The Option Investor Newsletter Sunday 05-09-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Stronger Than Expected Futures Market: See Note Index Trader Wrap: Follow the Money Editor's Plays: IBM Got The Blues? Market Sentiment: Washout Ask the Analyst: ETF Symbol Guide 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 5-07 WE 4-30 WE 4-23 WE 4-16 DOW 10117.34 -108.23 10225.6 -247.27 10472.9 + 20.87 + 9.94 Nasdaq 1917.96 - 2.19 1920.15 -129.62 2049.77 + 54.03 - 57.12 S&P-100 537.35 - 3.53 540.88 - 15.92 556.80 + 1.86 - 1.18 S&P-500 1098.69 - 8.61 1107.30 - 33.30 1140.60 + 6.03 - 4.76 W5000 10686.04 -107.62 10793.7 -356.76 11150.4 + 72.34 - 87.98 SOX 457.01 + 13.52 443.48 - 44.50 487.98 + 7.84 - 31.64 RUT 548.56 - 11.24 559.80 - 30.91 590.71 + 7.34 - 14.51 TRAN 2846.18 - 40.26 2886.44 -115.27 3001.71 + 62.24 + 12.59 ****************************************************************** Stronger Than Expected by Jim Brown April was a strong month for jobs according to the employment report released on Friday. The much stronger than expected numbers led to some serious volatility as traders alternately bought and sold the markets on supposed Fed fears. There is no doubt now that rates are going up soon. The only question is when? Dow Chart - Daily 100/200 Nasdaq Chart - Daily 100/200 SPX Chart - Daly The big news on Friday was the Jobs Report. The U.S. economy created +288,000 jobs in April which was well over the +185K expected. Not only did jobs grow in April but there were upward revisions in both February and March. February was revised from 46K to 83K and March was revised up from 308K to 337K. This was a total of +66K in upward revisions and when added to the April gains of 288K we get a monster jump of +354,000 over the prior numbers. This was the 8th consecutive month of job gains that total 1.113 million jobs. A gain of +300,000 or more was the point many analysts thought would trigger a Fed rate hike either at the June meeting or before. +288K is very close and when you add the revisions it looks to most analysts like a rate hike soon is in the cards. JPM went on record as saying the Fed would hike +25 in June and +25 in August. Merrill duplicated those remarks with only slightly less conviction about the June hike. The Fed funds futures are now calling for a 92% chance of a +25 point hike at the June meeting and successive hikes of +25 points at each of the Aug, Sept and Nov meetings. The Fed target is showing as 2.0% by the end of November. There is already a 76% chance of another +25 point hike in December. There is also a chance that the Fed could hike before the June meeting. In 1994 the first rate hike after a three year layoff was on a Friday after a blowout Jobs report. With the weekend event risk I believe the Fed would wait for Monday if they had plans on doing it now. If it does not happen on Monday then June-30th should be the date. Since the Fed did not hike rates at the recent meeting the majority of analysts feel the Fed is behind the curve and will have to accelerate their pace to catch up just like in 1994. I went back and looked at the 1994 rate hikes and it was a very strong, very fast series that investors are afraid they will repeat. This is a table of the 1994 hikes. - Date - Day - Hike 02/04/94 Fri +0.25 surprise hike 03/22/94 Tue +0.25 FOMC meeting 04/18/94 Mon +0.25 surprise hike 05/17/94 Tue +0.50 FOMC meeting 08/16/94 Tue +0.50 FOMC meeting 11/15/94 Tue +0.75 FOMC meeting 02/01/95 Wed +0.50 FOMC meeting Total +3.00% in 12 months to 6.00% You can see why traders are concerned. Even if this came to pass this does not mean the market is not going higher. We are starting from a much lower level at 1.0% instead of 3.0% and the state of the economy has changed significantly in the last ten years. 1994 was pre Internet and global consumption was significantly less high tech. Here is a chart Jeff put together showing the S&P growth after the 1994 rate hikes. Note that 1994 was flat during the hikes but growth really took off when the hikes stopped even though interest rates were significantly higher. Jeff's SPX Chart - Monthly 1993-2004 There are considerations for the gigantic ramp job and leading the list was the rush to change out computer hardware and software systems prior to Y2K. Add in the Internet revolution and the stock market bubble and you have the extreme highs in 2000. Most of that activity did not start until 1997 leaving the gains in 1995/1996 on their own and on top of a strong Fed funds rate. Economic growth does and will trump rate hikes but that growth has to have a chance to get a strong foothold before the Fed accidentally stunts its growth. I believe the Fed has learned its lesson after the various rate hike debacles under the Greenspan leadership and will continue at a measured pace this time around. Greenspan would love to leave as a legacy a booming economy and a booming market. Both would do wonders to resolve the coming deficit crisis when the baby boomers begin to retire in 2008-2012. Massive corporate profits and large gains in the market create strong cash flow from taxes and strong consumption by retail consumers. I am expounding here because I believe that the market has already priced in the potential rate hikes and there is nothing ahead from the Fed to hold the market back. This is an excuse for selling that is being applied by analysts to compensate for their bullish views not coming true. Get over it! I built my case on Thursday that the market malaise is not rate related. I agree it is a factor but it is not the only factor. Since Wednesday I think the market is factoring in the potential for a Kerry victory as the Bush administration goes down in flames. Revelations from multiple sources show the Iraq prisoner scandal has been known since last year. Numerous relief organizations had filed complaints and charges over the last six months. We are hearing now that there are video tapes of even worse atrocities being committed and may even include prisoner deaths. I will be the first to admit I don't have the facts and all I get is the news from the various major sources. We all know how sensational news makes better copy. I think investors are seeing the same thing and running for cover. Gail Dudak, a noted analyst from one of the big firms, said a couple weeks ago that appearance of a Kerry victory could knock -1000 points off the Dow and do it in a hurry. We know from experience that markets prosper under both democrats and republicans so it is not a party problem. The major problem is the vow to reverse the tax cuts and remove some of the business friendly initiatives that are helping this rebound. Kerry is more eco friendly than Bush and has a strong reluctance to approve defense spending to name a couple. Again, it is not a party thing but an administration change that the markets are dreading. The more the Iraq scandal takes over the headlines the more likely Kerry will win. Another factor continues to be the jump in oil prices. Oil finally traded at $40 on Friday and closed at $39.90 with no indications that there is any relief in sight. This price gain was in spite of a serious ramp in the dollar to highs for the month. Gold also got whacked from a morning high at $391 to close at $379.30. While I talked down the rate hike impact above I am talking about the impact from a Fed hike. The market has already priced in way more in the way of rate increases than the Fed could do in good conscience over the next twelve months. Yields on the ten-year treasury soared on Friday to 4.769% and a TWO YEAR HIGH. Considering we were at the 3.65% level in March this is a +30% jump in little more than a month. This is going to have an impact on the markets because real borrowing costs have already gone up. Any Fed hike will be anticlimactic. Ten-year Yield Chart - Weekly Big problems in the Dow on Friday included GM after saying that inventory levels had risen about +30% over their desired levels. Auto sales are slowing at a time consumers should be buying with their tax refunds. GM fell to a six month low. HD also fell to a six month low on fear higher mortgage rates would slow home repair projects. AA and DD both crashed on falling metals prices. Citigroup and JPM fell to four month lows on fears higher rates would shrink their margins. It was not a good day for the Dow. The Dow lost -124 points and closed only three points off its low of 10114. Support at 10250, 10200 and 10150 failed with barely a hint of slowing. Because we rallied off the prior Friday's lows the Dow only ended down -108 for the week but it was a critical 100 points. Current support is 10100 with disaster support at 10000 which is also the 200dma. The month long downtrend closed at its lowest point and internals were very negative. For all markets the A/D line was 5:1 in favor of decliners and volume was 4:1 in favor of declining volume. Volume was only slightly higher than Wed/Thr but did manage to break 4.0B. The new 52-week highs hit a new 12-month low at only 61 and new 52-week lows also set a new 12-month high at 897. We have gone from double-digit new lows just three weeks ago to nearly 1000 on Friday. There is no joy in Mudville tonight. The Nasdaq was slightly less negative and tried to single handedly keep the markets from falling off the cliff. It was a valiant effort but it did close at the low of the day at 1919 and support from last week. There is no other way to look at it today. The Nasdaq has broken the 200dma at 1939 by a bunch and is on the verge of testing real disaster support at 1900. A break under 1900 would be to a new six month low and very negative for tech bulls. Remember our discussion last Sunday about the difference between the 200 sma/ema? The 200sma is 1939 as I mentioned above and it has broken again. The 200ema is 1915 and just below where the Nasdaq came to rest at the close. A rebound here would be a successful second test. A failure here could be ugly. Helping push us lower is a complete lack of support from overseas markets. Art Cashin said on Friday the emerging markets are turning into submerging markets and he is right. The Nikkei has been down for five straight days and losing nearly -700 points. The rising dollar, rising oil and threats of slowing in China are knocking the profits out of the overseas markets. This global sentiment is not helping our direction. Other challenges remain the slowing consumer for whatever reason and the peaking in earnings for the year. Add all these things together and the market has a lot of weight on its shoulders heading into the summer doldrums. Fund flows were negative last week for the second time since March and fund managers cannot be thrilled about that. Tax day is on the way and money is flowing out to make those payments. This additional drag is worsened by the flood of new IPOs with the heaviest schedule since 2000. $39B in new issues has been sucked out of the existing market over the last 90 days. Trading next week could be frantic. With the markets right at or just above critical support this would typically be the right place for a relief rally. The selling over the last several days was very strong internally and we should see some relief of that pressure on Monday. Last Friday I suggested going long at the open on Monday because the NDX was resting just above 1400 support. Well the plan worked and we did rally at the open and the NDX rose to 1436 before failing. This Friday the NDX has fallen to just over 1400 once again. I am not nearly as optimistic this time around. While I would like to think that closing the at NDX 1400, Nasdaq 1920, Dow 10100 and SPX 1100, all critical support levels, would produce a Monday rebound I can't make that recommendation today. I will be making the call in real time on the Futures Monitor Sunday night but there is too much risk to make it today. The major risk is that we are beginning that -1000 point election dive Gail Dudak predicted. We also have the risk the Fed will hike rates at the open on Monday. It is a slim chance but it does exist. Actually I wish they would as it would clear the table for the next three months and take that implied threat out of the forecast. I think the markets would rally if they did. Russell Chart - Daily Once past Monday morning we should see the real direction appear. Unfortunately based on the Russell as the leading market indicator the direction is still down. We may get a trading rebound when the Russell hits the 200dma at 544 but I am not counting on it. The Russell has broken to a new four month low and that is not a good sign for mutual fund health. The semiconductor sector actually closed up on Friday and was instrumental in holding the Nasdaq up for most of the day. Despite the rebound in the SOX it is still in a down trend as well. There is a lot of potential here with all the major indexes at support but there is just enough cracking of that support to weight that potential to the downside. Even if we do get a trading rally on Monday it may be very brief. There are simply no material events on the horizon to act as catalysts for a sustained move higher. For the next 90-120 days we are in a period of economic, political and geopolitical uncertainty that may not lend itself to broad gains in the market. We are no longer in a range bound market where selling tops and buying dips will work. The game plan for the future has changed to simply sell the rallies. I suggested last week to remain in short mode under 10275/1940 and that advice still stands. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** 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 ******************** Follow the Money By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – The apparently contradictory market preoccupations are: 1.) A rebounding economy WITH (finally) new job creation - bullish - versus 2.) The anticipated Fed interest rate hike because of #1 - bearish. This particular conflicting viewpoint has gone on in every economic recovery in the last 50 years and is not contradictory exactly - rather, this is the market shifting gears so to speak. Eventually the Market always follows the economy and earnings - the money - earnings trump everything, eventually. The Indices all had the minor early week rebound that I was looking for - and, these rallies then reversed and all the indices fell to new lows for the current decline. My sense of how things might unfold was that the recent or first rally would not "work" and that a final bottom would come later on. I can also continue to say the same thing about the S&P and Dow indices - they are not yet registering a fully "oversold" condition. The Nasdaq is getting somewhat oversold however - but not yet on longer-term weekly charts. The Composite might fall under its prior lows in the 1900 area even, if the Russell 2000 Index provides a "bellwether" indication - more on this follows in my comments on the Composite. FRIDAY'S TRADING ACTIVITY – The BIG story was that 288,000 new jobs were created - and unemployment fell to 5.6% as estimated by the Labor Department as released Friday. Both numbers were above expectation. Moreover, March's non farm payroll gains got revised higher from 308,000 to 337,000. The S&P 500 (SPX) was off 1.4% on the day and closed under 1100, at 1,098.69. The Dow 30(INDU)lost 124 points (1.2%) on its close at 10,117. The Nasdaq Composite (COMP) fell some 20 points (1%) to close at 1,918. Given the outlook now for a rate hike, interest sensitive sectors like financials and the home builders took a beating. Also factoring into negative sentiment was crude oil's run above $40 per barrel. Ouch!! - those fill up runs with my high performance German car are getting painful to the pocketbook. Time to look at something more fuel efficient as everyone is buying SUV's still - I always did like to buck the trend. Technology stocks showed some strength with bellwethers Cisco, Dell, and Intel, up on the day, bucking the trend. The SOX Index (Philadelphia Semiconductor index) was up 1 percent. I can't say that the chart looks at all bullish however. OTHER MARKETS - I mentioned already that Crude oil broke through $40 per barrel on Friday, but did not also note that this was a 13-year high. Yipes! I would say that this is also an underlying worry related to the economic recovery. Treasury yields closed Friday at their highest level since last July as the bond market closed off for the seventh straight week after the employment report. The 10-year note closed down a point and 1/4 at 94 1/32 to yield 4.77% versus 4.6% on Thursday. The dollar rose against the euro, to close at $1.1978 and back below 1.20 - the greenback was up 1.4% against the Yen, at 111.30 yen on the New York Forex market close. Gold continues to look weak technically and was off 2.6% - at $378.40 an ounce on the New York Merc. Gold continues to retreat from the 400 area which seems to be a benchmark resistance level - but so was $40 a barrel in Crude Oil! MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: It looks like the S&P 500 could re-test the prior low in the 1087 area, or even get down to about 1080. I would be a buyer of the SPX calls if 1080 was seen, looking for a rebound to maybe 1120 where I see resistance currently. Needless to say, its getting close to getting out of puts. Well, traders are getting so bearish, that it's bullish! Makes perfect sense in the Alice In Wonderland world in the street of dreams. That is to say that when my Call to Put ratio gets down to the area of the green line once or twice, a rebound is usually not far off - typically, coming within 1-5 trading sessions. S&P 100 Index (OEX) – Daily chart: I said last time that "its also quite possible that the prior lows around 532-534 get re-tested...." To add to this, I would note that this is also the area of its 200-day moving average as you can see on the left hand daily chart of the S&P 100 (OEX). 