The Option Investor Newsletter Sunday 05-23-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Bullish Signs Appearing? Futures Market: See Note Index Trader Wrap: TRACTION Editor's Plays: Back From the Dead Market Sentiment: Investors Still Cautious Ask the Analyst: Economics 101 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 5-21 WE 5-14 WE 5-07 WE 4-30 DOW 9966.74 - 46.13 10012.9 -104.47 10117.3 -108.23 -247.27 Nasdaq 1912.09 + 7.84 1904.25 - 13.71 1917.96 - 2.19 -129.62 S&P-100 534.33 - 1.14 535.47 - 1.88 537.35 - 3.53 - 15.92 S&P-500 1093.56 - 2.10 1095.66 - 3.03 1098.69 - 8.61 - 33.30 W5000 10625.10 - 9.61 10634.7 - 51.33 10686.0 -107.62 -356.76 SOX 458.18 + 7.19 450.99 - 6.02 457.01 + 13.52 - 44.50 RUT 545.81 + 2.05 543.76 - 4.80 548.56 - 11.24 - 30.91 TRAN 2861.75 + 12.86 2848.89 + 2.71 2846.18 - 40.26 -115.27 ****************************************************************** It may be far too soon to make any definite bullish predictions but there are some signs that there may be a bounce ahead. With the very low volume the last several days it would be tough to apply much validity to improving technicals but they are there just the same. It could be that the bears are just getting tired more than the bulls staging a rebound but next week should supply the answers. S&P-500 Chart – Daily Dow Chart – Daily Nasdaq Chart – Daily SOX Chart - 90min The only economic report for Friday was the Internet Commerce Sales for Q1 and at $15.52 billion it was the second highest quarter on record and a +28% jump over last year. Sales only dipped -$2B from the record holiday sales in the 4Q. This is a very strong confirmation that the Internet is not only here to stay but picking up speed and acceptance by consumers. We need to shift some of those Internet sales back into tech stocks which posted their sixteenth straight week of outflows from tech funds. Overall fund outflows eased to a negative outflow of only $600 million for the week ended Wednesday. This was far less than I expected and far less than the -$2.5B outflows for the prior week. Considering the drop by the Dow to the lows for the year at 9852 on Wednesday a week ago I had thought the outflows would increase. Chalk up one point for a potential bounce ahead. Oil prices fell again as OPEC prepared to meet this weekend in Amsterdam to discuss raising production quotas. Saudi Arabia Oil Minster Ali al-Naimi said he would ask OPEC to raise production quotas by more than two million barrels per day. Saudi wants to knock prices down below $40 to prevent long term damage to oil demand. As long as prices are high the sales outlook for gas guzzlers drops sharply. Automakers and consumers revert back to high mileage vehicles. This does produce a longer term lessening of demand and eventually it lowers oil prices. With oil prices high companies begin to explore alternate energy sources for new plants. Again, the long term demand then declines. With prices high the demand for new domestic drilling as well as drilling in non OPEC countries skyrockets. This brings on new supply and depresses the prices OPEC receives. OPEC wants to keep the prices in the sweet spot where demand and prices are balanced and they control the cash register. They have to raise production targets this weekend to prevent these things from taking place. Wal-Mart said on Friday that customers in their survey were losing $7 per person per week in buying power due to high oil prices. Falling oil prices ahead? Chalk up another point for a potential bounce. The Fed is going out of their way to press the point that rates will only rise if the economy rises. This seems to point to a Fed that is not sure the economy has risen to the level where a rate hike is necessary. The bond market has already priced in several hikes as well as the stock market. If those hikes were to be pushed later into the year then the market may be under priced. Bernanke hammered this point home once again as did McTeer with their "rate of increases dependent on the economy" comments. Fed fund futures are now showing only a 94% chance of a rate hike in June. Cracks are beginning to show in the prior premise that it was guaranteed. They are however still predicting a 25 point hike in August. A potentially friendlier Fed? Chalk up another point for a potential bounce. Volume for the past week has been very light despite some rather big swings. For three of the last four days up volume was significantly above down volume despite the failure of a bounce to hold. Over the last four days up volume accounted for 8.7B shares compared to only 5.3B on the down side. New 52-week lows have fallen to only 167 on Friday compared to 1181 on the big drop on May 10th. Friday had the fewest 52-week lows since April 22nd. Improving internals? Chalk up one more reason. For the last two weeks the markets have plateaued at support across all the varied indexes. The SPX came to a dead stop at the 200dma at 1080 last week and tested it on three separate days. For the last four days the SPX support has risen to 1090 and it has defended it very aggressively. The SOX appeared to make a low the first week of May at 435 and has been making progressively higher highs and lows ever since. We are not seeing a charging bull in the SOX but more of creeping support now in the 455 range. The very strong Book-to-Bill report Thursday night should provide additional support for the semi sector. The major indexes all seem to have found a support level that they can defend. The Wilshire-5000 defended 10500 last week and 10600 this week. The Nasdaq defended 1880 last week but upped the ante to 1900 this week. The $BKX.x banking index hit a low of 90.62 on May 10th and has been moving progressively higher for two weeks and closed right at a two week high on Friday. If financials are back can the other sectors be far behind? This outlook is not without its problem child. The Dow has been defending 9900 for the last two weeks but is showing little signs of mounting a real rally. Because of the very narrow representation in the 30-stock Dow I am giving it less weight in light of the improvement in the broader indexes. Support that can't be broken? Chalk up another point in favor of a rebound attempt. Three times last week the markets tried to produce a rally. Three times they failed but the low for the week was on Monday. There are buyers coming back into the market as evidenced by the 50% higher up volume than down. The real problem was simply overhead supply waiting for any rebound attempt. Eventually that supply has to be depleted. There is also a chance the rallies failed (or were caused) by option expiration activity. There was huge open interest in the index options and ETFs and hedge funds with billions under management can push low volume markets around like leaves in a tornado. Program trading for the week was 50.5% of total volume. This is NOT arbitrage programs that just key on fair value discrepancies as they only came to 13.8% of the total. These are programs triggered by very big players with one thing in mind and that is getting in or out of positions in a hurry. Considering the low volume and the amount of program trading and the extremely high option open interest I think the fact we did NOT break support is bullish. Chalk up another point. GE is being bought. The low print for GE was Monday's open and it was all up from there. The gap open on Wednesday was hit hard by that monster sell program Wednesday afternoon but Friday saw those losses almost erased. GE has fought for support at $30 for the last month. Five times that support was broken intraday and each time it was quickly bought. Monday was the last time it traded under $30. If GE, the proxy for the economy, has successfully defended $30 for the last time and is being bought then can a real rally be that far away? Get the chalk again. Throughout this commentary we have been making points in chalk, not permanent marker. While there are some serious yet subtle signs of a potential rebound there are still some problem areas. The Dow is one of those areas. Several stocks in the Dow are spiraling into rapidly lower lows. For instance, GM, PFE, VZ, UTX, C, MO, CAT and MCD to name a few. They are offset by some of the others like HD, INTC and AXP that have strong uptrends in place but it will still be the weaker index. There are still some negatives in our future and they include the Iraq turnover and the FOMC on June-30th. You have the FBI issuing new warnings about suicide bombers in the U.S. and attacks a multiple McDonalds abroad. The election will continue to be a producer of uncertainty but Bush appears to be weathering the storm. CNBC did a survey of 28 market analysts and all 28 said the market favored a Bush victory over Kerry. Assuming there are no new surprises like the Iraq prisoner abuse and oil prices do moderate I think traders will begin to ignore the election risk. That leaves us with the normal summer doldrums ahead and the earnings warnings in June just before the Fed meeting. There is still a rocky road to be traveled but most of the risk is still a month away. Just because there may be another rebound in our future does not mean it will stick. We saw what happened to a couple +100 point moves last week. They evaporated as quickly as they appeared. For the Dow the 10050 resistance appears solid but a strong break there could trigger substantial short covering with initial higher resistance not until 10200 then 10300. That would be a huge rebound and I would be surprised if that is in the cards for next week. If we could just get over 10100 I would be pleased. The Nasdaq has strong resistance at 1935-1960 and a move over 1960 would be a strong move. The key point is not that there might be a rebound attempt in our immediate future but that it may be too early to expect it to succeed. The lack of any real selling pressure last week may have just been a pause for option expiration or a pause in hopes we do get a real bounce they can sell into. You just never know until it happens. The SPX 200dma is still intact at 1081 and still the line in the sand that any rebound will be built on. Should that line fail we could easily see Dow 9600. I would also remind everyone that our biggest drops lately have been on external events like the change in the Indian government. These things can never be predicted and will pop up when they can do the most harm. Always keep your stops in place whether long or short the market. Monday after option expiration is not normally a strong day in either direction as there is too much settling in progress to enter new trades. This produces somewhat higher volume but on both sides of the ledger. If my speculation is correct and we do get a rebound attempt next week I would watch prior resistance levels very carefully for signs of weakness. If sellers are still waiting overhead then don't fight it. If we do fail again and our current support levels are retested (9900/1880/1080) I would not hesitate to buy the dip but be prepared for a potential support failure. One more test could just be a strong bottom forming but a failed test could produce a significant drop. I received an email this week that said essentially "don't take both sides, are we going up or down?" I seriously do not think I take both sides. I do paint the picture for both sides so everyone can understand the pros and cons of the current market. However, I think I have been explicit in telling you to "sell the rallies" for several weeks. Last Tuesday was the first time I recommended a neutral position because I saw support strengthening. Of course Wednesday was a monster rally that should have been sold again. Hindsight is always 20:20. Okay, to avoid confusion for Monday and using the SPX as a guide, buy a bounce from 1080 and sell a failure at 1120. Under 1080 begins a new leg down. The game plan is simple. I hope everybody is now on the same page. 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 ******************** TRACTION By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – We have to distinguish to some degree between the most important New York Stock Exchange index and the key Nasdaq index. The former is having trouble gaining any traction here in trying to re-gain some upside momentum. Given that the S&P 500 (SPX) is holding at and above its 200-day moving average [even though the S&P 100 (OEX) and the Dow 30 (INDU) are not], that this index is now oversold on both daily and weekly charts and that trader "sentiment" is at the level of bearishness we commonly see at market turning points, I think most if not all of the gains from SPX, OEX and DJX puts has been realized. As I noted last week as areas to watch, SPX has also held above key support at 1080 and above 527-530 in the OEX. The Nasdaq Composite (COMP) is not as oversold yet as SPX, but is getting there. COMP appears to be digging into support on dips below 1900 and has made an approximate double bottom relative to the late-March lows. There is probably not a lot of downside left – and the Nasdaq 100 (NDX) has actually held above its late- March low on what liked a reversal day at the beginning of this past week (17th) and forming a rounding bottom on hourly charts. That is the technical picture and consistent with fundamentals: an improving economy and earnings picture eventually outweighs the predictable rebound in interest rates and other shorter-term factors like the spike in energy prices. Iraq is the wild card but has more political than economic fallout at this point. FRIDAY'S TRADING ACTIVITY – Market volume was light, as traders and investors were gun shy and reluctant to take on positions ahead of the weekend and after a choppy trade all week. Stock market participants have been keeping one eye on the nearby July crude oil futures, which ended down 87 cents (at 39.93) after Saudi Arabia said it would suggest to OPEC members at a weekend meeting – not a formal production get together - to raise oil production by more than 2 million barrels per day. Expiration of options on stocks indexes and individual stocks seemed to lift volume early in session, trading slowed way down as the day went on. The S&P 500 Index (SPX) gained 4.4 points to 1,093.5. The Dow 30 (INDU) closed at 9966, up 29 points. The Nasdaq Composite (COMP) ended at 1912, up 15.5 points and the Russell 2000 index (RUT) was up not quite 1 percent to close 545.8. Federal Reserve Governor Bernanke helped lift stocks in the morning after saying Thursday at a luncheon and that was quoted as: "The good news is that, because of the impact of private-sector expectations about policy on current long-term rates, a significant portion of the financial adjustment associated with the tightening cycle may already be behind us. As we look ahead, core inflation appears likely to remain in the zone of price stability during the remainder of 2004 and into 2005." The Governor also spoke about the inflationary price trend for commodity prices, when he also said that there were signs that commodity prices, with the exception of oil, "may be peaking." Well, what about oil prices – guess he didn't want to go out on a limb and predict that one. The Semiconductor sector rallied (SOX index) from a Thursday night report from Semiconductor Equipment and Materials International that indicted North America-based chip equipment orders for April totaled $1.59 billion, up 16% from the $1.38 billion in March and up 111% from the $757 million in April 2003. The April book-to-bill ratio, which measures the value of orders received against the value of products shipped, was 1.14, up from 1.09 March. Good News although the rally was limited – the SOX ended up 4.3, to 458.2. OTHER MARKETS – Bonds were up early and then fell back from early highs, as the yield on the benchmark 10-year Treasury note ticked up .05 percent to 4.762 The dollar fell .4% against the euro to $1.2006, dropped 0.7 percent against the British pound to $1.7892 and lost 0.5 percent vs. the yen to 112.14. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: I am still of the same view that as long as the S&P 500 (SPX) can hold above 1080, at both some key prior chart support and its 200-day moving average that a bottom is forming – this as opposed to a pause on the way still-lower. This view suggests what the criteria is to suppose that another down leg lies ahead – a daily close below 1080; better evidence even is two consecutive closes under 1080. Forming still more lows in at and above the 1080 area might go for awhile – if so, the stronger would I expect a next rally to be. Resistance is at 1100 at the down trendline and extends up to 1107. A close over 1107, the current level of the 21-day moving average, is what is needed turn the technical picture a bit more bullish. Stay tuned! Above 1105-1107, further resistance can be anticipated in the 1120 area. A close over 1120 would suggest upside potential of another 20 points higher from there – toward the upper trading (red) band or envelope line. My Put to Call to Put indicator gave the most bullish reading in a while last week, as the level of put activity picked up. Such readings by themselves don't get me into index calls, but given the other things that suggest that SPX is digging into support and finding buying interest for stocks there, I anticipate a strong rebound soon – within a few days more. The market is more likely to "find" some good news when it gets oversold like now. S&P 500 Index (SPX) – Hourly chart: Resistance, at the hourly down trendline still is apparent around 1100, then at the prior hourly high at 1105. SPX has not yet been able to achieve an upside penetration of the upper end of its bearish downtrend channel. It seems to me that the Index either breaks out above 1100 soon or there is another downswing. If there is another swing lower potential support is at 1087 (see highest most green arrow), at the minor up trendline that has been traced out recently on the hourly chart. Next, we should look to the prior hourly low at 1076 as a possible low again. S&P 100 Index (OEX) – Daily & Hourly charts: 528-530 is key support - the ability of the S&P 100 (OEX) Index to hold this area will be my gauge of rally potential. Near resistance is at 538, then around 540. 