever other bullish label we want to place on it. Make no mistake, the stock will have an uphill battle in front of it, as it is below the 50-dma (28.66) and the 200-dma ($29.88) and the picture is even more disheartening with the 50-dma below the 200-dma. While the PnF chart is still bearish with a price target well below current levels, it will only take a rise to $30 to generate a new PnF Buy signal and negate that bearish outlook. That would also have price over both the 50-dma and the 200-dma, which would be another very encouraging sign. We were looking for a dip to the $25-26 area and SNDK delivered on Thursday. Sure I bent the rules a bit by taking the entry on Thursday's $25.98 close instead of waiting for a confirmed break above $26, but that's where judgment comes into play. As it turns out, it was a good decision in light of the strong rebound on Friday. Successive dips near $25-26 can still be used for entry, while more conservative traders may want to wait for that breakout over $30 before jumping aboard. Our initial target will be for a rise back to the $35 level, but I suspect a run as high as $40 will be in the cards later this year. Due to the higher risk associated with this play, let me strongly urge you to utilize the protective put. The cost is quite low and could be invaluable if something unexpected occurs. Isn't that why we buy insurance? We'll place our initial stop at $21.50, just under the 62% retracement of last year's impressive rally. BUY LEAP JAN-2005 $27 XWS-AY $ 5.10 BUY LEAP JAN-2006 $27 YSD-AY $ 6.80 BUY PUT JUL-2004 $22 SWQ-SX $ 1.65 **Protective Put** New Watchlist Plays EBAY - eBay Inc. $69.13 **Call Play** While it's certainly aggressive, I've been considering the idea of a bullish long-term play on EBAY for quite a while now. I know all the arguments against it, from fundamental to technical and have used a number of them myself in order to justify past bearish profiles on the stock. Here's the bottom line though -- investors LOVE this stock. It is a business that just continues to grow and it is almost as ubiquitous in our lives as McDonalds and Starbucks. Aside from the meltdown from the 2000 highs, the stock has been virtually immune to the broad market selloffs in recent year. After bottoming near $15 in early 2001, EBAY spent the remainder of the year posting higher lows, then traded perfectly sideways in 2002 before gaining well over 100% from the October 2002 lows to its December peak near $65. How's that for being impervious to the bears' attack? Is there any other stock that was able to hold its own in 2001-2002 and then gain more than 100% from the October 2002 lows? All that is in the past though, and all it does is give us a subjective feel for the strength of the stock in past bear and bull cycles. That brings us forward to now. Since late December, EBAY has been gradually working its way higher in a healthy manner, as the 50- dma has risen to support the stock and it has provided support on a couple of occasions in the past couple weeks. Will that trend continue and produce a sustained breakout over the $70 level of resistance? The PnF chart seems to think so, with its current bullish price target of $97. What it would take to change that view is a drop below $66, which would result in a fresh PnF Sell signal. There's no question this is aggressive, but if we buy into the view that the broad market will continue higher throughout the year and EBAY will lead that charge, it's hard to justify letting this one get away without at least an attempt to catch a ride on the northbound train. We'll set our entry target at $67, hoping for one more dip to test the 50-dma and then wait for the breakout over $70. Actually, what we'll really need to see is a move through last Monday's $72.04 intraday peak to really confirm a breakout move in progress. Initial stops go at $65, which should only come into play on a serious violation of support. Our upside target will be the PnF objective of $97. BUY LEAP JAN-2005 $70 ZQX-AN BUY LEAP JAN-2005 $65 ZQX-AM **Covered Call** BUY LEAP JAN-2006 $70 YEU-AN BUY LEAP JAN-2006 $65 YEU-AM **Covered Call** BUY Put JUL-2004 $60 XBA-SL **Insurance Put** Drops None *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ********** 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 03-14-2004 Sunday 5 of 5 In Section Five: Option Spreads: “The Quick & The Dead” Comes To Wall Street Spreads/Straddles/Combos: Another Entry Point Or Time To Sell? *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3594857663 *********************************************** ************************ Option Spread Strategies ************************ “The Quick & The Dead” Comes To Wall Street By Mike Parnos, Investing With Attitude “The Quick and The Dead” wasn’t just about a gunfight in the old west. It was about survival. It was good vs. evil. There are a lot of similarities to option expiration week. In the movie, Sharon Stone, beautiful, intense, dressed in leather, walks slowly down Main Street, spurs jingling with each step. Waiting in the street, in front of the saloon, is Gene Hackman, the devil incarnate. He’s run roughshod over the town for years and never lost a gunfight. He pulls his coat back, exposing his holstered Colt 45 (not the malt liquor). Years ago, Hackman killed Stone’s father. She’s been living for this day, the day she can exact her revenge. Stone stops 100 feet away. Her hand, only inches from her weapon. One will walk away. The other will not. They wait for the clock to strike 12. Hackman flicks away his cigarette, poised, confident. The hatred and determination evident on Stone’s face. Tick, tick, tick . . . Fast forward to today. Instead of walking down Main Street, it’s Wall Street. Gene Hackman has turned into some nameless, faceless market maker. Sharon Stone is now the glorious mass of option traders, intent on survival, motivated by countless portfolio casualties. There’s no killing market makers. If one dies, another magically appears to take his place. It’s a bottomless pit. But, underdog option traders never give up. Quitting is not an option. How do we compete? Are you bringing a knife to a gunfight? At the very least, you’re going to get mugged. You might as well just hand over your money and beg for mercy. The educated option trader can make choices to increase his/her chances of success. The mission of the CPTI (Couch Potato Trading Institute) is to prepare each and every option trader for his/her monthly showdown with the market makers. The sensible choice is to arm yourself with the strategies you learn at the CPTI. Will it level the playing field? Not entirely, but it will give you a fighting chance. In an option trading shootout, you can’t ask for more. ______________________________________________________________ March Expiration Quickies First, the warning. These quickies can be hazardous to your wealth. In past months we’ve had many more winners than losers. The losers can be expensive, though. These are hypothetical and educational plays, but readers have been known to roll the “quickie” dice. Should you be so inclined, only use hypothetical money you can afford to lose. ______________________________________________________________ Quickie #1: RUT – 582.84 – Iron Condor Sell 10 RUT March 560 puts Buy 10 RUT March 550 puts Credit: $.65 (x 10 contracts = $650) Sell 10 RUT March 600 calls Buy 10 RUT March 610 calls Credit: $.80 (x 10 contracts = $800) Total net credit of $1.45. Maximum profit range of 550 to 600. Safety range: 548.55 to 601.45. Potential profit: $1,450. _____________________________________________________________ Quickie #2: BBH – 146.10 – Siamese Condor BBH faked us out of our regular CPTI position. I guess I’m just a glutton for punishment. What the hell . . . Sell 10 BBH March $145 calls Sell 10 BBH March $145 puts Buy 10 BBH March $155 calls Buy 10 BBH March $135 calls Credit: $3.45 (x 10 contracts = $3,450) Our profit range is $141.55 to $148.45. As long as BBH finishes somewhere within this range, we’ll make money. The closer BBH finishes to $145, the more we’ll make. Our bailout point parameters are the same as the profit range -- $141.55 on the bottom and $148.45 on top. _______________________________________________________________ Quickie #3: QQQ - $35.51 – Straddle The market has been nuts lately. Expiration week has been known to be crazy at times. I don’t believe Friday’s