The Option Investor Newsletter Thursday 04-29-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Trend Change! Futures Markets: See Note Index Trader Wrap: BEARS & BEAR TRAPS Market Sentiment: Truth Or Dare? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 04-29-2004 High Low Volume Adv/Dcl DJIA 10272.27 - 70.30 10407.97 10219.18 2.30 bln 850/2400 NASDAQ 1958.78 - 30.80 1998.02 1946.10 2.37 bln 830/2362 S&P 100 544.54 - 3.30 551.53 541.69 Totals 1680/4762 S&P 500 1113.89 - 8.52 1128.80 1108.02 W5000 10867.10 -100.30 11008.24 10811.96 SOX 450.48 - 11.80 464.46 443.74 RUS 2000 567.25 - 9.81 580.45 564.44 DJ TRANS 2904.06 - 43.10 2964.52 2890.85 VIX 16.60 + 0.31 17.27 15.87 VXO (VIX-O)17.30 + 0.58 18.01 16.23 VXN 24.90 + 0.98 25.51 23.95 Total Volume 5,147M Total UpVol 825M Total DnVol 4,174M Total Adv 5410 Total Dcl 1900 52wk Highs 98 52wk Lows 300 NasTRIN 2.13 TRIN 1.24 PUT/CALL 1.00 ************************************************************ Trend Change! by Jim Brown It only took two days but the trend is on the verge of a drastic change. The Dow hit 10537 on Tuesday and 10219 today. In only two days the Dow has moved from the high end of its range to the very low end of its range for the entire month. The earnings sentiment has gone from very bullish to very bearish despite any material change in the earnings. Fear of the Fed, trouble in Iraq, decline in China and election fears have all been given as excuses. Which one is it? Dow Chart – Daily Nasdaq Chart – Daily The morning started out good with Jobless Claims dropping back below 350K to 338,000 and moving back to the level we saw in March. Something to do with the Easter holiday had bumped the numbers back over 350K for two weeks but that anomaly appears to have passed. That was the extent of the good news. The Employment Cost Index rose faster than expected at +1.1% pushed higher on soaring benefit costs. Those costs jumped +2.4% for Q1 and nearly double the costs for the prior three quarters. Benefits for blue collar workers rose +3.8% and +4.2% for manufacturing workers. This is a very strong jump for benefits where most of the cost is due to rising healthcare. The wage component rose only +0.6% and it was the slowest growth rate recorded to date! That suggests the labor market is still very soft and employees have no leverage in negotiating wages. This was not good news for the employment picture or for future company earnings if the trend continues. Confirming the weak employment market was a drop in the Help Wanted Index for March to 39. It was not a big move but it did reverse the minor uptick from the prior month. It appears there was some pickup in job advertising in February as the new year got underway but that may have only have been a blip. Not an earth shaking report compared to those we have next week but still another crack in the economic outlook. The biggest economic blow for the day was the GDP which only posted a +4.2% gain in the most current estimate. Consensus estimates had been in the +5.2% range with whisper numbers nearing +6%. Suddenly all the constantly improving bullish comments on the economy imploded and with it the expectations for surging stock prices. All things considered the +4.2% rate is very good. Everyone would be very happy to maintain that rate for several years but the problem was expectations. The market had priced in expectations of 5.2-5.5% or more. The constant buzz about the very strong Q1 earnings had investors thinking the revised GDP for the quarter was also going to be very strong and surprise to the upside. Instead the surprise shocked everyone back to reality. Business is good but not great and harder times lay ahead. That reality is also creeping into earnings. As of last weekend 78% of companies had beaten estimates for Q1. As of today that number is down to 76% and still very respectable. The problem is the guidance. As we get deeper into the earnings cycle the quality of companies reporting declines and we are getting fewer upside surprises and more downside guidance. The common report is now predicting stronger comparisons ahead. I have been cautioning you that this would happen but when the markets are near their highs and the bulls are running nobody wants to face facts. The underlying fact is simple. The economy boomed in late 2003. Remember that +8.2% GDP in Q3-2003? The Q2-2003 production cycle is what pushed us to much stronger earnings and output in Q2, Q3 and Q4. That ramp up on the very large tax rebate program in 2003 pulled us out of the depths of recession and boosted us into high gear. We hit full speed in late Q3 and quickly ran out of tax rebate fuel. We posted a GDP of 4.1% in Q4, normally a strong quarter and have been coasting through Q1 at that 4.1% rate. Companies were hoping to pit stop in Q1 and pickup some more tax refund cash to spur buying but as I have reported previously those refunds shrank to about 1/4-1/3 of what was expected. Now we are faced with the summer doldrums ahead and no gas in the economic tank. Obviously that is a greatly simplified picture and not exactly correct but I think you get the idea. The good news from the lower GDP is no urgency on the part of the Fed. They were about to go into attack mode if we had broken out over +5% and that threat has been neutralized. We have several more critical economic reports over the next several days and the Fed meeting on Tuesday but the decision should already be over. Odds of a rate hike in May or even June just went to near zero. The market obviously did not celebrate that fact. The market opened down and then rallied slightly on a single buy program on the Help Wanted news and then crashed. Whoever pulled the trigger on that buy program was probably celebrating the Fed knockout but when the keg ran dry he found himself the only one at the party. Falling expectations trumped the falling chances of a rate hike. Stocks that had been highly leveraged on the chances of a strong economic explosion suddenly found themselves over priced for a return to a slow growth environment. Semiconductors, techs and small caps were dumped with no hesitation. Helping fuel the fears of an economic slow down were comments from China that the government was going to take "strong" steps to slow down its overheated economy. Commodities dropped like a rock on Wed when the comments were made. China has been on a ferocious pace with growth at a 9.7% rate. They have been sucking up gold, silver, copper, oil and almost every manufacturing material in excess of current supply. Prices had been soaring. The potential for China to suddenly slow rippled through all the markets. This ripple was hardly warranted. The target growth rate for China is +7.1%, hardly a recession. China's growth can be slowed by the Premier taking strong measures as he has said but it is not going to stop tomorrow. We all know it takes months if not years to see any impact from economic brakes. The greed factor is alive and well and it will always find a way to prosper if buyers are available. Yes, comments from China did hit our markets over the last couple days but the real impact is more imagined than real for the time being. Iraq and Israel were also used as excuses for the depression in the U.S. markets. I would hope that anybody investing real money is intelligent enough to know there has been and will be fighting in those countries until hell freezes over. Sure, news that ?? American soldiers were killed on any given day is still very troubling but it is not something that should tank the market by triple digits. It all boils down to earnings and profits. Polite conversations about the merits of particular stocks and the potential for the next rally are held daily in institutions and across supper tables. They remain polite as long as the uptrend remains intact. Many funds, institutions and private traders have huge profits on the table from the March rebound last year. The Dow 100 dma was not touched from April through February. It was broken in March but quickly recovered. Trigger fingers relaxed and traders with huge profits began to breath again. It was broken again on the 21st but a rebound the next day put traders back at ease. However, we all know the adage, once bitten twice shy and the markets have been bitten several times lately. The markets have been very nervous for the last couple of weeks. Traders continued to hope for new highs to confirm the economic expectations and their justifications for continuing to hold profits from the 2003 rally. Unfortunately since the current high for the year was set on February 19th we have seen a steady progression of lower highs. Tuesday's push to 10537 was the culmination of two weeks of gains but it was still a lower high and one that was only 131 points over the 100dma. Once that high failed with no attempted rebound the rats began deserting the ship. That desertion turned into a rout on Wed/Thr. Volume made new highs for the year and it was extremely negative. On Wednesday volume across all markets was 4.9B shares. 