532 is the prior low - 531 is where my lower trading envelope line comes - if OEX gets here don't expect it to go much lower, without some kind of rally. If OEX gets to 531-532, then rebounds, its sets up a potential double bottom, a pretty bullish pattern if it holds as a low. Of course if prices fall under a prior low and don't rebound to back above this low within 1-2 sessions, it's showing a very weak market. I peg resistance now at 550. Dow Industrials (INDU) Daily: I can't get too bearish on the Dow with it at the lower end of its hourly downtrend channel, as can be seen with DJX right hand chart. The very key 200-day moving average intersects in the Industrials at 10,000. A weekly close under this level, would set up potential lower targets to 9800. In the Dow Index (DJX), resistance is at 102.5, then around 103.5 and finally, at the top end of the current downtrend channel in the 104 area. The Dow 30 Index (INDU) had a very weak technical close at the end of this past week and the Dow had been holding up the best. The market is spooked - per usual - by the Fed. It was always an analogy that the Fed gets the party going and then takes away the punchbowl! Nasdaq Composite (COMP) and Russell 2000 Indexes – Daily: The 1900 area is key support in the Nasdaq Composite (COMP) and this index is oversold on the daily charts. Traders should be, will be, on the outlook for signs of support in this area, if reached. Especially so, with the bellwether Semiconductor Index (SOX) having a bit of a rebound on Friday. Resistance is at 1980, then 2000 - I would look at buying Nasdaq related Index puts in this area. Suggesting that 1900 or the prior lows might not hold in the Composite is the action in the bellwether Russell Index (RUT), which took out its prior lows and suggests that another down leg may be underway in Nasdaq. My recent Trader's Corner article on Bellwether indexes and stocks can be found at: http://www.OptionInvestor.com/traderscorner/tc_050404_1.asp Nasdaq 100 (NDX) Index – Daily: 1400 has been my target on the Nasdaq 100 (NDX), thinking that NDX might get a rebound back up to 1450 at key resistance. Now however, I'm beginning to wonder if 1400 will hold - 1368 is the prior low and this may be the next target given the tendency for the indices to re-test prior key lows (or highs). If NDX does get into this area, and holds, its sets up a potential double bottom and would offer a compelling indication to get into calls at that point - that (the pattern) and the fast approaching oversold reading on oscillator type indicators like the RSI - see chart below. Nasdaq 100 tracking Stock (AMEX:QQQ)– Hourly: Buying QQQ under 35 is what I suggested. Still do, but how much under? The 34.50 area, at the lower end of the hourly downtrend channel looks a possible target and potential support early in the coming week. If the Q's take out that prior low at 34.80, the stock would likely dip a bit further. Then there is the prior low at 34 and the question of whether this low will get re-tested. 34 is a definite technical target or lower target possibility. I have some degree of confidence in looking to buy the stock in the 34.5-34 area, if reached - using a sell stop at 33.7 to exit. In that case my objective is back up to 35.50-35.70. The ability to hold above 35.70 would be bullish and suggest that prices could regain 36. Good Trading Success! ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ************** Editor's Plays ************** IBM Got The Blues? I am afraid our sell the rallies program of late is about to turn into simply sell anything. I am not naove enough to think it is that simple but there are some dangers ahead. There were so many targets this weekend I had trouble picking the one I liked best. Lots of cheap stocks have already gotten cheaper so I focused on those big caps at risk. IBM ended up getting the brunt of the joke today with a two month decline to support at $88. I know IBM's earnings were good last quarter but there is trouble brewing. A very large part of their earnings came from favorable currency translation from the weak dollar. With the dollar soaring those currency translation profits are going to evaporate. Earnings warning season is just ahead and late May early June could be a minefield of multinational companies confessing earnings shortfalls due to the stronger dollar. It does not make any difference if IBM warns or not. They will be painted by the same brush once the scenario starts to play out. Should they break support at $88 the next real support level is $80. They are already under the 200dma at 90 and have a solid downtrend in place. We also have a rough Head & Shoulders in place. I am looking at the June-$85 Put IBM-RQ at $1.15 and targeting $2.25 for an exit. This is a simple play with a cheap option and no stop. Use your own risk profile to exit if the play goes against us. If we do open with a rebound on Monday then wait to enter until the market begins to roll over again. No rush. IBM Chart - Daily ********************** QQQ/DJX Calls Update The QQQ target was $36.00 and we hit $35.75 on Tuesday. That is close enough to call it a winner. The $35 call hit $1.20 and I had estimated $1.25 at $36. The DJX target was hit at 10325 and closed the play. The $103 call at $.95 hit $1.55. ********************** EBAY Update This makes two Fridays in a row that EBAY has closed under $80 after rallying during the week. This week we have a lower high and more substantial Nasdaq weakness. The target remains $76. http://members.OptionInvestor.com/editorplays/edply_042504_1.asp ********************** Taser Update TASR continues to die and we are just waiting for the options to expire for a full profit around $20. As I mentioned last week the play is so deep in the money there is no time premium and can be closed now for a full profit less any spread. I am calling this one closed. http://members.OptionInvestor.com/editorplays/edply_041804_1.asp http://members.OptionInvestor.com/editorplays/edply_042504_1.asp *********************** News Corp Update $36.62 Still waiting for a chance to fill the last one third of the position. Waiting until entire position is filled to sell calls against our current leaps. It would help to have a market bounce to actually produce some call premium to sell. I am very encouraged by the staying power of NWS. It was actually positive again on Friday after posting higher than expected earnings. You should be long (4) 2006 Leap Calls at an average price of $4.10 and waiting for the final (2) to be filled. Still unfilled: Buy (2) Jan-2006 $40 Calls WLN-AH with a touch of 200dma (currently $35.25) http://members.OptionInvestor.com/editorplays/edply_041104_1.asp http://members.OptionInvestor.com/editorplays/edply_041804_1.asp **************** MARKET SENTIMENT **************** Washout Jonathan Levinson Sentiment and breadth were wildly negative on Friday as bullish employment data buoyed the US Dollar and sparked another selloff in bonds. Despite the upward march in yields for two months, the implications of higher interest rates were big news in the markets on Friday. Volatility increased along with the put to call ratio, and up volume spiked against down volume almost 9:1 on the NYSE, though less than 2:1 on the Nasdaq. Total NYSE volume actually exceeded Nasdaq volume, and it's apparent that the real damage was in the NYSE while tech shares were spared. Next week is loaded with economic reports, most notably the Producers Price Index on Thursday and Consumers Price Index, along with Industrial Production and Capacity Utilization on Friday. Inflation and interest rates will again be the theme, and given the oversold conditions of both stocks and bonds, the stage is set for either a strong bounce or more serious technical damage. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8416 Current : 10117 Moving Averages: (Simple) 10-dma: 10306 50-dma: 10362 200-dma: 10001 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 912 Current : 1098 Moving Averages: (Simple) 10-dma: 1118 50-dma: 1127 200-dma: 1076 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1103 Current : 1406 Moving Averages: (Simple) 10-dma: 1443 50-dma: 1445 200-dma: 1413 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 18.13 +1.08 CBOE Mkt Volatility old VIX (VXO) = 19.07 +1.42 Nasdaq Volatility Index (VXN) = 25.50 +0.32 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.01 684,716 693,425 Equity Only 0.81 529,005 418,012 OEX 0.89 33,845 30,276 QQQ 1.03 46,943 48,212 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 69.7 - 2 Bear Confirmed NASDAQ-100 40.0 + 0 Bear Confirmed Dow Indust. 76.6 - 3 Bear Confirmed S&P 500 65.6 - 2 Bear Confirmed S&P 100 67.0 - 3 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: 0.83 10-dma: 1.29 21-dma: 1.12 55-dma: 1.15 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 239 801 Decliners 2691 2284 New Highs 28 37 New Lows 419 81 Up Volume 219M 566M Down Vol. 1706M 1028M Total Vol. 1944M 1606M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/04/04 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 reduced their longs and increased shorts slightly, while small traders added to longs and covered shorts. Commercials Long Short Net % Of OI 04/12/04 412,827 419,910 ( 7,083) (0.9%) 04/20/04 409,729 421,456 (11,727) (1.4%) 04/27/04 406,927 416,244 ( 9,317) (1.1%) 05/04/04 397,964 417,175 (19,211) (2.4%) 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 04/12/04 135,840 89,090 46,750 20.8% 04/20/04 136,699 92,982 43,717 19.0% 04/27/04 133,775 90,535 43,240 19.3% 05/04/04 137,112 80,201 56,911 21.6% 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 added to longs and maintained their shorts, while small traders significantly reduced their long positions and added to shorts. Commercials Long Short Net % Of OI 04/12/04 261,889 341,163 (79,274) (13.1%) 04/20/04 275,985 355,555 (79,570) (10.1%) 04/27/04 291,365 370,549 (79,184) (12.0%) 05/04/04 316,840 370,781 (53,941) ( 7.8%) 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 04/12/04 172,473 52,274 120,199 53.5% 04/20/04 186,799 69,137 117,662 46.0% 04/27/04 175,788 69,613 106,175 43.3% 05/04/04 119,308 74,407 44,901 23.2% 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 increased their long positions and short positions, but the net addition to longs was sufficient to set a new high bullish reading of the year for the second week in a row. Small Traders added slightly to longs and more heavily to shorts, setting a new most bearish reading of the year - Commercials Long Short Net % of OI 04/12/04 54,144 34,432 19,712 22.3% 04/20/04 54,852 35,964 18,888 20.8% 04/27/04 54,196 33,948 20,248 23.0% 05/04/04 56,931 35,209 21,722 23.6% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 21,722 - 05/04/04 Small Traders Long Short Net % of OI 04/12/04 8,297 20,746 (12,449) (42.9%) 04/20/04 8,538 19,431 (10,893) (39.0%) 04/27/04 9,008 20,347 (11,339) (38.6%) 05/04/04 10,247 24,764 (14,517) (41.5%) Most bearish reading of the year: (14,517) - 05/04/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders added slightly to longs and maintained their short positions, while small traders added slightly to longs and covered shorts. Commercials Long Short Net % of OI 04/12/04 23,501 22,748 753 1.6% 04/20/04 24,156 22,009 2,147 4.7% 04/27/04 23,676 22,009 1,667 3.6% 05/04/04 24,296 22,181 2,115 4.6% 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 04/12/04 6,136 7,450 (1,314) (9.7%) 04/20/04 5,997 9,631 (3,634) (23.3%) 04/27/04 5,998 8,868 (2,870) (19.3%) 05/04/04 6,262 8,155 (1,893) ( 9.2%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** ETF Symbol Guide Each week I get a lot of questions for ETF ticker symbols, or questions as to where a trader/investor can find a security that represents a particular sector or index. I usually end up at prior Ask the Analyst columns from 10/12/03 "Asian Markets," or an 08/03/2003 article titled "China Depository Receipts for Hot and Sour Trading" or the 06/15/03 column titled "Sector/Index Trading with HOLDRs and iShares, all which have web links to various information recourses. I've got more ticker symbols in my head than I do brain cells anymore, so I thought I'd put together a QCharts list of ticker symbols for a full list of various ETFs as a quick reference guide. It's a loooooong one, so I've had to divide the list into two parts, and have sorted the list by the security name. ETF (Exchange Traded Funds) - Sorted by Name (Part I) Whether you looking for security that represents Consumer Discretionary (AMEX:XLY) $30.46 sector, or want to trade Mid Cap Value (AMEX:IWS) $92.19 with options or the underlying security itself, there's plenty of ETFs that give the trader/investor exposure (long/short or call/put). ETF (Exchange Traded Funds) - Sorted by Name (Part II) I couldn't for the life of me remember what some of the Small Cap ETF symbols were during today's session, but I've highlighted some of the various "small cap" ETF's that may offer traders/investors a more affordable security or option than the Russell 2000 Index ($RUT.X). The Streettrks Small Cap do not trade with option. If you're looking for brief descriptions of the various ETF's and what each ETF has been designed to represent, I like to use Yahoo! finance http://finance.yahoo.com Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- AYE Allegheny Energy, Inc.Mon, May 10 Before the Bell 0.08 ANPI Angiotech Pharm Mon, May 10 After the Bell -0.03 BAY Bayer Mon, May 10 Before the Bell N/A CVC Cablevision Sys Corp. Mon, May 10 Before the Bell -0.37 CHTR Charter Comm Mon, May 10 After the Bell -0.32 FOSL Fossil, Inc. Mon, May 10 Before the Bell 0.20 KGC Kinross Gold Mon, May 10 After the Bell 0.04 L Liberty Media Grp Mon, May 10 -----N/A----- 0.03 NHY Norsk Hydro Mon, May 10 -----N/A----- N/A PSUN Pac Sunwear of Ca, IncMon, May 10 After the Bell 0.16 PRA ProAssurance Corp Mon, May 10 Before the Bell 0.48 KPN Royal Kpn N.V. Mon, May 10 -----N/A----- N/A SPP Sappi Limited Mon, May 10 Before the Bell 0.06 SRV Service Corp Intl Mon, May 10 Before the Bell 0.15 SBL Symbol Tech Inc. Mon, May 10 After the Bell 0.08 TEO Telecom Argentina Mon, May 10 After the Bell N/A UCOMA UnitedGlobalCom, Inc. Mon, May 10 -----N/A----- -0.14 WR Westar