bounce will last (but, what do I know?), so I’m going to risk a buck and see what happens. Buy 10 QQQ March $36 puts Buy 10 QQQ March $36 calls Total debit: $1.00 ($1,000) If the QQQs continue the current downtrend and get down to $34, our $36 put will be worth $2 and we’ll double our money. Even if the QQQs don’t move, we should be able to recoup half of the $1 risked. With the QQQs at $35.51, I selected the $36 puts and calls because I have a slight downward bias. If you have an upward bias, you might want to use the $35 calls and puts. ________________________________________________________________ Those Friendly Reminders The premiums quoted on the above educational trades are based on Friday's closing bid/ask prices. On Monday, the premiums will likely be different due to market movement and/or the additional two days of time erosion. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you a trader. And make sure you thoroughly know the intricacies of a strategy before you trade. The money you save may be your own. ________________________________________________________________ MARCH CPTI POSITIONS Position #1 – OEX (S&P 100 Index) Iron Condor – 549.92 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 – 582.84 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 - $143.14 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. Our range was violated and we closed the position for $2,300. We took in $1,800. Result: $500 loss. Position #4 – BBH (Biotech Index) - Siamese Condor - $146.10 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 was $6.25 ($6,250). Our profit (safety) range was $138.75 to $151.25. These were also our bailout points. The closer BBH finishes to $145, the more money we will make. We closed the position for a loss of $1.15 ($1,150). ______________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $35.51 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. April: Apr. $34 calls and $37 puts – credit of $750 Total credit: $8,050. 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 – 549.92 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. That guarantees the principal $100,000 investment. We’re trading the remaining $26,000 to generate a “risk free” return on the original investment. Bought 3 OEX Jan. 2006 540 calls @ $81 (x 300 = $24,300) March: Sold 3 OEX 585 calls @ $3.10 (x 300 = $930) March: 535/525 Bull Put Spread for credit of $1.10 (x 300 = $330) Current cash position is $2,960 ($1,260 plus the unused $1,700). Adjustment: This week we bought back the OEX March 585 calls for $.10 and sold the March 560 calls for $1.35. A credit of $1.25 x 300 = $375.00. We won’t update our cash position until the March cycle resolves itself and we put on our April positions. _________________________________________________________________ A Sign Of The Times: ATTN: ALL EMPLOYEES - ALERT Recently we have received credible intelligence that there have been seven terrorists working in your office. Six of the seven have been apprehended. Bin Sleepin’, Bin Loafin’, Bin Goofin’, Bin Lunchin’, Bin Drinkin’ and Bin Butt-Kissin have all been taken into custody. At this time, no one fitting the description of the seventh cell member, Bin Workin’, has been found at your office. We are confident that anyone who looks like he's Bin Workin’ will be very easy to spot. You are OBVIOUSLY not a suspect at this time. So keep on doing what you Bin Doing. _________________________________________________________________ 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. ************************ SPREADS/STRADDLES/COMBOS ************************ Another Entry Point Or Time To Sell? By Ray Cummins U.S. stocks rallied Friday after a week of sharp declines that saw the major equity averages erase their gains for 2004. The blue-chip Dow industrial average ended up 111 points at 10,240, reducing its losses for the week to 355 points. The NASDAQ soared as well, adding 40 points to close at 1,984, only 3% lower than it started on Monday. The S&P 500 gained 13 points, which helped the broader market index recover to a 36-point deficit for the week. Volume was active, with about 1.4 billion shares trading hands on the New York Stock Exchange while