4.2B was down volume with only 606 million shares of up volume, a 7:1 disadvantage. On Thursday volume hit 5.2B shares, a record for the year, and down volume was 4.2B with up volume only 829 million, 5:1. The new highs/new lows number was also a disaster. Only 99 stocks hit new highs and 303 hit new lows. To put this in perspective that is the first time new highs have been under 100 since March 24th, 2003. It is the first time new lows have been over 300 since March 12th, 2003. That just happens to be the day the Dow broke under 7500 and set the low for 2003. I want to make sure this is clear. The new high/lows for today were as bad as the day the Dow was at the low for 2003. The difference is about 2750 Dow points. We should not be seeing these kinds of internals at this level in the market. This is serious but it does not mean it will continue. The Dow has dropped nearly -300 points in three days. It closed today at 10272 after touching 10219. This level is very critical. 10300 has been the bottom of our range since March 29th. However, if you remember the March drop took us to 10007. There is still a technical possibility that we could hold here or at the March lows near 10000. I say technical possibility because the sentiment has definitely changed. It is one thing to predict higher moves when all the earnings and economics are improving but once the dominoes begin to fall the change in sentiment accelerates quickly. I am not going to sugar coat this. We are at a critical point in the market. We could continues to go either way but the path of least resistance is definitely down. The Nasdaq also broke critical support today and has fallen -100 points since Monday. Further support remains at 1940 and again at 1900 but the outlook is not good. Taking the Nasdaq down is the semiconductor sector which broke final support on Thursday and sank to a six month low. Take a look at the SOX chart and the risk to the overall market will be quickly apparent. SOX Chart – Daily Russell 2000 Chart – Daily The last twig on the cliff that the bulls can cling to is the Russell. Small caps have been taking a beating this week and the Russell is on the verge of breaking that last critical support at 560. We have been near this level four previous times since January and each time there was a miraculous recovery and it could happen again. Unfortunately the chart is not suggesting that for tomorrow. Before I get too bearish we all need to remember that market events run in cycles and this cycle could just be an over reaction to the changing trend. We have serious economic events in our near future as well as a Fed meeting and the GDP today was a warning. Actually it is unrelated to any of the economics we will see over the next week but it did take some of the complacency out of the economic expectations. We have had two very negative days in the market. It may be time for the bargain hunters to rush into the gap but there are no indications yet that it will happen tomorrow. I have been telling you to sell the tops and buy the bottoms as long as we remained range bound. I suggested selling the 10500-10550 top of the range as recently as Tuesday. On Sunday I suggested a break of this trend would be a move under Dow 10250 and Nasdaq 1975. Both of those levels were broken today. The Dow regained some ground to close back above 10250 but only slightly. The stage is set. Another drop at the open and the bulls could be heading for summer pasture. While nobody would expect the market to roll over and die it could be a rocky month ahead. The majority of the initial damage has been done and after Friday we could move sideways until after the Fed meeting. If we rebound from 10250/1975 I would be very cautious about going along for the ride. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** 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 ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 291-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** INDEX TRADER SUMMARY ******************** BEARS & BEAR TRAPS By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – Now I am friendly to bears and other critters and it pays to be friendly to the current bearish correction; read, play puts. However, tomorrow (Friday) or the following trading day (Monday) expect the bulls to raise the roof, if not the market, with the bear holding sway. The market is oversold now on a short-term basis – that's one thing. The other thing worth noting is about bear "traps". A bear trap is a reversal that occurs AFTER a stock or index goes to a new relative low, followed by a fairly immediate rebound. I keep one eye for this possibility, having gone to sleep before sitting on good put profits figuring I was all comfy and cozy. Anyway, some charts are seen below. That's for those who skip this section – ha, I don't do the same thing the same way all the time. It's clear where the prior lows were that were exceeded. Watch for any hourly, then daily closes back above those lows noted at the dashed (level) lines – making for a possible bear trap reversal. What was (prior) support should now "become" resistance – if not, well cash in some puts, don't hole up with em. By the way, or as my e-mail savvy Son says "BTW", as in "BTW Dad I need some more money" – the stochastic "length" setting is 21 – the slow stochastic indicator therefore on an hourly chart measures 21 bars = 21-hours of trading. When that indicator gets this oversold, don't be surprised if there is a rally, even a good one. Also BTW, if you are a die hard bear, grisly or teddy, an hourly close above those prior lows only suggests being alert to what is happening in the next hour and the hour after that – there is still needed a DAILY (the moment of truth) close above these levels to suggest a possible short or longer-term reversal back to the upside – these levels to watch, for penetration, are: 1118 in the S&P 500 (SPX), 546-547 in the S&P 100 (OEX), 10,282-10,287 in the Dow 30 (INDU), 1978-1980 in the Nasdaq Composite (COMP), 1437 in the Nasdaq 100 (NDX) and 35.75 in QQQ. TODAY'S TRADING ACTIVITY – In the too much of a good thing department that I sometimes can't quite figure out - the Commerce Department reported today that the U.S. economy grew at a 4.2% seasonally adjusted annual rate in Q1" was that inflation jumped. Hey, anyone surprised!? Anyone been at the gas pumps lately! The GDP purchases deflator increased at a quarterly rate that represented an annual rate of 3.2%. The so-called "core" rate rose at a 2.3% rate. Now, 3.2 is not raging inflation, but as I keep saying, when investor and trader psychology are running scared and nervous, the glass is half EMPTY! The S&P 500 (SPX) closed at 1113.88, a fall of 8.5 points or 0.8% and the Dow 30 Average closed down 70 at 10,272, but this was after reaching 10,407 – and scaring the aforementioned bearish ones. The Nasdaq Composite (COMP) fell 30.7 points (1.5%) to 1,958.78. Of course, as ALWAYS happens, cause sooner or later given sufficient economic recovery, rates are going to go back up especially with Fed Funds, at what 1% !! – Duh – nevertheless, when the moment of truth arrives, no one seems prepared for this reality. As has been said, those that don't study history are doomed to repeat it. So, the current down swing or correction, that has been going on for a while can be seen as an attempt to price into the indices, that "easy money" is not going to go on forever. Fear takes over from greed for a while? If you want to see fear, greed and loathing, just participate in the frenzied bidding wars for houses in place like Marin County – that's just an area I know about, there are plenty of others that are too hot not to cool down! Semiconductors were among the leading sector hit in the tech wreck slide – this after LSI Logic (LSI) put out sales targets for Q2 that were below expectations. Needless to say, the SOX Semiconductor index got hit, and closed down some 2.6%. Networking stocks, oil services on profit taking, computer box and hardware makes and airlines – remember the pump story and hey, even frequent flyer tickets aren’t free anymore as there are these fuel surcharge fees creeping in. OTHER MARKETS – Bonds also succumbed to inflation fears with the benchmark 10- year T note down 10/32 at 95 23/32 to yield 4.54 percent vs. 4.50 percent on Wednesday – this is the highest yield since early- September. The dollar fell 1.2% - (yea! Opps - I sold an apartment in Spain that will close in Euros) against the euro with the greenback finishing at $1.1984. The dollar was down 0.2 percent against the Yen to 109.82 yen. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: Hey guess, where the S&P stopped today – right on that trendline! Amazing sometimes how that works. 1105-1108 is the key support right now – with 1118 as key near resistance as mentioned above. Given the oversold and the basic bullishness that still out there, I doubt that SPX closes under 1100-1105 absent a very bad event. Put holders, don't let those profits slip away! The Call to Put ratio is getting more bullish but the S&P is not a bullish play based on this indicator alone – by the end of this correction, I anticipate a reading or two at and below the bullish line – which is when equity put activity gets more heavy than it is now. One of those contrary facts of life, is that the herd is wrong. Maybe bulls should avoid packs and bears only lead a solitary existence. S&P 100 Index (OEX) – Daily chart: With the looks of the downtrend channel, the oversold reading coming up and all, downside looks limited to 540, maybe one shot down to 535 – take put profits and run and take a fling in OEX calls if 535 is seen. Nasdaq 100 (NDX) Index – Daily: 1410, maybe a quick dip to 1400, is my target on NDX, with upside potential back up; to 1450 on a rebound. Nasdaq 100 tracking Stock (AMEX:QQQ)– Hourly: Contrary to what I said about a target to 35, then maybe to 34.50 or 34, in the short-term I think that the Q's could rally some first, probably back up to 36.30 or so. I am covering short positions Friday and play the bounce – but then what else does a trader do but trade – especially if I don't buy options looking for a short bounce at this juncture. Good Trading Success! ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-291-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** **************** MARKET SENTIMENT **************** Truth Or Dare? - J. Brown The major indices hit new monthly lows but managed a weak end of day rebound to lessen the sting of Thursday's losses. The markets remain in their trading range but now here at the low end of the range the question remains. Will investors buy the bottom? There are plenty of sectors and stocks that are approaching short-term oversold conditions and we're due for a bounce. The NASDAQ composite is one of them, down four days in a row. It just happened to rebound from the 1950 level outlined as potential support in the wrap on Wednesday. Underpinning this area is the 200-dma about 20 points below it. Weighing on tech stocks was a significant drop in the semiconductor index (SOX). The SOX pierced support at the 450 level intraday but managed a rebound to close (just barely) above it. The SOX, like many of the tech sector indices, have seen four strong days of declines. The NWX networking index, thanks to more weakness from Nortel Networks and Cisco Systems, broke down and closed under key support at its 200-dma and the 250 level. The +4.2% GDP number was less than the 5% growth expected and probably would have eased some fears regarding the proximity of any rate hike. Unfortunately, with the GDP report was the personal consumption expenditure index, a key gauge of inflation, that came out pretty strong. This effectively revived the rate hike specter once again. Noteworthy was the market's internals. They've been very bearish the last couple of days. The advance/decline numbers were pretty dark today with losers outnumbering winners 3-to-1 on the NYSE and 23-to-8 on the NASDAQ. Down volume completely overshadowed up volume 4-to-1 on the NYSE and nearly 6-to-1 on the NASDAQ. Tomorrow brings even more economic data that will steal the focus from corporate earnings as Wall Street frets over next Tuesday's FOMC meeting. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8305 Current : 10272 Moving Averages: (Simple) 10-dma: 10399 50-dma: 10404 200-dma: 9967 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 898 Current : 1113 Moving Averages: (Simple) 10-dma: 1130 50-dma: 1130 200-dma: 1072 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1084 Current : 1431 Moving Averages: (Simple) 10-dma: 1463 50-dma: 1452 200-dma: 1408 ----------------------------------------------------------------- Volatility indices continued their march higher but they remain within their recent trading range. If the range holds true then we could see a bullish reversal in the markets soon. CBOE Market Volatility Index (VIX) = 14.07 +0.30 CBOE Mkt Volatility old VIX (VXO) = 14.98 +0.04 Nasdaq Volatility Index (VXN) = 21.84 +0.01 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.00 797,749 798,591 Equity Only 0.77 664,197 513,577 OEX 1.05 31,395 33,244 QQQ 2.69 48,744 131,405 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 74.7 - 1 Bull Confirmed NASDAQ-100 47.0 - 9 Bear Confirmed Dow Indust. 80.0 - 3 Bear Confirmed S&P 500 71.6 - 3 Bear Confirmed S&P 100 73.0 - 1 Bear 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: 3.59 10-dma: 2.69 21-dma: 1.83 55-dma: 1.49 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 712 830 Decliners 2127 2303 New Highs 48 59 New Lows 94 53 Up Volume 438M 336M Down Vol. 1739M 1983M Total Vol. 2289M 2332M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 04/20/04 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 Commercials still not willing to place in big one-sided bets. The remain net short. Small traders upped their bearish positions by a couple of thousand contracts. Commercials Long Short Net % Of OI 03/30/04 407,987 420,624 (12,673) (1.5%) 04/06/04 409,429 419,471 (10,042) (1.2%) 04/12/04 412,827 419,910 ( 7,083) (0.9%) 04/20/04 409,729 421,456 (11,727) (1.4%) 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 03/30/04 130,112 81,937 48,175 22.7% 04/06/04 130,262 80,174 50,088 23.8% 04/12/04 135,840 89,090 46,750 20.8% 04/20/04 136,699 92,982 43,717 19.0% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Commercials remain heavily net short the e-minis and small traders, who typically do the opposite, are right on track with heavy long positions. Commercials Long Short Net % Of OI 03/30/04 265,492 305,797 (40,305) ( 7.1%) 04/06/04 270,904 328,862 (57,958) ( 9.7%) 04/12/04 261,889 341,163 (79,274) (13.1%) 04/20/04 275,985 355,555 (79,570) (10.1%) 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 03/30/04 123,494 59,550 63,944 35.0% 04/06/04 148,737 46,235 102,502 52.6% 04/12/04 172,473 52,274 120,199 53.5% 04/20/04 186,799 69,137 117,662 46.0% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Very little movement in the NDX futures for commercial traders. The same can be said for small traders. Commercials Long Short Net % of OI 03/30/04 52,749 67,967 (15,218) (12.6%) 04/06/04 54,862 34,762 20,100 22.4% 04/12/04 54,144 34,432 19,712 22.3% 04/20/04 54,852 35,964 18,888 20.8% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 13,386 - 03/16/04 Small Traders Long Short Net % of OI 03/30/04 8,928 16,551 (7,623) (30.0%) 04/06/04 7,971 20,721 (12,750) (44.4%) 04/12/04 8,297 20,746 (12,449) (42.9%) 04/20/04 8,538 19,431 (10,893) (39.0%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Hmm... we're seeing a little bit of money getting shuffled around here. Commercials are slightly more bullish this week. Small traders, as expected, have turned more bearish. Commercials Long Short Net % of OI 03/30/04 23,642 22,180 1,462 3.2% 04/06/04 23,101 22,108 993 2.2% 04/12/04 23,501 22,748 753 1.6% 04/20/04 24,156 22,009 2,147 4.7% 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 03/30/04 7,020 6,711 309 2.3% 04/06/04 7,316 8,085 (769) (5.0%) 04/12/04 6,136 7,450 (1,314) (9.7%) 04/20/04 5,997 9,631 (3,634) (23.3%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. 