The Option Investor Newsletter Sunday 08-29-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Quiet Before the Storm Futures Wrap: See Note Index Trader Wrap: WALL OF WORRY Editor's Plays: Google Mania Market Sentiment: The RNC approaches Ask the Analyst: Synthetic hedge. What is it? What is it intended to do? 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 8-27 WE 8-20 WE 8-13 WE 8-06 DOW 10195.01 + 84.91 10110.1 +284.79 9825.35 + 10.02 -324.38 Nasdaq 1862.09 + 31.07 1831.02 + 73.80 1757.22 – 19.67 -110.47 S&P-100 540.88 + 4.84 536.04 + 15.32 520.72 - 1.11 - 15.84 S&P-500 1107.77 + 9.42 1098.35 + 33.55 1064.80 + 0.83 - 37.75 W5000 10755.02 +106.22 10648.8 +344.09 10304.6 - 3.18 -393.81 SOX 382.34 - 3.66 386.00 + 19.35 366.65 – 20.23 - 29.55 RUT 551.67 + 3.75 547.92 + 30.53 517.39 - 2.26 - 31.64 TRAN 3108.80 + 17.93 3090.87 +123.95 2966.92 + 0.84 -145.61 ****************************************************************** Quiet Before the Storm by Jim Brown Friday morning continued the pattern set on Thursday and was Boring with a capital B. Volume was non existent and reports from the NYSE compared it to a ghost town. The bad news bulls were still circulating with rising support just under the bid but there was no interest in chasing the price. Actually there was no interest in any trading. Buyers waited patiently for dips and sellers were absent along with the volume. Dow Chart – Daily Nasdaq Chart SPX Chart SOX Chart Russell Chart Friday started slow with a GDP report that came in as expected with a drop to +2.8% for the second quarter. This makes it the weakest quarter since Q1-2003 which only grew +1.9%. The headline number does not show the positive internal changes with consumer spending moving higher from the initial report to +1.6%. Still not strong but better than expected. That is the lowest gain in household consumption since the end of 2002. Business Spending and Personal Expenditures both rose sharply from the initial report. Dragging down the headline number was exports and a dramatic slowdown in auto production. The GDP revision underlines the strong drop after three quarters of strong growth. We did however managed to show continued growth despite the weak quarter end. This would suggest Q3, not normally a strong quarter anyway, will follow in the footsteps of Q2 with sub 3% growth. With corporate America holding their breath until the election is over the 4Q is likely to be power packed in Nov/Dec and that will produce something near +4% growth to close the year. The challenge remains the high oil prices and their dragging impact on the economy. If oil does move lower with the resolution of some fighting in Iraq and additional Russian production then the worst may be behind us. The Michigan Sentiment final came in at 95.9 and up sharply from the initial reading of 94.0. This is still down from July's 96.7 but the rebound from the initial reading is moving in the right direction. Expectations declined to 88.2 from 91.2 but present conditions rose to 107.9 from 105.2. Analysts felt consumers were more optimistic when gas prices did not go higher when oil was hitting $48. There is a perception that gas prices today should reflect the current oil prices and in reality there is a significant lead time before the high oil reaches the refineries and then the gas stations. Either way consumers felt better about current conditions and the lack of any terrorist event in Athens probably helped that feeling. Obviously an event in New York would be significantly depressing to sentiment. The New York City area has been putting terrorist plans in place for the convention for over a week with street closings, random vehicle searches and setting up for checkpoints into the city and convention area. The NYSE has disaster plans in place and the floor will only be manned at half staff or less with half the traders working from remote locations. One desk with 30 traders is reportedly only going to operate with only eight from the NYSE floor. There is significant fear and caution in NYC that was not reflected in trading as we closed the week ahead of the convention. The attendees at the Jackson Hole Conference probably wish they could stay there for all of next week to avoid the extreme security and the risk for some of returning to NYC. However, they may be feeling a little stressed after the Greenspan speech today. He opened his speech expressing concern about the elderly dependency ratio. That is the number of older adults to younger adults. That ratio has been rising for the last 150 years and is about to spike sharply higher. The growth of the working age population is currently +1% per year but is expected to slow to only 1/4% by 2035 according to Greenspan. During that same time the percentage of the population over 65, currently 12%, will expand to 20% by 2035. He went on to discuss the impact on various economies but his real target was social security and the problem ahead. His premise was that the disability factor for people over 65 was dropping rapidly as people reaching 65 were healthier and more active than in the past. He said workers were working smarter and not harder and their bodies were not wearing out as quickly as when we were primarily an agricultural society where manual laborers composed 75% of the workforce. With the population rapidly aging, with baby boomers heading into retirement, the system was going into fiscal arrest in the very near future. Workers are retiring sooner and living longer thereby requiring more contributions from younger workers to support them. This is nothing new to most investors and as Greenspan himself ages he tends to talk about the problem more. His two solutions for this problem were allowing more immigrants into the country to inject liquidity into the social security system AND/OR raising the retirement age to prevent a system bankruptcy. He also suggested the Federal government begin saving money instead of spending it but we all know how likely that is. He suggested making the decision to change the retirement age quickly so those facing retirement shortly will have time to plan for additional years of employment and a higher rate of savings to offset the loss of benefits from social security. I don't know about you but for someone planning on collecting at least some of the fortune I have paid into social security over the years the prospect of waiting until I am 70 is not pleasant. While I have never expected the government to support me in my retirement I would like to see some return for my 40+ years of contributions to date. Everyone reading this probably understands the problem but are not going to rush out and volunteer to forego their social security payments and work an extra five years just for the heck of it. Do I mention that you would continue contributing to social security while you continued working? I understand why Greenspan is constantly posing these tough economic questions but I seriously doubt any politician is going to make it part of their platform. They would get about as many votes as a leper with Aids on the Bachelorette would get roses. I doubt Greenspan's words fell on fertile ground but at least he did the right thing. That is he did not say anything about the market that would blunt the current uptrend. No news is good news in his case. Monday was the lightest volume day of the year with only 2.75 billion shares traded. Friday was even worse with only 2.23 billion shares traded across all markets. As the lightest day of the year the potential for a real disaster loomed large all day but never came to pass. The underlying bid continued to grow despite volume being so slow watching charts paint was almost painful. All the indexes but the SOX finished positive for the week. Considering last weeks rally this was an almost impossible feat ahead of this weekends event risk. What event risk? I know, it appears the press are the only ones worried. The bullish undertones all week suggest there is little fear in investor minds. With the Democratic convention over and the Olympics finishing on Sunday and neither having any problems other than long lines at security checkpoints the event risk fear has left the market. I have been expecting a post convention rally but I also expected some more weakness over the last two weeks. I suggested a couple weeks ago to buy the dips as we waited out the Olympics on minimal volume but reality definitely exceeded my expectations. It appears everyone had the same game plan and we closed not only at the highs for the week but the highs for the month right in front of the convention. The stock Traders Almanac says six of the last seven years has seen a down market the last five days of August. That string is about to be broken with only two days to go in the month. It appears the fear of the Olympics prompted those that wanted to exit to bail early and that broke the trend. The Dow traded down to strong support at 9800 and the risk takers stepped up to the table. Now, if conventional wisdom is to be believed the next two weeks should be bullish assuming the convention concludes successfully. Since the market exists to confound the maximum number of traders on any given day it almost makes me wonder if we are not being set up for a big surprise. I don't know what would cause it because all the negatives are already known. It is almost the perfect storm in reverse. We know earnings are going to be weak for Q3. We know the Fed is still going to raise rates again on Sept-21st. We know the economy is creeping along at a snails pace. We know oil is not going back to $30 any time soon. We know chip sales are weaker than expected and retail sales are barely showing any gains. What is going to be the big surprise that trumps this bullish advance? I pose the question because I don't see one. The bulls have the perfect wall of worry to climb and no mountains in their path. The setup is almost too perfect with the various indexes closing almost exactly on critical resistance. We were able to push right to the vertical limit but not quite hard enough to produce a breakout. The trap, I mean stage is set for a strong move but I feel like the mouse in this picture. The setup is perfect but I know there is a headache ahead somewhere. For next week I plan on going with the flow. Monday could be erratic on even lower volume until the actual convention opens on Monday night. Tuesday could be a strong day if there are no problems Monday night. Unfortunately Tuesday is where it starts getting tricky. This is a huge week for economic reports. That is fine if they are all positive but this is the week for the big guns. Tuesday is the NY-NAPM, PMI and Confidence. Wednesday has August ISM, Construction Spending, Semi Billings, Vehicle Sales and Mortgage Applications. Thursday has Chain Store Sales, Monster Employment, Jobless, Productivity and Factory Orders followed by the Employment Report on Friday. Obviously the key numbers are PMI, ISM and Jobs but the entire week is a mine field of data. Adding to the jumble is the Intel update on Thursday. Is inventory still growing or did sales pick up? Only Craig Barrett knows for sure and he will tell us on Thursday. I believe if everything else is mildly positive investors will forgive any Intel sins on Thursday. Make no mistake there is still strong resistance just overhead at Dow 10250, SPX 1120 and Nasdaq 1910. While the majority of factors are pointing to a positive week there is plenty of roadblocks up ahead. Lately bulls have been scaling them with ease and I would love to see that again for the third consecutive week but with the Dow gaining +400 points in just the last two weeks it makes me very cautious. Bullish but cautious. That makes my game plan for the week look like this. I am going long over SPX 1111 (100 and 200 dma) and buying any dips back to support levels at 1104 and 1095. I am going to put on my helmet and be wary of any setups that appear to good to be true. I will be leery of an opening breakout over 1111 on Monday but will reluctantly tag along. I would feel much better about a long entry if I could see a little fear in the market and a decent dip to buy but the market seldom does what I want. Buckle those seatbelts and let's get ready for a ride. Enter Very Passively, Exit Very Aggressively! Jim Brown ************ FUTURES WRAP ************ 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 ******************** WALL OF WORRY By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – I figure that the major indices have a bit more they can go on the upside this coming week, especially with buyers still cautious actually – the market was helped in this past week's gain by the cautious attitude toward stocks and call options. The market sometimes is said to climb a "wall of worry". A lot of bad news got priced in, particularly record oil prices, until stocks hit a bottom when oil prices fell, with the path of least resistance being up, as short positions got covered and bargain hunting type buying also came in. Result: continued upward creep. FRIDAY'S TRADING ACTIVITY – Stocks ended higher on Friday as the Dow and S&P extended its rally for the third week and the Nasdaq made was up for a second week based on optimism most directly tied to a significant fall (-8%) in oil prices over the past week. THE NUMBERS – The S&P 500 stock index (SPX) was up 2.68 points (+0.2%), to 1,107.77 and +0.9% for the week. The Dow Industrials (INDU) were up 21.6 points (+0.2%) to 10,195 and gained 0.8% on the week. The Nasdaq Composite Index (COMP) rose 9.16 points (+0.5%), to 1,862 and gained 1.3% on a weekly basis. The Russell 2000 index (RUT) of small-cap stocks was up 0.8%. REPORTS & ECONOMIC NEWS – Stocks got an early boost after the University of Michigan consumer sentiment index for August fell less than expected. The U of M index declined to 95.9 in August from 96.7 in July, versus expectations of a drop to 93.8. Market fears that the U.S. economy slowed down more than expected in Q2 didn't materialize as the revised estimate to gross domestic product (GDP) growth came in as forecast. The economy slowed in the second quarter - growth was estimated at a 2.8% annual rate versus an initial estimate of 3%. There were also no major changes in the GDP report's inflation measures, suggesting no change in the Fed's current policy of raising interest rates at a measured pace. After a seesaw day for oil futures, crude oil for October delivery settled at $43.18, up slightly but this after a steady decline all week. Oil traders watched developments in Najaf, Iraq, calculating what peace in the holy city there would mean for Iraqi exports. Under a peace deal brokered by leading Shiite cleric Grand Ayatollah Ali al-Sistani, radical cleric Muqtada al-Sadr ordered his fighters to leave the shrine, Najaf and neighboring Kufa. U.S. forces, which had laid siege to the Imam Ali mosque, where al-Sadr and his militiamen had been holed up, also pulled back. A welcome stand down! OTHER MARKETS – U.S. Treasury bonds closed mostly lower as Friday's economic data and the drop in crude prices over the week increased demand for stocks relative to bonds. The dollar was mixed against the major currencies in the wake of the GDP data. The euro was off 0.7% against the dollar at $1.2022 in New York. Against the Yen, the buck was unchanged at 109.63. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: My view from last week is pretty much unchanged, as I see the S&P 500 Index (SPX) as having key near resistance at 1110, at a prior rally high and at the 200-day moving average. The next resistance I peg at 1120-1122. Near support is at 1090. Main technical support is 1080, at the prior upside price gap. I see mostly limited further upside potential at this point – watch 1110 – if SPX closes through there, the Index could make it to 1115, maybe the 1120 area. On a risk to reward basis, don't stick around for the possibility a few more points above 1115. (I figure only an outside chance of SPX getting up to 1130 without a pullback first – 1130 being where the major resistance (down) trendline comes in.) What I do find bullish and favorable here is that my call to put ratio has not shot up on the advance – it in fact dropped back at week's end. The absence of excessive bullishness is a plus and might be what keeps this rally going longer than I'm anticipating right now. S&P 100 Index (OEX) – Hourly chart: As with the 500, the S&P 100 (OEX) looks near to being into a technical resistance zone as highlighted on the chart below. A correction or dip would be common at this point to throw off the near-term overbought condition suggested by the RSI indicator applied to the hourly chart below. A decline to the 533-535 area wouldn't be surprising, perhaps a bit lower before OEX has another rally. I calculate 550, at the dominant down trendline on the daily chart (not shown), to be the best upside potential for OEX, where I would then favor put purchases. Dow 30 (INDU) – Daily chart: 10253 is resistance implied by the 200-day moving average, with increasing selling pressure probably extending up to around 10,350 at the top end of the downtrend channel on the daily chart, where I favor buying DJX puts. Support is at 10,100, then at 10,000. The Dow 30, and by extension the S&P indices, is getting up toward an overbought extreme, which would be more extreme even if INDU advanced to the 10,350 area or the top end of the downtrend channel outlined on the chart above. Nasdaq Composite (COMP) Index – Daily: The 1896-1900 area looks to be potential technical resistance, based on a significant prior (up) swing high. A little higher than 1900, around 1916, is the intersection of the upper trading envelope line and is about as far extended above the key 21-day moving average as COMP has been getting in recent months. The Nasdaq Composite is lagging the S&P market but is also at less of an extreme – at more of a neutral reading – in the oscillator type indicators like the RSI shown. Nasdaq 100 (NDX) Index – Daily: 1410 is where I see overhead resistance based on the prior rally peak in the Nasdaq 100 (NDX), but the even-100 level of 1400 should be watched if the rally carries to this area and then falters. If prices take out that prior high and NDX got up to around 1425, I will be looking to buy puts. 1360 is support, then 1350. If there was a drop early in the week that took prices back to the 1360, at the 21-day moving average with a tendency then to rally from there, there is probably a buying opportunity in calls, looking for a rally to the 1410 area. It’s been a decent rally after the RSI finally got fully oversold – if only we always had the patience to wait for those extremes! Nasdaq 100 tracking Stock (QQQ) Daily: The Q's churned through near resistance at 34 and may be headed to the next area of selling interest/resistance at 35. 36 looks like a place to buy puts, if reached. Not the most impressive rally we've seen given the lackluster volume – note the downtrend in the daily trading activity. Only prices have been going up, average daily volume is not also trending higher. This is not uncommon off the lows however and I mentioned, earlier on, that bullish sentiment has not risen overly much suggesting some disbelief in the staying power of an advance. Moderate bullish "sentiment" often goes hand in hand with rallies that can keep going. The market could do better in the upcoming week as there is still some upside momentum technically – fundamentally, some encouragement comes from an easing of tensions in Iraq and as long as oil prices don't start shooting up again. On a longer-term note, there is also a tendency for the market to advance in the second half of a Presidential election year regardless of whether the elephants or the donkeys get their candidate elected. TRADER'S CORNER – This past week's article was on Trendlines; part 1 is on the uses and construction of trendlines. This one starts with an oil futures chart that showed how a trendline pinpointed the exact top in prices, providing a strong clue that the indices would continue to gain. See - http://www.OptionInvestor.com/traderscorner/tc_082604_1.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 ************** Google Mania You have heard the hype and months of confusion about the Google IPO and the various shenanigans behind the scenes. The stock opened below it hoped for level and then rapidly spiked to nearly $114 three days later. It was unable to hold that level and returned to $104 the following day. It has been trading in the $104-$108 range for the last week. The IPO was for 25 million shares. However there are 260 million additional shares in insider hands that will come out of lockup over the next six months. That means by the end of February more than ten times the number of shares in the IPO will be available for trading. Here is the schedule of the shares coming out of lockup. The IPO was on August 19th. At 15 days... 4,575,048 new shares for sale At 90 days... 39,081,106 At 120 days... 24,875,091 At 150 days... 24,874,091 At 180 days... 170,784,389 This represents a monumental shorting opportunity but shares may be hard to short until more volume hits the market. Also shorting a highly volatile $100 stock is very dangerous. Fortunately options became available on Friday and this presents us with a unique opportunity. We know exactly when the shares are available to sell and in what quantities. This gives us a very clear roadmap to the future. Google may be worth $100 a share with only 25M trading but once the additional 260 million shares hit we could be looking at a much smaller share price. We will have two quarters of earnings and with competition heating up for Google's market they could see some drop in expectations. All of these factors suggest a March option would be long enough to capture the majority of any drop. Once that 170 million block hits the market any remaining drop should be swift. Those people will have watched the stock fall from its highs to whatever valuation the market eventually assigns it without being able to do anything about it. The potential for a rush to the exit in February is strong. The biggest challenge is the option prices. For the first day of option trading the option prices are placed very high because the market makers don't know what the demand will be and with only a week of history on the stock there is no history to use for your model. This means we will be forced to pay more than we would normally want for this position. This suggests the best plan of attack may be a combination position or a put spread. I am going to recommend a straight put position using the March $100 put GOQ-OT because I do not want to limit my upside. Other options would include a put spread of buying the March $100 put for $11.90 and selling the March $80 for $5.50. Unfortunately even with a move under $80 the profits are minimal given the high premiums. The best plan for those with a high-risk profile would be to sell the March $110 call GOQ-CB for $13.50 and buying the March $100 put for $11.90. That leaves you with $1.60 in excess premium from the call and you have defeated the market makers. A drop to $75 and the call expires worthless and the put is worth at least $25. Heck of a deal. Of course the risk is a surge by Google to a higher level with you holding a naked call. I would hedge against this with a stop at a new high of $115 on the call. I would roll out to a $120 call once any rally failed. I don't think anyone not currently long expects Google to move much higher but it is always possible. This play assumes Google will eventually crumble under the weight of 260 million new shares coming to market over the next six months. Obviously you should not take this risk unless you have the same view. You may want to wait a couple more days before making an entry to give the options premiums time to deflate. I want to get in early so I am writing the play this weekend to capitalize on Google still trading over $100. Once it cracks that triple digit barrier to the downside it could drop quickly. BUY Put March-$100 GOQ-OT Friday's close = $11.90 GOOG Chart ********************** PVN Call Update $14.65 PVN spent Thursday near a new 52-week high at $15 but the downgrade of COF eventually weighed on PVN. I still have faith that we will see $20 before this play is over. http://members.OptionInvestor.com/editorplays/edply_061304_1.asp **************** MARKET SENTIMENT **************** The RNC approaches - J. Brown This past week was certainly an interesting one. Crude oil abruptly changed direction and fell more than 7% from its highs in a five-day losing streak. Wal-Mart lowered its August sales forecasts blaming Hurricane Charley and a slow back-to-school season. Federal Reserve Chairman Alan Greenspan not only mentioned a potential housing bubble, a possible slow down in Japan's economy, and a not so soft landing for China's economy but he also suggested raising the retirement age and putting a cap on social security benefits before the system goes bankrupt. Friday's trading was extremely light and a prime example of what we were likely to see next week as Wall Streeters leave town to avoid the traffic jams and security checkpoints for the Republican National Convention. Despite the low volume Friday's session was pretty bullish. Networking, Broker-dealers and airline stocks were the only sector indices to close in the red. The Dow transports did close about four cents off unchanged. Market internals looked pretty good. Advancing stocks overshadowed decliners 2-to-1 o the NYSE and 19 to 11 on the NASDAQ. Up volume was about double down volume on both exchanges. Next week Wall Street will be watching three things. First and foremost is oil. This remains the leading influence. Fortunately, as of the time of this article, the Iraq peace deal in the city of Najaf, which was guided by recently returned Shiite cleric Grand Ayatolla Ali al-Sistani, is still holding. If we can see several days of peace (a.k.a. less violence than usual) then the market's fears over oil disruptions may subside even more. The second major story investors will be watching is the Republican National Convention in NYC, which begins Monday night. So far the DNC was uneventful and the Olympics have been terror- free so traders seem quietly optimistic that the RNC will go off without any violence as well. The RNC runs from Monday through Thursday with President Bush speaking on Thursday night. This could keep stocks trading sideways until Friday morning but the low volume could be a wild card as the remaining traders push stocks around. Unfortunately, we can't expect a relief rally on Friday until after the economic reports, which is the third major story Wall Street will be following. There is a boatload of economic data to be delivered with the most significant reports being the PMI, ISM and August Jobs data. The Jobs report comes out on Friday. Right now economists are expecting growth of 139,000 jobs but many are already discounting a miss due to the two hurricanes that hit Florida and the east coast. Caution is definitely the mood in the markets. The current short-term trend may be up but now the major indices are starting to look overdue for a dip and the longer-term prevailing trend is still down. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9233 Current : 10195 Moving Averages: (Simple) 10-dma: 10049 50-dma: 10160 200-dma: 10251 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 983 Current : 1107 Moving Averages: (Simple) 10-dma: 1095 50-dma: 1104 200-dma: 1111 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1280 Current : 1388 Moving Averages: (Simple) 10-dma: 1364 50-dma: 1404 200-dma: 1441 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.71 –0.20 CBOE Mkt Volatility old VIX (VXO) = 14.83 -0.04 Nasdaq Volatility Index (VXN) = 21.27 -0.33 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.92 478,110 439,606 Equity Only 0.73 362,855 266,495 OEX 1.03 14,555 15,065 QQQ 1.95 29,210 56,926 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 55.2 + 1 Bear Confirmed NASDAQ-100 32.0 + 0 Bear Confirmed Dow Indust. 