448-550 is the next area of expected resistance and anticipated selling pressure. 533 is near support – at the trendline on the hourly chart at right. The 527-528 area, at the prior lows of earlier in the month, is key support with a close under this area suggesting that the 520-521 area could be seen in OEX. Dow Industrials (INDU) Daily: The Dow 30 Average still trades under its 200-day moving average which is bearish overall. I'm keying in however more on the 9850 level – the area of the prior lows that is seen at the dashed green level line. 9600 is the next level of support below these prior lows and dates back to another set of lows. Resistance has been seen at 10,060, then is anticipated around 10,200 – and, lastly, up in the 10,400 area at the intersection of the down trendline currently. Nasdaq Composite (COMP) Index – Daily: Key technical resistance is at the down trendline first – this intersects in the 1920 area. If the recent low at 1865 doesn't hold if there is another decline – and that day had the look of an upside reversal and possible "exhaustion gap" – then my next downside target is to around 1850 at the lower envelope line. A close or two back above the 21-day moving average would suggest potential to 1965-1975, possibly back to the 2000 area on a rebound. The COMP is oversold as registered by the 14-day RSI but could get a bit more oversold still judging by the weekly RSI (not shown and using a "length" setting of 8). Nasdaq 100 (NDX) Index – Daily & Hourly: The last daily low was at a level above the prior low as seen on the daily chart below left. This fact and the possible rounding bottom formation that has been traced out on an hourly basis could be an indication of a bottom – particularly the daily low and reversal that occurred from a price area a bit higher than the last low. (The rounding pattern is of interest but is not as reliable as if seen over a longer period on the daily chart.) The 1380 area still looks to be the key support. Key resistance is at 1435-1438. A close over this area is needed to suggest that a strong rally might be underway. Nasdaq 100 tracking Stock Daily & Hourly (AMEX:QQQ): 35.5 – 35.7 is key near resistance as is highlighted on the hourly chart at right below. Resistance then comes in just over 36. A close over 36.75 would be a breakout above the down trendline on the Daily chart (left, below). 34 still looks like key support. I would trade next only when this sideways price range resolves itself with a breakout higher – I would say lower also, but am not inclined to play the short side when an index is oversold. I would rather wait to buy QQQ at some point as I figure my risk to reward potential is better on this side of the market – except for a "scalping" type trade I don't see big potential in shorting on a further rally. Well, maybe shorting on a move back up the 36.25 area, with a tight stop at 35.50 and an objective to 34.25. 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 ************** Back From the Dead Tyco has come back from the dead after being beaten to within an inch of its life with the Kozlowski scandal. The stock sank to $7 in 2002 as the magnitude of the problem became apparent. Tyco is a huge company with revenues of $10 billion per quarter and profits of $750 million. Even Kozlowski could not spend all the money they make. The rebound in the stock is proof that investors are confident there are no further revelations in the pipeline. The stock fell from a high over $60 when the scandal hit the press and should return there eventually. Currently the stock is pressing against resistance at $30 which has held for the last three months. A break over $30 should produce significant short covering and breakout buying. Next real resistance is around $35 and then again at $40. There are multiple ways to play this. A simple straight June $30 call is only 60 cents but only has four weeks to run. I like Tyco for the longer term and would go for the July-$30 call at $1.00 or January $35 call for 85 cents. Either option requires a break over $30 to be profitable but once that break occurs I expect a significant move. Strictly personal opinion on my part. You should notice that TYC has moved up +$3 in the last two weeks on less then favorable market conditions. July $30 Call TYC-GF $1.00 Jan $35 Call TYE-AG $0.85 TYC Chart – Weekly ********************** PNRA Put Update $33.24 The stock is still falling despite a slight bullish uptick in the market. Target for the June $30 put UPA-RF is still $1.00. http://members.OptionInvestor.com/editorplays/edply_051604_1.asp ********************** EBAY Put Update $80.30 We are not seeing any drop in EBAY and while our profiled June-$80 put rose to $5.30 from the $2.45 when profiled we did not exit because EBAY did not hit our target of $76. The low was $76.85 on May 10th. In hindsight we should have exited but with EBAY trading under $78 as late as May-17th I kept thinking we would get one more dip. With the market firming slightly I am going to recommend closing the position Monday for a breakeven before time decay becomes a material problem. The problem with a weekly recommendation is the inability to react to a near hit on the price until a week later. http://members.OptionInvestor.com/editorplays/edply_042504_1.asp *********************** News Corp Update $35.49 NWS continues to hold over its 200dma and should follow the market from here. We are looking for some bullishness to return to allow us to sell come covered calls against our leaps to reduce our cost. Current position: Long (6) Jan-2006 $40 Calls WLN-AH @ $3.83 http://members.OptionInvestor.com/editorplays/edply_041104_1.asp http://members.OptionInvestor.com/editorplays/edply_041804_1.asp **************** MARKET SENTIMENT **************** Investors Still Cautious - J. Brown May has been a tough month for the markets but most of the pain all happened in the first week. The last couple of weeks have been generally sideways and if you're a chart reader one might suspect that we could have a new bottom in place. At least that's the train of thought if you're an optimist. Bears might say that the last two weeks are merely a consolidation of the previous declines before we see more. After all May is the first month in the "worst six months" of the year theory. Fueling the rally this past Friday were two issues. Oil and the Fed. Oil lifted the markets because OPEC was meeting informally in Amsterdam on Saturday and the Saudi minister had already suggested that OPEC raise production by 2 million barrels a day to ease demand and price issues. Jim offers a good explanation in the weekend wrap on why it's important that OPEC should curb these record high prices so I won't go into detail. It's important to the stock market because oil prices and record gas prices are taking a huge toll on our economy at the consumer level. Two-thirds of our GDP is based on consumer spending and right now Americans are forking over a lot of cash to fill up their cars everyday. Wal-mart (WMT) went so far as to quantify the damage as $7 per week per WMT customer is being lost to higher gas prices. The bad news is that OPEC's informal meeting didn't offer any decisions and they did not discuss the Saudi proposal to raise output. That's going to be a wet blanket on the markets come Monday. OPEC meets formally on June 3rd in Beirut. The Fed helped ease some market concerns when a couple of the Federal Reserve governors issued calming comments late this week suggesting that a rate hike isn't necessarily imminent. Their focus now seems to be that they'll hike rates if the economy continues to improve and only if it continues to improve. Now given the positive economic data over the past few months most still believe that a rate hike before the November election is a guarantee but the question is by how much will the FOMC raise rates. There is a growing camp that believes the Fed is "behind the curve" which would force them to hike rates faster and higher than we might expect. Furthermore the recent comments creates a stronger focus on the next round of economic data as Wall Street ponders how each report may or may not influence monetary policy. Speaking of economic reports next week is full of them. Monday is empty but Tuesday offers the Consumer Confidence numbers. Wednesday the durable goods orders. Thursday brings the preliminary GDP while Friday unveils the Michigan Sentiment and Chicago PMI and that's not even the complete list of reports due out next week. However, it's also noteworthy to mention that the President is expected to offer a prime-time speech on Iraq this Monday but I'm not sure how that will affect investor sentiment. In the mean time the ongoing geo-political risk (a.k.a. terrorism threat) is an underlying concern that will only heat up and sap the strength in any market rally as we approach the June 30th Iraq handover. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8540 Current : 9966 Moving Averages: (Simple) 10-dma: 9979 50-dma: 10257 200-dma: 10041 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 927 Current : 1093 Moving Averages: (Simple) 10-dma: 1091 50-dma: 1117 200-dma: 1082 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1123 Current : 1408 Moving Averages: (Simple) 10-dma: 1402 50-dma: 1435 200-dma: 1420 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 18.49 -0.18 CBOE Mkt Volatility old VIX (VXO) = 19.16 -0.20 Nasdaq Volatility Index (VXN) = 24.90 -0.64 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.21 868,694 973,948 Equity Only 0.81 661,326 534,158 OEX 1.41 82,978 117,042 QQQ 0.71 101,300 71,859 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 61.9 + 0 Bear Confirmed NASDAQ-100 30.0 + 0 Bear Confirmed Dow Indust. 66.7 + 0 Bear Confirmed S&P 500 58.8 + 0 Bear Confirmed S&P 100 61.0 + 0 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: 1.21 10-dma: 1.11 21-dma: 1.17 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 1865 1931 Decliners 933 1081 New Highs 31 58 New Lows 45 64 Up Volume 1024M 973M Down Vol. 501M 316M Total Vol. 1544M 1345M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/18/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders remain net short and seem to be increasing their bearish sentiment. Small traders are net bullish and in mirror-like fashion are growing more bullish compared to the big traders. Commercials Long Short Net % Of OI 04/27/04 406,927 416,244 ( 9,317) (1.1%) 05/04/04 397,964 417,175 (19,211) (2.4%) 05/11/04 401,365 421,672 (20,307) (2.5%) 05/18/04 394,352 423,258 (28,906) (3.5%) 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 04/27/04 133,775 90,535 43,240 19.3% 05/04/04 137,112 80,201 56,911 21.6% 05/11/04 135,534 76,987 58,547 27.5% 05/18/04 139,647 74,597 65,050 30.4% 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 The four-week trend for the commercial traders has been a bullish one as they increase their long positions. Meanwhile the small traders have been busy shuffling money around and reducing their long and short positions. Commercials Long Short Net % Of OI 04/27/04 291,365 370,549 (79,184) (12.0%) 05/04/04 316,840 370,781 (53,941) ( 7.8%) 05/11/04 378,696 362,887 15,809 2.1% 05/18/04 390,484 357,157 33,327 4.5% 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 04/27/04 175,788 69,613 106,175 43.3% 05/04/04 119,308 74,407 44,901 23.2% 05/11/04 101,199 94,408 6,791 3.5% 05/18/04 62,216 87,269 25,053 16.8% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 There continues to be very little movement in the commercial traders' positions. Small traders have reduced their short positions somewhat. Commercials Long Short Net % of OI 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% 05/18/04 58,376 37,528 20,848 21.8% 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 04/27/04 9,008 20,347 (11,339) (38.6%) 05/04/04 10,247 24,764 (14,517) (41.5%) 05/11/04 9,716 21,072 (11,356) (36.9%) 05/18/04 9,843 18,935 ( 9,092) (31.6%) 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 The dead heat between longs and shorts for the commercial traders has grown even thinner. Small traders have moved from net bearish to net bullish on the Industrials. Commercials Long Short Net % of OI 04/27/04 23,676 22,009 1,667 3.6% 05/04/04 24,296 22,181 2,115 4.6% 05/11/04 22,614 21,507 1,107 2.5% 05/18/04 22,257 22,444 ( 187) (0.4%) 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 04/27/04 5,998 8,868 (2,870) (19.3%) 05/04/04 6,262 8,155 (1,893) ( 9.2%) 05/11/04 7,009 7,640 ( 631) ( 4.3%) 05/18/04 9,098 6,591 2,507 16.0% 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 *************** Economics 101 It's summer time in the northern hemisphere and kids are looking forward to some time off from school, but this week's e-mail was largely comprised of questions centering around inflation, and various economic indicators. While I'm not an economists, my business marketing/finance degree in college required me to sit in many a class and listen to the professor spew out tons of information and theory on economic indicators and how a student studying business should have a firm grasp of various economic indicators. One thing I learned, which didn't become a core belief until after I got out in the "real world," was that you can give 5 economists or analysts the same set of data, and the odds are that you would get back 5 very different answers as to what the economic data was saying. Gone now are some of the concerns for deflation that usually come from an economic recession, and sure enough, its inflation that is on everyone's mind as the U.S. and global economy improves. Is there one single economic indicator that is MOST important to follow, or understand? My answer, would be emphatically... NO! That's why we get hammered with so many economic reports each week. And with these reports can come confusion, and sometimes a "rush to judgment" as to what that economic report may have suggested. Based on some of the questions received this week, I thought I'd pick out a few economic reports that are released each month, place them in a table where we could look at some of the data, and try to understand, or get a feel, for how the various economic reports all mesh together, where somehow, the various markets we may be trying to trade/invest in, always seem to get it right, as they correctly predict the eventual outcome of what the economic data was saying. Certainly there are times when the MARKET suddenly realizes it was wrong in its original analysis, and when it does (the MARKET that is), it is quick to adjust and make appropriate corrections. I went through a very long list of various economic reports we are hammered with each month, and tried to pick out some of those that I feel can be of focus at this point in time. During the recent recession, it was the housing market that was of great focus as the industrial and service portions of the economy were in decline, where construction of homes was one of the key drivers for keeping some pulse in the economy. While the homebuilding market will always be a key part of the U.S. economy, we won't be discussing those economic data in this column. Certainly I will have left out something that you deem overly necessary to have considered, but by the time most of us get the crash course in Econ. 101, we will have had enough from some of the basics. One of the most often-asked questions after an economic report has been released is "why did the market do this, and not that?" Like I said.... give 5 economists the same set of data, and you'll probably get 5 different analysis of that data. Hopefully I can try and walk through some of the things I've learned not only in college, but in life and from other business people, are how to at least think about various economic readings/reports, to try and build a foundation of just what the MARKET is thinking, and where we can look for clues for further confirmation of our economic analysis. You may want to print the following table out in order to follow along with today's discussion. Table of Economic Reports - Dec. 2003 to May 2004 Good gravy! This is the reduced version? Don't worry, I'm not going to go into great detail on every single number, but I wanted to at least give us 5-months of various economic report observations, so we can get a feel for what some of the economic reports have been. At the top is quarterly Gross Domestic Product (GDP), where in the fourth quarter of 2003, the economy grew at a 4.1% annual rate. Recent economic data showed the economy grew at a 4.2% annual rate, where on May 27, we're going to get a potentially revised reading on the first quarter's GDP, which economists are currently forecasting an upward revision to 4.5%. If you don't understand what Business Inventories are, or any of the other economic reports about to be discussed in brief, most of them are described in the EDUCATION section of the website under GLOSSARY. Business Inventories and Sales: has been one of the most dynamic and sometimes misinterpreted (in my opinion) pieces of economic data. One of the biggest "rush to judgment" analyses is when the Business Inventory headline number is considered by itself, without any regard as to sales trends. One thing I learned from a client of mine (he managed a manufacturing plant in Puerto Rico for Hewlett Packard) was how a efficient corporations were becoming in the management of inventory (especially at the wholesale end of inventory). I was shocked to learn that that his plant actually overnight couriered in slats of microprocessors just ahead of a large production run. I told him that that was