The Option Investor Newsletter Thursday 09-16-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Passing Time Futures Wrap: See Note Index Wrap: A vessel without its captain Market Sentiment: Investors Prepare for Option Expiration Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 09-16-2004 High Low Volume Adv/Dcl DJIA 10244.49 + 13.10 10281.88 10228.64 1.41 bln 2366/ 847 NASDAQ 1904.08 + 7.60 1914.38 1898.36 1.33 bln 1957/1109 S&P 100 543.35 + 0.72 544.94 542.63 Totals 4323/1956 S&P 500 1123.50 + 3.13 1126.06 1120.37 W5000 10956.52 + 43.67 10977.31 10912.83 SOX 381.45 + 0.70 386.47 380.15 RUS 2000 574.54 + 6.02 575.10 568.45 DJ TRANS 3233.41 + 17.70 3237.28 3208.83 VIX 14.39 - 0.25 14.66 14.27 VXO (VIX-O)14.44 - 0.33 14.76 14.15 VXN 19.92 - 0.38 20.48 19.60 Total Volume 2,958M Total UpVol 1,873M Total DnVol 1,026M Total Adv 4838 Total Dcl 2275 52wk Highs 239 52wk Lows 55 TRIN 1.40 NAZTRIN 1.08 PUT/CALL 0.75 ************************************************************ Passing Time by Jim Brown On the surface today was rather unspectacular with all the major indexes finishing very close to the flat line. They all gave up some decent midday gains but rallied back from a late day sell off to keep the bullish bid intact. Dow Chart – Daily Nasdaq Chart The morning started off with positive economic news and a tame jump in Jobless Claims to 333,000. Analysts were expecting a slightly stronger bounce in the wake of Hurricane Charley and the abnormal dip to 317K last week. The bottom line remains a steady claim rate of 330K once the hurricane adjustments are factored in. This is a level that is consistent with an increasing job market but only at approximately 100K per month. Consumer Prices rose slightly with the CPI posting a +0.1% gain but this was also slower than expectations for a +0.2% jump. Energy prices fell for the second month and food prices posted the smallest gain since January. Core inflation for the year dropped to only +1.7% while the headline rate is +2.7% mostly on the higher energy prices earlier in the year. The Fed action to stop inflation appears to have been the right amount at the right time but I doubt their hikes actually had any impact. Hikes and cuts take about six months to work their way through the system. The more likely reason for the slowing in inflation is a lack of demand as retail slumped over the summer. The worst news for the day was drop in the Philly Fed General Business Index to 13.4 from 28.5. This is a major blow to the recovery theory and could only be a month away from the return of negative numbers. The index has been averaging around 30 since January with the high at 36.1 in July. The shipments component fell to 22.4 from 32 and the six-month outlook fell to 44.9 from 52.7. All other components were mostly positive with New Orders rising to 26.4 from 19.2 and Employment jumping to 21.5 from 17.2. This report shows we could be at a the crossroads for the recovery. Some of the bounce in the internals could be related to holiday orders and staffing. If that is the case those same internals should begin to decline again in Q4. The bond market exploded on the Philly Fed news and the yields on the benchmark ten-year fell to a five month low at 4.06%. The yield is nearing support that dates back to July of last year at 4.0% and it appears the bonds are telling us there is fear creeping into investors about the strength of the recovery. The Fed funds futures are still indicating another hike at two of the next three meetings. Ten-year Yield Chart Another shock to the economic groupies today was a speech by Fed Governor Gramlich on the impact of higher oil prices. He claimed the standard economic models do not allow for a major increase in the price of oil at this point in the economic cycle. He said a serious oil price shock could affect consumers confidence or spending plans in a way that could not be anticipated by current models. He also showed he was one of the few Fed heads that did not have his head buried in the sand on future prices. He noted that the sharp jump in futures prices was an unusual occurrence and one that suggests the price gains may be permanent. I am sure he is in the Fed doghouse tonight for opening Pandora's Box. A 100% jump in oil prices over the last year and some of those gains may be permanent? Duh! Who would have thought that? The recent OPEC statements may have continued to target in print the $22-$28 price band of a year ago but