roughly 1.7 billion shares were swapped on the NASDAQ. Advancers trounced decliners by a ratio of 3 to 1 on both the NYSE and the technology exchange. Bond prices slid lower after a recent rally as the U.S. dollar firmed against other major currencies. The yield on the benchmark 10-year note climbed to 3.77%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 03/12/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 18.88 (0.67) 0.00% 2.30% * LSCP MAR 17 17.10 23.15 0.40 6.20% 2.34% PCLN MAR 22 21.70 23.50 0.80 7.85% 3.69% AMLN MAR 20 19.55 23.98 0.45 6.42% 2.30% ATRX MAR 22 22.05 25.67 0.45 6.79% 2.04% BRCM MAR 37 36.95 39.55 0.55 4.29% 1.49% IDCC MAR 22 22.10 18.88 (3.22) 0.00% 1.81% * OSTK MAR 20 19.35 29.77 0.65 10.25% 3.36% NEOL MAR 17 16.95 22.19 0.55 10.48% 3.24% RMBS MAR 30 28.90 28.98 0.08 0.77% 3.81% SMTC MAR 22 22.15 22.13 (0.02) 0.00% 1.58% * ADEX MAR 20 19.55 21.20 0.45 8.22% 2.30% ALXN MAR 20 19.70 24.42 0.30 6.05% 1.52% APPX MAR 30 29.70 39.36 0.30 4.59% 1.01% ATRX MAR 22 22.20 25.67 0.30 6.03% 1.35% MRVL MAR 37 37.10 41.83 0.40 4.40% 1.08% NEOL MAR 17 17.30 22.19 0.20 5.25% 1.16% OSTK MAR 20 19.70 29.77 0.30 6.70% 1.52% SEPR MAR 17 17.25 46.63 0.25 5.37% 1.45% ADEX APR 20 19.45 21.20 0.55 5.64% 2.83% ALXN MAR 22 22.05 24.42 0.45 10.40% 2.04% KMRT MAR 30 29.65 34.07 0.35 6.19% 1.18% NEOL APR 15 14.55 22.19 0.45 6.79% 3.09% OSTK MAR 25 24.65 29.77 0.35 9.74% 1.42% PKZ MAR 25 24.60 29.26 0.40 8.63% 1.63% AAPL MAR 25 24.65 27.56 0.35 9.53% 1.42% AMLN APR 22 21.80 23.98 0.70 6.68% 3.21% APPX APR 32 32.48 39.36 0.90 5.98% 2.77% ASKJ MAR 25 24.70 28.64 0.30 10.09% 1.21% NEOL APR 15 14.65 22.19 0.35 5.57% 2.39% NKTR APR 20 19.20 20.51 0.80 8.87% 4.17% OSTK APR 25 24.30 29.77 0.70 7.25% 2.88% Interdigital (NASDAQ:IDCC) shares plunged Wednesday after the company posted an 81% decline in its fourth-quarter profit due to higher-than-expected operating expenses and lower revenue. Conservative traders should have closed the play Tuesday, after the second consecutive session of sharp declines, for a smaller than published loss. As noted last week, Semtech (NASDAQ:SMTC) is a candidate for early exit and many of the technology issues in the portfolio are on the "watch" list after the recent slump in equities. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AAII MAR 25 25.40 9.41 0.40 7.47% 1.57% CMTL MAR 35 35.45 26.18 0.45 7.46% 1.27% FLML MAR 35 35.35 26.39 0.35 6.02% 0.99% MHS MAR 35 35.45 31.40 0.45 4.40% 1.27% CECO MAR 55 55.50 46.47 0.50 4.96% 0.90% ECLG MAR 22 22.85 19.40 0.35 10.15% 1.53% ESI MAR 50 50.30 28.70 0.30 4.96% 0.60% ISSI MAR 17 17.85 16.00 0.35 11.45% 1.96% SEAC APR 20 20.40 14.62 0.40 7.86% 1.96% NTE MAR 30 30.00 24.83 0.00 0.00% 0.00% NTLI MAR 70 70.50 59.38 0.50 6.27% 0.71% PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status CERN 46.09 45.49 MAR 35 40 0.60 39.40 0.60 Open DNA 98.25 107.70 MAR 85 90 0.70 89.30 0.70 Open ESRX 70.58 73.53 MAR 60 65 0.65 64.35 0.65 Open NBR 46.97 44.40 MAR 40 42 0.25 42.25 0.25 Open BSX 41.94 41.24 MAR 35 37 0.25 37.25 0.25 Open CEC 51.62 58.00 MAR 45 50 0.55 49.45 0.55 Open ONXX 36.80 36.19 MAR 30 35 0.55 34.45 0.55 Open OSTK 29.27 29.77 MAR 22 25 0.30 24.70 0.30 Open RYL 85.72 89.90 MAR 75 80 0.50 79.50 0.50 Open GS 107.09 104.93 MAR 95 100 0.65 99.35 0.65 Open MSTR 64.78 61.20 MAR 50 55 0.55 54.45 0.55 Open MICC 22.06 19.22 MAR 18 19 0.12 18.63 0.12 Open VIP 83.25 88.40 MAR 70 75 0.65 74.35 0.65 Open GDT 69.79 67.55 MAR 60 65 0.65 64.35 0.65 Open MTH 71.09 75.50 MAR 60 65 0.70 64.30 0.70 Open APOL 77.82 80.77 APR 65 70 0.60 69.40 0.60 Open S 48.35 45.00 APR 42 45 0.35 44.65 0.35 Closed BZH 111.90 108.50 APR 95 100 0.70 99.30 0.70 Open KBH 78.71 77.73 APR 65 70 0.55 69.45 0.55 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Sears (NYSE:S) is now on the "early-exit" list. The position in 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 22.01 MAR 35 30 0.65 30.65 0.65 Open SOHU 29.05 24.46 MAR 40 35 0.60 35.60 0.60 Open KLAC 54.24 53.09 MAR 65 60 0.60 60.60 0.60 Open IACI 31.92 31.00 MAR 37 35 0.30 35.30 0.30 Open NVLS 33.26 31.01 MAR 40 37 0.30 37.80 0.30 Open BBBY 40.62 39.82 MAR 45 42 0.30 42.80 0.30 Open LLTC 40.03 38.30 MAR 45 42 0.25 42.75 0.25 Open PIXR 65.76 63.76 MAR 75 70 0.55 70.55 0.55 Open SFNT 37.96 37.90 MAR 45 40 0.60 40.60 0.60 Open UTEK 26.28 23.61 MAR 35 30 0.60 30.60 0.60 Open AMZN 44.87 42.44 MAR 55 50 0.50 50.50 0.50 Open CTAS 42.77 41.55 MAR 50 45 0.60 45.60 0.60 Open CCU 43.44 41.84 MAR 50 45 0.60 45.60 0.60 Open DISH 35.50 35.48 APR 42 40 0.30 40.30 0.30 Open NVLS 31.15 31.01 APR 37 35 0.35 35.35 0.35 Open ADBE 36.46 35.71 APR 45 40 0.55 40.55 0.55 Open VSEA 40.85 39.23 APR 50 45 0.60 45.