The Option Investor Newsletter Sunday 06-27-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: Tick, Tick, Tick Futures Market: See Note Index Trader Wrap: SUMMER DOLDRUMS Editor's Plays: Got Cash? Market Sentiment: Deadline June 30th Ask the Analyst: Another quarterly rebalancing (update) 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 6-25 WE 6-18 WE 6-11 WE 6-04 DOW 10371.84 - 44.57 10416.4 + 6.31 10410.1 +167.18 + 54.37 Nasdaq 2025.47 + 38.74 1986.73 - 13.14 1999.87 + 21.25 - 8.12 S&P-100 549.75 - 5.06 554.81 - 0.09 554.90 + 7.82 + 1.95 S&P-500 1134.43 - 0.57 1135.00 - 1.47 1136.47 + 13.97 + 1.86 W5000 11073.60 + 39.48 11034.1 - 11.83 11045.9 +109.64 + 9.95 SOX 478.91 + 25.83 453.08 - 23.20 476.28 + 5.37 - 17.95 RUT 587.70 + 17.16 570.54 + 1.42 569.12 + 1.37 - .53 TRAN 3164.18 + 95.61 3068.67 + 43.96 3024.71 + 32.43 + 44.27 *************************************************************** Tick, Tick, Tick by Jim Brown While most Americans are oblivious to the coming events the clock continues to count down to June 30th. Whether it will pass as a major calendar event or pass quietly like a mini Y2K is yet unknown. The volume of press the events are now getting should go a long way toward making them anticlimactic. Investors, if you believe the talking heads, are sitting on pins and needles worrying about Wednesday's events. Personally I think Friday's Jobs Report will be more critical but you never know. Dow Chart - Daily Nasdaq Chart- Daily Russell-2000 Chart - Daily In the economic arena investors received another blow when the final GDP for Q1 came in lower than expected at +3.9%. This was less than the 4.4% estimate and the last revision. This shocker contained offsetting components. Corporate profits were revised up to +1.7% from the +1.2% reported in the last revision. That is good news but there was an offsetting entry. The PCE deflator, a key inflation gauge used by the Fed, jumped to +2.0% from the prior +1.7%. The GDP price index was also revised up to +2.8% from +2.6%. It seems the inflation threat is increasing and the economy is slowing. This is bad news for the Fed and could put them in a bind when they make their rate decision on Wednesday. Business inventories were revised down to $25.5B from $28.2B. The bulk of the downward GDP revision came from a larger than expected trade deficit at -$535.6B. This was a $10B increase from the prior revision. The Michigan Consumer Sentiment did rise as we expected but only slightly to 95.6 from the preliminary 95.2. This was more than a +5 point jump from May's 90.2. If you recall May saw a -5 point decline from April and the June bounce has now completely erased that drop. We speculated at the time that the Iraq prisoner scandal had depressed the May responses. Rocketing gas prices also impacted consumer wallets. It appears those problems have passed. As I suspected on Thursday the Existing Home Sales roared higher than consensus estimates and set a new record of 6.8 million units. This was substantially over estimates and the 6.63 million units in April. For the same reasons I wrote about on Thursday the turnover in existing homes is ripping along at the same hot pace as new homes. Each move to a new home vacates an existing home and the ripples behind the scenes begins. Each time a high-end buyer upgrades it produces a series of vacancies/sales at lower levels. Firming consumer confidence/sentiment is helping promote the current wave of upgrades. Including new home sales the annualized pace of total home sales surged past the eight million mark for the first time ever in May. The big news of the day was not the economics although a low GDP and negative Durable Goods did nothing to help stocks. The big news was the Russell shuffle at the close and it was nothing like anyone expected. Normally the Russell tanks into the close as fund managers sell the stocks leaving the indexes and buy the new stocks that will be in the indexes as of Monday. Surprise, surprise! The Russell failed to see any serious selling during the day despite constant conversations on stock TV about the possibilities. Just before the close, around 3:30, the Russell begin to climb, not just climb but accelerate into a vertical spike. The Russell posted a gain of +8.65 for the day and the Dow went out at -71 due to extreme volatility related to the rebalancing. This is crazy. The Dow closed at 10443 on Thursday and is showing a 4:PM close of 10412 for Friday. However, due to extreme after hours volatility right at 4:PM the after hours settlement is printing 10371 for a -71 loss. Needless to say there will be some serious volatility at the open on Monday. Major drops in GE, -1.00 at the close, and several other Dow stocks tanked the Dow instead of the Russell. Dell moved +1.00 after the close. Somebody needs to reevaluate their computer models if stocks not really involved in the rebalance got thrown this severely out of whack. The normal pattern was supposedly disrupted by the lack of hedge fun participation according to one analyst. The current lack of interest in the market and the pending news events prompted many hedge funds to simply pass on trying to arbitrage the trade. Many funds were reported to have legged out of the deletions and into the additions over the last two weeks instead of doing the normal Friday dump and buy. Whatever the reason it appears there was a substantial short contingent in anticipation of the normal routine and that routine was broken. Shorts found themselves in a squeeze with nobody dumping stock and once the short covering began it skewed the delicate market balance into a serious imbalance. On the charts the Dow is showing a solid stop at 10400 and a close at 10412. With the after hours imbalance we have no idea where this will resolve on Monday. I feel the 10400 level is the current support level and it held up very well on Friday. However, for the third consecutive day the Dow rebounded to 10487 and failed. It just can't seem to get to the strong resistance at 10500. With support at 10400 and resistance at 10500 we are looking at a very tight range next week while we wait for the Wednesday events. If the after hours volatility stands then I would expect that range to expand to 10360 to 10500. We could easily trade there through Wednesday except for several external factors. The Fed meeting has become a non-event. More than 25 points have already been priced into the market and with the two weak reports, GDP and Durable Goods, and the high Jobless Claims the Fed is back in the hot box. They have gone out of their way to prepare the market for a rate increase and yet the economy is not holding its prior pace. On the other side of the coin it appears inflation is rising on all fronts. The Fed is trapped and has to raise rates and a 25 point hike should be market positive. The uncertainty will be gone and a calming statement with the hike could put the bond junkies at peace until after the election. Bottom line, the Fed meeting should not have any negative impact on the market. The Iraq turnover has been cussed and discussed so much that everyone expects the worst and anything short of a Saddam escape should be ignored. The new Iraq officials are talking a good game and everybody knows there will be numerous attacks. I believe this is already priced into the market. I do not believe we will see any event that will cause us to tank except an event on U.S. soil. We saw 75 deaths and nearly 400 injured in the big attack this week and the market barely blinked. As one reporter put it on Friday, Iraq will revert to prime time next week and while we are not sure they are ready for the spotlight even the bad side will not be anything we have not seen before. The more they exaggerate the event the less impact it may have on the markets. Traders tend to glaze over after days and days of the same news. On the positive side this is the end of the quarter and retirement funds will be flowing. Some analysts think most funds are heavy in cash because they were waiting for the June implosion from the convergence of events. With no implosion and the events upon us and priced in those funds will want to put the money into stocks before the quarter end statements. With more cash about to hit those retirement accounts this should accelerate this need to invest. This should provide a positive bias into Wednesday's close. Conventional wisdom suggests we are going sideways until after the June 30th events. I have been buying this argument myself up until last week. When I started seeing the bullish factors lining up a week ago I began to reevaluate this outlook. Friday's action convinced me we still have more potential to move higher than lower next week. Of course any material event not currently contemplated could change that in an instant but that is my view today. To expand on this thought process I think the longer term view is the key. By longer term I am thinking three weeks. I have to clarify that because "longer term" means different things to different people. My longer term view is a post Fed rally into the holiday weekend and then a continuation of that rally for the week after the holiday. This will set us up for the Q2 earnings and the Q3 guidance. Once we get to July expiration all bets are off for the rest of the summer. One of the potholes in this yellow brick road is the Nonfarm Payrolls next Friday. The current consensus for the June jobs gain is +275,000. This is very strong for a summer jobs report. John Challenger was interviewed on Friday and he said employment was slowing. According to his surveys 69% of corporations did some hiring in the first six months of 2004. For the next six months the number of firms considering hiring drops to only 44%. Also the pace of hiring is slowing. Corporations have staffed up and now they are only looking at filling the vacancies rather than a new wave of additions. This view along with some of the slowing employment components from the various manufacturing surveys suggests the next Jobs Report could be a disappointment. That report is next Friday. But, depending on what the Fed says on Wednesday it could be completely ignored. For Q2 earnings we have had very few warnings and also very few guidance upgrades. Racing into the earnings cycle with no material earnings news could have a dual impact. No news could be good news for stocks as all the optimists line up at the buyer window. This allows us to speculate about how good things might be without really having any evidence to back it up. That sets us up for an earnings challenge for the last two weeks of July if there is no positive news from the early reporters. Most analysts expect a deceleration of earnings and an increasing failure to hit the high bar as we near 2005. In fact 2005 estimates are positively anemic compared to the last two quarters. This will put added emphasis on the Q3 guidance, especially in front of a tossup election. Traders will be looking for a reason to stay in the market not necessarily a reason to exit. To net all this out into a trading plan for next week I would again suggest buying the dips in anticipation for a retest of the 10500 resistance level. We may not hit it until after the Fed decision but I suggest you plan your trades for the eventuality. With the high volatility at Friday's close there is no telling where we will open on Monday. The Dow is showing a close at 10371 based on the after hours settlement. Using the 10360 support I mentioned earlier I would look for a long entry on a rebound from that level. Should the market gap up in a correction from the Friday volatility skew I would probably look for another dip to enter. Try to get in as close to the 10360-10400 range as possible. The risk on a long entry is the extended Nasdaq at 2030. This is the beginning of a strong resistance range for the Nasdaq and a level that could produce some profit taking. 2050-2070 is the next major resistance. The Nasdaq could see an additional bounce on Monday as funds complete their Russell purchases. Quite a few funds will normally wait until after the volatility event to enter the new stocks. This could provide support for the Nasdaq if not an outright upward bias. I hope I have given you a general idea of what may happen but please realize this will be an event motivated week. These events may be already priced in but there is always the potential for the unexpected. For instance Bush is out of the country and could try to sneak into Iraq for the changeover. A truck full of explosives was reportedly found in a Turkey airport on Friday. An airport Bush will use this weekend. On Friday an air strike in Fallujah knocked al-Zaqawi to the ground with a near miss but he was helped into a car and escaped. A direct hit could produce a significant market bounce. The Fahrenheit 9/11 film opening this weekend could start something and change the entire election balance. I hope you get the picture that this is a critical week and the picture could change in a heartbeat. Plan your trades including your exits and trade your plan. Don't get married to your market bias, divorce is painful. 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 ******************** SUMMER DOLDRUMS By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – I thought that we would see some modest further upside gains in the S&P related indices – we did – but the subsequent fall to back below the prior highs from early this month, is bearish. Unless the S&P 500 (SPX) can get, and stay, back above this prior peak at 1142, this market segment will likely drift sideways to lower. The tech heavy Nasdaq (COMP) – hey, fund managers got to find something to buy and Nas stocks have been lagging – rallied to finally achieve an upside penetration of its bearish down trendline. So, tech may get a further bounce, as led by the smaller stocks and seen in the Russell 2000 (RUT)upside progress this past week. However, the related bellwether index for tech, the Semiconductor SOX) Index, has not also achieved a bullish breakout, which it would do if it gets, and stays, above 480 (Fri. close: 478.9), so I'm watching this level as key to whether there is going to be much sustained upside follow through in tech. The market is hanging in, but further upside progress seems stymied – not a good situation for index option traders - unless you are selling premium or shorting calls and puts I suppose. FRIDAY'S TRADING ACTIVITY – THE NUMBERS – The Standard & Poor 500 Index (SPX) was off 6.3 points (-0.6%) to close for the week at 1,134.3, which was basically unchanged from the prior weekly close. The Dow 30 (INDU) finished down 71.9 points (-0.7%) to 10,371.8. For the week, the Dow was down just under a half percent. The Nasdaq Composite Index (COMP) rose 9.9 points on the day (+ 0.5%), closing at 2,025.47. The Nasdaq was up nearly 2% on the week and so bucked the trend of the S&P market group. There is now a clear cut break out of the COMP (and in the Nas 100 – NDX) above its January – April – early June down trendline. By the way, Nasdaq bellwether Microsoft (MSFT) has failed to achieve upside follow through after its prior week's gains, pointing up its possible vulnerability to starting to fall again – a possible bearish wedge pattern was noted in my Trader's Corner article of a couple days back. There is more on wedge patterns and a link to this article further on – scroll on. The Dow Transportation Average (TRAN) ran up to 3164, +37 points, which exceeds its high made early this year. The fundamental influence was a decline in oil prices, as August Crude Oil futures fell under $38. I would also say that technically, it might have a lot to do with short-covering buying as well. The Transportation stocks have been favored shorts. In terms of Dow theory, this is an "unconfirmed" new high in TRAN without a similar new high in the Dow 30 or the Dow "Industrials" (Is it time to change the name? – "Manufacturing" even doesn't quite capture the flavor anymore!) Having just written recently, in the past week, about rising "Wedge" type patterns that often signal a reversal ahead, I wonder what is to come – if prices stall from Friday's high point and then fall back under the up trendline or that prior high, look out below – Along with the delusions of crowds, tulip manias, south sea bubbles, there is a tendency (among technical analyst types) to see the things that they have recently been thinking about everywhere. There is a cure for that called reality! The market will soon tell us about whether the outlined "wedge" pattern on the Transports chart above, marks a possible high and even a substantial downside reversal after that. Stay tuned! Anyway, my musings on the subject of Wedges, along with