The Option Investor Newsletter Sunday 06-06-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: D Day For Bulls Futures Market: See Note Index Trader Wrap: The Bottom Line Editor's Plays: Stand Aside Market Sentiment: Lights Are Green Ask the Analyst: Can I interest you in an IPO? (Retracement) 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 6-04 WE 5-28 WE 5-21 WE 5-14 DOW 10242.82 + 54.37 10188.5 +221.71 9966.74 - 46.13 -104.47 Nasdaq 1978.62 - 8.12 1986.74 + 74.65 1912.09 + 7.84 - 13.71 S&P-100 547.08 + 1.95 545.13 + 10.80 534.33 - 1.14 - 1.88 S&P-500 1122.50 + 1.86 1120.64 + 27.08 1093.56 - 2.10 - 3.03 W5000 10936.31 + 9.95 10926.4 +301.26 10625.1 - 9.61 - 51.33 SOX 470.91 - 17.95 488.86 + 30.68 458.18 + 7.19 - 6.02 RUT 567.75 - .53 568.28 + 22.47 545.81 + 2.05 - 4.80 TRAN 2992.28 + 44.27 2948.01 + 82.26 2861.75 + 12.86 + 2.71 ****************************************************************** D Day For Bulls by Jim Brown With the bears hunkered down in their bunkers wondering what happened to their reinforcements the bulls are gaining in strength on a daily basis. Next week could see the bulls storming the trading floor and putting the bears into full retreat. The stars are aligning and the storm clouds are disappearing. Monday could be a decisive day for the bulls to attack. Dow Chart - Daily Nasdaq Chart - Daily Russell Chart - Daily SPX Chart - Daily It was a report made in heaven for the bulls. The Jobs report showed that the economy gained +248,000 payroll jobs in May and like the Goldilocks porridge it was just right. It was not too low and not too high and the jobs gained were in the right places. The headline number was about +25K over the consensus estimates and not enough to energize the Fed into a rate hike frenzy. The good news came in the form of upward revisions to the prior two months for an additional +74,000 jobs. Over the past three months 75.4% of industries have added workers. Over the same three months nearly one million jobs have been created and this could go a long way to help consumer sentiment and election rhetoric. This was the third excellent report in a row and there was no bad news. There were 32,000 new manufacturing jobs added in a sector that has been decimated. Average earnings rose and 173,000 of the new jobs were in positions making over $16 per hour. This quiets the claims that all new jobs are Wal-Mart or McDonalds quality and shows the depth of the recovery. Too bullish for you? Me too but that was what the airwaves were blasting all day. Bullish sentiment was simply oozing out of every news report. The bad news, what there was of it, came in a serious jump in the Fed funds futures. The futures are now showing a +75 point hike by the August meeting. There is only one meeting between now and the August 10th meeting and that is on June 30th. According to the futures there is a 10% chance of the 50-point hike being in June and a 30% chance it will be in August. We can expect those numbers to vacillate greatly as the month progresses. Just as the debate heated up on Friday we had a speech by Fed Governor Kohn on "The Outlook for Inflation". A very timely topic in view of the coming Fed rate hike series. http://www.federalreserve.gov/boarddocs/speeches/2004/20040604/default.htm The net of his speech is that the Fed still believes that the inflation monster is still slumbering despite the recent rapid jump in some indicators. Kohn said the Fed believes the jump in inflation was simply due to a rebound from abnormally low inflation over the last year. The rebound merely put the standard inflation rate back into sync with an expanding economy. He said while the Fed will remain cautious they still believe there is sufficient slack in the economy to prevent inflation from rising significantly in the near future. That said he did warn that the current Fed funds rate was too low and the Fed would be raising soon but he echoed and emphasized that there was no reason to rush the process and it will be removed at a measured pace. Glad to see they all have the key catch phrase firmly imbedded in their vocabulary. The bottom line is calm in bond market despite a two week high in the ten-year yields and calm in the stock market despite multiple rate hikes ahead. Just when you thought the stock market could not have any better news oil prices closed at a five week low at $38.49. The OPEC posturing and bad mouthing oil prices for the last couple days has kicked the props from under the speculative oil market. No longer are the ripe profits there for the picking and traders are beginning to lighten up just in case oil supplies begin to increase in July as OPEC promised. In reality almost everyone I have heard claims OPEC is already pumping the two million barrels they claim they will raise production and there will not be any new oil coming to market. Regardless, traders are being much more careful about long positions in a falling market until some more details are known. With oil closing today nearly -$4 under Tuesday's levels the transports finally found a bid on the hopes the oil crisis has passed. To wrap the week we had favorable reports from Intel and PMCS to help the chip sector along with an expanded growth outlook from the Semiconductor Statistics group. The Intel mid qtr update Thursday night came on the heels of three down days for the sector. Friday's relief rally added +1.61% to the SOX and we have the TXN mid quarter update on Monday. You would think the positive chip news and rebounding Russell would give the Nasdaq wings. Unfortunately it didn't and the Nasdaq lost -8 points for the week. The Nasdaq appears stuck on 1980 and has traded across that line, sometimes multiple times for the last six days only to close at 1979 on Friday. What is up with that? The 50 dma is 1978 and it is trying very hard to move above that level. We have traded over 1990 six times only to fail each time. Resistance has been tough as we approach 2000 and it only gets tougher as we try to move higher. The Dow however has moved continually higher for the week and even succeeded in hitting 10300 on Friday after a four week dip. Unlike the flat Nasdaq the Dow gained +54 points for the week which may not sound like much but the trend was definitely higher. Unfortunately there is monster resistance at 10325 and any continued rally will face a tough uphill battle but support is gradually rising. There are no material economic reports next week until the PPI and Consumer Confidence on Friday. Greenspan testifies before the Senate on Thursday regarding his re-nomination. This means we will trade almost the entire week on stock news with the Thursday testimony the first real drag on the bulls. I started this article with commentary that next week could see the bulls press the attack. Last Sunday I said this week would likely be range bound and attempts to move higher would fail until the Jobs report was history. Now that the numbers are on the board and good news is breaking out all over the bulls should be smelling greener grass ahead. Believe it or not there are only four weeks left in the quarter and the earnings cycle will begin again. We are moving into the warning period for the 2Q and so far there has been almost none. Estimates are still being raised and the economy does appear to be picking up speed. In any other year this would be the recipe for a rare summer rally. The challenge is the convergence of events on June 30th. We have the Iraq changeover, FOMC meeting, the end of the quarter and Russell rebalancing. It is also an election year with the incumbent in trouble. Stir all these ingredients together and you get a witches brew forecast. This is how I read the road map. Oil prices are falling and OPEC is going on the offensive on prices. Regardless of any new production they appear committed to push the price down. This is bullish for the market for multiple reasons. The Iraq changeover has already been factored into the market. At least the idea of the changeover has been accepted and the optimists think that will be the end of the news. The pessimists know better and fully expect an increasing number of terrorist activities in Iraq as we near the date. I would not be a potential government official in Iraq for any amount of money. They are walking targets. While I think traders have factored in the changeover they will still react to the increasing attacks as the date approaches. The FOMC meeting is a given. A 25-point increase has already been factored in and to some extent there is already an expectation for more. I am sure we will see some volatility around the meeting but I cannot imagine an outcome that would sour the market. If they did raise +50 and I doubt it for political reasons, the market would just ratchet down its expectations for August and proceed. The wild card that I think will have the biggest impact on next week is the election. Typically election summers tend to be positive when the incumbent is ahead. The jobs numbers were very positive for Bush and a serious blow for Kerry in terms of political talking points. You can expect positive comments and better poll numbers next week and that should encourage the bulls. This analysis suggests the bulls will TRY and press higher but there is very strong resistance at 10325/2020/1130. The ideal scenario would be a strong Asian/European performance on Sunday night and a gap open for the U.S. markets on Monday to these resistance levels or even higher. The overnight futures can sometimes overcome resistance levels that cash trading cannot. A futures gap at the open sometimes causes short covering in the cash that will overcome sellers at certain levels because they become less confident during periods of high volatility. A slow creep up can be met and measured over an extended period where a strong gap open must be reacted to immediately or face strong losses. But, that would be the ideal scenario not necessarily what will come to pass. However we get there any push to resistance will need some serious volume to overcome those levels. Friday's volume was barely three billion shares across all markets. We will need a lot more conviction than that to breakout to a new range. The more likely scenario is a slow chipping away at resistance with spikes to new highs that are quickly sold but a continued series of higher lows as support continues to build. With no economic news and very little stock news expected it could be another range bound week that resembles trench warfare more than a cavalry charge. I would normally say sell resistance here but with current resistance so close and with support rising the bigger move could come on the long side. I know moving higher will be tough and we are not likely to breakout the first time but I think the best plan is to buy the dips in anticipation of a breakout. Dow 10200 has held for three days and 10150 for three days before that. Those would be my target levels for any dips. The Nasdaq has such a narrow range for the week that its support at 1970 is only 10 points below its midpoint at 1980. I would hope for a lower dip but not count on it. The key is event risk for next week. Any negative events could provide an entry point and I would not hesitate to take them. Just keep your stops tight on the entry just in case our dip turns into more than just a dip. Don't be misled by my suggestion to buy the dips. Current resistance is VERY strong. Look at the S&P and Dow charts above for a very good visual picture. Moving higher will be tough if not impossible but as long as support keeps rising and the news continues to be good we have a chance. We could also return to the bottom of the channel but there is nothing on the horizon for Monday to provide that strong of a dip. I think the risk is on the side of the bears and the bulls are growing stronger. Hopefully the week will prove that theory. 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 ******************** The Bottom Line By Leigh Stevens THE BOTTOM LINE – There are two, not one "bottom line" views of the market here. The S&P 500 (SPX) looks like it's capable of churning through near resistance, based on the chart picture, moving averages and sentiment measures. The Nasdaq Composite (COMP), while back above its 200-day average, remains in an overall downtrend channel and it doesn't appear likely it can break out above its key resistance around 2000. More on COMP in my Index Outlook section. What kept me bullish on the blue chip stocks at recent lows was that SPX held, or rebounded from, its 200-day average, not the case for the Dow (INDU) or S&P 100 (OEX). Upside potential, assuming SPX closes above down trendline resistance currently at 1126, is to the 1140 area at the upper trading envelope line or to the prior rally highs at 1147-1150. If the index continues to stall at the down trendline, I'm watching SPX's ability to hold key near support at 1120 as a trend benchmark. FRIDAY'S TRADING ACTIVITY – The NUMBERS - The Standard & Poor's 500 Index (SPX)gained a half percent to close at 1,122.51 - for the week SPX was up less than 2 points. The Dow 30 average (INDU) also gained a half percent on the day, up +46.9 points to 10,243. The Nasdaq Composite Index (COMP) gained close to full percent and closed at 1,979, +18.4, but lost 8 points for the week. The Russell 2000 Index of small-cap stocks (RUT), another important bellwether index .9% on the day, closing at 567.75. THE REPORTS - The Labor Department released its latest jobs report and this report was the biggest economic/market influence of the day. The 248,000 non-farm payroll jobs were created by the U.S. economy in May. Also reported was their revision in payroll growth in April and March by being higher by 74,000 jobs, which was a significant increase. Consensus estimates were for a U.S. payroll growth of about 220,000 - so, this was a good number. There has been a lot of politically related talk about why the recent growth in jobs has not translated into better poll numbers for the Administration - it just seems to take a number of months before these numbers translate into an experience of having people we know and hear about, finding work. Over the past three months, three quarters of the nearly 300 industries surveyed added workers. The average workweek stayed at 33.8 hours for the fifth month in a row in May. Total hours worked in the economy increased by 0.3 percent. Average hourly pay rose 5 cents or 0.3 percent. Wages are up 2.2% in the past year. The unemployment rate remained at 5.6%. Jobless claims fell by 6,000 to 339,000 for the week ended May 29 - expectations were for a fall (in jobless claims) to 337,000. The 4-week average of initial claims rose by 4,250 to 341,000 after falling to a 3-year low two weeks ago. Additional economic data released by the Labor Dept. showed non- farm productivity in the U.S. revised higher to 3.8% from the previously reported 3.5% in the first quarter, slightly above a consensus forecast of around 3.7%. The only fly in this ointment was that unit labor costs were revised to a 1.7% gain from an earlier estimate of zero percent. However, the productivity numbers are dazzling - you may have suffered in the tech stock implosion but the results of all that technology and computing power is impressive - over the past 4 quarters, the output per hour of American businesses has increased 5.5%. This number is the fastest productivity gain in 31 years. THE TALK - Helping Bonds on Friday and providing a positive backdrop for equities were comments by Federal Reserve Governor Donald Kohn who indicated that we are not seeing out of control inflation in the U.S. despite higher energy