46.6 + 0 Bear Confirmed S&P 500 51.0 + 1 Bear Confirmed S&P 100 49.0 + 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: 0.96 10-dma: 0.80 21-dma: 1.20 55-dma: 1.24 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 1833 1880 Decliners 929 1101 New Highs 80 46 New Lows 13 35 Up Volume 663M 675M Down Vol. 337M 279M Total Vol. 1022M 979M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 08/24/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials have upped both their longs and shorts but remain net bearish. Small traders have upped their shorts and pared back their longs a bit but remain net bullish. Commercials Long Short Net % Of OI 08/03/04 401,619 419,429 (17,810) (2.2%) 08/10/04 397,576 419,734 (22,158) (2.7%) 08/17/04 398,472 416,109 (17,637) (2.2%) 08/24/04 402,599 420,478 (17,879) (2.2%) 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 08/03/04 128,510 88,833 39,677 18.3% 08/10/04 135,689 93,897 41,792 18.2% 08/17/04 138,550 97,792 40,758 17.2% 08/24/04 135,151 100,351 34,800 14.7% 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 Commercial traders have decreased their longs and increased their shorts, which could be bad news for the S&P 500. In lockstep mirror-like fashion small traders are moving the opposite direction than the "smart money". Commercials Long Short Net % Of OI 08/03/04 340,053 428,736 ( 88,683) (11.5%) 08/10/04 369,547 441,055 ( 71,508) ( 8.8%) 08/17/04 404,065 457,372 ( 53,307) ( 6.2%) 08/24/04 392,065 473,911 ( 81,846) ( 9.4%) 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 08/03/04 195,105 68,717 126,388 47.9% 08/10/04 179,940 89,239 90,701 33.7% 08/17/04 192,939 92,361 100,578 35.3% 08/24/04 211,995 76,184 135,811 47.1% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders have added to both their shorts and longs but the end result was an increase in bullish sentiment on the NDX. Small traders are also bullish but have cut their enthusiasm in half. In essence small traders are beginning to turn bearish, which in a contrarian sense is bullish. Confused yet? Commercials Long Short Net % of OI 08/03/04 42,771 36,863 5,908 7.4% 08/10/04 43,968 38,351 5,617 6.8% 08/17/04 44,743 41,535 3,208 3.7% 08/24/04 48,624 43,222 5,402 5.8% 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 08/03/04 8,995 13,901 (4,906) (21.4%) 08/10/04 10,081 10,858 ( 777) ( 3.7%) 08/17/04 12,256 8,352 3,904 18.9% 08/24/04 11,666 10,068 1,598 7.3% 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 Commercial traders remain bullish but have pared back their longs a bit. Meanwhile small traders remain bearish but have also hedged their enthusiasm a bit. Commercials Long Short Net % of OI 08/03/04 30,118 25,029 5,089 9.2% 08/10/04 30,634 22,994 7,640 14.2% 08/17/04 30,271 22,809 7,462 14.1% 08/24/04 28,919 23,658 5,261 10.1% 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 08/03/04 4,325 5,212 ( 887) ( 9.3%) 08/10/04 6,450 8,488 (2,038) (13.6%) 08/17/04 4,388 7,089 (2,701) (23.5%) 08/24/04 5,052 7,214 (2,162) (17.6%) 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 *************** Synthetic hedge. What is it? What is it intended to do? I'm confused about your logic in being short NTES and long SOHU. It appears these 2 travel in tandem, where do you think this industry is going, up or down? It appears to me that they may have hit a bottom and are trending up. Did you in fact buy SOHU as a hedge or do you see something intriguing about the upside potential in SOHU. Reply: I received a couple of questions regarding two different trades I've profiled in the OptionInvestor.com Market Monitor, where the "strategy" discussed is considered a synthetic hedge. I've discussed this type of strategy in past commentary, and traders and investors will sometimes use this strategy when an initial buy/sell decision, finds that trade moving against you. Sometime, a synthetic hedge will be established immediately. However, in this article's discussion, the synthetic hedge was established after the initial 1/2 put position was established in the Netease.com (NASDAQ:NTES) $36.15 +0.72% December $30 puts (NQGXF) on August 13, 2004. Yes, both of these stocks do tend to trade in tandem. While Neteas.com (NTES) and Sohu.com (SOHU) are not identical, their areas of business interest (Internet) are very similar. Most traders/investors that have heard of these two stocks may view them as "Chinese Internets." Currently, the only thing I find intriguing about a bullish position in Sohu.com (SOHU) at this point is that it may provide a near-term hedge against a strong bounce Netease.com (NTES) has found after I profiled the 1/2 bearish put position in Netease.com (NTES). However, I will fully explain my thought process for the bearish profile in Netease.com and subsequent bullish profile in Sohu.com, and you can be the judge if this strategy makes any sense. If it does, then you may find this strategy to be useful in your own trading, or account management. I will also discuss how a synthetic hedge needs to be monitored, in order to see if it is working as it is intended to. I will also touch on how/why traders and investors can/will/should utilize account management policies of determining just what a "full position" is First things first. What is "synthetic?" In financial terms, synthetic is any financial instrument that is artificially created by using a collection of other assets, whose combined features are comparable to the instrument it replicates. (Source: Investopedia.com) A "hedge" is a strategy traders/investors will use in an attempt to insure against a loss, or further loss. I wrote an article on hedging for the 11/23/03 Ask the Analyst column, which isn't too dissimilar to today's column, but in that trade I was discussing the S&P 500 and NASDAQ-100 tracker and a synthetic hedge. Some similarity exists as that article was focused on two separate, yet similar MARKETS (SPX vs. QQQ), while this article surrounds two separate, yet similar STOCKS. Here is a quick look at the current synthetic hedge where I've profiled a 1/2 bearish position in the NTES Dec. $30 puts, and the 1/4 bullish position in the SOHU Dec. $15 calls. Position size was determined using a hypothetical $10,000, where at time of profile, a trader/investor that has set guidelines for their own account might view a full position as being equivalent to $10,000 of the underlying stock (some may use $1,000, some may consider $100,000 as a full position). For the NTES trade, the underlying stock was trading at $28.55. Since 1/2 of $10,000 is equal to $5,000, I quickly divided $5,000 by $28.55 to derive a share base of 175 shares. This is roughly equivalent to 2 option contracts (1 contract is equivalent to 100 shares). Netease.com (NTES) and Sohu.com (SOHU) - Synthetic hedge Based on two put option contracts, a trader that bought the NTES Dec. $30 puts (NQGXF) was risking $1,100.00. As of Friday's close, shares of NTES have rebounded to $36.10 from $28.55 (see basis). If a trader had shorted 175 shares of NTES, that trade would currently show a loss of 1,321.25. The utilization of options, which is a derivative designed to reduce risk, would currently show a loss of $680.00 for the two NTES Dec. $30 puts. I'm showing the 5-day Net % and 20-day Net % changes, where a trader/investor's main focus would be the STOCK's percentage change. These are the securities we are trying to measure. As Netease.com was rebounding, it was on August 25 that I profiled the 1/4 bullish position in the SOHU Dec. $15 calls when the underlying shares of SOHU were trading $16.50. Again, using $10,000.00 as the hypothetical base value for a full position, I quickly divided $2,500 (1/4 of $10,000) to derive an underlying stock position amount of 151 shares. Since NTES and SOHU had both been rebounding up to August 25, but looking near-term extended, I decided that just 1 SOHU Dec. $15 call (UZKLC) would be purchased for the portfolio. Note: According to QCharts, NTES' beta is calculated at 1.76, while SOHU's beta is calculated at 3.19. Beta is a mathematical measure of the sensitivity of rates of return on a given stock compared with rates of return on the market as a whole. In essence, 1 SOHU call should provide enough of hedge versus the 2 NTES puts. I would consider the NASDAQ-100 (NDX.X), as a comparable MARKET for NTES and SOHU. In the past 5 sessions, the NASDAQ-100 Tracking Stock (AMEX:QQQ) has risen 1.61%, and has fallen 0.94% during the past 20 sessions. Assessment of RISK: A trader holding the two positions would have assessed a TOTAL risk of $1,460.00 to their account. Profit Benchmarks: Should NTES continue to hold above $30 by December expiration then for this synthetic hedge to profit, with just 1 SOHU Dec. $15 call, SOHU must trade above $29.60. To derive the $29.60 level, add cost of $1,100 + $360 = $1,460. Divided $1,460 by 100 (1 SOHU $15 call) = $14.60. Then add $14.60 to strike of $15 to total $29.60. Should NTES reverse course and confirm initial bearish analysis, then for this synthetic hedge to profit, NTES must trade below $22.70. To derive $22.70 level, take the same $1,460, but this time divide by 200 (2 NTES $30 puts) = $7.30. Then subtract $7.30 from the strike of $30.00 to total $22.70. Current analysis: NTES' STOCK has traded STRONGER relative SOHU's STOCK in the last 5 sessions (+6.3% vs. -0.5%) and 20 sessions. NTES' STOCK has traded relatively STRONGER than SOHU's stock in the last 20 sessions (-3.08% vs. -23.98). There may be the potential for a narrowing of recent price performance differential between NTES and SOHU based on 5 and 20- day percentage observations. Ideally (best case scenario) SOHO would trade unchanged from here, with NTES falling 20% from current price level, where the current 20-day percentage difference currently shown would be erased. Now, this is where the synthetic hedge between NTES and SOHU currently stands. Let's now review some of the steps taken to derive the trades, but also TEST to see if the current hedge makes any "financial sense" as it relates to past and current technical analysis. Determining Position Size with MARKET/SECTOR Risk Analysis: For NTES, I used observations from the NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com to assess market strength/weakness, but also risk. With the NASDAQ-100 Bullish % in "bear confirmed" status at 25% bullish, MARKET internals were very weak, but also at oversold levels below 30%. With MARKET internals weak, it made sense to be trading bearish, but at low levels of risk, it made sense to limit position size based on NTES supply/demand chart (will discuss below). Let's first take a look at the current readings and chart of the NASDAQ-100 Bullish % ($BPNDX) for assessing MARKET RISK. NASDAQ-100 Bullish % ($BPNDX) - 2% box size On August 13, may assessment of market risk using the NASDAQ-100 Bullish % ($BPNDX) would have had me observing that the RISK of establishing a new bearish position would have been high, as the $BPNDX was at oversold levels and strength could resume. A new bearish position should only be established in a weak sector, where the technicals for shorting/putting a stock must have some indications that a lower price objective (bearish vertical count) warranted a trade. In an attempt to REDUCE bearish risk, position size could be reduced. On Wednesday of this week, we noted that the NASDAQ-100 Bullish % reversed up to "bull alert" status, signaling some strengthening of market internals. Traders and investors will utilize the bullish % chart, using the point and figure method of charting, to simply benchmark against the MONTHLY intervals. This can be useful when trying to determine how much TIME to purchase when selecting an option expiration. The point and figure charting method also allows for time referencing to SECTORS and STOCKS. Now lets look at Dorsey/Wright and Associates' Internet Bullish % (BPINET) to assess the Internet sector's strength/weakness as well as SECTOR RISK. Internet Bullish % (08/27/04) - 2% box size A quick assessment of SECTOR strength/weakness and RISK had me determining that the Internet sector was and is still showing internals weakness, with the bulk of Internet-related stocks that Dorsey/Wright and associates tracks in their point and figure charting database, have a "sell signal" associated with their chart. However, RISK for a BEARISH trade could be HIGH at oversold levels of 18% (based on chart's reading). We can see some similarity between the NASDAQ-100 Bullish % ($BPNDX) and the Internet Bullish % (BPINET). Since February (2 on a point and figure chart) we've seen weakness "O" find brief periods of strength "X", then followed by weakness "O." As volatile as Internet stocks are, the NASDAQ-100 Bullish % has shown more gyration than the Internet Bullish % chart has, which gives me the impression that the Internet sector as a whole tends to FOLLOW the QQQ around. Now that we have reviewed the MARKET and SECTOR bullish %, let's look at NTES' and SOHU's point and figure charts and see if the current synthetic hedge makes any sense. I would have preferred to show a side-by-side comparison of NTES and SOHU, but due to horizontal space limitations, I can't, as both of these stocks are rather volatile, creating many columns of "X" (demand) and "O" (supply) gyrations. Here are some techniques and analysis I'm using for my current BEARISH bias for Netease.com (NTES). Netease.com (NTES) Chart - $1 box I had been keeping a BEARISH eye on NTES for several days prior to my bearish profile as the NASDAQ-100 and the Internet sector were showing weakness. I was hesitant to short/put the stock at $30 when it traded that level on August 13, as MARKET and SECTOR risk were high for a short/put, and wanted to make sure I didn't get caught in a "bear trap," which is a point and figure chart pattern where a stock triggers the triple bottom sell signal ($30), moves JUST 1-box lower ($30) then quickly reverses up. When NTES traded $29, that helped negate the "bear trap" possibility, but we see how the stock has quickly reversed up. One reason I selected December expiration, was the study Professor Davis published, regarding probabilities of various point and figure chart patterns. Professor Davis' study revealed that on average, a stock that generated a triple bottom sell signal in a "bear" market environment (as depicted by the bullish percent charts) was profitable 93.5% of the time for an average gain of 23% in 3.4 months on average. I had also performed various "old" bearish vertical counts. Sometimes we'll find a stock's point and figure chart giving both "old" bearish and bullish vertical counts that keep giving similar price targets. I show three "old" bearish vertical counts (BVC) where two of them hinted that NTES might be headed to $31 and $33. Hmmmmm.... stock was trying to firm at $31. One of the "old" bearish vertical counts hinted at $17. What has me currently viewing NTES as further bearish is when the stock did trade to $29, the current bearish vertical count was calculated at $19. With the breaking of some major near-term resistance at $30, then $29, the risk/reward was 2:1 for an OPTION trade (risking $5.50 to potentially make/reward $11). However, for a STOCK trade, a BEAR would have had to assess RISK to a point and figure buy signal ($39) as RISK of $10.50 to potentially make $11. That is TERRIBLE risk/reward and even here, that type of RISK could only be reduced with a PARTIAL position, perhaps 1/2 position in order help try and mitigate RISK should the MARKET, SECTOR or STOCK suddenly reverse its declines. I've pointed to some of the beginning MONTHLY (Feb, March, May, July, Aug) trades, where we can compare against the NASDAQ-100 Bullish % ($BPNDX) and Internet Bullish % (BPINET) charts. On the above NTES chart, I