their actions AND abilities to lower the price much under $40 remain in serous doubt. Oil demand is continuing to rocket higher, supplies are continuing to decrease and reserves are moving closer to depletion. Just yesterday crude oil inventories in the U.S. dropped by seven mil barrels for the week. This was the 7th consecutive weekly drop. How about this for a Fed understatement from Gramlich? "This whole issue, however, is new and imperfectly understood. It is virtually inevitable that shocks will result in some combination of higher inflation and higher unemployment for a time". I bet he got a phone call from Alan after that speech hit the wires. It is no wonder the bonds rocketed higher with the double hit of the 50% haircut on the Philly Fed and a Fed speech warning of unemployment and inflation. Oil fell at the open after it was determined that Ivan missed the majority of the oil patch and damage to the system was minor. It spiked again at the close to $44 on reported short covering related to options expiration. We continue to see a pattern of higher lows wedging up to $45, a level that appears to be the current pain threshold. The markets moved in a tight range today as the Ivan news was filtered for economic impact. Volume was low due to Ivan, expiration and the Jewish holidays but the earnings warnings barely slowed. The hurricane excuse is appearing more often and whether real or imagined the results are the same. The pace of new warnings is growing and Q3 could be a challenge. Retailers from Office Depot to Panera Bread are now jumping on the hurricane excuse train and it appears that train will be loaded to capacity over the next three weeks. Despite the tight range today the internals were very strong with the A/D line ending positive with more than +2400 advancers than decliners. A/D volume was nearly 2:1 in favor of advancers and this was a throw away day given all the factors in play. The strongest indexes were the transports, utilities and the Russell-2000. Strange bedfellows for today's market. The transports hit a FIVE-YEAR high despite the $44 oil. This is a serious disconnect with reality but a new transport high has got to be good for the Dow theory crowd. Somebody needs to point this out to those investors in Dow stocks as the index closed very close to a three week low at 10244. Just as amazing is the Russell clinging to a +10% gain over the last three weeks and threatening to breakout of its 575 resistance. A breakout there would be an open door to 590 and only a strong day away from its all time closing high at 606. With the two strongest months of the year about six weeks ahead the possibilities are enormous. Russell 2000 Chart Getting to that November rally could still be a challenge as the other indexes have slowed at strong resistance. Next week begins the real Q3 warning season and odds are good there will be some high profile disappointments. Stocks like MMM, PG, HON and IBM have pulled back from their highs as traders begin to worry about which Dow component will be the next to warn. Next week traders will run the earnings gauntlet not knowing who will be the next to take a hit. We are getting close to the Osama surprise. There has been speculation for several weeks that Osama would suddenly be killed or captured in the weeks leading up to the election as the pressure to produce a trump card increases. This must be a recurring Kerry nightmare. The chip bulls got some more bad news tonight. The S.E.M.I. Association reported a drop in the book-to-bill number to 1.00, the fourth consecutive monthly drop and the lowest level since Sept-2003. Bookings fell -4.5% in August according to SEMI. Readers should remember that this is a three-month moving average which suggests bookings for August were significantly less than 1.00 with the average for the last two months at 1.04 and 1.07. SEMI does not release the raw data so it makes deciphering the numbers more of an art than science. The SOX had pulled back to support at 380 and held there for the last two days. 380 could provide a decent launch point but tonight's news could provide some minor instability. Of course the bulls could point to the fact that this negative news was already priced in and maybe it is not as negative as traders expected. It all depends on whether they see it as a glass half full or half empty. SOX Chart Friday should be another low volume day and the only event risk is earnings surprises expected next