prices. Mr. Kohn is known as a close adviser to Fed chairman Alan Greenspan. In his words to the National Economics Club in Washington: "Inflation pressures can be contained, allowing the Fed to raise interest rates at a 'measured' pace. The best indications are that some economic slack persists and that long-term inflation expectations are stable, which bolsters the inference that the economy has not entered a situation of steadily rising inflation." Kohn went on to say that the Fed would not allow its hard-won victory over inflation to be lost through complacency. "We must preserve those gains. Experience counsels caution." If you wonder why the tech heavy Nasdaq is languishing you can check out the Semiconductor index (SOX) chart below. News influencing this key sector came from Intel (INTC), a key Nasdaq and Dow component stock - the stock rallied slightly on the release of their mid-quarter update. Analysts who follow Intel and the Semiconductors were positive on the report, but remain somewhat subdued on the prospects for Intel and the sector. There were some analysts who raised the target on this key bellwether stock's earnings for Q2 - others also noted that increase in revenue projections was already priced into the stock. The Semiconductor Index (SOX) is a key bellwether sector and Intel is key bellwether stock - I don't look for too much improvement in the Nasdaq Composite (COMP) and Nas 100 (NDX) while SOX is performing as shown on the chart above relative to its key moving averages, especially its downturn/reversal after the Index got back up to its 200-day moving average. For more on the bellwether concept, I refer you to a prior Trader's Corner article I wrote on this subject. See - http://www.OptionInvestor.com/traderscorner/tc_051304_1.asp OTHER MARKETS – Treasuries finished their session at the lows, with yields moving higher during the course of Friday's trade, as the benchmark 10- year T-bond yield rose to 4.77, +6.2 basis points. This is the 10-year's highest closing yield close since late-May. Crude futures closed down for the day as well as for the week, under pressure from OPEC's recent plan to raise output quotas and a after a reported rise in last week's U.S. petroleum stocks. July crude futures closed at $38.49 per barrel on the New York Merc Exchange(NYMEX). This close was off 79 cents on the day and put the lead Crude contract down 3.5% on the week versus 39.88 the week before. You can believe that stock traders are keeping a close eye on the NYMEX front-month futures contract and especially that prices back off from $40 a barrel, a key benchmark and psychological number. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Hourly chart: What the chart and price recent price patterns are showing here is that the Index has gone into a sideways consolidation or rectangle pattern after breaking out to the upside above the hourly down trendline late last month. Such a sideways consolidation most often gets "resolved" in the direction of the trend that preceded it - the trend was up, so the odds are more in favor of another up leg. However, the overarching thing is to watch for a decisive upside or downside penetration of the lines drawn across the various highs and lows in the sideways trend. S&P 100 Index (OEX) – Hourly chart: The S&P 100 or OEX has been trading in what has become a well- defined channel since mid-May. Key near resistance implied by the top end of this channel comes in around 552 currently and key trendline support is down in the 540 area. Based on top and low end of the hourly channel, I favor put purchases at 550-551 (exit on an hourly/close above 552) and buying OEX calls in the 540 area (exit on a close below 539). The most striking thing to me about any of the technical indicators is that, while prices have trended higher, the RSI (length = 21) has made two lower highs. This type of bearish price/RSI divergence is pretty common where an Index (or stock) is susceptible to a reversal or, in this case, a pullback. Stay tuned on this! Dow Industrials (INDU) Daily: The Dow 30 (INDU) is approaching key resistance at its down trendline which intersects around 10,360 currently. I peg resistance at 10,360-10,400. Given that INDU is approaching an overbought condition, it seems doubtful to me that the Dow is going to achieve an upside penetration of this resistance and manage, certainly on a closing basis, to get above 10,400. Support can be anticipated at the 200-day moving average, currently at 10,257 and rising slowly. 10,060 was where the Dow had some support, then this same area later defining resistance for a time - now, it may offer technical support again. [NOTE the prior instance where resistance (red down arrow) became support (green up arrow) or an area of buying interest, quite a bit later on at 9850.] Nasdaq Composite (COMP) Index – Daily: I made mention in my beginning commentary that the Nasdaq Composite (COMP) remains in a downtrend technically until there is higher (up) swing high, thereby breaking the pattern of lower rally peaks. A close above 2000 is needed to achieve a bullish upside penetration of the downtrend channel as outlined below. Support is apparent in the 1875-1900 area. While the COMP is now trading back above its 200-day moving average, a minor bullish positive, I place more weight on the aforementioned downtrend pattern to give the dominant view. Only a close over 2000 and the ability to hold this area on subsequent pullbacks would change the chart picture to a bullish one in my estimation. Then we would have to see if the Index could rally above its prior highs in the 2050 and 2075 areas. Nasdaq 100 (NDX) Index – Daily & Hourly: I made a measurement or target for the recent rally based on the one side ("A") of the first outlined triangle on the hourly chart below, as being equal to itself or to the height of "B". A nifty measuring trick that works sometimes quite well. Not that the index can't/won't go still higher after this kind of "measured move" objective is achieved, but the fact that it has been going sideways since achieving this objective, while the RSI is trending down, is of interest - and, suggests that the next move will most likely be a downswing for the Composite and the Nas 100 (NDX). My most recent Trader's Corner article covered in some more detail "Triangles" and price objectives implied by triangle breakouts - see http://www.OptionInvestor.com/traderscorner/tc_060304_1.asp Nasdaq 100 tracking Stock Daily chart (AMEX:QQQ: I would rather be short the stock than long as it comes again up to its down trendline, which intersects in the 36.50 area currently. Above the trendline, the next resistance has to be assumed to be at the prior highs in the 37.50 area. Support is apparent down in the 34 - 34.25 area. I don't see anything ahead that will take QQQ either below 34 or above 37.50- 38 for this month. 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 ************** Stand Aside No new play this week. I considered several dozen possible trades and none appealed to me for the coming week. We have risen to very strong resistance in the markets and this is where we are either going to fail or post a strong breakout. The direction is completely unknown. I could easily see SPX 1125-1130 acting as down trend resistance along with Dow 10325-10350 and squelching any summer rally but I can also see a breakout in the making. The Jobs data could have energized the bulls but the volume was still very light. If the volume is this light on Monday then the resistance will hold. If the bulls show up ready for a fight then a break of those levels could produce some serious short covering. The problem is there is no clear direction. Picking a play requires some hint of direction. Sometimes it is best to simply stand aside and watch. Using those levels above you can play accordingly as the week progresses but for me to pick a play in advance today would be like flipping a coin. I would not trade my own money that way and definitely not yours. We will wait patiently for the situation to be resolved and then place a trade from a position of strength instead of blindfolded. S&P Chart - Daily with downtrend resistance ********************** DITC Put Update $19.77 We did not get the pullback on DITC I was expecting to $18 but it did decline to $19. The stock was unable to add to its gains and still appears on the verge of a collapse. I am still targeting $18 for an exit. http://members.OptionInvestor.com/editorplays/edply_053004_1.asp ********************** TYC Call Update $31.09 Tyco continued to rally all week closed near the highs. The bad news is priced in and TYC continues to post new 52-week highs each week. There is no exit on this play and the July-$30 call hit a high of $1.95 for the week and closed at $1.70. Still plenty of time and very close to a double from our $1.00 profiled price. I would set a stop at $1.40 and target something over $2.00 for a profit. I said I was closing the play last week but I still thought it would move higher. This is the last update on Tyco. http://members.OptionInvestor.com/editorplays/edply_052304_1.asp ********************** PNRA Put Update $34.74 PNRA is still holding just under $35 and no movement for the week. The $30 put is nearly worthless (45 cents when profiled) and I would look to exit on any dip for a quarter. PNRA did not drop as expected and I am writing this one off as a loss. http://members.OptionInvestor.com/editorplays/edply_051604_1.asp *********************** News Corp Update $36.35 NWS is still holding while we wait for the stock to move to the U.S. and be added to the S&P. This is a very long term position and once we get some upward movement in the stock we will sell some calls 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 **************** Lights Are Green - J. Brown The streetlight is green but the market might just be spinning its wheels. Friday's rally was very widespread with only the OIX oil index and the XNG natural gas index closing lower. Market internals were very bullish with advancing stocks beating decliners by 2-to-1 on both the NYSE and the NASDAQ. Up volume was more than 3 times down volume on both exchanges. Despite all the bullishness we didn't get very far. The Dow is still under 10,300. The NASDAQ has spent the last week and a half trying to breakout over the 2000 level. Positive news from OPEC, crude oil under $39 a barrel, and a jobs report that was just right still wasn't enough to fuel the move through resistance. Don't get me wrong. I'm not complaining but merely making an observation. We needed to hear the OPEC news and whether or not their "extra" 2 million barrels a day will make a difference or not the price of crude has fallen. July futures for crude oil are testing support at $38.00 and its simple 50-dma. Oil is already down 9% from its closing highs. Don't look now but it could be due for a bounce. However, should crude breakdown under the $38 per barrel level it should be a big lift for stocks. Investor sentiment should be pretty high. The economy is on track. Oil prices are slipping. Jobs are rising. Corporate profits are strong. If these factors can sink in then we might have a decent summer in front of us. Holding us back are rising terrorism concerns as we approach the June 30th handover in Iraq. Closer to home the market might be a little nervous about security surrounding the G8 summit in Georgia this week. Next week's economic reports are not quite the market movers this week's were. The PPI and sentiment numbers at the end of the week are probably the most important but Wall Street will still be watching the wholesale inventories and import/export pricing numbers. We'll also hear from two fed governors this week. Thomas Hoenig speaks on Wednesday and Jack Guynn talks on Friday but both are liable to maintain their new mantra of slow and easy. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8871 Current : 10242 Moving Averages: (Simple) 10-dma: 10145 50-dma: 10257 200-dma: 10081 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 962 Current : 1122 Moving Averages: (Simple) 10-dma: 1114 50-dma: 1118 200-dma: 1087 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1180 Current : 1445 Moving Averages: (Simple) 10-dma: 1448 50-dma: 1444 200-dma: 1429 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 16.78 -0.25 CBOE Mkt Volatility old VIX (VXO) = 16.52 -0.77 Nasdaq Volatility Index (VXN) = 23.84 -0.09 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.02 569,900 580,062 Equity Only 0.83 424,059 350,459 OEX 1.45 27,385 39,659 QQQ 3.05 45,241 137,780 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 64.8 + 0 Bear Confirmed NASDAQ-100 38.0 + 0 BULL ALERT Dow Indust. 66.7 + 0 Bear Confirmed S&P 500 61.6 + 0 Bear Confirmed S&P 100 62.0 + 1 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.08 10-dma: 0.88 21-dma: 1.00 55-dma: 1.07 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 1873 1994 Decliners 911 1021 New Highs 60 62 New Lows 26 19 Up Volume 1018M 1048M Down Vol. 315M 325M Total Vol. 1344M 1389M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/01/04 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 Action in the large S&P 500 futures contracts has been slow. Commercial traders remain net short but the bearish interest has been declining for two weeks now. Small traders' positions are virtually unchanged. Commercials Long Short Net % Of OI 05/11/04 401,365 421,672 (20,307) (2.5%) 05/18/04 394,352 423,258 (28,906) (3.5%) 05/25/04 400,713 420,764 (20,051) (2.4%) 06/01/04 406,665 421,681 (15,016) (1.8%) 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 05/11/04 135,534 76,987 58,547 27.5% 05/18/04 139,647 74,597 65,050 30.4% 05/25/04 136,086 79,060 57,026 26.5% 06/01/04 137,100 79,583 57,517 26.5% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Wow! Commercial traders are completely undecided with a dead heat between longs and shorts. Meanwhile small traders have turned bullish. Commercials Long Short Net % Of OI 05/11/04 378,696 362,887 15,809 2.1% 05/18/04 390,484 357,157 33,327 4.5% 05/25/04 353,722 336,406 17,316 2.5% 06/01/04 325,865 325,274 591 0.0% 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 05/11/04 101,199 94,408 6,791 3.5% 05/18/04 62,216 87,269 25,053 16.8% 05/25/04 91,515 100,759 ( 9,244) ( 4.8%) 06/01/04 111,484 90,625 20,859 10.3% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders have hit new bullish extremes we've not seen in many months. Right on track small traders have hit bearish extremes. Commercials Long Short Net % of OI 05/04/04 56,931 35,209 21,722 23.6% 05/18/04 58,376 37,528 20,848 21.8% 05/25/04 59,891 37,630 22,261 22.8% 06/01/04 59,944 34,784 25,160 26.6% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 25,160 - 06/01/04 Small Traders Long Short Net % of OI 05/11/04 9,716 21,072 (11,356) (36.9%) 05/18/04 9,843 18,935 ( 9,092) (31.6%) 05/25/04 10,184 20,653 (10,469) (33.9%) 06/01/04 9,755 30,025 (20,270) (51.0%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Not much action going on here with the commercial traders. They remain slightly bearish on the Dow. Small traders are growing more bullish. Commercials Long Short Net % of OI 05/11/04 22,614 21,507 1,107 2.5% 05/18/04 22,257 22,444 ( 187) (0.4%) 05/25/04 23,578 24,632 (1,045) (2.2%) 06/01/04 23,397 24,393 ( 996) (2.0%) 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 05/11/04 7,009 7,640 ( 631) ( 4.3%) 05/18/04 9,098 6,591 2,507 16.0% 05/25/04 9,623 6,614 3,009 18.5% 06/01/04 9,000 6,021 2,979 19.8% 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 *************** Can I interest you in an IPO? (Retracement) Have you ever answered