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The Option Investor Newsletter Thursday 04-29-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: APA, MBG Dropped Puts: None Call Play Updates: BBY, BEC, DGX, MIK, WFMI, New Calls Plays: AU, GDW Put Play Updates: COF New Put Plays: ASD, SLAB **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Apache Corp. - APA - close: 41.67 change: -1.90 stop: 42.00 Now this is simply an example of bad timing! No sooner did we add coverage of APA than the stock spiked up enough to lure us into new positions and then head south. Yesterday's drop wasn't so back, but today's price action was a disaster. The stock responded to the weakness in the price of crude and overcorrected to the downside, smashing the 50-dma ($42.18) in the process of hitting our stop at $42. There's nothing left to do here but clean up the mess. Use any rebound back near the $43 level as an opportunity to exit at a more favorable level. Picked on April 27th at $44.27 Change since picked: -2.60 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.40 mln -- Mandalay Resort Group - MBG - cls: 58.35 chg: -0.95 stop: 58.99 We're still fundamentally bullish on MBG and the stock is still in a steady up trend. Its P&F chart remains in a bullish buy signal. However, the breakdown under round-number support at $60.00 and its 21-dma doesn't look healthy. We were never triggered on this play since MBG never traded above $61.51. However, more aggressive bulls might want to look for a bounce from the simple 50-dma as a potential entry point. Picked on April xx at $ 00.00 <-- see TRIGGER Change since picked: + 0.00 Earnings Date 06/03/04 (unconfirmed) Average Daily Volume: 1.1 million PUTS: ***** None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-291-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Best Buy Co - BBY - close: 54.18 change: -0.46 stop: 51.99 The last couple of days have been pretty rough on the stock market but BBY has weathered it relatively well. Shares consolidated sideways between $54 and $56 until the last couple of hours on Thursday. Fortunately, BBY rebounded back above the $54 level ahead of the closing bell. We're still bullish on the stock and its head-and-shoulders pattern is still in effect but traders looking for new positions might want to wait for BBY to trade back above $55 or $56 before initiating plays. Picked on April 23 at $ 55.05 Change since picked: - 0.87 Earnings Date 03/31/04 (confirmed) Average Daily Volume: 3.6 million --- Beckman Coulter - BEC - cls: 56.07 chg: +0.57 stop: 54.99 The good news is that BEC bounced from support at $55.00 as we expected it too. The bad news is that we're out of time. BEC is due to report earnings on Monday and that means we're going to close this play tomorrow at the closing bell. We do not suggest readers hold over the announcement nor do we suggest new positions even though this is a bounce from support. Picked on April 18 at $ 56.16 Change since picked: - 0.09 Earnings Date 05/03/04 (confirmed) Average Daily Volume: 333 thousand --- Quest Diagnostics - DGX - close: 84.35 change: -0.90 stop: 82.00 Despite a strong looking breakout in DGX last week, broad market weakness has conspired against the stock over the past few days, keeping it from continuing its upward trajectory. To its credit though, DGX has held up fairly well in light of the heavy market- wide selling, consistently finding support near the $84 level. Recall that we were looking for a dip into the $83-84 area to give us an attractive entry into the play. We've gotten the dip, and now we need the rebound in order to justify the entry. The 10-dma ($83.83) is rising to meet support near this week's lows and should help to catalyze the rebound we're expecting. More conservative players may want to wait for a rally back over the $85.50 level before venturing into the play. Maintain stops at $82, which is solidly below the bottom of last week's gap. Picked on April 25th at $86.15 Change since picked: -1.80 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 675 K --- Michaels Stores - MIK - cls: 49.45 chng: -1.41 stop: 48.50 After being stymied near the $52 resistance level, MIK had drifted back to find support near the $51 level and we were just waiting for the next catalyst to get the stock moving again. Well the action over the past two days has certainly gotten the stock moving again, but it certainly isn't what we were hoping for. MIK has succumbed to the selling pressure in the broad market and took a big hit on Thursday, dipping briefly below the 30-dma ($49.23) before a very slight rebound at the end of the day. Today's drop brings the stock right back to testing former resistance as new support and we need to see the $49 level hold as support. This may turn out to be a gift of an entry point, but we really need to see the bounce get underway before taking action. The 50-dma ($48.53) has now inched over our $48.50 stop, so that should provide a bit of additional protection until the uptrend can resume. Picked on April 20th at $51.23 Change since picked: -1.78 Earnings Date 5/26/04 (confirmed) Average Daily Volume = 332 K --- Whole Foods Market - WFMI - cls: 79.98 chng: -0.38 stp: 9.25*new* No matter how you look at it, the past two days have been brutal to bulls in the broad market and there have been very few stocks or sectors that have been spared the punishment. WFMI is one of the few bright spots though and we really can't say why except to speculate that investors are remaining optimistic ahead of next week's earnings report. Since breaking out over $80 last week, the stock has been gravitating to that price magnet. Earnings are set to be released next Wednesday, so we're actually a bit too close for suggesting new entries, except perhaps on a breakout over $81.10 and even that should only be considered by aggressive traders. We're still hoping for another breakout to take the stock up to the $83-84 area and a broad market rebound would certainly get things moving in the right direction. But at the same time, we're attempting to keep squeezing our stop tighter to minimize the amount we'll give back if price does reverse. We've been talking about trailing stops just under the 10-dma, and with that average rising to $79.28 today, we're raising our stop just a bit further to $79.25. Picked on April 15th at $76.01 Change since picked: +3.97 Earnings Date 5/05/04 (confirmed) Average Daily Volume = 691 K ************** NEW CALL PLAYS ************** Anglogold - AU - close: 31.34 change: +0.57 stop: 30.49 Company Description: AngloGold is a major global gold producer with 19 operations, in 8 countries worldwide. The company also has extensive and focused exploration activities in 10 countries. (source: company website) Why We Like It: Gold and gold stocks have been getting crushed lately. Gold has dropped from its early April highs near $430 an ounce to almost $380 intraday on Wednesday. The XAU gold & silver index has plummeted with it to new seven-month lows. Shares of AU have likewise fallen precipitously. So why are we considering a bullish play? We have a couple of reasons but first we must disclose that this is a very high-risk play. We only recommend it for speculators willing to handle the volatility. We are going to use a tight stop loss to try and limit our risk but with every play we list it's never a guarantee. First of all, why go long gold now? Gold has been getting whacked on the strength in the U.S. dollar. However, the U.S. dollar has been struggling with resistance at its 200-dma (we're using the Qcharts symbol DX00Y). Today the dollar dropped strongly after failing at resistance again. This looks like a bearish reversal for the dollar and that lead to a decent intraday rebound for gold. Looking at the gold futures we see a small "hammer" candlestick with the bounce above $380. So we have a potential one-day bearish reversal in the dollar and a potential one-day bullish reversal in gold. Now why AU? Shares of AU are seriously oversold. The stock closed at $42.27 in March and it closed at $30.77 yesterday. That's a 27% drop in a month. AU probably suffered more than some of its peers because the company issued an earnings warning several days ago due to a drop in output. Earnings were out this morning and while the headline number was bad analysts commenting on the report said the results were not as bad as expected. We also like AU for a few technical reasons. Its daily/weekly chart shows the stock bouncing from its long-term trendline stretching back to October 2002. This is bolstered by