Energy, Inc. Mon, May 10 Before the Bell 0.39 ------------------------- TUESDAY ------------------------------ ANF Abercrombie & Fitch CoTue, May 11 After the Bell 0.30 AGO Assured Guaranty Tue, May 11 Before the Bell N/A ATO Atmos Energy Corp Tue, May 11 After the Bell 1.11 BRG BG Grp Tue, May 11 Before the Bell 0.47 CHD Church & Dwight Co. Tue, May 11 -----N/A----- 0.56 CSCO Cisco Systems Tue, May 11 After the Bell 0.18 TEU CP Ships Tue, May 11 Before the Bell 0.08 E ENI SpA Tue, May 11 During the Market 2.46 FIA Fiat S.p.A. Tue, May 11 -----N/A----- N/A MIM MI DEVS INC Tue, May 11 -----N/A----- N/A MYL Mylan Laboratories Tue, May 11 Before the Bell 0.27 OSIP OSI Pharmaceuticals. Tue, May 11 After the Bell -1.03 IMI SanPaolo IMI SpA Tue, May 11 -----N/A----- N/A SCMR Sycamore Networks Tue, May 11 After the Bell -0.04 MAY The May Dept Stores CoTue, May 11 -----N/A----- 0.28 WTW Weight Watchers Intl Tue, May 11 After the Bell 0.47 ------------------------ WEDNESDAY ----------------------------- ACXM Acxiom Wed, May 12 After the Bell 0.17 AEG AEGON N.V. Wed, May 12 Before the Bell N/A ABV AmBev - Co Wed, May 12 Before the Bell 0.40 ANN AnnTaylor Stores Wed, May 12 After the Bell 0.56 RMK Aramark Corp Wed, May 12 Before the Bell 0.23 AIZ Assurant, Inc. Wed, May 12 Before the Bell 0.57 CIB Bancolombia SA Wed, May 12 After the Bell N/A BNG Benetton Grp Wed, May 12 -----N/A----- N/A BSY British Sky BrdCst GrpWed, May 12 Before the Bell N/A CPWR Compuware Corp Wed, May 12 After the Bell 0.09 EN Enel S.p.A. Wed, May 12 -----N/A----- N/A FD Federated Dept Stores Wed, May 12 -----N/A----- 0.48 GALN Galen Holdings PLC Wed, May 12 Before the Bell 0.73 LQU Quilmes Industrial Wed, May 12 After the Bell 0.40 REP Repsol YPF Wed, May 12 Before the Bell 0.49 SCM Swisscom AG Wed, May 12 Before the Bell N/A UTI Unvrsl Tech Institute Wed, May 12 After the Bell 0.24 DIS Walt Disney Wed, May 12 -----N/A----- 0.21 ------------------------- THUSDAY ----------------------------- ATVI Activision Thu, May 6 After the Bell 0.01 ALKS Alkermes, Inc. Thu, May 13 -----N/A----- -0.15 AEOS Am Eagle Outfitters Thu, May 13 Before the Bell 0.28 ADI Analog Devices Inc. Thu, May 13 After the Bell 0.35 IRE Bank of Ireland Thu, May 13 Before the Bell N/A BEAS BEA Systems Thu, May 13 After the Bell 0.08 BOX BOC Grp PLC Thu, May 13 Before the Bell N/A DELL Dell, Inc. Thu, May 13 -----N/A----- 0.28 DT Deutsche Telekom Thu, May 13 Before the Bell N/A EON E.ON AG Thu, May 13 Before the Bell 2.60 ELN Elan Corp, PLC Thu, May 13 Before the Bell -0.27 JHX James Hardie Inds N.V.Thu, May 13 -----N/A----- N/A KSS Kohl's Thu, May 13 After the Bell 0.33 PNRA Panera Bread Thu, May 13 -----N/A----- 0.31 PBY Pep Boys Thu, May 13 Before the Bell 0.24 RYG Royal Grp Tech Lmtd Thu, May 13 Before the Bell N/A TGT Target Corp Thu, May 13 Before the Bell 0.47 TIF Tiffany & Co. Thu, May 13 Before the Bell 0.27 UBB Unibanco Thu, May 13 -----N/A----- 0.71 URBN Urban Outfitters Thu, May 13 During the Market 0.34 WMT Wal-Mart Stores Inc. Thu, May 13 -----N/A----- 0.49 ------------------------- FRIDAY ------------------------------- ERJ Embraer Fri, May 14 After the Bell 0.22 KUB Kubota Limited Fri, May 14 -----N/A----- N/A NTT Nippon Tlgrph Tlphn Fri, May 14 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable FARM Farmer Bros. Co 10:1 May 10th May 11th YHOO Yahoo! Inc 2:1 May 11th May 12th DNA Genentech Inc 2:1 May 12th May 13th IKNX IKONICS Corp 3:2 May 13th May 14th NSM Natl Semiconductor Corp 2:1 May 13th May 14th SYK Stryker Corp 2:1 May 14th May 17th TOUS Tech Olympic USA, Inc 3:2 May 14th May 17th BCR C.R.Bard 2:1 May 14th May 17th PBCT Peoples Bank 3:2 May 15th May 17th BWA BorgWarner Inc 2:1 May 17th May 18th TK Teekay Shipping Corp 2:1 May 17th May 18th DHR Danaher Corp 2:1 May 20th May 21st ODFL Old Dom Freight Line, Inc 3:2 May 20th May 21st CCNE CNB Financial Corp 5:2 May 21st May 24th FBTC First BancTrust Corp 2:1 May 21st May 24th ASBC Associated Banc-Corp 3:2 May 21st May 24th SONC Sonic Corp 3:2 May 21st May 24th -------------------------- Economic Reports This Week -------------------------- Earnings announcements continue to dwindle, with a number of big retailers and computer-hardware giant DELL due to report this week. Traders should focus on the flood of economic reports set for next week. The trade balance and treasury budget are due to report on Wednesday, while retail sales/ex-auto is due on Thursday. Capacity utilization figures, business inventories, and the Michigan sentiment-prel. round out the weeks economic calendar. ============================================================== -For- ---------------- Monday, 05/10/04 ---------------- None ----------------- Tuesday, 05/11/04 ----------------- None ------------------- Wednesday, 05/12/04 ------------------- Trade Balance (BB) Mar Forecast: -$42.6B Previous: -$42.1B Export Prices ex-ag. (BB) Apr Forecast: N/A Previous: 0.6% Import Prices ex-oil (BB) Apr Forecast: N/A Previous: 0.2% Treasury Budget (DM) Apr Forecast: -$46.8B Previous: -$51.1B ------------------ Thursday, 05/13/04 ------------------ Initial Claims (BB) 05/08 Forecast: N/A Previous: 315K PPI (BB) Apr Forecast: 0.3% Previous: 0.5% Core PPI (BB) Apr Forecast: 0.2% Previous: 0.2% Retail Sales (BB) Apr Forecast: 0.1% Previous: 1.8% Retail Sales ex-auto (BB) Apr Forecast: -0.2% Previous: 1.7% ---------------- Friday, 05/14/04 ---------------- Business Inventories (BB) Mar Forecast: 0.4% Previous: 0.7% CPI (BB) Apr Forecast: 0.3% Previous: 0.5% Core CPI (BB) Apr Forecast: 0.2% Previous: 0.4% Industrial Production (BB) Apr Forecast: 0.5% Previous: -0.2% Capacity Utilization (BB) Apr Forecast: 76.7% Previous: 76.5% Mich Sentiment-Prel. (BB) May Forecast: 96.5 Previous: 94.2 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** 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 05-09-2004 Sunday 2 of 5 In Section Two: Watch List: Big Declines in Small Caps Dropped Calls: AU, BBY, DGX, GDW Dropped Puts: SLAB ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** Big Declines in Small Caps _________________________________________________________________ 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. _________________________________________________________________ Western Gas Res - WGR - close: 55.55 change: +0.55 WHAT TO WATCH: A P&F upside target of $62.00 advises us to look for a bullish play in this stock. In addition, the daily chart depicts WGR stair-stepping nicely up the chart. It's consolidating nicely now, broadening out to form a firm base before it breaks out and climbs again. However, we've seen several of these consolidating stocks break unexpectedly to the downside lately, so those adding WGR to their personal watch lists need exits in mind before entering the play. Fortunately, the consolidation pattern provides us easy entry and exit levels. Use a trigger over $57.00 and set a stop at $53.50. Those willing to take a bit more risk might set that stop a few cents under the 30-dma, now at $53.23. Follow the stock higher with stops. If triggered, some participants might elect to exit just ahead of a test of round-number resistance near $60.00. Average daily volume is only 282,000, so be sure you understand the kind of volatility that attends such a low-ADV stock before considering the play. Earnings were May 6. Chart= --- Autodesk, Inc. - ADSK - close: 35.79 change: +1.73 WHAT TO WATCH: ADSK, a company that provides computer-aided design (CAD) to architects, reports earnings May 18, so this play doesn't warrant a listing on our play listing. Those who like aggressive and risky plays might take a look at this stock, however, appearing to be breaking out of its recent consolidation pattern. Friday's trade left a long upper shadow, normally a troublesome sign in a potential bullish play, but the fact that it held up as well as it did during Friday's market weakness might be encouraging. ADSK had threatened to form a H&S formation, but then shot up above the head level in a rejection of that formation. Under such conditions, bulls often are relieved to see their bearish fears erased, resulting in that kind of strong drive. Entries could be found on intraday pullbacks to and bounces from $35.00, but Friday's long upper shadow warns those considering such an entry to check intraday volume levels before entering. Pullbacks should draw lower volume than the bounces. Be aware that the stock looks extended on the weekly chart, so that any earnings disappointment is likely to see the stock punished harshly. Be sure to exit before earnings. Chart= --- Johnson Controls Inc. - JCI - close: 52.62 change: -2.17 WHAT TO WATCH: This auto parts manufacturer reported earnings April 15 and zigzagged its way back to the top of its descending regression channel afterwards. After touching the top of that channel, it's been in free-fall, breaking through the bottom channel support and the 200-dma on Friday. Friday's drop proved too steep to consider breakdown entries now. Instead, watch for bounce-and-rollover entries below that 200-dma. Set a profit target just above the P&F downside target of $51.00. Be aware of some historical support on the weekly chart near $52.20, planning exit strategies in advance if JCI should bounce from that level. Chart= --- S P X Corp - SPW - close: 42.96 change: -0.48 WHAT TO WATCH: After reporting earnings in April, this manufacturer of products used in the transformer and power conversion industries headed lower. SPW sports a big partially formed H&S on its weekly chart, and that's what we're watching. Recent historical support has been in the $41.50 level, and some might trigger a play on a move below that recent historical support, but others might wait until a neckline test. While it's sometimes difficult to pinpoint the exact neckline level when a pattern forms over such a long period of time, as the slightest miscalculation in the angle of the line can throw off the neckline level considerably by the time the right-shoulder breaks, the slightly descending neckline of that formation currently appears to be at about $40.80-41.00. What's been happening with many of these formations lately is that candles cling to the neckline for a day or two and then suddenly gap lower, so start making preparations for entry when you see the neckline being tested. A trade at $42.00 creates a new P&F sell signal. Support is layered in close intervals as SPW heads down, perhaps increasing the risk in this play, but if that H&S is confirmed, its downside target would send it back to test the 2003 low. We wouldn't advise waiting for that target to be hit, but instead would advise aiming for a downside target in the mid-thirties. Chart= ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Anglogold - AU - close: 30.78 change: 1.27 stop: 31.84 Weakness in gold and the gold miners hit AU on Friday, sending it below our stop by 10:15 in the morning. It continued lower all day, demonstrating the need to adhere to those stops. Those who did suffered a smaller loss as compared to those who stuck out the day to the bitter end, waiting for a bounce that didn't come. AU seemed more determined to roll down toward the $27 downside target of the confirmed H&S on its daily chart than to rise in a countertrend bounce. There's still a chance that it could form an equal or slightly higher low, bouncing again, but we won't be in the play to watch. Gold doesn't always glitter. Picked on April 30 at $ 32.25 Change since picked: - 1.47 Earnings Date 04/29/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Best Buy Co - BBY - close: 52.10 change: -1.30 stop: 51.99 The rate-hike fears that hurt homebuilders harmed the retailers that sell furnishings or electronics to equip those new or refinanced homes. HD, LOW, and S all dove. So did BBY. We had hoped that the stock was consolidating near the neckline of its reverse H&S. Instead it turned lower, perhaps to form a second right shoulder or reject the formation entirely. It ended Friday sitting squarely on the 200-dma and only cents above our stop. That offers slight hope that BBY will find support and rise, but that hope is too dim for our liking. RSI and stochastics hint at more downside to go, with BBY already demonstrating that it's capable of falling along with those oscillators. We're closing the play. Intraday charts, however, show BBY oversold on a short-term basis, so it's possible that players could use intraday bounces up to $53-53.20 and $53.60-53.90 to exit the play. Don't allow the hope of such an intraday bounce to keep you in the play if BBY heads down instead, however. Picked on April 23 at $ 55.05 Change since picked: - 2.95 Earnings Date 03/31/04 (confirmed) Average Daily Volume: 3.6 million Chart = --- Quest Diagnostics - DGX - close: 84.15 change: -1.85 stop: 83.75 It seems every time our DGX play builds up a head of steam and looks ready to blast higher, somebody opens the pressure relief valve and lets all that pressure out in an unproductive manner. Midweek, the stock had risen to new recent highs and looked ready to break out with conviction. That bullish setup vaporized on Friday, with the stock plunging right from the opening bell and just barely holding above the $84 level. While it is certainly possible that we'll get another strong bounce from support, that doesn't look like the most likely outcome, especially with the daily oscillators turning south. Rather than take the risk, we're going to drop the play this weekend and suggest exiting on Monday. Picked on April 25th at $86.15 Change since picked: -2.00 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 581 K Chart = --- Golden West Fin. - GDW - close: 101.22 change: -3.14 stop: 101.75 After a solid week of failing to push through the $106 level, our GDW play tipped over on Thursday, causing us to comment on the potential that the stock was building a bear flag pattern. Sure enough, that pattern was confirmed in a big way on Friday as the stock plunged through the supporting trendline near $103 and continued down below $101, triggering our $101.75 stop in the process. This play never really worked to our advantage, just barely moving up far enough to satisfy our entry trigger before rolling over. Clearly, any open positions should have been closed on Friday's disheartening plunge, as a test of the 200-dma seems imminent. Picked on April 29th at $104.99 Change since picked: -3.77 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 665 K Chart = PUTS ^^^^ Silicon Labs. - SLAB - close: 48.81 change: +0.08 stop: 50.40 There's no two ways about it, our SLAB play ended on a very frustrating note. After the stock fell below the $46 level last week, we cautiously edged our stop down to just above the $50 level, leaving plenty of room for an oversold bounce -- or so we thought. The rebound that began in earnest on Tuesday made one more thrust higher on Friday, just enough to trigger our stop before tipping over and ending the day near unchanged. But by then the damage was done, leaving us with no choice but to drop the play this weekend. We should note that the stock appears to be finding intraday support near what had been prior resistance earlier in the week, so it may be for the best that we're being forced to drop the play this weekend. Open plays should have been exited on that early thrust above the $50 level, but for those traders that may have ignored that stop, a drop early next week near the $48 level should be used as a more favorable exit point. Picked on April 29th at $50.03 Change since picked: -1.22 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.29 mln Chart = *********** DEFINITIONS *********** ! Please note changes to the Option Chains for new call and put plays. We are no longer listing a "SL" or Suggested Stop Loss on individual options. Most brokers offer the ability to list a stop loss for your option on the underlying stock. All of OptionInvestor.com's directional call or put plays list a suggested stop loss for the stock itself and if the stock trades at or below that stop on an intraday basis we will close any hypothetical play at that time. OI = Open Interest - the number of open contracts outstanding. Last Trade @ = Indicates where the option traded last. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. 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The Option Investor Newsletter Sunday 05-09-2004 Sunday 3 of 5 In Section Three: Current Calls: OMC New Calls: ADP, JNJ Current Put Plays: AMZN, BZH, LTR, WHR, MSTR New Puts: GM ! Please note changes to the Option Chains for new call and put plays. We are no longer listing a "SL" or Suggested Stop Loss on individual options. Most brokers offer the ability to list a stop loss for your option on the underlying stock. All of OptionInvestor.com's directional call or put plays list a suggested stop loss for the stock itself and if the stock trades at or below that stop on an intraday basis we will close any hypothetical play at that time. ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ****************** CURRENT CALL PLAYS ****************** Omnicom Group - OMC - close: 80.90 change: -0.84 stop: 79.25 Company Description: Omnicom Group is a marketing and corporate communications company. The company has grown its strategic holdings to over 1500 subsidiary agencies operating in more than 100 countries. OMC's wholly and partially owned businesses provide communications services to clients on a global, pan-regional and national basis. The company's agencies provide an extensive range of marketing and corporate communications services, including advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, business-to-business advertising, employee communications and environmental design. OMC also provides field marketing, healthcare communications, marketing research, promotional marketing and sports and event marketing. Why we like it: While it wasn't what we wanted to see, we'll count ourselves lucky that OMC tipped over and dropped in the latter half of the trading week without hitting our $84 entry trigger. It's no surprise that the stock felt some significant selling pressure over the past couple days, as the overall market has been acting poorly as fears of rising interest rates increase. OMC actually didn't fare too badly, especially during Friday's rout of the bulls, with the stock only falling back to support at the converged 10-dma ($80.78) and 20-dma ($80.74). Should investors return in a better mood on Monday, we could see another assault on resistance near $83.50, setting the stage for an actual move through $84 to satisfy our entry trigger. Should the stock continue to weaken from here, we'll abide by our $79.25 stop and drop the play. For now, we remain comfortably on the sidelines and will remain there until (hopefully) the stock breaks out over the $84 level, satisfying our entry trigger. Suggested Options: Shorter Term: The May $80 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the June $85 Call, while the more conservative approach will be to use the June $80 Call. Our preferred option is the June $80 strike, as it is currently in the money and should provide sufficient time for the play to move in our favor. ! Alert - May options expire in 2 weeks! BUY CALL MAY-80 OMC-EP OI=1063 last traded @ $2.10 BUY CALL JUN-80*OMC-FP OI= 162 last traded @ $3.00 BUY CALL JUN-85 OMC-FQ OI= 230 last traded @ $0.95 Annotated Chart of OMC: Picked on May 4th at $82.78 Change since picked: -1.88 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 1.21 mln ************** NEW CALL PLAYS ************** Auto. Data Proc. - ADP - close: 46.03 change: +0.78 stop: 43.25 Company Description: Through its many subsidiaries, ADP is a provider of computerized transaction processing, data communication and information services. The company's operations are divided into Employer Services, Brokerage Services, Dealer Services and Claims Services. Among the activities managed by the Employer Services division are payroll, human resources, benefits administration, tax filing and reporting and retirement plan services. Why we like it: What's so special about ADP and its business model? Unlike the rest of the market, this stock has just continued its relentless upward march, holding easily within its 13-month rising channel and threatening to break out with enthusiasm. Technically the stock has already broken out, with Friday's close inching above the highs from last month, which had already exceeded the highs of late 2002. That assessment can be made without including the intraday spike near the $46.50 area, which was unsustainable on Friday with the rest of the market in the tank. Turning to the PnF chart, we can see the strength of the stock's bullish move, as the push through $45 created another Buy signal, giving added credence to the idea that the stock will eventually make its way to the $61 price target implied by the PnF chart. With ADP right at the cusp of a major breakout, this is also the perfect time to contemplate new entries. Aggressive traders can jump onto a breakout move over $46.50, while those with a more cautious approach will want to look for a slight pullback near the $44.50-45.00 support zone before playing. Once the stock gets moving above near-term resistance, we can look for the rally to continue up towards next resistance at $50. While that may be all we can squeeze out of the play, we'll keep an open mind for now, with the thought of a continued rally up towards stronger resistance at $52. Obviously in order to achieve either of these upside targets in the near term, we're going to need to see ADP break out over the top of its long-term rising channel. Initial stops will be set at $43.25, just under the lows of the past month, as well as the 50-dma ($43.41). Suggested Options: Shorter Term: The May $45 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the June $47 Call, while the more conservative approach will be to use the June $45 Call. Our preferred option is the June $45 strike, as it is currently in the money and should provide sufficient time for the play to move in our favor. ! Alert - May options expire in 2 weeks! BUY CALL MAY-45 ADP-EI OI=3444 last traded @ $1.45 BUY CALL JUN-45*ADP-FI OI=1073 last traded @ $2.05 BUY CALL JUN-47 ADP-FW OI= 163 last traded @ $0.75 Annotated Chart of ADP: Picked on May 9th at $46.03 Change since picked: +0.00 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 1.91 mln --- Johnson & Johnson - JNJ - close: 55.30 change: +0.46 stop: 52.75 Company Description: Johnson & Johnson is engaged in the manufacture and sale of products related to human health and well-being. Through over 200 operating companies, it conducts business worldwide. The company's business is divided into three segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment manufactures and markets a range of products used in the baby and child care, skin care, oral and wound care and women's healthcare fields, as well as nutritional and over-the-counter pharmaceutical products. The Pharmaceutical segment's principal worldwide franchises are in the antifungal, anti-infective, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, psychotropic and urology fields. The Medical Devices and Diagnostics segment includes a range of products used by or under the direction of physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. Why we like it: Throughout much of the past year, shares of JNJ have been mired in a gradual downtrend, with the stock dropping from the $58.50 area all the way down to very strong support near $49. After spending much of last fall building a new base near that support level, the stock pushed up to the vicinity of $55, pulled back to test $49 support one more time and then launched higher following the last test of support in late March. What the bulls accomplished in that first failed rally was enough of an upward movement to get the 50-dma ($52.34) over the 200-dma ($51.37), a classic bullish alignment. Then the stock was poised for a bullish move, and that move really got started the day after the company's most recent earnings report (April 14th), with a strong rally through both the 100-dma ($52.42) and the 50-dma, taking the stock up to just below the February highs near $55. All it took was a slight pullback to the 10-dma ($54.45) and the buyers re-emerged and really got serious over the past couple days, succeeding in breaking out over $55 on strong volume on Friday. This move wouldn't be that impressive if it weren't for the significant weakness seen throughout the rest of the market last week. JNJ seems to be the beneficiary of investors that are looking for strong defensive stocks to protect and potentially even grow their capital. Regardless of the root cause, the charts say Buy, with last week's trade at $55 issuing another PnF Buy signal to go along with the bullish price target at $65. That seems a long ways away for a stock that tends to move as slowly as JNJ, so we'll set a more modest objective at the $60 level, the site of strong resistance in late 2002. We can expect to find initial resistance in the $57-58 area. Optimum entries will be found on a pullback near $54, and due to the slow and methodical way in which JNJ trades, we're not real enthusiastic about chasing the stock higher. We'll do better by waiting for the pullback. Initial stops at $52.75 should be well out of the way of mischievous bears unless this nascent breakout fails. That stop is set below the bottom of the post-earnings gap, as well as the 10-dma ($54.45), 20-dma ($53.82) and 30-dma ($52.84). Suggested Options: Shorter Term: The May $80 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. However, due to the stock's slow moving nature and expiration only 2 weeks away, we'd suggest moving out to the June or July strikes. Longer Term: Longer-term traders can use the June $55 Call, while the more conservative approach will be to use the July $55 Call. Our preferred option is the July strike, as it is currently at the money and gives the stock plenty of time to move upwards without a significant loss of time value. ! Alert - May options expire in 2 weeks! BUY CALL MAY-55 JNJ-EK OI=16014 last traded @ $0.85 BUY CALL JUN-55*JNJ-FK OI= 9263 last traded @ $1.35 BUY CALL JUL-55 JNJ-GK OI=43816 last traded @ $1.80 Annotated Chart of JNJ: Picked on May 9th at $55.30 Change since picked: +0.00 Earnings Date 4/13/04 (confirmed) Average Daily Volume = 7.07 mln ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Amazon.com - AMZN - close: 41.90 chg: -1.24 stop: 45.25*new* Company Description: Amazon.com, a Fortune 500 company based in Seattle, opened on the World Wide Web in July 1995 and today offers Earth's Biggest Selection. Amazon.com seeks to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices. Amazon.com and other sellers offer millions of unique new and used items in categories such as health and personal care, jewelry and watches, gourmet food, sports and outdoors, apparel and accessories, books, music, DVDs, electronics and office, kids and baby, and home and garden. (Source: Company Press Release) Why We Like It: Many theorized that investors would ditch their Internet favorites to reserve funds for Google's planned IPO. They did that Friday, with the $INX Internet Index dropping 1.07 percent. That proved comparable to the Nasdaq's 1.02 percent drop, so perhaps it was general market weakness that sent the Internet- related stocks lower. Whatever hit them, we'll take the result. After rising to test its 50-dma one last time, AMZN fell to midline support on its descending regression channel on strong volume. With stochastics already trending in levels showing oversold conditions, as sometimes happens when a trend gets underway, and with MACD lines headed below signal, it's possible AMZN could see the bottom of its descending regression channel. The bottom now crosses at about $35.40, but descends, of course. That lower trendline marks our official target, but some play participants might consider sticking with that $35.40 exit level. That level represents a 50 percent retracement of the rally off the September 2001 low. What about new entries? With AMZN hitting midline support on Friday, it's possible that next week will bring a bounce up to $44.25-45.00 and a rollover from there. Watch carefully to be sure that such bounces occur on low volume before watching for rollover entries at that level. Suggested Options: Because AMZN dropped all the way to support Friday and may now bounce into a lower high, June options might be advisable. Our preference is for the June 40's or 42.50's. ! Alert - May options expire in two weeks ! BUY PUT JUN 40.00 ZQN-RH OI=1491 Last traded @ $1.42 BUY PUT JUN 42.50 ZQN-RV OI=4358 Last traded @ $2.50 BUY PUT JUN 45.00 ZQN-RI OI=2810 Last traded @ $4.10 Annotated Chart: Picked on May 02 at $ 43.60 Change since picked: - 1.70 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 8.4 million Chart = --- Beazer Homes - BZH - close: 92.47 chg: - 4.33 stop: 98.91*new* Company Description: Beazer Homes USA, Inc., headquartered in Atlanta is one of the country's ten largest single-family homebuilders with operations in Arizona, California, Colorado, Delaware, Florida, Georgia, Indiana, Kentucky, Maryland, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas and Virginia. Beazer Homes also provides mortgage origination and title services to its homebuyers. (Source: Company Press Release.) Why We Like It: The strong non-farms payroll number and upward revisions to the previous two months' numbers increased the chances that interest rates will be hiked in June, if not sooner. Although mortgage lenders have been discounting that possibility for weeks now, raising mortgage rates ahead of a hike in the Fed's overnight lending rate, the news hit homebuilders hard. The $DJUSHB, the Dow Jones US Homebuilders Index, gapped straight down Friday to its 200-dma, where it held for the rest of the day, printing a small-bodied candle that was nearly a doji. BZH opened beneath its 200-dma, rose to test it, and then dropped again, doing so on stronger-than-normal volume. The stock dropped straight into the zone that included several weekly opens or closes at the beginning of the year. Although daily oscillators do not yet show a likelihood of a bounce, we think the steep drop and the beginning of a weekly support zone could slow the descent or even produce a bounce. We encourage conservative traders to set a breakeven exit on this play, not letting their profits evaporate. We're lowering our official stop to $98.91, just above Thursday's high and the 21-dma. More conservative traders might set a breakeven exit or an exit at $97.41, just above the 200-dma and the violated trendline on the chart below. We would not suggest new breakdown entries since BZH draws so near our profit target of $90.30. If BZH should bounce up to and rollover from below $95.70-96.90, and particularly if it bounces toward that higher number and then rolls back down through the 200-dma, traders might take a rollover entry. As we always suggest, make sure that any bounce occurs on low rather than high volume and pass up apparent rollover entries if volume had expanded on the bounce. Suggested Options: Those seeking a new entry on a bounce and rollover should consider June options. Because of its higher open interest (OI), we would suggest the June 95 option. ! Alert - May options expire in two weeks ! BUY PUT JUN - 95 BZH-RS OI=1,256 last traded @ $6.60 BUY Put JUN - 90 BZH-RT OI= 125 last traded @ $4.00 Annotated Daily Chart for BZH: Picked on May 07 at $ 95.49 Change since picked: - 3.02 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 501 hundred thousand Chart = --- Loews Corp - LTR - close: 56.58 chg: -0.78 stop: 60.01 Company Description: Loews Corp is a New York, NY based holding company that owns a number of major subsidiaries. LTR owns 100% of Lorillard, a cigarette company (a.k.a. the Carolina Group); Loews Hotels, and Texas Gas Transmission. LTR is a majority owner in Bulova Corp (97% owner), CNA Financial (90% owner) and Diamond Offshore Drilling (54% owner). (Source: Company Press Release) Why We Like It: After triggering this play, LTR clung