the On Balance Volume Indicator or OBV, is at - http://www.OptionInvestor.com/traderscorner/tc_062404_2.asp THE REPORTS – Prior to the opening, the Commerce Department released its final revision of first-quarter Gross Domestic Product (GDP) showed growth at an annual rate of 3.9%, down from the previous estimates of 4.4% growth. GDP at 3.9% came in well under the consensus estimates of a 4.4% growth rate. This was a significant number and you had to figure that the market would react to it, although the market rallied briefly after the opening when initial thoughts were more about how this would cause the Fed to be measured in raising interest rates. An inflation measure - the personal consumption expenditure price index, rose 3.2%, and this was a bit higher than expectations, which averaged around 3%. The University of Michigan came out with a revision on its June Consumer Sentiment Index, to a slightly higher number – to 95.6 from 95.2, and above the forecasted number of 95.0. Now, the idea that you can forecast anything as wily as a number that surveys the feelings of consumers, seems a bit crazy to me. Hey, people will bet on anything. THE TALK – The rise in consumer sentiment index is a plus, as is the final revision of Q1 GDP downward – from 4.4 to an annual rate of 3.9%. The weaker than expected growth is positive for the market on balance as it makes a half percent hike by the Fed this coming week less likely. All eyes will be on the Fed. Some amount of bad news is already priced into stock prices and the mood with investors is mostly confident about corporate earnings and the health of the economy. OTHER MARKETS – In currency trading, the dollar was higher. The euro was down 0.1% against the buck at $1.216, influenced by data showing business confidence in Germany back on the decline. I don't blame them – if I had their labor costs it would take a lot to get me really confident. The dollar was also up (+0.5%) against the yen, closing at 107.70. Treasury bonds closed the week in plus territory, with prices slightly up and yields down after the week's economic data – which did not influence the prevailing view of a Fed rate hike next week of a quarter of 1 percent. Crude oil futures were down, with the most actively traded nearby August contract off 38 cents to $37.55, which is off nearly 4% on the week. Crude prices were under pressure by news that the Norwegian government will use compulsory arbitration to end a management-labor dispute. Not settling this eventually threatens oil output from Norway, the world's 3rd-largest exporter. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: As I noted already: the move to a new relative high in the 1147 area, an area of some prior peaks, followed by a close well under the most recent top, is bearish. This plus the rising Call-Put indicator of last week that almost got to a 1-day extreme. It seems that there is a bit of a complacent attitude and consensus confidence that stock prices will stay steady and not retreat much. I don't know if that's warranted – the technical action of this past week suggests that buying support may not be strong enough to churn through stock available for sale. It takes strong buying to put em up into new high ground but a lack of buying interest (mostly) will bring em back down. Technically, the S&P 500 (SPX) appears vulnerable to a fall back to at least the 1120 support area. Major support is 1100. Major resistance is around 1160. S&P 100 Index (OEX) – Daily chart: OEX is stalling out just under 560. As with the broader 500 (SPX), I think it'll take more bullish optimism than we see at present to take the S&P 100 up through resistance and a prior series of highs at 560-564. I took the close under 550, after making a new high as a possible bull trap reversal. Stay tuned. The technical outlook turns more bullish if and when OEX can get above 560. Major resistance begins in the 570 area. Some support may be found at 545-546, but better technical support looks to be at 540-541. Momentum is down now according to the 14-day Stochastic. I suggested last week that the overbought/high Stochastic reading at least suggested that the trend at best would be more sideways. All in all, not an exciting market – summer doldrums! Dow Industrials (INDU) Hourly: As anticipated, resistance and selling interest picked up once the Dow got into the 10,500 area. Key technical support continues to look like 10,300. Prices have broken down below the hourly uptrend channel I was working with, and I think prices head lower still. I would say again, unchanged from last week, that an ability for INDU to now hold at or above 10,400 is a tip off as to whether the Dow average can continue higher or has to fall back to 10,300 or bit above to consolidate for another possible rally attempt. Nasdaq 100 (NDX) Index – Daily: Resistance was figured for the 1500 area and that's the key test in the coming week – the ability to stay above 1500 – there are a series of highs there as you can see on the chart below. Based on the lack of a confirming new high in the stochastic model, plus the minor overbought condition and the inability of the semiconductors to rally much, my best guess is that this rally runs out of steam shortly. However, if more buying does come in this week, a first key test ought to be at the prior peak at 1524. 1550 is major resistance. If we get there, buying puts is a "lay up" – pardon my sports metaphor but it would to me look like a high potential trade. Too easy and won't happen I'm thinking – the market is too perverse to hand us these neat (trade) setups – well, sometimes it does. Like, you can most often believe in double tops for example! Nasdaq 100 tracking Stock (QQQ) Daily: The pattern is bullish with the upside penetration of the down trendline with the possibility QQQ could get to 38.25 or higher. First, the stock has to get through the prior highs in the 37.4- 37.5 area, then 37.70-37.9. There was a good move up from the last dip to the 36 area. Those who bought the stock may get a couple of bucks out of the trade. I would protect something and set an exiting (sell) stop at 36.75. The Q's have an advantage of giving a volume trend we can also analyze like any other stock. Notice the declining daily volume trend since the sideways trend since from when the Q's started going more or less sideways. With Wednesday's breakout move, volume has continued to be low – not the best confirming indicator for rally strength. But, at least the On Balance Volume (OBV) turned up since the point of the recent low, which is mildly bullish as to the volume trend – best would have been to have seen a surge in volume along with the rally. Information on the OBV indicator is in the same recent Trader's Corner article that I cited above – Balance Volume Indicator or OBV, is at - http://www.OptionInvestor.com/traderscorner/tc_062404_2.asp 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 ************** Got Cash? We all know which company has the biggest cash hoard stashed away for a rainy day. Microsoft has between $50-$60 billion depending on who is telling the story. Microsoft has been steadfast in their refusal to spend the money. They are rapidly running out of reasons to postpone the event. The current plan according to news releases is for MSFT to announce a plan for the cash before the analyst meeting on July 29th. Various thoughts have been offered including a huge share buyback or a one time cash dividend. Either way it should move the stock either in excitement or disgust. They could announce this plan with their July-22nd earnings. The game plan for this event will be a combination play. Since we do not know which way the stock will move we are going to cover both directions. With MSFT at $28.57 the AUG-$27.50 put is 60 cents and the AUG-$30 call is 45 cents. With a little volatility on Monday we can probably get both for a total of $1.00. This gives us a month of anticipation and a good chance we could see a directional move before the event. MSFT has already moved from $26.50 to $28.50 on the news but the potential is still there, especially if we were to get a strong post Fed rally. The plan will be to weigh our options just before the earnings announcement and decide a course of action. Hopefully it will be clear by then. AUG-$27.50 Put MSQ-TY $0.60 AUG-$30.00 Call MSQ-HE $0.45 Microsoft Chart - Weekly ********************* SEC Going to School Last week I profiled puts on CECO and the continuing problems they were having with allegations of falsifying records and earnings to influence the stock price. CECO was trading at $55 after a -$14 drop the prior two days. Our target was to enter on a bounce to $58 and again on a touch of $60 in anticipation of another drop once the dip buyers ran dry. On Tuesday CECO rose to 59.22 and several readers took advantage of the bounce to enter positions early. I had suggested waiting until Wednesday for the option expiration volatility to ease as well as the -$14 drop to wear off. Those that entered early were richly rewarded. On Wednesday it was announced the SEC was going to formally investigate the allegations based on preliminary findings in their informal review. CECO was immediately knocked for another loss to $50 with a two day decline to just under $41. I tracked the play in the market monitor with a trailing stop and we were hit at $44. If you were one of the lucky ones that entered on the bounce to $58 then you profited from the -$14 drop. Congratulations. *********************** Trouble Across the Pond News Corp Update $35.50 Our News Corp leaps ran into a little trouble this week when the keepers of the indexes issued a ruling that NWS could not be in multiple indexes at the same time if it did complete its move to the U.S. News Corp wanted to maintain a dual listing in both the Australian ASX marketplace and the U.S. NYSE exchange. News Corp is 7.5% of the ASX and by preventing a dual listing those fund managers indexing to the ASX will have to sell their positions as the move progresses. This could pressure NWS in the U.S. as the current NWS ADR price is tied to the current ASX share price. NWS dropped -$1 on the news but company officials tried to ease the blow by restating the reasons for the move. NWS is expected to gain significantly more world wide investor interest as part of the S&P-500 than they would ever see on the ASX. With the billions of dollars indexed to the S&P a NWS inclusion could spike the stock +25% or more just from funds adjusting their holdings. Many funds are currently prohibited from holding ADR shares. This was a long term play in anticipation of the eventual move to the U.S. and inclusion to the S&P. Nothing has changed. The plan is to sell calls against our leaps but with the stock stuck in the $37 range it has not been practical yet. Our time will come. 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 ********************** TYC Call Update $32.57 http://members.OptionInvestor.com/editorplays/edply_052304_1.asp ********************** PVN Call Update $14.85 Providian still hanging in at its 52-week highs and waiting on the Fed news to free the financials once again. http://members.OptionInvestor.com/editorplays/edply_061304_1.asp **************** MARKET SENTIMENT **************** Deadline June 30th - J. Brown This is it. We've finally made it to the final week of June. Wednesday June 30th marks the end of a two-day FOMC meeting and the formal handover of sovereignty from the coalition to the Iraqi people. Alan Greenspan & Co is expected to announce a 25 bps hike in interest rates and Iraq is expected to be an exceptionally dangerous place to be this week. Of course there's no guarantee the Fed won't surprise us with a 50-point hike and there's no guarantee that terrorist in Iraq and/or Saudi Arabia won't shock the world with some sort of unexpected attack. That's why stocks are likely to remain range bound through Wednesday. Actually stocks are prone to trade sideways all week long because Wall Street will also be waiting and watching for the Friday morning non-farm payrolls report. (Although I will note that the NASDAQ looks more bullish than the other indices.) June 30th also marks the end of the quarter. While I don't expect much window-dressing to push stocks higher by month's end we could see some pension-fund buying pressure in early July. As Jim pointed out in the market wrap if we can make it through this week and then the long fourth of July holiday weekend without any terrorist event on home soil we're set up for a rally into the Q2 earnings season. It could be a strong rally too because right now a lot of the sentiment indicators look bearish. A big move higher would catch a lot of shorts off guard. The volatility indices remain near their lows. The ARMS or TRIN index is approaching some bearish signals on some of its moving averages. The latest COT data (below) also offers some interesting insights. Commercial traders have brought their large S&P futures contracts close to parity while slashing their long positions on the e-minis leaving them drastically net short/bearish. Commercial traders tend to be correct on the big moves while small, retail traders march the opposite direction. Sure enough small traders dramatically reduced their short positions on the e-minis leaving them overwhelmingly bullish. Hmm.. maybe things aren't looking so hot and money managers plan on "selling the news" come Wednesday? On the positive side oil prices have continued to slip in spite of rising violence in Iraq and elsewhere. A steady decline in oil will be good news for several cyclical sectors as well as give consumers some relief at the gas pumps. Let's not forget the stellar home sales this week. Surging home sales, both new and used, is a huge boom for the economy because they produce so many ancillary purchases by consumers. They can also be interpreted as a direct vote of confidence by Americans about the economy and the future. Or if you're a cynic the big home sales numbers are just consumers trying to get in before the next up cycle in interest rates hits the market. I continue to suggest trading what you see but make sure you're aware of your risk. We may trade sideways this week but it could be a choppy sideways! ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8871 Current : 10371 Moving Averages: (Simple) 10-dma: 10388 50-dma: 10252 200-dma: 10143 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 962 Current : 1134 Moving Averages: (Simple) 10-dma: 1134 50-dma: 1119 200-dma: 1096 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1180 Current : 1498 Moving Averages: (Simple) 10-dma: 1475 50-dma: 1447 200-dma: 1439 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 15.19 +0.38 CBOE Mkt Volatility old VIX (VXO) = 14.89 +0.50 Nasdaq Volatility Index (VXN) = 18.96 -0.40 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.68 567,925 385,072 Equity Only 0.57 477,164 272,300 OEX 1.03 12,950 13,353 QQQ 1.16 26,644 30,910 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 67.1 + 0 Bear Confirmed NASDAQ-100 45.0 + 2 BULL ALERT Dow Indust. 