the phone and an unfamiliar voice introduces him/herself to you and asks if you are an investor? If you say yes..... The enthusiastic voice then begins telling you about a "ground floor" or "unique" opportunity with their investment firm, for an Initial Public Offering of ABC stock. As the summertime now swings into full gear, questions for the Ask the Analyst column become rather thin, but one investor asked a couple of questions regarding IPOs, and how to tell a "good one" from a "bad one." I have first hand experience with IPOs, from both the sell side and investor side of this "unique/ground floor" investment opportunity. After having started my investment career with an investment bank/broker dealer, my general impressions are this. The first impression, and maybe you've heard somebody say this before is that "a good IPO is one the general public very rarely gets to participate in." Unless you're a big wheel that is in the upper echelons of company's like Dell Computer, eBay, Martha Stewart Enterprises, etc. Nothing wrong with this. A good broker always looks after his/her biggest customers, or the ones that provide the roof over their head, and food on their table. The second impression, is that IPOs are risky. To participate in many IPOs, the participating investor must often times meet higher net worth limits, where most brokers really don't check to see if your liquid or asset net worth is what you say it is. The third impression is to stick with a larger investment bank/broker. While many boutique firms (smaller) will underwrite solid initial public offerings, one possible advantage a larger investment bank/broker can bring you, the potential investor, is some added clout to support the deal (the initial public offering. If you are contacted by a boutique firm, even a larger firm, check into past IPOs they've underwritten over the past couple of years. Get a feel for their track record and investment banking expertise, or better yet, lack of expertise. A good investment banker should have a pretty good track record for sniffing out good and bad company's they will have underwritten. A good starting place to familiarize yourself with the IPO process is www.iporesources.org, at this http://www.iporesources.org/ My fourth impression is that whether I was soliciting a buyer for the brokerage firm's underwriting of the IPO, or if I am being solicited by a broker for an IPO, a first question is "why is the company going public?" Good gravy! Who wants to have to explain every bit of detail of the ongoing business if they don't have to? Who's selling and why? Is the IPO a way for the owner to cash out before things go in the tank? Or are the proceeds for from the IPO, the piece of the company they're selling, going to be utilized to fund expansion for a product/service they simply have too much demand for, but don't currently have the capital resources to fund? The fifth impression is that if you do participate in an IPO, then know what to look for once the stock begins trading in the public market. If it starts discounting.... then something might be wrong. It might not necessarily be "stock specific," but the broker syndicate (the group of investment bankers that underwrote the deal) is falling apart. This happens, and I speak of personal experience! I had sold an IPO to some of my best clients, and one of the syndicate members went bankrupt about three weeks after the deal went public. In the matter of hours, the stock fell 20% as the going bankrupt syndicate member dumped their portion of the shoe (overallotment taken by the investment bank in order to allow for market making activities). If memory serves me correct, that was the last IPO deal I and my clients participated in. Hey... if your firms lawyers can't pick their partners any better than that, then ..... Oh! And my sixth impression regarding IPOs.... some of the best ones are the ones that came public within the past couple of months, where you and I as investors can make some observations as to how things are going! Recent Initial Public Offerings I missed profiling a good one this week in Gander Mountain (GMTN) $25, which came public back in late April. Last weekend I had read some past comments from fellow analyst Linda Piazza regarding this IPO, saw what looked like a good entry point for Tuesday, and simply forgot about it over the 3-day weekend. What I've done is dated each IPO for its first day of trade, the "indicated price" was the estimated price the deal was indicated for. For instance, if I'm selling the deal to you, I call you and say... "John/Sue, are you interested in 100,000 shares of ANDS between $11 and $13?" You might say.... "No, but I'll indicate for 50,000 at $12." So... I write up a ticket that tells the syndicate manager that one of my clients has indicated an interest to buy 50,000 of the underwriting at $12. This gives my syndicate manager an idea for demand, based on their assessed value of the offering. Guess what? You don't pay until the deal actually begins trading. All you are doing as the buyer is giving me (the broker) a good faith indication that you'll pay up at $12, for 50,000 shares. (Hint... if I start twisting your arm to take down 100,000 a day or two before the IPO, then you should sense there hasn't been a lot of interest from other investors) Then I've listed "priced," which is the official pricing of the deal. For instance, if you indicated for 50,000 shares of GMTN at $15, but the deal was PRICED at $16.00, then when it started trading at $20, you the buyer only had to write my brokerage firm a check for $800,000 ($16 x 50,000). (Hint.... if you ever indicate for $15, but a deal is priced at $16, and the deal starts trading at $20, don't get mad at your broker, telling him/her that he/she quoted you a price of $15) (Hint... Don't necessarily draw the conclusion that just because a deal is priced above or below the INDICATED price that the IPO will trade HIGHER or LOWER once trading begins, but combined with any changes shares offered, can be used to weed out trade candidates) GMTN, NILE and PUMP were priced ABOVE their indicated pricing level. PROS was priced pretty close to its mid-range, while those with RED "priced" were priced below their initial indicated price levels. The number of shares can from day to day as the IPO date draws near. Based on indicated level of interest, market conditions, what have you, both PRICED and SHARES can change, but gives the investor a general idea of how big the offering is, which they can perhaps begin to weigh against any fundamental data that was provided in the Red Herring or Prospectus. I've also listed the current High, Low and Friday's Close since the above IPOs began trading. Sector consideration is important. Is the sector hot, cold, or luke warm when the deal is expected to come to market? Remember that roughly 70% of a stock's price movement can be attributed to the sector it is associated with. Underwriter's is also something to consider. Who is underwriting the deal? If I call you for a deal and tell you I'm with Goldman Sachs or I call you with a deal and say I'm with Huey, Dewy and Suckfinger, then what's your impression? Don't answer that! (grin). (Hint.... While there's more to a good IPO than the underwriter, an IPO with not much market trade history needs all the help it can get, and it can't hurt to have a bigger investment bank in the deal to support it) OK... so there you have some of my thoughts, and then some, on IPOs, which should more than answer the 1 question asked by a trader/investor this week. So lets go over some things and techniques I like to try and use to sniff out a good trade in an IPO that has started to trade. Why would somebody consider trading an IPO after it has started trading? One reason is the supply/demand relationship that exists. Did you know that you cannot short an IPO until 30-days after it has started trading? That's one less seller to worry about in my book. One thing I prefer is to let a new IPO trade for awhile. A couple of weeks at a minimum is what I prefer as this allows for the stock to settle down a bit, start developing a range or trend, and allows for me to try and analyze the stock's technicals. As much as you can do with a fewer number of observation. I'm kicking myself tonight as I look at what Gander Mountain (NASDAQ:GMTN) $25.00 +3.05% did this week. Gander Mountain (GMTN) Chart - Daily Intervals I've marked some general observations along with facts regarding GMTN's recent IPO. Then I pose a few questions to myself to try and get in the mindset of not only the market makers, but also that of institutions that may have gotten some of the GMTN. The way the stock was holding up should be some hint that investors like the stock, and may not be in it for just the "quick buck" and nice gain from the $16 pricing. Those that may have been in the stock for the "quick buck" might have left by now, where volume levels have dried up. When I looked at GMTN last week, the stock had closed at $22.50, which looked bullish after I did some work with retracement. What made me almost scream tonight (Friday 06/04/04) was that GMTN close right at $25.00, which was where I thought the stock might be able to trade this week. Now.... I also received a couple of e-mail regarding "how can I read up on your fitted 38.2% retracement level technique?" Another question is where do my "yellow zones" come from when using two different retracement?" To be truthful, using the 38.2% retracement technique is more of an art than a science, as is developing those "yellow zones." All we're trying to do is try and figure out, or identify, "zones" where the smartest money in the market would have been most profitable, or used those zones to make buy/sell decisions. Gander Mountain (GMTN) Chart - Daily Intervals This is the first chart with some retracement work I start with. The RED retracement is simply anchored at the pricing of the IPO, and after a couple of weeks of trade, we will sometimes build an observation of a "key level" of resistance where the stock either refused to trade above, or CLOSE above. I tend to like to use the highest closing value as if to say "why was that the level agreed upon my market participants. The BLUE retracement is conventional use of retracement, whereby we simply anchor a high and a low. You can perhaps see where in an IPO, with very little trade history, the stock doesn't "make sense" at many of the levels, but perhaps the "yellow zone" defined a zone of support, but more interesting is the resultant BLUE 19.1% retracement of $25.03, which seems to mark a key level of past trade. See how last Friday's close may have gotten a trader's attention, with a target of $25.00 being derived? So... that was my first attempt to analyze GRTN. Here was a second attempt, and the one I liked best. Gander Mountain (GMTN) - Daily Intervals Hmmm.... that little sliver of yellow zone sure had the look the GMTN might be set for a move back to the $25.00 level at some point. All be darned if it didn't do it this week. But wait! It isn't over yet. Why is the stock doing so well? Are institutional bulls that weren't allotted enough in the IPO (just 5.7 million shares) coming back for seconds? So far, nobody seems to eager to dump their shares for a nice gain. I can almost hear it now.... "Recently IPO-d catalog retailer Gander Mountain is really doing well where after jumping from its IPO Price of $16.00, the stock is hitting new highs." If so... then traders/investors may need this chart. Gander Mountain (GMTN) Chart - Daily Intervals Now I'm showing BOTH of the previously shown "fitted 38.2%" retracement on the same chart, where should GMTN make a break to new highs, we can identify some potential "zones of resistance" and trading targets. I've marked the $26.25 all-time high with a thin BLUE line, as if it were the 0% retracement level shown previous charts to mark the high and keep trade of that "zone." IPOs are considered to be more of a "speculative" investment, where an investor is really buying a company, where the purchaser of the IPO is risking his/her capital on what may be considered to be a security, where the value of that security is really unknown, as it has not yet been exposed to the MARKET, which will eventually establish the worth of that security. As such, the rewards can be handsome, but those potential rewards for those who indicate and get the IPO, come with greater risk perhaps, than a security that has been trading for awhile, where the MARKET has been given the opportunity to begin establishing a price it deems appropriate. If I get a chance this weekend, I might take a look at some of the other "old" IPOs that have recently come to market. Gander Mountain is a company I'm at least familiar with, as I've ordered some products from their sporting catalogs. I've heard some talk that Cabella's, which is also a large catalog and online outdoor products retailer may be looking to come public and if nothing else, Gander Mountain may be a test case for how a Cabella's IPO might perform. Hey.... if Banc of America, William Blair and Piper Jaffray can put together a successful offering of Gander Mountain, maybe this syndicate will be a front runner if Cabella's or Sportsman's Warehouse ever decide to go public! Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- BTH Blyth Inc. Mon, Jun 07 Before the Bell 0.38 UTIW UTi Worldwide Mon, Jun 07 Before the Bell 0.32 ------------------------- TUESDAY ------------------------------ TTWO Tk-Two Intract Sftwr Tue, Jun 08 Before the Bell -0.15 ------------------------ WEDNESDAY ----------------------------- HRB H&R Block, Inc. Wed, Jun 09 After the Bell 3.16 MATK Martek Biosci Corp Wed, Jun 09 After the Bell 0.14 OVTI Omnivision Tech Wed, Jun 09 After the Bell 0.31 SIGY Signet Group Wed, Jun 09 -----N/A----- N/A SFD Smithfield Foods Wed, Jun 09 Before the Bell 0.51 TOM Tommy Hilfiger Wed, Jun 09 -----N/A----- 0.37 ------------------------- THUSDAY ----------------------------- NSM National Semicon Thu, Jun 10 -----N/A----- 0.29 TKC Trkcll Iltsm Hzmtlri Thu, Jun 10 -----N/A----- 0.50 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable PCBC Pacific Capital Bancorp 4:3 Jun 8th Jun 9th ZLC Zales 2:1 Jun 8th Jun 9th MOGN MGI Pharma Inc 2:1 Jun 9th Jun 10th SFCC SFBC International, Inc 3:2 Jun 10th Jun 11th HE Hawaiian Electric Ind 2:1 Jun 10th Jun 11th BXX Brooke Corp 2:1 Jun 10th Jun 11th SSP E.W.Scripps 2:1 Jun 10th Jun 11th PVA Penn Virginia Corp 2:1 Jun 10th Jun 11th PNM PNM Resources 3:2 Jun 11th Jun 12th FELE Franklin Electric Co 2:1 Jun 15th Jun 16th NARA Nara Bancorp, Inc 2:1 Jun 15th Jun 16th IRM Iron Mountain Inc 3:2 Jun 15th Jun 16th HSY Hershey Foods Corp 2:1 Jun 15th Jun 16th APPB Applebees Internatl Inc 3:2 Jun 15th Jun 16th RIMM Research In Motion Ltd 2:1 Jun 17th Jun 18th PG Procter & Gamble 2:1 Jun 18th Jun 21st CACH Cache Inc 3:2 Jun 18th Jun 21st WGR Western Gas Resources, Inc2:1 Jun 18th Jun 21st -------------------------- Economic Reports This Week -------------------------- This week Wall Street will continue to focus on oil and economic data but the big events are behind us with the OPEC meeting and the jobs number. Terrorism here at home will continue to be an issue with the G8 Summit in Georgia this week. Look for comments from two federal reserve governors on the economy and a host of economic reports Thursday and Friday. ============================================================== -For- ---------------- Monday, 06/07/04 ---------------- Consumer Credit (DM) Apr Forecast: $5.5B Previous: $5.7B ----------------- Tuesday, 06/08/04 ----------------- None ------------------- Wednesday, 