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss The bearish position in Icos (NASDAQ:ICOS), which is positive, as well as the spreads in Neurocrine Bisosciences (NASDAQ:NBIX), OSI Pharmaceuticals (NASDAQ:OSIP), and Multimedia Gaming (NASDAQ:MGAM) have previously been closed to limit losses. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status SNP 40.74 41.16 APR 40 40 5.70 5.70 Open TTWO 32.03 32.75 MAR 32 32 3.20 3.00 Open? AMX 35.66 35.74 MAY 35 35 3.65 4.30 Open CCMP 44.55 42.24 APR 45 45 5.90 5.75 Open AIG 74.28 71.61 MAY 75 75 5.60 6.00 Open SLB 65.13 62.50 MAY 65 65 6.75 6.50 Open Hovnanian (NYSE:HOV) was the "play of the month," offering up to a $8.00 gain on $7.00 invested. Straddles in Martek Biosciences (NASDAQ:MATK), Bear Stearns (NYSE:BSC) and Forest Labs (NYSE:FRX), which is now profitable, have previously been closed to preserve capital. Prices for the new positions in American International (NYSE:AIG) and Schlumberger (NYSE:SLB), as well as any potential gains (max. value) for existing straddles, will not be accurate as I did not monitor the portfolio during my recent absence from the market. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ APPX - American Pharma Partners $39.36 *** Near 2004 Highs! *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty drug company that develops, manufactures and markets injectable pharmaceutical products, focusing on the oncology, anti-infective and critical care markets. The company is one of the largest producers of injectables, with more than 130 generic products in more than 350 dosages and formulations. APPX - American Pharma Partners $39.36 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 30 AQO PF 3606 0.25 29.75 2.8% 0.8% TS SELL PUT APR 33.37 AXD PV 422 0.65 32.73 5.8% 2.0% * SELL PUT APR 35 AQO PG 1511 1.05 33.95 7.8% 3.1% __________________________________________________________________ ASKJ - Ask Jeeves $28.64 *** A Necessary Consolidation! *** Ask Jeeves (NASDAQ:ASKJ) is a provider of Internet-wide search, providing consumers with authoritative and fast ways to find relevant information to their everyday searches. Ask Jeeves deploys its search technologies on Ask Jeeves (Ask.com and Ask.co.uk), Teoma.com, and Ask Jeeves for Kids (AJKids.com). In addition, to its internet sites, Ask Jeeves syndicates its monetized search technology and advertising units to a network of affiliate partners. The company is based in Emeryville, California, with offices in New York, Boston, New Jersey, Los Angeles, London and Dublin. ASKJ - Ask Jeeves $28.64 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 22.5 AUK PX 316 0.25 22.25 3.9% 1.1% TS SELL PUT APR 25 AUK PE 966 0.85 24.15 9.0% 3.5% * __________________________________________________________________ CLZR - Candela $27.00 *** Multi-Year High! *** Candela (NASDAQ:CLZR) develops, manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies. Founded near Boston in 1970, the company markets and services its products in over 60 countries from offices in the United States, Europe, Japan and other Asian locations. Candela established the aesthetic laser market 14 years ago, and currently has an installed base of over 6,000 lasers worldwide. CLZR - Candela $27.00 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 22.5 UKZ PX 44 0.35 22.15 4.9% 1.6% * SELL PUT APR 25 UKZ PE 80 0.95 24.05 9.0% 4.0% __________________________________________________________________ INVN - InVision Technologies $41.22 *** Solid Earnings! *** InVision Technologies (NASDAQ:INVN) develops, manufactures, sells and supports explosives detection systems based on its advanced computed tomography technology for civil aviation security. The company's wholly-owned subsidiary Yxlon develops, manufactures, markets and supports