way too expensive, but he explained that holding INVENTORY of those processors (more storage space and that's costly, buy those processors months in advance and that's dead money sitting in storage until product is manufactured and then sold, an earthquake or geopolitical event could become costly for inventory held, etc.) Perhaps you've heard the term "just in time" inventory, where the concept is that your inventory shows up just in time to get it into production, and not let it sit around. Just in time inventory plays a BIG ROLE in why inventory to sales continues to decline. An just what is "just in time" inventory a part of? PRODUCTIVITY!!!!!!! That's right! PRODUCTIVITY which helps LOWER the COST of manufacturing goods. Fed Chairman Alan Greenspan and other Fed governors are constantly talking about the rates of productivity as being a key part of their inflation/deflation analysis. Wholesale Inventories: are the second stage of the manufacturing process, and perhaps more difficult for a business unit to handle, but can give important readings on demand for the Business Inventories, or first stage of a products manufacture. Certainly demand (sales) has been outstripping supply (inventory). Is this inflationary? Or is this dynamic partially created from PRODUCTIVITY? Factory Orders: Once you've gotten information from Wholesale Inventories, the Factory Orders usually doesn't carry that much weight, but can still be an important demand observation, which helps separate out lower priced ticket items we call non-durable goods. This economic indicator can give us a QUANTITATIVE reading on consumer spending, where Consumer Sentiment readings are more anecdotal. One "fear" among some economists is that the recent rise in Treasury Yields, which has brought about a decline in mortgage refinancing, is that the consumer will not have has much money to spend. Factory Orders may give future insight to these fears being correct, or incorrect. Durable Orders: or the Durable Goods report is the rate of spending (up or down) on big-ticket items that we expect to last at least three years. Televisions, refrigerators, office furniture are products that make up this category, and similar to the Factory Orders data, gives insight as to what types of products consumers are buying. Are we rewarding ourselves with a new shirt or blouse this month, or are we feeling wealthier and buying that flat panel TV that just came out? Industrial Production: was one of my FAVORITE classes in college was industrial production. Running all those simulators and trying to forecast what demand would be in order to set up my production to efficiently meet that demand. This is one of those economic reports that can also be grossly misinterpreted. Did industrial production fall because of accurately perceived economic slowing? Or did industry underestimate demand one month, and have to ramp up production the next month to catch up? We would be encouraged to monitor SALES at both the Business and Wholesale level when trying to analyze Industrial Production figures. Capacity Utilization : is released along with Industrial Production. Capacity Utilization at 100% would consider all AVAILABLE production capacity, even if a portion of that capacity had been shut down for 2-years. Capacity Utilization can be a key reading in regards to inflation. Is there enough capacity still yet to be utilized before "full capacity" is reached, where demand is so great, that higher prices can be charged? 12 months ago, capacity utilization was 74.2 and considered a recessionary figure. Current levels are just starting to show Industrial Production starting to build and economic slack from the recession being absorbed. Productivity: we touched on earlier. The United States is thought to be a leader in technological advancements, and it is from technological advancement that productivity can thrive. Productivity measures are one of the key measures we should use when interpreting other economic readings. Nonfarm Payrolls: have been showing some life the past two months. Here again, think about PRODUCTIVITY and what its impact may have had, or still does have on the amount of workers needed to perform a task. PRODUCTIVITY is good for cost efficiency, but because of higher productivity rates, it may only take the work of 1 to do what 2 workers did years ago. Earlier this year, it was thought by some that the economy wasn't going to start generating a meaningful number of jobs until early 2005. We've seen the bond market's reaction to the stronger than expected nonfarm payroll data the past two months. Average Workweek: speaks to PRODUCTIVITY, but gives greater insight as to demand building or contracting among businesses. Since I started working for a living at age 18, I can't remember working less that 40 hours a week. Hourly Earnings: will be measured for a sense of not only wage inflation, but the "quality" of job that might have been created. This is another number that can be misconstrued if not looked into. Is wage inflation being found if hourly wages rise? Or are higher paying jobs being generated? This data can be found inside the nonfarm payrolls data, and is broken down into many categories like temporary help, leisure/hospitality, financial, manufacturing, construction and several others. At this stage of the economic recover, hourly earnings and wage costs are not an overriding employment concern, where many economists also cite strong PRODUCTIVITY growth trends limiting rising wage costs. Consumer Confidence: is largely driven by a consumers view of job availability, income, geopolitics and believe it or not.... stock market gains and losses. The reading indicated are derived from survey questions, where responses are considered anecdotal. Reading will be observed, but history shows that respondents don't necessarily always ACT as they say they FEEL. I tend to think of this as an emotional survey, where emotions can change quickly. PPI and Core PPI: give us insight as to rising (inflation) or falling (deflation) prices at the production/manufacturing level. Many will dispute if these reading are an accurate measure of prices at the manufacturing level. The Core PPI excludes the more volatile food and energy components, as sometimes brief imbalances in supply/demand due to weather or geopolitical events should be brought into consideration when trying to interpret price volatility at the manufacturing level. CPI and Core CPI: give insight as to rising (inflation) or falling (deflation) prices at the consumer level. Not unlike the PPI data, there are disputes if these readings are accurate. Here again, PRODUCTIVITY rates should be observed when making a comparison of PPI to CPI data. While higher prices at the producer level can be found, high rates of PRODUCTIVITY can allow for steady pricing at the consumer level. Treasury Budget: is a monthly account of the U.S. government's surplus (more receipts than outlays) or deficit (more outlays than receipts). The year-to-date deficit worsened by $80 billion from a year earlier, while the 12-month deficit stands at $454 billion. My personal view is that while the deficit matters, at this point of an economic cycle, which certainly appears to be robust, tax receipts should begin to rise and help stem the rise in the deficit. Economists currently see the 2004 deficit at $370 billion, while the White House forecast is higher at $521 billion. I was critical of the Treasury when it told investors it would cease auctioning off 30-year debt, when the long bond's yield was falling. In my mind, if my cost of borrowing (when the government sells/auctions off its bonds it is borrowing) is falling, and I can borrow longer-term at a lower cost to borrow, then that's where I would want to try and borrow. There are criticisms to the size of the deficit and I have my criticisms too. But if you're going to build a deficit in order to try and turn an economy around to growth, while at the same time funding a war, then the "best time" to do it is at 45-year lows rates of borrowing. My core belief is that a strong economy will pay down a deficit, and a weak economy will usually find a rising deficit. Nonfarm payroll figures will be monitored closely as an additional generator of tax receipts will be needed to eventually pay down the deficit. M2 Money Supply: shows growth, where this growth in money supply has fueled what many economists call a "monetary led expansion." Monthly M2 Money growth and velocity provide a very rough read on the growth/inflation outlook over the intermediate term. Over the long term, inflation is thought to be led by money growth. However, this has become a point of dispute as recent evidence isn't all that convincing as the 2001 M2 growth rate ran at the fastest pace since 1983 as continued strong M2 growth in 2002 and early 2003 had the Fed concerned about DEFLATION risks. In late 2003, M2 fell as economic growth surged and money flowed to higher yielding investments from commercial banks, which is not Fed policy related. Some of the inflation fears you may be hearing about, in regards to the surge in money supply may not fully account for the possibility that the renewed growth in money supply may not necessarily be Fed driven, but commercial banks capturing profit from prior investments. In a prior Ask the Analyst (07/20/03) column titled "Money supply is surging, but where's it going?" greater detail of M1, M2 and M3 money supply is discussed. Has anyone noticed that stock prices have fallen lately, while money supply has grown? Is Fed policy currently in error and the rise in money supply a sign of inflation? Well that's it for Econ 101. Below these various economic indicators/reports, I've placed the recent closing values of various market indices we will discuss and analyze throughout time. Only the Fed funds rate is derived by one body, the Federal Open Market Committee, while all others are derived by the MARKET (you, me and others). The one point I would want to make is in regards to questions regarding just ONE economic report and trying to analyze the stock or bond market in the scope of that one specific report. Late last year, one analyst said he thought stock prices were going to fall because M2 had stalled and actually showed a decline. That looks to have been a good call. It's interesting though that while M2 was growing rabidly in 2003, it was the rising price of gold that was this signal along with a rising M2 that was spelling future inflation. That is until gold fell, but now M2 rises, that gold is not really the indicator for inflation, but instead, its M2. Wait, no.... M2 was rising in 2003 and there wasn't inflation. Oh... wait a minute. The rising dollar is the signal for inflation that will bust the stock market bubble. Ooops! The dollar was strong during the great bull market of the 1990's. Aha! It's the rising deficit and lack of job growth combined with rising commodity prices that will....... Don't get confused and feel that you have to FULLY comprehend every detail of economic data, and fully comprehend what that ONE single report is saying, but it does help to have a basic understanding of how many of the reports combined create the bigger economic picture. Don't be confused, or swayed by the friend that tells you just because Business Inventories are trending lower, that it is a sure sign of economic slowing. Ask them what there views are on the decline in Business Inventories as it relates to rising sales and the current rate of productivity. Is the disparity between Producer Prices and Consumer Prices a governmental plot to mislead economists and investors? Or does productivity, have something to do with the disparity? Jeff Bailey ************* COMING EVENTS ************* Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- CPB Campbell Soup Mon, May 24 Before the Bell 0.32 DY Dycom Industries Mon, May 24 After the Bell 0.23 MDT Medtronic Inc. Mon, May 24 4:15 pm ET 0.46 NOVL Novell, Inc. Mon, May 24 After the Bell 0.03 ------------------------- TUESDAY ------------------------------ CPRT Copart Tue, May 25 After the Bell 0.21 EASI Engineered Support SysTue, May 25 Before the Bell 0.64 HNZ H.J. Heinz Company Tue, May 25 Before the Bell 0.58 HUG Hughes Supply Tue, May 25 After the Bell 0.92 KKD Krispy Kreme Doughnut Tue, May 25 Before the Bell 0.24 LZB La-Z-Boy Inc. Tue, May 25 -----N/A----- 0.43 SPI ScottishPower Tue, May 25 Before the Bell N/A SMTC Semtech Tue, May 25 During the Market 0.18 TKA Telekom Austria AG Tue, May 25 Before the Bell N/A TTC Toro Tue, May 25 Before the Bell 1.83 VOD Vodafone Group Public Tue, May 25 Before the Bell N/A WSM Williams-Sonoma Tue, May 25 Before the Bell 0.16 ------------------------ WEDNESDAY ----------------------------- AZO AutoZone Inc. Wed, May 26 Before the Bell 1.55 BMO Bank Of Montreal Wed, May 26 -----N/A----- N/A BCM Canadian Impl Bank ComWed, May 26 -----N/A----- N/A DLTR Dollar Tree Stores Wed, May 26 After the Bell 0.29 DCI Donaldson Wed, May 26 After the Bell 0.31 MIK Michaels Stores Wed, May 26 After the Bell 0.37 NDSN Nordson Wed, May 26 Before the Bell 0.41 RL Polo Ralph Lauren CorpWed, May 26 Before the Bell 0.78 TECD Tech Data Corporation Wed, May 26 After the Bell 0.49 TOL Toll Brothers Wed, May 26 -----N/A----- 0.87 ------------------------- THUSDAY ----------------------------- BFb Brown-Forman Corp Thu, May 27 After the Bell N/A CHS Chico's FAS Thu, May 27 After the Bell 0.39 COST Costco Wholesale Corp Thu, May 27 Before the Bell 0.38 DG Dollar General Corp. Thu, May 27 -----N/A----- 0.20 FLO Flowers Foods Thu, May 27 Before the Bell 0.35 OTE Hellenic Telecomm Thu, May 27 -----N/A----- N/A PFP Prem Farnell Plc (ADR)Thu, May 27 Before the Bell N/A RY ROYAL BK CDA MONTREAL Thu, May 27 -----N/A----- N/A TKP Technip Thu, May 27 Before the Bell N/A TD Toronto Dominion Bank Thu, May 27 -----N/A----- N/A VIP Vimpel Communications Thu, May 27 -----N/A----- N/A V Vivendi Universal Thu, May 27 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- RDY Dr. Reddy's Labs Fri, May 28 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable 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 RCI Renal Care Group, Inc 3:2 May 24th May 25th BMRC Bank of Marin 3:2 May 24th May 25th BFCF BFC Financial Corp 5:4 May 25th May 26th ESCA Escalade, Inc 2:1 May 25th May 26th ANN AnnTaylor Stores Corp 3:2 May 26th May 27th ERES eResearchTechnology, Inc 3:2 May 27th May 28th KIND Kindred Healthcare, Inc 2:1 May 27th May 28th IEX IDEX Corp 3:2 May 28th May 31st CEDC Central European Dist 3:2 May 28th May 31st QCRH QCR Holdings, Inc 3:2 May 28th May 31st CNQ Canadian Natural Res Lmtd 2:1 May 28th May 31st PVTB PrivateBancorp, Inc 2:1 May 31st Apr 1st BNN Brascan Corp 3:2 May 31st Apr 1st GSBC Great Southern Bancorp 2:1 Apr 1st Apr 2nd BR Burlington Resources 2:1 Apr 1st Apr 2nd FNLC First Natl Lincoln Corp 3:1 Apr 1st Apr 2nd -------------------------- Economic Reports This Week -------------------------- Wall Street will focus on economic data again as this week brings forth a basket of reports. Some of the more important releases this week are the Consumer Confidence report, durable orders, help wanted index, Michigan Sentiment and the Chicago PMI. ============================================================== -For- ---------------- Monday, 05/24/04 ---------------- None ----------------- Tuesday, 05/25/04 ----------------- Consumer Confidence (DM) May Forecast: 94.0 Previous: 92.9 Existing Home Sales (DM) Apr Forecast: 6.48M Previous: 6.48M ------------------- Wednesday, 05/26/04 ------------------- Durable Orders (BB) Apr Forecast: -0.8% Previous: -5.0% New Home Sales (DM) Apr Forecast: 1200K Previous: 1228K ------------------ Thursday, 05/27/04 ------------------ Initial Claims (BB) 05/22 Forecast: 334K Previous: 345K GDP-Prel. (BB) Q1 Forecast: 4.5% Previous: 4.2% Chain Deflator-Prel (BB) Q1 Forecast: 2.5% Previous: 2.5% Help-Wanted Index (DM) Apr Forecast: 41 Previous: 39 ---------------- Friday, 05/28/04 ---------------- Personal Income (BB) Apr Forecast: 0.5% Previous: 0.4% Personal Spending (BB) Apr Forecast: 0.2% Previous: 0.4% Mich Sentiment-Rev. (DM) May Forecast: 94.6 Previous: 94.2 Chicago PMI (DM) May Forecast: 62.4 Previous: 63.9 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. 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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 05-23-2004 Sunday 2 of 5 In Section Two: Watch List: AVP, CAT, SUN, ASD, RIMM Dropped Calls: None Dropped Puts: 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 ************************************************************** ********** Watch List ********** Avon Products - AVP - close: 85.31 change: +0.75 WHAT TO WATCH: We strongly considered adding AVP to the OI call list this weekend. The stock has been relatively strong compared to the major indices the past few weeks especially after its late April earnings report and stronger earnings forecast. Shares appear to have new support at $82.00 and AVP is close to breaking out over resistance at $86.00. We would consider new long plays on a breakout. --- Caterpillar - CAT - close: 73.03 change: +0.77 WHAT TO WATCH: CAT appears to be struggling. The Dow-component and heavy machinery manufacturer has withered back towards key support near $71-$70. Its P&F chart also shows key support near $71.00. Also noteworthy is its P&F bearish price target near $61.00. Bullish traders can look for a breakout back above $76 and its 200-dma while bearish traders can look for that drop under $71-70 to open plays. Given the recent trend of selling the rallies more aggressive traders might consider a bearish position on a failed rally near $75. --- Sunoco Inc - SUN - close: 58.56 change: -0.88 WHAT TO WATCH: Normally one would think that an oil refiner like SUN who probably has more business than they can handle would have a pretty strong share price. That's exactly what we saw from October of 2003 through April '04 but now we're beginning to see some profit taking. Traders might be able to capitalize on any drop with a trigger under $58.00. There is some support near $55.00 but we might be able to target old support near $52.50 just above its 200-dma. --- American Standard Co. - ASD - close: 107.83 change: +1.19 WHAT TO WATCH: ASD doesn't have much time left before its 3-for-1 stock split. Shares are due to split near May 28th and that doesn't give the split-momentum traders much time left if they don't already have a position. ASD has already bounced from the $100 level but it would not surprise us to see it breakout over resistance at its 40 & 50-dma's and the $110 mark before it actually splits. --- Research In Motion - RIMM - close: 109.02 change: +5.07 WHAT TO WATCH: Wow! Something has reignited the fire under shares of RIMM. It may have been the company's recent analyst meeting as the stock has garnered a few more upgrades and reiterations of positive outlooks lately. The breakout over resistance at $95 was sharp and cut through technical resistance at its 40 & 50-dma's as well. Now RIMM is challenging its all- time highs. It's easy to say that RIMM is now short-term overbought but it has a tendency to be volatile and move farther than one might expect. A breakout over $110 might be a play for the aggressive but we'd suggest tight stops! ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- GS $91.74 -0.66 - Keep an eye on Goldman Sachs. A drop under $90.00 and this might be a bearish play toward the $85 mark. NMG.A $50.56 +1.51 - Upscale retailer Neiman Marcus is seeing some strength in its stock price this week. Friday's 3% gain broke through resistance at $50.00 and its 200-dma. ZMH $83.55 +1.42 - ZMH is another relative strength candidate. The stock has been consolidating in a wide $6.00 range the last few weeks but looks close to breaking out to new highs. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ None *********** 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. 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The Option Investor Newsletter Sunday 05-23-2004 Sunday 3 of 5 In Section Three: Current Calls: ADP, ERTS, BCR, JNJ, LXK, New Calls: QCOM Current Put Plays: AMZN, APOL, CAKE, CTX, GM, GDT, WHR, New Puts: FRX ! 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 ****************** Auto. Data Proc. - ADP - close: 44.28 change: +0.01 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: To say that ADP has been a disappointment would be an understatement, as the stock couldn't manage even one bullish session last week. The stock continued to see profit taking after being rejected from the top of its rising channel 2 weeks ago. It was encouraging to see the 50-dma ($43.86) hold as support at the end of the week and if there's going to be a rebound and another run at resistance, this is the point from which it should start. In conjunction with strong support at the 50-dma and horizontal support near $43.50, we have the daily Stochastics now fully oversold and attempting to turn bullish. Traders unwilling to take the plunge here after the stock has trended steadily lower for two weeks will want to keep their eye on the $45 level. A breakout over that level looks like an excellent point to enter on strength, as it would have the stock moving through short-term resistance and back over both the 20-dma ($44.94) and the 30-dma ($44.95). Maintain stops at $43.25. Suggested Options: Shorter Term: The June $45 Call will offer short-term traders the best return on an immediate move, as it is currently near the money. Longer Term: Aggressive longer-term traders can use the August $45 Call, while the more conservative approach will be to use the August $42 Call. Our preferred option is the June $45 strike, as it is currently at the money and should provide sufficient time for the play to move in our favor. BUY CALL JUN-42 ADP-FV OI= 58 last traded @ $2.35 BUY CALL JUN-45*ADP-FI OI=1357 last traded @ $0.80 BUY CALL AUG-42 ADP-HV OI=1062 last traded @ $3.20 BUY CALL AUG-45 ADP-HI OI=2576 last traded @ $1.75 Annotated Chart of ADP: Picked on May 9th at $46.03 Change since picked: -1.75 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.06 mln Chart = Electronic Arts - ERTS - close: 48.71 change: +0.41 stop: 47.00 Company Description: ERTS creates, markets and distributes interactive entertainment software for a variety of hardware platforms, including Sony's PlayStation 2, the PC, Nintendo GameCube and the recently launched Xbox. The company's EA.com business segment is engaged in the creation, marketing and distribution of entertainment software which can be played or sold online, as well as the ongoing management of subscriptions of online games and Website advertising. Why we like it: We knew it was an aggressive play, trying to pick the bounce point in shares of ERTS, but so far things are proceeding normally. We would have liked to have seen the stock find support above the $48 level, thus avoiding the PnF Sell signal, but the bulls did finally step in towards the end of the week and we have a hint of a rebound taking place on the daily chart. ERTS found support just over the 200-dma ($47.72) and the rising trendline, which is currently right at the same level. The bulls have their work cut out for them though, with solid resistance waiting above at the $50 level and then at the shorter-term descending trendline and 50-dma, currently converged near $51. Right now, the best entries still look to be on rebounds from the $48 level. Traders that would prefer to enter on signs of strength will want to see a move back over $49, taking ERTS through the intraday resistance of the past 2 days. We'll need to see the breakout over the 50-dma before we'll know whether we've got a runner on our hands though. Maintain stops at $47. Suggested Options: Shorter Term: The June $47 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 $52 Call, while the more conservative approach will be to use the June $50 Call. Traders looking for more insulation against time decay may want to consider the September strike. Our preferred option is the June $47 strike, as it is currently in the money and should provide sufficient time for the play to move in our favor. BUY CALL JUN- 47*EZQ-FW OI=2607 last traded @ $2.55 BUY CALL JUN- 50 EZQ-FJ OI=6443 last traded @ $1.25 BUY CALL JUN- 52 EZQ-FX OI=2454 last traded @ $0.55 BUY CALL SEP- 50 EZQ-IJ OI=2082 last traded @ $3.50 Annotated Chart of ERTS: Picked on May 18th at $49.60 Change since picked: -0.89 Earnings Date 4/29/04 (confirmed) Average Daily Volume = 3.87 mln Chart = ------- Bard C R - BCR - close: 109.47 chg: -0.53 stop: 106.00 Company Description: C. R. Bard, Inc. (www.crbard.com), headquartered in Murray Hill, N.J., is a leading multinational developer, manufacturer, and marketer of innovative, life-enhancing medical technologies in the fields of vascular, urology, oncology, and surgical specialty products. (source: company press release) Why We Like It: (Original Play from Thursday) It's been tough to find really enticing bullish play candidates lately with the markets so weak the past few weeks so we've decided to add BCR based on its relative strength. The company reported earnings on April 20th and smashed the estimates of $1.03 with $1.19 per share. The stock soared on the earnings news and a 2-for-1 stock split announcement. Since then we've seen the stock consolidate those gains over the past month with new support at the $105 level. The gradual trend higher over the last two weeks has now brought it back to the $110 level. Its MACD is about to produce a new buy signal and its faster momentum oscillators are already pointing higher. Now we will admit that BCR does look overbought, especially on its weekly chart. Yet there has been virtually no weakness the past ten days even as the Industrials darted under the 10K mark. There is also clear resistance at the $112 level and more conservative traders may want to wait for BCR to trade and/or close above this level. The stock is set to split 2-for-1 on May 28th and begin trading split adjusted after the Memorial day holiday when the markets open on June 1st. BCR could see a steady pre-split run up into this date. Traders should also remember that any options you hold over the split will have their symbols change along with their strikes, value and open interest. If you own one $110 call before the split you'll own two $55 calls after the split with the appropriate change in value. We are starting the play with a stop loss at $106.00. Weekend Update: We have nothing new to report on BCR after adding it Thursday night. The stock traded in a relatively tight range on Friday near the $110 level. The stock remains a relative strength play. More aggressive traders willing to try and buy a dip might look for a bounce from the $108 level. Suggested Options: Short-term traders will probably do best with June or July calls. We're going to suggest the June's, especially the $110's, which will become $55s after the split. BUY CALL JUN 105 BCR-FA OI= 91 Last traded @ $6.10 BUY CALL JUN 110 BCR-FB OI=114 Last traded @ $2.90 BUY CALL JUN 115 BCR-FC OI=246 Last traded @ $1.05 Annotated Chart: Picked on May 20 at $110.00 Change since picked: - 0.53 Earnings Date 04/20/04 (confirmed) Average Daily Volume: 386 thousand ---- Johnson & Johnson - JNJ - cls: 54.94 chng: +0.36 stop: 53.50*new* 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: Just as we expected when we wrote the Thursday update, shares of JNJ gravitated back to the $55 level on expiration Friday. With that artificial influence removed next week, we'll see JNJ trade on its own merits and we'll see if there's any real life in this bullish play. The rebound over the past couple days is encouraging, as it is pulling the daily oscillators into bullish crossovers and it could very well be that we'll see some real follow-through early next week. Aggressive traders got their shot at entries on the successful rebound from the $54 level last week and we're still eyeing a breakout over $55 as the signal to take entries on renewed strength. That $54 support level is now being reinforced by the 30-dma ($54.16). If JNJ is indeed going to make a bullish move, we really shouldn't see the $54 level violated, so we're going to get more aggressive with our stop this weekend, raising it to $53.50. Suggested Options: Shorter Term: The June $55 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Longer-term traders can 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. BUY CALL JUN-55 JNJ-FK OI=12485 last traded @ $1.10 BUY CALL JUL-55*JNJ-GK OI=44737 last traded @ $1.55 Annotated Chart of JNJ: Picked on May 9th at $55.30 Change since picked: -0.36 Earnings Date 4/13/04 (confirmed) Average Daily Volume = 7.23 mln Lexmark Intl. - LXK - close: 92.76 change: +1.06 stop: 89.75 Company Description: Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Why we like it: The past week has certainly bee interesting for LXK investors as the stock has made alternating attempts at rallying and selling off, none of which have been able to stick yet. Resistance is still holding firm just over $94, while except for Monday, the stock has been adhering to support at the 50-dma ($91.81). There's no telling how much of the back and forth action last week can be attributed to options expiration, but with that artificial influence removed next week, we ought to get some resolution of the current impasse. Recall that we're looking for a repeat of the rebounds from the 50-dma that LXK has produced in recent months. If the pattern holds true, we should see the stock getting serious about rallying early next week with a breakout over the $94.50 level. That breakout can be used for new momentum entries, particularly with the daily oscillators hinting at bullish reversals. Maintain stops at $89.75. Suggested Options: Shorter Term: The June $90 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 $95 Call, while the more conservative approach will be to use the July $95 Call due to the greater time until expiration. Our preferred option is the June $90 strike, as it is currently in the money and should provide sufficient time for the play to move in our favor. BUY CALL JUN-90*LXK-FR OI= 219 last traded @ $4.90 BUY CALL JUN-95 LXK-FS OI= 566 last traded @ $2.20 BUY CALL JUL-90 LXK-GR OI=1222 last traded @ $6.30 BUY CALL JUL-95 LXK-GS OI= 434 last traded @ $3.60 Annotated Chart of LXK: Picked on May 13th at $94.03 Change since picked: -1.27 Earnings Date 4/19/04 (confirmed) Average Daily Volume = 1.07 mln ************** NEW CALL PLAYS ************** QUALCOMM - QCOM - close: 65.40 chg: +1.20 stop: 63.50 Company Description: QUALCOMM Incorporated (www.qualcomm.com) is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. Headquartered in San Diego, Calif., QUALCOMM is included in the S&P 500 Index and is a 2003 FORTUNE 500. company. (source: company press release) Why We Like It: We continue to search out relative strength plays given the markets overall weakness these last few weeks. The expectation is that if the market turns higher again these will outperform. Fortunately, some of these are strong enough to march higher without the market's help. QCOM may be just that sort of candidate. The company issued positive earnings guidance a couple of weeks ago with a better than expected forecast for the June quarter. They also raised their full year predictions with business better than expected. Following their announcement the stock garnered three upgrades. Meanwhile the stock price has been consolidating sideways the entire month of May but now looks ready to breakout to the upside. We like the new buy signal on its MACD indicator but we're going to wait and use a TRIGGER at $66.01 to open any positions. More aggressive traders might want to consider positions now with Friday's move over its 50-dma and the $65 mark. Support is down near $62.00 but we're going to try and reduce our risk with a stop loss at $63.50. Our first target is $70.00 and our secondary target is $74. Suggested Options: Short-term traders should be looking at the June or July strikes. Our favorites are the June 65s. BUY CALL JUN 60 AAO-FL OI= 1738 Last traded @ $6.20 BUY CALL JUN 65 AAO-FM OI= 7198 Last traded @ $2.50 BUY CALL JLY 65 AAO-GM OI=21031 Last traded @ $3.70 Annotated Chart: Picked on May xx at $ 0.00 <-- see TRIGGER Change since picked: + 0.00 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 9.6 million ************************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: 41.17 chg: +0.19 stop: 44.05 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: We added AMZN to the put list three weeks ago on its technical breakdown under $45.00 and its 50-dma. Our short-term target was the $40 region with a preferred target of its descending trendline of lows (see chart below). Since adding AMZN the stock has found support at the $40.50 level twice with the latest "bounce" this past Friday. The bounce isn't very convincing but this close to the round-number psychological support/resistance level at $40.00 makes us hesitant to add new positions here. Fortunately, the technical picture and P&F chart for AMZN remain bearish but we're seeing a potential bullish turnaround in the INX Internet index, which is trying to rebound from its own 200- dma. We continue to feel that investors are likely to shy away from AMZN in this uncertain climate of geo-political tension and the stock market is likely to see high P/E stocks consolidate lower. Further depressing AMZN could be alternatives for investors' capital like the recently launched Blue Nile IPO (NILE) and the upcoming Google IPO. However, even though we are listing options below we would not open new plays until AMZN broke through the $40.00 mark. More aggressive traders willing to scalp a smaller move might look for a bounce back to the $42.50 level and then short the rollover back toward $40.00. Something else to be aware of is AMZN's May 25th annual shareholding meeting. While these meeting aren't necessarily a stock-moving event you never know what news may come out. Suggested Options: This close to the $40 level we are not suggesting new positions. However, if AMZN breaks down below the $40 mark then we're game for another leg down. Our favorites are the June 42.50s and June 40s. BUY PUT JUN 37.50 ZQN-RU OI=2070 Last traded @ $0.75 BUY PUT JUN 40.00 ZQN-RH OI=3591 Last traded @ $1.50 BUY PUT JUN 42.50 ZQN-RV OI=5403 Last traded @ $2.75 BUY PUT JUN 45.00 ZQN-RI OI=4956 Last traded @ $4.50 Annotated Chart: Picked on May 02 at $ 43.60 Change since picked: - 2.43 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 8.4 million --- Apollo Group - APOL - close: 89.68 change: +1.43 stop: 92.00 Company Description: The Apollo Group provides higher education to working adults. The company operates through its subsidiaries, The University of Phoenix, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation and Western International University, Inc. APOL offers its programs and services at 58 campuses and 102 learning centers in 36 states, Puerto Rico, and Vancouver, British Columbia. Why we like it: Not wanting to be left out of the volatile expiration Friday action, APOL reversed course after Thursday's apparent breakdown, coming back to close very near the $90 level. While the break and close under the 50-dma ($89.45) did look ugly on Thursday, we noted in our update the likelihood that the stock would come back to close near $90 due to the normal option expiration antics. That bounce leaves us with a clean slate heading into next week. A break back under the 50-dma should have the lows from early May being tested and a break under $87.50 still looks like a viable momentum entry. The concern is that daily oscillators are trying to turn bullish and a strong upward day could give a confirmed bullish cross. Looking at APOL's subsidiary UOPX presents