also point to the $35 level, which is approximately where the SOHU synthetic hedge was established. Question: If NTES were to break above resistance with a trade at $39, and rally further, say to its June (6 on a PnF chart) highs, what level might it trade? We might assess a $46 price level. Now let's look at SOHU's point and figure chart. Does it trade SIMILAR to NTES? This is my assumption, and was also the observation that the trader asking today's question made. Sohu.com (SOHU) Chart - $0.50 and $1 box Similarities between SOHU and NTES aren't necessarily obvious as it relates to their Xs and Os, but you can pick up on the price similarities when comparing the monthly (April, May, June) time reference. However, it is the August time reference that may have SOHU a suitable synthetic hedge security for NTES, which is what compelled me to use it as the hedge security. With NTES nearing its August (8) trade reference of $37, it could be that SOHU is "undervalued" and poised to do some catching up. Both NTES and SOHU traded fresh lows on the same day. This is the ONLY bullish case a trader could make for SOHU at this time. Based on that observation, analysis would have me thinking SOHU is the WEAKER stock when compared to NTES. As such, it is often a trader/investor's observation that a WEAKER stock will lead a further DECLINE. Other than the current rally in NTES, its point and figure chart is still considered BEARISH, until the stock would be able to generate a point and figure buy signal. With a current BEARISH position in NTES and a BULLISH position in SOHU, what would YOU as a trader want to see from this hedge? With the BULK of capital exposed to the NTES trade, a trader would most likely want to see SOHU decline, but then want/need to see NTES reverse course, and FOLLOW that weakness back lower, ideally with BOTH stocks trading their bearish vertical counts. Right now, we do not have any bullish vertical counts to work with, and can only assess upside/strength from the bullish percent indications. We do have bearish vertical counts to work from. When I calculated out the "Profit Benchmarks" the synthetic hedge still makes sense in my opinion, should NTES reverse from its recent rally, and eventually achieve its current bearish vertical count of $19.00 on or before December expiration. Do you see how this is not a TRUE hedge? A true hedge would be protecting a BEARISH NTES trade with a BULLISH NTES trade, where future price action is directly tied to the same security. The SYNTHETIC hedge discussed above involves assumptions, based on historical observation. It could be that there is nothing "wrong" with NTES and there is something "wrong" with SOHU. Should NTES continue to rally to its early June price levels, then it is assumed that SOHU might also rally to its June price levels, and on a near-term basis, should be rallying to its early August price level of $19.50 or $20. That remains to be seen, and only time will tell. One last comment: Whenever possible, try NOT to establish a new position when the 13th of the month falls on a Friday. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- -no major earnings announcements- ------------------------- TUESDAY ------------------------------ ABS Albertson's Tue, Aug 31 -----N/A----- 0.33 BAY Bayer Tue, Aug 31 During the market n/a DCI Donaldson Tue, Aug 31 After the close 0.33 EASI Engineered Support Tue, Aug 31 Before the open 0.75 FCEL FuelCell Energy Tue, Aug 31 Before the open -0.40 MBT Mobile Telesys Tue, Aug 31 Before the open 2.33 OTEX Open Text Tue, Aug 31 At the close 0.28 COO Copper Companies Tue, Aug 31 After the close 0.68 ZLC Zale Corp Tue, Aug 31 Before the open 0.13 ------------------------ WEDNESDAY ----------------------------- COCO Corinthian College Wed, Sep 1 Before the open 0.19 SKIL SkillSoft Wed, Sep 1 After the close 0.02 ------------------------- THUSDAY ----------------------------- CAO CSK Auto Thr, Sep 2 After the close 0.29 DLM Del Monte Foods Thr, Sep 2 Before the open 0.06 DEO Diageo PLC Thr, Sep 2 During the market n/a FNSR Finisar Thr, Sep 2 After the close -0.05 MBG Mandalay Resort Thr, Sep 2 -----N/A----- 1.03 ------------------------- FRIDAY ------------------------------- -no major earnings announcements- ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable BAC Bank of America 2:1 Aug 27th Aug 28th CFC Countrywide Financial Corp2:1 Aug 30th Aug 31st VNBC Vineyard National Bancorp 2:1 Aug 30th Aug 31st HOC Holly Corp 2:1 Aug 30th Aug 31st TRBS Texas Regional Bancshares 3:2 Aug 30th Aug 31st ENSI EnergySouth, Inc 3:2 Sep 1st Sep 2nd CHD Church & Dwight Co. Inc 3:2 Sep 1st Sep 2nd TCB TCF Financial Corp 2:1 Sep 3rd Sep 6th TCHC 21st Century Holding 3:2 Sep 7th Sep 10th CVX ChevronTexaco 2:1 Sep 10th Sep 13th SSP E.W.Scripps Co 2:1 Sep 10th Sep 13th POOL SCP Pool Corp 3:2 Sep 10th Sep 13th -------------------------- Economic Reports This Week -------------------------- This week has a parade of economic data but most of it will be overshadowed by the Republican National Convention in New York and any movement in oil. Watch for the PMI on Tuesday, the ISM on Wednesday and the Jobs number on Friday. ============================================================== -For- ---------------- Monday, 08/30/04 ---------------- Personal Income (bb) July Forecast: +0.5% Previous: +0.2% Personal Spending (bb) July Forecast: +0.7% Previous: -0.7% Republican National Convention in NYC ----------------- Tuesday, 08/31/04 ----------------- Chicago PMI (DM) Aug. Forecast: 60.0 Previous: 64.7 Consumer Confidence(dm)Aug. Forecast: 103.2 Previous: 106.1 Chain Store Sales (bb) Redbook Retail Sales (bb) Republican National Convention in NYC ------------------- Wednesday, 09/01/04 ------------------- ISM Manufacturing (DM) Aug. Forecast: 60.0 Previous: 62.0 Construction Spending July Forecast: +0.4% Prevoius: -0.3% Revised Q2 Productivity Ford's August sales GM's August sales MBA Refinancing index Crude oil and gas inventories Republican National Convention in NYC ------------------ Thursday, 09/02/04 ------------------ Initial Jobless Claims Forecast: Previous: 343K Factory Orders July Forecast: Previous: +0.7% Natural gas inventories Money Supply Intel's mid-quarter update Republican National Convention in NYC - Last Night! ---------------- Friday, 09/03/04 ---------------- Non-farm Payrolls(Jobs) Aug. Forecast: +150K Previous: +32K Unemployment Aug. Forecast: 5.5% Previous: 5.5% Average Hourly Earnings ISM Services index Aug. Forecast: 62.5 Previous: 64.8 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. 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The Option Investor Newsletter Sunday 08-29-2004 Sunday 2 of 5 In Section Two: Watch List: IVGN, DGX, AHC, BRCM Dropped Calls: None Dropped Puts: KLAC ************************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 ********** Biotech to Oil to Chips and more! ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ Invitrogen - IVGN - close: 51.25 change: +1.25 WHAT TO WATCH: The rebound in the DRG drug index has been impressive. It might be finally rubbing off on beleaguered IVGN. The stock is trying to find a base at the $50.00 level. We would watch the stock for a move over $52.00 as a potential entry point toward the bottom of the gap down near $57.50. Chart= --- Quest Diagnostic - DGX - close: 84.65 change: +1.49 WHAT TO WATCH: The rebound from the simple and exponential 200- dma's has sent DGX back to the $85.00 mark. If shares can push through this resistance traders can target a run toward $90.00. The P&F chart is more bullish with an upside target at $93.00 but this will likely be revised upward. Chart= --- Amerada Hess - AHC - close: 79.31 change: +1.76 WHAT TO WATCH: The oil sector has been rebounding in spite of the 7% drop in the price of crude this past week. AHC appears to have produced a bottom near $76.00. Short-term technicals are bullish and its MACD has produced a new "buy" signal. We would watch for a push through the $80.00 mark as an entry point for longs. Our short-term target would be $85.00. Chart= --- Broadcom - BRCM - close: 28.31 change: -0.92 WHAT TO WATCH: We came very close to adding BRCM to the play list this weekend as a put. The downtrend shows no signs of stopping unlike other semiconductor stocks that are beginning to rebound higher. Recent bad news has undermined confidence in BRCM and we'd use a trigger under $28.00 to target a drop to $25.00. The P&F chart is very bearish with a $10.00 target. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- PDX $69.90 +1.11 - PDX appears to have produced a big double- bottom at the $60.00 mark. Now shares are challenging resistance at $70.00. Use a trigger over $70.00 or the April highs at 71.50 and target 6-to-8 week move toward $80.00. PRX $41.91 +0.78 - Slow and steady shares of this biotech/drug stock has been pushing through resistance. Consider buying a bounce from $40.00 or a new high over $42. BA $51.99 -0.08 - We're still bullish on BA but we'd watch for a bounce from $51.00 first. ************************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
The Option Investor Newsletter Sunday 08-29-2004 Sunday 3 of 5 In Section Three: Current Calls: AET, BOL, FMC, INSP, MHK, PD, POT, RAI, TDS, ZBRA New Calls: FO Current Puts: SPW New Puts: None ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ****************** CURRENT CALL PLAYS ****************** Aetna - AET - close: 92.42 change: +0.14 stop: 89.95 Company Description: As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 13.4 million medical members, 11.4 million dental members, 8.1 million pharmacy members and 12.6 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost- effective health care through a nationwide network of more than 633,000 health care professionals, including over 377,000 primary care and specialist doctors and 3,866 hospitals. (source: company press release) Why We Like It: The IUX insurance index has churned sideways in a very tight range the last couple of sessions and AET is following suit. Actually, if you look more closely at AET's intraday chart you'll see a minor trend of higher lows building over the last couple of days. Unfortunately, the stock isn't climbing fast enough to head off what appears to be an imminent "sell" signal in its MACD. We're still bullish on AET but we would probably not suggest new positions right here. A bounce from $90.00 or a breakout over $95 are probably the better plays. Suggested Options: We like the September calls. Our favorites are the $90 strikes although the $95s work well too. See play details for entry points. BUY CALL SEP 90 AET-IR OI=3827 current ask $3.80 BUY CALL SEP 95 AET-IS OI=7250 current ask $1.15 BUY CALL SEP 100 AET-IT OI= 997 current ask $0.30 Annotated Chart: Picked on August 15th at $90.72 Change since picked: + 1.70 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 1.4 million Chart = --- Bausch Lomb - BOL - close: 65.76 change: +0.63 stop: 62.50 Company Description: Bausch & Lomb is the eye health company, dedicated to perfecting vision and enhancing life for consumers around the world. Its core businesses include soft and rigid gas permeable contact lenses and lens care products, and ophthalmic surgical and pharmaceutical products. The Bausch & Lomb name is one of the best known and most respected healthcare brands in the world. Celebrating its 150th anniversary, the Company is headquartered in Rochester, New York. Bausch & Lomb's 2003 revenues were $2.0 billion; it employs approximately 11,500 people worldwide and its products are available in more than 100 countries. (source: company press release) Why We Like It: BOL is going nowhere fast. The stock rallied right to resistance near $66.00 and has spent the last week churning sideways. Optimistically we're encouraged that the consolidation managed to hold above minor round-number support at $65.00. This strengthens our hope that the rally isn't over yet but merely taking a rest. However, as with any stock that pauses after a decent rally the technical oscillators start to sour. We're still waiting for BOL to trade at $66.51 to open the play. Until then we'll sit on the sidelines. Suggested Options: Short-term traders can choose from the September or October calls. We like both months at the $65 strike. BUY CALL SEP 65 BOL-IM OI=213 current ask $1.95 BUY CALL SEP 70 BOL-IN OI= 19 current ask $0.35 BUY CALL OCT 65 BOL-JM OI=186 current ask $3.00 BUY CALL OCT 70 BOL-JN OI= 81 current ask $0.95 Annotated Chart: Picked on August xxth at $xx.xx <-- see TRIGGER Change since picked: + 0.00 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 397 thousand Chart = --- F M C Corp - FMC - close: 45.92 change: -0.46 stop: 42.00 Company Description: FMC Corporation is a diversified chemical company serving agricultural, industrial and consumer markets globally for more than a century with innovative solutions, applications and quality products. The company employs approximately 5,300 people throughout the world. The company operates its businesses in three segments: Agricultural Products, Specialty Chemicals and Industrial Chemicals. (source: company press release) Why We Like It: FMC is thus far on track. We added the play on Tuesday after its high-volume breakout over resistance at $45.00. Shares saw some follow through but Friday FMC experienced some minor profit taking. Fortunately traders stepped in to buy the dip near $45.00, which is what we should expected after the breakout. We continue to suggest bullish positions at current levels but make sure you're comfortable with the overall market environment before committing any capital. The P&F chart for FMC remains bullish with an $88 target. We're only targeting a quick move to $50.00. Suggested Options: Option volume is pretty sparse except near the ATM strikes. We like the October 45s. If you're feeling daring the October 50s work but there is no current open interest. BUY CALL OCT 40 FMC-JH OI=400 current ask $6.50 BUY CALL OCT 45 FMC-JI OI=510 current ask $2.70 BUY CALL OCT 50 FMC-JJ OI= 50 current ask $0.70 Annotated chart: Picked on August 24 at $45.87 Change since picked: + 0.05 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 265 thousand Chart = --- InfoSpace - INSP - close: 38.88 change: +0.36 stop: 37.75*new* Company Description: InfoSpace, Inc. is a diversified technology and services company that develops Internet and wireless solutions for a wide range of customers. InfoSpace Search & Directory provides Web search and online directory products that help users find the information they need while creating opportunities for merchants. InfoSpace Mobile develops