06/09/04 ------------------- Wholesale Inventories (DM) Apr Forecast: 0.5% Previous: 0.6% Fed Governor Hoenig in roundtable with reporters. ------------------ Thursday, 06/10/04 ------------------ Initial Claims (BB) 06/05 Forecast: 335K Previous: 339K Export Prices ex-ag. (BB) May Forecast: N/A Previous: 0.4% Import Prices ex-oil (BB) May Forecast: N/A Previous: 0.3% Treasury Budget (DM) May Forecast: -$67.5B Previous: -$88.9B ---------------- Friday, 06/11/04 ---------------- Trade Balance (BB) Apr Forecast: -$44.9B Previous: -$46.0B PPI (BB) May Forecast: 0.6% Previous: 0.7% Core PPI (BB) May Forecast: 0.2% Previous: 0.2% Mich Sentiment-Prel. (DM) Jun Forecast: 91.5 Previous: 90.2 Fed Governor Guynn speaks on U.S. Outlook 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 06-06-2004 Sunday 2 of 5 In Section Two: Watch List: Food, Financials and more Dropped Calls: IMCL 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 ********** Food, Financials and more ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ Whole Foods Market Inc - WFMI - close: 84.55 change: -0.76 WHAT TO WATCH: WFMI has been exceptionally strong the past couple of weeks but the stock looks tired. The breakdown under $85.00 on Friday and the bearish tint to its MACD, RSI and stochastic indicators all suggest a round of profit taking in its immediate future. We would watch WFMI for a pull back to the $81.00 level and buy a bounce should one occur. Chart= --- Capital One Financial - COF - close: 69.86 change: +1.55 WHAT TO WATCH: Looking at the BKX struggle under resistance at 98 and you'll see a similar pattern in COF and its challenge with the $70.00 mark. The technical picture for COF is mixed and its P&F chart has produced a low pole reversal so traders need to be careful with their stop losses. Consider buying a breakout over $70.00 or its 100-dma. More aggressive traders might want to look at a bounce from $68.00. Chart= --- Legg Mason - LM - close: 89.24 change: +1.81 WHAT TO WATCH: The XBD broker-dealer index turned in a strong bullish rebound on Friday and LM followed suit. LM's P&F chart has recently produced a new bullish buy signal with a $98 price target. We would consider LM a bullish candidate and use a trigger over its 50-dma, just over the $90 mark, as a trigger to go long. An early target for short-term traders would be the $95 level but we can probably target the $100 region. Chart= --- MDC Holdings - MDC - close: 64.16 change: +1.40 WHAT TO WATCH: Chart pattern traders will note the bull flag breakout in MDC with Friday's 2.2% gain. The rebound off its simple 40-dma was fueled by better than average volume. Its P&F chart has produced a low pole reversal but won't hit a new buy signal until $67. We would consider a trigger over $65.00 to go long and target a run toward the $70-72 region. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- HSY $89.24 -0.25 - We are still watching HSY and we're waiting for the breakout over $90.50. PD $67.34 +2.00 - PD turned in a big bounce on Friday despite a drop in copper futures. Shares remain under tough resistance at its 40-dma. FLIR $52.25 +3.72 - We mentioned FLIR on the MarketMonitor this Friday. The stock soared to a 7.6% gain on huge volume and broke out over resistance at $50.00 with no news. NKE $69.28 -0.92 - NKE has failed at its 40-dma resistance multiple times and is now breaking down under its $70.00 mark. Look for a drop back to support near $66. ************************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 ^^^^^ Imclone Systems - IMCL - close: 72.49 chg: -0.47 stop: 72.00 We have very mixed feelings about IMCL at these levels. The stock has been drifting lower towards our stop for the last three days. Friday afternoon saw some sharp selling and IMCL has broken its recent trendline of rising support. However, what is tempting us to hold on is the analyst meeting on Sunday and the huge biotech conference going on next week, which is bounce to produce some good news for the sector. Do we hope for good news that might lift all stocks in the group? Should we bet on positive comments from the analyst meeting on Sunday? More aggressive traders might want to speculate but we're going to exit IMCL with a small loss. Readers should monitor their own positions on Monday and see how IMCL reacts at the open. Murphy's law is alive and well and it wouldn't surprise us to see IMCL trading higher next week but right now the short-term outlook on IMCL shares is negative and we expect it to test support at $70. Picked on May 26 at $ 74.05 Change since picked: - 1.55 Earnings Date 04/27/04 (confirmed) Average Daily Volume: 2.9 million Chart = 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. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. 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The Option Investor Newsletter Sunday 06-06-2004 Sunday 3 of 5 In Section Three: Current Calls: AET, BCR, DGX, QCOM, ZMH, AIG, BA, ERTS, JNJ New Calls: MERQ Current Put Plays: GS New Puts: KSS ! 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 ****************** Aetna Inc - AET - close: 84.60 change: -0.28 stop: 81.50*new* Company Description: As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 13.3 million medical members, 11.2 million dental members, 8.1 million pharmacy members and 12.4 group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost effective health care through a nationwide network of more than 618,000 health care professionals, including over 370,000 primary care and specialist doctors and 3,783 hospitals. (source: company press release) Why We Like It: The HMO healthcare index and the IUX insurance index hit new four-week highs this past week and we were encouraged to see AET do the same. Our initial target price for AET was the $85.00 mark and we've achieved that on Thursday and Friday. Thursday's gap higher was on double the normal volume and a breakout above its 40-dma. Unfortunately, AET is still struggling with resistance at $85.00 and its simple 50-dma. Considering how the stock is right at resistance and at our initial target we are suggesting that short-term traders take profits if they have not done so already. FYI: The July 80s calls we suggested are up 50% from when we picked AET as a long and the June 80s have almost doubled. We would be very careful about opening new positions. The positive news out this past week could fuel the rally into next week a number of stocks and sector indices look tired and overbought. We could be overdue for a pull back. Should that occur look for a bounce from the $82.50-83.00 levels on AET. Only then would we really consider new positions. Meanwhile we're going to raise our stop loss to $81.50. Don't forget that AET Will be presenting at the Goldman Sachs Global Healthcare Conference on June 10th. Suggested Options: Remember, we're looking for a dip now to consider new positions now that AET has hit our initial target. On a pull back our favorite would still be the July 80's. ! Alert - June options EXPIRE in TWO WEEKS! BUY CALL JUL 80*AET-GP OI=11364 Last traded @ $6.20 BUY CALL JUL 85 AET-GQ OI= 3559 Last traded @ $2.85 Annotated Chart: Picked on May 30 at $ 81.20 Change since picked: + 3.40 Earnings Date 04/29/04 (confirmed) Average Daily Volume: 1.5 million Chart = --- Bard C R - BCR - close: 56.65 chg: -0.86 stop: 54.95 *new* 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: Uh-oh! It may be time to batten down the hatches. Friday's action painted a bearish engulfing pattern on BCR's chart. These patterns are normally bearish reversals but they do require confirmation. Our initial plan to ride any pre-split run up in BCR worked out to some degree but the move hasn't been quite as big as expected. There's been little post-split profit taking and Friday's decline may have been some traders taking some money off the table ahead of the weekend. We continue to be impressed with BCR's relative strength (granted it wasn't so strong on Friday) so we're not quite ready to abandon ship. Traders can watch for a bounce from the $56 level of support. If it breaks down under $56 then we might suggest exiting. However, the $55 mark should also be support so we're going to raise our stop loss to $54.95. Traders should definitely look for a bounce before considering new positions. Suggested Options: BCR may be getting tired so we're suggesting traders look for a bounce from support before considering new positions. We like the July 55's. ! Alert - June options EXPIRE in TWO WEEKS! BUY CALL JUL 52.50 BCR-GX OI= 226 Last traded @ $4.90 BUY CALL JUL 55.00 BCR-GK OI= 364 Last traded @ $3.00 BUY CALL JUL 57.50 BCR-GY OI= 131 Last traded @ $1.50 Annotated Chart: Picked on May 20 at $ 55.00 (post split) Change since picked: + 1.65 Earnings Date 04/20/04 (confirmed) Average Daily Volume: 386 thousand Chart = --- Quest Diagnostic - DGX - cls: 88.60 chg: +0.52 stop: 83.95*new* Company Description: Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff. Quest Diagnostics is the leading provider of esoteric testing, including gene-based medical testing, and provides advanced information technology solutions to improve patient care. (source: company press release) Why We Like It: We certainly can't complain with the action in DGX. Sure the moves this past week could have been bigger but the stock has been climbing for two weeks straight. The relative strength in DGX is impressive and the recent breakout has produced an ascending triple-top buy pattern on its P&F chart. Volume has been above average for most of this past week. Now DGX is starting to look a little tired and is due for a dip. We want to be ready when that dip comes. A pull back to previous resistance in the $86.50-87.50 range is a good bet. We'd consider new entry points on a bounce from this range. Our short-term target is $92.50 but longer-term trader can probably target the $100 level. We are going to inch up our stop loss from $83.75 to $83.95. Suggested Options: We're suggesting the July 85s and 90s but if you're eyeing the $100 mark the August calls might work well. ! Alert - June options EXPIRE in TWO WEEKS! BUY CALL JUL 85 DGX-GQ OI= 98 Last traded @ $5.20 BUY CALL JUL 90 DGX-GR OI= 206 Last traded @ $2.10 BUY CALL AUG 90 DGX-HR OI= 777 Last traded @ $3.30 Annotated chart: Picked on June 01 at $ 87.70 Change since picked: + 0.90 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 603 thousand Chart = --- QUALCOMM - QCOM - close: 67.28 chg: -0.36 stop: 64.95*new* 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: Keep those fingers nimble. It may be time to jump out of QCOM. The NASDAQ has struggled with resistance at the 2000 level for a week and Friday's intraday action in the composite almost suggest a pull back next week. We see the same last hour sell-off in QCOM and it has us a little worried. It could just be profit taking ahead of the weekend but technicals on QCOM like the MACD, stochastics and RSI are starting to hint at a bearish roll over. While the stock has not yet broken support at its 10-dma or the $65.00 level it wouldn't surprise us to see it test the $65.00- 65.50 range soon. That's a couple of points away from its current level and such a drop will suck the premiums out of its calls. What concerns us is this might be a new lower high on QCOM's daily chart. Traders looking for new positions will probably do best to wait and look for a bounce. We're going to raise our stop loss to $64.95. Suggested Options: Short-term traders should be looking at the June or July strikes. Our favorites are the July 65s. ! Alert - June options EXPIRE in TWO WEEKS! BUY CALL JLY 65 AAO-GM OI=21910 Last traded @ $4.20 BUY CALL JLY 70 AAO-GN OI=17674 Last traded @ $1.45 Annotated Chart: Picked on May 24 at $ 66.01 Change since picked: + 1.27 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 9.6 million Chart = --- Zimmer Holdings - ZMH - close: 87.01 chg: +0.63 stop: 83.00 Company Description: Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer is the worldwide #1 pure-play orthopaedic leader in the design, development, manufacture and marketing of reconstructive and spinal implants, trauma and related orthopaedic surgical products. In October, 2003, the company finalized its acquisition of Centerpulse AG, a Switzerland-based orthopaedics company and the leader in the European reconstructive market. The new Zimmer has operations in more than 24 countries around the world and sells products in more than 80 countries. As a result of the acquisition of Centerpulse, reported 2003 sales were $1.9 billion. Full-year 2003 pro forma worldwide sales of Zimmer and Centerpulse were approximately $2.6 billion. The new Zimmer is supported by the efforts of more than 6,500 employees. (source: company press release) Why We Like It: Our combined fundamental and technical bullish play in ZMH finally saw some action this week. The stock spent a few days consolidating its breakout over the $85 level of resistance but now the stock is climbing higher again. We're bullish on the stock at these new highs, especially with its point-and-figure chart triple-top breakout, but buying a dip back to $85.50 wouldn't be a bad idea either. There really isn't much more to say. ZMH is exhibiting great relative strength and we should see the stock hit $90.00 in a week or two. No change in our stop at $83.00. Suggested Options: We are suggesting that traders consider the July calls. Our favorites would be the July 85s on a dip. ! Alert - June options EXPIRE in TWO WEEKS! BUY CALL JUL 85 ZMH-GQ OI= 173 Last traded @ $4.30 BUY CALL JUL 90 ZMH-GR OI= 524 Last traded @ $1.80 Annotated Chart: Picked on May 27 at $ 85.20 Change since picked: + 1.81 Earnings Date 04/26/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- American Int'l Grp. - AIG - cls: 74.10 chng: +0.65 stp: 70.50 Company Description: Engaged in a broad range of insurance and insurance-related activities through its subsidiaries, AIG's primary focus is on its general and life insurance businesses. Additionally, the company is growing its presence in financial services and asset management. Other operations include auto insurance, mortgage guaranty, annuities, and aircraft leasing. With operations in 130 countries, AIG generates more than half of its revenues outside the United States. Why we like it: With a lack of direction provided by the broad market, our AIG play spent most of last week rising in a halting manner, but posting a respectable gain nonetheless. Volume on the rise was light, as the stock rose more on a lack of selling pressure, than an abundance of buying pressure. Despite the fact it wasn't the strong move we would have liked, it was nice to see the stock setting out near $74 resistance on Friday and market permitting, we ought to see upside continuation on Monday. We still don't like momentum entries until AIG can push through the $75.50 level and hold it, so the best opportunities for entry will likely be found on a mild pullback near the $72 level, as former resistance should now be support. Maintain stops at $70.50, which is solidly below the 20-dma ($71.33). Suggested Options: Shorter Term: The June $70 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 July $75 Call, while the more conservative approach will be to use the July $70 Call. Our preferred option is the July $75 strike, as it is currently just out of the money and should provide sufficient time for the play to move in our favor. ! Alert - June options expire in 2 weeks! BUY CALL JUN- 70 AIG-FN OI=10968 last traded @ $4.50 BUY CALL JUN- 75 AIG-FO OI=18859 last traded @ $0.75 BUY CALL JUL- 70 AIG-GN OI= 559 last traded @ $5.00 BUY CALL JUL- 75*AIG-GO OI= 5841 last