another picture of concern as that stock broke out over near-term resistance on Friday. Aggressive traders can consider new entries on a rollover below $91, but should confirm that the rally in UOPX is failing before doing so. Maintain stops at $92, which is above solid resistance, as well as the 20-dma ($91.12) and the 30-dma ($91.76). Suggested Options: Aggressive short-term traders can use the June $85 strike, although the more conservative approach will be to use the $90 strike. Our preferred option is the June 90 strike, as it is currently at the money and should provide ample time for the play to move in our favor. BUY PUT JUN-90*OAQ-RR OI= 1196 last traded @ $3.30 BUY PUT JUN-85 OAQ-RQ OI= 1146 last traded @ $1.60 Annotated Chart of APOL: Picked on May 11th at $90.32 Change since picked: -0.64 Earnings Date 6/11/04 (unconfirmed) Average Daily Volume = 1.72 mln --- Cheesecake Factory - CAKE - cls: 38.20 chng: +0.02 stp: 40.75*new* Company Description: The Cheesecake Factory operated 61 upscale, full-service, casual dining restaurants under The Cheesecake Factory mark in 20 states and the District of Columbia as of March 3, 2003. The company also operated three upscale casual dining restaurants under the Grand Lux Cafe mark in Chicago, Illinois, Los Angeles, California, and Las Vegas, Nevada, as well as one self-service, limited-menu, express foodservice operation under The Cheesecake Factory Express mark inside the DisneyQuest family entertainment center in Orlando, Florida. It also operated a bakery production facility in Calabasas Hills, California, which produces baked desserts and other products for its restaurants and for other foodservice operators, retailers and distributors. It also licensed three bakery cafes under The Cheesecake Factory Bakery Cafe mark to another foodservice operator. Why we like it: It had to happen eventually and CAKE rebounded slightly on Friday, right from the $38 level, as we suspected it might. The stock performed quite nicely for us last week, rolling over just below the 10-dma ($40.40) and plunging through support on Thursday. Given that the stock has fallen so sharply recently, it really didn't take a genius to figure out that a rebound was due, especially with the normal artificiality that we normally see on options expiration Fridays. If the recent pattern repeats, then we should see a few days of consolidation near the $38 level before the downtrend continues down towards our $36 target for the play. Resistance should now be very strong near $40, with the 10- dma bearing down and reinforcing that resistance. Look for a mild rebound and rollover in the $39.50-40.00 area to set up new entries. If that rebound fails to materialize, then look for exits from the play in the $36 area. Lower stops to $40.75. Suggested Options: Aggressive traders can use the $35 strike, while the more conservative approach will be to use the in-the-money $40 strike. Our preferred option is the June 40 strike, as it is currently in the money and should provide ample time for the play to move in our favor. BUY PUT JUN-40*CFQ-RH OI=443 last traded @ $2.65 BUY PUT JUN-35 CFQ-RG OI= 12 last traded @ $0.50 Annotated Chart of CAKE: Picked on May 13th at $40.09 Change since picked: -1.89 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 579 K --- Centex Corp - CTX - close: 44.95 change: +0.90 stop: 47.50 Company Description: Dallas-based Centex, through its subsidiaries, ranks among the nation's largest home builders, mortgage originators and commercial contractors. Centex was recently ranked No. 12 on Business Week's annual list of the "Top 50 Best Performing Companies" in the U.S. and consistently ranks among the most admired companies in its industry, according to FORTUNE magazine. (Source: Company Press Release.) Why We Like It: Technically we liked CTX as a short due to its breakdown through major support in early May. Since that time the stock has consolidated those losses in a sideways pattern around the $44-45 level. Our plan was to go short (by buying puts) on a failed rally under $47.00. We wanted to see CTX rally upwards toward $47, roll over, and then trade back down under $46 before opening any hypothetical position. This sort of action has not yet happened and leaves us "untriggered" while we wait for the next bump higher. What is beginning to concern us is that we're now beginning to see signs of a potential bullish turnaround. CTX has bounced twice from the $43.35 region in the last two weeks just as the DJUSHB home construction index has bounced twice from the 530 area. Both CTX and the DJUSHB look oversold from their three months of declines but Wall Street still seems unsatisfied without how higher interest rates will affect the builders, even though many builders have said they could withstand a significant uptick in rates before it would affect their business. We remain cautious but we're willing to hold on to our original plan. Look for the failed rally and the move back under $46. Until then we'll sit out on the sidelines. If this doesn't materialize a drop through $43 could be an alternative put-buying entry point. Suggested Options: Short-term traders can look to the June and July puts. Our favorites are the June 50s and 45s but the July 45s look good too. BUY PUT JUN 45.00 CTX-RI OI=2846 Last traded @ $2.05 BUY PUT JLY 45.00 CTX-SI OI=1922 Last traded @ $2.80 BUY PUT JUN 50.00 CTX-RJ OI= 778 Last traded @ $5.60 Annotated Chart Picked on May xx at $ xx.xx (See rollover entry.) Change since picked: - x.xx Earnings Date 04/20/04 (confirmed) Average Daily Volume: 2.0 million --- General Motors - GM - close: 43.08 change: -0.38 stop: 45.25*new* 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: Although it has been rather grudging about giving up ground, our GM play is sticking to the script quite nicely. The pattern of lower highs and lower lows and GM made more progress towards its next lower low on Friday. Friday's close was the lowest close for the stock since early December and was the first close under the bottom of the early December gap. We could still see another rebound attempt, but with the way the daily Stochastics have now tipped over in a bearish short-cycle reversal, the more likely direction on Monday will be down. Resistance is becoming firm in the $44-45 area, with the 10-dma ($43.93) bearing down and making entries on another failed bounce look favorable. Aggressive traders can consider new entries on a break under last Monday's $42.88 low, but keep in mind that there's likely to be some strong support at the $42 level, which will be the likely point from which the next rebound attempt will begin. When that rebound attempt fails, we'll finally be able to set our sights on that final target in the $39-40 area. Lower stops this weekend to $45.25, just over the May 11th intraday high. Suggested Options: Aggressive short-term traders will want to use the June 42 Put. Those with a more conservative approach will want to use the June 45 put. Traders looking for more insulation against time decay can look out to the September strike. Our preferred option is the June 45 strike, as it is now in the money and should provide ample time for the play to move in our favor. BUY PUT JUN-45*GM-RI OI=23197 last traded @ $2.65 BUY PUT JUN-42 GM-RV OI=14117 last traded @ $1.30 BUY PUT SEP-42 GM-UV OI= 3873 last traded @ $3.20 Annotated Chart of GM: Picked on May 9th at $44.60 Change since picked: -1.52 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 5.21 mln --- Guidant - GDT - close: 59.15 chg: +2.04 stop: 60.26 Company Description: Guidant Corporation is a world leader in the treatment of cardiac and vascular disease. The company pioneers lifesaving technology, giving an opportunity for better life today to millions of cardiac and vascular patients worldwide. Driven by a strong entrepreneurial culture of 12,000 employees, Guidant develops, manufactures and markets a broad array of products and services that enable less invasive care for some of life's most threatening medical conditions. (source: company press release) Why We Like It: (Thursday's Original Play Description) It looks like Guidant could be a candidate for one of its own defibrillators soon. The stock has steadily slipped lower over the past several weeks and has now broken through two levels of major support. Earnings were in late April and the company only met expectations while guiding lower for the second quarter and that's never a good sign. This week the company also announced that its CEO would retire at the end of the year. This is not necessarily a problem if they have a strong succession plan in place but it can still cause investor nervousness. Yesterday Citigroup's Smith Barney division initiated coverage on GDT with a "sell". The downgrade came out one day ahead of GDT's news for its COMPANION study. The company published its positive results in the May 20th edition of the New England Journal of Medicine. Yet still the stock failed to react positively. Instead we're seeing GDT fail at the $60 level of resistance on Wednesday and break through its simple 200-dma in Thursday's trading. Chart readers will also note the head-and-shoulders pattern over the last 4-to-5 months. The neckline was in the $59.40 area and that has clearly been broken. If the H&S pattern holds true then bears could target the $47.50 region. That's close to its bearish P&F chart of $44.00. We're going to open the play at current levels with a stop at $60.26. Our first target will be $52.50 but the $50.00 level looks good too. Weekend Update: Hmm... we were not expecting a 3.57% rebound in shares of GDT on Friday. Thursday's breakdown under the 200-dma on better than average volume looked like the momentum entry we wanted. Stranger still is that we can't find any catalyst for Friday's rebound. The BTK was relatively flat. There was no new news for GDT. This good news is this may be offering us a better entry point but we need to see it begin to roll over under $60.00 first. More aggressive traders may want to widen their stops to $61.00 but we're going to leave ours at $60.26. One item of concern is GDT's weekly chart. The last candle now looks like a "hammer", which can signal a bullish reversal. Suggested Options: We like the June and July puts for this trade. Our favorite would be the June 60's but the 55's look good too. BUY PUT JUN 60 GDT-RL OI= 714 Last traded @ $2.85 BUY PUT JUN 55 GDT-RK OI=1646 Last traded @ $1.00 BUY PUT JUL 60 GDT-SL OI=2442 Last traded @ $3.70 Annotated Chart: Picked on May 20 at $ 57.11 Change since picked: + 2.04 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 3.1 million --- Whirlpool Corp - WHR - close: 64.42 chg: +0.39 stop: 65.76 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: The chart on WHR continues to look ugly but we're not seeing much momentum either direction. The share price has been suffering as investors rotate out of interest rate sensitive stocks. WHR is sensitive because higher rates mean fewer new homes sold and fewer refi's. New homes mean new appliances and refi's fund a large portion of home improvements along with new appliances that can go with it. Rising steel costs is also an issue but fortunately WHR has recently won a court order forcing its steel supplier to continue to ship materials without added surcharges. WHR is at a pivotal turning point just under resistance at $65- 66. Unfortunately the stock's technical indicators are mixed and don't offer a clear direction so we're going to depend on the prevailing trend. Normally opening bearish plays with the stock near resistance can be an effective play if you use a tight stop loss. Suggested Options: If you can afford them the June 70s are probably a good choice but we also like the June 65s. BUY PUT JUN-70 WHR-RN OI= 891 Last traded @6.20 BUY PUT JUN-65 WHR-RM OI= 6837 Last traded @2.70 Annotated Daily Picked on May 05 at $ 64.69 Change since picked: - 0.27 Earnings Date 04/21/04 (confirmed) Average Daily Volume: 555 thousand ************* NEW PUT PLAYS ************* Forest Labs - FRX - close: 59.20 chg: -1.63 stop: 63.00 Company Description: Forest Laboratories develops, manufactures and markets pharmaceutical products principally in the United States and Europe. Forest's primary therapeutic markets include central nervous system disorders, hypertension and pulmonary disorders. Forest is currently developing additional compounds in these areas as well as in pain management and gastrointestinal disorders. Forest's principal products include Lexapro, a selective serotonin reuptake inhibitor (SSRI) for the treatment of depression; Celexa, also for depression; Benicar.,* an angiotensin receptor blocker (ARB) for the treatment of hypertension; and Aerobid., a metered dose inhaler for treating asthma. (source: company website) Why We Like It: One of the worst performers in the biotech/drug sectors the past two months has been FRX. Shares have dropped from $75 to under $60 and the slide appears to be picking up speed. Investors have ignored positive press releases from the company and some of its clinical studies the past few weeks as the stock broke through several levels of support. We mentioned FRX in the MarketMonitor on Thursday as a potential bearish play and Friday's drop through its 200-dma and the $60.00 mark on big volume looks like an entry point. This is purely a momentum/technical play and we plan to target the $55 mark. Old support at $62.00 should now be new resistance and we're going to start the play with a stop loss at $63.00. The P&F chart for FRX is very bearish and points to a $52.00 price target. Keep an eye on the BTK biotech index. The BTK looks poised for a breakdown under its 200-dma, which it has been testing for the last two weeks. A drop in this index and FRX will have even less support from its peers. Suggested Options: Short-term traders can choose from the June or August puts. Our favorites would be the June 60s. BUY PUT JUN 60 FHA-RL OI= 4530 Last traded @ $3.30 BUY PUT JUN 65 FHA-RM OI= 1931 Last traded @ $6.70 Annotated Chart: Picked on May 23 at $ 59.20 Change since picked: - 0.00 Earnings Date 04/20/04 (confirmed) Average Daily Volume: 1.9 million ************************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 05-23-2004 Sunday 4 of 5 In Section Four: Leaps: Still Undecided Option Spreads: Wow! It Doesn’t Get Any Better Than This ************************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 ***** Still Undecided By Mark Phillips mphillips@OptionInvestor.com Here we are 3 weeks into the month of May and the "Sell in May and go away" premise still seems to be valid. It wasn't that many years ago that we could count on the summer months to be rather dull, as the professional traders closed up shop, focusing more on fun in the sun. The past 2 years have been exceptions to that rule, with 2002 seeing a major selloff and last year, persistent strength. I've felt for some time that we'd be likely to see a return to the old pattern this year. Part of that belief comes from the need for the market to take a rest, which it has clearly been doing the past few weeks. The real problem in the near-term is that there are no catalysts to drive the market higher, and plenty of risks to keep risk-averse traders on the sidelines. Here are just some of the risks that traders obviously have on their minds: 1. Political Uncertainty - With the presidential race showing as a dead heat in the polls, investors are faced with the very real possibility of a Kerry presidency. Regardless of political affiliation, we should all understand the impact this could have on the markets, with the likelihood of the removal of several of the fiscal stimulus measures put in place by the Bush administration, not the least of which are the tax cuts. The market priced in those incentives and part of the current weakness is those incentives being removed from the equation. 2. Iraq - There is a tremendous amount of uncertainty regarding plans for the U.S to pull out of Iraq and we all know how the market hates uncertainty. The U.S. is incurring a large expense for their activity in that county, but the market likes the relative stability with the U.S. in control, even with the steep costs, much better than most alternatives. 3. Economy - Investors are still having a hard time getting a read on the economy. Is it growing at a healthy rate or are we just seeing the result of inflation creeping into the picture. Is there really sustainable job growth, or have we seen a couple of anomalous employment reports? How about the quality of the jobs being created -- are they high-paying jobs in the professional sector or just temporary and basic labor jobs. It's not that any one profession is better than another, but in terms of economic growth, those professional jobs provide a much stronger vote of confidence than do the lower wage positions. For me, the really big question is the degree to which we're seeing inflation appear in the overall economy. The official government reports are just showing hints of mild inflation, but when we turn to the monetary view, we see rampant inflation from the increase in the money supply. Just as a data point, the Fed goosed the money supply by $104 billion in the first two weeks of May -- I'll save you the math and tell you that this is a $2.7 trillion annual rate. I don't care how you slice it, that is frighteningly high level of money supply growth. 