X-ray based diffraction for explosives detection, and automated X-ray based non-destructive testing systems for a wide range of industrial applications. Another subsidiary, Quantum Magnetics, develops detection systems for weapons, narcotics, explosives and other threats based on unique magnetic sensing technologies. InVision's wholly-owned Inovec develops, manufactures, sells and supports scanning, optimization and control systems for the forest products industry. INVN - InVision Technologies $41.22 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 40 FQQ OH 794 1.15 38.85 42.6% 3.0% SELL PUT APR 35 FQQ PG 426 0.50 34.50 4.3% 1.4% * SELL PUT APR 40 FQQ PH 413 2.05 37.95 10.9% 5.4% __________________________________________________________________ JNPR - Juniper Networks $25.81 *** Next Leg Up? *** Juniper Networks (NASDAQ:JNPR) is a provider of Internet infra- structure solutions that enable Internet service providers and other telecommunications service providers to meet the demands resulting from the growth of the Internet. Juniper's Internet routers are designed and purpose-built for service provider networks and offer performance, scalability, interoperability and flexibility, as well as lower complexity and cost compared to legacy alternatives. Juniper's proprietary software is designed for the Internet protocol network routing, operations and control requirements of service providers and is an integral embedded component of its product family system architecture. JNPR - Juniper Networks $25.81 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 JUX OE 14842 0.25 24.75 15.6% 1.0% SELL PUT APR 22.5 JUX PX 9262 0.65 21.85 7.8% 3.0% * SELL PUT APR 25 JUX PE 8858 1.50 23.50 12.6% 6.4% __________________________________________________________________ NEOL - NeoPharm $22.19 *** Near 2-Year 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 - NeoPharm $22.19 "SPECULATIVE" PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 15 UOE PC 2743 0.35 14.65 6.7% 2.4% * SELL PUT APR 17.5 UOE PW 607 1.00 16.50 16.9% 6.1% __________________________________________________________________ PDII - PDI Incorporated $25.72 *** In A Trading Range? *** PDI (NASDAQ:PDII) is an innovative healthcare sales and marketing provider to biopharmaceutical and medical devices companies and and the diagnostics industry. Its three business units offer service and product-based capabilities for companies seeking to maximize profitable brand sales growth. The three units include PDI Pharmaceutical Products, PDI Sales and Marketing Services, and PDI Medical Devices and Diagnostics. PDII - PDI Incorporated $25.72 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 PKU OE 199 0.25 24.75 15.5% 1.0% SELL PUT APR 22.5 PKU PX 13 0.70 21.80 8.3% 3.2% * SELL PUT APR 25 PKU PE 9 1.50 23.50 12.5% 6.4% __________________________________________________________________ SWIR - Sierra Wireless $30.30 *** Entry Point? *** Sierra Wireless (NASDAQ:SWIR) is a leader in delivering highly differentiated wireless solutions that enable our customers to improve their productivity and lifestyle. Sierra Wireless develops and markets AirCard, the industry-leading wireless PC card line for portable computers; embedded modules for OEM wireless applications; the MP line of rugged vehicle-mounted connectivity solutions and Voq, a line of professional phones with secure, easy-to-use, products for mobile professionals. SWIR - Sierra Wireless $30.30 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 22.5 IYQ PX 31 0.35 22.15 5.0% 1.6% * SELL PUT APR 25 IYQ PE 65 0.80 24.20 9.7% 3.