traded @ $1.65 Annotated Chart of AIG: Picked on May 25th at $72.00 Change since picked: +2.10 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 5.31 mln Chart = --- The Boeing Company - BA - close: 46.90 change: +0.80 stop: 44.00 Company Description: One of the world's major aerospace firms, BA operates in three principal segments: commercial airplanes, military aircraft and missiles, and space and communications. Commercial airplanes operations involves the development, production and marketing of commercial jet aircraft, principally to the commercial airline industry. The Military Aircraft and Missiles division is involved in the research, development, production, modification and support of military aircraft, including transport and attack aircraft. The Space and Communications segment is involved in the research, development, production, modification and support of space systems, rocket engines and battle management systems. Why we like it: Wednesday's news-driven spike in shares of BA looked unsustainable and indeed it was, as the stock quickly cam back to the $46 level to test it as new support. The bulls held their ground and the stock rebounded into the close. Sellers ruled the day on Thursday before Friday's light volume rally that pressed the stock back near the $47 level. Viewed in big picture terms, the breakout over $45 looks quite solid and BA is simply consolidating its recent move in preparation for another breakout and subsequent run at very strong resistance near $50. While aggressive traders can consider breakout entries over the $47.25 level, that isn't our preferred strategy. Instead, we favor intraday pullbacks near the 10-dma (currently $45.62) for new entries, as BA has not tended to follow through with breakout moves without at least a bit of back and fill type action. Note that we're leaving our stop in place at $44, solidly below the 20-dma ($44.35) and just under the top of the recent gap. Suggested Options: Shorter Term: The June $45 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the July $47 Call, while the more conservative approach will be to use the July $45 Call. Our preferred option is the July $45 strike, as it is currently in the money and should provide sufficient time for the play to move in our favor. ! Alert - June options expire in 2 weeks! BUY CALL JUN- 45 BA -FI OI=7676 last traded @ $2.25 BUY CALL JUN- 47 BA -FW OI=2104 last traded @ $0.60 BUY CALL JUL- 45*BA -GI OI= 841 last traded @ $2.85 BUY CALL JUL- 47 BA -GW OI=1011 last traded @ $1.35 Annotated Chart of BA: Picked on May 27th at $46.20 Change since picked: +0.70 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 2.87 mln Chart = --- Electronic Arts - ERTS - close: 51.40 change: +0.04 stop: 48.00 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: As astounding as it may seem, the stalemate between the bulls and the bears continues in shares of ERTS, as the 50-dma ($51.48) continues to act as a price magnet. The stock made several forays above that average last week, testing the $52 resistance level over the past couple days, but so far buyers haven't been able to sustain a close over that mark. As noted in prior updates, what we really need to see is a breakout over $53 in order to produce a PnF Buy signal. Until then, ERTS is doing little more than drifting sideways, awaiting the next catalyst for directional movement. Technically the play still looks favorable for entries on dips near the $50 level, which has the support of both the broken descending trendline, as well as the 20-dma ($50.32). Dips and rebounds from that level look good for new entries, with momentum players needing to wait for that PnF Buy signal before playing. Maintain stops at $48, just under the rising brendline and the 200-dma ($48.07). Suggested Options: Shorter Term: The June $50 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 July $55 Call, while the more conservative approach will be to use the July $50 Call. Our preferred option is the July $50 strike, as it is currently in the money and should provide sufficient time for the play to move in our favor. ! Alert - June options expire in 2 weeks! BUY CALL JUN- 50 EZQ-FJ OI=7269 last traded @ $2.35 BUY CALL JUN- 52 EZQ-FX OI=3790 last traded @ $0.85 BUY CALL JUL- 50*EZQ-GJ OI= 505 last traded @ $3.30 BUY CALL JUL- 55 EZQ-GK OI=1533 last traded @ $0.95 Annotated Chart of ERTS: Picked on May 18th at $49.60 Change since picked: +1.80 Earnings Date 4/29/04 (confirmed) Average Daily Volume = 3.89 mln Chart = --- Johnson & Johnson - JNJ - cls: 56.38 chng: -0.21 stop: 54.00 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: After much preparation, JNJ finally made good on its much- advertised breakout over the $56 level, moving within a hair of the $57 level before drifting back on Thursday afternoon and Friday. Traders who set their expectations correctly have been rewarded by a slow and somewhat choppy ascent as the stock solidified support near $54 and then broke out late last week. Speaking of that breakout, did you notice that it came on strong volume, while Friday's profit taking was accompanied by very light volume? Key support now rests at $55, which is currently sandwiched between the 20-dma and 30-dma, making that support that much stronger. We'd like to see JNJ find support near $56 on a mild pullback next week, but more realistically we're going to see a dip to the $55 level. So long as support holds, that dip can be used for fresh entries in anticipation of a renewed rally towards next resistance at $58. Conservative traders can exit on that move, although we'll maintain coverage right up to our $60 target if possible. Suggested Options: Shorter Term: The June $55 Call will offer short-term traders the best return on an immediate move, as it is currently in 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. ! Alert - June options expire in 2 weeks! BUY CALL JUN-55 JNJ-FK OI=20184 last traded @ $1.60 BUY CALL JUL-55*JNJ-GK OI=45546 last traded @ $2.15 Annotated Chart of JNJ: Picked on May 9th at $55.30 Change since picked: +1.08 Earnings Date 4/13/04 (confirmed) Average Daily Volume = 7.26 mln Chart = ************** NEW CALL PLAYS ************** Mercury Interactive - MERQ - cls: 47.56 change: +0.96 stop: 44.00 Company Description: As a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications, MERQ is looking for growing e-commerce demand to continue to fuel its business. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks and automating quality assurance testing. MERQ's client base spans a wide range of industries including Internet companies such as Amazon.com and America Online, infrastructure companies Ariba and Oracle, as well as Apple Computer, Cisco Systems and Ford Motor Company. Why we like it: Along with the rest of the Technology sector, shares of MERQ have been undergoing an extended bout of profit taking since reaching their zenith in mid-January near $54. But after bottoming near the $41-42 area in the middle of March, the stock has really been trying to build a new base. While that based looks a bit noisy on the candle chart, if we turn to the PnF chart, it certainly looks healthier. With strong historical support near the $42 level, MERQ fell to that point and then finally touched and rebounded from the bullish support line at $43 just over a month ago. The key factor that was missing was a new PnF Buy signal, but we got that just over a week ago when the bulls managed a brief foray over $48. While there hasn't been much in the way of follow-through, it has been encouraging to see how the stock is holding above the 200-dma ($46.96). The daily chart shows a fair amount of historical support near $46, and we ought to expect a dip near that level to be met with buying interest now that the PnF chart has turned bullish. There's no need to use a trigger on the play, with the overall landscape already bullish, so we can just focus on picking the right entry point. A dip to $46 looks like the ideal entry, especially with the 20-dma ($45.75), 30-dma ($45.40) and 50-dma ($45.43) all clustered just below there and likely to provide strong support. The final line in the sand is the rising trendline at $44, which is where we're initially going to place our stop. After entry, we'll look for an initial rise to the $50 level, and then possibly towards $52. Note that one of the keys to a successful play will be whether the Software index (GSO.X) can bust out of its funk and push through the 50-dma at $152. Traders considering entries into strength will want to wait for a push through $48.60, with the GSO managing a breakout over the 50-dma. Suggested Options: Shorter Term: The June $45 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the July $50 Call, while the more conservative approach will be to use the July $47 Call. Our preferred option is the July $47 strike, as it is currently at the money and should provide sufficient time for the play to move in our favor. ! Alert - June options expire in 2 weeks! BUY CALL JUN- 45 RQB-FI OI=1319 last traded @ $3.10 BUY CALL JUN- 47 RQB-FR OI=1964 last traded @ $1.20 BUY CALL JUL- 47*RQB-GR OI=2045 last traded @ $2.45 BUY CALL JUL- 50 RQB-GJ OI=1351 last traded @ $1.35 Annotated Chart of MERQ: Picked on June 6th at $47.56 Change since picked: +0.00 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.44 mln Chart = ************************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 ***************** Goldman Sachs Grp. - GS - close: 91.52 change: +0.97 stop: 94.50 Company Description: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net- worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why we like it: Just to keep us on our toes, GS popped a bit higher on Friday after the economic news was released and then traded in a very tight intraday range, centered about the $91.50 level. With our trigger point at $90 untouched, that left us on the sidelines for the day, which is precisely what we wanted. Our trigger did the job of keeping us out of the play until the technical criteria (break below support) occurs. Once GS breaks below $90, it should be a fairly quick trip down to next support near $85. Aggressive traders will want to enter on the initial breakdown, while the more conservative approach will be to look for a failed bounce near the $92 level for entry. Our initial stop is set at $94.50, but on a serious breakdown, we'll look to tighten the stop as soon as possible. Suggested Options: Aggressive short-term traders will want to use the June 90 Put. Those with a more conservative approach will want to use the July 90 put, as it will provide greater insulation against time decay. Our preferred option is the July 90 strike, as it is just out of the money and should provide ample time for the play to move in our favor. ! Alert - June options expire in 2 weeks! BUY PUT JUN-90 GS -RR OI=6665 last traded @ $1.10 BUY PUT JUL-90*GS -SR OI=6662 last traded @ $2.45 BUY PUT JUL-85 GS -SQ OI=4145 last traded @ $1.10 Annotated Chart of GS: Picked on June 3rd at $90.55 Change since picked: +0.97 Earnings Date 3/23/04 (confirmed) Average Daily Volume = 3.75 mln Chart = ************* NEW PUT PLAYS ************* Kohl's Corp - KSS - close: 47.45 change: -0.29 stop: 50.01 Company Descriptions: Based in Menomonee Falls, Wis., Kohl's is a family-focused, value oriented specialty department store offering moderately priced national brand apparel, shoes, accessories and home products. The company operates 589 stores in 38 states. (source: company press release) Why We Like It: We might need to label this put play as more than a little aggressive. KSS has been steadily climbing higher for four out of the past five weeks and it can be dangerous to step in front of that kind of momentum. The company recently announced May same-store sales that were better than expected with a 5% increase. Plus, the last couple of months has produced a number of positive analysts comments outlining their belief that KSS is in the process of a positive turnaround and that the company will be seeing easier comparisons over last year's dismal performance. That's the good news. The bad news that could affect shares are recent comments from the company that June same-store sales are likely to be flat to +2% while July same-store sales will probably be negative in the single digits. Chart readers will also note that KSS' rally is starting to falter with the stock trading sideways under resistance at $48 for the last six sessions. Plus, its technicals like its MACD indicator is starting to roll over and its RSI and stochastics are starting to edge lower from overbought levels. In addition to the above shares of KSS are under a major trendline of resistance dating back to September (see chart). We're going to speculate on a roll over at current levels and target a move back toward $41-42. More conservative traders may want to wait for KSS to traded under $47.00 again before considering positions. Suggested Options: It could take a few weeks to achieve our target so we're suggesting the July puts. Our favorites are the July 50s. BUY PUT JUL 50 KSS-SJ OI= 3119 Last traded @ $3.50 BUY PUT JLU 45 KSS-SI OI= 6206 Last traded @ $0.85 Annotated Chart: Picked on June 06 at $ 47.45 Change since picked: - 0.00 Earnings Date 05/13/04 (confirmed) Average Daily Volume: 3.7 million Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ********** 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 06-06-2004 Sunday 4 of 5 In Section Four: Leaps: Deja Vu All Over Again Option Spreads: You May Think You’re Covered, But Your Bottom Is Still Exposed ************************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 ***** Deja Vu All Over Again By Mark Phillips mphillips@OptionInvestor.com Hmmm...let's see what did we see last week? Was it a breakout? Was it a breakdown? No on both accounts. Last week was another chapter in the play we should all now have memorized, "As The Rangebound Market Turns". As I've said enough times to make you all sick of hearing it, we're stuck in a trading range and there's not likely to be a catalyst to get us out of here until at least the June 30th FOMC meeting and the official handover date in Iraq have passed. Of course, that is just before the 4th of July weekend, so we're unlikely to see much a move before then. By the second week in July, market participants will have something to sink their teeth into again -- anticipation of earnings, where we'll get another read on whether the economic recovery is continuing on track. Additionally, we ought to have a better feel for what the inflation picture looks like and what the Fed appears likely to do with interest rates, at least for the remainder of the year. Make no mistake, there will still be some very cloudy portions of the picture at that time, not the least of which will be 'who is likely to be sitting in the White House this time next year'. But by the time July earnings roll around, there may be just enough clarity on the geopolitical front to give investors the confidence to take a position and stick with it. Hey, I can dream, can't I? It really seems fruitless to continue hashing out the technicals of the current market until something breaks, so instead of writing 2000 words on the subject, I'm going to leave you with a couple simple pictures, which I think makes the point more clearly than I could with several pages of text. Weekly Chart of the S&P 500 The strong rally from the October 2002 lows came to a halt just over 1160, amazingly close to the 50% retracement of the entire bear market decline. Since tapping that important retracement level, the SPX has been in the process of