4. Interest Rates - Now we come to the biggie. Well, at least it seems to be big with most investors right now. As I've stated in the recent past, I don't think we're going to see much of a rise in interest rates ahead of the election in November. Oh sure, we might get a token 25 basis point hike at the June or August meetings, but that's it. Take a look at how far bond yields have moved in the past couple months and I think it's clear that the market has over-reacted to the prospects of inflation and rising short-term rates. Greenspan gets to keep his job for a while longer, as long as his health holds up and I would expect him to toe the line for the Bush administration, avoiding raising rates any more than absolutely necessary prior to the election. So let's see -- we have major uncertainty in the minds of investors concerning the political reins of the country, what's going to happen on the international stage (Iraq), inflation and interest rates. It's no great surprise that we've been seeing some solid market weakness. In all honesty, I'm a bit surprised we haven't seen more weakness, especially in light of the collapse in the internal strength of the overall market, with the dramatic reversal between new highs and new lows. If you were a mutual or hedge fund manager and you had just made a solid gain for the past 12 months, how aggressive would you be about locking in gains on those positions in light of all the factors I listed above? How eager would you be to put on large new positions, either to the long or the short side? That's exactly my point! There's no incentive to take the risk during the summer months. Of course there's also the picture being offered by the CRB index – - to me, this is a much more reliable measure of inflation and with the index charting to new 20 year highs earlier this year. This index measures the price of a basket of commodities. If it is breaking out through such major resistance, that ought to be telling us something very important about the current rate of inflation, don't you think? In case there's any doubt, this latest rally wasn't exactly a creeping one, as the CRB vaulted from the 185 area to the 285 area from late 2002 to March of this year. That's a 54% gain in the price of a basket of commodities in a period of less than 18 months. Do you think it is any coincidence that the rise coincided with the most flagrant period of Fed money creation in history? Which brings me to the good old dollar. We've seen quite the rally in the Dollar index (DX00Y) with this rebound off the lows near 85 over the past few months, now haven't we? I seem to recall suggesting that the 92 level was going to be a tough level to scale in terms of resistance, as it is both strong horizontal resistance (broken support) as well as the location of the declining trendline from the 2002 highs. Sure enough, the recent rally stopped right at 92 and appears to be rolling over, with even the weekly oscillators looking like they're ready to roll over. Ok, I'll grant you that we saw an intraday high of 92.29 and we actually closed as high as 92.02 before the rollover got started just over a week ago. No reasonable technician would characterize either of those metrics as any kind of breakout. This dollar rally back to resistance has been driven by expectations of rising interest rates in the U.S. making our currency more attractive on the international market. Well let's just say I have my doubts about that. I mean whether interest rates rise or fall, the rampant money supply growth should still create a very strong downward pressure on the dollar. The only way the DX00Y can put in a sustained rise in that environment is if the other currencies in the basket are losing value at an even faster rate. That brings us right back to one of my favorite subjects, the price of gold. If all fiat currencies are continuing to fall, then I have a very hard time seeing how the price of gold and shares of the major gold mining stocks can't rise and rise sharply. So is now the time to be jumping into new gold positions? I really don't think so. Even with the rebound we saw last week, gold futures are still on a PnF Sell signal. My favorite gold stock, NEM is still on a Sell signal as well. But on an interesting note, both the XAU and HUI mining indices generated new PnF Buy signals. That tells me that the gold/mining area of the market is trying to put in a solid bottom here near major support. If my premise is correct for the longer-term direction for the dollar and other global currencies, then NEM and other strong gold stocks should be on our Radar screen. I'm not going to waste your time or mine going through the major indices in any great detail this week because quite honestly nothing of note transpired there last week. We had attempted selloffs that failed and attempted rallies that failed as well. The consolidation range of the past 2 weeks needs to break to give us any indication of what's next for the longer-term direction for the market. So here's the quick recap of the ranges that need to break. DOW - Break above 10,100 is mildly bullish, and break below 9850 is bearish. But we can expect strong resistance to come in starting at the 10,200 area and strong support near 9600. S&P 500 - Break above 1105 would be mildly bullish, but then strong resistance is seen at 5 point increments all the way to 1140. On the downside, a break and close under 1080 would be bearish, but then we have strong support waiting in the 1065-1070 area. NASDAQ Composite - While a break under 1865 would have the bears gaining traction, there's lots of support below, basically every 30-40 points. On the upside we have lots of resistance too. A break above 1940 would get us out of the torturous range of the past 2 weeks, but then lots more supply waiting at 1960, 1980 and 2000. Like I said, there's not a lot to report on the action of the past two weeks and it's going to take a solid catalyst to break any of the major indices significantly beyond the current trading range. For me, that's a large neon sign telling me to be very cautious about placing long-term directional bets. We've got a very small set of plays to choose from right now, and hopefully you can see the wisdom in doing so. Let's go take a quick look and see what merits our attention. Portfolio: HD - Expiration week failed to give us any resolution on our HD play, as the stock rebounded from the $33 support level, but stalled before reaching the $35 level, which is now resistance. Recall that the PnF chart won't give a Sell signal until price breaks below the $31 level, so that leaves us in no man's land. The price chart still looks bearish, with the stock firmly below the 200-dma and the 50-dma nearing the point where it will cross the 200-dma, underscoring the near-term bearish tone. But the fact that we haven't gotten a PnF Sell signal is disconcerting, especially with the weekly Stochastics now nearing oversold territory. We'll stick with the plan we've laid out, looking for the break of $31 as the next sign that the bears are gaining traction again. Maintain stops at $38, just over the recent highs and also the point at which the stock would see a confirming PnF Buy signal. CHK - With the rest of the market muddling around near critical support/resistance levels, shares of CHK have had a hard time building on the recent breakout over $14. The past couple weeks have seen the stock trading in a narrow consolidation range just above $13, after the sharp drop back under $14 in early May. Weekly Stochastics are now clearly bearish and it remains to be seen whether the stock will be able to remain in its 4-month rising channel, the bottom of which is now at $12.80. The 200-dma continues to rise to meet price and is now at $12.34. The recent weakness certainly can't be attributed to any weakness in the price of Natural Gas, as the September futures contract continues to hold well above $6. Dips near the bottom of the rising channel still look like favorable entry points for those traders still on the sidelines. The ideal scenario will see price trading sideways until weekly Stochastics once again turn bullish, which will set the stage for a solid run at a breakout over the recent highs. Maintain stops at $12, which is well below the 200-dma and the point at which the PnF chart would issue a Sell signal. LUV - While the rest of the market languished just under strong support levels that appear to be morphing to resistance, the DOW Transports found support above the March lows and appear to be trying to rebound. The Airline sector (XAL.X) is showing renewed signs of life after hitting a new low near $48, rallying strongly into the end of the week. Standing out as one of the stronger stocks in the sector, LUV put in a solid bottom just above $13.50 a couple weeks ago and rallied strongly last week, coming very close to a breakout on Friday. Resistance is at $15.30, which is just pennies above Friday's close. Technically we can call Friday's action a breakout, as LUV posted its best close since late January. Price action looks strong enough that we can raise our stop to $13.50 this weekend in anticipation of a continued bullish move on Monday. At this point in the play, a break under that early May low would be a very bad sign and make us want to exit the play if hit. TYC - I may be getting excited prematurely, but it looks to me like our patience in picking the right entry point for TYC is going to be rewarded. After the recent rebound from near $27, the stock satisfied our entry requirement last Friday and put in a respectable performance last week, rising back into the broken rising channel. Additionally, the weekly Stochastics are really trying to put in a bullish short-cycle reversal here. We still have a strongly bullish PnF chart and that view will be reinforced if the stock can break out over the March highs and trade the $31 level. That will give us a confirming PnF Buy signal and should give the bulls enough fuel to take a serious run at the next level of resistance at the 200 week moving average, just over $33.50. We're looking for substantially higher prices in the months ahead, but as we've discussed previously, we'll have to exercise a great deal of patience, as we shouldn't expect any rapid movement from the stock -- just a steady ascent. Maintain stops at $24.50 until we get that trade at $31 and then we can get more aggressive by raising our stop to $26. Not only is there strong support at that level, but it is the level at which TYC would issue a new Sell signal on its PnF chart. Watch List: AIG - So you don't think the PnF chart is a good tool for picking important levels? AIG's chart certainly provides a strong argument in favor of the utility of the supply/demand charts. Recall that it would take a trade at $68 to turn AIG's PnF chart bearish. The bears have certainly had ample opportunity to take a serious run at that level, but so far have been unsuccessful, as any dip below $69 has met with solid buying interest, keeping that PnF chart nominally positive. We're still waiting for confirmation that the bulls are interested in driving price higher, keeping our entry trigger as a close over the $72 level. Not only would that break the near-term declining trend, but would put price back over both the 100-dma and the 50-dma, setting the stage for an initial move back to the recent highs over $77. Wait for the breakout and then take entries according to your risk tolerance, using a firm stop at $68. GM - I think I blew it on this one. GM finally gave a great bearish entry point when it tipped over in January. Unfortunately, I failed to notice the rollover until the stock had fallen below $50 and weekly Stochastics were nearly to oversold. So I was looking for a rebound back to the top of the long-term falling channel to give us the ideal entry. From the way the stock has been trading the past couple weeks, it looks like it is probably too late to play. I would expect the current move to continue down towards the $38 level, at which point, we'll probably see the bulls step in. That really doesn't give us enough room to work with on a long-term play. Should we get a strong rebound back to the listed trigger, it MIGHT offer a nice entry point for aggressive traders, but it isn't an entry I'm particularly interested in right here. My inclination is to drop the play, rather than get caught in a bad entry. I'll monitor it for another week or two, but right now it feels like we missed this one. Radar Screen: EK - Zzzzzzzzzzzzzzzzz...Oops, sorry -- I must have dozed off there! GRIN I'm continually amazed how little this stock is moving. I have a very bearish view of the stock, both for the short and long term, but you can't make any money on that bias if the stock doesn't move. EK appears to be finding equilibrium near the $25 level and is doing so in a very erratic manner, failing to give us any sort of viable trading pattern except for the fact that it is continuing to hold below its multi-year descending trendline. We have gotten the bearish cross of the 50-dma under the 200-dma and price action is mostly remaining below both averages. What we need is some sort of rally to justify getting into that bearish position, and with weekly Stochastics now clearly turned upward, we may just get that chance in the weeks ahead. But for now, we just wait and watch. QQQ - I think you can now see why I've been in no hurry to initiate a new play on the QQQ here. The stock continues to trade in a narrow range, just above key support at $34. And Friday's options expiration pinned QQQ almost exactly to the $35 strike. The market is at a critical turning point, trying to decide if it wants to head lower or rebound from here. In all likelihood, we're probably looking at rangebound trade through much of the summer, so there's certainly no incentive to aggressively jump into a bearish position here. Likewise, I don't think it makes sense to play the upside, with price holding under the 200-dma and the 50-dma threatening to break below that 200-dma. The only way I'll consider an actual play here is if we see price get off the mat and bounce up towards the descending trendline just under $37. Shy of that, we're best leaving this one alone. $DJUSHB - I haven't forgotten about my promise to delve into a study of where we ought to focus our attention to the downside in the Housing sector. A rash of personal distractions kept me from doing the article last week, but I promise to tackle the topic in my Trader's Corner article this week. Recall that I'm not looking for the real directional play to unfold until AFTER the Fed begins the rate hike cycle, so at a minimum we have until late June to put together an action plan. NEM - From the commentary above, you had to know NEM was going to show up on this list, right? We're nowhere close to an actionable point here, but the new PnF Buy signals on the XAU and HUI indices are giving us a "heads up" warning to start getting our ducks lined up. We won't want to take the plunge until we see a new PnF Buy signal on both the gold futures and on NEM, which gives us the flexibility to just watch the price action unfold for now. Closing Thoughts: With all of the nerve-wracking factors listed at the top of this week's column, I hope you can see why I've been so stingy of late in terms of adding plays to either the Watch List or the Portfolio. Unless I see something that appears to give us a strong possibility of a nice gain, I'm likely to remain cautious in the weeks leading up to the end of June. Of course, I'll keep my eyes peeled for the diamond in the rough and I'm always open to suggestions from all of you. As I've noted on more than one occasion, some of my best ideas have come from my readers. Have a great week! Mark LEAPS Portfolio Current Open Plays LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: 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 None 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 ************************ Wow! It Doesn’t Get Any Better Than This By Mike Parnos, Investing With Attitude Get U-Haul on the phone and order a truck. No, not one of those little 10-footers. We’re going to need an 18-footer to haul this month’s profits to the bank. We may not be able to afford the gas to get to the bank, but we can certainly fill up the truck with money. I hereby christen our trading method the “Green Machine.” It has a nice ring to it. While the directional traders are whining and crying about losing money (what else is new?), we’re “magically” making money month after month. The irony is that the money we’re taking home comes from the directional traders (bless them). This month we set a CPTI record. Our previous high monthly profit was last month’s $6,050. Well, everything went right this month and we now have an additional $8,530 in our coffers, compliments of option buyers everywhere. We have every reason to celebrate. Go to Mickey D’s, take the whole family, and you have my permission to “super size” everything. The May option cycle was the seventh cycle in the second year of tracking our Couch Potato Trading Institute portfolio. With our $8,530 of profits, we’ve now accumulated a total of $26,010 in seven months. May Trade Summary SPX – Iron Condor – Profit: $2,880 RUT – Iron Condor – Profit: $2,500 MNX – Iron Condor – Profit: $1,750 BBH – Iron Condor – Profit: $1,400 TOTAL PROFIT: $8,530 Happy Returns Of The Day (Month) I couldn’t resist. I just had to calculate our hypothetical return on our risk in this month’s portfolio trades. The total amount of maintenance in the above four trades was $35,500. If we subtract the $8,530 of premium we took in, we now have a real risk of $26,970. When we divide $26,970 into our $8,530 profit, we get a return on risk of 31.6%. Amazing, but true. Some investors don’t get that return in four years combined. __________________________________________________________ MAY CPTI POSITION RESULTS May Position #1 – SPX Iron Condor – 1093.56 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 was $2,880. Our maximum profit range was 1080 to 1175. SPX finished over 1080. PROFIT: $2,880. May Position #2 – RUT Iron Condor – 545.81 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 was 540 to 620. RUT finished over 540 (just enough). PROFIT: $2,500. May Position #3 – MNX Iron Condor - $140.82 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 was $1,750. Our maximum