stubbornly to the $57.00 support, but that support finally broke Friday. U.S. District Judge Gladys Kessler helped push LTR over the $57.00 ledge when she refused to throw out $289 billion in penalties levied against tobacco companies in a suit the government originally filed in 1999. Now that LTR has dropped below $57.00, conservative players might consider exits nearer $55-56.00 than $54.00 because of moderate weekly support near that level. We also note support from a descending regression channel near that level. We're setting our official target at $54.00, just above the 38.2 percent retracement of the rally off the November low. What about new entries? We've been concerned at LTR's hesitation to move below the $57.00 level, so are somewhat reluctant to suggest bounce-and-rollover entries, but such entries could be found on a bounce to and rollover from the midline of that regression channel. Breakdown entries would come too close to our $54.00 target to consider such entries. Suggested Options: Because this has been a slow-moving play, buying front-month May options does not appear to be a good choice. We suggest either the June 55 or 60 options. ! Alert - May options expire in two weeks ! BUY PUT JUN 55 LTR-RK OI= 99 Last traded @ $1.15 BUY PUT JUN 60 LTR-RL OI=111 Last traded @ $3.20 Annotated Chart for LTR: Picked on May 03 at $ 57.74 Change since picked: - 1.16 Earnings Date 04/29/04 (confirmed) Average Daily Volume: 419 thousand Chart = --- Whirlpool Corp - WHR - close: 62.09 chg: -1.68 stop: 67.15*new* Company Description: Whirlpool is one of world's leading manufacturers and marketers of major home appliances, with annual sales of more than $12 billion, 68,000 employees, and nearly 50 manufacturing and technology research centers. The company markets Whirlpool, KitchenAid, Brastemp, Bauknecht, Consul and other major brand names to consumers in more than 170 countries. (Source: Company Press Release.) Why We Like It: By Thursday when initial claims were reported, market pundits already had an idea that Friday's non-farm payroll number might be strong. It was, and traders began pricing in the likelihood of a rate hike in June, if not sooner. With mortgage rates already heading higher and likely to rise even more, retailers and manufacturers of household goods headed lower. Maytag (MYT) dropped 1.09 percent, Electrolux shed 0.91 percent, and Whirlpool (WHR) dropped a bigger 1.68 percent. WHR headed into last nearby support on its weekly chart before our $58.01 profit target, but we do expect some degree of round- number support near $60.00. Conservative traders should consider measures to protect profits if WHR should bounce from the current support level or near $60.00, with those plans perhaps including a breakeven exit. What about new entries? Consider bounces up toward $65.00 and then a rollover back through that $64.69 original entry level as new entries. Do not enter if volume expands on the bounce. We have lowered our stop to $67.15, just above the 21-dma. Suggested Options: With May expiration in less than two weeks, we suggest June options, in particular the June 65's. ! Alert - May options expire in two weeks ! BUY PUT JUN-60 WHR-RL OI= 27 Last traded @1.65 BUY PUT JUN-65 WHR-RM OI=4,363 Last traded @4.30 Annotated Daily Chart for WHR: Picked on May 05 at $ 64.69 Change since picked: - 2.60 Earnings Date 04/21/04 (confirmed) Average Daily Volume: 555 thousand Chart = --- MicroStrategy Inc. - MSTR - cls: 44.81 chng: -2.21 stp: 50.05*new* Company Description: MicroStrategy Inc. is a worldwide provider of business intelligence software that enables companies to analyze the raw data stored across their enterprise to reveal the trends and insights needed to develop solutions to manage their business effectively. The company's software delivers this critical information to workgroups, the enterprise and extranet communities via e-mail, Web, fax, wireless and voice communication channels. MSTR offers an integrated business intelligence platform, known as MicroStrategy 7i, which is designed to enable businesses to turn information into strategic insight and make more effective business decisions. Why we like it: There's nothing like a play starting off with a bang to put a smile on our faces. MSTR did just that on Friday, smashing through our $46.50 entry trigger on Friday. The bulls did attempt a weak rebound early in the day, but the stock just rolled over near $48 after the opening bounce and then plunged lower throughout the afternoon. Hitting our entry trigger at $46.50 only caused the decline to pick up speed and by the closing bell, MSTR had shed a large 4.4%, barely hanging onto support near the $45 level. The action here will be critical for our play, as the stock could easily put in a rebound from this potential support. If it does, then we'll be looking for new entry points on a subsequent rollover from the $47-48 area. If however, the weakness we saw on Friday continues next week, then a break below Friday's low ($44.30) can be used for momentum entries. Below current levels, look for potential support again at $42 enroute to our $40 target. Lower stops to $50.05 this weekend, just above the top of last week's failed rebound attempt. Suggested Options: Aggressive short-term traders will want to use the May 45 Put. Those with a more conservative approach will want to use the June 45 put. Our preferred option is the June 45 strike, as it is just now at the money and should provide ample time for the play to move in our favor. ! Alert - May options expire in 2 weeks! BUY PUT MAY-45 EOU-QI OI=1105 last traded @ $2.15 BUY PUT JUN-45*EOU-RI OI= 212 last traded @ $3.60 BUY PUT JUN-40 EOU-RH OI= 49 last traded @ $1.65 Annotated Chart of MSTR: Picked on May 6th at $47.02 Change since picked: -2.21 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 392 K Chart = ************* NEW PUT PLAYS ************* General Motors - GM - close: 44.60 change: -1.67 stop: 48.00 Company Description: General Motors Corporation provides automotive-related products and services by primarily designing, manufacturing and marketing vehicles, as well as providing communications services and financial services. The company operates in two segments, Automotive, Communications Services and Other Operations, and Financing and Insurance Operations. It's automotive business segment consists of General Motors Automotive, which encompasses four regions: GM Norma America, GM Europe, GM Latin America/Africa/Mid-East and GM Asia Pacific. The communication services include digital entertainment, information and communications services and satellite-based private business networks. The company's other operations include the design, manufacturing and marketing of locomotives and heavy-duty transmissions. GM's Financing and Insurance Operations primarily relate to General Motors Acceptance Corporation (GMAC). Why we like it: That great sucking sound you hear last week was the realization that in a rising interest rate environment, GM will lose much of its appeal with investors. The reason why is simple. GM doesn't make much money from building cars anymore. The company has largely become a Finance company that happens to build and sell cars and trucks on the side. If interest rates are going to be rising, it will take a big bite out of the company's profits, just like all the other big Financial company's. Proof of that cause and effect can be seen in the stock's price action over the past two days. Strong data on the employment front had investors thinking the Fed will move sooner rather than later to raise rates and the stock sold off on heavy volume, slicing through the 200-dma ($45.29) on Friday and closing at its worst level since early December. Looking at the PnF chart, we can see that GM will need to trade the $44 level before we'll have a fresh Sell signal to work with. For that reason, it makes sense to set a trigger at $44 on this play. Aggressive traders can enter on the initial break of that level, while those with a more conservative approach will want to look for a failed bounce in the $45-46 area (near the 200-dma) as their signal to enter the play. Once below $44, the stock won't find much in the way of support until reaching $42 and realistically not until the $39-40 level. Taking another look at the PnF chart, we can see that the trade at $44 that generates the Sell signal will bring with it a tentative price target of $37. That coincides nicely with strong historical support near $38 and the bullish support line at $38. We'll split the difference and target a drop to the $38 level for our play. Initial stops will be rather wide to give the stock room to bounce around before breaking under our trigger. Set stops at $48, which is above the 10-dma ($47.70) -- along with the rest of the short-term moving averages -- and shouldn't be threatened unless there is a major change in the stock's bearish trend. If entering on the initial breakdown, make sure to confirm the strength of the move by verifying that selling volume is still running strong. Suggested Options: Aggressive short-term traders will want to use the May 45 Put. Those with a more conservative approach will want to use the June 45 put. Our preferred option is the June 45 strike, as it is just out of the money and should provide ample time for the play to move in our favor. ! Alert - May options expire in 2 weeks! BUY PUT MAY-45 GM-QI OI= 8310 last traded @ $1.50 BUY PUT JUN-45*GM-RI OI=17161 last traded @ $2.35 BUY PUT JUN-42 GM-RV OI= 8540 last traded @ $1.25 Annotated Chart of GM: Picked on May 9th at $44.60 Change since picked: +0.00 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 5.10 mln Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. 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The Option Investor Newsletter Sunday 05-09-2004 Sunday 4 of 5 In Section Four: Leaps: Sell In May and Go Away Option Spreads: A New Meaning Of "IPO" Futures Corner: Selling Overshoots ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ***** LEAPS ***** Sell In May and Go Away By Mark Phillips mphillips@OptionInvestor.com That's the old market axiom and an argument could be made that this is the effect that took control of the broad market last week. After a half-hearted attempt at a rebound early in the week, the market got spooked and sold off hard into the end of the week. Is this the "Sell in May" crowd at work or something else. If you've been with me for awhile, you know that I never choose the obvious answer. I think people finally acknowledged that inflation, interest rates and the economy actually do matter. But at the same time, as I've alluded to in recent commentary, I think last week's selloff was an over-reaction. Let's review. The FOMC meeting didn't change anything except remove a few more of the roadblocks that have been keeping the Fed in check in terms of ending their accommodative stance. While the message being sent is one of balanced risks, the various Fed Heads have gone out of their way to reassure the markets that they're in no hurry to embark on the tightening cycle. Up until now, the missing ingredient necessary to finish the rate hike cake was robust job growth. Well, we did get another strong report on both Thursday and Friday and investors jumped to the conclusion that the Fed could act as early as Monday to raise rates and reign in the out-of-control economic growth. Say what?? It wasn't that long ago that officials were opining that we weren't growing fast enough. So why when we just start to see some growth would the Fed slam on the brakes? The simple answer is that they won't. I'll go out on a limb here and say that the first hike in the upcoming tightening cycle will NOT be an inter-meeting cut. The Fed is trying to walk a very fine line between "Not too hot" and "Not too cold" as they try to revive the Goldilocks economy. The last thing that will give them that delicate control is ham-handed, surprise rate cuts. It isn't going to happen. I've talked about this before, but I think it needs to be reiterated. Interest rates are going to be rising soon and the market is adjusting to that reality, but let's focus on what's actually important. To effectively make my point, I'll borrow a line from both Jim Brown and Mike Parnos, "SIZE MATTERS!" Now if that statement offends you, I'm sorry. But let me gently suggest that you pull your own mind out of the gutter. There is nothing wrong with that statement and I could see it being used on Sesame Street in the right context. Sometimes we get so wrapped around the axle seeing hidden meanings in everything that we lose sight of the fact that there is no hidden meaning. So let me be doubly clear -- SIZE DOES MATTER! In this context we're talking about interest rates, and the size of the moves in the discount rate will be absolutely critical to the effect on the market. The market right now is totally over- reacting, as though the Fed is going to raise rates by 100 basis points on Monday. I'll go out on another limb (although it's a pretty sturdy one, in my opinion) and say that the extent of interest rate increases over the next 6-9 months will be limited to 25-50 basis points. The market is a forward looking mechanism, and it looks roughly 6 months into the future. So if the recent market weakness is really based on expected moves in interest rates, I think it is an over-reaction. My opinion is much different from most of the analysts I've read in recent weeks. I don't think interest rate policy matters until we see a rate hike in excess of 200 basis points. That would get us close to a neutral interest rate policy, not a restrictive one. Barring a huge surge in both inflation and employment, along with capacity utilization moving over 80% and staying there, I don't think we'll see that much of a rise in interest rates even in the next 24 months. Quite simply, investors are acting as though that 200 basis point hike is going to arrive Monday before the open. If I'm correct, then that means the current moves in the market are not really related to the reality of rising interest rates, but the fear of those rates beginning to rise. It's the Bogeyman, run for your lives! GRIN Seriously, if we're seeing market weakness now, it is because it is finally time for some serious consolidation of the stellar rally of the past year. The excesses need to be worked off and this is the time for it to happen. April earnings are over, guidance from much of Corporate America is suggesting slower economic growth over the next couple quarters as the economic stimulus peters out. Sure there are some troubling signs in the technicals of most of the major averages, but they are the sorts of signs that point to drops on profit taking or brief selloffs. Where we will start to get really concerned about the bear market (which has just been hibernating for the past 18 months in my opinion) is re-awakening is when we start to see the 50-dmas of the major indices crossing down through the 200-dmas. Probably the closest market to this critical juncture is the NASDAQ-100, but even there, we have 50 points of separation still between those averages. To reiterate, we're seeing some serious selling in many issues that have run WAY too far over the past year and they now need to come back to build new bases for the next leg up. By now I know you're wondering "Who are you and what did you do with the real Mark Phillips?" right? Don't worry, he's still here, but I'm trying to adopt a more balanced viewpoint. Yes, the bear market that ravaged investors from 2000 to 2002 is alive and well and still sleeping off that huge feast. But this bull market is a fanciful creation of Wall Street and it won't last. The valuations don't support it, the levels of debt don't support it and most importantly smart investors like Warren Buffett and Sir John Templeton see NO VALUE. Nobody else has ever built the kind of wealth that Mr. Buffett has by investing. That alone leads me to pay attention to what he has to say -- the central theme of his comments lately is that there is no long-term