consolidating the gains from last year, spending the past several months confined to roughly a 100-point range between the 38% and 50% retracement levels of the entire bear market decline. Now certainly there are viable short-term trading opportunities in a 100-point range on the SPX, right? What happens if we dial our analysis down a notch and just look at the action over the past few months? Daily Chart of the S&P 500 That's a bit eerie, don't you think? All that back and forth action and the SPX seems inexplicably pinned to the 50% retracement off the March highs, with the past week's action confined between the 38% and 62% retracement levels, a mere 20 point range. Let's say you wanted to develop a directional bias -- would you be bullish or bearish, based on those two charts. Well, let's add a bit of spice to the mix. One of the key tenets of DOW Theory has to do with the importance of the 50% level, speaking of retracements within a primary trend. If we look at that weekly chart, we can see that the inability of the bulls to push the SPX through the 50% point of the entire bear market decline is very important. Until that obstacle is cleared, the overall bearish tone of 2000-2002 remains in force. On the other hand, there seems to be a concerted effort to get the SPX over the 50% level of the decline off the March highs and that suggests another serious rally attempt is brewing, which ought to have the spring highs in play as a potential target. Of course the other piece of the puzzle is where the SPX is relative to the rally off the October 2002 lows and while I haven't shown it, the market is in a very bullish state on that timeframe. The SPX would have to drop below 1065 just to challenge the 25% retracement, with the real test being a drop to the 50% level all the way down at 965. Melding these three timeframes together, we can come up with a pretty good impression of what the market is currently "thinking". In terms of the very long-term, the market has been unable to recover more than 50% of its bear-market losses and that keeps the spectre of the bear hanging over investors' heads. Stepping down one notch, we see the broad market trading very strong relative to the rally off the October-2002 or even the March-2003 lows and there we see the bullish bias very much intact. But on the shorter timeframe of just the past several months, we can see a great deal of indecision at play, partially due to the summer doldrums, but the competing messages from the bearish view of the past several years and the bullish view of the past 15 months is keeping either the bulls or the bears from gaining any substantial traction. This is visually demonstrated on the daily chart with retracements shown above. There will certainly be directional plays that will be quite viable even if the rangebound action continues, but we need to understand that they will be the exception, not the rule. And attempting long-term (i.e. LEAPS) plays on any of the major indices will be a fools errand until this stalemate is broken. I will consider new positions from time to time, but only when there is something that really catches my attention. In a bifurcated environment like we are currently presented with, our attitude should be one of "Show me", forcing our trade candidates to jump out and grab us by the collar, shouting out its merits. Alas, there are very few stocks capable of doing that right now, so I'm content to stick with a small and truncated playlist through much of the summer. Portfolio: HD - Here we go again! After a brief and encouraging foray down into the low $30s, HD is settling right back into its familiar $35-37 range near where we began coverage a few months back. The 50-dma and 200-dma and coming together and Friday's price action was pinned between those two averages. The descending upper channel line is now just over $36, but weekly Stochastics are now clearly in bullish ascent. There's just a lack of conviction in either direction, so the most prudent choice is to sit tight. I would not advocate new positions at this point and I would certainly understand if traders opted to exit the play here near break even in order to put the capital to work elsewhere. We still need a substantial breakdown to get this play moving and we may have to wait for the start of the rate hike cycle before that comes to pass. CHK - There hasn't been much of substance to report on our CHK play for nearly a month now, as the stock continues to meander in the lower half of the rising channel from the February lows. The bulls have failed to sustain any breakouts into new high territory, but at the same time the bears haven't been able to gain much traction to the downside. This looks like a situation where the overbought condition on the weekly chart is being worked off through sideways consolidation. With energy prices remaining quite high, once the weekly oscillators reach oversold, then we ought to be able to see a real move towards breakout territory. For now, extreme patience is required. LUV - Despite the continued strength in energy prices, Airline stocks are looking more healthy and LUV is certainly leading the charge. Recall that we were looking for this play to really take off once the summer travel season got underway and that appears to be what is taking place. Now solidly over the $15.00-15.25 resistance area, LUV should find support there on any pullback and dips near there can be used for new entries. The next real upside obstacle is $16, which is soon to be reinforced by the 200-dma. After taking another look at the PnF chart this weekend, I'm going to back off on our upside target though, as I think $18 is going to be about as far as the bulls can go, right at the bearish resistance line. Maintain stops at $13.50. TYC - There's certainly nothing to dislike about our TYC play, as the stock really hasn't slowed down since satisfying our entry criteria a few weeks ago. TYC is now overdue for a bit of profit taking and a drop back to the $29-30 area would be reasonable. That said, I wouldn't mind a continued rally right to that first major resistance at the 200-week moving average near $33 and then $35 horizontal resistance before the bulls lock in some gains. Secondary entries can still be considered on a pullback and rebound from the $29-30 area, but we would not suggest chasing the stock higher. Buy the pullbacks or let this play go. AIG - It certainly wasn't pretty, but the initial rise off of support is looking decent here, with AIG having now risen back above the $74 level. There's still plenty more resistance to deal with near $75.50-76.00 before taking a run at the early April highs, but things look ok here. We're starting to see an upturn in the weekly oscillators now and that bodes well for a stronger upward move. But first we're likely to see a pullback to confirm higher support in the $71-72 area. A dip and rebound there looks viable for new entries. At least until the $76 resistance level is crested, we'll maintain our stop at $68. Watch List: GM - As I suspected, this rebound is looking like it might stick and on Friday, GM closed just over its 50-dma. Notice the way volume has been expanding the past few days and we now have the weekly Stochastics threatening to turn up from just above oversold territory. If they do indeed turn bullish here, we'll even have bullish divergence working against us. Clearly, this was a good time to put GM on hold, where we'll leave it until we see how much upside strength there actually is to this move. Radar Screen: EK - Just like our current play on HD, EK failed in its breakout attempt and dropped back near strong support at $25 last week. The trading range continues to narrow and with the stock having been confined to less than a $3 range since early March, there's just no incentive for jumping into a position. Fundamentally, I love the downside on this one, just as I do with HD. But neither stock is moving enough right now to make for a viable and profitable play. Remaining on the sidelines on EK is still the best course of action until we can get enough of a move outside the current range to give us a more attractive entry point. $DJUSHB - For those of you following along with our weekly discussion on the Housing sector, I hope the thought process I'm going through is helpful in trying to pinpoint a couple of viable downside candidates. I'd say we have a couple more installments in that series of articles and then we'll have those candidates which we can then monitor here until that attractive entry presents itself. Remember, nothing gets put into motion until the first rate hike occurs, so that means we have until at least the end of the month to get all our ducks in a row. Pretty convenient timing, don't you think? NEM - With NEM still on a PnF Sell signal, there's clearly no incentive to dive into a bullish position yet. We do have Buy signals on the two mining indices (XAU and HUI), so that's an encouraging sign, but I think we're still really premature in our search for another viable entry into NEM. My best guess is that we'll see enough of a pullback in the stock to creat a column of O's, and then we'll have a Buy signal when price moves over the $41 level. In short, the potential is there, but now we need to wait for everything to line up in our favor. I wouldn't be surprised to see the stock tread water near current levels for much of the month of June, as we wait for the FOMC decision. NOK - The past 3 months have been absolutely brutal to shares of NOK, with price falling back to levels not seen since early 2003. An argument could be made for doing some bottom-fishing here, with weekly Stochastics bottomed deep in oversold territory. The problem we have to confront is the VERY bearish PnF chart, which is on a huge Sell signal, with a downside target of only $2.00. That's just a bit too risky for my blood. However, there is potential here -- we just need to wait for some consolidation to take place and then for the PnF chart to issue a new Buy signal. Look for a rally back to $15, then a drop back to test support near $13 and we'll have the setup for a new PnF Buy signal. Nothing is likely to set up for several weeks yet, but now we know what to watch for. Closing Thoughts: As I've been harping on recently, it is really hard to get overly excited about any long-term directional plays when the broad market is so clearly stuck in a trading range. Without the catalyst of either a bullish or bearish market to drive our plays, the vast majority of candidates we might come up with just don't have the necessary fuel to break orbit. This muddled action could end on Monday (very unlikely) or continue through the bulk of the summer (much more likely). In either case, until we see signs of a more lively trading pattern emerging in the broad market, I will continue to be stingy about adding new candidates onto the Watch List and Portfolio. This is clearly a time where capital preservation is more important than aggressive attempts at capital growth. Due to an important family matter, I'll be out of town next weekend, so there will be no LEAPS column. But fear not, I doubt we'll have much of consequence transpire this month, so we should be able to pick up right where we left off on Father's Day weekend. Best Trading Wishes! Mark LEAPS Portfolio Current Open Plays LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: GM 05/09/04 HOLD 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 ************************ You May Think You’re Covered, But Your Bottom Is Still Exposed By Mike Parnos, Investing With Attitude When you embark upon your first adventure into options trading, there are those who will tell you that “covered call writing” is the safest option strategy. Even brokerage firms will allow novice option traders to trade covered calls in their IRA accounts. Little do they know . . . DAMN little! Not all who read this column are ready for the more advanced strategies that I usually discuss here. If you do trade covered calls, you should probably have your head examined. This deserves some attention. So let’s give it a try. The most basic theories of therapy involve going back to one’s childhood -- where impressions and life-long habits are formed. So, let’s begin at the beginning. Once upon a time there was an investor. All of his life he was taught that if you bought a stock and held onto it forever, the stock would go up, he’d make a lot of money and live happily ever after. It was the American dream. As we’ve come to learn, those dreams and Mother Goose have a lot in common. They’re fairytales. These same investors are now collecting can deposits to supplement their Social Security. The harsh realities of the market have resulted in a rude awakening from dreamland. The Internet bubble, the recent bear market, and an abundance of corporate improprieties, have systematically demolished hordes of retirement accounts. They “buy-and-holders” are still “holding.” Old habits die hard. Only, what they’re holding isn’t hard anymore. Covered Call: The Stock For our example, we’ll say you currently own 1,000 shares of Juniper (JNPR) trading at $21.30. How you came to own this stock is anybody’s guess. Maybe you bought and held, maybe you inherited it, maybe you won the lottery. It’s not really important. The question is – how can you best use this asset to make money? You have a neutral to bullish outlook on JNPR. You project that it will trade flat or possibly up a little in the next few months. If your projection is just wishful thinking and you have nothing on which to base your opinion, you have no business owning a stock, trying to trade options, or being allowed to cross the street by yourself. Covered Call: The Option Well, if you’ve read my previous columns, you know that there is a bottomless pit of speculators out there. “Speculators” is the nice word. “Gamblers” is more accurate. We all know that fools rush in where angels fear to tread. That’s why there will always be, someone out there who is willing to buy an option – betting that JNPR will rise substantially in the next month. He wants to buy the right to buy JNPR from you at $22.50 anytime between now and June expiration (about 4 weeks). For that right he’s willing to pay you $1.50 per share. That translates into $1,500 worth of dead presidents into your pocket. The speculator is buying the JNPR June $22.50 call option. He’s buying the “right,” but not the “obligation,” to buy the stock from you at $22.50. He’s expecting that JNPR is going to appreciate well beyond $22.50. If he’s buying the stock at $22.50 and the option costs him $1.50, his breakeven is $24.00. The nice part about all this is that the $1,500 he’s paying you is yours to keep – regardless what happens to the stock. It shows up in your brokerage account the very next business day. What you have to be willing to accept is the fact that, if JNPR does happen to move up, you’ve agreed to sell it at $22.50. You will not participate in any gains above and beyond $22.50. More Profit Than You Think Once you’ve accepted the fact that you and your 1,000 shares may soon experience a separation, you can focus on the potential profit in the trade. If JNPR finishes above $22.50. There are two ways you will profit. 1) You took $1,500 when you sold the call. That’s a good start. 