historical support near $30.00 from last summer. Plus, its P&F chart, as abysmal as it looks, has already reached its bearish price target. That doesn't mean it can't keep dropping but the potential for a turnaround is there. How are we going to play AU? We're going to use a TRIGGER at $32.01. Shares of AU failed several times this morning just under the $32.00 mark. If we use a trigger to catch a breakout we'll be playing the upward momentum from a deeply oversold condition. However, if we are triggered we'll use a tight stop under yesterday's low at $30.49. There is plenty of overhead resistance as the stock stepped its way down but hopefully it can step its way up too. Remember, this is a speculative rebound play. Essentially we're trying to catch the proverbial "falling knife" because it appears to have finally hit the floor. Suggested Options: We're going to suggest the June calls. Our favorites are the June 30's. BUY CALL JUN 30 AU-FF OI= 165 at $2.90 SL=1.50 BUY CALL JUN 35 AU-FG OI= 664 at $0.80 SL= -- Annotated Charts: Picked on April xx at $ 00.00 <-- see TRIGGER Change since picked: + 0.00 Earnings Date 04/29/04 (confirmed) Average Daily Volume: 1.0 million -- Golden West Fin. - GDW - close: 104.99 change: +2.44 stop: 99.75 Company Description: Golden West Financial Corporation is a holding company for its wholly owned, federally chartered savings bank subsidiary, World Savings Bank, FSB (WSB). WSB has a wholly owned subsidiary, World Savings Bank, FSB (WTX), a federally chartered savings bank. The company, through its financial institution subsidiaries, operates 268 savings branches in nine states and 311 loan offices in 38 states, of which 110 loan offices are located in savings branches. The company's primary source of revenue is interest from loans on residential real estate and mortgage-backed securities. Why we like it: The bull run in Financial stocks was more than overdue to take a breather and recent talk of rising interest rates (along with the weakness in the bond market) on a strengthening economy have delivered the first decent correction in many moons. After rallying up to the $116 level in early March, shares of GDW began a controlled slide down to the $110 level, then at the 50-dma. After one failed bounce, the stock broke down in early April and fell right to the $100 mark before finding renewed buying interest. Over the past couple weeks, the stock has been trying to build a new base and today's strong rally looks particularly encouraging in light of the weakness throughout the rest of the market. GDW advanced more than 2% by the close and moved above near-term resistance at $104.50 on strong volume. This play does carry higher risk though, as in trying to catch a bullish play near the bottom of the recent slide, we're confronted by the reality that the move up over the past couple weeks could be creating a bear flag pattern. Additionally, even though the PnF chart is ostensibly bullish with a price target of $139, it is currently showing us a High Pole warning that warns of potential exhaustion by the bulls. That said, this is the logical place to go fishing for a bullish entry point, as the stock looks ready to reclaim some of its recent losses and the rebound is coming from very strong support near $100. We'd really like to see the stock prove itself to us before playing though, so we're going to use an entry trigger at $106, just over the 100-dma ($105.93). Once through that barrier, we ought to see GDW make progress up toward the 50-dma ($109.75) and possibly up to strong resistance at $112-113. Aggressive traders can enter on the initial breakout, while the more conservative approach will be to wait for a subsequent pullback to test support in the $104 area. Our stop will be placed initially at $99.75, just under the intraday low on 4/15. Suggested Options: Shorter Term: The May $105 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the June $110 Call, while the more conservative approach will be to use the June $105 Call. Our preferred option is the June $105 strike, as it is currently at the money and should provide sufficient time for the play to move in our favor. BUY CALL MAY-100 GDW-ET OI= 207 at $5.70 SL=3.75 BUY CALL MAY-105 GDW-EA OI= 661 at $2.40 SL=1.25 BUY CALL JUN-105*GDW-FA OI= 209 at $3.50 SL=1.75 BUY CALL JUN-110 GDW-FB OI= 3 at $1.55 SL=0.75 Annotated Chart of GDW: Picked on April 29th at $104.99 Change since picked: +0.00 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 661 K ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-291-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Capital One - COF - close: 66.07 chg: -0.33 stop: 69.01 *new* So far so good. The failed rally on Tuesday worked out well and COF appears to be moving in a downward channel, albeit a narrow one. The company did announce yesterday that it would be cutting costs mainly through job cuts and attrition but COF management has not decided how large the cuts will be yet. We're encouraged by the weakness in the stock but honestly expected it to drop faster with the major indices so weak. We'd suggest that more aggressive traders leave their stop above $70.00 but we're going to lower ours to $69.01, just above its 100-dma. Readers looking for new entries can still consider failed rallies under $68. Point-and-figure chart readers will note that COF's bearish price target is now $57. Picked on April 26 at $ 67.99 Change since picked: - 1.92 Earnings Date 04/21/04 (confirmed) Average Daily Volume: 2.2 million ************* NEW PUT PLAYS ************* American Standard Co - ASD - cls: 104.80 chg: -1.65 stop: 107.51 Company Description: American Standard is a global manufacturer with market leading positions in three businesses: air conditioning systems and service, sold under the Trane. and American Standard. brands for commercial, institutional and residential buildings; bath and kitchen products, sold under such brands as American Standard. and Ideal Standard.; and vehicle control systems, including electronic braking and air suspension systems, sold under the WABCO. name to the world's leading manufacturers of heavy-duty trucks, buses, SUVs and luxury cars. The company employs approximately 60,000 people and has manufacturing operations in 28 countries. (source: company press release) Why We Like It: ASD is a conglomerate that sells more than toilets but that didn't stop investors from flushing their positions. The stock produced a bearish failed rally pattern under resistance at $110 and its simple 50-dma on Tuesday and the recent market weakness has taken its toll on the stock price. Now shares have broken support at its simple 100-dma and the $105 level on rising volume. The recent consolidation now looks like a somewhat flat bear flag pattern. Even new coverage from Bank of America at a "buy" this morning was not enough to lift the stock very high off its lows of the session. We have been frequently adding ASD to the OptionInvestor.com watch list because shareholders are expected to approve a previously announced 3-for-1 stock split at the annual meeting next Tuesday. Now we feel the technical damage is enough that ASD will probably trade toward the $100 level and potentially aim for its 200-dma near $96 (this may be a bit optimistic). Yet it may not be a coincidence that its P&F chart's freshly minted sell signal points to a $96 price target. We'll start the play with a stop loss at today's high ($107.51). Suggested Options: Short-term traders can play the May options but you'll only have three weeks left before they expire. We suggest the June puts. Our favorite is the June 105 put even though open interest is low. BUY PUT JUN 105 ASD-RA OI= 1 at $3.80 SL=1.90 BUY PUT JUN 100 ASD-RT OI= 1 at $1.75 SL=0.90 Annotated Charts: Picked on April 29 at $104.80 Change since picked: - 0.00 Earnings Date 04/14/04 (confirmed) Average Daily Volume: 495 thousand -- Silicon Labs. - SLAB - close: 50.05 change: -1.24 stop: 54.50 Company Description: Silicon Laboratories designs, manufactures and markets proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. Why we like it: The picture is turning downright gloomy for the Semiconductor stocks, as the SOX index has really broken the 200-dma ($477) and the 50-dma ($489) isn't that far away from giving a very bearish signal by crossing back under the 200-dma. We tried playing the downside in shares of SLAB last month but it didn't work out, as the stock found support at its rising 