week. With the positive internals today I would say it was a tossup for direction on Friday. Options expiration should have produced about all the damage they are going to do as positions were squared ahead of the event. Wednesday's drop was probably more options related than earnings related but that would be pure speculation at this point. If there are two keys to watch for Friday it would be the SOX at 380 and the Russell at 575. A bounce in the SOX and a breakout on the Russell would set the stage for a strong close and a positive setup for Monday. Enter Passively, Exit Aggressively. Jim Brown Editor ************ 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 ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** INDEX TRADER SUMMARY ******************** A vessel without its captain The major indices drifted higher, at times almost aimlessly, but for the most part bobbed between Wednesday's highs and yesterday's lows in a choppy session. Market participants won't know just what damage Tropical Storm Ivan, as it is now called, caused after the eye of Hurricane Ivan hit the gulf shores of Alabama late yesterday and now heads inland. However, television shots certainly showed Ivan packed a punch. So strong a punch did Ivan deliver that deepwater driller Transocean Inc. (NYSE:RIG) $33.35 +1.52% said it was searching not for oil, but its deepwater sumisubmersible Deepwater Nautilus in the aftermath of Hurricane Ivan. All personnel had previously been evacuated from the missing rig, which was moored to the seafloor with anchors approximately 160 miles south of Mobil, Alabama. Today's release of September consumer prices, which rose a tepid 0.1% as well as a weaker than forecasted September Philly Fed report drew little response from stocks, but the dollar weakened while Treasuries surged with the benchmark 10-year bond closing at a 4-month high, with the 10-year yield ($TNX.X) plunging 10.1 basis points to 4.069%. U.S. Market Watch - 09/16/04 (52-week % change) The major 5, 10 and 30-year Treasury Yields dropped sharply in today's session, and with Fed funds futures still predicting a 100% chance of a Fed tightening of 25 basis points next week, bond traders seem to be responding more to "inflation" or lack- thereof data, and not necessarily trying to predict what the Fed is going to be doing on Tuesday. Sniffffff..... I also smell some massive short covering and capitulation from "inflation hawks" dating back to May. Did you refinance a mortgage this spring? Buy a new house? Give your friendly mortgage banker a call and see if it might be worth cost effective to refinance. Market Snapshot / Internals - 09/16/04 Close Volumes weren't anemic, but they weren't that robust for a quarterly index expiration. By my account, average daily volume for the month of September has been 1.19 billion shares at the NYSE, and NASDAQ's been running closer to 1.45 billion per day. June's volume, perhaps more comparable to September, also a quarterly expiration begins to have looked euphoric when the NYSE turned 1.3 billion shares per day on average, while NASDAQ was running around 1.58 billion. One thing we may want to take a note on was how strong the A/D lines were today, but index gains somewhat fractional. The note would be how the TRIN, which is measuring up/down volume stayed above 1.0 despite the strong A/D breadth, strongly suggesting one of those "light volume" rallies that bears will say lacks conviction. Pivot Matrix - 09/16/04 Close DIA and QQQ as well as stock options settle on tomorrow's close and while the QQQ was trading $35.25 at 04:00 PM EDT, a pop in volume had them gaining a suspicious 7 cents by the close, to finish up 7 cents. A tricky day tomorrow. But, I've had several questions from traders regarding HL Camp & Company's thoughts on "The Expiring Option Exercise Manipulation Game," which they discuss at their website (http://www.programtrading.com). Their theory (based on observation) is centered around the OEX. I won't say its complicated, but you really need to read it, as it is interesting, educational, and will instill the thought of just why we can expect some weird, or unexpected gyrations ahead of an option expiration. I brief, the theory is that institutional traders (even large speculators) will start buying a few thousand IN THE MONEY calls on the OEX and/or SPX at around 03:20 PM EDT on a Thursday, with (I can't stop chuckling to myself) HL Camp noting that it helps if the "spoos" are dropping so you can slowly pick them up real cheap. HL Camp's records show this happens about 75% of the time. Today's action certainly looks suspicious. Doesn't it? S&P 100 Index (OEX.X) Chart - 10-minute intervals I placed my QCharts' cursor tracker on the 10-minute interval from 03:10 to 03:20 PM EDT. Hmmmm..... pulled right back didn't it? HL Camp & Company then gives greater detail, but the essence of the manipulation game is that once a trader has his/her calls, he then comes in and starts hammering the big guns of the OEX (the most heavily weighted stocks) with buy orders. Taking offers with size on GE, XOM, PFE, C, WMT, AIG, BAC and gets a little move higher going. Then the trader waits. About 6 or 7 minutes for the ripple effect of buying takes hold. (Hmmmm.... OEX did move higher from the QCharts' WEEKLY S1). Interesting, as what I made note of in the QQQ, is HL Camp saying often times, day trade shorts will start to panic near the close as stocks move higher, and they come in and start covering to the bell, where shorts "almost always panic with "at the market orders." Oh... but traders aren't done yet according to HL Camp. After the move higher to the close takes hold, a trader will buy a few thousand (remember we're talking large speculators and institutions) IN THE MONEY PUTS, which should closely match the dollar amount of stocks like GE, XOM, PFE, C, WMT, AIG, BAC the trader had bought. Then, at 04:16 PM EDT, further manipulation takes place as traders call the clearing firms and traders EXERCISE their CALLS that night, thereby locking in profits on the calls that were bought. Now here's where I mark tomorrow's DAILY S2 for the OEX, and QQQ traders might want to take some notes here. On the Friday morning, just after the open, traders will often start selling all of the STOCKS they bought Thursday afternoon, where this selling can start some "panic dumping" as other traders start selling bids and bears come in and start shorting with no bids in sight. HL Camp's observations say this can have the OEX falling about 2 points (THAT's ABOUT HOW FAR IT IS TO TOMORROW'S DAILY S2 for the OEX). You're still not done! Don't forget those PUTS traders bought. As the OEX drops 2- points (perhaps DAILY S2) its ca-chingo time for those IN THE MONEY PUTS. If you've never believed that option expiration can be somewhat manipulative, then HL Camp's "The Expiring Option Exercise Manipulation Game," may be something to be cognizant of. I (Jeff Bailey) have NEVER used, nor monitored this until several subscribers asked me about it, as they saw it. The one trade I kind of like for tomorrow is to look for an opening pop in the QQQ, then look to day trade short the UNDERLYING QQQ, using the correlative QQQ $33.50-$33.55 as resistance. Jeff Bailey **************** MARKET SENTIMENT **************** Investors Prepare for Option Expiration - J. Brown It was an odd day on Wall Street. After Wednesday's weakness many felt that the rest of the week would be down. That's probably not a surprise. We've already mentioned that September's option expiration Friday historically tends to end lower. Having the major averages at or near resistance and the volatility indices at or near bearish reversal levels looked like a good set up for a decline. Yet strangely the markets don't seem ready to fall yet. They shrugged of an earnings warning from Canadian networker Nortel Networks. They ignored news from Delta Airlines that it too may seek bankruptcy protection soon. Overall the market seems to be ignoring the recent parade of earnings warnings. Actually the market internals today were rather bullish. Advancing stocks outnumbered decliners 20-to-7 on the NYSE and 19-to-10 on the NASDAQ. Up volume outweighed down volume on both exchanges. Active traders will note that overall volume was somewhat low. This was due to the onset of Rosh Hashanah, the Jewish new year. Hogging the spotlight most of the day was news coverage of Hurricane Ivan and its effect on the Alabama, Florida and Louisiana coasts. Believe it or not there is another hurricane lurking in Ivan's shadow. That would be Hurricane Jeane, the fourth hurricane in five or six weeks, and one potential factor in the afternoon spike in oil prices. Economic data was mixed with the CPI confirming what the PPI already told us - inflation is under control. It's too bad the Philly Fed survey came in weaker than expected but this slow down in the economy and the lack of