2) If your stock is called away at $22.50, you will have made another $1,200 in profit from the appreciation of the stock price. Remember, this all started with JNPR trading at $21.30. When the stock is sold, you get the $1,200 difference. You took, in $1,500 from the sale of the option plus another $1,200 profit from the sale of the stock – a total of $2,700. That’s a better than 13% return for about a month. If you used margin to purchase the stock, it would be about a 26% return. If JNPR finishes below $22.50, you will still own the stock and may be able to sell another call for July. The Good, The Bad & The Ugly You now know the good. Get ready to learn about the bad and the ugly. The main risk in covered call writing is the fact that you do own the stock. And, contrary to popular optimistic thinking of the masses, the shares of JNPR could go down just as easily as it can go up. The $1.50 taken in from the option purchase provides a little cushion – a damn little cushion. The same principles apply to covered call selling as to all other trading and/or investment strategies. The main principle, and the toughest one to live with, is that you must have an established exit point – and the self-discipline to act on it when necessary. Of course, that means having to admit that you’re wrong when JNPR turns south instead of going up. How do you figure out your exit point? There are a few ways. 1) Use a specific dollar stop. Your account management techniques tell you that you have a maximum limit of a $2,000 loss per position. That would dictate that you have to close out your entire position by selling your stock and buy back your short JNPR $22.50 option when it costs you a total of $18.90 ($18,900). 2) Check for support levels. There may be a support level at $20.50. Maybe there’s a 50-day moving average at $19.55. You can establish an exit point if one, or both, of these support levels are violated. Another Way To Play Covered Calls This strategy alternative is for more aggressive traders. What the hell, as long as you own the shares of stock anyway let’s have some fun. One thing that we know is likely is that JNPR will move up and down 2-3 points a few times during the next month. When JNPR moves down, the value of the $22.50 call decreases. After two weeks, JNPR falls to $19.60. The value of the June $22.50 call may be $.40. You can buy it back and play the bounce back up from the $50 day moving average at $19.55. Then, you wait until JNPR moves back up to about $22.25 and sell the $22.50 again, this time for $1.00. That’s an extra $.60 ($600) taken in during the option cycle. This may happen two or three times during the four weeks if the market gets volatile. That could increase the premium taken in by a total of $1.20. Again, there’s no guarantee that any of this will happen. Some traders, who can’t keep their hands in their pockets, like to trade “within their trade” to try and generate more premium. The Bottom Line Can you guess what I’m going to say? If you buy a stock, you’re exposed for the entire value of the stock, all the way down to zero. If you combine stock ownership with selling a call against the stock, you may be able to generate some monthly cashflow. The likelihood is that, if you guess right about the direction, the stock will be called away. If you guess wrong, the stock will go down and you will take a few hits of that “hopium” drug and sit there “hoping” the stock comes back up. It won’t and you’ll end up still owning the stock at $15. Selling Calls On Tanking Stocks Why can’t you sell a call when the stock is at $15? Well, you can, but there won’t be any premium in the $20 or $22.50 July calls. If you sell a $15 or $17.50 call, you’ll be locking yourself into a loss on the stock– which is a no-no. A Marriage Made In . . . ? Fact: Many brokerage firms only allow covered-call selling in IRAs. Fact: There are still countless “buy and holders” who are still holding stocks in their IRA. It’s fate. It’s inevitable that the twain will meet. Their money and/or the stocks will eventually disappear and these novice traders will have more bad things to say about options. They will continue to live in denial. It wasn’t their fault. They’ll blame the options -- when they simply don’t know how to use them. When all is said and done, the only rational way to own a stock is to buy a protective put as insurance to protect against catastrophic events. Check out my previous columns in which I discuss the “collar” in great detail. ____________________________________________________________ NEW JUNE POSITIONS June Position #1 – SPX Iron Condor – 1122.50 We sold 5 SPX June 1150 calls and bought 5 SPX June 1170 calls for a credit of $1.20 (x 5 contracts = $600). Then we sold 7 SPX June 1025 puts and bought 7 SPX June 1010 puts for a credit: $1.00 (x 7 contracts = $700). Our total net credit is $1,300. Maintenance: $10,500. Maximum profit range of 1025 to 1150. Potential profit is $1,300. June Position #2 – BBH Iron Condor - $147.50 We sold 10 BBH $155 calls and bought 10 BBH $165 calls for a credit of $.70 (x 10 contracts = $700). Then we sold 10 BBH $135 puts and bought 10 BBH $125 puts for a credit: $.90 (x 10 contracts = $900). Our total net credit is $1,550. Maintenance: $10,000. Maximum profit range of $135 to $155. Potential profit: $1,550. June Position #3 – RUT – Iron Condor – 567.75 We sold 10 RUT 590 calls and bought 10 RUT 600 calls for a credit of $.80 (x 10 contracts = $800). Then, we sold 10 RUT 490 puts and bought 10 RUT 480 puts for a credit: $1.00 (x 10 contracts = $1,000). Our total net credit is $1,800. Maintenance $10,000. Maximum profit range of 490 to 590. Potential profit: $1,800. June Position #4 – MNX – Iron Condor - $145.50 Sold 10 MNX 147.50 calls and bought 10 MNX 152.50 calls for a credit: $.70 (x 10 contracts = $700). Then sold 10 MNX $132.50 puts and bought 10 MNX $127.50 puts for a credit: $.60 (x 10 contracts = $600). Our total net credit of $1,300. Maintenance: $10,000. Maximum profit range of $132.50 to $147.50. Profit potential: $1,300. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.19 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 – 547.08 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. Our current position: We own 3 OEX December 2006 540 calls @ $81 (x 300 = $24,300). Our cash position as of May expiration is $4,390 plus unused $1,700 = $6,090. June Zero Plus Positions. A June OEX bull put 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. If all goes well, we’ll be able to add an additional $1,175 to our cash position at June expiration. OSX Calendar Spread Plus - $97.18 Originally 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. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-06-2004 Sunday 5 of 5 In Section Five: Covered Calls: Conservative Stock Ownership Spreads and Straddles: Stocks Rally On Favorable Jobs Report! Premium-Selling Plays: Naked Puts and 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 ************************************************************** ************* COVERED CALLS ************* ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ 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 NKTR 20.61 JUL 17.50 QNX-GW 4.00 22 16.61 40 4.1% PTIE 8.60 JUL 7.50 UQ-GU 1.45 401 7.15 40 3.7% CAMD 14.14 JUL 12.50 CGQ-GV 2.20 173 11.94 40 3.6% JAKK 17.83 JUL 17.50 UFF-GW 1.10 0 16.73 40 3.5% TIBX 8.13 JUL 7.50 PAV-GU 0.95 1923 7.18 40 3.4% SINA 38.79 JUL 35.00 NOQ-GG 5.20 359 33.59 40 3.2% IMMU 6.00 JUL 5.00 QUI-GA 1.20 531 4.80 40 3.2% DITC 19.77 JUL 17.50 QZD-GW 2.95 386 16.82 40 3.1% WEBX 24.55 JUL 22.50 UWB-GX 2.90 27 21.65 40 3.0% SYNA 19.23 JUL 17.50 QYG-GW 2.35 59 16.88 40 2.8% OPSW 8.14 JUL 7.50 UWA-GU 0.90 1762 7.24 40 2.7% VXGNE 16.01 JUL 12.50 UWG-GV 3.90 20 12.11 40 2.4% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER IN SECTION ONE ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ******************* SPREADS & STRADDLES ******************* Stocks Rally On Favorable Jobs Report! By Ray Cummins U.S. equities moved higher Friday amid positive employment data and lower crude oil prices. Investors were optimistic after a Labor Department report showed employers added 248,000 jobs in May, and crude oil futures stayed below $40 for the third consecutive day, due to OPEC's agreement to raise output quotas. The Dow Jones industrial average added 46 points to end at 10,242, with a majority of blue-chip issues enjoying gains during the session. The NASDAQ Composite Index climbed 18 points to finish at 1,978, with Intel's (NASDAQ:INTC) positive profit outlook lifting the technology segment. The S&P 500 Index rose 5 points to 1,122 amid renewed buying pressure in the major industry groups. Trading volume was relatively low, with 1.12 billion shares changed hands on the Big Board, while only 1.41 billion shares were crossed on the NASDAQ. Advancers outpaced decliners on both the NYSE and the technology exchange by a ratio of 2 to 1. Bond prices retreated with the benchmark 10-year note falling 11/32, while its yield climbed to 4.75%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 06/04/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 CB G/L Status ERTS 51.88 51.51 JUN 45 47 0.35 47.15 0.35 Open IMDC 61.17 58.52 JUN 50 55 0.50 54.50 0.50 Open GPRO 38.30 44.85 JUN 30 35 0.70 34.30 0.70 Open MATK 68.01 63.32 JUN 55 60 0.65 59.35 0.65 Open ASD 35.96 37.74 JUN 32 33 0.16 33.17 0.16 Open IMCL 71.36 72.49 JUN 50 55 0.50 54.50 0.50 Open CSC 42.17 42.45 JUN 35 40 0.65 39.35 0.65 Open GILD 62.54 64.54 JUN 55 60 1.00 59.00 1.00 Open RIMM 99.98 116.15 JUN 80 85 0.45 84.55 0.45 Open QCOM 65.40 67.28 JUN 55 60 0.45 59.55 0.45 Open ZBRA 80.08 78.02 JUN 70 75 0.65 74.35 0.65 Open BRCM 42.54 41.64 JUN 37 40 0.30 39.70 0.30 Open EBAY 85.33 88.08 JUN 75 80 0.50 79.50 0.50 Open AMZN 48.50 50.95 JUN 42 45 0.30 44.70 0.30 Open EYET 44.32 43.74 JUN 35 40 0.50 39.50 0.50 Open RIMM 119.93 116.15 JUN 95 100 0.40 99.60 0.40 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Martek Biosciences (NASDAQ:MATK) and Inamed (NASDAQ:IMDC) are on the "watch" list. CALL-CREDIT SPREADS Stock Pick Last Month LC SC Credit CB G/L Status CTX 44.80 47.48 JUN 55 50 0.50 50.50 0.50 Open IVGN 67.61 66.96 JUN 80 75 0.55 75.55 0.55 Open NTLI 55.28 61.85 JUN 65 60 0.80 60.80 (1.05) Closed VIP 91.45 92.08 JUN 110 105 0.50 105.50 0.50 Open CERN 41.33 42.12 JUN 50 45 0.55 45.55 0.55 Open SEPR 45.06 45.18 JUN 55 50 0.60 50.60 0.60 Open BSC 80.02 80.92 JUN 90 85 0.50 85.50 0.50 Open FRX 59.20 63.95 JUN 70 65 0.55 65.55 0.55 Open MDT 47.66 49.49 JUN 55 50 0.60 50.60 0.60 Open AZO 83.38 87.53 JUN 95 90 0.40 90.40 0.20 Open RYL 79.60 78.72 JUN 90 85 0.60 85.60 0.60 Open VIP 92.25 92.08 JUN 105 100 0.60 100.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss The position in NTL Inc. (NASDAQ:NTLI) has been closed to limit potential losses. Forest Laboratories (NYSE:FRX) and Medtronic (NYSE:MDT) remain on the "watch" list. The Autozone (NYSE:AZO) spread finally offered a viable credit during Thursday's rally. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status GRMN 32.60 33.78 JUL 35 30 2.15 2.35 Open KKD 19.63 21.34 JUN 20 20 3.00 2.80 Open? There was no additional volatility after Krispy Kreme (NYSE:KKD) announced quarterly earnings, thus conservative traders should begin to consider an early exit in the position. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AMZN - Amazon.com $50.95 *** Second Chance Entry! *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. AMZN - Amazon.com $50.95 PLAY (conservative - bullish/credit spread): BUY PUT JUL-42.50 ZQN-SV OI=10904 ASK=$0.50 SELL PUT JUL-45.00 ZQN-SI OI=8231 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$44.70 __________________________________________________________________ YHOO - Yahoo! $31.87 *** Another 2004 High! *** Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 200 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the firm also provides many business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. YHOO - Yahoo! $31.87 PLAY (conservative - bullish/credit spread): BUY PUT JUL-25.00 YHQ-SE OI=18961 ASK=$0.35 SELL PUT JUL-27.50 YHQ-SY OI=25290 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$27.20 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ APPX - American Pharma Partners $34.03 *** Downtrend Intact? *** 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 $34.03 PLAY (conservative - bearish/credit spread): BUY CALL JUL-45.00 AQO-GI OI=6748 ASK=$0.30 SELL CALL JUL-40.00 AQO-GH OI=3970 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$40.50 __________________________________________________________________ OIH - Oil Service Holdrs Trust $65.40 *** Sector Slump? *** The Oil Service Holdrs Trust (AMEX:OIH) is a unique instrument that represents an investor’s ownership in the stock of specified companies in the oil service sector. HOLDRS allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient. Each HOLDR is a fixed basket of 20 stocks (except the Telebras HOLDR, which holds 12 companies). They work operate much like ADRs; American Depositary Receipts, which allow U.S. investors to purchase foreign-owned companies on the U.S. exchanges in dollar denominated amounts. In just the same way, the investor actually owns the shares of each underlying company, receives dividends, proxies, and annual reports from each. The HOLDRs are not managed, and once the companies and amounts have been determined they are fixed, no companies will be substituted. In this way, the HOLDRs differ somewhat from Spiders (SPDRs), or Standard & Poor Depositary Receipts and other exchange traded funds, which will add and delete stocks on a regular basis, usually in conjunction with an index that they are tracking. A complete explanation of this issue, including the companies that make up each HOLDRS' particular industry, sector or group can be found here: http://www.holdrs.com/holdrs/main/index.asp?Action=Definition OIH - Oil Service Holdrs Trust $65.40 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-75.00 OIH-GO OI=3046 ASK=$0.25 SELL CALL JUL-70.00 OIH-GN OI=3265 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$70.65 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ SNDK - Sandisk $22.90 *** Break-Out Coming? *** SanDisk Corporation (NASDAQ:SNDK) designs, manufactures and sells flash memory storage products that are used in a wide variety of electronic systems and devices. The firm's memory products are compatible with a number of rapidly growing consumer electronics applications such as digital cameras, personal digital assistants (PDAs), portable digital music players, digital video recorders and mobile telephones, as well as in industrial and communications applications, including communications routers and switches and wireless communications base stations. SNDK - Sandisk $22.90 PLAY (speculative - neutral/debit straddle): BUY CALL JUL-22.50 SWQ-GX OI=2885 ASK=$2.00 BUY PUT JUL-22.50 SWQ-SX OI=7402 ASK=$1.60 INITIAL NET-DEBIT TARGET=3.40-$3.50 INITIAL TARGET PROFIT=$1.55-$1.90 __________________________________________________________________ RIO - VALE RIO DO $49.38 *** Active Sector! *** VALE RIO DO (NYSE:RIO) is an American Depository Receipt (ADR) for Companhia Vale do Rio Doce (CVRD), which produces and sells iron ore, pellets, manganese, iron alloys, gold, kaolin, bauxite, alumina, aluminium, and potash. The company also owns stakes in several steel companies. CVRD is based in Brazil, where it owns and operates railroads and maritime terminals. RIO - VALE RIO DO $49.38 PLAY (very speculative - neutral/debit straddle): BUY CALL JUN-50.00 RIO-FJ OI=493 ASK=$1.10 BUY PUT JUN-50.00 RIO-SJ OI=1154 ASK=$1.75 INITIAL NET-DEBIT TARGET=2.65-$2.75 INITIAL TARGET PROFIT=$0.85-$1.15 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 06/04/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 BCGI JUN 10 9.65 10.60 0.35 7.73% 3.63% LPNT JUN 35 34.30 37.70 0.70 4.03% 2.04% ASCA JUN 30 29.35 31.91 0.65 5.02% 2.21% DRIV JUN 25 24.25 