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ COF - Capital One Financial $73.50 *** Bracing For A Rally? *** Capital One Financial (NYSE:COF) is a holding company whose major subsidiaries market a variety of financial products and services to consumers using its proprietary information-based strategy. The company's primary business is consumer lending, with a focus on credit cards, but including other consumer lending activities such as unsecured installment lending and automobile financing. The company's principal subsidiary, Capital One Bank, a limited purpose, state-chartered credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered bank, offers consumer lending and deposit products. Capital One Services, the other major subsidiary, provides various operating, administrative and business services to the company and its subsidiaries. COF - Capital One Financial $73.50 PLAY (conservative - bullish/credit spread): BUY PUT APR-60.00 COF-PL OI=1483 ASK=$0.40 SELL PUT APR-65.00 COF-PM OI=1825 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$64.50 __________________________________________________________________ HUG - Hughes Supply $52.95 *** New "All-Time" High! *** Hughes Supply (NYSE:HUG) is one of the United State's largest diversified wholesale distributors of construction, repair and maintenance-related products, with 489 locations in 38 states. Headquartered in Orlando, Florida, Hughes employs approximately 8,400 associates and generates annual revenues of over $3 billion. Hughes Supply is a Fortune 500 company and was named the second most admired company in America in the Wholesalers: Diversified Industry segment by Fortune Magazine. HUG - Hughes Supply $52.95 PLAY (conservative - bullish/credit spread): BUY PUT APR-45.00 HUG-PI OI=10 ASK=$0.25 SELL PUT APR-50.00 HUG-PJ OI=60 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$49.50 __________________________________________________________________ SYMC - Symantec $44.64 *** Rally Mode! *** Symantec (NASDAQ:SYMC) provides content and network security software and appliance solutions to enterprises, individuals and service providers. The firm provides client, gateway and server security solutions for virus protection, firewall and virtual private network, security management, intrusion detection, e-mail filtering and Internet content, remote management technologies and security services to enterprises and service providers worldwide. The company views its business in five operating major segments: enterprise security, enterprise administration, consumer products, services and other activities. SYMC - Symantec $44.64 PLAY (less conservative - bullish/credit spread): BUY PUT APR-37.50 SYQ-PU OI=1912 ASK=$0.25 SELL PUT APR-40.00 SYQ-PH OI=4812 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$39.65 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CECO - Career Education $46.47 *** Pure Premium-Selling! *** Career Education Corporation (NASDAQ:CECO)) is the world's largest on-campus provider of private, for-profit postsecondary education and has a rapidly growing presence in online education. CEC's Colleges, Schools and Universities Group operates 51 campuses in the U.S., Canada, France, the United Kingdom and the United Arab Emirates and offers master's degree, bachelor's degree, associate degree and diploma programs in the career-oriented disciplines of visual communication & design technologies, information technology, business studies, culinary arts and health education. The Online Education Group's AIU Online Division offers master's degree, bachelor's degree and associate degree programs in information technology, business administration, visual communication and education. CECO - Career Education $46.47 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 50 CUY CJ 6538 0.35 50.35 13.8% 0.7% SELL CALL APR 55 CUY DK 8899 0.65 55.65 5.6% 1.2% * SELL CALL APR 50 CUY DJ 2322 1.75 51.75 9.6% 3.4% __________________________________________________________________ ERES - eResearch Technology $27.68 *** Downgrade = Sell-Off! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES - eResearch Technology $27.68 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 30 UDB CF 742 0.20 30.20 13.6% 0.7% SELL CALL APR 35 UDB DG 363 0.30 35.30 4.7% 0.8% * SELL CALL APR 32.5 UDB DZ 276 0.50 33.00 6.8% 1.5% __________________________________________________________________ FARO - FARO Technologies $23.15 *** Post-Earnings Plunge! *** FARO Technologies (NASDAQ:FARO) designs, develops, markets and supports portable, software-driven, 3-D measurement systems used in a broad range of manufacturing and industrial applications. The firm's principal products are the Faro-Arm Control Station and Control Station Pro (articulated measuring devices), the Faro Laser Tracker and Laser Control Station and their companion Soft Check Tool and CAM2 software, respectively, which provide for computer-aided design (CAD)-based inspection and factory-level statistical process control. Faro's products bring precision measurement, quality inspection and specification conformance capabilities, integrated with CAD software, to the factory floor. FARO - FARO Technologies $23.15 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 25 QEJ CE 409 0.40 25.40 31.2% 1.6% SELL CALL APR 30 QEJ DF 377 0.40 30.40 7.3% 1.3% * SELL CALL APR 25 QEJ DE 13 1.45 26.45 15.1% 5.