profit range was $140 to $152.50. MNX finished over $140 (just enough). PROFIT: $1,750. May Position #4 – BBH Iron Condor - $145.15 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 was $1,400. Our maximum profit range was $135 to $155. BBH finished at $145.15. Profit: $1,400. _________________________________________________________________ MAY QUICKIE RESULTS I can’t help it. I have to gloat a little. Well, OK, maybe more than a little. Do I get to take a victory lap? Hell, I’ll settle for a lap dance. If you participated in this month’s quickies, you’re probably buying a round of double cheeseburgers for everyone in the joint. May Quickie #1 – QQQ Call This one was just based on a feeling. I believed that, at some point last week, the QQQs were going to bounce up to about $35.50. It was going to take a few very strong days for that to happen. I said that you should buy the QQQ $35 calls at $.15 and then sell them if it got up to $35.50. Well, the QQQs dipped, and the $35 calls were available to buy at $15. Then came the two big up days. The QQQs got as high as $35.51. Then, the $35 calls could have easily been sold at $.65. I actually sold some at $.70. It offered a PROFIT of $.50 x 20 contracts = $1,000. May Quickie #2 – OEX Siamese Condor I believed the QQQs would be in a pretty tight range for expiration week. We put on one of our Siamese Condors. We sold 10 of the OEX 535 calls and sold 10 of the OEX 535 puts @ $4.60 for a total credit of $9,600. We protected ourselves by buying 10 OEX 555 calls @ $.25 and 10 OEX 510 puts @ $.50. Our net credit was $8.85 ($8,850). Our ABSOLUTE bailout points were 543.85 on the topside and $526.15 on the bottom. The closer OEX closed to 535, the more money we would make. OEX closed Friday at 534.33. We had to give back $.67 of our $8.60. Our profit was a WHOPPING $7,930!!! May Quickie Position #3 – BBH Iron Condor We sold 10 BBH $145 puts and bought 10 BBH $140 puts. We then, sold 10 BBH $150 calls and bought 10 BBH $155 calls. Our total net credit was $1,350. BBH had to finish between $145 and $150. Surprise, surprise. The damn thing finished at $145.15 – inside the range. Our PROFIT was another $1,350. Quickie Summary Wow!! These are the kind of hypothetical results dreams are made of. They sure aren’t going to happen every month, but it sure helps perk up the averages. Our quickie PROFITS totaled: $10,280 – for ONE WEEK! Absurd, but a thing of beauty. ________________________________________________________ NEW JUNE POSITIONS June Position #1 – SPX Iron Condor – 1093.56 Let’s establish a nice large 125-point range and take in a few bucks. We’re being a little more conservative this month. Sell 5 SPX June 1150 calls Buy 5 SPX June 1170 calls Credit: $1.20 (x 5 contracts = $600) Sell 7 SPX June 1125 puts Buy 7 SPX June 1110 puts Credit: $1.00 (x 7 contracts = $700) Total net credit of $1,300. Maintenance: $10,500. Maximum profit range of 1025 to 1150. Lots of room for the SPX to roam. Potential profit is $1,300. June Position #2 – BBH Iron Condor - $145.15 This one gave us a scare early in the May cycle, but there’s still money to be made in another nice wide spread. Sell 10 BBH $155 calls Buy 10 BBH $165 calls Credit: $.70 (x 10 contracts = $700) Sell 10 BBH $135 puts Buy 10 BBH $125 puts Credit: $.90 (x 10 contracts = $900) Sell 10 BBH $155 calls Buy 10 BBH $154 calls Credit: $65 (x 10 contracts = $650) Total net credit of $1,550. Maintenance: $10,000. Maximum profit range of $135 to $155. Lots of room to roam. Potential profit: $1,550. June Position #3 – RUT – Iron Condor – 545.81 I think we can make some good “hypothetical” money with a 100 point spread. Sell 10 RUT 590 calls Buy 10 RUT 600 calls Credit: $.80 (x 10 contracts = $800) Sell 10 RUT 490 puts Buy 10 RUT 480 puts Credit: $1.00 (x 10 contracts = $1,000) Total net credit of $1,800. Maintenance $10,000. Maximum profit range of 490 to 590. Lots of room. Potential profit: $1,800. June Position #4 – MNX – Iron Condor - $140.82 Here’s another opportunity to take in respectable premium and create a relatively large range. Sell 10 MNX 147.50 calls Buy 10 MNX 152.50 calls Credit: $.70 (x 10 contracts = $700) Sell 10 MNX $132.50 puts Buy 10 MNX $127.50 puts Credit: $.60 (x 10 contracts = $600) Total net credit of $1,300. Maintenance: $10,000. Maximum profit range of $132.50 to $147.50. Profit potential: $1,300. __________________________________________________________ Those Friendly Reminders The premiums quoted on the above educational trades were based on Thursday’s closing bid/ask prices. On Monday, the premiums will surely be slightly different due to market movement and/or the additional day of time erosion. You may not be able to get the above “hypothetical” quoted premiums. Even if you come reasonably close, these should still be good “hypothetical” trades. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you a trader. And make sure you thoroughly know the intricacies of a strategy before you trade. The money you save may be your own. __________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $34.85 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. We rolled out the May $34 calls to the June $34 calls for a credit of $.60 and then the May $37 puts to the June $37 puts for credit of $.15. The total net credit was $.75 ($750). Our new total credit: $9,600. 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 – 533.20 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). The May 560 OEX call and the OEX 530/520 bull put spread expired worthless. We added $1,750 to our cash position. Our new cash position as of May expiration is $4,390 plus unused $1,700 = $6,090. June Zero Plus Positions. We established a June OEX bull puts spread 515/505, taking in a credit of $1.15 x 5 contracts = $575. We also sold the June 560 call taking in a credit of $1.20 x 5 contracts = $600. Some people have asked about why I’m using a five contract position when we only own 3 OEX Dec. 2006 calls. Well, we have $74,000 worth of zero coupon bonds that are certainly marginable and years to go to maturity. If violated, we can roll these spreads out however long is necessary to retain our profits. We’ll be adequately covered by the margin from the zeroes. OSX Calendar Spread Plus - $95.86 OSX is the Oil Index. This was a play based on the belief that oil prices will continue to move up. Well, the oil prices have gone up, but the index hasn’t. Bought 10 OSX June $115 calls and sold 10 OSX April $115 calls 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, we were a "plus" $.75 ($750). The May $115 call expired worthless. For June, on Thursday, we sold the June $105 call for $.70 against the June $115 call we still own. We closed our May bull put spread for a loss of $3.25 and rolled it out to the June $95/$85 bull put spread for a credit of $2.25. We had to trade 15 contracts of the bull put spread to cover what we spent to close the May $100/$90 bull put spread. We now have a positive $1.45 ($1450) -- $750 from before and another $700 from selling the $105 June call. We bought ourselves another month for the OSX to behave. We’re scrambling and I’ll be glad to be out of this damn trade with my butt still attached. That’ll teach me to try something directional. Never fear, we shall persevere. __________________________________________________________ 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. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Sunday 05-23-2004 Sunday 5 of 5 In Section Five: Spreads and Straddles: Bulls Regain Control...Barely! Premium-Selling Plays: Naked Puts and Calls CONSERVATIVE STOCK OWNERSHIP: COVERED-CALLS ************************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 ******************* Bulls Regain Control...Barely! By Ray Cummins U.S. stocks closed higher Friday as investors crept back into the equity markets in the wake of easing crude prices and a cautiously optimistic outlook for inflation. The Dow Jones industrial average closed up 29 points at 9,966 with twenty-three of the thirty blue-chip components ending in positive territory. The NASDAQ broke its three-week losing streak, rising 15 points to 1,912 on strength in semiconductor shares. Standard and Poor's 500 stock index added 4 points to finish at 1,093, with steel, homebuilding, gold, casino and airline shares enjoying some renewed buying interest. In the broad market, advancing stocks trounced decliners by roughly a 2 to 1 margin on both the NYSE and the NASDAQ. The expiration of options on stocks and stock indexes helped boost volume in the early going, but activity slowed as the day progressed. Big Board volume finished near 1.26 billion while the technology exchange crossed 1.37 billion shares. Bonds backed down from earlier-session highs with the yield on the 10-year note note closing up 0.05 percentage points at 4.76%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 05/21/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 56.00 59.61 MAY 47 50 0.25 49.75 0.25 Closed EBAY 75.94 80.34 MAY 65 70 0.65 69.35 0.65 Closed HDI 55.63 56.43 MAY 47 50 0.25 49.75 0.25 Closed PDCO 74.97 70.59 MAY 65 70 0.65 69.35 0.65 Closed CME 116.11 124.56 MAY 100 105 0.60 104.40 0.60 Closed MATK 65.12 61.60 MAY 55 60 0.60 59.40 0.60 Closed MTG 74.42 69.74 MAY 60 65 0.50 64.50 0.50 Closed AVP 84.00 85.31 MAY 75 80 0.45 79.55 0.45 Closed MUR 68.50 63.77 MAY 60 65 0.50 64.50 (0.73) Closed ERES 32.29 33.30 MAY 27 30 0.25 29.75 0.25 Closed ZBRA 74.62 80.08 MAY 65 70 0.40 69.60 0.40 Closed ERTS 51.88 48.72 JUN 45 47 0.35 47.15 0.35 Open IMDC 61.17 58.51 JUN 50 55 0.50 54.50 0.50 Open GPRO 38.30 37.13 JUN 30 35 0.70 34.30 0.70 Open MATK 68.01 61.60 JUN 55 60 0.65 59.35 0.65 Open ASD 107.89 107.83 JUN 95 100 0.50 99.50 0.50 Open IMCL 71.36 70.24 JUN 50 55 0.50 54.50 0.50 Open CSC 42.17 41.89 JUN 35 40 0.65 39.35 0.65 Open GILD 62.54 63.33 JUN 55 60 1.00 59.00 1.00 Open RIMM 99.98 109.02 JUN 80 85 0.45 84.55 0.45 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Bullish positions in BJ Services (NYSE:BJS), Nabors Industries (NYSE:NBR), Navistar (NYSE:NAV), Henry Schein (NASDAQ:HSIC) and Silicon Labs (NASDAQ:SLAB) have previously been closed to limit potential losses. CALL-CREDIT SPREADS Stock Pick Last Month L/C S/C Credit C/B G/L Status SOHU 25.46 18.70 MAY 35 30 0.60 30.60 0.60 Closed SFNT 31.65 21.91 MAY 40 35 0.70 35.70 0.70 Closed GENZ 46.40 41.63 MAY 55 50 0.60 50.60 0.60 Closed PRX 55.25 40.06 MAY 65 60 0.65 60.65 0.65 Closed MERQ 45.59 45.39 MAY 55 50 0.60 50.60 0.60 Closed NEM 42.86 38.40 MAY 50 47 0.25 47.75 0.25 Closed RYL 77.41 74.50 MAY 90 85 0.60 85.60 0.60 Closed AMZN 45.20 41.17 MAY 55 50 0.65 50.65 0.65 Closed BOBJ 27.85 20.45 MAY 35 30 0.75 30.75 0.75 Closed NTES 51.43 39.05 MAY 65 60 0.50 60.50 0.50 Closed VECO 27.43 24.05 MAY 35 30 0.55 30.55 0.55 Closed BSX 40.25 37.90 MAY 45 42 0.25 42.75 0.25 Closed RIMM 97.54 109.02 MAY 115 110 0.50 110.50 0.50 Closed MRVL 38.92 44.09 MAY 45 42 0.30 42.80 (1.29) Closed OVTI 22.38 20.59 MAY 30 25 0.55 25.55 0.55 Closed AMZN 43.95 41.17 MAY 50 47 0.25 47.75 0.25 Closed CHIR 45.58 42.60 MAY 50 47 0.25 47.75 0.25 Closed BCSI 38.55 38.35 MAY 50 45 0.40 45.40 0.40 Closed CFC 56.30 62.77 MAY 65 60 0.45 60.45 (2.32) Closed CTX 44.80 44.95 JUN 55 50 0.50 50.50 0.50 Open IVGN 67.61 66.16 JUN 80 75 0.55 75.55 0.55 Open NTLI 55.28 56.47 JUN 65 60 0.80 60.80 0.80 Open VIP 91.45 95.18 JUN 110 105 0.50 105.50 0.50 Open CERN 41.33 39.89 JUN 50 45 0.55 45.55 0.55 Open SEPR 45.06 43.31 JUN 55 50 0.60 50.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss The "watch-list" position in Countrywide Financial (NYSE:CFC) should have been closed early in the week, when the stock moved above the sold (call) strike, for a smaller than published loss. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ZMH 80.84 83.55 MAY 80 80 4.90 6.15 Closed AH 35.78 34.98 MAY 35 35 3.10 2.90 Closed QLTI 29.60 23.42 MAY 30 30 3.00 6.70 Closed HOTT 22.26 21.05 MAY 22 22 1.80 3.40 Closed LF 19.67 19.99 JUN 20 20 3.50 5.25 Closed BSTE 30.63 38.26 JUL 30 30 6.00 11.50 Closed MKSI 23.10 20.58 JUL 22 22 4.70 5.50 Closed Biosite (NASDAQ:BSTE) was the "Straddle of the Month," however Hot Topic (NASDAQ:HOTT), Zimmer (NYSE:ZMH), LeapFrog (NYSE:LF), MKS Instruments (NASDAQ:MKSI), QLT Incorporated (NASDAQ:QLTI), and Stratasys (NASDAQ:SSYS) also offered potential gains in May. Corinthian Colleges (NASDAQ:COCO), although very volatile, was not a viable position due to the "gap-up" on the day after the straddle was listed as a 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ QCOM - Qualcomm $65.40 *** Uptrend Intact! *** Qualcomm (NASDAQ:QCOM) is the leading developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $65.40 PLAY (conservative - bullish/credit spread): BUY PUT JUN-55.00 AAO-RK OI=1944 ASK=$0.20 SELL PUT JUN-60.00 AAO-RL OI=112251 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$59.55 __________________________________________________________________ ZBRA - Zebra Technologies $80.08 *** Bullish Outlook! *** Zebra Technologies Corporation (NASDAQ:ZBRA) and its wholly owned subsidiaries design, manufacture, and support a broad range of direct thermal and thermal transfer bar code label and receipt printers, plastic card printers, related accessories and support software. The company's main products consist of a broad line of computerized printers for the production of bar code labels, receipts and tags, and plastic cards, specialty bar code labeling materials, ink ribbons for bar code and card printers, and bar code label design software. ZBRA - Zebra Technologies $80.08 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-70.00 ZBQ-RN OI=70 ASK=$0.35 SELL PUT JUN-75.00 ZBQ-RO OI=1574 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$74.35 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BSC - Bear Stearns $80.02 *** In A Trading Range? *** Founded in 1923, Bear Stearns Companies Inc. (NYSE:BSC) is the parent company of Bear, Stearns & Co. Inc., a leading investment banking and securities trading and brokerage firm. With over $37 billion in total capital, Bear Stearns serves global governments, corporations, institutions and individuals worldwide. The firm's business includes corporate finance and mergers and acquisitions, institutional equities & fixed income sales, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities, it offers financing, securities lending, clearing and technology solutions to hedge funds, broker-dealers and investment advisors. BSC - Bear Stearns $80.02 PLAY (conservative - bearish/credit spread): BUY CALL JUN-90.00 BSC-FR OI=964 ASK=$0.15 SELL CALL JUN-85.00 BSC-FQ OI=912 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$85.50 __________________________________________________________________ FRX - Forest Labs $59.20 *** Sell-Off Underway! *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. The company's many products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. FRX - Forest Labs $59.20 PLAY (conservative - bearish/credit spread): BUY CALL JUN-70.00 FHA-FN OI=2229 ASK=$0.20 SELL CALL JUN-65.00 FHA-FM OI=1714 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$65.55 __________________________________________________________________ MDT - Medtronic $47.66 *** Pre-Earnings Slump? *** Medtronic (NYSE:MDT) is a medical technology firm that provides lifelong solutions for people with chronic disease. With roots in the treatment of heart disease, Medtronic has expanded beyond its historical core business and provides a range of products and therapies that help solve many challenging, life-limiting medical conditions. The company operates in five major business segments that make and market device-based medical therapies. These are: cardiac rhythm management, vascular, cardiac surgery, neurological and diabetes and spinal and ear, nose and throat. MDT - Medtronic $47.66 PLAY (less conservative - bearish/credit spread): BUY CALL JUN-55.00 MDT-FK OI=1363 ASK=$0.10 SELL CALL JUN-50.00 MDT-FJ OI=8453 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$50.60 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ DEBIT SPREADS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This strategy offers a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. SUPPLEMENTAL CANDIDATES 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. __________________________________________________________________ CALL DEBIT SPREADS Stock Current Long Ask Short Bid Cost Spread Max Symbol Price Call Price Call Price Basis Debit ROI% PHRM 38.56 JUTFE 14.00 JUTFG 5.10 33.90 8.90 12.4 DRIV 32.38 DQIFX 10.20 DQIFF 3.50 29.20 6.70 11.9 IMCL 70.24 QCIFK 16.00 QCIFL 11.50 59.50 4.50 11.1 KMRT 49.11 KTQFH 9.80 KTQFI 5.30 44.50 4.50 11.1 DNA 59.61 DNAFJ 10.00 DNAFK 5.50 54.50 4.50 11.1 GPRO 37.13 PSUFF 7.60 PSUFG 3.10 34.50 4.50 11.1 IMDC 58.51 UZIFJ 9.00 UZIFK 4.50 54.50 4.50 11.1 GILD 63.33 GDQFJ 13.80 GDQFL 4.70 59.10 9.10 9.9 ANF 34.33 ANFFY 7.00 ANFFZ 2.40 32.10 4.60 8.7 PUT DEBIT SPREADS Stock Current Long Ask Short Bid Cost Spread Max Symbol Price Put Price Put Price Basis Debit ROI% OVTI 20.59 UCMRY 7.30 UCMRX 2.95 23.15 4.35 14.9 OSTK 31.13 QKTRH 9.70 QKTRG 5.30 35.60 4.40 13.6 XMSR 23.29 QSYRF 6.80 QSYRE 2.35 25.55 4.45 12.4 APPX 32.20 AQORI 13.00 AQORG 4.10 36.10 8.90 12.4 ENDP 20.90 IUKRE 4.70 IUKRX 2.45 22.75 2.25 11.1 RMBS 18.29 BNQRX 4.60 BNQRD 2.35 20.25 2.25 11.1 LEND 27.46 QFWRG 7.80 QFWRF 3.30 30.50 4.50 11.1 NTAP 18.67 NULRX 3.90 NULRD 1.65 20.25 2.25 11.1 NTES 39.05 NQGRJ 11.20 NQGRI 6.70 45.50 4.50 11.1 MYGN 15.88 GSQRD 4.40 GSQRW 2.15 17.75 2.25 11.1 NBIX 55.19 UOTRM 10.40 UOTRL 5.90 60.50 4.50 11.1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ GRMN - Garmin $32.60 *** Recent Volatility *** Garmin (NASDAQ:GRMN) is a worldwide provider of navigation, communications and information devices, most of which are enabled by global positioning system (GPS) technology. The company designs, develops, manufactures and sells a diverse family of handheld, portable and fixed-mount GPS-enabled products and other navigation, communications and information products for the general aviation and consumer markets. Each of Garmin's GPS products utilizes its proprietary integrated circuit and receiver designs to collect, calculate and display location, direction, speed and other information in optimized formats for specific uses. GRMN - Garmin $32.60 PLAY (speculative - neutral/debit strangle): BUY CALL JUL-35.00 GQR-GG OI=332 ASK=$1.20 BUY PUT JUL-30.00 GQR-SF OI=167 ASK=$1.20 INITIAL NET-DEBIT TARGET=2.10-$2.25 INITIAL TARGET PROFIT=$0.95-$1.25 _________________________________________________________________ KKD - Krispy Kreme Doughnuts $19.63 *** Earnings Play! *** Krispy Kreme Doughnuts (NYSE:KKD) is a specialty retailer of doughnuts. It owns and franchises Krispy Kreme doughnut stores where over 20 varieties of doughnuts, including its Hot Original Glazed variety, are made and sold. Each of its stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts on a daily basis. The company's sales channels consist of "on-premises" sales and "off-premises" and it has two complementary business units: its company and franchised stores, which Krispy Kreme refers to, collectively, as Store Operations and Manufacturing and Distribution (KKM&D). The quarterly earnings report is due Wednesday, May 26, 2004. KKD - Krispy Kreme Doughnuts $19.63 PLAY (very speculative - neutral/debit straddle): BUY CALL JUN-20.00 KKD-FD OI=824 ASK=$1.40 BUY PUT JUN-20.00 KKD-RD OI=7348 ASK=$1.75 INITIAL NET-DEBIT TARGET=2.95-$3.05 INITIAL TARGET PROFIT=$1.00-$1.