inflation may actually give the FOMC reason to pass on its next interest rate hike. At least that's what some are arguing. Others look at the economy and see it speeding up from its summer slow down. Just one more "indicator" that might make you pause before initiating another bullish play is the action in bonds. Bonds have been climbing ever since their double-bottom in May and June. The 10-year note rallied to a new 5 1/2-month high today pushing the yield lower to 4.069%. If "smart money" is buying bonds that's a defensive posture and doesn't speak well for where Wall Street thinks stocks are going. I'm not expecting much for tomorrow. Volume is likely to remain low but we could see some volatility with the quadruple option expiration. Look for the preliminary Michigan sentiment/consumer confidence numbers for September to come out. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9230 Current : 10244 Moving Averages: (Simple) 10-dma: 10291 50-dma: 10118 200-dma: 10287 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 990 Current : 1123 Moving Averages: (Simple) 10-dma: 1120 50-dma: 1100 200-dma: 1115 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1417 Moving Averages: (Simple) 10-dma: 1402 50-dma: 1382 200-dma: 1440 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.39 -0.25 CBOE Mkt Volatility old VIX (VXO) = 14.44 -0.33 Nasdaq Volatility Index (VXN) = 19.92 -0.38 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 773,434 582,658 Equity Only 0.61 555,654 340,448 OEX 0.77 41,157 31,938 QQQ 0.65 65,724 42,963 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 61.1 + 1.0 Bear Correction NASDAQ-100 43.0 - 1.0 Bull Alert Dow Indust. 56.6 + 0 Bear Correction S&P 500 59.0 + 0 Bear Correction S&P 100 56.0 + 1 Bear Correction 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: 0.99 21-dma: 1.05 55-dma: 1.28 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 2070 1909 Decliners 717 1047 New Highs 107 62 New Lows 16 13 Up Volume 881M 817M Down Vol. 504M 468M Total Vol. 1411M 1311M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 09/07/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders did add to positions during the most recent week of data but there was zero change in their slightly bearish bias. Meanwhile small traders also added to both their longs and shorts and scaled back their bullish attitude just a bit. Commercials Long Short Net % Of OI 08/17/04 398,472 416,109 (17,637) (2.2%) 08/24/04 402,599 420,478 (17,879) (2.2%) 08/31/04 406,637 416,778 (10,141) (1.2%) 09/07/04 415,952 426,342 (10,390) (1.2%) 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 08/17/04 138,550 97,792 40,758 17.2% 08/24/04 135,151 100,351 34,800 14.7% 08/31/04 144,120 114,343 29,777 11.5% 09/07/04 157,732 130,817 26,915 9.3% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 We're starting to see some big numbers line up on the short side from the commercial traders. This is not good news for the S&P 500 as the "smart money" grow more bearish on the market. Naturally small traders are walking the opposite direction by increasing their longs and bullish stance. This sort of tug-o-war usually ends up with the small trader losing. Commercials Long Short Net % Of OI 08/17/04 404,065 457,372 ( 53,307) ( 6.2%) 08/24/04 392,065 473,911 ( 81,846) ( 9.4%) 08/31/04 372,071 543,100 (171,029) (18.7%) 09/07/04 371,111 600,593 (229,482) (23.6%) 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 08/17/04 192,939 92,361 100,578 35.3% 08/24/04 211,995 76,184 135,811 47.1% 08/31/04 258,624 77,036 181,588 54.0% 09/07/04 286,194 80,075 206,119 56.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Surprisingly the commercial trader added to his or her long positions and increased their bullish bias a tad. Small traders also added to their longs but the jump in short positions decreased the overall bullishness. Commercials Long Short Net % of OI 08/17/04 44,743 41,535 3,208 3.7% 08/24/04 48,624 43,222 5,402 5.8% 08/31/04 48,167 43,411 4,756 5.2% 09/07/04 51,814 44,179 7,635 7.9% 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 08/17/04 12,256 8,352 3,904 18.9% 08/24/04 11,666 10,068 1,598 7.3% 08/31/04 14,635 10,572 4,063 16.1% 09/07/04 16,817 12,561 4,256 14.5% 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 are still asleep here for the Industrials with very little movement. Meanwhile small traders are growing more bearish on the average. Commercials Long Short Net % of OI 08/17/04 30,271 22,809 7,462 14.1% 08/24/04 28,919 23,658 5,261 10.1% 08/31/04 29,143 24,147 4,996 9.3% 09/07/04 29,128 24,011 5,117 9.