66.7 + 0 Bear Confirmed S&P 500 64.8 + 0 Bear CORRECTION S&P 100 63.0 + 0 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 0.95 10-dma: 0.99 21-dma: 0.95 55-dma: 1.04 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 1522 1749 Decliners 1273 1244 New Highs 198 133 New Lows 42 44 Up Volume 1078M 1690M Down Vol. 1228M 893M Total Vol. 2354M 2623M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/22/04 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 It looks like commercial traders are hedging all their bets by bringing them close to parity. If the "smart money" doesn't know what direction the S&P is going to go after June 30th how are the "little folk" supposed to know? *grin* Evidently, the retail trader isn't listening. They reduced their shorts to leave them strongly bullish on stocks. Commercials Long Short Net % Of OI 06/01/04 406,665 421,681 (15,016) (1.8%) 06/08/04 397,294 452,904 (55,610) (6.5%) 06/15/04 428,905 444,197 (15,292) (1.8%) 06/22/04 407,842 415,462 ( 7,620) (0.9%) 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 06/01/04 137,100 79,583 57,517 26.5% 06/08/04 158,373 92,794 65,579 26.1% 06/15/04 169,595 115,336 54,259 19.0% 06/22/04 124,985 89,934 35,051 16.3% 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! Maybe commercial traders are just ignoring the large S&P contracts and focusing on the e-minis. They reduced their positions in both longs and shorts but they almost cut their longs in half. That's VERY bearish for the market. Likewise small traders are lockstep in unison going the opposite direction. Commercials Long Short Net % Of OI 06/01/04 325,865 325,274 591 0.0% 06/08/04 367,191 409,246 (42,055) (5.4%) 06/15/04 440,867 522,546 (81,679) (8.5%) 06/22/04 229,290 446,974 (217,684) (32.2%) 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 06/01/04 111,484 90,625 20,859 10.3% 06/08/04 140,191 84,649 55,542 24.7% 06/15/04 216,759 147,247 69,512 19.1% 06/22/04 243,444 58,389 185,055 61.3% 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 are reducing their positions in both longs and shorts for the NDX and bringing them closer to break even. Small traders are following suit bring their shorts and longs close to even. Looks like no one knows what direction the NASDAQ is going. Commercials Long Short Net % of OI 06/01/04 59,944 34,784 25,160 26.6% 06/08/04 64,747 41,178 23,569 22.3% 06/15/04 78,542 54,341 24,201 18.2% 06/22/04 40,397 37,413 2,984 3.8% 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 06/01/04 9,755 30,025 (20,270) (51.0%) 06/08/04 9,716 29,594 (19,878) (50.6%) 06/15/04 15,794 35,880 (20,086) (38.9%) 06/22/04 9,311 9,950 (639) ( 3.3%) 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 Hmm... oddly enough commercial traders are turning more bullish on the Dow Industrials. Looks like they like the upside breakout. Small traders are more pessimistic here. Commercials Long Short Net % of OI 06/01/04 23,397 24,393 ( 996) (2.0%) 06/08/04 24,636 25,821 (1,185) (2.3%) 06/15/04 30,438 24,766 5,672 10.3% 06/22/04 26,808 19,752 7,056 15.2% 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 06/01/04 9,000 6,021 2,979 19.8% 06/08/04 8,325 6,431 1,894 12.8% 06/15/04 13,942 20,953 (7,011) (20.1%) 06/22/04 5,626 7,798 (2,172) (16.2%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** Another quarterly rebalancing (update) It's that time of year. Pull out your brokerage statement, get your calculator out, sharpen up a pencil, as it time to rebalance your investment portfolio. Last quarter (see 04/05/2004 Ask the Analyst) we rebalanced the "Beetles Balanced Benchmark Fund" and boy did that rebalancing pay off and save investors, that diversify across various asset classes, some money. Well kind of. Here's where things stood on our last rebalancing (03/26/04 as we neared the end of the first quarter), where without trying to time the market, we rebalanced, forcing us to "buy low and sell high," whereby rebalancing, and bringing things back to an even distribution across asset classed, we have no other choice but to sell some profits (high), and buy asset classes that declined in value (low). As noted in prior articles. I'm using a non-strategic dollar weighting among asset classes, in part so that we can actually see how the various asset classes are performing, and reacting to various economic and geopolitical dynamics that can impact investments. Beetle's Balanced Benchmark - 03/26/04 Close (Since 12/26/03) On March 26, 2004, the "Beetles Balanced Fund" showed a value of $12,119.47, where strong gains in the fixed income portion of the portfolio (+3.38% for that quarter) had our portfolio a little "overweight" relative to the equity side of things (-1.07%) where we sold some of our fixed income (SHY, IEF, TLT, LQD, PHF) and also sold a small amount of our equity position (SPY) and redistributed those proceed more heavily in the HUI.X, and then the DIA and QQQ. In doing so, here's how things look today, at the June 25, 2004 close, where the "Beetle's Balanced Benchmark Fund" would show a quarterly loss of $459.09, or -3.79% for the quarter. Please note that the portfolio's value does not account for any monthly or quarterly distributions (additions) of interest earned, or dividends paid (from equities). Beetle's Benchmark - 06/25/04 Close (Since 03/26/04 rebalance) The "good news" is that by selling some of the fixed income assets and redistributing that cash more toward the equity side of the portfolio, greater quarterly losses were avoided. The "worst news" came from the AMEX Gold Bugs Index ($HUI.X), which on the 03/26/04 rebalancing, we put a greater portion of cash to work with, and in return, got slapped with 15.75% decline for our effort. With a current "Value" now of 11,655.04, and 10 asset classes represented in the portfolio, I would need to bring all asset classed back to an equal "Cost" of $1,165.55 per asset class. This will have me selling some dollars (dx00y), 1-3 year Treasuries (SHY), Dow Diamonds (DIA), S&P Depository Receipts (SPY) and NASDAQ-100 Tracker (QQQ), then taking those proceeds and buying 7-10-year Treasury (IEF), 20-year + Treasury (TLT), Higher Grade Corporate Bonds (LQD) and "Junk Bonds" as depicted by the Pacholder High Yield (PHF). In brief, with the declines seen in the fixed income, we will be returning a portion of our cash into more income producing assets, where in the first quarter, most of the Treasury holdings were yielding multi-decade low returns. Now... we actually started this exercise, or what many believe to be a PRUDENT policy of investment/portfolio management, as it related to an investors question regarding an article he had read that rebalancing a portfolio can add upwards of 1% in gain to a portfolio per year, if an investor will rebalance their assets from time to time, instead of just "letting it ride." Well.... does it? Here's a comparison of what the Beetles Benchmark would look like if we hadn't rebalanced since 12/26/03, and where we stand today. Again, both portfolios "Value" do not account for an dividend and interest income received. Comparison of Non-rebalance vs. Quarterly Rebalanced The upper portfolio was how the Beetle's Balanced Benchmark Fund would look if we had not rebalanced since 12/26/03. It's value would be 11,649.14 at Friday's close. The lower portfolio is how the Beetle's Balanced Benchmark Fund looks today, having been rebalanced on 03/26/04. Please remember, that in the lower portfolio, or rebalanced portfolio, the P/L % represents the recent QUARTER'S percentage profit/loss of those asset classes. The upper portfolio's P/L % is actually a "benchmark" of how the various asset classes have performed. In BLUE, I have highlighted what should be a very important note to investors as it relates to fixed income investments. I personally know for a fact, that each month, the Pacholder High Yield Fund (PHF) has kicked off a monthly dividend of $0.075 per share. Based on WHEN, and at what COST BASIS, or AVERAGE COST BASIS an investor would have bought such an investment, an actual return would then be calculated. For example: With six months now under our belt, the PHF has distributed $0.45 per share in dividends. Yes, dividends, as this is a closed-end fund that trades like a stock, so while the fund manager is buying and selling "junk bonds," he's distributing the interest income, plus realized gains, less realized losses, to shareholders in the form of a dividend. Now, if using basic math, an investor that did hold a position, taken all at once on 12/26/04 (upper portfolio), could view the PHF holding as having a cost basis of $9.23 - $0.45 (dividends received over 6 months) or $8.78 per share. If moving to the LOWER portfolio, then based on Friday's close, a modest gain of $0.15 per share could be calculated ($8.93 - $8.78 = $0.15), or 1.7% gain. I would also urge investors that do short bonds on their own, most likely for the first time, to understand that when you or I short a bond, the process of shorting has us BORROWING the asset from another investor, where we also OWE that investor interest that the bond generates. On 12/26/04, the 10-year Treasury yield ($TNX.X) was yielding 4.148%. With six months now gone, a trader that SHORTED the 10- year yield would OWE roughly 2.124% in interest payments. In the context of "great gains" from shorting Treasuries, we might put that in the context of a 3.14% decline for the IEF since 12/26/04. A recalculation would be needed for such a comparison if having shorted the 10-year Treasury when it was yielding ($TNX.X) 3.834% on 03/26/04. Almost at the bottom of its 45-year lows, which were found on 03/17/04 at 3.65%. Well.... lets get back to rebalancing. Here's what the rebalanced portfolio looks like, and we're ready to start the third quarter! Beetle's Balanced Benchmark - 06/25/04 Close (rebalance 06/25/04) In PINK is the carryover total, where in BLUE is an equal distribution of approximately $1,165.50 in each asset class. Now.... lets have a little fun, but also learn how the market will add and remove risk, as only an efficient market can do. Here's a real neat feature that Dorsey/Wright and Associates provides with its EQUITY sector bullish percent, where we can actually make some time comparisons. This is an EQUITY sector bell curve comparison, and while the width is not conducive to posting on the web page, will really give us an idea of how "overbought" many sectors were on 12/26/03 (benchmark) and then what took place up to 03/26/04 (first rebalance). Dorsey/Wright Sector Bull Curve Comparisons - 12/26/03-03/25/04 We can see how things were shifted way to the right of the scale (0% to 100%) on 12/26/03, and by 03/25/04 the market was certainly starting to remove some risk (shifting to left). We really only have one "sector" represented in our portfolio as it relates to equities, and that's the AMEX Gold Bugs Index ($HUI.X), which I would equate to the Precious Metals Bullish % (BPPREC) from Dorsey/Wright and Associates. Gold stocks were seeing some risk removed weren't they? Now... here's another time reverence, from 03/25/04 to today. Dorsey/Wright Sector Bull Curve Comparisons - 12/26/03-03/25/04 And here's where the various sectors reside within the sector bell curve. Things have really been spread out over the last six months, that's for sure. I've noted that while the Precious Metals sector is still the weakest equity sector in the bell curve, it is also the most "oversold" at this point, and just this week, a couple of stocks in Dorsey/Wright's precious metals sector saw some reversing higher point and figure buy signals, where last week, only 0-14% of the stocks in that sector showed any type of demand being found. Hey... if the $HUI.X can gain back 1/2 of what it lost last quarter, then perhaps our current rebalancing will pay off! Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- RIMM Research In Motion LtdMon, Jun 28 After the Bell 0.32 SONC Sonic Corp. Mon, Jun 28 -----N/A----- 0.31 ------------------------- TUESDAY ------------------------------ MKC McCormick & Company Tue, Jun 29 Before the Bell 0.29 NPSN NASPERS LTD Tue, Jun 29 -----N/A----- N/A ------------------------ WEDNESDAY ----------------------------- STZ Constellation Brands Wed, Jun 30 After the Bell 0.50 EMMS Emmis Communications Wed, Jun 30 -----N/A----- 0.07 GIS General Mills, Inc. Wed, Jun 30 Before the Bell 0.72 MON Monsanto Company Wed, Jun 30 Before the Bell 0.82 ------------------------- THUSDAY ----------------------------- BMET Biomet, Inc. Thu, Jul 01 Before the Bell 0.36 CAG ConAgra Foods, Inc. Thu, Jul 01 Before the Bell 0.42 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable FBMT First National Bancshares 3:2 Jun 30th Jul 1st KWK Quicksilver Resources, Inc2:1 Jun 30th Jul 1st AXYS Axsys Technologies, Inc 3:2 Jun 30th Jul 1st TEVA Teva Pharm Industries Ltd 2:1 Jun 30th Jul 1st PTEN Patterson-UTI Energy Inc 2:1 Jun 30th Jul 1st CNT CenterPoint Prop Trust 2:1 Jun 30th Jul 1st LPMA Lipman Elect Engineering 2:1 Jul 1st Jul 2nd BPOP Popular Inc. 2:1 Jul 8th Ju1 9th URBN Urban Outfitters Inc 2:1 Jul 9th Ju1 12th -------------------------- Economic Reports This Week -------------------------- This is it! This is the week the markets have been focused on for the past month. Tuesday brings the consumer confidence numbers. Wednesday is the PMI, the FOMC decision on rates and the Iraq handover. Thursday is the ISM index announcement and Friday is the June non-farm payrolls report. ============================================================== -For- ---------------- Monday, 06/28/04 ---------------- Personal Income (BB) May Forecast: 0.5% Previous: 0.6% Personal Spending (BB) May Forecast: 0.8% Previous: 0.3% ----------------- Tuesday, 06/29/04 ----------------- Consumer Confidence (DM) Jun Forecast: 95.0 Previous: 93.2 ------------------- Wednesday, 06/30/04 ------------------- Chicago PMI (DM) Jun Forecast: 64.5 Previous: 68.0 FOMC Meeting - ANNOUNCEMENT on INTEREST RATES IRAQ DEADLINE for formal handover of power. ------------------ Thursday, 07/01/04 ------------------ Initial Claims (BB) 06/26 Forecast: N/A Previous: 349K Construction Spending (DM) May Forecast: 0.5% Previous: 1.3% ISM Index (DM) Jun Forecast: 61.2 Previous: 62.8 Auto Sales (NA) Jun Forecast: 5.6M Previous: 5.7M Truck Sales (NA) Jun Forecast: 8.0M Previous: 8.5M ---------------- Friday, 07/02/04 ---------------- Nonfarm Payrolls (BB) Jun Forecast: 240K Previous: 248K Unemployment Rate (BB) Jun Forecast: 5.6% Previous: 5.6% Hourly Earnings (BB) Jun Forecast: 0.3% Previous: 0.3% Average Workweek (BB) Jun Forecast: 33.9 Previous: 33.8 Factory Orders (DM) May Forecast: 1.5% Previous: -1.7% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-27-2004 Sunday 2 of 5 In Section Two: Watch List: Four-Lettered Candidates Dropped Calls: GDW Dropped Puts: INSP ************************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 ********** Four-Lettered Candidates ___________________________________________________________________ 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. ___________________________________________________________________ KLA-Tencor Corp - KLAC - close: 47.97 change: +0.89 WHAT TO WATCH: The SOX semiconductor sector has seen a pretty strong rebound this week with a 5.5% gain. KLAC has out performed its fellows with a 6.9% gain on the week. Furthermore KLAC has broken out above technical resistance at all its short- term moving averages. Right now KLAC is under resistance at $48.50. A push through this level could be an entry point for bullish positions. We would target a move to the 200-dma near $53.00. However, watch out for potential resistance at its 100- dma and the $50.00 mark. A trade above the $49.00 mark would reverse its P&F chart from a sell signal to a buy signal. Chart= --- Amazon.com - AMZN - close: 51.80 change: +0.78 WHAT TO WATCH: Just four days ago AMZN was on the verge of collapsing through support and heading lower. Actually, shares did trade below support at $49.00 and its simple 200-dma but managed a small rebound by the close on Tuesday. Now the stock has spent the last two sessions trying to breakout over resistance at $52.00. This just happens to coincide with the descending trendline of lower highs dating back to its October 2003 high. A breakout over $52.00 could lead to a run towards its January highs near $57.50. Its bullish P&F chart points to a $75 price target. Here is something else to keep in mind about AMZN. Internet-buddy YHOO is going to report earnings in a couple of weeks. Speculation is building that YHOO is going to have a great quarterly report. Bulls could send YHOO, AMZN and the rest of the Internets higher in a pre-earnings ramp up. AMZN's earnings are expected a week or two after YHOO's. Chart= --- Electronic Arts - ERTS - close: 53.25 change: +1.94 WHAT TO WATCH: Wow! ERTS was having a decent Friday but then shares surged higher toward the close to breakout above the $53.00 mark on stronger than average volume. We see a couple of different patterns in ERTS' daily chart. The easiest to see is the bull-flag pattern, which ERTS just broke out of. The flagpole is suggesting a $57.00 price target. The other pattern is an inverse head-and-shoulders pattern but it's harder to see so maybe we just need to wipe the dust from our monitors. However, if it is an H&S pattern then the target would be $58.00. This could be your bullish entry point. Chart= --- QUALCOMM - QCOM - close: 69.08 change: +0.40 WHAT TO WATCH: Yes, that is an optical illusion on your screen. If you look at QCOM's high for the day it might say $70.05 but we never actually saw it trade above $69.60 all day long. Should QCOM actually break the $70.00 barrier it would produce a new quadruple-top breakout buy signal on its P&F chart with an $81.00 price target. Fortunately, daily technicals are positive again so we might actually see the breakout occur next week. Chart= --- Inamed Corp - IMDC - close: 64.00 change: +1.99 WHAT TO WATCH: IMDC's high for the day is another optical illusion. Some of the charting services available might point to a trade at $70.00. It didn't happen during the normal session. IMDC never traded above $64.50. However, the gain today is a new breakout to a new high as investors moved into IMDC due to it being added to the S&P midcap 400 index. The recent rally also produced a new triple-top breakout buy signal on its P&F chart. This could be an entry point for a true run toward $70.00. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- WLS: $92.50 +0.30 - We highlighted WLS in the MarketMonitor today because the stock has produced an inverse H&S pattern with a triple-digit target. Unfortunately, it's not optionable and stock trading volume is low. BRCM: $45.41 +0.41 - We still like BRCM as a bullish play above the $44.00 level. Target $50.00. GD: $100.60 +1.67 - Wow! After all this time GD has FINALLY broken through resistance at the $100.00 mark. This looks like an entry point to target a run toward $110. YHOO: $34.91 +0.80 - Yet another new multi-year high. Earnings are expected on July 7th. WFMI: 93.43 +2.07 - There appears to be no stopping this train. Only VERY aggressive traders should try and jump on. Bulls are targeting psychological round-number resistance at $100. KMRT: $73.82 +2.75 - Speaking of non-stop trains if you're long this one we suggest you seriously tighten your stop loss. Nothing goes up forever! ************************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 ^^^^^ Golden West Fncl - GDW - close: 107.65 chg: -1.15 stop: 107.00 We think it's time to cut this one loose, even though we never actually opened the play. We've been waiting for two weeks for GDW to trade through resistance and hit our trigger at $110.01 but it never happened. Friday's drop in the banking indices was mirrored in GDW and the group appears stuck in its trading range and/or poised to test recent support. We'll look for new plays elsewhere. Picked on June xx at $xxx.xx <-- See TRIGGER Change since picked: + 0.00 Earnings Date 07/20/04 (confirmed) Average Daily Volume: 694 thousand Chart = PUTS ^^^^ Infospace, Inc. - INSP - close: 35.96 change: +0.79 stop: 36.00 So much for that potential H&S topping formation. INSP bottomed the day after we initiated coverage, having never hit our entry trigger and the proceeded to head higher throughout the balance of the week, finally triggering our stop on Friday. Chalk this one up as a potential play that never gave us an opportunity to get aboard. Given the way it played out, we're thankful for that! Picked on June 22nd at $33.83 Change since picked: +2.13 Earnings Date 7/28/04 (unconfirmed) Average Daily Volume = 1.08 mln Chart = *********** DEFINITIONS *********** ! Please note changes to the Option Chains for new call and put plays. We are no longer listing a "SL" or Suggested Stop Loss on individual options. Most brokers offer the ability to list a stop loss for your option on the underlying stock. All of OptionInvestor.com's directional call or put plays list a suggested stop loss for the stock itself and if the stock trades at or below that stop on an intraday basis we will close any hypothetical play at that time. OI = Open Interest - the number of open contracts outstanding. Last Trade @ = Indicates where the option traded last. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. 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The Option Investor Newsletter Sunday 06-27-2004 Sunday 3 of 5 In Section Three: Current Calls: AHC, CAT, DHR, MERQ, EASI, ETN, PD New Calls: EBAY Current Put Plays: CCMP, ESRX, KSS, MO, OMC, SLAB New Puts: GCI ! 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 ****************** Amerada Hess Corp. - AHC - close: 77.25 change: -0.26 stop: 73.85 Company Description: Amerada Hess Corporation explores for, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Equatorial Guinea, Gabon, Indonesia, Thailand, Azerbaijan, Algeria, Malaysia, Colombia and other countries. The company also manufactures, purchases, transports, trades and markets refined petroleum and other energy products. It owns 50% of a refinery joint venture in the United States Virgin Islands, as well as another refining facility, terminals and retail gasoline stations located on the east coast of the United States. Why we like it: As expected, shares of AHC had a strong move last week after breakout above the $75 resistance level, surging right to next resistance in the $78-79 area. After pulling back on Thursday, the stock consolidated near the $77 level and actually held up rather well in light of the broad market weakness on Friday. While we're expecting to see a bit more weakness before the next upward push, new entries look favorable on a rebound from the $76 level, which should provide solid support, with the 10-dma ($75.14) rising swiftly. We should not see price fall back into the former consolidation range, so our stop at $73.85 should be safe. Traders that would prefer to enter on renewed strength will want to use a trigger over last week's high of $79.10 for entering new bullish positions. We'll continue to target a rally to the $82-83 area for the successful conclusion of the play. Suggested Options: Shorter Term: The July $75 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 August $80 Call, while the more conservative approach will be to use the August $75 Call. Our preferred option is the August $75 strike, as it is currently in the money and should provide sufficient time for the play to move in our favor. BUY CALL JUL- 75 AHC-GO OI=2404 last traded @ $3.40 BUY CALL JUL- 80 AHC-GP OI=1483 last traded @ $0.95 BUY CALL AUG- 75*AHC-HO OI=2447 last traded @ $4.70 BUY CALL AUG- 80 AHC-HP OI=1063 last traded @ $2.15 Annotated Chart of AHC: Picked on June 17th at $74.15 Change since picked: +3.10 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 1.12 mln Chart = --- Caterpillar, Inc. - CAT - close 78.15 change: -0.95 stop: 76.00 Company Description: Caterpillar Inc. operates in three principal lines of business: Machinery, Engines and Financial Products. The Machinery segment designs, manufactures and markets construction, mining, agricultural and forestry machinery. The Engines segment designs, manufactures and markets engines for Caterpillar machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications, and related parts. The Financial Products segment consists primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a range of financing alternatives for Caterpillar machinery and engines, solar gas turbines, as well as other equipment and marine vessels. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of Caterpillar's equipment. Why we like it: When we initiated coverage of CAT following its breakout over the $78 resistance level, we were hoping for a pullback to test that broken resistance as new support. Based on Friday's pullback to near that level, it looks like we're going to get a solid shot at that ideal entry point. The PnF chart is solidly bullish now and carries with it an upside target of $86, which would represent a breakout to new all-time highs. We're setting our sights just a bit lower, looking for a rise to the $84-85 area, that caused the stock to stall both in January and then again in April. Traders that would rather enter on continued strength will want to wait for a push through the $79.50 level before playing. With the 50- dma ($76.83) and 200-dma ($76.80) converged below current price, our $76 stop should have ample protection. Suggested Options: Shorter Term: The July $75 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 August $80 Call, while the more conservative approach will be to use the August $75 Call. Our preferred option is the August $80 strike, as it is currently near the money and should provide sufficient time for the play to move in our favor. BUY CALL JUL- 75 CAT-GO OI=3269 last traded @ $3.80 BUY CALL JUL- 80 CAT-GP OI=4695 last traded @ $0.85 BUY CALL AUG- 75 CAT-HO OI=2962 last traded @ $4.80 BUY CALL AUG- 80*CAT-HP OI=8654 last traded @ $2.10 Annotated Chart of CAT: Picked on June 24th at $79.10 Change since picked: -0.95 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.35 mln Chart = --- Danaher Corp. - DHR - close 50.40 change: +0.24 stop: 48.50*new* Company Description: Danaher Corporation operates in two business areas: Process/Environmental Controls and Tools and Components. The company's Tools and Components segment produces and distributes general purpose mechanics' hand tools and automotive specialty tools. Among the household names they are responsible for are Sears' Craftsman line, Allen wrenches, and NAPA hand tools. The Process Controls division, led by Veeder-Root, makes leak detection systems for underground storage tanks, as well as sensors, switches, measurement devices, and communications and power protection products. Why we like it: It was a strong week for our DHR play, with the stock smashing through the $49 resistance level first thing on Monday and then continuing upward to almost $51 before succumbing to some profit taking at the end of the week. A quick look at the weekly chart shows just how significant this breakout is, as it is a bullish resolution to the continuation flag that has been building since the beginning of the year. Breakout entries can be taken on a move above $51, while those looking for a pullback to support will want to target the $49.50-50.00 area. Note that this support level should receive reinforcement from the rising 10-dma (currently $49.38). We've raised our stop to $48.50 this weekend, which will be below the 20-dma ($48.37) by Monday morning. There is likely to be more resistance found near $53, but our upside target for the play remains a viable target for those willing to wait for it. Suggested Options: Shorter Term: The July $50 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the August $55 Call, while the more conservative approach will be to use the August $50 Call. Our preferred option is the August $50 strike, as it is currently at the money and should provide sufficient time for the play to move in our favor. BUY CALL JUL- 50 DHR-GJ OI=1200 last traded @ $1.40 BUY CALL AUG- 50*DHR-HJ OI= 800 last traded @ $2.15 BUY CALL AUG- 55 DHR-HK OI= 554 last traded @ $0.40 Annotated Chart of DHR: Picked on June 20th at $48.74 Change since picked: +1.66 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 1.55 mln Chart = --- Mercury Interactive - MERQ - cls: 50.60 change: +0.16 stop: 48.50 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: The more time that passes, the better that entry point back down at $48 is looking. After consolidating there for the better part of a week, MERQ kissed the 20-dma (now at $48.56) and launched itself higher throughout last week. We knew there would be some resistance found near $50 and it was encouraging to see the stock steadily push right through that obstacle and end near its high of the day on Friday after a failed selloff to just above $49. We can expect to see solid support now in the $49.50 area, which is being supported by the 10-dma (now at $49.30). Traders that have their eye on a run all the way to strong resistance at $54 can consider new entries above $51, but such an entry doesn't make sense for those traders only seeking a rise into the $52 area. For traders seeking that lower price objective, the best approach for new entries is on another successful rebound from above the 10-dma. We'll maintain our stop at $48.50 this weekend, as it is just under the 20-dma. Suggested Options: Shorter Term: The July $50 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the August $50 Call, while the more conservative approach will be to use the August $47 Call. Our preferred option is the July $50 strike, as it is currently at the money and should provide sufficient time for the play to move in our favor. BUY CALL JUL- 47 RQB-GR OI=2169 last traded @ $3.40 BUY CALL JUL- 50*RQB-GJ OI=2404 last traded @ $1.60 BUY CALL AUG- 47 RQB-HR OI= 45 last traded @ $4.30 BUY CALL AUG- 50 RQB-HJ OI= 233 last traded @ $2.85 Annotated Chart of MERQ: Picked on June 6th at $47.56 Change since picked: +3.04 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.07 mln Chart = --- Engineered Support Sys - EASI - cls: 58.71 chg: +0.04 stop: 55.99*new* Company Description: Engineered Support Systems, Inc. is a diversified supplier of high-tech, integrated military electronics, support equipment and logistics services for all branches of America's armed forces and certain foreign militaries. The Company also serves a variety of commercial and industrial customers (source: company press release) Why We Like It: It's been a bullish couple of weeks for defense stocks with the DFI index hitting new all-time highs. EASI has followed in the DFI's shadow hitting new relative highs but not new all-time highs. EASI needs to breakout over resistance at $60.00 and it's been trying all week. Fortunately, traders have been buying the pull backs and EASI is producing a trend of higher lows that should produce an upside breakout. Consider how close EASI is to our suggested profit target in the $60-62 range we are not suggesting new bullish positions at this time. Traders currently in the play need to decide if they're willing to exit at $60.00 or look for the move to $62.00 or anywhere in the middle. We're feeling optimistic about the higher target with the DFI's intraday rebound from its simple 10-dma on Friday. The DFI has been bouncing from its 10-dma for the last few weeks so the group is poised for another spurt higher. We're going to raise our stop loss to $55.99 but more conservative traders could actually place theirs under the $58 level to reduce their risk. Suggested Options: We are not suggesting new bullish positions at this time. Annotated Chart: Picked on June 20 at $ 56.22 Change since picked: + 2.49 Earnings Date 05/25/04 (confirmed) Average Daily Volume: 297 thousand Chart = --- Eaton Corp - ETN - close: 62.81 chg: -0.04 stop: 59.95 Company Description: Eaton Corporation is a diversified industrial manufacturer with 2003 sales of $8.1 billion. Eaton is a global leader in fluid power systems and services for industrial, mobile and aircraft equipment; electrical systems and components for power quality, distribution and control; automotive engine air management systems and powertrain controls for fuel economy; and intelligent drivetrain systems for fuel economy and safety in trucks. Eaton has more than 54,000 employees and sells products to customers in more than 100 countries. (source: company press release) Why We Like It: If you missed the first entry point on the breakout above resistance at $62.00 here's your chance to buy the pull back. It is very common to see stocks pull back and retest recently broken resistance as support. Looking at ETN bulls can look for a dip back to the $62.50 region (give or take 50 cents) and buy the bounce. We will admit that ETN is overbought with the stock up five weeks in a row so we might actually see ETN trade sideways above $62.00 for a little while. The next leg (sideways or up) will likely depend on the action in the major market indices. Remember that we're playing a head-and-shoulders pattern breakout in ETN. The H&S pattern points to a $71.00 target. We're only going to target a move to $70.00. Currently, the point-and- figure chart, with its new triple-top breakout buy signal, points to an $80.00 price target (for longer-term investors). Traders do need to be aware of ETN's earnings, which are expected on July 13th. If ETN doesn't hit our target by then we'll most likely close the play to avoid any earnings-announcement surprises. Suggested Options: We're going to suggest the July options but the Octobers are available. Our favorite would be the July 60s. BUY CALL JUL 60.00 ETN-GL OI= 322 Last traded @ $3.50 BUY CALL JUL 62.50 ETN-GZ OI= 923 Last traded @ $1.70 BUY CALL JUL 65.00 ETN-GM OI= 325 Last traded @ $0.65 Annotated Chart: Picked on June 18 at $ 62.05 Change since picked: + 0.76 Earnings Date 04/14/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Phelps Dodge - PD - close: 77.73 chg: +1.65 stop: 77.00 *new* Company Description: Phelps Dodge Corp. is the world's second-largest producer of copper, a world leader in the production of molybdenum, the largest producer of molybdenum-based chemicals and continuous- cast copper rod, and among the leading producers of magnet wire and carbon black. The company and its two divisions, Phelps Dodge Mining Co. and Phelps Dodge Industries, employ more than 13,500 people in 27 countries. (source: company press release) Why We Like It: Wow! Sometimes it pays to be lucky. Not in the fact that PD has traded higher these last two weeks. We expected that. No, we're talking about PD trading higher for 9 days straight. Stocks don't move in a straight line. Normally it's 3 days up and 1 or 2 days back or 5 days up and 2 or 3 days back. Seeing PD up 9 days in a row makes us very cautious because we know the pull back is coming. Bulls should be encouraged by the rally, its breakout over resistance at $75.00 and the 100-dma and that it's been powered by better than average volume. We may have to give credit to PD's 2% jump on Friday to Lehman Brothers. For the last 55 years LEH has produced their "10 uncommon values" list with their top 10 picks they believe will out perform the S&P 500 over the next year. That list was announced on Friday and PD was on it. If you're curious the other nine stocks on the list are: CD, CVS, DISH, ITW, KRB, PGR, TEVA, TYC, and UNH. So what do we do now? Our target has been the $80.00 region and PD is within striking distance. Here's our suggestion. We strongly recommend that traders consider taking profits now. The July 70s calls have run from $3.80 to $8.20 and the July 75s have surged from $1.50 to $4.20. However, we're going to hold out hope that PD can keep the momentum alive just a little while longer. We're going to LOWER our OFFICIAL exit to $79.50. That way we can jump out before everyone else does as PD approaches round-number psychological resistance at $80.00. Yet we're also going to significantly TIGHTEN our stop to $77.00 so we can protect a good portion of this move. Suggested Options: PD is very close to our profit target. We are not suggesting new bullish positions at this time. Annotated Chart: Picked on June 20 at $ 71.68 Change since picked: + 6.05 Earnings Date 04/28/04 (confirmed) Average Daily Volume: 2.6 million Chart = ************** NEW CALL PLAYS ************** eBay Inc - EBAY - close: 90.72 change: +1.98 stop: 86.50 Company Description: eBay is The World's Online MarketplaceŽ. Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. Through an array of services, such as its payment solution provider PayPal, eBay is enabling global e- commerce for an ever-growing online community. (source: company press release) Why We Like It: Bulls certainly like to play their "favorites" and near the top of the list is EBAY. The Internet auction giant has been a non- stop train of momentum. Shares are up 250% in the last 21 months and up 39% YTD alone. Some would say the Internet bubble is back with EBAY's P/E reaching 111 but bulls point to its enviable growth rate. A week ago Goldman Sachs issued positive comments on the stock stating their belief that EBAY would continue to out perform. Sure enough in the last four days we've seen EBAY produce a bullish engulfing reversal candlestick while simultaneously rebounding from support at $84.00 and its rising 40-dma. This led to the breakout from its bull-flag pattern and now shares have hit new all-time highs above round-number psychological resistance at $90.00 (on volume 75% above average). Of course this should be nothing new to our readers. We've been commenting and following EBAY's moves in the daily MarketMonitor and our nightly watch lists. We feel the recent technical breakout will coincide with an old- fashioned earnings run. The flagpole on the bull-flag pattern points to a $100 price target. This plays handily into the old market maxim that stocks breaking past $90 tend to hit $100 in the near future. The $100 mark being a powerful magnet for the momentum traders. EBAY could also remain strong as investors speculate on another split announcement. We suspect that EBAY could announce their next split with their earnings report due on or around July 22nd. Currently its P&F chart just produced a new double-top breakout buy signal and points to a $117 price target. We're going to initiate the play with a stop loss at $86.50. Bulls can enter here or on any rebound above the $88.00 mark. More conservative traders may want to use a stop closer to $88. Suggested Options: We're going to suggest the August calls because the July calls will expire before EBAY's earnings announcement. Our favorites are the 90s and 95s, unless EBAY dips back to $88.00 and then the 85s would work nicely. BUY CALL AUG 85 XBA-HQ OI= 981 Current Ask $7.80 BUY CALL AUG 90 XBA-HR OI=4231 Current Ask $4.60 BUY CALL AUG 95 XBA-HS OI=1098 Current Ask $2.40 BUY CALL AUG100 XBA-HT OI= 623 Current Ask $1.15 - gamblers only Annotated Chart: Picked on June 27 at $ 90.72 Change since picked: + 0.00 Earnings Date 04/21/04 (confirmed) Average Daily Volume: 8.3 million 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 ***************** Cabot Micro. - CCMP - close: 28.77 chg: +0.26 stop: 29.51*new* Company Description: Cabot Microelectronics, headquartered in Aurora, Illinois, is the leading supplier of CMP slurries for polishing various materials used in semiconductor manufacturing processes. The company's products play a critical role in the production of the most advanced semiconductor devices, enabling the manufacture of smaller, faster and more complex devices by its customers. (source: company press release) Why We Like It: As you know CCMP is a chemical/slurries supplier to the semiconductor industry. As such it can be affected by big moves in the SOX. We're encouraged that CCMP traded sideways on a week the SOX gained more than 5%. The relative weakness in CCMP continues to look promising and overhead resistance at its simple 40-dma is holding up. Keep an eye on the SOX as a warning beacon. If the SOX surges through overhead resistance at 480 and its 100-dma then CCMP might try to follow. We'd probably consider new short positions in CCMP if it traded back down through $28.00 or $27.85. Or we'd consider new positions now at current levels with our new stop at $29.51. Suggested Options: Our favorite puts for short-term traders are the July 30s. Traders looking for new positions might want to consider the August 30s. BUY PUT JUL 30 UKR-SF OI= 3044 Last traded @ $2.10 BUY PUT JUL 25 UKR-SE OI= 3085 Last traded @ $0.35 BUY PUT AUG 30 UKR-TF OI= 138 Last traded @ $2.90 Annotated chart: Picked on June 13 at $ 29.46 Change since picked: - 0.69 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 3.7 million Chart = --- Express Scripts - ESRX - close: 77.05 chg: +0.98 stop: 77.51 Company Description: Express Scripts, Inc. is one of the largest pharmacy benefit management (PBM) companies in North America. Express Scripts provides integrated PBM services, including network pharmacy claims processing, mail pharmacy services, benefit design consultation, drug utilization review, formulary management, disease management, medical and drug data analysis services, and medical information management services. Express Scripts is headquartered in St. Louis, Missouri.(source: company press release) Why We Like It: (ORIGINAL Thursday Play Description) We like ESRX because the stock is starting to fade after a strong run from under $55 to $80.00 between October 2003 and April 2004. Technically everything is turning bearish. ESRX broke its five- month rising channel in early May but managed another rally back to resistance at $80.00. When ESRX failed to breakout over $80 again this turned into a bearish double-top pattern. Then on June 14th Wachovia downgraded the stock from "out perform" to "market perform" and ESRX gapped down under its simple 50-dma to test mild support at $75.00. Shares of ESRX have since rallied back to fill the gap at $78.00 and are now rolling over again. Its daily technicals (MACD, RSI and stochastics) are all bearish while its weekly chart also shows a new MACD sell signal. Its point-and-figure chart is bearish with a $64 price target. The company had a chance to announce positive stock-moving news at the William Blair & Co 24th Annual Growth Stock conference this morning but whatever they presented failed to inspire investors. We're going to suggest using a TRIGGER at $74.95, which would be a breakdown under the round-number psychological $75.00 mark and its simple 100-dma. Once triggered we'll target a move toward the 200-dma currently at $68.50; of course by the time we reach the 200-dma it may be a bit higher. Our initial stop loss will be $77.51. WEEKEND UPDATE: ESRX did manage to bounce from support above $75.00 and its 100- dma but the rebound began to lose steam in the afternoon and the stock produced a new short-term lower high. We remain un-triggered in this play as we wait for the drop to $74.95. Suggested Options: There are only three weeks left for July options so we're going to suggest the August puts. Our favorite is the August 75s but the 70s look good too. BUY PUT AUG 75 XTQ-TO OI= 1408 Last traded @ $2.05 BUY PUT AUG 70 XTQ-TN OI= 1000 Last traded @ $0.80 Annotated Chart: Picked on June xx at $ xx.xx <-- see Trigger Change since picked: - 0.00 Earnings Date 04/27/04 (confirmed) Average Daily Volume: 733 thousand Chart = --- Kohl's Corp - KSS - close: 43.20 change: -0.40 stop: 44.35*new* 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: Another day, another decline. That seems to be the order of things for KSS and bears are loving it. The stock is down 11 out of the last 12 days. Shares have broken through round-number support at $45.00, at what should have been technical support in its 40 and 50-dma's and volume is better than average on the declines. We feel it's important to reiterate to readers that it's okay to take profits early. The July 50 puts have grown from $3.50 to $7.00 and the July 45 puts have risen from 85 cents to $2.15. KSS is very short-term overbought and overdue for a bounce. Don't let a rebound rob you of your profit. After looking over KSS' intraday chart we suspect the stock could bounce back to the $44.00 region before fading again. Therefore we're going to really tighten our stop to $44.35 to protect a decent chunk of this move. Our goal all along has been a drop to the $41-42 region and KSS is getting close. The $42 level is potential support so we might call it quits and exit if KSS hits $42.00. Be ready. Suggested Options: KSS is getting pretty close to our profit target range. We are not suggesting new bearish positions at this time. Annotated Chart: Picked on June 06 at $ 47.45 Change since picked: - 4.25 Earnings Date 05/13/04 (confirmed) Average Daily Volume: 3.7 million Chart = --- Altria Group - MO - close: 47.80 change: -0.65 stop: 49.50 Company Description: Altria Group, Inc., formerly Philip Morris Companies Inc., is a holding company and the parent company of Philip Companies Inc. The company's wholly owned subsidiaries, Philip Morris USA, Philip Morris International and its majority-owned (84.2%) subsidiary, Kraft Foods Inc. are engaged in the manufacture and sale of various consumer products, including cigarettes, foods and beverages. The company changed its name from Philip Morris Companies to Altria Group in January 2003. Why we like it: We've certainly had our patience tested by MO, as the stock drifted along for close to two weeks in a very tight consolidation pattern. With the move slightly over the 30-dma ($48.32) late last week, it looked like we might be in trouble -- that is until the end of day selloff that took the stock back under $48, along with daily Stochastics tipping over into a fresh bearish cross. Traders that kept the faith and used the recent test of resistance as an entry point may be rewarded next week, with MO looking like it is finally going to roll over and break near support at $47. That breakdown will be the trigger for momentum traders to jump into the fray, seeking a quick plunge down to next support near $45. Maintain stops at $49.50, just over the top of the most recent failed rebound. Suggested Options: Aggressive traders will want to use the July 47 Put while those with a more conservative approach will want to use the July 50 strike. Our preferred option is the July 50 strike, as it is currently in the money and should provide ample time for the play to move in our favor. BUY PUT JUL-50*MO -SJ OI= 1344 last traded @ $2.40 BUY PUT JUL-47 MO -SW OI=12811 last traded @ $0.85 Annotated Chart of MO: Picked on June 15th at $47.55 Change since picked: +0.25 Earnings Date 7/20/04 (unconfirmed) Average Daily Volume = 6.63 mln Chart = --- Omnicom Group - OMC - close: 77.02 change: +0.88 stop: 79.75 Company Description: Omnicom Group is a marketing and corporate communications company. The company has grown its strategic holdings to over 1500 subsidiary agencies operating in more than 100 countries. OMC's wholly and partially owned businesses provide communications services to clients on a global, pan-regional and national basis. The company's agencies provide an extensive range of marketing and corporate communications services, including advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, business-to-business advertising, employee communications and environmental design. OMC also provides field marketing, healthcare communications, marketing research, promotional marketing and sports and event marketing. Why we like it: Just as we hoped it would, OMC slid lower during the early part of last week, confirming the long-term H&S pattern with a breakdown under the $76 neckline. Also as expected, the stock found solid support at the $75 level and rebounded strongly on Friday to close back over $77 and right on that broken neckline. Note that Friday's intraday high was perfectly capped by the 10- dma ($77.34). While we'd like to think OMC will roll over from here, that doesn't seem a reasonable expectation with the daily Stochastics only part way towards overbought. More realistically, we should be looking for a continued rebound up into the $78.00-78.50 area for a retest of broken support. With the 20-dma ($79.01) and 30-dma ($79.13) steadily approaching the top of that resistance zone, any upside move over that level is going to be difficult to achieve. We'll continue to target entries on a rollover from that resistance area, expecting the downtrend to reassert itself and drive OMC down towards the $70 area. Momentum traders will now want to see a break of the March low at $74.65 before jumping aboard. Note that our stop is currently $79.75, which is just over the 50-dma ($79.74) and solidly over what should be strong resistance. Suggested Options: Aggressive traders will want to use the July 75 Put while those with a more conservative approach will want to use the July 80 strike. Our preferred option is the July 80 strike, as it is currently in the money. BUY PUT JUL-80*OMC-SP OI=3589 last traded @ $3.60 BUY PUT JUL-75 OMC-SO OI= 939 last traded @ $0.80 Annotated Chart of OMC: Picked on June 20th at $77.14 Change since picked: -0.12 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 1.09 mln Chart = --- Silicon Labs. - SLAB - close: 47.27 change: +0.01 stop: 48.50 Company Description: Silicon Laboratories designs, manufactures and markets proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. Why we like it: What a roller coaster ride SLAB has been on in the past week. Starting out with a strong break under the $44.90 entry trigger, the stock plunged below $43 only to turn on a dime and rally strongly higher, coming within 2-cents of tapping our stop on Thursday before pulling back under the 20-dma ($48.19) and 30-dma ($48.05). So we're left with the question of whether the breakdown was a bear trap or if this current rebound is a bull trap. The Semiconductor index (SOX.X) isn't really providing any guidance, as it is above the $470-475 area, but not by much, keeping the larger downtrend intact. Until we see more significant signs of renewed weakness, it is hard to justify new entries into the play. That doesn't mean that it wouldn't work well for aggressive traders willing to do so, but it is a very aggressive move in light of the strength with which SLAB ended the week. A more prudent approach will be to wait for a break back under $46.50 before playing. We still have our sights set on a decline down to the $39-40 area, but first we need to see this rebound fail. Maintain stops at $48.50, as a move through that level will confirm that we're on the wrong side of the trade. Suggested Options: Aggressive traders will want to use the July 45 Put while those with a more conservative approach will want to use the July 50 strike. Our preferred option is the July 50 strike, as it is currently in the money. BUY PUT JUL-50 QFJ-SJ OI= 675 last traded @ $3.70 BUY PUT JUL-45*QFJ-SI OI=4993 last traded @ $1.10 Annotated Chart of SLAB: Picked on June 20th at $44.99 Change since picked: +2.28 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.14 mln Chart = ************* NEW PUT PLAYS ************* Gannett Co - GCI - close: 84.95 change: -0.32 stop: 86.05 Company Description: Gannett Co., Inc. is a leading international news and information company that publishes 101 daily newspapers in the USA, including USA TODAY, the nation's largest-selling daily newspaper. The company also owns more than 500 non-daily publications in the USA and USA WEEKEND, a weekly newspaper magazine. Gannett subsidiary Newsquest is the United Kingdom's second largest regional newspaper company. Newsquest publishes more than 300 titles, including 17 daily newspapers, and a network of prize-winning Web sites. Gannett also operates 22 television stations in the United States and is an Internet leader with sites sponsored by its TV stations and newspapers including USATODAY.com, one of the most popular news sites on the Web. (source: company press release) Why We Like It: It's been a tough week for advertisers and newspaper companies. The industry has already been struggling because a much- anticipated rebound in the advertising market, fueled by big spending for political ads and the upcoming Olympics, is behind schedule. Now the sector is sinking after it was reported this past week that two major newspapers in the Chicago and NY area have been lying about their circulation numbers. Fears that over-inflated circulation results are an industry wide problem have hit GCI, the producer of USA Today. Furthermore GCI recently reaffirmed its earnings guidance for $1.28-1.30 per share, which is essentially under current analysts' estimates at $1.30. Technically GCI doesn't look so hot either. The stock broke through technical support at its 200-dma two days ago. Volume has been very big on the last three days of declines suggesting there is some momentum behind the move. GCI's point-and-figure chart shows support at $84.00, which matches with support on its daily and weekly charts. A breakdown under $84.00 would produce a quadruple-bottom breakdown sell signal on its P&F chart. So we're going to use a TRIGGER at $83.95 to open the play. Our initial target is only $80.00 but we'll re-evaluate as GCI nears $80. We'll use an initial stop loss at $86.05. We need to see the breakdown soon because GCI is set to report earnings on July 13th and we don't plan to hold over the announcement. Suggested Options: While we plan to exit before the July options expire we'd still prefer to play the August puts. Our favorites are the August 85s. BUY PUT AUG 85 GCI-TQ OI= 170 Current Ask $2.30 BUY PUT AUG 80 GCI-TP OI= 11 Current Ask $0.75 Annotated Chart: Picked on June xx at $ xx.xx <-- See TRIGGER Change since picked: - 0.00 Earnings Date 07/13/04 (confirmed) Average Daily Volume: 957 thousand Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. 