infrastructure, tools and applications that enable carriers and content providers to efficiently develop and deliver mobile data services across multiple devices. (source: company press release) Why We Like It: Heads up! It may be time to consider exiting INSP. We're not giving up just yet but the oscillators continue to deteriorate and we've not seen much of a bounce from the $38.00 level. Shares of INSP traded in a very tight 70-cent range on Friday, which doesn't offer us any guidance. We are not suggesting new bullish positions until INSP trades back over the $40.00 level. We are going to try and minimize any losses by raising our stop loss to $37.75, just under the simple 10-dma, which should act as support. Suggested Options: We are not suggesting new bullish positions until INSP trades back above the $40.00 level. Annotated Chart: Picked on August 23rd at $40.10 Change since picked: - 1.22 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 1.1 million Chart = -- Mohawk Industries - MHK - close: 77.47 change: +0.27 stop: 73.00 Company Description: Mohawk is a leading supplier of flooring for both residential and commercial applications. Mohawk offers a complete selection of broadloom carpet, ceramic tile, wood, stone, laminate, vinyl, rugs and other home products. These products are marketed under the premier brands in the industry, which include Mohawk, Karastan, Ralph Lauren, Lees, Bigelow, Dal- Tile and American Olean. Mohawk's unique merchandising and marketing assist our customers in creating the consumers' dream. Mohawk provides a premium level of service with its own trucking fleet and over 250 local distribution locations. (source: company press release) Why We Like It: MHK was one of the big winners this week with a major breakout over the top of its trading range, round-number resistance at $75.00 and technical resistance at its simple 200-dma. Volume was strong on the breakout and we were triggered at $75.51. Traders bought the early dip back to $75.00 on Wednesday and MHK looks poised to hit new relative highs next week. Short-term traders can prepare to exit as MHK nears the $80.00 level. More aggressive types can hang on to see if MHK breaks through $80. The P&F chart looks very bullish with a triple-top breakout buy signal and a $90.00 target (the target keeps rising). We would probably not suggest new positions unless MHK dipped back to $76.00. Suggested Options: Traders need to be careful here. We're not suggesting any big positions. The September calls are our favorites but volume is very light. Novembers are available but that's two extra months we don't think we need. BUY CALL SEP 70 MHK-IN OI= 2 current ask $7.90 BUY CALL SEP 75 MHK-IO OI= 73 current ask $3.40 BUY CALL SEP 80 MHK-IP OI= 67 current ask $0.70 BUY CALL OCT 75 MHK-JO OI= 46 current ask $4.30 BUY CALL OCT 80 MHK-JP OI= 52 current ask $1.65 BUY CALL NOV 75 MHK-KO OI=1130 current ask $5.10 BUY CALL NOV 80 MHK-KP OI= 72 current ask $2.55 Annotated Chart: Picked on August 24th at $75.51 Change since picked: + 1.96 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 397 thousand Chart = --- Phelps Dodge - PD - close: 82.89 chg: +0.79 stop: 77.00 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: (Original Play from Thursday night) If you're a MarketMonitor subscriber then you know we've been following PD as it flirts with the $80.00 level the last couple of weeks. Today Jeff Bailey mentioned the new high and bullish P&F buy signal. Investors bid up shares of PD and other miners due to a rise in copper prices. Copper surged to a new eight- year high ($1.403 a lb.) because of news that workers at two Southern Peru Copper Corp mines have threatened a strike on August 31st if the company doesn't cough up some wage increases. The obvious risk here is that the Southern Peru Copper Corp capitulates pretty quickly and copper prices subside again. We don't know if or when that can happen. All we do know is that global demand for copper is very strong right now and any disruption would be a boon for those companies still producing. Plus, we have the very obvious bullish breakout over $80-82 in shares of PD and the triple-top breakout buy signal on its P&F chart. Actually, if you're counting it's a quintuple-top breakout. The P&F chart's bullish target is $93.00 but we would target the $87.50-90.00 range. We're willing to speculate on a continued rise with an immediate stop under $77.00, which was the recent low on Wednesday. Weekend Update: PD did see some follow through on Thursday's breakout but the rally stalled under the $84 mark. We suspect traders will get another chance to buy a dip to $82.00 or $81.00. Look for the bounce. Suggested Options: We're going to suggest the September or October calls. The $80 and $85 strikes should work well. BUY CALL SEP 80 PD-IP OI=8095 current ask $4.60 BUY CALL SEP 85 PD-IQ OI=3153 current ask $1.75 BUY CALL OCT 80 PD-JP OI=3023 current ask $6.20 BUY CALL OCT 85 PD-JQ OI=1928 current ask $3.40 Annotated Chart: Picked on August 26th at $82.10 Change since picked: + 0.79 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 2.1 million Chart = --- Potash - POT - close: 54.03 change: +0.41 stop: 51.00 *new* Company Description: Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash, fourth largest in phosphate and third largest in nitrogen; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and one of only three North American suppliers of industrial phosphates. (source: company press release) Why We Like It: It's been a great week for POT. The stock has not experienced any post-split depression and Merrill Lynch upgraded the stock to a "buy" on Tuesday. Thursday saw POT take off on better than average volume and Friday had POT closing near its highs. Now that shares are over the $54 level it's within striking distance of our target at $55. We will officially exit the play at $54.90 to avoid everyone else who may want to exit at $55.00. We are not suggesting new bullish plays at this time. Readers can be preparing to exit. We will raise our stop loss to $51.00. Suggested Option: We are not suggesting new positions at this time. We suggest readers prepare to exit with a profit. Annotated Chart: Picked on August 10th at $ 51.08 Change since picked: + 2.95 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 180 thousand Chart = -- Reynolds American - RAI - close: 73.81 change: +0.44 stop: 69.36 Company Description: Reynolds American Inc. is the parent company of R.J. Reynolds Tobacco Company, Santa Fe Natural Tobacco Company, Inc., Lane Limited and R.J. Reynolds Global Products, Inc. R.J. Reynolds Tobacco Company, the second- largest U.S. tobacco company, manufactures about one of every three cigarettes sold in the United States, including five of the nation's 10 best-selling brands: Camel, Winston, KOOL, Salem and Doral. Santa Fe Natural Tobacco Company, Inc. manufactures Natural American Spirit cigarettes and other tobacco products, and markets them both nationally and internationally. Lane Limited manufactures several roll-your-own, pipe tobacco and little cigar brands, and distributes Dunhill tobacco products. R.J. Reynolds Global Products, Inc. manufactures, sells and distributes American-blend cigarettes and other tobacco products to a variety of customers worldwide. (source: company press release) Why We Like It: The bullish trend of higher lows continues to build for shares of RAI. We're encouraged to see RAI close at new three-week highs but the stock is still struggling with the $74.00 level. We believe that RAI will continue to attract buyer interest with its 5 percent dividend yield and relative "safe haven" status in spite of the litigation pressures. Readers can choose to buy a bounce from $73.00 or a breakout over $74.00. Suggested Options: We like the September and November calls although our favorites are probably the September 70s and 75s. BUY CALL SEP 70 RAI-IN OI=1781 current ask $4.10 BUY CALL SEP 75 RAI-IO OI=1750 current ask $0.90 BUY CALL OCT 70 RAI-JN OI= 5 current ask $4.90 BUY CALL OCT 75 RAI-JO OI= 407 current ask $1.85 BUY CALL NOV 70 RAI-KN OI=7986 current ask $5.80 BUY CALL NOV 75 RAI-KO OI=1789 current ask $2.95 Annotated Chart: Picked on August 19 at $72.88 Change since picked: + 0.93 Earnings Date 08/02/04 (confirmed) Average Daily Volume = 1.2 million Chart = -- Telephone & Data Sys - TDS - cls: 77.33 change: -0.18 stop: 74.00 Company Description: TDS Telecom is a growing communications company serving more than 1 million residential and business customers in small rural and suburban communities in 30 states. The company's goal is to provide the most effective communication technology and high- quality services in its chosen markets. TDS Telecom is a subsidiary of Telephone and Data Systems, Inc., a diversified telecommunications corporation founded in 1969 and a FORTUNE 500 company, that operates primarily by providing wireless and local telephone service through its strategic business units, U.S. Cellular and TDS Telecom. (source: company press release) Why We Like It: We are starting to turn more cautious on TDS. There was no follow through on the breakout over $78.00 and shares continue to churn sideways. Bulls can be encouraged by the bullish P&F chart but we're just not seeing any momentum. We're going to give TDS a couple more days to generate some excitement. If it does not we'll cut it loose. Remember this has been an aggressive, higher-risk play given the low stock volume and low option volume. Volume next week is going to get even lower! Suggested Options: We are not suggesting new bullish positions until TDS trades back above $78.40. Annotated Chart: Picked on August 24th at $78.05 Change since picked: - 0.72 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 195 thousand Chart = --- Zebra Tech. - ZBRA - close: 57.43 chg: +0.98 stop: 53.99*new* Company Description: Zebra Technologies Corp. delivers innovative and reliable on- demand printing solutions for business improvement and security applications in 90 countries around the world. More than 90 percent of Fortune 500 companies use Zebra-brand printers. A broad range of applications benefit from Zebra-brand thermal bar code, "smart" label, receipt, and card printers, resulting in enhanced security, increased productivity, improved quality, lower costs, and better customer service. The company has sold four million printers, including RFID printer/encoders and wireless mobile solutions, and also offers software, connectivity solutions and printing supplies. (source: company press release) Why We Like It: The rebound continues for ZBRA and the stock is hitting new six- week highs. We're encouraged by the follow through on the breakout over resistance this past week and the fact there's been no post-split depression. We're also optimistic about next week since ZBRA closed near its highs for the day on Friday. This is a tough spot to consider new positions though. Our target is $60.00. We might consider initiating new plays if ZBRA dipped back to 56.50-57.00 but watch your stops. We're going to raise our stop loss to $53.99 but more conservative traders should be able to get away with a stop closer to $54.95. Suggested Options: Our favorites are the September calls but the Novembers have more volume. You will want to confirm the option symbols with your broker consider ZBRA's recent 3:2 split. Our old suggested strikes have become new strikes at 53.75 and 56.62. The new strikes below have very low volume. BUY CALL SEP 55 ZBQ-IK OI= 0 current ask $3.90 BUY CALL SEP 60 ZBQ-IL OI= 15 current ask $1.05 BUY CALL NOV 55 ZBQ-KK OI= 14 current ask $5.70 BUY CALL NOV 60 ZBQ-KL OI= 12 current ask $2.75 Annotated Chart: Picked on August 25th at $56.18 Change since picked: + 1.25 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 419 thousand Chart = ************** NEW CALL PLAYS ************** Fortune Brands - FO - close: 74.08 change: +1.63 stop: 71.50 Company Description: Fortune Brands, Inc. is a $6 billion leading consumer brands company. Its operating companies have premier brands and leading market positions in home and hardware products, spirits and wine, golf equipment and office products. Home and hardware brands include Moen faucets, Aristokraft, Schrock, Diamond and Omega cabinets, Therma-Tru door systems, Master Lock padlocks and Waterloo tool storage sold by units of Fortune Brands Home & Hardware, Inc. Major spirits and wine brands sold by units of Jim Beam Brands Worldwide, Inc. include Jim Beam and Knob Creek bourbons, DeKuyper cordials, The Dalmore single malt Scotch, Vox vodka and Geyser Peak and Wild Horse wines. Acushnet Company's golf brands include Titleist, Cobra and FootJoy. Office brands include Swingline, Wilson Jones, Kensington and Day-Timer sold by units of ACCO World Corporation. (source: company press release) Why We Like It: The stock market has been rather volatile in August and shares of FO didn't fare any better. Early August was painful and shares broke down through multiple levels of support to produce a new P&F sell signal. The latter half of August has been equally volatile to the upside. The stock has risen back through old support, which was now new resistance. More importantly we're seeing a new relative high. FO has broken through the downtrend of lower highs as well as all of its overhead moving averages. This is a technical play and with its P&F chart now in a new "buy" signal (also a bear-trap signal) the P&F chart is forecasting an $85 target. We'd be happy with a run toward $80.00. We're willing to consider positions at current levels but some traders may feel more comfortable waiting for FO to breakout above the $75.00 mark. Suggested Options: Traders can choose from the September or October calls for short- term positions. We like the October $70 and $75 strikes. BUY CALL SEP 70 FO-IN OI= 720 current ask $4.60 BUY CALL SEP 75 FO-IO OI= 787 current ask $0.90 BUY CALL OCT 70 FO-JN OI= 0 current ask $5.10 BUY CALL OCT 75 FO-JO OI= 36 current ask $1.75 Annotated Chart: Picked on August 29th at $74.08 Change since picked: + 0.00 Earnings Date 07/23/04 (confirmed) Average Daily Volume = 636 thousand 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 ***************** SPX Corp - SPW - close: 36.81 change: +0.05 stop: 38.26 Company Description: SPX Corporation is a global provider of technical products and systems, industrial products and services, flow technology, cooling technologies and services, and service solutions. (source: company press release) Why We Like It: We're not giving up yet. Thus far we remain un-triggered. SPW has not broken through support at $36.00 and hit our trigger to buy