value. When there is value to be found in our stock market, then the secular bear market will be over. Don't hold your breath because it isn't going to happen this year and I seriously doubt it will be next year. So where does that leave us? It's a stock-picker's market and that means that we have to pay especially careful attention to the technicals. Remember over the past couple weeks we've looked at the big trading ranges in the broad market. So far those ranges have not been broken. In order to deliver some resolution, we still need to see the DOW break 10,000, the SPX break under 1080 and the COMPX take out the 1900 support level. All three of those levels could be smashed first thing on Monday morning, but until they are, we remain in a trading range market. That means we need to tread carefully. So far we seem to be doing all right and our primary focus as we move into the summer doldrums will be to not screw it up. So with that in mind, let's turn our attention to our current plays and see what kind of additional excitement we can dredge up. Portfolio: HD - What's this? Do my eyes deceive me or did HD actually make a directional move last week? GRIN Well, I was right in stating that the FOMC meeting wasn't likely to be the catalyst we're waiting for, but the strong Employment numbers seemed to do the trick on Thursday and Friday, with investors apparently convinced that rates can now rise at any time. HD cratered on Thursday, smashing its 200-dma near $35 and the picture only got that much worse (better for us) on Friday, as the stock fell right to the next potential support at $33 on very heavy volume. It certainly looks like the downdraft that we've been (im)patiently waiting for over the past few months has finally gotten underway. What we'll really need to see now is a break under the $31 level, which will finally give us our PnF Sell signal and it will carry with it an initial downside target of $24. Should this decline reverse itself, we'll know for certain with a trade at $38, which would issue a new PnF Buy signal, so we're lowering our stop to $38 this weekend. CHK - It's hard to get terribly concerned about the pullback in shares of CHK last week, as it is likely due to the broad market weakness. The stock continues to behave well, testing the $14.00- 14.50 resistance area, while continuing to find support near $13.50, former resistance a few short weeks ago. The key that keeps us comfortably bullish is that the price of Natural Gas continues to push higher, now solidly over the $6.00 level again. We'll continue to ride out the current volatility, while we want for the next bullish move that ought to push the stock up towards the next level of resistance near $16. LUV - Considering the absolute pounding being dished out to the Transport stocks last week, our LUV play really didn't do too badly. Of course, I'd feel a lot better if it had managed to work its way up near the $16 level before this latest round of profit taking hit, but with the price of crude oil knocking on the door of $40 and likely to go higher, it's natural to assume a bit of additional pressure on the Airline stocks. After rolling over from just above $15, LUV is back at the $14 level, our initial entry point. We'll now need to see the stock stabilize near here and then move up, preferably through its April highs, to give us some confidence that the bulls will win out. My largest source of concern is the fact that weekly Stochastics moved almost to overbought territory and are now tipping over on this weakness. That could portend another move down and I certainly wouldn't argue with conservative traders that want to exit here and then look for a better entry point at a lower level. We'll stick with the play until the bulls regain control, or price falls through our stop, just under the March lows. EBAY - Conservative traders have certainly had ample opportunity to find a favorable exit from our EBAY play over the past couple weeks, as the as the stock has repeatedly moved into the $83-84 area, only to fall back towards support due to the incessant broad market weakness. If we squint, we can see the potential for a tiny little H&S top formation building right now and I find it interesting that the neckline of that formation (from the hourly chart) crosses right at $79. Recall that a trade at $79 will generate a new PnF Sell signal and is also the site of our stop. we now have the 20-dma above that level, helping to protect that level of support. So far the bulls have done a good job of defending that support and we'll see what happens next week. Whatever you do, make sure to keep those stops in place, just in case the bulls lose their resolve. Watch List: TYC - Sticking with our discipline, we still have not had a viable entry point on our TYC play. Yes, we got a move back through the $28 level and the stock ended back near that level on Friday. The first move up early last week was a gap move following it earnings report, which we ignore for entry possibilities. And then on Friday, TYC approached $28 once again -- this time ending near its low of the day with negligible signs of a rebound. What I'd really like to see at this point is a dip back near $27.50 and then a rebound to close just over the $28 level. But we'll just have to see what the market has in store. AIG - It really seems amazing, but last week, shares of AIG just continued to deteriorate, never managing a rebound back over the $72 level, which we need to see for the stock to give us a viable entry signal. Note that the stock may find support near the $69.50 level on this decline, as that is the site of the rising trendline connecting the lows from late January and late March. The PnF chart is still bullish so long as AIG doesn't trade the $68 level, but I don't really care for the way the stock broke under the 100-dma, with the 50-dma now apparently rolling over. We don't want to catch a falling knife, and that means we wait for the bonified rebound over $72 to give us our desired entry signal. Should the stock just continue down from here, we'll drop it on a trade at $68. Radar Screen: EK - Despite what looked like an honest attempt at an upward move, shares of EK stalled out at the junction of the 50-dma and the 100-dma as the shorter-term average moved down through the longer one, and for the past few weeks, the stock has found consistent resistance at that 50-dma. After lifting out of oversold territory, the weekly Stochastics appear to be tipping over again. Price action is obviously weak, and the 50-dma is just inching down under the 200-dma, another clear bearish sign. All the while, EK continues to be unable to move through its multi-year descending trendline. So why isn't it making a move to the Watch List yet? Quite honestly, I can't see the bang for the buck unless we can get an entry at a higher level. Note that we also are still waiting for a bearish signal from the PnF chart, which is still technically on a Buy signal with an upside target of $52. I like the odds for new entries near the $29-30 area (even though that is above the descending trendline), but I can't shake the feeling that entries at current levels will be susceptible to too much upside risk for the downside potential I see down to the $20 area. QQQ - At odds with the bearish picture presented by looking at the NDX and the COMPX, the QQQ remains on a PnF Buy signal and that keeps me cautious. Sure there was another painful drop back near COMPX 1900 last week, but is this the precursor to a rebound from strong support or are we getting set for a more substantial drop? I lean towards the idea of a bigger drop, but I think it will come AFTER we see another rebound from support that has been holding for the past several months. That means we ought to see a rebound on the QQQ from the $34 level (or above) and I would expect to see resistance hold firm in the $37-38 area. So even though we're seeing the weekly Stochastics tip over in a short-cycle reversal, we're going to wait for the fat pitch, which will be a rollover near higher resistance. If we don't get it, that's just fine...there'll be another pitch coming along very soon. $DJUSHB - Alright, I know, we can't buy LEAP puts on the $DJUSHB index, but I think it's time to start thinking about a long-term bearish strategy on the sector. Not now though, as I suspect housing will remain strong through the summer. The final piece of the puzzle will come when the Fed actually does begin to raise interest rates. After that event, I believe we'll see one more push on the home buying front, as people rush to buy a house before it's "too late" and interest rates begin to rise for real. Does it make sense? No not really, but then people in crowds aren't particularly sensible. I think the strategy we should employ is to start monitoring the LEAP-able Housing stocks for favorable technical patterns over the next few months. Next week, our commentary will center on the process of how we'll pick the one or two that look the most favorable to the short side. That's right, we actually have some choices this time around. A couple years back, our only choice was LEN as it was the only stock in the sector that had LEAPS available. But LEN has now been joined in that arena by DHI, CTX, PHM and RYL. So we've got enough ammo to start doing some serious analysis work. It should be clear that this will be strictly a technical analysis exercise, as every one of the above-referenced stocks has a single-digit P/E ratio...that's a symptom of the strong growth we've been seeing in the industry. But when the music stops (rates start rising) things could get pretty exciting. Stay tuned. Closing Thoughts: Near-term, the bears are in control, but they're going to need some fresh ammunition to break the markets down through the key support levels identified in the commentary above. If successful, then the technical picture will have changed significantly in my opinion. But I really expect to see the range hold a bit longer. So let's stick with what's working, and that means playing very carefully with those long-term positions. Taking a position for a 1-2 or even 3-week trade is quite manageable in the current environment. But as we've seen, the macro picture can change significantly in a period of 3-6 months, our typical holding time for our plays. Wait a minute, what does this have to do with the idea of "Sell in May and go away"? Remember, we're not talking about active, aggressive selling. We're talking about judicious selling to take advantage of the historical market cycle. I don't tend to place a lot of stock in these historical patterns, but it does make sense to pay attention to them so that we aren't surprised on those occasions when they do reassert their influence. We'll continue to add new plays when we can get the setups we're looking for, but chasing entries will not be a part of our strategy. Long or short should work equally well in the next few months, but we should be looking for singles and doubles, not going for the grand slam. Play it safe and hope for another bounce from support next week! GRIN 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 $28 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 AIG 04/25/04 $71-72 JAN-2005 $ 75 ZAF-AO CC JAN-2005 $ 70 ZAF-AN JAN-2006 $ 75 WAP-AO CC JAN-2006 $ 70 WAP-AN PP AUG-2004 $ 65 AIG-TM PUTS: GM 05/09/04 $47-48 JAN-2005 $ 45 ZGM-MI JAN-2006 $ 45 WGM-MI PP SEP-2004 $ 50 GM -IJ New Portfolio Plays None New Watchlist Plays GM - General Motors $44.60 **Put Play** We've been discussing playing the downside in shares of GM for a few weeks now, and this isn't the first time we've made the attempt, as my bearish opinion on the stock is no secret. While the stock market rebound over the past year has mitigated the pension underfunding issue, there's another problem brewing. GM has become much more of a Finance company in recent years, deriving the lion's share of its profits from its financing arm, as the production and sale of vehicles becomes less and less of a factor. This reality is borne out by the stock's price action last week, as it plummeted to critical support on the positive employment news that is being widely interpreted as clearing the way for the Fed to raise interest rates at any time. Rising rates will cut right to GM's bottom line and that wasn't lost on investors who sold on heavy volume. Last week's weakness was enough to almost give a bearish cross on the weekly Stochastics and if the cross occurs, it will be a bearish short-cycle reversal. While Friday's break below the 200-dma looks bad, to me the real key is the $44 level, as a trade below that level will issue a new PnF Sell signal, with a minimum downside target of $37. I may regret this, but I'm going to try and get cute with the entry strategy on GM. I don't think there is much more downside in the play before we get a bounce, but I'm hoping we can see $44 before that bounce arrives. So we're going to use a trigger point on that $44 level. Once we see a trade there, we'll want to watch for a SUBSEQUENT rebound and failure in the $47-48 area. That now looks like strong resistance, with all the shorter-term moving averages clustered in that area. One reason for getting cute with the entry strategy is that it allows us to be stingy with our stop, placing it at $51, just over the recent double top formation. We aren't going to try to chase the stock lower. If it just breaks down hard (unlikely in my opinion, then we'll just let it go. Note that on the PnF chart, the initial target after trading $44 will be $37, and with the bullish support line at $39, we should expect at least one solid attempt at a rebound once the $40 level is breached. BUY LEAP JAN-2005 $45 ZGM-MI BUY LEAP JAN-2006 $45 WGM-MI BUY Call SEP-2004 $50 GM -IJ **Insurance Put** Drops None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************************ Option Spread Strategies ************************ A New Meaning Of "IPO" By Mike Parnos, Investing With Attitude I'm no economist. That's for sure. Maybe that's why I can't understand why the stock market has such a bug up its butt about a potential 1/4% interest rate increase. Well, maybe they're worried about subsequent rate hikes, too. The bottom line is that the good companies will still make more money than the not-so-good companies. Normally, I could care less about fundamentals. We make most of our trading decisions based on charts. News? Usually the news balances itself out. But, the current environment puts traders, in a no-win situation. Good economic news? The market goes down. CEOs lining their pockets? The market goes down. Gas prices skyrocketing? The market goes down. This is the "mierde" that I talk about. Enough already. It's time to find Bin Laden. Be Alert I only say this because some of our CPTI portfolio positions are at risk of violating their lower strikes. Be ready to possibly make adjustments. This week is a good time for a bounce. The buyers are poised to jump back in. How do I know? I read it in a damn fortune cookie. Plus, I got an email from the Psychic Friends Network. What better confirming indicators are there? They're just as reliable as those used by most money managers. Options Trading Is Up According to the Options Clearing Corporation, the March volume of US options traded was up by 63% over March of 2003. That's good news for us premium sellers. There are more retail option traders stepping up to the craps table. Three years ago, about 70% of US options trading came from retail traders. Although the percentage of retail investors hasn't necessarily increased, the sheer percentage increase means there are more premium dollars out there to be had. There is additional good news. This for mutual fund investors. Apparently, there is an increased interest in options from institution investors looking for new risk management tools. Why is this good? Because they're concerned about the future. Imagine how nice it would be if more mutual funds used options to hedge their extensive portfolios. The cost of this kind of insurance might mean mutual fund values would increase a little slower. However, the knowledge that their positions are, at least to some degree, hedged should provide peace of mind. Plus, I suspect that it would attract more investors to the funds that partake in this hedging. What Does "I-P-O" Really Mean? In this instance it means "I'm Pissed Off." Why? Because some more of our civil liberties may be at risk. It's enough that the government can tap our phones and search our homes on a whim. They can even go to libraries and see what books we've checked out. A piece of paper allows them to hack into our computers and see what web pages we visit – all in the name of suspicion. I'm fully in favor of G-strings, but I have some reservations about Gmail. Email is a wonderful thing. It allows us to communicate almost instantly to people next door or all over the world – in complete privacy. So, where's the problem. By now you must know that Google is going public. Google is a great search engine, to be sure. However, they're trying to further enhance their appeal by offering a new wrinkle to email. It's going to be free – or, almost free. What's the cost? Maybe a civil liberty or two. Google makes their money by selling advertising. They do very well. To subsidize Google's proposed "Gmail," their computers will supposedly scan the text of your emails. When it recognizes a keyword, like "car," a related ad will appear on the email. Google maintains that it will all be computerized – no human involvement. Maybe, maybe not. I would rather pay for my email rather than having a computer (or anyone) poking around in my business. I'm sure Google will remain immensely popular and profitable. It will remain my search engine of choice – until the government starts scrutinizing my searches. It's just not right. I'll pass on Gmail. That's why the whole new meaning to I-P-O. ________________________________________________________________ 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 – 1098.70 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 – 548.56 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 - $140.62 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 - $146.03 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 -- $34.97 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 – 537.35 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 and the OEX 515/505 bull put spread expired worthless. 