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The Option Investor Newsletter Sunday 06-27-2004 Sunday 4 of 5 In Section Four: Leaps: Anticipation Option Spreads: Covered Call Trading – The Reality – Part II ************************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 ***** Anticipation By Mark Phillips mphillips@OptionInvestor.com It seemed so far away when we first started discussing the events about to unfold this week - the FOMC meeting and the Iraq handover - but here they are in the week straight in front of us. As expected, the markets have had a hard time gaining any real traction ahead of these major events, but in 3 more trading days, the rubber is going to hit the road and we'll see whether the bulls or the bears have the upper hand. In my opinion, it's a foregone conclusion that the Fed will raise interest rates by 25 basis points in Goldilocks fashion. There's been enough jaw-boning about the "measured approach" that will be taken that anything more than 25 basis points will be too much. On the other hand, if the Fed were to fail to raise rates at all, we would collectively be asking ourselves "what's wrong with the economy that the Fed doesn't think it can handle even a minor rise in rates?". The die is cast and I think that's what we've been seeing in these halting upward moves in the market. Investors have come to the same conclusion and expect rates to rise by the token 25 basis points. Any deviation from the expectation and I would expect to see the broad market sell off. The Fed has put so much effort into guiding investors' expectations, that I think a surprise is unlikely. The major indices have begun to inch over solid resistance, gold has pushed over the $400 level and the yield on the 10-year Note is threatening to break back under the key 4.6% level after putting in a double top near 4.9%. To me, this suggests that the stock market will go up after the meeting, gold will resume a bullish trajectory and bonds will drop. The action in the bonds is what I think is the most interesting. After breaking out on fears of rising short-term rates, it appears the bond traders are having second thoughts. I think this is a direct reflection of the admission that perhaps bonds have moved too far, too fast for what is now the perceived rate of rising rates from the Fed. Make no mistake, rates are going to be heading higher and we will see the 10-year Note push through the 4.9% level in the months ahead, but perhaps not until we see a significant pullback first. The only thing that could prevent bonds from heading higher over the balance of the year is if investors start to get a whiff of that nasty "Deflation" monster, which I view as unlikely, but still possible. So with equities, gold and bonds giving us a hint as to where they're headed in the near-term due to clear expectations of what the Fed will do this next week, why hasn't it happened with any real force? That's the big question and the answer comes in two parts. First off, in concert with the FOMC meeting, we have the Iraq handover, and with the escalation in violence as the date approaches, there's clearly some concern that the transition will not proceed smoothly. Additionally, we have the 4th of July weekend coming up right afterwards and that is potentially a ripe target for terrorists bent on causing madness and mayhem. In short, while the decision on interest rates is important, there's still a great deal of uncertainty in investors' minds as to what the immediate future holds. We see that manifested in the lack of conviction in any moves in any broad market, whether it be related to stocks, bonds, currencies or commodities. Combine those immediate factors with the fact that there are other notable events throughout the summer (Olympics and the Republican and Democrat conventions) and there is a dearth of motivation to take big positions. Of course, we're already well within the usual summer doldrums, but I have a sneaky suspicion that this summer won't turn out to be the sleeper that so many market participants expect. That opinion won't buy you much though, as it is only one man's view, however well-considered that opinion might be. So once we get past the events of next week, what might create the catalyst to heat things up? How about earnings? That's right, it's time to get that cycle started again and with the dearth of meaningful warnings, what might that tell us? Reading between the lines, I think we can say that our corporate chieftains are pretty comfortable with earnings estimates and are looking for a solid performance for this earnings cycle. I dare say investors have already come to that conclusion and it is the near-term event risk that has them on the sidelines. One aspect of the market that has caught my attention over the past couple weeks is the very strong action in the Internet sector. Have you looked at the charts of EBAY, YHOO and AMZN lately? I can't believe I missed Watch Listing EBAY, but the recent dip was a classic bullish entry point near the $85 level. Check out that PnF chart, and it gives an upside target of $117!! How about YHOO pushing to fresh multi-year highs and AMZN on a PnF Buy signal again with an upside target of $75. I'm not ready to put any of them on our list of play candidates, but I do view this as a sign of investor sentiment. These stocks are not particularly sensitive to interest rate policy and as we've seen in the past, not particularly vulnerable to geopolitical events. Could it be that they're giving us the early hint that the market will head higher through the summer months, barring any big surprises? But there is one issue that is causing me some concern on the economic front. It is the relative action in the CPI and PPI reports. Let's deal with the raw numbers, rather than core numbers, as I think it is silly to remove such things as food, energy and housing from the equations -- these are obviously important factors. Over the past 3 months, we've seen the PPI rise by +0.5%, +0.7% and most recently +0.8%. Let's forget about the implications of projecting that out to an annual rate of inflation and instead just note that we've seen a total increase of +1.8% over the past 3 months. Now let's look at the CPI reports over the same period of time. The CPI rose +0.4% in March, followed by +0.3% in April and most recently +0.6% in May for a total rise of +1.3% over the past 3 months. Now let's review what these reports actually represent. The PPI is the Producer Price Index, which represents the rise (or fall) in the cost to producers of finished goods. The CPI is the Consumer Price Index, which represents the rise (or fall) in the price of goods we as consumers pay. If PPI is up +1.8% in the past 3 months and CPI is up +1.3%, it doesn't take a genius to figure out that producers have not been able to pass all their additional costs on to the consumer. The bottom line there is that profits will be squeezed. That extra 0.5% has to come from somewhere, doesn't it? That, in a nutshell is my concern -- why aren't the costs being passed on to the consumer? Is competition that stiff? The corollary to that question is whether we're looking at a strong rise in consumer prices in the months ahead, as producers play catch up? We all know that consumer expenditures make up roughly 70% of U.S. GDP. Could it be that we can't afford to pass all the additional production costs on to the consumers for fear that it will cause spending to slow down and thus threaten the strength of the economic recovery? I don't have the answers, but I do have a lot of questions and that keeps me cautious when trying to interpret the macro-economic data trends. Alright, that's enough of the big picture -- now let's see what is happening in our individual plays and play candidates. With the notable exception of AIG (which I think is waiting on the FOMC decision) our bullish plays are actually doing quite well. Portfolio: HD - It certainly appears that HD is waiting for some direction from the FOMC meeting next week before making a directional move. The stock continues to wander around in the $35-36 area, with neither the bulls or the bears able to make any significant progress. We'll stay the course here, with our stop up at $38, but my expectation is that this one will not work out in our favor. Traders unwilling to take the risk of a significant adverse post-FOMC move may just want to book the loss near current levels and look for a more favorable place to put the capital to work. As we've been saying for more weeks than I care to count, a break below $31 will be necessary to turn that PnF chart bearish. The way the stock continues to hug the upper channel line suggests to me that an upside break is brewing. CHK - After several failed attempts, our Natural Gas play on CHK has really gotten some traction and last week the stock actually touched the $15 level. I like the way volume appears to be rising along with price and the stock looks like it has finally begun the bullish move that will take it up to next resistance near $16.50. Note how price actually broke above the top of the 4-month rising channel last week. New positions at this juncture don't really look favorable, but those positions already established appear to be in good shape. The weekly chart is particularly encouraging, as it shows the stock having broken above more than 6-months of horizontal consolidation, with the Stochastics oscillator making another bullish reversal from well above oversold territory. We're nearing the point of having a double on this play since our entry point, so I would suggest that a rally up to the $16.00- 16.50 area should be used to harvest gains and then perhaps look to re-enter on the next pullback near support. LUV - As mentioned last weekend, LUV certainly looked poised for an upside breakout, with the strength in the Transports starting to have a positive effect. It took until Friday's deal was struck with the flight attendants to provide the catalyst for the breakout, but then the stock really took off. The first leg of Friday's rally took the stock over the 200-dma, and then upside continuation pushed it even higher, ending right at $17 on huge volume. Recall that we were expecting the heavy travel season to give this play an upside boost and it certainly seems to be playing out that way. We should expect to see some resistance come in near the $18 level and then we'll see if there's enough thrust for a rally towards strong resistance in the $19.50-20.00 area. Raise stops to $15 this weekend, which is just under the 50-dma, as well as exactly the intraday low from mid-June. TYC - While TYC didn't exactly end the week on a positive note, the stock did manage another weekly gain. Of course, it wasn't any great surprise to see the pullback from the first foray over the $33 level, as the stock ran into the 200-week moving average. I would expect to see a dip into the $31-32 area before TYC is able to once again return to its upward trajectory. With our initial target at $35 and our longer-term objective up at $40, we don't want to crowd our stops too much yet. But it does make sense to raise the stop to $29.50, which is just below both the 50-dma (29.83) and the lower boundary of the rising channel. AIG - With investors clearly fixated on the impact of rising interest rates, AIG is the lone laggard on our bullish playlist, as it continues to vacillate about our $72 entry point. We still have the potential for a H&S top being built, but at the same time, this could simply be a sideways consolidation before the stock delivers a strong upside move in agreement with the picture offered by the PnF chart (target = $94). We've taken our position and now we're waiting with the rest of the market to see what impact next week's FOMC decision will have on the stock. With $4 of downside risk and more than $20 of upside potential, the risk to reward scenario is quite favorable. Maintain stops at $68, which would be a new PnF Sell signal, invalidating our current $94 target. Watch List: GM - Another week of consolidation in the $47-48 area is about what we should have expected from our potential play on GM. Afterall, the company derives the bulk of its profits from the Financial arena, so next week's interest rate decision should be pivotal. We could see the stock surge or plunge following the FOMC meeting, but I'm personally expecting an upside move. What we can't gauge is whether it will be strong enough to propel GM through the top of its long-term descending channel or if it will offer a delectable entry point and rollover right at the top of the channel. I'm quite content to keep the play on hold, pending the outcome of next week's trading action, especially with weekly Stochastics still pointing straight up after having given us very clear bullish divergence. OMC - Last week's price action certainly gave us some nice confirmation for our potential play on OMC. The stock continued its weakness early in the week, breaking the long-term H&S neckline near $76.50 and then finding support right at the $75 level. The ensuing bounce has price action headed towards what should be very strong resistance in the $79-80 area, with a fresh bearish cross of the 50-dma and 200-dma. The PnF chart is currently bearish to the $69 level, but our H&S pattern gives us a downside target of $65. With our entry target at the $79-80 resistance level, and our stop at $84, that gives us a very nice risk to reward ratio. Look for that rollover at resistance to provide entry. Radar Screen: EK - We're actually starting to see a bit of upside action from EK as the stock hints that it might be waking from its long slumber. I took some time this week to more accurately draw my long-term descending trendline, and it now rests right at $27. Oscillator and price action suggests that we'll see a test of that line, quite possibly next week in response to the FOMC decision on interest rates. Despite that potential, I just can't bring myself to move EK onto the Watch List this weekend. The better entry will come on a rollover up near the highs from January and February, but at the same time, that would be a solid breakout over the descending trendline. That leaves us with a mixed picture, which is a strong indication that we ought to leave it alone for now. Perhaps more clarity will emerge in the week ahead. CTX - It took over a month, but we've finally finished the analysis series on the Housing sector and CTX emerged as one of the two