puts at $35.75 or lower. However, the stock's trend of lower highs just coincided with its overhead 21-dma. SPW appears to be coiling for a breakdown under support soon. We'll give it a few more days. Suggested Options: We like the September puts. Our favorites are the $37.50s and $35s. BUY PUT SEP 37.50 SPW-UU OI=4719 current ask $1.80 BUY PUT SEP 35.00 SPW-UG OI=1225 current ask $0.60 Annotated Chart: Picked on August xxth at $xx.xx <-- see TRIGGER Change since picked: - 0.00 Earnings Date 08/02/04 (confirmed) Average Daily Volume = 814 thousand Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 08-29-2004 Sunday 4 of 5 In Section Four: Leaps: More Stress Ahead ************************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 ***** More Stress Ahead It is stress for me to watch our targeted stocks move higher and farther away from our potential entry points. However, we have to keep focused on two things. We only want to buy them if we can get our price. This reduces our risk substantially. Chasing prices can cause you to buy at the top and the next bout of weakness puts you in a losing position. If we wait to buy on weakness then our long term results will be much better. Secondly, we have the two worst months of the year ahead of us. September and October normally have the biggest dips of the year and are known for their corrections. October is known as the bear killer month because many sharp corrections end in October with a monster rebound. That is still a potential for this year and one that I am counting on. Be patient, cash is a position and it is really tough to lose money while waiting in cash. New Plays COP - Conoco Phillips $73.33 Conoco has been on a permanent uptick since October 2002. That uptrend accelerated in December 2003 and topped out at $80 this August. The stock took a dive in early August when Conoco released earnings that almost doubled but said they were selling some assets to reduce $1.5B in debt. Investors decided to take profits and see what Conoco had for future plans. COP, along with AHC, MRO and OXY is working with Libya to get assets frozen in 1986. This would be a favorable event but would require some updating to return to full production. At least that production would not need to be bought or bid on as any new leases in Libya currently on the auction block. COP took a serious jump on Thursday when it was announced they are a front runner in acquiring a strong stake in the Russian oil firm Lukoil. The Russian government is selling the 7.6% it owns and COP is rumored to be trying to acquire a 25% interest in the full company. This would give COP access to literally hundreds of billions of barrels in oil reserves. The prospect of COP pulling this off sent share soaring to $74.50 from their 71.28 low on Thursday. The initial drop was on the prospect of a huge cash outlay for the Lukoil interest but the size of the reserves and the potential for gain changed direction quickly. I view the August drop on COP as an entry point and will not be putting a target price on the entry. We are going to take what is offered on Monday and take our chances. Already -10% off its 52-week high with strong support at $70 there should be little risk. With oil prices not expected to stay low any future reserves increase in value daily. With COP at $73.33 I am going to recommend the Jan 2006 $75 LEAP Call YRO-AO currently $6.70. Should oil break $50 over the next two years any recovered assets in Libya and reserves in Russia could easily provide a strong boost to the stock. Buy Jan-2006 $75 LEAP Call YRO-AO currently $6.70 COP Chart Portfolio Update TYC - Tyco Intl. $31.86 **Stop $28.00** This was a strong weak for Tyco with a spike to $32.20 on Thursday. Shorts were caught off guard and were forced to cover after the Wednesday jump in the markets. If we do get a post convention rally I expect Tyco to set a new 52-week high. JNPR - Juniper Networks $22.96 **Stop $19.00** Juniper continued to rally out of the August tech wreck and broke above its 100/200 day averaged on Friday. It is poised to run and now that the Cisco problems are behind it there are blue skies ahead. SMH - Semiconductor Holders $30.29 **Stop 31.25** The SOX is still weak and with the Intel update next Thursday this tech insurance play could still pay off. Even at today's prices we are still up about +30% but that is well below the strong gains we had in this play before the SOX rebound. Plenty of time for this November insurance to come back into play. **************************** Current Portfolio: SMH - Semiconductor Holders $30.16 **Stop $31.25** Entry $32.50 August 2nd Profit Target = SMH $28 ($28.30 low hit 8/13) Current position: Nov-$30 Put SMH-WF cost $1.40 current $1.80 Nov-$35 Put SMH-WG cost $3.80 current $5.10 Initial play description: http://members.OptionInvestor.com/leaps/Lp_080104_1.asp SMH Chart TYC Tyco $31.84 **Stop $28.00** Entry $28.32 2005 $30 LEAP Call TYC-AF cost $2.15 current $3.10 2006 $30 LEAP Call WPA-AF cost $4.00 current $5.20 July $25 insurance put - expired - cost $.55 Tyco Chart JNPR - Juniper Networks $22.96 **Stop $19.00** Entry $20.19 2006 $25 LEAP Call WBW-AE cost $3.50 current $4.70 Insurance = Sept-$17.50 Put JUX-UW cost 50 cents. http://members.OptionInvestor.com/leaps/Lp_081504_1.asp JNPR Chart Position Summary Graph LEAPS Watch List **Editors Note** In the event of a market drop due to a terrorist attack on U.S. soil all entry targets should be immediately cancelled. Watch List Update: We are still vertically challenged with a two week rally behind us. I raised several target entry points but not very far. We still have a couple of rough months ahead and plenty of time for those targets to be hit. New Entry OXY - Occidental Petroleum $50.89 Target $49.50 Just copy my comments on COP in the new play today and you will have a general idea about adding OXY to the watch list. OXY is a strong bidder in several places today and is actively trying to tie up as many reserves as possible. The news headlines for OXY are full of positive press and the chart shows it. The reason I am putting OXY on the watch list instead of making it an instant play is the chart. It hit a 52-week high on Friday and that is not the time to buy calls. I am hoping to get at least a minor pullback to enter a position. BUY 2006 $50 JAN LEAP Calls WXY-AJ currently $6.00 *Note - there is only $2 difference between the premium on the $50 and $55 calls. Hopefully if we get a drop in the stock we can shave some off the $50 leap. I hate to give up $5 to save only $2. OXY Chart EBAY - EBAY $85.91 target entry $74.00 Missing that EBAY entry at $72 with EBAY's dip to $73 was painful. It is even more painful to watch it rocket higher on a daily basis. I raised the entry to $74 today to keep with the 200dma. I am not going to chase it with Sept/Oct still ahead. Plenty of time for another correction. 2006 $80 LEAP Call YEU-AP http://members.OptionInvestor.com/leaps/Lp_072504_1.asp EBAY Chart MER - Merrill Lynch $51.50 target entry $46.00 2006 $50 LEAP Call WZM-AJ http://members.OptionInvestor.com/leaps/Lp_071804_1.asp MER Chart INTC - Intel $22.02 target entry $20.00 Intel is still lagging the recovery and with the mid quarter update next week we could still get lucky. 2006 $22 LEAP Call WNL-AX 2006 $25 LEAP Call WNL-AE http://members.OptionInvestor.com/leaps/Lp_071804_1.asp INTC Chart MMM - 3M Company - $81.51 Target entry $75, add to position at $70. MMM is also lagging the rally. Should the market roll over again I think we still have a good chance of filling at $75. 2006 $80 LEAP Call VMU-AP 2006 $85 LEAP Call VMU-AQ http://members.OptionInvestor.com/leaps/Lp_080804_1.asp MMM Chart C - Citigroup $46.73 LEAP Call Citigroup is pulling another EBAY on us with a daily uptick but it is not moving quite as fast. Just keep thinking October, October, October. Plenty of corrections occur over the next 60 days. Enter 1/2 position at $42.50 Enter 1/2 position at $40.00 2006 $45 LEAP Call WRV-AI http://members.OptionInvestor.com/leaps/Lp_080804_1.asp Citigroup Chart SYMC - Symantec - $48.39 - Target $43 I thought SYMC might be out of reach but software stocks have been weak over the past week. I raised the target to $43, half way between the 100 dma at 45.35 and the 200dma at 41.70. 2006 $45 LEAP Call YAG-AI current $9.20, target $6.00 2006 $50 LEAP Call YAG-AJ current $7.10, target $5.00 http://members.OptionInvestor.com/leaps/Lp_080804_1.asp SYMC Chart WMT - Wal-Mart $53.58 Target $51.00 2006 $55 LEAP Call WW-TAK Insurance = Sept-$50 Put WMT-UJ http://members.OptionInvestor.com/leaps/Lp_081504_1.asp WMT Chart GE $32.80 LEAP Call Target $31.00 2006 $30 LEAP Call WGE-AF $4.20, target $3.50 2006 $35 LEAP Call WGE-AG $2.00, target $1.75 I am not suggesting insurance on GE but the December $27.50 put is only 40 cents. We would need a serious national disaster to see GE break $30 and I think it would only be temporary. GE Chart ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. 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The Option Investor Newsletter Sunday 08-29-2004 Sunday 5 of 5 In Section Five: Covered Calls: Stocks Grind Higher Amid Favorable Economic Data! Spreads and Straddles: The “Sure Thing” Credit Spread Premium-Selling Plays: Naked Puts and Calls ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************** COVERED CALLS ************** A better-than-expected gross domestic output, combined with improving consumer sentiment, helped the major equity averages finish the week on a bullish note. The Dow Jones industrial average closed up 21 points at 10,195 with Alcoa (NYSE:AA) leading the blue-chip group into positive territory. The NASDAQ composite index gained 9 points to 1,862 as biotechnology stocks enjoyed renewed buying interest. The broader Standard & Poor's 500-stock index ended 2 points higher at 1,107 with steel, aluminum, hospital, and health care supply issues among the best performers. Advancing stocks outnumbered decliners by nearly 2 to 1 on the NYSE, but volume was only 875 million shares. NASDAQ breadth was better than 3 to 2, despite volume of only 1.1 billion. Bonds traded lower with the 10-year note down 4/32, while its yield climbed to 4.22%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 08/27/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 Mon L/P S/P Credit CB G/L Status FRE 65.04 66.37 SEP 55.0 60.0 0.40 59.60 0.40 Open FPL 67.73 68.55 SEP 60.0 65.0 0.45 64.55 0.45 Open MCO 67.33 68.52 SEP 60.0 65.0 0.65 64.35 0.65 Open BSTE 44.14 46.94 SEP 35.0 40.0 0.55 39.45 0.55 Open ISCA 53.40 52.98 SEP 45.0 50.0 0.55 49.45 0.55 Open LEND 33.89 38.36 SEP 25.0 30.0 0.60 29.40 0.60 Open PIXR 69.93 76.00 SEP 60.0 65.0 0.45 64.55 0.45 Open PD 80.77 82.89 SEP 65.0 70.0 0.40 69.60 0.40 Open RYL 86.01 88.25 SEP 75.0 80.0 0.65 79.35 0.65 Open FRO 40.05 38.00 SEP 30.0 35.0 0.60 34.40 0.60 Open NIHD 37.59 36.52 SEP 33.4 35.0 0.20 34.80 0.20 Open NCEN 53.10 54.13 SEP 45.0 50.0 0.60 49.40 0.60 Open SEPR 49.35 50.99 SEP 42.5 45.0 0.30 44.70 0.30 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss CALL-CREDIT SPREADS Stock Pick Last Mon L/C S/C Credit CB G/L Status PDCO 73.40 74.90 SEP 85.0 80.0 0.55 80.55 0.55 Open CDWC 59.25 60.09 SEP 65.0 60.0 0.45 60.45 0.36 Open BGG 69.80 75.96 SEP 80.0 75.0 0.45 75.45 (0.51) Open? DNA 44.23 49.90 SEP 52.5 50.0 0.35 50.35 0.35 Open? EASI 43.53 42.79 SEP 55.0 50.0 0.40 50.40 0.40 Open VLO 64.36 66.04 SEP 75.0 70.0 0.60 70.60 0.60 Open FD 44.60 45.00 SEP 50.0 47.5 0.30 47.80 0.30 Open PHS 32.42 32.47 SEP 37.5 35.0 0.30 35.30 0.30 Open GDT 56.26 60.40 SEP 65.0 60.0 0.60 60.60 0.20 Open? OSTK 31.03 32.58 SEP 40.0 35.0 0.60 35.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss Briggs & Stratton (NYSE:BGG), Guidant (NYSE:GDT) and Genentech (NYSE:DNA) are on the early-exit list. Kmart (NASDAQ:KMRT) and Vimple Communications (NYSE:VIP) were previously closed in order to limit potential losses. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status DITC 17.97 21.84 SEP 17.5 17.5 3.00 5.50 Open? Our new straddle in Ditech (NASDAQ:DITC) was a "big winner" last week as the issue jumped over $4 on a strong earnings report and the announcement of two additional customers in Asia. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ GILD - Gilead Sciences $69.39 *** Next Leg Up? *** Gilead Sciences (NASDAQ:GILD) is a biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases worldwide. Gilead has six products that are sold in the United States, all of which are also marketed worldwide. These products are Viread and Emtriva, for the treatment of HIV infection; Hepsera, for the treatment of chronic hepatitis B infection; AmBisome, an antifungal agent, and Vistide, for the treatment of CMV retinitis. In addition, Hoffmann-La Roche sells Tamiflu, for the treatment of influenza, under a royalty agreement with Gilead. GILD - Gilead Sciences $69.39 PLAY (less conservative - bullish/credit spread): BUY PUT SEP-60.00 GDQ-UL OI=2211 ASK=$0.25 SELL PUT SEP-65.00 GDQ-UM OI=1984 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$64.45 __________________________________________________________________ PCU - Southern Peru Copper $43.29 ** Basic Materials Demand! ** Southern Peru Copper (NYSE:PCU)) is an integrated producer of copper that operates mining, smelting and refining facilities in the southern part of Peru. The copper operations of the company involve mining, milling and flotation of copper ore to produce copper concentrates, the smelting of concentrates to produce blister copper and the refining of blister copper to produce copper cathodes. The company also produces refined copper using the solvent extraction/electrowinning technology. PCU - Southern Peru Copper $43.29 PLAY (less conservative - bullish/credit spread): BUY PUT SEP-35.00 PCU-UG OI=13 ASK=$0.25 SELL PUT SEP-40.00 PCU-UH OI=42 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$39.50 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AMZN - Amazon.com $39.90 *** Consolidation In Progress? *** Amazon.com (NASDAQ:AMZN) is a customer-centric company that sells a wide range of products that it purchases from manufacturers and distributors through its six primary websites: www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca. The company offers new, used, refurbished and collectible items in a wide variety of categories. Through its Syndicated Stores program, the company utilizes its e-commerce services, features and technologies to sell its products through other businesses' Websites. AMZN - Amazon.com $39.90 PLAY (less conservative - bearish/credit spread): BUY CALL SEP-45.00 ZQN-II OI=8901 ASK=$0.20 SELL CALL SEP-42.50 