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 May 575 calls for $1.40 (x 5 contracts = $700). On Thursday, when the market tanked, we bought back the May 575 call for $.15 ($75). This locked in $1.25 profit on the 575 call. Then, we still have two weeks left, so we sold 5 of the May 560 calls for $1.15 ($575). If these plays work out, we can add another $1,175 + $575 ($1,750) 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. ************** FUTURES CORNER ************** Selling Overshoots This was a "Selling Overshoots" kind of week. The confluence last week of economic reports, FOMC language, interest rate "fears," and geopolitical PR disasters (pictures of Iraqi prisoner abuse) took us on a wild ride. Notwithstanding all the back-and-forth tug-of-war gyrations there was surprising symmetry to the market's gyrations. Without further ado, let's look at the daily chart of the ES (below the next paragraph), which many would argue spearheads the world financial system. Yes, we look at a lot of charts in the daily Futures Wrap which are important to keep track of, but the main index and contract that I follow are the SPX and ES respectively. Many traders posit that the SPX tends to reflect all the conflicting opinions of multiple time frame traders equity, bond traders, and commodity traders. It also tends to reflect other things such as fundamental data including as economic reports, corporate earnings reports, and earnings forecasts. But it also reflects geopolitics and emotional reactions to various events from geopolitics to all the items enumerated above. S&P 500 Emini contract (ES04M) – Daily Chart On the daily chart, note the waves labeled 1, 2, and 3 as they as they swing back and forth from one extreme to the other around the red median line. The waves labeled A, B, and C are the more minor recent waves that show more subdued moves, but nonetheless very symmetrical around the median line. The (A) wave bounced off the 127.2% Fib extension of the prior wave 1 to 2. Wave B (and 4) was a rally-back to the 50% Fib resistance area of wave 2 to 3. This was also where the down-sloping 20 day moving average was (red line). The Bollinger band also gives "boundaries" that tend to "contain" price. In other words, when price goes outside of the band, it will "want to" go back inside the band, which is a matter of statistical probability. Wave 3 (and A) closed outside the band only one day before it shot up over 20 points (coinciding with the hyper-emotionalism of Tuesday's FOMC day, labeled on the chart above). This was an overshoot to be sold (or shorted). The buyer's strike Friday afternoon (wave 5, and C) was what we are thinking could be an "overshoot" in the other direction in that it closed (again) below the Bollinger band, and it stretched out toward the 161.8% Fib extension area of wave 1 to 2. Something else to consider is that this may be a "completion wave 5" (see Keene Little's write-ups on Elliott Wave methodology). These waves (and wavelets) took place after the "too perfect" 2.5 week run-up that started in late March, ending in early April. The reason I say "too perfect" is that it ran up too fast, and the trend was just plain "too good to be true." In turn, I say "too good" because price rode up a tend line, never violating it on a closing basis for 9 trading days, and even the intra-day price action did not violate what turned out to be a "sacred" trend line. While we are talking about "containment" (and I'm not referring to Cold War foreign policy here), the median line channel generally contains price on the daily chart (waves A, B, and C). However, on smaller time frames (intraday) you will often see the overshoots (the subject of this article) "fly off the handle" and go outside those channels. S&P 500 Emini contract (ES04M) – Daily Chart (zoomed in) The chart above shows the price action for the week, but we are sticking with the daily chart, zooming in. On the chart above you can see how selling into strength or trying to get in short ties in with our theme of selling overshoots. But the intra-day action on Friday also fits this directive, but is not very apparent on the daily chart (even the zoomed in daily chart above), so we shall look at a 15 min chart, see below. I use the word "directive" advisedly, because it was stronger than mere advise (see transcript below from the Futures Monitor). ES – 15 minute chart At the open, with an almost 6 point gap down on the ES (see the 15 minute chart above), we had a Buy Early setup, which differs from the Buy Early Weakness in this respect: we usually do not have to wait a few minutes for entry. Indeed, the ES moved up 2.50 in the first 2 minutes, so we were a little late (we should call it a Buy Immediately setup). We had a 4 minute trade about 4 minutes after the open for 3.00 points. A massive 2 minute short squeeze pumped things up to the high of the day by 9:44 EST, or 10 points above the open in 14 minutes. Normally, we try to catch these type of intraday blow-offs, but the market's risk-reward due to the major economic report did not seem balanced, especially as fast a market as it was in the first half hour. We made one more attempt at 10:15, but got stopped out for a 1.50 loss. 5/7/2004, 9:31:45 AM I have a buy early bias, but neutral background setup (early meaning before 10:00) 5/7/2004, 9:35:44 AM Set a profit target of 1111.50 5/7/2004, 9:39:37 AM We had a second target of 1112.50, a third of 1113.50 (for other time frame traders) 5/7/2004, 9:42:29 AM Went above our 3rd target, medium time frame traders should tighten up stops 5/7/2004, 9:43:06 AM Should be taking profits on "overshoots" 5/7/2004, 9:45:59 AM Like I said, take profits on overshoots! To wrap things up, we have covered the sell overshoots concept (and reality), but you can just as effectively buy overshoots. However, the theme of the week last week (as it turned out) was one of selling run-ups. Depending on your level of risk aversion you can sell overshoots in the manner of taking profits, or if you are more aggressive you can short the overshoots (which basically amounts to "picking a top"). It was a very, very fast market, and most ES and SP traders don't even attempt to trade the first hour, so in terms of the signals in the Futures Monitor we were more risk averse due to the plethora of economic reports this week, and the wild trading action after the jobs report on Friday morning. I actually had a limit sell order in (for my personal trading) set at 1115.00, but was one tick too late. Too bad, because it turned out to be a massive 20 point dump, as buyers were either sitting on their hands (due to weekend event risk), or took off early for the weekend (judging my the very low mid-day volume). ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-09-2004 Sunday 5 of 5 In Section Five: Spreads and Straddles: Premium-Selling Plays: ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* SPREADS & STRADDLES ******************* Stocks Plunge Amid Interest Rate Fears... By Ray Cummins U.S. equities closed the week with a decidedly bearish bias as a surge in crude prices and unexpected jobs growth set the stage for rising interest rates. The Dow Jones industrial average fell 123 points to 10,117 with Home Depot (NYSE:HD) and General Motors (NYSE:GM) among the worst blue-chip performers. The tech-laden NASDAQ Composite slumped 19 points to 1,917, despite a strong showing by semiconductor shares. Interest rate-sensitive stocks, as well as raw materials issues, helped drag the S&P 500 Index 15 points lower to 1,098. Trading volume was average, with 1.65 billion shares changing hands on the New York Stock Exchange. On the technology exchange, 1.63 billion shares were traded. Decliners outnumbered advancers by a ratio of about 3 to 1 on in the broader market. Bond prices fell 1 5/32 after the upbeat employment report, with the yield on the benchmark 10-year treasury note closing at 4.75% for the first time in almost two years. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 05/07/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. PUT-CREDIT SPREADS Stock Pick Last Month L/P S/P Credit C/B G/L Status DNA 112.00 118.95 MAY 95 100 0.50 99.50 0.50 Open EBAY 75.94 79.82 MAY 65 70 0.65 69.35 0.65 Open HDI 55.63 54.83 MAY 48 50 0.25 49.75 0.25 Open PDCO 74.97 75.05 MAY 65 70 0.65 69.35 0.65 Open CME 116.11 116.51 MAY 100 105 0.60 104.40 0.60 Open MATK 65.12 66.97 MAY 55 60 0.60 59.40 0.60 Open MTG 74.42 72.54 MAY 60 65 0.50 64.50 0.50 Open AVP 84.00 84.56 MAY 75 80 0.45 79.55 0.45 Open MUR 68.50 66.80 MAY 60 65 0.50 64.50 0.50 Open? ERES 32.29 32.49 MAY 28 30 0.25 29.75 0.25 Open ZBRA 74.62 74.26 MAY 65 70 0.40 69.60 0.40 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss As suggested on Tuesday, bullish spreads on BJ Services (NYSE:BJS), Nabors Industries (NYSE:NBR), Navistar (NYSE:NAV) and Henry Schein (NASDAQ:HSIC) were closed due to further downside activity. The position in Silicon Labs (NASDAQ:SLAB) has previously been closed to limit potential losses. Murphy Oil (NYSE:MUR) is now on the "watch" list. CALL-CREDIT SPREADS Stock Pick Last Month L/C S/C Credit C/B G/L Status SOHU 25.46 16.65 MAY 35 30 0.60 30.60 0.60 Open SFNT 31.65 21.97 MAY 40 35 0.70 35.70 0.70 Open GENZ 46.40 42.60 MAY 55 50 0.60 50.60 0.60 Open PRX 55.25 40.06 MAY 65 60 0.65 60.65 0.65 Open MERQ 45.59 43.96 MAY 55 50 0.60 50.60 0.60 Open NEM 42.86 35.41 MAY 50 48 0.25 47.75 0.25 Open RYL 77.41 74.18 MAY 90 85 0.60 85.60 0.60 Open AMZN 45.20 41.90 MAY 55 50 0.65 50.65 0.65 Open BOBJ 27.85 20.73 MAY 35 30 0.75 30.75 0.75 Open NTES 51.43 38.35 MAY 65 60 0.50 60.50 0.50 Open VECO 27.43 24.00 MAY 35 30 0.55 30.55 0.55 Open BSX 40.25 39.77 MAY 45 43 0.25 42.75 0.25 Open RIMM 97.54 90.70 MAY 115 110 0.50 110.50 0.50 Open MRVL 38.92 40.51 MAY 45 43 0.30 42.80 0.30 Open OVTI 22.38 23.00 MAY 30 25 0.55 25.55 0.55 Open AMZN 43.95 41.90 MAY 50 48 0.25 47.75 0.25 Open CHIR 45.58 43.51 MAY 50 48 0.25 47.75 0.25 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status SSYS 20.88 20.88 MAY 22 20 2.10 2.25 Closed ZMH 80.84 81.85 MAY 80 80 4.90 6.15 Open? AH 35.78 33.83 MAY 35 35 3.10 2.90 Open QLTI 29.60 25.60 MAY 30 30 3.00 4.50 Open? HOTT 22.26 20.17 MAY 22 22 1.80 2.25 Open LF 19.67 20.80 JUN 20 20 3.50 5.25 Open? BSTE 30.63 38.95 JUL 30 30 6.00 11.50 Open? MKSI 23.10 19.75 JUL 22 22 4.70 5.50 Open Hot Topic (NASDAQ:HOTT) provided a favorable one-week profit and Zimmer Holdings (NYSE:ZMH), LeapFrog (NYSE:LF), MKS Instruments (NASDAQ:MKSI) and QLT Inc. (NASDAQ:QLTI) have also offered small, short-term gains. The Corinthian Colleges (NASDAQ:COCO) position was not available at the target entry price, due to the "gap-up" on the day after the straddle was listed as a new candidate. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ERTS - Electronic Arts $51.88 *** Consolidation Complete? *** Electronic Arts (NASDAQ:ERTS) develops, markets, publishes and distributes interactive software games that are playable by consumers on platforms such as home videogame machines, personal computers (PCs), hand-held game machines (Game Boy Advance) and online platforms over the Internet. Its products for playing on consoles and handhelds are published under license from the manufacturers of these platforms and EA pays a fee to these console manufacturers for the right to publish products on their platforms. EA operates in two major business segments: EA Core business that creates, markets and distributes interactive entertainment software and its EA.com business that creates, markets and distributes interactive entertainment software that can be played or sold online, ongoing management of subscriptions of online games and Website advertising. ERTS - Electronic Arts $51.88 PLAY (conservative - bullish/credit spread): BUY PUT JUN-45.00 EZQ-RI OI=8680 ASK=$0.45 SELL PUT JUN-47.50 EZQ-RW OI=2679 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$47.15 __________________________________________________________________ IMDC - Inamed $61.17 *** Rally Mode! *** Inamed (NASDAQ:IMDC) is a medical device firm that develops and sells a diverse line of products that enhance the quality of people's lives. The company has three principal product lines: breast aesthetics, consisting primarily of breast implants and tissue expanders marketed for use in plastic and reconstructive surgery; facial aesthetics, consisting primarily of collagen and other dermal fillers sold largely to dermatologists and plastic surgeons, and obesity intervention, consisting of products for use in treating severe and morbid obesity. The firm also offers collagen products for use by medical manufacturers. IMDC - Inamed $61.17 PLAY (conservative - bullish/credit spread): BUY PUT JUN-50.00 UZI-RJ OI=63 ASK=$0.30 SELL PUT JUN-55.00 UZI-RK OI=58 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$54.50 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BCSI - Blue Coat Systems $38.55 *** Sell-Off In Progress! *** Blue Coat Systems (NASDAQ:BCSI) designs, develops, markets and supports secure proxy appliances that are specifically designed or purpose-built to serve as a point of control and integration for multiple Web security functions. The firm calls its secure proxy appliances ProxySGs. It manufactures three primary types of ProxySG appliances, the ProxySG 400 Series, the ProxySG 800 Series and the ProxySG 6000 Series. These appliances are very similar in terms of functionality and differ mainly in terms of their performance characteristics and scalability. The company licenses two separate software products, a third-party universal resource locator filtering software and Blue Coat Reporter, which are used in conjunction with its ProxySG appliances. BCSI - Blue Coat Systems $38.55 PLAY (less conservative - bearish/credit spread): BUY CALL MAY-50.00 IYU-EJ OI=65 ASK=$0.40 SELL CALL MAY-45.00 IYU-EI OI=98 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$45.40 __________________________________________________________________ CFC - Countrywide Financial $56.30 *** Interest Rate Woes! *** Countrywide Financial (NYSE:CFC), formerly Countrywide Credit Industries, is a holding company that originates, purchases, sells and services mortgage loans through its major subsidiary, Countrywide Home Loans. The company's mortgages are principally prime credit first-lien mortgage loans secured by single one- to four-family residences (prime credit first mortgages). The firm also offers home equity loans and sub-prime credit loans. CFC, through its other wholly owned subsidiaries, offers products and services that are largely complementary to its mortgage banking business, including lender-placed mortgage insurance, insurance brokerage, mortgage-backed securities brokerage and underwriting, brokerage of bulk servicing transactions, loan processing and servicing in foreign countries, and retail banking. The company conducts its business through four segments: Insurance Segment, Capital Markets Segment, Global Segment and Banking Segment. CFC - Countrywide Financial $56.30 PLAY (less conservative - bearish/credit spread): BUY CALL MAY-65.00 CFC-EM OI=4282 ASK=$0.20 SELL CALL MAY-60.00 CFC-EL OI=8775 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$60.