most likely candidates for a downside play. But I can't stress enough the importance of remembering that every view we can take of the overall sector is one of continued bullishness. In other words, we don't yet have "permission" to play the downside. But when the sector does crack, we have a very clear benchmark for where to consider a play on CTX. That will come on a breakdown under the $43 level. If we had a bearish view on the $DJUSHB sector, I might have considered adding CTX to the Watch List this weekend, but that's just too big a leap (pun intended) to take ahead of next week's FOMC meeting. Barring any big surprises, look for CTX to make a move to the Watch List next weekend. LEN - I actually like the downside prospects for LEN better than CTX, the reasons for which have been laid out in my recent series on the Housing sector. But with the picture on the daily chart hinting at an upside breakout, it's obviously premature to move this one onto the Watch List. My expectation is that we'll see a near-term upward move towards the $50 level, which will hopefully complete that H&S top formation and then we'll finally see the breakdown below the $41 neckline. What I really like about LEN as a downside candidate is the fact that the modified scale PnF chart is already on a strong Sell signal. As I've mentioned several times lately, next week's decision on interest rates is only the starting point for the final setup we're looking for. NEM - We've been closely monitoring the action in the Precious Metals sector in recent weeks, looking for a sign that it's time to take another shot at a bullish play on NEM. One of the keys we've talked about is needing to see the price of gold move back over the pivotal $400 level and we got that last week. That turned the $5-box scale PnF chart for $GOLD bullish again, with an upside target of $455, which will continue to grow as long as we don't see the price of the yellow metal put in a 3-box reversal. We've also looked at the alternate scale PnF charts on the XAU and HUI indices, and are seeing some encouraging signs there as well. XAU is already bullish, with its upside target of $120, while $HUI is also bullish with an upside target of $258. Note that those targets (if achieved) would be new multi-year highs for $XAU and a match of the recent highs for $HUI. NEM's own PnF chart looks solid on the standard scale, and a trade at $41 will be a new Buy signal there as well, completing the bullish picture. We're likely to see things shaken up a fair amount following next week's FOMC meeting, and if NEM can trade the $41 level, then we'll be looking to add this one to the Watch List as well. But for now, we remain interested observers. NOK - We're still waiting for something bullish to materialize on NOK's charts, with the stock still looking rather weak, especially on the PnF chart. The stock has spent the past few weeks hugging the $14 level, as it continues to be pressured by the 50-dma. At the same time, we're seeing a very tempting bullish picture on the weekly Stochastics -- we just need something else to tilt the scales in our favor. Patience has been working rather well for us in recent months, so we'll apply it to this play as well. Hopefully next week's decision on interest rates will help to provide more clarity. MSFT - This one's been percolating around in my head ever since the announcement that MSFT will decide what to do with its cash hoard. I don't think the actual use of that cash is particularly important except as a catalyst to get the stock moving again. Take a look at the weekly chart and you can see the way it has been wedging up under the $30 level. I need to do some more chart research on this one, but I'm thinking we could see a strong breakout -- possibly ahead of the company's earnings report. If MSFT does break out, the obvious first hurdle will be the $35 level, but I like the prospects for a long-term move towards the $40 resistance level, which was last visited 4 years ago. Closing Thoughts: One way or the other, 7 days from now, we should have a great deal more clarity to work from. I was really tempted to add some new plays this weekend, but in the end felt it was more in keeping with our disciplined approach to wait for the events of the next week to unfold first. We've been doing fairly well lately and I'm not one to mess with success. Patience has been working quite well and I think it's a quality we should all endeavor to apply in all of our trading exploits. One thing is certain -- next week there will be some new plays to consider. I just don't know if they will be bullish or bearish! Have a great week! 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 PC SEP-2004 $ 50 GM -IJ OMC 06/20/04 $79-80 JAN-2006 $ 80 YGS-MP JAN-2007 $ 75 OBG-MO PC SEP-2004 $ 85 OMC-JQ 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 ************************ Covered Call Trading – The Reality – Part II By Mike Parnos, Investing With Attitude Successful option trading is a lot like therapy – it takes hard work. Unfortunately, we live in a lazy world. Rather than put forth a little effort, many people hand over life responsibilities and tasks to others – then whine like spoiled children when the results aren’t what they wanted. The path of least resistance isn’t like the yellow brick road. It leads to the soup kitchen – especially when it comes to taking care of your money. Covered call writing is a popular strategy. Why? Because it’s pretty simple. You own a stock. You sell someone the right to buy your stock. They give you money. Either the stock goes or it stays. Like I said, pretty simple. You can’t lose, right? If you believe that, you’re either an idiot or you’ve been listening to too many old Wade Cook tapes. What Is A Successful Covered Call? A successful covered call play results in your stock being called away. Don’t become depressed. Don’t take it personally. You haven’t been deserted. You shouldn’t suffer from separation anxiety. Your stock was a tool – something you used to generate a little cash flow – nothing more, nothing less. You shouldn’t sell covered calls on stocks that you don’t want to have called away. Does that stop traders from selling calls on their favorite stocks? Hell no. When their precious stock is trading above the strike price of the short call, what can they do – besides panic, of course? Rolling For Dollars If you believe your sold call is at risk of being exercised, you can buy it back and roll it out for another month or two and to a higher strike price. This, in effect, buys you more time and should put a few more premium dollars into your account. For example, let’s say you sold the near term DELL $30 call. The stock has moved to $31.50 and you believe it’s going to continue higher – without you. The problem is that you’ve capped your potential profit when you sold the $30 covered call. With a few weeks left to expiration, there will still be some time value left (about $.50) in the $30 call along with the intrinsic value ($1.50). It might cost you $2.00 to buy back the option and free up your stock. You might look at the next month’s option chain and see that the $32.50 call is selling for $.75. You could sell the July $32.50 call and take in the $.75, thereby covering the extra $.50 of time value you spent to buy back the June $30 call. You would again be taking on an obligation to sell your DELL shares – this time at $32.50 – in about six weeks. As DELL continues to move up, you can repeat the process. Additional option premium may not always be there, but at least you’ll still own your precious stock. When Uncle Sam Gets Too Personal Let’s say you bought a stock years ago and, after a few stock splits, you have a cost basis of $5 on 1,000 shares of DELL stock. DELL was trading at $29 when you decided to pick up a few extra dollars by selling the $30 covered call. It didn’t cross your mind at the time that, if the DELL stock gets called away, you will have to pay capital gains tax on your profits. On expiration Friday, DELL closed at $31.50. Say goodbye to 1,000 shares. Is there a way to avoid that uncomfortable feeling of Uncle Sam’s hand fishing around in your pocket for his share of your profits? Yes, there is. There are actually two things you can do. 1) On expiration Friday, when you see that DELL is $31.50, you should be able to buy back your short call for about $1.60. That eliminates your obligation and your 1,000 shares of DELL are still yours. The $1.60 you paid to buy back the short call is almost entirely made up for by the additional $1.50 that DELL is above the $30 strike price. 2) Suppose you didn’t have the presence of mind to buy back your short call prior to expiration and you’re faced with losing your 1,000 shares of DELL. All is not lost. All you have to do is, on Monday, simply buy another 1,000 shares of DELL. You see, the market doesn’t care which 1,000 shares of DELL it takes from you when the short call is exercised. You will have do designate in your records (and with your broker) that the new 1,000 shares are the ones you want to give up. Your records will then reflect your cost basis as whatever you paid for the new shares. If you paid over $30, the increased value of your old 1,000 shares should make up for any difference. In this instance, you can take advantage of your ability to buy the new shares of stock on margin. After all, you’ll only have them in your possession for a day or two before they’re gone. So, what looks like a $31,500 expenditure is actually only half of that. That’s another reason why it never hurts to keep some powder dry – just in case. The funds to buy new shares can actually come from other marginable securities. If you have another $32,000 of marginable stock in your account, you probably wouldn’t need any additional cash. We’re Not Done Yet We’ve only addressed what your alternatives are if the stock moves up too far too fast. The more likely scenario is that the stock will go down too far too fast – and you will have reacted like the deer caught in the headlight. That’s where venison steaks come from. In our next column – “A Covered Call Story – The Repair” – we’ll look at ways of fixing covered call trades that have gone bad. Bear in mind that there’s not always a solution. But, there are avenues we can explore to try and mitigate the losses. ___________________________________________________________ JULY NEW POSITIONS Position #1 – SPX Iron Condor – 1134.43 We sold 10 July SPX 1170 calls and bought 10 July SPX 1180 calls for a credit of about: $1.10 ($1,100). Then we sold 7 July SPX 1075 puts and bought 7 July SPX 1060 puts for a credit of about: $1.20 ($840). The total net credit of was $1,940. Maximum profit range of 1075 to 1170. Breakeven points of 1072.23 to 1171.94. Maintenance: $10,500. Potential profit: $1,940. Position #2 – RUT Iron Condor – 587.70 We sold 10 July RUT 600 calls and bought 10 July RUT 610 calls for a credit of about: $1.00 ($1,000). Then we sold 10 July RUT 530 puts and bought 10 July RUT 520 puts for a credit of $1.30 ($1,300). Our total net credit was $2.30 ($2,300). Maximum profit range of 530 to 600. Breakeven points of 527.70 to 602.30. Maintenance: $10,000. Profit potential $2,300. Position #3 – SPX Credit Spread Boogie – 1134.43 We haven’t done this strategy is quite some time. To review, it consists of establishing a 25-point credit spread and taking in $6-7 of premium (as much as possible). If the trend continues, you keep the premium. If the trend reverses, you close the trade for double the premium amount. Then, you open a credit spread in the opposite direction, using enough contracts to replenish what you spent to close the initial spread. We sold 3 SPX July 1125 puts and bought 3 SPX July 1100 puts for a total credit of about: $6.30 ($1,800). Our profit potential: $1,800. Maintenance: $7,500 (initially). We’ll need to keep a close eye on this one. We have to be alert – plus, we have to have a large enough account size to accommodate trading an increased number of contracts if adjustments become necessary. Position #4 – SOX (Semi-Conductor Index) – Iron Condor – 478.91 We sold 10 SOX July 490 calls and bought 10 SOX July 500 calls for a credit of about: $1.10 ($1,100). Then we sold 10 SOX July 420 puts and bought 10 SOX July 410 puts for a credit of about: $1.30 ($1,300). Our total net credit of: $2.40 ($2,400). Maximum profit range: 420 to 490. Breakeven points: 417.60 & 492.40. Maintenance: $10,000. Potential profit: $2,400. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $37.33 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). We rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60 credit) on Tuesday and took in another net credit of $.80 ($800). Our new total credit is now $10,400. Note: We haven’t included the proceeds from this long term QQQ ITM Strangle in our profit calculations. It’s a bonus! And it’s a great cash flow generating strategy. ZERO-PLUS Strategy. OEX – 549.75 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 was $4,390 plus unused $1,700 = $6,090. From the June option cycle, we are able to officially add $1,175 to our cash position – that now stands at $6,265 ($4,565 plus unused $1,700). New July Zero Plus Positions. July bull put spread 535/525 for credit of $1.30 x 5 contracts = $650. Short 570 call for credit of $1.40 x 5 = $700. If all goes well, we’ll be able to add $1,350 to our cash position as we wait for the market to move up. ____________________________________________________________ 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 "Spreads & Combos." They're waiting for you 24/7. ____________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Sunday 06-27-2004 Sunday 5 of 5 In Section Five: Spreads and Straddles: Premium-Selling Plays: ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* SPREADS & STRADDLES ******************* Trepidation Emerges Ahead Of Fed Meeting... By Ray Cummins Stocks closed the week mixed as the rally in technology shares continued while the broader equity sectors retreated on concerns over the FOMC's upcoming decision on interest rates. The Dow Industrial Average fell 71 points to 10,371 with Pfizer (NYSE:PFE) among the laggards after announcing it would acquire the rights it doesn't already own to a colorectal cancer drug from Sanofi-Synthelabo for $620 million. The technology-laden NASDAQ Composite added 9 points to close at 2,025 on strength in Internet, electronic manufacturing, and wireless shares. The S&P 500 Index slid 6 points to 1,134 on weakness in automotive, tobacco, homebuilding, pharmaceutical, and cable stocks. About 1.8 billion shares changed hands on the New York Stock Exchange while 1.9 billion shares were crossed on the NASDAQ. Breadth was positive on both exchanges. In the bond market, the 10-year note closed the session unchanged at 4.64%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 06/25/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 AMZN 50.95 51.80 JUL 42 45 0.30 44.70 0.30 Open YHOO 31.87 34.91 JUL 25 27 0.30 27.20 0.30 Open CFC 69.15 71.09 JUL 60 63 0.35 63.03 0.35 Open QCOM 69.86 69.08 JUL 60 65 0.45 64.55 0.45 Open SWIR 33.83 34.31 JUL 25 30 0.90 29.10 0.90 Open CTSH 24.25 25.93 JUL 20 22 0.27 22.23 0.27 Open NUE 69.54 75.85 JUL 60 65 0.75 64.25 0.75 Open SII 53.26 55.99 JUL 47 50 0.30 49.70 0.30 Open MXIM 51.62 52.03 JUL 45 50 0.70 49.30 0.70 Open RJR 65.90 66.84 JUL 55 60 0.35 59.65 0.35 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss CALL-CREDIT SPREADS Stock Pick Last Month LC SC Credit CB G/L Status APPX 34.03 30.26 JUL 45 40 0.50 40.50 0.50 Open GENZ 41.93 47.06 JUL 47 45 0.30 45.30 (1.76) Closed INSP 34.71 35.96 JUL 45 40 0.65 40.65 0.65 Open WMS 28.75 28.52 JUL 35 30 0.65 30.65 0.65 Open GS 90.21 94.55 JUL 100 95 0.70 95.70 0.70 Open SYMC 42.42 42.14 JUL 50 45 0.65 45.65 0.65 Open FRX 56.32 58.46 JUL 65 60 0.60 60.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss The position in Genzyme (NASDAQ:GENZ) should have been closed on Wednesday, when the issue moved through the sold (call) strike, for a smaller than published loss. Goldman Sachs (NYSE:GS) is on the "early-exit" list and Forest Labs (NYSE:FRX) is one to "watch" closely in the coming sessions. The Oil Service Holdrs (AMEX:OIH) position has previously been closed to limit potential losses. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status GRMN 32.60 34.66 JUL 35 30 2.15 2.35 Open? SNDK 22.90 21.93 JUL 22 22 3.40 3.60 Open GDT 56.02 56.40 JUL 55 55 4.80 4.50 Open DNA 54.60 54.50 JUL 55 55 4.25 4.10 Open OVTI 15.50 17.03 JUL 15 15 2.70 2.75 Open Omnivision (NASDAQ:OVTI) and Sandisk (NASDAQ:SNDK) have achieved small profits, and there may be hope for Garmin (NASDAQ:GRMN) as it has once again become active in recent sessions. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ PHTN - Photon Dynamics $34.93 *** Bottom-Fishing Only! *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display (FPD) industry. The company also offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries and the cathode ray tube display and CRT glass and auto glass industries. The firm's test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing. PHTN - Photon Dynamics $34.93 PLAY (less conservative - bullish/credit spread): BUY PUT JUL-30.00 PDU-SF OI=216 ASK=$0.35 SELL PUT JUL-32.50 PDU-SZ OI=28 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$32.20 __________________________________________________________________ IWM - iShares Russell 2000 Index $116.60 *** Disparity Play *** The iShares Russell 2000 Index Fund (IWM) seeks to achieve investment results that correspond generally to the price and yield performance of the Russell 2000 Index. The fund uses a representative sampling strategy in order to track the Russell 2000 Index, which measures the daily performance of the small capitalization sector of the US equity broad market. It invests in approximately 2000 of the smallest capitalization-weighted companies in the Russell 3000 Index. IWM - iShares Russell 2000 Index $116.60 PLAY (conservative - bullish/credit spread): BUY PUT JUL-109.00 IWT-SE OI=22735 ASK=$0.40 SELL PUT JUL-110.00 IWT-SF OI=11584 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.10-$0.15 POTENTIAL PROFIT(max)=11% B/E=$109.90 __________________________________________________________________ URBN - Urban Outfitters $60.80 *** Bullish Retailer! *** Urban Outfitters (NASDAQ:URBN) is a lifestyle merchandising company that operates specialty retail stores under the Urban Outfitters, Anthropologie and Free People brands, as well as a wholesale division under the Free People brand. The firm offers differentiated collections of fashion apparel, accessories and home goods in inviting and dynamic store settings. In addition to its retail stores, Urban Outfitters offers its products and markets its brands directly to the consumer through its e-commerce Websites, and the Urban Outfitters and Anthropologie catalogs. URBN - Urban Outfitters $60.80 PLAY (conservative - bullish/credit spread): BUY PUT JUL-50.00 URQ-SJ OI=234 ASK=$0.20 SELL PUT JUL-55.00 URQ-SK OI=721 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$54.60 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CTX - Centex $47.34 *** Homebuilding Sector Slump! *** Centex Corporation (NYSE:CTX) is a multi-industry company with operates in six principal business segments. Conventional Homes operations involve the construction and sale of single-family homes, town homes and low-rise condominiums, and the purchase and development of land. Investment Real Estate operations involve the acquisition, development and sale of land, and the development of industrial, office, retail and mixed-use projects. Financial Services operations involve the financing of homes, home equity and sub-prime lending, and the marketing of insurance coverage. Construction Products involves cement production and distribution, and the production, distribution and sale of gypsum wallboard, concrete, aggregates and recycled paperboard. Contracting and Construction Services involves the construction of buildings. Centex HomeTeam Services is involved in pest and termite control, lawn and landscape care, electronic security, alarm monitoring and home-wiring services. CTX - Centex $47.34 PLAY (conservative - bearish/credit spread): BUY CALL JUL-52.50 CTX-GX OI=1761 ASK=$0.10 SELL CALL JUL-50.00 CTX-GJ OI=5488 BID=$0.35 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$50.30 __________________________________________________________________ SINA - SINA Corporation $35.60 *** Premium-Selling Only! *** 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. SINA generates revenue through advertising, various fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $35.60 PLAY (conservative - bearish/credit spread): BUY CALL JUL-45.00 NOQ-GI OI=4630 ASK=$0.20 SELL CALL JUL-40.00 NOQ-GH OI=8435 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$40.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ STRADDLES AND STRANGLES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. __________________________________________________________________ MDC - M.D.C. Holdings $64.77 *** Earnings Speculation *** M.D.C. Holdings (NYSE:MDC) is principally engaged in owning and managing subsidiary companies that build and sell homes under the name Richmond American Homes. The company also owns and manages HomeAmerican Mortgage Corporation, which originates mortgage loans primarily for MDC's home buyers. In addition, it provides title agency services through American Home Title and Escrow Company to MDC home buyers in Virginia, Maryland and Colorado and also offers third-party insurance products through American Home Insurance Agency, to the company's home buyers in all of its markets. The company's quarterly earnings are due on July 12, 2004. MDC - M.D.C. Holdings $64.77 PLAY (very speculative - neutral/debit straddle): BUY CALL JUL-65.00 MDC-GM OI=430 ASK=$1.80 BUY PUT JUL-65.00 MDC-SM OI=64 ASK=$2.35 INITIAL NET-DEBIT TARGET=$4.00-$4.05 INITIAL TARGET PROFIT=$1.50-$2.10 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 06/25/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 CVTX JUL 15 14.60 16.73 0.40 5.63% 2.74% DITC JUL 17 16.80 24.61 0.70 8.40% 4.17% SYNA JUL 17 16.85 19.96 0.65 7.48% 3.86% PTIE JUL 7 7.15 9.18 0.35 9.89% 4.90% BCC JUL 35 34.25 37.36 0.75 5.12% 2.19% JILL JUL 20 19.45 24.44 0.55 6.72% 2.83% LSS JUL 20 19.50 27.30 0.50 6.07% 2.56% OI JUL 15 14.65 16.78 0.35 5.64% 2.39% NVTL JUL 15 14.65 25.13 0.35 7.34% 2.39% PDII JUL 25 24.70 30.30 0.30 3.91% 1.21% RSAS JUL 17 17.05 20.92 0.45 6.22% 2.64% STLD JUL 25 24.45 28.49 0.55 5.33% 2.25% UPL JUL 30 29.55 37.77 0.45 4.14% 1.52% USG JUL 15 14.15 18.00 0.85 13.32% 6.01% ATI JUL 12 12.20 15.62 0.30 7.44% 2.46% BJS JUL 42 41.70 46.02 0.80 4.75% 1.92% LCAV JUL 25 24.35 28.98 0.65 6.85% 2.67% NCRX JUL 27 26.80 32.02 0.70 7.30% 2.61% NVTL JUL 17 17.05 25.13 0.45 8.97% 2.64% SSYS JUL 23 22.20 28.40 0.30 4.41% 1.35% SWIR JUL 30 28.85 34.31 1.15 10.66% 3.99% SYNA JUL 17 16.90 19.96 0.60 8.98% 3.55% YHOO JUL 30 29.20 34.91 0.80 6.80% 2.74% AMHC JUL 22 21.80 26.60 0.70 9.36% 3.21% CTSH JUL 22 22.20 25.93 0.30 4.34% 1.35% CYBX JUL 30 29.25 35.65 0.75 10.31% 2.56% ERES JUL 22 21.85 26.88 0.65 9.03% 2.97% HLEX JUL 15 14.65 16.78 0.35 7.40% 2.39% NINI JUL 20 19.65 26.29 0.35 5.89% 1.78% NFI JUL 30 29.30 37.95 0.70 9.77% 2.39% PTIE JUL 7 7.25 9.18 0.25 11.96% 3.45% RIMM JUL 50 49.15 60.69 0.85 6.57% 1.73% SGTL JUL 22 22.25 29.13 0.25 4.25% 1.12% BRCM JUL 40 39.30 45.41 0.70 6.43% 1.78% CSGP JUL 40 39.60 45.41 0.40 3.49% 1.01% DHB JUL 12 12.20 14.94 0.30 8.97% 2.46% DY JUL 25 24.65 27.53 0.35 4.63% 1.42% ERES JUL 22 22.20 26.88 0.30 4.97% 1.35% FWHT JUL 20 19.60 22.83 0.40 6.89% 2.04% GVHR JUL 22 22.20 26.48 0.30 5.07% 1.35% IMH JUL 20 19.75 22.50 0.25 4.41% 1.27% NVTL JUL 17 16.90 25.13 0.60 15.07% 3.55% PLMO JUL 25 24.55 33.08 0.45 7.28% 1.83% USG JUL 15 14.70 18.00 0.30 7.05% 2.04% NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ASKJ JUL 45 45.55 37.97 0.55 6.50% 1.21% AMLN JUL 25 25.35 22.32 0.35 5.29% 1.38% ICOS JUL 30 30.45 28.81 0.45 5.26% 1.48% OIIM JUL 17 17.80 15.98 0.30 5.50% 1.69% INSP JUL 40 40.50 35.96 0.50 6.88% 1.23% RHAT JUL 25 25.60 22.23 0.60 9.08% 2.34% XMSR JUL 27 27.75 25.50 0.25 4.34% 0.90% CECO JUL 65 65.90 44.97 0.90 7.19% 1.37% ESI JUL 45 45.50 37.54 0.50 5.47% 1.10% FMT JUL 20 20.40 18.02 0.40 8.75% 1.96% NBIX JUL 55 56.10 51.94 1.10 8.21% 1.96% SLAB JUL 50 50.75 47.62 0.75 6.39% 1.48% AGIX JUL 20 20.45 19.29 0.45 9.16% 2.20% LEND JUL 30 30.55 29.63 0.50 6.63% 1.64% Lend America (NASDAQ:LEND) and Silicon Labs (NASDAQ:SLAB) 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 BCC JUL 35.00 34.55 37.36 0.45 5.53% 1.30% CHIC JUL 20.00 19.65 21.75 0.35 7.68% 1.78% CENX JUL 22.50 22.00 24.49 0.50 9.64% 2.27% ENDP JUL 22.50 22.15 23.84 0.35 6.56% 1.58% IFIN JUL 37.50 37.05 43.00 0.45 5.93% 1.21% STTX JUL 22.50 22.05 23.43 0.45 8.10% 2.04% TASR JUL 30.00 29.65 42.09 0.35 6.39% 1.18% USG JUL 15.00 14.70 18.00 0.30 10.67% 2.04% VSAT JUL 22.50 22.20 23.88 0.30 5.67% 1.35% __________________________________________________________________ BCC - Boise Cascade $37.36 *** Strong Sector! *** Boise Cascade (NYSE:BCC) is a multinational contract and retail distributor of office supplies and paper, technology products and office furniture. Boise Cascade is also a distributor of building materials and a manufacturer and distributor of paper, packaging and wood products. The firm operates in four segments: Boise Office Solutions, Contract; Boise Office Solutions, Retail; Boise Building Solutions and Boise Paper Solutions. BCC - Boise Cascade $37.36 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 35 BCC SG 221 0.45 34.55 5.5% 1.3% __________________________________________________________________ CHIC - Charlotte Russe $21.75 *** Bullish Retailer! *** Charlotte Russe Holdings (NASDAQ:CHIC) is a mall-based specialty retailer of apparel and accessories targeting young women between the ages of 15 and 35. The firm has two distinct store concepts: Charlotte Russe and Rampage. Charlotte Russe stores provide a wide range of fashionable, affordable apparel and accessories that have been tested and accepted by the marketplace. Rampage stores feature emerging fashion trends. Both Charlotte Russe and Rampage stores are located in high-visibility, center court mall locations in spaces that average approximately 7,100 square feet. CHIC - Charlotte Russe $21.75 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 20 UYC SD 20 0.35 19.65 7.7% 1.8% __________________________________________________________________ CENX - Century Aluminum $23.49 *** Riding Alcoa's Coattail! *** Century Aluminum Company (NASDAQ:CENX) is a holding company, whose principal subsidiaries are Century Aluminum of West Virginia, Inc., Berkeley Aluminum, Inc. and Century Aluminum of Kentucky, LLC. Through its ownership interests, the company has an annual production capacity of approximately 1.2 billion pounds of primary aluminum. CENX - Century Aluminum $23.49 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 22.5 CQL SX 1 0.50 22.00 9.6% 2.3% __________________________________________________________________ ENDP - Endo Pharmaceuticals $23.84 *** Next Leg Up? *** Endo Pharmaceuticals (NASDAQ:ENDP) is a specialty pharmaceutical company specializing in pain management. The company is engaged in the research, development, sale and marketing of branded and generic prescription pharmaceuticals used primarily to treat and manage pain. The company's primary area of focus is analgesics, with a portfolio of branded products that includes Percocet, Lidoderm, Percodan and Zydone. Endo's generic portfolio is comprised of products that cover a broad range of indications, most of which are focused in pain management. ENDP - Endo Pharmaceuticals $23.84 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 22.5 IUK SX 148 0.35 22.15 6.6% 1.6% __________________________________________________________________ IFIN - Investors Financial Services $43.00 *** Rally Mode! *** Investors Financial Services (NASDAQ:IFIN) provides services for a variety of financial asset managers such as mutual fund complexes, investment advisors, banks, and insurance companies. Through a wholly-owned subsidiary, Investors Bank & Trust Company, they offer core services including global custody, multicurrency accounting, and mutual fund administration, and value added services including securities lending, foreign exchange, and cash management. IFIN - Investors Financial Services $43.00 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 37.5 FLQ SU 1164 0.45 37.05 5.9% 1.2% __________________________________________________________________ STTX - Steel Technologies $23.43 *** Entry Point? *** Steel Technologies (NASDAQ:STTX) is a steel processor engaged in the business of processing flat rolled steel to specified close tolerances in response to orders from customers who require steel of precise type, thickness, width, temper, finish and shape for their manufacturing purposes. The firm's principal processed products are cold-rolled strip and sheet, cold-rolled one-pass strip, high-carbon and alloy strip and sheet, hot-rolled strip and sheet, high-strength low-alloy strip and sheet, hot-rolled pickle and oil and coated strip and sheet, hot-rolled pickled and oiled sheet, tin plate, blanking and cut-to-length processing of coil steel and fabrication and welding of steel sheets and plates. STTX - Steel Technologies $23.43 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 22.5 SFU SX 0 0.45 22.05 8.1% 2.0% __________________________________________________________________ TASR - TASER International $42.09 *** Pure Premium-Selling! *** TASER International (NASDAQ:TASR) develops and manufactures a range of less-lethal self-defense devices. The firm's primary product lines include the ADVANCED TASER and the TASER X26, a recently introduced weapon system offering a new "shaped pulse" technology, and a smaller form factor. TASR - TASER International $42.09 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 30 QUR SF 12031 0.35 29.65 6.4% 1.2% __________________________________________________________________ USG - USG Corp. $18.00 *** Asbestos Fund Deal? *** 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. $18.00 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 USG SC 2623 0.30 14.70 10.7% 2.0% __________________________________________________________________ VSAT - ViaSat $23.88 *** Bracing For A Rally? *** ViaSat (NASDAQ:VSAT) is a provider of advanced broadband digital satellite communications and other wireless networking and signal processing equipment and services to the defense and commercial markets. For the defense market, the company offers UHF DAMA (ultra-high frequency demand assigned multiple access) products and services. In addition, ViaSat has developed communications products for military applications such as the Link-16 MIDS (multi-function information distribution system) terminal, information assurance and simulator and test products. VSAT - ViaSat $23.88 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 22.5 IQS SX 0 0.30 22.20 5.7% 1.4% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ FEIC - FEI Company $23.42 *** In A Trading Range? *** FEI Company (NASDAQ:FEIC) designs, manufactures, markets and services products and systems used in research, development and manufacturing of very-small objects, primarily by providing an understanding of their three-dimensional shape. The majority of the company's customers work in fields that are classified as nanotechnology, which can be described as the science of characterizing, analyzing and fabricating things smaller than 100 nanometers (a nanometer is one billionth of a meter). FEIC - FEI Company $23.42 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 25 FQE GE 88 0.35 25.35 6.9% 1.4% __________________________________________________________________ PAYX - Paychex $33.92 *** A Big "Down" Day! *** Paychex (NASDAQ:PAYX) offers payroll, payroll-related and human resource products to meet the needs of its client base. These include payroll processing, tax filing and payment, employee payment, retirement services administration, employee benefits administration, regulatory compliance (new-hire reporting and garnishment processing), workers' compensation insurance and bundled human resource administrative services. PAYX - Paychex $33.92 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 35 PQX GG 93 0.40 35.40 5.0% 1.1% __________________________________________________________________ TSS - Total System Services $21.06 *** PAYX Sell-Off Victim! *** Total System Services (NYSE:TSS) provides electronic payment processing and related services, primarily to financial and non-financial institutions throughout the United States, Canada, Mexico, Honduras, the Caribbean and Europe. The firm's services include processing consumer, debit, commercial, stored value and retail cards, as well as student loan processing. The firm also offers value-added products and services to support its core services, including risk management tools and techniques, revenue enhancement tools and customer retention programs, such as loyalty programs and bonus rewards. TSS - Total System Services $21.06 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 22.5 TSS GX 3 0.40 22.90 8.7% 1.7% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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