ZQN-IV OI=8457 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$42.80 __________________________________________________________________ CHIR - Chiron $43.41 *** Fluviron Release Delayed! *** Chiron (NASDAQ:CHIR) is a global pharmaceutical company focused on developing products for cancer and infectious diseases. The firm commercializes its products through three business units: blood testing, vaccines and biopharmaceuticals. Chiron Blood Testing develops and commercializes a range of blood safety products utilized by the blood banking and transfusion medicine industry. Chiron Vaccines offers more than 30 vaccines such as flu, meningococcal, travel and also pediatric vaccines. Chiron Biopharmaceuticals discovers, develops, manufactures and sells a range of therapeutic products. CHIR - Chiron $43.41 PLAY (less conservative - bearish/credit spread): BUY CALL SEP-47.50 CIQ-IT OI=2148 ASK=$0.15 SELL CALL SEP-45.00 CIQ-II OI=2493 BID=$0.40 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$45.30 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ CAH - Cardinal Health $45.79 *** Earnings Speculation *** Cardinal Health (NYSE:CAH) is a holding company encompassing a number of operating subsidiaries that do business as Cardinal Health. The company is a provider of products and services supporting the healthcare industry and helping healthcare providers and manufacturers improve the efficiency and quality of healthcare. Cardinal Health has four reporting segments: Pharmaceutical Distribution and Provider Services, Medical Products and Services, Pharmaceutical Technologies and Services and Automation and Information Services. Cardinal Health's quarterly earnings report is due on September 2, 2004. CAH - Cardinal Health $45.79 PLAY (speculative - neutral/debit straddle): BUY CALL SEP-45.00 CAH-II OI=9237 ASK=$1.95 BUY PUT SEP-45.00 CAH-UI OI=7766 ASK=$1.15 INITIAL NET-DEBIT TARGET=$2.90-$3.00 INITIAL TARGET PROFIT=$1.10-$1.65 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ******************* SPREADS & STRADDLES ******************* The “Sure Thing” Credit Spread By Mike Parnos I’ve heard it said that there are no “sure things.” I beg to differ. First of all, there was this girl in high school who . . . . and then there’s this interesting credit spread strategy. I lost touch with the girl (damn!), but the strategy lives on. Fluff up your couch cushions, open your mind, get comfortable, and read on. How “sure” of a thing is the “Sure Thing” strategy? It depends partially on the market. It depends mostly on YOU! This strategy is for the aware trader, the experienced trader, the capitalized trader, and the trader who has the time freedom to monitor the position. The “Sure Thing” strategy is actually a new name for our Credit Spread Boogie. “Sure Things” are taken a lot more seriously than “Boogies.” Since we are using this strategy in our CPTI portfolio, it seems appropriate to review how it works. ____________________________________________________________ The Position We like the SPX index because it’s a cash settlement vehicle. We will use a conservative 2-contract position for our example. You should, as always, adjust your position to accommodate your risk tolerance and account size. For our hypothetical example, let’s assume SPX is trading at 1105 with four weeks left until front month expiration. In the “Sure Thing” strategy, we’re going to try to take advantage of a market trend. Yes, you heard me right. We are, at least temporarily, going to predict a direction. Notice I said “temporarily.” The beauty of this strategy is that we are ready to change our mind – IF the market shows us that it has changed ITS mind. We’re starting with the belief that the downtrend in the market is not over and will continue into the foreseeable future. Therefore, we’re going to establish a bear-call spread above where the SPX is currently trading. Sell a September SPX 1115 call @ $10.40 Buy a September SPX 1140 call @ $3.10 Net Credit: $7.30 x 100 = $730 per contract x 2 contracts = $1,460 We're assuming that you’re at least a semi-shrewd trader and have managed to shave some premium off each side of the posted spreads. Depending on the time you place the trade, you should be able to get between $7.00-$8.00 for a similar 25-point spread. The larger the credit, the better. The Risk You’ve created a 25-point spread and you’ve taken in $7.30 of premium. That leaves $17.70. Your out-of-pocket risk is calculated by multiplying the $17.70 x 2 contracts (3,540). That’s your worst-case scenario. But you’ll never allow it to reach that point because you are disciplined, right? Right!! Are You Sufficiently Capitalized? The “Sure Thing” strategy requires a decent sized account. At first, per the above example, you’ll only need about $5,000. But, if the market reverses, and you need to make an adjustment, there will likely be larger margin requirements. Your broker’s initial maintenance requirement on the original 2-contract position would be $5,000 (the 25 point difference between the strikes multiplied by 2 contracts). A Plan For The Well Adjusted How can we adjust our position and keep our risk to minimum? We’re going to accomplish this by having a plan – a way to adjust the position should the SPX go in the wrong direction. If the trend continues and SPX remains below 1105, you’ll be in great shape. Both options of the bear call spread will expire worthless, you keep the premium and live happily ever after. No adjustments were necessary. It will please all of our beneficiaries -- and enable you to pay your for your therapy sessions. But, as we know, the market is a living, breathing and very annoying thing. It has multiple personalities. No sooner do we begin to get comfortable with Mr. Bear, but, with no warning, Mr. Bull shows up and confuses the situation. Sounds like my ex-mother-in-law. We have to be ready to soothe the savage beast – regardless what form it takes. What If . . . If the SPX relapses, its alter ego emerges, does an about-face, and starts to trend in the other direction: You wait until the SPX gets to the point where it costs about $14.00 to close out the bear call spread. At that point, you close both contracts of the bear call spread (both the short and long call) for the $14.00. Why wait that long? You want to wait for a sufficiently large movement because, if the SPX has gone that far in the opposite direction, it’s likely a new trend has begun. Believe me, with this strategy, you’d much prefer not to be whipsawed back and forth. What If You’re Wrong? We were wrong about the initial direction. That’s OK? It’s not the first time we’re wrong and certainly won’t be the last. It broke, the chart lied, but it’s fixable. We’re at the mercy of the markets. With the “Sure Thing” strategy, we have become counter-punchers. 2. Look over to the put side of the option chain. You’ll want to find a bull-put spread, at or above where the SPX is trading (at the time you closed the bull put spread), which will enable us to take in a total credit of at least $14.00. Our objective is to replace the $14.00 it cost us to close out the original bull put spread. To accomplish this, we may have to establish a slightly wider spread (more than 25-points) and/or sell a few more contracts of the new bull put spread. It may even be necessary to roll into the October option cycle. To achieve a $7.00 credit in the new bull-put spread, it might be necessary to widen the spread a bit – thereby increasing your maintenance requirement. For example, instead of a $25 difference between strikes, it might require a $30 difference between strikes. If you took in $7.00 per new 30-point spread, it would require trading four contracts to completely replenish the $14.00. Much depends on whether the SPX has moved quickly or not. If it has moved quickly, you may be able to establish the new spread in the original option cycle. If it has taken a few weeks, you may have to roll out to the next option cycle where more premium is available. By rolling to the next option cycle, you may be able to maintain the 25- point spread or not have to increase the number of contracts. How does that affect your maintenance? Obviously, the kind of adjustment discussed above will require more maintenance. But, that’s why we started out with only two contracts. Let’s look at a possible scenario. If you have to establish a new 30- point SPX bear call spread with four contracts to get back our $14.00, here’s what we’re looking at for maintenance. $30 (30-point spread) X 400 (4 contracts) = $12,000. That’s the maintenance figure. Since we’ve already taken in the original $1,460, our actual out of pocket risk is $10,540. Many Forms Of Maintenance When we discuss maintenance, remember that maintenance does not have to be in the form of cash. If you have bonds, mutual funds, stocks or other securities, the maintenance amount can be applied against their marginable value. Make sure your bungee cord is attached before you jump – and confirm length of the cord, too. Call your broker and check out their margin policies. They are NOT all the same. Note that, after our little flurry of trades, our original $7.30 ($1,460) credit is still intact – less a few commissions. If the SPX continues trending up, it’s time to light up your victory cigar. However, if it reverses again, we have to repeat the process – by going in the other direction – and increasing the number of contracts. We’re hoping for a trend, and it doesn’t really matter what direction. It doesn’t have to last forever – four or five weeks is plenty. We’re willing to go with the flow and that’s how we position ourselves. You’ll never look more forward to option expiration. This is why it’s called the “Sure Thing” strategy. It might take a month, or two, or three, but eventually you will be right and the premium will be yours. It takes awareness, a plan and a few extra bucks in your trading account. It’s only a risk if you let it move out of control without acting. The Return Of The Return How do we calculate a return with the “Sure Thing” strategy? The method that makes most sense is to base the return on what is actually at risk. In the first scenario, if all goes according to plan, our actual risk is $3,540. Our maximum potential profit is $1,460. When we divide $3,640 into $1,460, we get a potential return on risk of 41.2% -- for a very short period of time. In the second scenario, let’s assume we had to make an adjustment and we’re sitting with four contracts of a 30-point spread. Our maintenance, as calculated above, is $12,000. Our risk is $10,540. Therefore, our new return on risk is $1,460 divided by $10,540 – or 13.85% -- in two months – which sure beats the hell out of a CD. When All Is Said And Done The SPX “Sure Thing” strategy may not be your salvation. It probably isn't going to do much for fools and drunks either – they're God's problem. Losing the high school girl’s phone number – well, that was definitely NOT just a paper loss. She truly provided instant gratification. With the “Sure Thing” strategy, gratification takes a little longer. It does, however, give skilled, dedicated traders a way of taking advantage of a trending market. ____________________________________________________________ SEPTEMBER CPTI POSITIONS September Position #1 – SPX Iron Condor – 1107.77 The SPX has become our favorite index. The premiums are respectable. The spreads are wide enough to do a little shaving, and we can create some huge trading ranges for safety purposes. We sold 10 Sept. SPX 1015 puts and bought 10 September SPX 995 puts for a credit of about: $1.10 ($1,100). Then we sold 10 September SPX 1140 calls and bought 10 September SPX 1160 calls for a credit of about $1.40 ($1,400). Total credit and potential profit of $2,500. Maximum profit range: 1015 to 1140. That’s a 125-point range. It is going to require $20,000 in maintenance. The return on risk will be about 14.3%. September Position #2 – RUT Iron Condor – 551.67 The RUT gave us a big scare in August. A lot of traders rolled out their 520 short puts when the price was violated a week ago. It was the prudent thing to do. The huge bounce could not have been predicted. Those that held had a 50/50 chance of success. They rolled the dice and they won. We sold 10 RUT September 500 puts and bought 10 RUT September 490 puts for a credit of about: $1.00 ($1,000). Then we sold 10 RUT September 580 calls and bought 10 RUT September 590 puts Credit of about $1.00 ($1,150). Total credit and profit potential of $2,000. It’s a nice size maximum profit range of 500 to 580. The maintenance requirement is only $10,000. The return on risk will depend on what premium you take in. If you take in $2,000, the return on risk will be 25%. September Position #3 – SPX Credit Spread Boogie – 1107.77 In this August cycle, our Credit Spread Boogie play is going to be 100% profitable. It may have taken two months to make this money, but it was well worth it. So, let’s do it again. We sold 3 September SPX 1105 calls and bought 3 September SPX 1130 calls for a credit of about $7.00 ($2,100). This is based on the feeling that, despite the recent bounce, the downtrend will continue. We’ve taken in $2,100. We’re going to remain in this position until it costs $14.00 to unwind it. That will be an indication that the trend has likely changed and we will then reposition ourselves in the opposite direction – playing enough contracts to replenish what we spent to close out the original spread. The initial maintenance requirement is $7,500. However, keep some of your powder dry. If we have to shift positions, we will need additional maintenance dollars for the additional contracts. September Position #4 – OEX Iron Condor – 540.88 This position is in response to some requests for an OEX play. We sold 10 September OEX 505 puts and bought 10 September OEX 495 puts for a credit of about: $.65 ($650). Then we sold 10 September OEX 555 calls and bought 10 September OEX 565 calls for a credit of about $.75 ($750). Total net credit of about $1.40 ($1,400). Maximum profit range: 505 to 555. Potential return on risk of about 16%. It’s been a long time since I’ve traded the OEX in a condor. I don’t remember how generous they are in shaving the bid/ask spreads. Good luck. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $34.56 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. June $34 calls and $37 puts -- total net credit of $750. We rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60 credit) and took in a credit of $.80 ($800). We rolled to the August $34 calls and $37 puts, taking in a credit of $900. For the September cycle, we rolled to the Sept. $34 calls and $37 puts, only yielding $.45 or $450 for the cycle. Our new total credit is now $11,750. 