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 05/21/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 20.43 0.35 4.19% 2.04% MICC MAY 17 17.15 21.50 0.35 4.31% 2.04% MNST MAY 22 21.95 24.20 0.55 4.39% 2.51% HNT MAY 22 22.00 22.35 0.35 3.33% 2.27% IPXL MAY 20 19.50 19.64 0.14 1.52% 2.56% SSNC MAY 22 21.60 22.67 0.90 7.85% 4.17% IPXL MAY 20 19.65 19.64 (0.01) 0.00% 1.78% JBLU MAY 22 22.15 28.38 0.35 3.65% 1.58% LSCP MAY 22 21.95 28.18 0.55 5.43% 2.51% USG MAY 15 14.25 14.28 0.03 0.41% 5.26% ASKJ MAY 30 29.50 35.94 0.50 4.47% 1.69% BRCM MAY 37 36.70 40.75 0.80 4.83% 2.18% FWHT MAY 20 19.35 20.43 0.65 7.29% 3.36% MRVL MAY 42 41.55 44.09 0.95 4.95% 2.29% NFLX MAY 27 27.10 31.26 0.40 3.84% 1.48% HOLX MAY 20 19.50 19.76 0.26 2.86% 2.56% GVHR MAY 25 24.65 25.16 0.35 4.00% 1.42% HSII MAY 22 22.25 28.40 0.25 2.61% 1.12% LF MAY 20 19.55 19.99 0.44 5.05% 2.30% TSAI MAY 20 19.80 19.53 (0.27) 0.00% 1.01% TSO MAY 20 19.50 21.85 0.50 5.60% 2.56% APPX MAY 35 34.40 32.20 (2.20) 0.00% 1.74% * ELN MAY 17 17.30 21.30 0.20 4.01% 1.16% ERES MAY 25 24.50 33.30 0.50 6.05% 2.04% HOLX MAY 20 19.65 19.76 0.11 1.43% 1.78% LSCP MAY 22 22.10 28.18 0.40 5.49% 1.81% PDII MAY 22 21.75 27.97 0.75 8.99% 3.45% TELK MAY 22 22.20 21.98 (0.22) 0.00% 1.35% TNOX MAY 15 14.50 16.66 0.50 8.35% 3.45% APPX MAY 35 34.65 32.20 (2.45) 0.00% 1.01% * EYE MAY 17 17.20 22.56 0.30 5.00% 1.74% JCOM MAY 22 22.30 22.55 0.20 2.82% 0.90% MGAM MAY 22 21.90 21.39 (0.51) 0.00% 2.74% NIHD MAY 33 32.88 34.72 0.50 4.38% 1.52% SNIC MAY 17 17.15 18.35 0.35 5.76% 2.04% FWHT MAY 20 19.60 20.43 0.40 7.10% 2.04% NIHD MAY 35 34.50 34.72 0.22 2.21% 1.45% OSTK MAY 30 29.25 31.13 0.75 9.75% 2.56% SNIC MAY 17 17.20 18.35 0.30 6.05% 1.74% UTHR MAY 20 19.65 23.96 0.35 6.71% 1.78% ATRS MAY 25 24.55 25.08 0.45 7.08% 1.83% FWHT MAY 20 19.65 20.43 0.35 6.77% 1.78% INSP MAY 30 29.50 32.30 0.50 7.20% 1.69% ISPH MAY 15 14.50 17.45 0.50 11.39% 3.45% PTEN MAY 35 34.65 29.34 0.40 4.13% 1.01% UTHR MAY 22 22.10 23.96 0.40 6.82% 1.81% HEW MAY 30 29.50 31.19 0.50 6.70% 1.69% ISPH MAY 15 14.55 17.45 0.45 12.90% 3.09% MGM MAY 20 19.65 20.33 0.35 7.24% 1.78% SONO MAY 20 19.60 20.91 0.40 8.71% 2.04% USPI MAY 35 34.35 37.35 0.65 7.48% 1.89% DRIV MAY 25 24.75 32.38 0.25 5.17% 1.01% GPRO MAY 35 34.70 37.13 0.30 4.34% 0.86% JILL MAY 20 19.60 19.57 (0.03) 0.00% 2.04% MVSN MAY 20 19.65 22.71 0.35 9.34% 1.78% PDII MAY 25 24.55 27.97 0.45 8.88% 1.83% SYMC MAY 45 44.65 46.80 0.35 3.95% 0.78% VXGN MAY 15 14.50 15.64 0.50 16.34% 3.45% ADP MAY 45 44.65 44.28 (0.37) 0.00% 0.78% BCGI JUN 10 9.65 10.35 0.35 7.73% 3.63% ERES MAY 30 29.70 33.30 0.30 7.04% 1.01% FARO MAY 20 19.75 25.75 0.25 9.82% 1.27% LPNT JUN 35 34.30 36.16 0.70 4.03% 2.04% MXIM MAY 45 44.70 47.38 0.30 4.57% 0.67% NCF MAY 30 29.50 31.40 0.50 11.10% 1.69% NSM MAY 20 19.70 20.32 0.30 9.79% 1.52% ASCA JUN 30 29.35 32.87 0.65 5.02% 2.21% DRIV JUN 25 24.25 32.38 0.75 7.04% 3.09% FARO JUN 20 19.45 25.75 0.55 7.32% 2.83% GIVN JUN 30 29.25 32.66 0.75 7.01% 2.56% MVSN JUN 20 19.65 22.71 0.35 4.54% 1.78% PDII JUN 22 22.00 27.97 0.50 6.67% 2.27% SMTC JUN 20 19.50 23.04 0.50 6.25% 2.56% CELG JUN 45 44.40 54.42 0.60 4.75% 1.35% ELN JUN 17 17.05 21.30 0.45 8.73% 2.64% FARO JUN 20 19.45 25.75 0.55 8.04% 2.83% FRO JUN 25 24.50 32.16 0.50 6.48% 2.04% IMMU JUN 5 4.75 5.42 0.25 13.52% 5.26% LNCR JUN 32 32.05 34.41 0.45 3.60% 1.40% MCK JUN 32 32.00 33.61 0.50 3.76% 1.56% NFLX JUN 25 24.45 31.26 0.55 7.36% 2.25% PHRM JUN 20 19.65 38.56 0.35 5.67% 1.78% RTN JUN 32 32.00 32.51 0.50 3.62% 1.56% VXGN JUN 12 12.10 15.64 0.40 10.35% 3.31% ARTI JUN 22 22.00 24.39 0.50 6.11% 2.27% AVID JUN 45 44.30 50.30 0.70 4.62% 1.58% BLUD JUN 25 24.70 28.45 0.30 3.54% 1.21% DIGE JUN 35 34.25 39.59 0.75 6.16% 2.19% DRIV JUN 25 24.60 32.38 0.40 5.37% 1.63% NUE JUN 55 54.25 62.35 0.75 3.96% 1.38% PHRM JUN 20 19.70 38.56 0.30 5.30% 1.52% SPLS JUN 25 24.60 26.72 0.40 4.24% 1.63% YHOO JUN 25 24.60 28.55 0.40 4.64% 1.63% Positions in ADEX, ALKS, BLDP, CAMD, CLZR, CPKI, DRTE, DNDN, ESIO, GNTA, GVHR, IMM, INSP ($35P), MICC ($22.5P), MRVL, NET, NFLX, ORBZ, PLMO, PXLW, SSTI, TINY, TOMO, USG and XMSR were previously closed to limit potential losses. Issues on the "watch" list are: Given Imaging (NASDAQ:GIVN) and Raytheon (NYSE:RTN). The bullish position in American Pharmaceutical Partners (NASDAQ:APPX) should have been closed, for a smaller than published loss, when the issue moved below the sold (put) strike at $35. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AFCI MAY 25 25.75 18.97 0.75 7.73% 2.91% QLGC MAY 37 37.95 26.67 0.45 4.22% 1.19% AVCT MAY 37 38.15 33.05 0.65 4.61% 1.70% INTU MAY 47 48.00 37.95 0.50 2.80% 1.04% PPCO MAY 20 20.30 11.00 0.30 6.92% 1.48% SINA MAY 45 45.55 30.01 0.55 6.61% 1.21% NANO MAY 20 20.40 11.77 0.40 10.66% 1.96% PHTN MAY 35 35.60 28.48 0.60 7.03% 1.69% SFA MAY 35 35.55 32.30 0.55 6.17% 1.55% SOHU MAY 25 25.75 18.70 0.75 11.61% 2.91% SWIR MAY 35 35.60 23.83 0.60 9.26% 1.69% HOV MAY 42 42.90 32.82 0.40 4.07% 0.93% NFI MAY 45 45.40 33.30 0.40 7.16% 0.88% PHTN MAY 35 35.30 28.48 0.30 6.07% 0.85% RMBS MAY 25 25.30 18.29 0.30 7.84% 1.19% FLSH MAY 20 20.25 15.98 0.25 8.55% 1.23% BRCM MAY 42 42.80 40.75 0.30 4.46% 0.70% APPX MAY 50 50.55 32.20 0.55 11.50% 1.09% KG MAY 20 20.25 13.09 0.25 12.67% 1.23% SHRP MAY 30 30.45 26.10 0.45 8.28% 1.48% ATRX MAY 30 30.35 25.60 0.35 9.16% 1.15% KOSP MAY 40 40.65 32.75 0.65 12.52% 1.60% PBY MAY 27 27.85 24.25 0.35 10.04% 1.26% IACI JUN 32 33.15 30.06 0.65 5.22% 1.96% OVTI JUN 30 30.80 20.59 0.80 11.79% 2.60% SLAB JUN 55 55.50 47.25 0.50 4.93% 0.90% PHTN JUN 35 35.35 28.48 0.35 4.69% 0.99% ENDP JUN 25 25.70 20.90 0.70 11.16% 2.72% IPXL JUN 22 23.05 19.64 0.55 8.75% 2.39% MMR JUN 15 15.25 13.53 0.25 7.20% 1.64% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 ARO JUN 23.37 23.03 25.16 0.35 4.75% 1.52% CRDN JUN 25.00 24.65 29.99 0.35 5.57% 1.42% ERES JUN 27.50 27.05 33.30 0.45 6.61% 1.66% FARO JUN 22.50 21.85 25.75 0.65 9.88% 2.97% ISPH JUN 15.00 14.55 17.45 0.45 10.57% 3.09% IDEV JUN 5.00 4.70 8.61 0.30 17.36% 6.38% PDII JUN 22.50 22.20 27.97 0.30 5.83% 1.35% SSYS JUN 22.50 21.85 25.14 0.65 9.43% 2.97% SLXP JUN 25.00 24.70 34.68 0.30 4.85% 1.21% __________________________________________________________________ ARO - Aeropostale $25.16 *** Bullish Retailer! *** Aeropostale (NYSE:ARO), together with its subsidiary, Aeropostale West, is a mall-based specialty retailer of casual apparel and accessories that target both young women and young men aged 11 to 20 years. The firm provides its customers with a selection of active-oriented, fashion basic merchandise. Aeropostale maintains control over its proprietary brand by designing and sourcing all of its merchandise. The company's products can be purchased only at its stores or organized sales events at college campuses. The company plans to open approximately 95 new stores in fiscal 2004. ARO - Aeropostale $25.16 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 22.5 IRO RX 0 0.35 23.03 4.7% 1.5% __________________________________________________________________ CRDN - Ceradyne $29.99 *** Consolidation Complete? *** Ceradyne (NASDAQ:CRDN) develops, manufactures and sells advanced technical ceramic products and components for defense, industrial, automotive and commercial applications. The company's primary products include lightweight ceramic armor for soldiers and military helicopters; aesthetic ceramic orthodontic brackets; durable, reduced friction, ceramic diesel engine components; ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes, and ceramic industrial components for erosion and corrosion resistant applications. CRDN - Ceradyne $29.99 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 25 AUE RE 279 0.35 24.65 5.6% 1.4% __________________________________________________________________ ERES - eResearch Technology $33.30 *** Entry Point? *** 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 $33.30 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 27.5 UDB RY 392 0.45 27.05 6.6% 1.7% __________________________________________________________________ FARO - FARO Technologies $25.75 *** Next Leg Up? *** 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 $25.75 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 22.5 QEJ RX 304 0.65 21.85 9.9% 3.0% __________________________________________________________________ ISPH - Inspire Pharma $17.45 *** Favorable Drug Data! *** Inspire Pharmaceuticals (NASDAQ:ISPH) is a development-stage company engaged in the discovery and development of novel pharmaceutical products that treat diseases characterized by deficiencies in the body's innate defense mechanisms of mucosal hydration and mucociliary clearance, as well as other non-mucosal disorders. ISPH - Inspire Pharma $17.45 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 15 JPU RC 127 0.45 14.55 10.6% 3.1% __________________________________________________________________ IDEV - Indevus Pharmaceuticals $8.61 *** Drug Speculation! *** Indevus Pharmaceuticals (NASDAQ:IDEV) is a biopharmaceutical company engaged in the development and commercialization of a diversified portfolio of product candidates, including multiple compounds in late-stage clinical development. The company has a number of compounds in development: trospium for overactive bladder, pagoclone for panic and generalized anxiety disorders, citicoline for ischemic stroke, IP 751 for pain and inflammatory disorders, PRO 2000 for the prevention of infection by the human immunodeficiency virus and other sexually transmitted pathogens and aminocandin for treatment of systemic fungal infections. IDEV - Indevus Pharmaceuticals $8.61 "SPECULATIVE" PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 5 QUF RA 405 0.30 4.70 17.4% 6.4% __________________________________________________________________ PDII - PDI Incorporated $27.97 *** In A Trading Range? *** PDI Inc. (NASDAQ:PDII) is an innovative healthcare sales and marketing provider to biopharmaceutical and medical devices companies and and the diagnostics industry. Its three business units offer service and product-based capabilities for companies seeking to maximize profitable brand sales growth. The three units are: PDI Pharmaceutical Products, PDI Sales and Marketing Services, and PDI Medical Devices and Diagnostics. PDII - PDI Incorporated $27.97 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 22.5 PKU RX 106 0.30 22.20 5.8% 1.4% __________________________________________________________________ SSYS - Stratasys $25.14 *** Recovery Underway? *** Stratasys (NASDAQ:SSYS) manufactures and sells a line of rapid prototyping and three-dimensional printing devices that create physical models from computerized designs. The company's rapid prototyping systems are based on its patented fused deposition modeling technology or on its patented Genisys technology. The company is also involved in the office prototyping market (rapid prototyping) and develops, manufactures and markets a family of rapid prototyping devices and 3-D printers that enable engineers and designers to create physical models, tooling and prototypes out of plastic and other materials directly from a computer-aided design workstation. SSYS - Stratasys $25.14 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 22.5 QQG RX 50 0.65 21.85 9.4% 3.0% __________________________________________________________________ SLXP - Salix Pharmaceuticals $34.68 ** Pure Premium-Selling! ** Salix Pharmaceuticals (NASDAQ:SLXP) is a specialty pharmaceutical company engaged in acquiring, developing and commercializing prescription drugs used in the treatment of a wide variety of gastrointestinal diseases that affect the digestive tract. The company's four products are balsalazide disodium, which it sells in the United States under the brand name Colazal; three dosage strengths of azathioprine, a FDA-approved product licensed by the company, launched in the United States in February 2004 under the brand name Azasan; rifaximin, if approved by the FDA, is intended to be sold in the United States for the treatment of travelers' diarrhea, and a granulated formulation of mesalamine, if approved by the FDA, is intended to be sold in the United States to expand the range of treatment options for ulcerative colitis. SLXP - Salix Pharmaceuticals $34.68 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 25 PQN RE 26 0.30 24.70 4.9% 1.2% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ APPX - American Pharma Partners $32.30 ** Downtrend Resumes! ** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty drug company that develops, manufactures and markets injectable pharmaceutical products, focusing on the oncology, anti-infective and critical care markets. The company is one of the largest producers of injectables, with more than 130 generic products in more than 350 dosages and formulations. APPX - American Pharma Partners $32.30 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUN 40 AQO FH 3219 0.40 40.40 6.8% 1.0% __________________________________________________________________ OVTI - OmniVision Technologies $20.59 *** Premium-Selling! *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and markets high-performance, cost-efficient semiconductor image sensor devices. The company's main product, an image sensing device called the CameraChip, is used to capture an image in a variety of consumer and commercial mass market applications, including digital still cameras, cellular telephones, security and surveillance cameras and video game consoles. The firm's CameraChips are manufactured using the complementary metal oxide semiconductor (CMOS) process, the most widely utilized method of producing modern integrated circuits. OVTI - OmniVision Technologies $20.59 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUN 27.5 UCM FY 3496 0.25 27.75 6.7% 0.9% __________________________________________________________________ WSM - Williams-Sonoma $30.27 *** Recent Slump! *** Williams-Sonoma (NYSE:WSM) is a specialty retailer of products for the home. The company has two primary segments, retail and direct-to-customer. The retail segment sells products for the home, while the direct-to-customer segment sells a collection of similar products through direct-mail catalogs and e-commerce web sites. Williams-Sonoma's stores offer a selection of culinary and serving equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware, table linens, specialty foods and cooking ingredients. The company's core brands in retail and direct-to-customer are Pottery Barn, which sells contemporary tableware and home furnishings; Williams-Sonoma, which markets cookware essentials, and Pottery Barn Kids, which sells stylish children's furnishings. WSM - Williams-Sonoma $30.27 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUN 32.5 WSM FZ 413 0.50 33.00 5.6% 1.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ******************************************* CONSERVATIVE STOCK OWNERSHIP: COVERED-CALLS ******************************************* Many investors find that writing "in-the-money" covered-calls fits their criteria for a conservative, easy-to-manage options strategy. __________________________________________________________________ The market is offering little in the way of bullish stocks with robust call-option premiums, so this week's section is simply a list of... SUPPLEMENTAL COVERED-CALL CANDIDATES The following group of issues is a list of potential candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. __________________________________________________________________ Sequenced by Target Yield (monthly basis) Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield SLXP 34.68 JUN 30.00 PQN-FF 6.50 193 28.18 26 7.6% INSP 32.30 JUN 30.00 IOU-FF 3.60 235 28.70 26 5.3% UTHR 23.96 JUN 20.00 FUH-FD 4.80 21 19.16 26 5.1% NVTL 17.29 JUN 15.00 NVU-FC 2.90 82 14.39 26 5.0% KERX 14.21 JUN 12.50 QKY-FV 2.20 89 12.01 26 4.8% IDEV 8.61 JUN 5.00 QUF-FA 3.80 306 4.81 26 4.6% NKTR 18.13 JUN 15.00 QNX-FC 3.70 10 14.43 26 4.6% DRIV 32.38 JUN 30.00 DQI-FF 3.50 816 28.88 26 4.5% MICC 21.50 JUN 20.00 CQD-FD 2.20 47 19.30 26 4.2% ENER 11.21 JUN 10.00 EQI-FB 1.55 2384 9.66 26 4.1% DYAX 14.00 JUN 12.50 DQA-FV 1.90 173 12.10 26 3.9% WEBM 8.18 JUN 7.50 QNM-FU 0.90 10 7.28 26 3.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER IN SECTION ONE ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... 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