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ COGN - Cognos $29.54 *** Next Leg Down? *** Cognos (NASDAQ:COGN), the world leader in business intelligence and corporate performance management, delivers software that helps companies monitor and understand corporate performance. Cognos delivers the next level of competitive advantage achieved through the strategic application of BI on an enterprise scale. Cognos serves more than 22,000 customers in over 135 countries. Cognos enterprise business intelligence solutions and services are also available from more than 3,000 worldwide partners and resellers. COGN - Cognos $29.54 PLAY (less conservative - bearish/credit spread): BUY CALL APR-35.00 CRQ-DG OI=31 ASK=$0.25 SELL CALL APR-32.50 CRQ-DZ OI=401 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$32.85 __________________________________________________________________ SFA - Scientific-Atlanta $31.96 *** In A Trading Range? *** Scientific-Atlanta (NYSE:SFA) is a leading supplier of digital content distribution systems, transmission networks for broadband access to the home, digital interactive set-tops and subscriber systems designed for video, high-speed Internet and voice over IP (VoIP) networks, and worldwide customer service and support. SFA - Scientific-Atlanta $31.96 PLAY (conservative - bearish/credit spread): BUY CALL APR-40.00 SFA-DH OI=102 ASK=$0.15 SELL CALL APR-35.00 SFA-DG OI=589 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$35.55 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ LEN - Lennar $55.58 *** Earnings Speculation *** Lennar (NYSE:LEN) is a homebuilder and a provider of residential financial services. The company's homebuilding operations include the sale and construction of single-family attached and detached homes as well as the purchase, development and sale of residential land directly and through its unconsolidated partnerships. The company's financial services operations provide mortgage financing, title insurance and closing services for both its homebuyers and others, resell the residential mortgage loans it originates in the secondary mortgage market and also provide Internet access, cable television and alarm monitoring services to residents of its many communities. Lennar's quarterly earnings report is due March 17. LEN - Lennar $55.58 PLAY (very speculative - neutral/debit straddle): BUY CALL MAR-55.00 LEN-CK OI=2326 ASK=$1.50 BUY PUT MAR-55.00 LEN-OK OI=1699 ASK=$0.95 INITIAL NET-DEBIT TARGET=$2.30-$2.40 INITIAL TARGET PROFIT=$1.05-$1.75 __________________________________________________________________ TEK - Tektronix $29.59 *** Earnings Speculation *** Tektronix (NYSE:TEK) is a test, measurement and monitoring firm providing measurement solutions to the communications, computer and semiconductor industries worldwide. With more than 55 years of experience, Tektronix enables its customers to design, build, deploy and manage next-generation global communications networks, computing and advanced technologies. Headquartered in Beaverton, Oregon, Tektronix has operations in more than 20 countries around the globe. The company's earnings are due Thursday, March 18. TEK - Tektronix $29.59 PLAY (very speculative - neutral/debit straddle): BUY CALL MAR-30.00 TEK-CF OI=40 ASK=$0.55 BUY PUT MAR-30.00 TEK-OF OI=13 ASK=$1.00 INITIAL NET-DEBIT TARGET=1.40-$1.45 INITIAL TARGET PROFIT=$0.45-$0.80 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ *********************************************** 2004 Stock Traders Almanac, Mousepad and Video *********************************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. 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