3-month trendline. Well, that trendline was broken yesterday and the stock distanced itself even further from that broken support in today's session. SLAB is fast approaching its 200-dma ($48.51). Today's drop below $50 put the PnF chart back on a Sell signal, with a tentative price objective of $43. Looking at the daily chart, we can see the potential for support near the $49 level, so we'll use a trigger at $48.40, just under the 200-dma. Once SLAB breaks that support, we can look for a fairly swift drop to the $45 level and with the SOX continuing to lose ground at a rapid pace, we may not have long to wait. The $45 level, if it does serve as support will more than likely only be a resting point before the stock continues its downward journey towards strong support in the $42-43 area. Aggressive traders will want to enter on the initial break of the 200-dma, while those with a more conservative approach can wait for a subsequent failed bounce below $50. If entering on the breakdown, make sure to confirm continued weakness in the SOX as well, which appears destined for the $420 level and then the important $400 support. We'll use a target of $43 for the play, but will keep an open mind about a possible decline to lower levels. Initial stops are set at $54.50, which will be just above the 50-dma ($54.55) by tomorrow. Suggested Options: Aggressive short-term traders will want to use the May 50 Put. Those with a more conservative approach will want to use the June 50 put. Our preferred option is the June 50 strike, as it is currently at the money and should provide ample time for the play to move in our favor. BUY PUT MAY-50 QFJ-QJ OI=2311 at $2.40 SL=1.25 BUY PUT JUN-50*QFJ-RJ OI= 51 at $3.60 SL=1.75 Annotated Chart of SLAB: Picked on April 29th at $50.05 Change since picked: +0.00 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.42 mln ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Thursday 04-29-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: BSX, SLB, S, ZMH Option Spreads: Spicing Up The Zero-Plus Strategy Traders Corner: Planning To Fail ********** WATCH LIST ********** Boston Scientific - BSX - close: 40.78 change: +0.57 WHAT TO WATCH: Not many stocks were green today and we were impressed that BSX managed to hold support at the $40.00 mark and its simple 100-dma for the third session in a row. Its technical oscillators are hinting at a bullish turnaround. We could consider long positions here with a tight sop under today's low at $39.75. Our target would be the top of the recent trading range near $45-46. --- Schlumberger - SLB - close: 58.88 change: -2.12 WHAT TO WATCH: The oil service sector took a big hit today with the OSX index falling 3.35%. Shares of SLB paced the decline with a 3.47% drop of its own and broke through support at the $60.00 mark and its 100-dma. This looks like a bearish entry point for a run toward the $55 level or its 200-dma. Traders might also watch for another failed rally under the $60.00 level. --- Sears Roebuck - S - close: 40.10 change: -0.35 WHAT TO WATCH: Sears has under performed its peers in the retail group for weeks. When the RLX retail index was hitting new all- time highs shares of Sears were inching toward a breakdown. That breakdown occurred yesterday under support of $41.00. Now S is trying to hold on to support at $40.00. Currently its P&F chart points to a $29.00 price target. We would consider new bearish positions on a move below $39.50. --- Zimmer Holdings - ZMH - close: 80.95 change: +0.42 WHAT TO WATCH: ZMH has weathered the recent market weakness very well. Shares have held support at the $80.00 despite the market sell-off. Its technical indicators are mixed with a bearish MACD while short-term oscillators are flattening out. Bulls might want to consider new positions if ZMH can trade back above the $82.00 level. ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-291-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************************ Option Spread Strategies ************************ Spicing Up The Zero-Plus Strategy By Mike Parnos, Investing With Attitude Back in the beginning of February we put on the Zero-Plus strategy. It was originally designed for the conservative trader. We started with a hypothetical account of $100,000. We then purchased $74,000 of Zero-Coupon Bonds that will mature in seven years at a value of $100,000. This, in effect, guaranteed our investment. With the remaining $26,000 we purchased three OEX December 2006 calls, with a strike price of 540, for $24,300. Now, we did this with the assumption that, over time, the market would appreciate and we would be the beneficiaries of this appreciation, all the while having our $100,000 guaranteed. While we are waiting for the market to go up, we’re generating some pocket money every month by selling a far out-of- the-money OEX calls against our 2006 OEX 540 calls. We’re also putting on a far out-of-the-money bull put spread each month to bring in a few more bucks. Everything has been going as smooth as can be. Well, that’s all fine and dandy. And, if the market goes up, we should be just fine. Will the market go up? Probably. How much? Only time will tell. As you all know, I’m a patient kind of guy. But, this way of making money, although safe, is like watching paint dry. I may be able to watch endless reruns of Everybody Loves Raymond, but my patience is wearing a little thin waiting for the market to go up. Getting Conservatively Aggressive We’re tying up $24,000 of our hard earned dollars with those Dec. 2006 OEX 540 calls. We’re generating about $500-$600 per month on the “while we’re waiting” plays, but that’s chicken feed. While that might excite the chickens, maybe we can assert ourselves a little more and bring in a little more. What if we were to change our game plan slightly? Perhaps we should apply the CPTI portfolio strategies to our Zero-Plus position. The $26,000 of cash we have to work with represents at least two 10-contract 10-point iron condors plus one 5-point iron condor – not too unlike our typical CPTI portfolio. The above projection of possible positions is based on using a broker that only holds maintenance on one side of our Iron Condor positions. Let’s also titillate our profit taste buds by adding another nuance to our plan. Let’s compound our return by adding our profits to our trading capital. If, in one month, we make $3,000, we will then have $29,000 to use as maintenance on the next month’s trades. That means we will be able to trade more contracts and, in turn, generate more profits. This is starting to look pretty lucrative. In our monthly CPTI portfolio, we don’t use our profits. We’ve been basically thinking of them as cash flow and just sticking them in our mattress or buying necessities like microwave popcorn and underwear. Can you imagine how much we would have accumulated had we would have rolled those profits every month into subsequent trades? Real Or Pie In The Sky? I better take off my shoes again. It’s time to calculate. Projecting stuff is really fun. As you know, you can manipulate numbers to say almost anything you want. But, in this case, it’s quite realistic. I figured that, in our CPTI portfolio, we’ve averaged a 7% monthly return on our maintenance. I just applied that same 7% to the Zero-Plus $26,000, compounded it monthly, and, in one year, our $26,000 would have turned into $58,558. That’s a profit of $32,558. Taking it a step further, that means we have made – in one year -- 32.5% on our original $100,000 investment (of which our $100,000 is 100% safe). Can we do this year after year until the Zero-Coupon bonds mature? We sure can try. And, remember, every year we’ll be starting with a larger figure for our calculations. Even with occasional draw- downs, that would make it a lot easier. I’m probably starting to sound like Carleton Sheets or Wade Cook, but the calculator doesn’t lie (much). Look at the chart below. Isn’t it pretty? If you like green, you can’t help but love this chart. Is This Strategy For Everyone? Every week I receive emails from CPTI students who are conservatively taking in money and watching their accounts grow. Even with CPTI positions, there is some risk involved. I also receive emails from skeptics – and that’s fine. There is no such thing as an investment without some degree of risk. They’re reluctant to put their hard earned dollars out there. This Zero-Plus strategy is the next best thing to a sure thing. The