31.50 0.75 7.04% 3.09% FARO JUN 20 19.45 26.27 0.55 7.32% 2.83% GIVN JUN 30 29.25 31.80 0.75 7.01% 2.56% MVSN JUN 20 19.65 23.65 0.35 4.54% 1.78% PDII JUN 22 22.00 29.54 0.50 6.67% 2.27% SMTC JUN 20 19.50 24.33 0.50 6.25% 2.56% CELG JUN 45 44.40 58.79 0.60 4.75% 1.35% ELN JUN 17 17.05 23.80 0.45 8.73% 2.64% FARO JUN 20 19.45 26.27 0.55 8.04% 2.83% FRO JUN 25 24.50 38.45 0.50 6.48% 2.04% IMMU JUN 5 4.75 6.00 0.25 13.52% 5.26% LNCR JUN 32 32.05 33.11 0.45 3.60% 1.40% MCK JUN 32 32.00 33.99 0.50 3.76% 1.56% NFLX JUN 25 24.45 31.40 0.55 7.36% 2.25% PHRM JUN 20 19.65 40.00 0.35 5.67% 1.78% RTN JUN 32 32.00 33.55 0.50 3.62% 1.56% VXGN JUN 12 12.10 16.01 0.40 10.35% 3.31% ARTI JUN 22 22.00 24.32 0.50 6.11% 2.27% AVID JUN 45 44.30 52.31 0.70 4.62% 1.58% BLUD JUN 25 24.70 31.02 0.30 3.54% 1.21% DIGE JUN 35 34.25 36.24 0.75 6.16% 2.19% DRIV JUN 25 24.60 31.50 0.40 5.37% 1.63% ERES JUN 18 18.11 22.99 0.22 3.85% 1.21% NUE JUN 55 54.25 64.08 0.75 3.96% 1.38% PHRM JUN 20 19.70 40.00 0.30 5.30% 1.52% SPLS JUN 25 24.60 27.36 0.40 4.24% 1.63% YHOO JUN 25 24.60 31.87 0.40 4.64% 1.63% ARO JUN 22 23.03 28.12 0.35 4.75% 1.52% CRDN JUN 25 24.65 35.25 0.35 5.57% 1.42% ERES JUN 18 18.63 22.99 0.30 6.61% 1.61% FARO JUN 22 21.85 26.27 0.65 9.88% 2.97% ISPH JUN 15 14.55 17.30 0.45 10.57% 3.09% IDEV JUN 5 4.70 7.69 0.30 17.36% 6.38% PDII JUN 22 22.20 29.54 0.30 5.83% 1.35% SSYS JUN 22 21.85 25.83 0.65 9.43% 2.97% SLXP JUN 25 24.70 26.96 0.30 4.85% 1.21% ASKJ JUN 35 34.40 41.42 0.60 6.85% 1.74% AUO JUN 20 19.55 19.33 (0.22) 0.00% 2.30% ERES JUN 20 19.80 22.99 0.20 4.60% 1.01% FWHT JUN 20 19.65 22.48 0.35 6.25% 1.78% GPRO JUN 35 34.45 44.85 0.55 5.54% 1.60% MEE JUN 22 22.15 24.99 0.35 5.66% 1.58% SMTC JUN 20 19.70 24.33 0.30 6.79% 1.52% SWIR JUN 22 22.20 27.24 0.30 6.05% 1.35% YHOO JUN 27 27.15 31.87 0.35 4.58% 1.29% ASKJ JUN 35 34.55 41.42 0.45 6.43% 1.30% CRDN JUN 30 29.45 35.25 0.55 8.32% 1.87% DRXR JUN 15 14.65 13.28 (1.37) 0.00% 2.39% * ERES JUN 23 23.03 22.99 (0.04) 0.00% 1.52% NKTR JUN 17 17.25 20.61 0.25 8.24% 1.45% NSM JUN 20 19.70 21.02 0.30 6.58% 1.52% NVDA JUN 22 22.15 21.91 (0.24) 0.00% 1.58% SMTC JUN 22 22.20 24.33 0.30 6.21% 1.35% YHOO JUN 27 27.25 31.87 0.25 4.28% 0.92% The position in Drexler Technologies (NASDAQ:DRXR) was not a good candidate for entry after the news of Accenture's (NYSE:ACN) government contract award and traders who opened the play on Tuesday morning were likely out of it by the end of the session, for a smaller than published loss. Silicon Storage Tech (NASDAQ:SSTI), which is profitable, as well as Au Optronics (NYSE:AUO) and Nvidia (NASDAQ:NVDA), have been closed to limit potential losses. Some of the most obvious issues on the "watch" list are: Boston Comm. (NASDAQ:BCGI), Digene (NASDAQ:DIGE), Raytheon (NYSE:RTN), eResearch Tech (NASDAQ:ERES), and Salix Pharmaceuticals (NASDAQ:SLXP). NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield IACI JUN 32 33.15 30.27 0.65 5.22% 1.96% OVTI JUN 30 30.80 23.44 0.80 11.79% 2.60% SLAB JUN 55 55.50 49.86 0.50 4.93% 0.90% PHTN JUN 35 35.35 31.06 0.35 4.69% 0.99% ENDP JUN 25 25.70 22.31 0.70 11.16% 2.72% IPXL JUN 22 23.05 22.14 0.55 8.75% 2.39% MMR JUN 15 15.25 14.11 0.25 7.20% 1.64% APPX JUN 40 40.40 34.03 0.40 6.84% 0.99% OVTI JUN 27 27.25 23.44 0.25 6.69% 0.92% WSM JUN 32 33.00 31.47 0.50 5.64% 1.52% ABAX JUN 20 20.25 19.98 0.25 5.81% 1.23% CHIC JUN 20 20.35 19.51 0.35 8.70% 1.72% USNA JUN 30 30.40 28.75 0.40 6.29% 1.32% ABGX JUN 17 17.85 14.76 0.35 13.94% 1.96% CREE JUN 25 25.25 22.32 0.25 5.36% 0.99% SSNC JUN 25 25.50 19.99 0.50 10.41% 1.96% Abaxis (NASDAQ:ABAX), Charlotte Russe (NASDAQ:CHIC), Impax Labs (NASDAQ:IPXL) and Williams-Sonoma (NYSE:WSM) are on the "watch" list. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 CVTX JUL 15.00 14.60 16.66 0.40 5.63% 2.74% JILL JUN 20.00 19.70 21.22 0.30 10.05% 1.52% NKTR JUN 17.50 17.20 20.61 0.30 13.99% 1.74% OSIP JUN 65.00 64.50 78.53 0.50 6.89% 0.78% PTIE JUL 7.50 7.15 8.60 0.35 9.89% 4.90% SINA JUN 35.00 34.50 38.79 0.50 10.37% 1.45% SMTC JUN 22.50 22.25 24.33 0.25 7.77% 1.12% SYNA JUL 17.50 16.85 19.23 0.65 7.48% 3.86% TELK JUN 20.00 19.75 23.53 0.25 10.33% 1.27% USG JUN 15.00 14.70 15.95 0.30 13.27% 2.04% UTHR JUN 22.50 22.15 23.84 0.35 10.38% 1.58% __________________________________________________________________ CVTX - CV Therapeutics $16.66 *** Analyst Upgrade! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on the discovery, development and commercialization of new small molecule drugs for the treatment of cardiovascular diseases. The company's most well-known drug is Ranexa (ranolazine), for the treatment of chronic angina. CVTX also has several research and preclinical development programs designed to bring additional drug candidates into the market. CVTX - CV Therapeutics $16.66 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 15 UXC SC 1973 0.40 14.60 5.6% 2.7% __________________________________________________________________ JILL - J. Jill Group $21.22 *** Bullish Retailer! *** The J. Jill Group (NASDAQ:JILL) is a multi-channel specialty retailer of women's apparel, accessories and footwear. The company markets its products through catalogs, retail stores and an e-commerce website. J. Jill has two business segments, direct and retail, and each segment is separately managed and utilizes distinct distribution, sales and inventory management strategies. The direct segment markets merchandise through its catalogs and an e-commerce website. The retail segment markets merchandise through retail stores. The firm's target customers are active, affluent women ages 35 to 55, who want comfort and styling, from relaxed career clothing to sophisticated casual weekend wear, in a broad range of sizes. JILL - J. Jill Group $21.22 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 20 JUI RD 235 0.30 19.70 10.0% 1.5% __________________________________________________________________ NKTR - Nektar Therapeutics $20.61 *** Pure Premium-Selling! *** Nektar Therapeutics (NASDAQ:NKTR) makes drug delivery products based on its portfolio of technologies and expertise designed to improve drug performance throughout the drug development process. The company has developed three distinct technology platforms: Nektar Molecule Engineering, which uses advanced PEG (polyethylene glycol)ylation and PEG-based delivery systems to enable drug performance, Nektar Particle Engineering, which uses the company's expertise in pulmonary particle technology and supercritical fluids technology to design and manufacture optimal drug particles and Nektar Delivery Solutions, which uses advanced systems for pulmonary drug administration to improve therapeutic outcomes. NKTR - Nektar Therapeutics $20.61 "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 17.5 QNX RW 1857 0.30 17.20 14.0% 1.7% __________________________________________________________________ OSIP - OSI Pharmaceuticals $78.53 *** Tarceva Speculation! *** OSI Pharma (NASDAQ:OSIP) is a biotechnology company focused on the discovery, development and commercialization of oncology products that both extend life and improve the quality of life for cancer patients worldwide. The company has established a balanced pipeline of oncology drug candidates that includes both next-generation cytotoxic chemotherapy agents and novel mechanism based, gene-targeted therapies. The company's most advanced drug candidate, Tarceva (erlotinib HC1), is a small-molecule inhibitor of the epidermal growth factor receptor (HER1/EGFR). The protein product of the HER1/EGFR gene is a receptor tyrosine kinase that is over-expressed or mutated in many major solid tumors. OSIP - OSI Pharmaceuticals $78.53 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUN 65 GHU RM 3693 0.50 64.50 6.9% 0.8% __________________________________________________________________ PTIE - Pain Therapeutics $8.60 *** Rally Mode! *** Pain Therapeutics (NASDAQ:PTIE) is developing a new generation of opioid painkillers with improved clinical benefits. The company's drugs will offer enhanced pain relief and reduced tolerance/physical dependence or addiction potential compared to existing opioid painkillers. If approved by the Food and Drug Administration, these proprietary drugs could replace certain existing opioid painkillers commonly used to treat moderate to severe pain. PTIE - Pain Therapeutics $8.60 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 7.5 UQ SU 779 0.35 7.15 9.9% 4.9% __________________________________________________________________ SINA - Sina Corporation $38.79 *** Internet Sector Rally! *** Sina Corporation (NASDAQ:SINA), formerly known as SINA.com, is an online media company and value-added information service provider for China and the global Chinese communities. With a branded network of localized Websites targeting China and overseas Chinese, the company provides an array of services to its users including region-focused online portals, search, directory, interest-based and community-building channels, free and premium e-mail, wireless short messaging, online games, virtual Internet service provider, classified listings, e-commerce, e-learning, and enterprise e-solutions. In turn, SINA generates revenue through advertising, fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $38.79 "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 35 NOQ RG 8535 0.50 34.50 10.4% 1.4% __________________________________________________________________ SMTC - Semtech $24.34 *** In A Trading Range? *** Semtech (NASDAQ:SMTC) is a supplier of analog and mixed-signal semiconductors. The company operates in two business segments, Standard Semiconductor Products and Rectifier, Assembly and Other Products. The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes power management, protection, test and measurement, advanced communications and human input device product lines. The Rectifier, Assembly and Other Products segment includes the company's line of assembly and rectifier devices, which are the remaining products from its original founding as a supplier into the military and aerospace market. SMTC - Semtech $24.34 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 QTU RR 7477 0.25 22.25 7.8% 1.1% __________________________________________________________________ SYNA - Synaptics $19.23 *** Conservative Entry Point? *** Synaptics (NASDAQ:SYNA) is a worldwide developer and supplier of custom-designed user interface solutions for notebook computers. The company's original equipment manufacturer customers include ten large personal computer OEMs. Synaptics generally supplies its OEM customers through its contract manufacturers, which take delivery of its products and pay the company directly for the OEMs. Synaptics family of product solutions include TouchPad, TouchPad Under Plastic, TouchStyk, dual pointing solutions, ClearPad, Spiral, QuickStroke, TouchPad with embedded Chinese character recognition, Fingerprint TouchPad, TouchRing and TouchScreen. SYNA - Synaptics $19.23 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 17.5 QYG SW 50 0.65 16.85 7.5% 3.9% __________________________________________________________________ TELK - Telik $23.53 *** New Drug Speculation! *** Telik (NASDAQ:TELK) is a biopharmaceutical company working to discover, develop and commercialize small-molecule drugs to treat serious diseases, including cancer and diabetes. Telik's most advanced product development programs include TLK286, which is a small-molecule tumor-activated cancer drug to treat cancers that are resistant to standard chemotherapy drugs; TLK199, which is a small-molecule bone marrow stimulant for the treatment of blood disorders involving low white blood cell levels; and TLK19781, a proprietary, orally active small-molecule insulin receptor activator for the potential treatment of Type II diabetes and other conditions related to insulin resistance. TELK - Telik $23.53 "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 20 ZUL RD 118 0.25 19.75 10.3% 1.3% __________________________________________________________________ USG - USG Corp. $15.95 *** On The Rebound! *** USG Corporation (NYSE:USG) produces a range of products for use in new residential, new non-residential and repair and remodel construction, as well as products used in certain industrial processes. Its operations are organized into three operating segments: North American Gypsum, which manufactures Sheetrock brand gypsum wallboard and related products in the United States, Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region, and Building Products Distribution, which distributes gypsum wallboard, drywall metal, ceiling products, joint compound and other building products throughout the United States. USG - USG Corp. $15.95 "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 15 USG RC 1831 0.30 14.70 13.3% 2.0% __________________________________________________________________ UTHR - United Therapeutics $23.84 *** Uptrend Intact! *** United Therapeutics (NASDAQ:UTHR) is a biotechnology company focused on the development and commercialization of therapeutics to treat chronic and life-threatening diseases in 3 therapeutic areas: cardiovascular medicine, infectious disease and oncology. It has 5 therapeutic platforms: Prostacyclin analogs are stable synthetic forms of a molecule that has effects on blood-vessel health and function; Remodulin has been approved in the United States for the treatment of pulmonary arterial hypertension in patients with New York Heart Association Class II-IV symptoms; Immunotherapeutic monoclonal antibodies are antibodies that activate patients' immune systems to treat cancer; Glycobiology anti-viral agents are a class of small molecules that may be effective as an oral therapy for hepatitis C or other infections, and Telemedicine involves portable digital devices that enable physicians to remotely monitor patients' bodily measurements. UTHR - United Therapeutics $23.84 "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 22.5 FUH RX 312 0.35 22.15 10.4% 1.6% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ DIGE - Digene $36.24 *** Trend Reversal? *** Digene (NASDAQ:DIGE) develops, manufactures and sells proprietary gene-based testing systems for screening, monitoring and diagnosis of human diseases. Its primary focus is in women's cancers and infectious diseases. The firm has applied its proprietary Hybrid Capture technology to develop a unique diagnostic test for human papillomavirus, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. In addition to its HPV Test, the company's product portfolio includes gene-based tests for detecting chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus. DIGE - Digene $36.24 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 QDG FH 819 0.30 40.30 6.9% 0.7% __________________________________________________________________ MDCO - The Medicines Company $29.13 *** Sell-Off Underway! *** The Medicines Company (NASDAQ:MDCO) operates as a pharmaceutical company selling and developing products for the treatment of hospital patients. MDCO acquires, develops and commercializes biopharmaceutical products that are in late stages of development or have been approved for marketing. The company began selling Angiomax, its lead product, in U.S. hospitals in January 2001 as an anticoagulant replacement for heparin. MDCO is developing Angiomax for additional potential hospital applications as a procedural anticoagulant and for use as a treatment of ischemic heart disease. MDCO - The Medicines Company $29.13 "SPECULATIVE" PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUN 30 MQL FF 7 0.70 30.70 15.5% 2.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... 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