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ SUPPLEMENTAL DEBIT STRADDLES -- "EARNINGS REPORT SPECULATION" The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Stock Pick Exp. Straddle Long Long Target Target Symbol Price Month Strike Call Put Debit Gain BRKS 16.99 MAY 17.50 BQE-EW BQE-QW 1.50 0.35 KDE 20.02 MAY 20.00 KDE-ED KDE-QD 1.85 0.45 PLCE 22.56 MAY 22.50 TUY-EX TUY-QX 1.90 0.45 PNRA 40.42 MAY 40.00 UPH-EH UPH-QH 3.25 0.75 POSS 25.20 MAY 25.00 UPQ-EE UPQ-QE 2.05 0.50 SRNA 17.77 MAY 17.50 NHU-EW NHU-QW 1.70 0.40 VSAT 22.50 MAY 22.50 IQS-EX IQS-QX 1.90 0.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ***************************************** PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS ***************************************** All of these issues have robust option premiums and favorable technical indications. However, current news and events as well as market sentiment, will have an effect on these stocks so review each position thoroughly and make your own decision about its outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 05/7/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 FWHT MAY 17 17.15 19.62 0.35 4.19% 2.04% MICC MAY 17 17.15 23.02 0.35 4.31% 2.04% MNST MAY 22 21.95 25.78 0.55 4.39% 2.51% HNT MAY 22 22.00 23.40 0.50 4.76% 2.27% IPXL MAY 20 19.50 23.18 0.50 5.43% 2.56% SSNC MAY 22 21.60 22.84 0.90 7.85% 4.17% TINY MAY 15 14.70 16.01 0.30 4.60% 2.04% IMM MAY 15 14.70 16.81 0.30 4.66% 2.04% IPXL MAY 20 19.65 23.18 0.35 4.38% 1.78% JBLU MAY 22 22.15 26.75 0.35 3.65% 1.58% LSCP MAY 22 21.95 31.09 0.55 5.43% 2.51% TINY MAY 17 17.00 16.01 (0.99) 0.00% 2.94% XMSR MAY 25 24.50 23.01 (1.49) 0.00% 2.04% ASKJ MAY 30 29.50 36.21 0.50 4.47% 1.69% BRCM MAY 37 36.70 39.12 0.80 4.83% 2.18% FWHT MAY 20 19.35 19.62 0.27 3.03% 3.36% IMM MAY 17 17.05 16.81 (0.24) 0.00% 2.64% HOLX MAY 20 19.50 20.08 0.50 5.51% 2.56% HSII MAY 22 22.25 24.00 0.25 2.61% 1.12% IMM MAY 17 17.25 16.81 (0.44) 0.00% 1.45% LF MAY 20 19.55 20.80 0.45 5.16% 2.30% TSAI MAY 20 19.80 21.47 0.20 2.99% 1.01% TSO MAY 20 19.50 20.51 0.50 5.60% 2.56% APPX MAY 35 34.40 38.89 0.60 5.81% 1.74% BLDP MAY 10 9.75 9.81 0.06 1.57% 2.56% ELN MAY 17 17.30 21.00 0.20 4.01% 1.16% ERES MAY 25 24.50 32.49 0.50 6.05% 2.04% HOLX MAY 20 19.65 20.08 0.35 4.54% 1.78% LSCP MAY 22 22.10 31.09 0.40 5.49% 1.81% PDII MAY 22 21.75 27.53 0.75 8.99% 3.45% TELK MAY 22 22.20 23.36 0.30 4.32% 1.35% TNOX MAY 15 14.50 17.02 0.50 8.35% 3.45% APPX MAY 35 34.65 38.89 0.35 3.75% 1.01% EYE MAY 17 17.20 21.80 0.30 5.00% 1.74% JCOM MAY 22 22.30 22.83 0.20 2.82% 0.90% MGAM MAY 22 21.90 23.01 0.60 7.17% 2.74% MICC MAY 22 22.10 23.02 0.40 5.16% 1.81% NIHD MAY 33 32.88 34.88 0.50 4.38% 1.52% PXLW MAY 17 16.95 18.49 0.55 7.81% 3.24% SNIC MAY 17 17.15 18.19 0.35 5.76% 2.04% CAMD MAY 15 14.60 13.80 (0.80) 0.00% 2.74% DNDN MAY 12 12.25 13.40 0.25 6.83% 2.04% FWHT MAY 20 19.60 19.62 0.02 0.36% 2.04% MICC MAY 25 24.45 23.02 (1.43) 0.00% 2.25% NIHD MAY 35 34.50 34.88 0.38 3.81% 1.45% OSTK MAY 30 29.25 36.60 0.75 9.75% 2.56% SNIC MAY 17 17.20 18.19 0.30 6.05% 1.74% TINY MAY 17 17.20 16.01 (1.19) 0.00% 1.74% UTHR MAY 20 19.65 24.48 0.35 6.71% 1.78% ALKS MAY 15 14.70 13.84 (0.86) 0.00% 2.04% ATRS MAY 25 24.55 25.22 0.45 7.08% 1.83% DRTE MAY 17 17.20 17.18 (0.02) 0.00% 1.74% FWHT MAY 20 19.65 19.62 (0.03) 0.00% 1.78% INSP MAY 30 29.50 31.65 0.50 7.20% 1.69% ISPH MAY 15 14.50 16.63 0.50 11.39% 3.45% PTEN MAY 35 34.65 32.03 0.40 4.13% 1.01% UTHR MAY 22 22.10 24.48 0.40 6.82% 1.81% ARTC MAY 22 22.20 22.35 0.15 2.76% 1.35% CPKI MAY 20 19.70 20.07 0.30 6.19% 1.52% HEW MAY 30 29.50 29.65 0.15 2.01% 1.69% ISPH MAY 15 14.55 16.63 0.45 12.90% 3.09% MGM MAY 20 19.65 20.59 0.35 7.24% 1.78% SONO MAY 20 19.60 22.56 0.40 8.71% 2.04% USPI MAY 35 34.35 35.85 0.65 7.48% 1.89% DRIV MAY 25 24.75 27.12 0.25 5.17% 1.01% GPRO MAY 35 34.70 37.76 0.30 4.34% 0.86% JILL MAY 20 19.60 21.11 0.40 9.70% 2.04% MVSN MAY 20 19.65 22.43 0.35 9.34% 1.78% ORBZ MAY 25 24.75 21.73 (2.57) 0.00% 2.83% * PDII MAY 25 24.55 27.53 0.45 8.88% 1.83% SYMC MAY 45 44.65 48.25 0.35 3.95% 0.78% VXGN MAY 15 14.50 15.38 0.50 16.34% 3.45% Positions in ADEX, CLZR, ESIO, GNTA, GVHR, INSP ($35 strike), MRVL, NET, NFLX, PLMO, TOMO, and USG have previously been closed to limit losses. Obvious additions to the early-exit list are ALKS, CAMD, IMM (17.50 strike), MICC, TINY, and XMSR. Orbitz (NASDAQ:ORBZ) gapped lower before the opening bell on the day after the earnings-related position was listed, but even those traders who chose to open the play (for a larger initial premium) would likely have exited early for a smaller than published loss. In light of the recent bearish trend, the majority of portfolio issues remain on the "watch" list. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AFCI MAY 25 25.75 16.18 0.75 7.73% 2.91% QLGC MAY 37 37.95 27.13 0.45 4.22% 1.19% AVCT MAY 37 38.15 33.23 0.65 4.61% 1.70% INTU MAY 47 48.00 40.51 0.50 2.80% 1.04% PPCO MAY 20 20.30 13.40 0.30 6.92% 1.48% SINA MAY 45 45.55 26.98 0.55 6.61% 1.21% NANO MAY 20 20.40 12.00 0.40 10.66% 1.96% PHTN MAY 35 35.60 30.80 0.60 7.03% 1.69% SFA MAY 35 35.55 31.68 0.55 6.17% 1.55% SOHU MAY 25 25.75 16.65 0.75 11.61% 2.91% SWIR MAY 35 35.60 22.79 0.60 9.26% 1.69% HOV MAY 42 42.90 32.14 0.40 4.07% 0.93% NFI MAY 45 45.40 33.82 0.40 7.16% 0.88% PHTN MAY 35 35.30 30.80 0.30 6.07% 0.85% RMBS MAY 25 25.30 20.13 0.30 7.84% 1.19% FLSH MAY 20 20.25 17.07 0.25 8.55% 1.23% BRCM MAY 42 42.80 39.12 0.30 4.46% 0.70% APPX MAY 50 50.55 38.89 0.55 11.50% 1.09% KG MAY 20 20.25 14.52 0.25 12.67% 1.23% SHRP MAY 30 30.45 27.16 0.45 8.28% 1.48% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW NAKED-PUT CANDIDATES Stock Strike Strike Cost Stock Option Max. Simple Symbol Month Price Basis Price Price Yield Yield ADP MAY 45 44.65 46.03 0.35 5.00% 0.78% BCGI JUN 10 9.65 11.51 0.35 7.73% 3.63% ERES MAY 30 29.70 32.49 0.30 7.04% 1.01% FARO MAY 20 19.75 23.00 0.25 9.82% 1.27% LPNT JUN 35 34.30 37.51 0.70 4.03% 2.04% MXIM MAY 45 44.70 47.75 0.30 4.57% 0.67% NCF MAY 30 29.50 31.80 0.50 11.10% 1.69% NSM MAY 40 39.40 41.75 0.60 9.78% 1.52% __________________________________________________________________ ADP - Automatic Data Processing $46.03 *** Next Leg Up? *** Automatic Data Processing (NYSE:ADP) is primarily engaged in computerized transaction processing, data communication and information services. The firm offers four types of services: Employer Services, Brokerage Services, Dealer Services and Claims Services. All of ADP's services are offered broadly across North America and Europe. Some employer services and brokerage services are also offered in South America (mainly Brazil), Australia and Asia. ADP's revenues are primarily attributable to fees for providing these services, as well as investment income on payroll funds, tax filing funds and other Employer Services client-related funds. It also recognizes revenues associated with the sale of software systems and associated software licenses. ADP - Automatic Data Processing $46.03 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 45 ADP QI 4025 0.35 44.65 5.0% 0.8% __________________________________________________________________ BCGI - Boston Communications Group $11.51 *** Own This One! *** Boston Communications Group (NASDAQ:BCGI) provides real-time subscriber management services to the wireless industry. The company's real-time subscriber management products include the following: proprietary software applications, which include extensive software suite to manage subscribers; hosting environment, which is a real-time, large scale, micro-payment transaction processing platform; Intelligent Voice Services Network, which includes edge-of-network voice services and Signaling System 7 call control; and Distribution Technology Partnership Program, which is a national payment network for cash collection. BCGI - Boston Communications Group $11.51 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 10 QGB RB 1265 0.35 9.65 7.7% 3.6% __________________________________________________________________ ERES - eResearch Technology $32.49 *** 3-For-2 Split Coming! *** 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 $32.49 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 30 UDB QF 482 0.30 29.70 7.0% 1.0% __________________________________________________________________ FARO - FARO Technologies $23.00 *** A Big Day! *** 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 $23.00 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 20 QEJ QD 206 0.25 19.75 9.8% 1.3% __________________________________________________________________ LPNT - LifePoint Hospitals $37.51 *** Safe-Haven Sector? LifePoint Hospitals (NASDAQ:LPNT) operates 28 general, acute care hospitals with an aggregate of 2,617 licensed beds in non-urban communities in the United States. The company's general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non-urban markets. Most of LifePoint's hospitals provide diagnostic and emergency services, as well as outpatient and ancillary services, including outpatient surgery, laboratory, rehabilitation, radiology, respiratory therapy and physical therapy. LPNT - LifePoint Hospitals $37.51 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 35 PUN RG 0 0.70 34.30 4.0% 2.0% TS __________________________________________________________________ MXIM - Maxim Integrated $47.75 *** Chip Sector Strength? *** Maxim Integrated Products (NASDAQ:MXIM) designs, develops, makes and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high-frequency design processes and capabilities that can be used in custom design. Maxim's products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, radio frequency circuits, fiber-optic transceivers, sensors and voltage references. The firm's unique products are sold to customers in various markets including automotive, communications, consumer, industrial control, instrumentation and data processing. MXIM - Maxim Integrated $47.75 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 45 XIQ QI 12136 0.30 44.70 4.6% 0.7% __________________________________________________________________ NCF - National Commerce Financial $31.80 *** Merger Target? *** National Commerce Financial (NYSE:NCF) is a bank holding company that provides banking and other financial services through its banking and non-banking subsidiaries. The firm is the surviving corporation from the merger of National Commerce Bancorporation with the former CCB Financial Corporation. NCF's primary banking subsidiary is National Bank of Commerce. Across North and South Carolina, NBC operates under the name Central Carolina Bank. NBC offers commercial and retail banking, savings and trust services through 266 CCB offices located in the Carolinas and 183 offices located in Tennessee, Mississippi, Arkansas, Georgia, Virginia and West Virginia. In addition, the firm offers trust services through a subsidiary located in Florida. NCF - National Commerce Financial $31.80 "SPECULATIVE" PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 30 NCF QF 0 0.50 29.50 11.1% 1.7% __________________________________________________________________ NSM - National Semiconductor $41.75 *** Bottom Fishing! *** National Semiconductor (NYSE:NSM) designs, develops, manufactures and markets an array of semiconductor products, including a line of analog, mixed-signal and other integrated circuits. These products address a variety of markets and applications, including amplifiers, personal computers (PCs), power management, local and wide area networks (LANs and WANs), flat panel and CRT displays, and imaging and wireless communications. The firm seeks to sell the information appliance business, primarily consisting of the Geode family of products, and the cellular base-band business. NSM - National Semiconductor $41.75 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 40 NSM QH 10600 0.60 39.40 9.8% 1.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ATRX - Atrix Laboratories $28.09 *** Sell-Off Underway? *** Atrix Laboratories (NASDAQ:ATRX) is a specialty pharmaceutical company focused on advanced drug delivery. Its drug delivery systems deliver controlled amounts of drugs in various time frames to address a range of therapeutic and patient needs. Atrigel is the company's original proprietary sustained release biodegradable polymer drug delivery system. The Atrigel system is designed to provide benefits over traditional methods of drug administration such as safety and effectiveness, ease of use and application, site-specific or systemic delivery, biodegradability and customized release rates. ATRX - Atrix Laboratories $28.09 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAY 30 OQF EF 2955 0.35 30.35 9.2% 1.2% __________________________________________________________________ KOSP - KOS Pharmaceuticals $37.51 *** A Big "Down" Day! *** KOS Pharmaceuticals (NASDAQ:KOS) is a fully integrated specialty pharmaceutical company engaged in the development of proprietary prescription products for the treatment of chronic cardiovascular and respiratory diseases. The company manufactures its marketed products, Niaspan and Advicor, and markets such products directly through its own specialty sales force and through a sales force provided by a contract sales organization. Their cardiovascular products are based on controlled-release, once-a-day, oral dosage formulations. The company's respiratory products in development consist of aerosolized inhalation formulations to be used mainly with its proprietary inhalation devices. KOSP - KOS Pharmaceuticals $37.51 "SPECULATIVE" PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAY 40 KQW EH 1024 0.65 40.65 12.5% 1.6% __________________________________________________________________ PBY - Pep Boys $25.72 *** Consolidation In Progress! *** Pep Boys -- Manny, Moe & Jack (NYSE:PBY) is engaged primarily in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores. The company operated its stores in 36 states and Puerto Rico and its primary operating unit is its Supercenter format. Its operates over 600 Supercenters and one Service and Tire Center, having an aggregate of 6,527 service bays, as well as 12 non-service/non-tire format Pep Boys Express stores. The Supercenters serve "do-it-yourself" (retail) and "do-it-for-me" (service labor, installed merchandise and tires) customers. PBY - Pep Boys $25.72 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAY 27.5 PBY EY 1687 0.35 27.85 10.0% 1.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ********** 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
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