one thing that is certain is that your initial investment is safe – unless our government collapses. And, regardless of which idiot is running the country, we have enough checks and balances to keep the US afloat. You could always put your money into one of the 10,000+ mutual funds. You could give your money to a financial planner. Hell, you might as well give it to the Salvation Army. But, ask yourself, why are you reading this column? Don’t you want to take control of your investments? Your future? If you consider the Zero-Plus platform and combine it with our CPTI strategies, you can’t lose. Your might lose your mind. You might you’re your car keys. But, if you keep your hands off those Zeroes, there’s a good chance you be able to add quite a few zeroes to your net worth when all is said and done. ____________________________________________________________ MAY CPTI POSITIONS Remember, May is a five-week option cycle. Get comfortable. We're going to exercise some patience and self-discipline. That's the best kind of exercise. It beats the hell out of a Stairmaster. It's more profitable, too - usually. May Position #1 - SPX Iron Condor – 1113.89 We sold 10 SPX May 1080 puts and bought 10 SPX May 1070 puts for a total credit of $1.90 ($1,900). Then we sold 7 SPX May 1175 calls and bought 7 SPX May 1190 calls for a credit of $1.40 ($980). Our total net credit and potential profit is $2,880. Our maximum profit range is 1080 to 1175. Maintenance: $10,500. May Position #2 - RUT Iron Condor – 567.25 We sold 10 RUT May 620 calls and bought 10 RUT May 630 calls for a credit of $1.20 ($1,200). Then we sold 10 RUT May 540 puts and bought 10 RUT May 530 puts for a credit of $1.30 ($1,300). Our total net credit and profit potential is $2,500. Our maximum profit range is 540 to 620. Maintenance: $10,000. May Position #3 - MNX Iron Condor - $143.14 We sold 10 MNX May $152.50 calls and bought 10 MNX May $157.50 calls for a credit of $.80 ($800). Then we sold 10 MNX May $140 puts and bought 10 MNX May $135 puts for a credit: $.95 ($950). Our total net credit and profit potential is $1,750. Our maximum profit range is $140 to $152.50. Maintenance: $5,000. May Position #4 - BBH Iron Condor - $150.31 We sold 10 BBH May $155 calls and bought 10 BBH May $165 calls for a credit of $.70 ($700). Then we sold 10 BBH May $135 puts and bought 10 BBH May $125 puts for a credit of $.70 ($700). Our total net credit and profit potential is $1.40 x 10 contracts = $1,400. Our maximum profit range is $135 to $155. Maintenance: $10,000. ______________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle - Ongoing Long Term -- $35.64 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: Oct. $33 puts and Oct. $34 calls - credit of $1,900. Nov. $34 puts and calls - credit of $1,150. Dec. $34 puts and calls - credit of $1,500. Jan. $34 puts and calls - credit of $850. Feb. $34 calls and $36 puts - credit of $750. Mar. $34 calls and $37 puts - credit of $1,150. Apr. $34 calls and $37 puts - credit of $750. May $34 calls and $37 puts - credit of $800. Total credit: $8,850. 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 – 544.54 In my Feb. 8th column, I outlined a strategy based on an initial investment of $100,000. $74,000 was spent on zero coupon bonds maturing in seven years at a value of $100,000. The principal $100,000 investment is guaranteed. We're trading the remaining $26,000 to generate a "risk free" return on the original investment. Long Term: 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). Bought back 3 OEX March 585 calls for $.10 & sold 3 of March 560 calls for $1.35. A credit of $1.25 x 300 = $375.00. Bought back March 560 calls for $.15, locked in profit of $120 x 3 = $360. Cash position is $3,320 ($1,620 plus the unused $1,700). Our cash position as of April expiration is $2,640 plus unused $1,700 = $4,340. The April 570 OEX call expired worthless. The OEX 515/505 bull put spread also expired worthless. (Isn't this fun?) New May Zero Plus BPS Position We sold 5 OEX May 530 puts and buy 5 contracts of May 520 puts for credit of $1.10 (x 5 contracts = $550). We sold a call against our long 540 call. We sold 5 OEX April 575 calls for $1.40 (x 5 contracts = $700). If both of these plays work out, we can add another $1,250 to our cash total - just a little bonus while we wait for the market to go up. OSX Calendar Spread Plus - $104.10 OSX is the Oil Index. This is a play on the common belief that oil prices will continue to move up over the next month or two. Bought 10 OSX June $115 calls (36 delta) and sold 10 OSX April $115 calls (23 delta) at a cost of $2.15 ($2,150). We also put on an April $100/$90 bull put spread and took in an extra $.70 ($700) to reduce the cost basis to $1.45 ($1,450). We rolled out our April $115 call and took in $1.20 - further reducing our cost basis to $.20. Then, aggressive traders (which we are in this strategy) put on the May $100/$90 bull put spread and took in $.95. So, now we are a "plus" $.75. In the best-case scenario, the OSX will finish just below $110 at May expiration. ______________________________________________________________ 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, first look under "Education" on the OI home page and click on "Traders Corner." For more recent columns, you can look under "Strategies" and click on "Combinations." 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. ************** TRADERS CORNER ************** Planning To Fail by Mark Phillips mphillips@OptionInvestor.com I've always been an overly organized person, going all the way back to childhood. My parents have shared stories of the degree to which I would plan my activities, even those that were "just for fun". Every year, we'd spend a long weekend at the coast, camping near the beach. I liked to build sand castles and on the 4-hour drive to the campground, I would routinely sketch and plan just what this year's castle's design would be. Then I'd spend an entire afternoon with shovel in hand, creating what I'd designed on the drive. Some years, I'd spend a second afternoon, striving for a more perfect implementation. There was no reason for this analytical approach except that is how I approached everything I did, even from an early age. It probably could have been just as much fun to just show up and start moving sand here and there – but the results wouldn't have been nearly as good. I share this story so you have an understanding that I'm predisposed to planning my activities, whether leisure or more serious. This trait has served me well over the years, from helping me to manage to slog through a dual engineering major to landing my first engineering job at NASA, to laying out the designs for some of the complex control systems for which I had responsibility to design, install and operate during my tenure in that role. I've been an avid long-distance runner for most of my life, beginning long before I even entered junior high school. I planned out every aspect of my running, from which 'course' I'd run each day of the week, how I would build up my mileage and then peak for each important race. The results speak for themselves, as I completed my first marathon when I was 15, winning my age group and beating my time goal by nearly 20 minutes. I'm not trying to make the point of what I have accomplished with my life, because I know that doesn't matter one whit to any of you. The point I'm trying to convey is that realistic planning plays an important (I would argue critical) part of success in any venture. This reality applies to trading just as it does to any other aspect of life. Certainly, one can be too focused and organized, planning the joy right out of life -- a perfect example is my story above about the sand castles. But properly applied, planning in any area of life will enhance the results and more than likely shorten the amount of time it takes to move from point A to point B. I can't remember where I first ran across the saying, but it is one I've carried with me for many years and I think it is important for us to all keep it in mind. "If you fail to plan, you're planning to fail." That really lays it out there, doesn't it? So let's turn our focus to trading and talk about planning. I understand there are traders out there that trade for the excitement or "juice", craving the adrenaline rush of winning or beating the market. Me, I couldn't care less about that. I trade to make money -- that's it! I