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 – 540.88 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 As of July expiration we had a total of $7,440. We now add the $950 for the August expiration for a new total of $8,390. New Zero Plus Positions For September September bull put spread 505/495 for credit of $.75 x 5 contracts = $375. Short 555 call for credit of $1.20 x 5 = $600. If all goes well, we’ll be able to add $975 to our cash position as we wait for the market to move up – hopefully in this lifetime. __________________________________________________________ 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. Mike Parnos, CPTI Master Strategist 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************************* 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 08/27/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 IVX SEP 16.00 15.64 19.69 0.36 5.52% 2.30% MCIP SEP 15.00 14.30 17.71 0.70 8.50% 4.90% PAAS SEP 12.50 12.05 14.73 0.45 6.87% 3.73% UTHR SEP 25.00 24.70 31.99 0.30 3.01% 1.21% AMED SEP 25.00 24.25 25.92 0.75 6.54% 3.09% PHM SEP 50.00 49.25 59.30 0.75 3.32% 1.52% KOSP SEP 30.00 29.25 37.72 0.75 5.48% 2.56% GLBCE SEP 12.50 11.90 16.45 0.60 11.90% 5.04% ECLP SEP 12.50 12.10 14.37 0.40 6.90% 3.31% OMM SEP 12.50 12.10 13.30 0.40 6.51% 3.31% CNCT SEP 25.00 24.10 26.05 0.90 7.11% 3.73% TOY SEP 15.00 14.45 16.38 0.55 7.51% 3.81% ACF SEP 20.00 19.25 21.15 0.75 7.16% 3.90% PLMO SEP 30.00 29.45 38.25 0.55 5.05% 1.87% ION SEP 25.00 24.50 26.48 0.50 4.17% 2.04% ESLT SEP 20.00 19.20 21.70 0.80 7.95% 4.17% WBSN SEP 35.00 33.75 39.56 1.25 8.46% 3.70% NTMD SEP 12.50 12.15 18.28 0.35 8.12% 2.88% UTHR SEP 25.00 24.30 31.99 0.70 7.30% 2.88% CNCT SEP 25.00 24.30 26.05 0.70 6.65% 2.88% DDS SEP 20.00 19.50 20.20 0.50 6.31% 2.56% MEE SEP 22.50 22.00 27.94 0.50 5.93% 2.27% FOSL SEP 25.00 24.35 28.75 0.65 5.95% 2.67% HUM SEP 17.50 17.10 18.99 0.40 5.34% 2.34% SCSC SEP 50.00 49.40 61.51 0.60 3.30% 1.21% POSS SEP 25.00 24.20 18.04 (6.16) 0.00% 0.00% JOSB SEP 24.00 23.52 28.06 0.48 5.27% 2.04% ECLP SEP 12.50 12.20 14.37 0.30 6.57% 2.46% WBSN SEP 35.00 34.05 39.56 0.95 7.44% 2.79% ARO SEP 30.00 29.05 33.75 0.95 7.67% 3.27% MW SEP 25.00 24.60 28.74 0.40 4.22% 1.63% TOL SEP 40.00 39.05 44.38 0.95 6.19% 2.43% SEAC SEP 15.00 14.40 15.75 0.60 12.11% 4.17% CLHB SEP 10.00 9.60 11.62 0.40 10.87% 4.17% NTMD SEP 15.00 14.65 18.28 0.35 8.62% 2.39% ESLT SEP 20.00 19.20 21.70 0.80 10.61% 4.17% MYGN SEP 15.00 14.55 16.01 0.45 8.06% 3.09% NAVR SEP 12.50 12.15 15.07 0.35 9.14% 2.88% IVX SEP 18.00 17.56 19.69 0.44 7.02% 2.51% UTHR SEP 25.00 24.40 31.99 0.60 8.89% 2.46% AAPL SEP 30.00 29.50 34.35 0.50 5.37% 1.69% ARO SEP 30.00 29.50 33.75 0.50 5.51% 1.69% SONO SEP 22.50 22.05 24.66 0.45 6.40% 2.04% ESLT SEP 20.00 19.30 21.70 0.70 10.92% 3.63% MEE SEP 25.00 24.45 27.94 0.55 7.13% 2.25% SRDX SEP 22.50 21.90 24.10 0.60 8.40% 2.74% IVX SEP 18.00 17.52 19.69 0.48 8.94% 2.74% BSTE SEP 45.00 44.45 46.94 0.55 4.16% 1.24% FCN SEP 17.50 17.05 17.75 0.45 7.56% 2.64% Ivax (NYSE:IVX) has been adjusted to reflect a 5-for-4 split in its common stock. The position in Possis Medical (NASDAQ:POSS) was closed earlier in the week after the stock price plunged on news of disappointing trial results of its blood clot treatment. Kyphon (NASDAQ:KYPH) has previously been closed to limit losses and Connetics (NASDAQ:CNCT), Dillards (NYSE:DDS), and Seachange (NASDAQ:SEAC) along with many others, are on the "watch" list. NAKED CALLS Stock Strike Strike Break Current Gain Max Simple Symbol Month Price Even Price (Loss) Yield Yield CRDN SEP 40.00 40.50 39.10 0.50 5.29% 1.23% SWIR SEP 35.00 35.60 23.05 0.60 7.40% 1.69% AVID SEP 50.00 50.50 43.70 0.50 3.56% 0.99% USPI SEP 37.50 38.05 36.45 0.55 3.90% 1.45% BDY SEP 25.00 25.75 24.29 0.75 7.42% 2.91% DRIV SEP 30.00 30.30 25.03 0.30 4.51% 0.99% SINA SEP 30.00 30.35 21.40 0.35 5.84% 1.15% ERES SEP 22.50 22.80 20.82 0.30 6.66% 1.32% MRVL SEP 25.00 25.40 23.71 0.40 8.22% 1.57% ICUI SEP 30.00 30.65 26.54 0.65 7.56% 2.12% SWIR SEP 30.00 30.30 23.05 0.30 5.90% 0.99% UPL SEP 45.00 45.40 38.70 0.40 4.90% 0.88% MCHP SEP 30.00 30.65 26.76 0.65 6.97% 2.12% EYET SEP 45.00 45.75 37.46 0.75 10.85% 1.64% CMX SEP 30.00 30.45 28.23 0.45 4.86% 1.48% IDXC SEP 30.00 30.30 28.75 0.30 3.95% 0.99% BRCM SEP 32.50 32.90 28.31 0.40 5.76% 1.22% ELAB SEP 30.00 30.55 26.83 0.55 8.34% 1.80% MRVL SEP 25.00 25.35 23.71 0.35 5.80% 1.38% Dick's Sporting Goods (NYSE:DKS) has previously been closed to limit potential losses. Bradley Pharmaceuticals (NYSE:BDY), Ceradyne (NASDAQ:CRDN), and United Surgical (NASDAQ:USPI) 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield PSRC 24.40 SEP 20.00 MQS-UX 0.65 4 19.35 20 5.1% 16.4% LCAV 24.60 SEP 22.50 JVQ-UX 0.55 93 21.95 20 3.8% 10.1% DITC 21.84 SEP 20.00 QZD-UD 0.45 361 19.55 20 3.5% 9.3% LNG 17.19 SEP 15.00 LNG-UC 0.30 210 14.70 20 3.1% 9.2% ATI 18.75 SEP 17.50 ATI-UW 0.40 138 17.10 20 3.6% 9.1% MYGN 16.01 SEP 15.00 GSQ-UC 0.30 29 14.70 20 3.1% 8.0% WNC 27.02 SEP 25.00 WNC-UE 0.40 205 24.60 20 2.5% 6.6% ICOS 26.64 SEP 25.00 IIQ-UE 0.40 205 24.60 20 2.5% 6.5% DBEIQ 27.88 SEP 25.00 GEU-UE 0.30 0 24.70 20 1.8% 5.3% Abbreviations: LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis without margin), MY-Maximum Yield (monthly basis with margin), TS-Target Shoot. _________________________________________________________________ PSRC - Palmsource $24.40 *** Rally Mode! *** PalmSource (NASDAQ:PSRC) is a developer and licensor of software that enables mobile information devices. The company's platform consists of the Palm operating system and software development tools that mobile information device manufacturers use to design products from PalmSource's unique platform. PalmSource has also extended its platform with new applications such as information management software, Web browsers and e-mail. PSRC - Palmsource $24.40 SEP 20.00 MQS-UX LB=0.65 OI=4 CB=19.35 DE=20 TY=5.1% MY=16.4% _________________________________________________________________ LCAV - LCA-Vision $24.60 *** Upgrade = Rally! *** LCA-Vision (NASDAQ:LCAV) is a developer and operator of laser vision correction centers under the brand name LasikPlus. The firm's vision centers provide the staff, facilities, equipment and support services for performing laser vision corrections that employ laser technologies to help correct nearsightedness, farsightedness and astigmatism. LCA uses fixed-site excimer lasers manufactured by Bausch & Lomb, VISX and Alcon and its vision centers are supported by full-time, board-certified ophthalmologists and optometrists, as well as other healthcare professionals. LCAV - LCA-Vision $24.60 SEP 22.50 JVQ-UX LB=0.55 OI=93 CB=21.95 DE=20 TY=3.8% MY=10.1% _________________________________________________________________ DITC - Ditech Communications $21.84 *** Solid Earnings! *** Ditech Communications (NASDAQ:DITC) is a global telecom equipment supplier for voice networks. The firm's voice-processing products focus on echo cancellers, used to eliminate echo, a common problem in existing and emerging voice networks. The company's newest voice-processing products not only provide customers with the traditional echo cancellation features, but also can be used to provide voice quality assurance features that address issues, such as background noise and other voice quality issues in wireline and wireless communications. The company's earnings report is due on August 24, 2004. DITC - Ditech Communications $21.84 SEP 20.00 QZD-UD LB=0.45 OI=361 CB=19.55 DE=20 TY=3.5% MY=9.3% _________________________________________________________________ LNG - Cheniere Energy $17.19 *** Energy Sector *** Cheniere Energy (NYSE:LNG) is engaged in the development of liquefied natural gas receiving and related opportunities, centered on the United States Gulf Coast. The LNG-receiving terminal business consists of receiving deliveries of LNG from LNG ships, processing such LNG to return it to a gaseous state and delivering it to pipelines for transportation to purchasers. The company is also engaged in exploration for oil and gas, as well as development and exploitation of major reserves, in the Gulf of Mexico. LNG - Cheniere Energy $17.19 SEP 15.00 LNG-UC LB=0.30 OI=210 CB=14.70 DE=20 TY=3.1% MY=9.2% _________________________________________________________________ ATI - Allegheny Tech. $18.75 *** Basic Materials Demand! *** Allegheny Technologies (NYSE:ATI) is a diversified producer of specialty materials. The company operates in three business segments: flat-rolled products, high-performance metals and industrial products. Their products include stainless steel, nickel-based alloys and super-alloys and titanium and other specialty materials. The industrial products segment's focus is producing tungsten powder, tungsten carbide materials and carbide cutting tools. ATI - Allegheny Technologies $18.75 SEP 17.50 ATI-UW LB=0.40 OI=138 CB=17.10 DE=20 TY=3.6% MY=9.1% _________________________________________________________________ MYGN - Myriad Genetics $16.01 *** Flurizan Speculation *** Myriad Genetics (NASDAQ:MYGN) is a biopharmaceutical company focused on the development of novel therapeutic products and the development and marketing of predictive medicine products. The company's researchers have made important discoveries in the fields of cancer, Alzheimer's disease, viral diseases (such as HIV), depression and obesity. Flurizan, the company's lead therapeutic candidate for the treatment of prostate cancer, is in a large, multi-center human clinical trial. Myriad is also conducting a Phase I human clinical trial for the evaluation of Flurizan for the treatment of Alzheimer's disease. MYGN - Myriad Genetics $16.01 SEP 15.00 GSQ-UC LB=0.30 OI=29 CB=14.70 DE=20 TY=3.1% MY=8.0% _________________________________________________________________ WNC - Wabash National $27.02 *** In A Trading Range? *** Wabash National (NYSE:WNC) designs, manufactures and markets standard and customized truck trailers and intermodal equipment under a number of trademarks. The company's subsidiary, Wabash National Trailer Centers, sells new and used trailers through its retail network and offers aftermarket parts and maintenance service for the company's and competitors' trailers and related equipment. Wabash markets its equipment to common carriers, leasing companies, private fleet carriers and package carriers. WNC - Wabash National $27.02 SEP 25.00 WNC-UE LB=0.40 OI=205 CB=24.60 DE=20 TY=2.5% MY=6.6% _________________________________________________________________ ICOS - Icos Corporation $26.64 *** Bottom-Fishing Only! *** ICOS Corporation (NASDAQ:ICOS) is a biotechnology firm bringing therapeutic products to patients. The company is marketing its first product, Cialis, for the treatment of erectile dysfunction, through Lilly ICOS LLC, its joint venture with Eli Lilly and Company. Cialis is an oral inhibitor of the phosphodiesterase type 5 enzyme (PDE5) and is being manufactured and marketed by Lilly ICOS, which has rights to commercialize Cialis in North America and Europe. Research and Development activities include studying and developing product candidates targeting a variety of serious diseases and medical conditions. ICOS - Icos Corporation $26.64 SEP 25.00 IIQ-UE LB=0.40 OI=205 CB=24.60 DE=20 TY=2.5% MY=6.5% _________________________________________________________________ BEIQ - BEI Technologies $27.88 *** Uptrend Intact! *** BEI Technologies (NASDAQ:BEIQ) designs, manufactures and sells electronic devices that provide sensory input and actuation for control systems of advanced machinery and automation systems. Sensors designed and manufactured by BEI Technologies, most of which are concerned with physical motion, provide information that is essential to logical, safe and efficient operation of sophisticated machinery. The firm also develops and produces motors and actuators for high-performance machinery. BEIQ - BEI Technologies $27.88 SEP 25.00 GEU-UE LB=0.30 OI=0 CB=24.70 DE=20 TY=1.8% MY=5.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ASKJ - Ask Jeeves $26.58 *** Premium-Selling Only! *** Ask Jeeves (NASDAQ:ASKJ) offers an advanced Internet search technology to the public through advertiser-supported sites on the Web. It operates four Websites dedicated to search: Ask.com, Ask.co.uk, Teoma.com and AJKids.com. On its main websites, Ask.com in the United States and Ask.co.uk in the United Kingdom, users submit their search requests, and the company's algorithmic search technology, Teoma, delivers a results list of Web pages likely to contain relevant and authoritative answers. Ask Jeeves also syndicates its search technology and advertising products to third-party websites, including portals, infomediaries and content and destination websites. ASKJ - Ask Jeeves $26.58 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL SEP 30 AUK-IF 6122 0.35 30.35 7.0% 1.2% _________________________________________________________________ PSFT - PeopleSoft $17.46 *** Oracle Buyout Speculation! *** PeopleSoft (NASDAQ:PSFT) designs, develops, sells and supports enterprise application software products for use in large and medium-sized organizations worldwide. The company provides enterprise application software for customer relationship management, human capital management, financial management and supply chain management, each with a range of industry-specific features and functions. Within each of its application suites, it offers embedded analytics and portal applications. The firm also offers a suite of products for application integration and analytic capability. PSFT - PeopleSoft $17.46 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL SEP 20 PQO-ID 109 0.35 20.35 11.1% 1.7% _________________________________________________________________ RSTI - Rofin-Sinar Tech. $27.46 *** Volatility = Premium! *** Rofin-Sinar Technologies (NASDAQ:RSTI) designs, develops, makes and markets laser-based products, primarily used for cutting, welding and marking a range of materials. The company offers its customers CO2, solid state and diode laser sources and solutions in a variety of configurations and options. Its lasers all deliver a high-quality beam at guaranteed power outputs and feature compact design, high processing speed, flexibility, low operating and maintenance costs and easy integration into the customer's production process. RSTI - Rofin-Sinar Tech. $27.46 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL SEP 30 QRT-IF 4 0.65 30.65 10.9% 2.1% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... 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