don't care if it is exciting or boring, just so I can look at the equity balance and see it growing month after month, preferably right along the projected trajectory that I've laid out in my plan. If your reward from trading is financial, then your planning should be done with the waypoints and end goal defined in terms of account growth. If it is the excitement of winning spectacular victories against the market that is important to you, then you need to find a way to quantify your results and work towards achieving your goal. The bottom line is that if you're trading without a plan for how to succeed, then I seriously doubt whether you'll be successful as a trader over the long term. That's a harsh statement, I know. But my job isn't to coddle or appease – it is to share what I believe to be the important lessons I've learned in the years that I've been trading. Here's a list of questions that I think are important to consider when deciding how we're going to proceed. What do you want to accomplish with your trading efforts over the next year? Two years? Five years? Is that a realistic goal, starting out from where your account is today and what your current skill level is? If so, then what are the weekly and monthly goals that will get you to that end destination? If not, then what are the deficiencies? Is the account growth curve that you're wishing for too steep? Or can you reach your goals by just adding to your skills and knowledge? Becoming a successful trader is like earning a college degree. We have to pay our tuition (taking courses, and suffering those early educational losses), study (subscribe to online educational sites like Option Investor, read books and study the charts and indicators), work out sample problems (paper trade) and then apply all that we've learned on the final exam (live trading). Human nature is such that we want the quick fix. We don't want to pay the price for success, if we can find a short-cut. The man said there's no such thing as a free lunch. It's true. If success was easy, then we wouldn't appreciate it. Do you scan the site for play candidates and then enter those trades because they were recommended? Or do you take the written plays as the starting point for your own research and decide for yourself whether it is a trade that fits within your own trading plan? If you don't feel you can competently do the research on your own to confirm or refute the points made in a given play writeup, then guess what? You've put the cart before the horse. You're trying to take the final exam (trade live money) before studying and working out the sample problems and learning from the process. Sure, the right way forces us to forgo the desire for instant gratification. But jumping in and getting a few early wins without doing the requisite work and planning is apt to give a false sense of security. What happens next is that we increase trade size and charge ahead, thinking we are good traders, when in reality we've just had a short run of good luck. Don't think it's just you! In my experience, this reality applies to ALL traders at different stages of their development. Some step back, realize they need to be better prepared, re-tool and then move forward with greater humility and success. Others never learn from the early mistakes and continue to beat their head against the wall until they burn through all of their emotional capital and give up dejected and in disgust, or burn through all their actual capital and have to leave the playing field. Nothing would make me happier than to know that everyone reading these words is nodding their head, agreeing with me because these are lessons they've already learned and view this as just a good reminder. Unfortunately, I know that isn't the case. We have two other groups out there. The first one thinks they can do it their own way, without a plan. They're smarter than the market and they're going to go out there and show everyone how smart they are. None of those people have bothered to read this far though, as they very quickly figured out at the top of this article that I didn't have anything important to share about what the market will do tomorrow or where a winning trade might be found. I can't save them from themselves, and I won't waste my effort trying. The third group is largely made up of fairly new traders. They have seen what is possible through the world of option trading, but haven't yet figured out how to make it happen. This is the group I'm trying to reach with this article. I hope I haven't made the process sound too daunting, because it really doesn't need to be. Trading should be approached just like any other business. You wouldn't start a landscaping business without first figuring out all the details and WRITING A BUSINESS PLAN. So why should we dive into trading without a plan? We shouldn't, at least not if our goal is to become consistently profitable over time. So what are some of the things that we ought to consider when writing our plan? How about what instruments to trade, what timeframe we'll be trading over -- intraday, swing trading or position trading? What tools will we use? We need to have live charts -- what timeframe charts will we use, what indicators will we apply and what rules for entry and exit will be applied? What about trade size? I think the most important question that must be answered by our trading plan is one of money/account/position management. Any monkey can tell you where to enter a trade and if your money management is structured properly, you'll make money over time. The smartest technician can tell you where to enter trades, and you'll lose money over time if you don't have a well thought out account management plan. This was a VERY hard concept for me to grasp early in my trading career and I made a lot of expensive mistakes before coming to understand just how important it is. So let me restate it as clearly as I know how. The best trading system in the world will be doomed to failure if it does not incorporate a prudent money management plan. Entering a trade with potential for a $300 gain with a $300 stop loss would be an example of poor risk control. Entering a trade with potential for $1000 gain and a stop loss of $300 is an example of good risk control. Let's say we've set a goal of $1000 per week for our trading business. We find a trade with $1000 upside potential and $300 of risk. Instead of putting on an initial position that is 3% of our account size, we decide to go for the gusto and put on a larger position (15% of account size) because we "know" we're right this time and we can really juice the monthly results. WRONG!!!!! This is a perfect example of what NOT TO DO. On a single trade, we've put 15% of our account at risk, completely abandoning the discipline that got us to this point. We're sacrificing discipline and steady account growth for the excitement of a big win. This is almost always a recipe for disaster. I can't tell you specifically what ought to be in your trading plan, but I think if you've honestly answered each of the questions above and would be comfortable sharing the questions and your answers with your spouse or significant other, then you're well on your way to a long-term successful trading plan. If you really want to know how solid your trading plan is, sit down with one of your trading associates or even someone that is business minded and walk through your trading plan with them. Your goal at this point is that you WANT them to find problems with it. If you can't defend the plan against reasoned arguments, then it is a safe argument that it isn't yet ready for prime time. But if the plan CAN withstand the scrutiny from a 3rd party, it's a good bet you're ready to at least start testing it out, first with paper trades and then with live trades using real money. Speaking from experience, I can say that it will never be complete, as there are always new lessons to be applied and incorporated into the plan. But even if it isn't perfect, having a plan that we adhere to for each of the trades we place will put us that much closer to our goals, both in the short term and the long term. Remember, it isn't a race. It's an endurance event. Our foremost goal is to stay in the game, keeping our account balance on the rise, whether that rise is shallow or steep. Plan to win! Mark ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. 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