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 08/17/04 4,388 7,089 (2,701) (23.5%) 08/24/04 5,052 7,214 (2,162) (17.6%) 08/31/04 4,929 7,122 (2,193) (18.2%) 09/07/07 5,041 8,656 (3,615) (26.4%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. 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The Option Investor Newsletter Thursday 09-16-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: RAI Dropped Puts: SPW Call Play Updates: AHC, BOL, PD, TDS New Calls Plays: None Put Play Updates: APOL, FFH, KRI, LXK, MMM New Put Plays: KSS **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Reynolds American - RAI - cls: 73.38 chg: -0.96 stop: 72.99 In last night's newsletter we commented on the weakness in RAI. We didn't like the drop and the afternoon selling looked ready to continue into Thursday. Hastening RAI's decline was a downgrade from Smith Barney this morning. The broker cut RAI from a "buy" to a "hold" on valuation concerns. The stock fell more than 1.2 percent on stronger than average volume. We've been stopped out at $72.99. Its MACD has now produced a new "sell" signal. If you're interested in following RAI keep your ears open for news as we approach the September 21st start of the racketeering case in Federal court. Picked on August 19 at $72.88 Change since picked: + 0.50 Earnings Date 08/02/04 (confirmed) Average Daily Volume = 1.2 million Chart = PUTS: ***** SPX Corp - SPW - close: 36.23 change: +1.22 stop: 36.01 It's hard to believe. With all the bad news on this company and its questionable accounting somehow, someone is buying the stock. SPW has rebounded enough to crack back above the $36.00 mark and stop us out. We've been stopped out at $36.01. Picked on September 08 at $35.40 Change since picked: + 0.61 Earnings Date 08/02/04 (confirmed) Average Daily Volume = 814 thousand Chart = ************************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 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amerada Hess - AHC - close: 82.02 chg: -0.08 stop: 81.00 We continue to be cautious on shares of AHC but if the stock continues to churn sideways we're not going to drop it. Our stop loss is at $81.00, which is 50 cents above our official entry. More aggressive traders should consider keeping their stop under round-number and technical support at the $80.00 mark. We are not suggesting new bullish plays in AHC at this time. Picked on August 31st at $80.50 Change since picked: + 1.52 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 1.0 million Chart = --- Bausch Lomb - BOL - close: 68.55 change: +0.14 stop: 66.99 News on BOL remains scarce but that's not hindering BOL's steady climb higher. Well, we call it a steady climb. While BOL is at new highs the momentum does appear to be fading. We are concerned about the impending sell signal in the MACD indicator if BOL doesn't pick up the pace. We're not suggesting new bullish positions at this time. No change to our stop loss. Picked on September 01 at $66.51 Change since picked: + 2.04 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 397 thousand Chart = --- Phelps Dodge - PD - close: 83.78 chg: -0.91 stop: 81.99*new* PD is also struggling to keep the momentum alive. On Tuesday Fitch upgraded PD's debt rating. Yesterday Morgan Stanley reiterated their "over weight" rating on the stock. Yet PD continues to struggle with the $85-$86 level. Technical oscillators are starting to falter and the MACD looks close to producing a new sell signal. We're starting to worry. Even a 2 percent rally in copper prices couldn't spur a move higher in PD today. Keep an eye on copper. The metal is trading near $1.30 a lb. and this has been resistance in the past. A breakout here could lead PD higher again. In the meantime more aggressive traders may want to leave their stop loss under round-number support at the $80.00 mark. We're going to turn cautious and up our stop near breakeven at $81.99. If PD dips to $80 and bounces again we can always jump back in. Picked on August 26th at $82.10 Change since picked: + 1.68 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 2.1 million Chart = --- Telephone & Data Sys - TDS - cls: 83.10 chg: +0.21 stop: 79.50 TDS is looking pretty good. The stock surged to new two-year highs on strong volume this week. Furthermore it's holding on to those gains with very mild profit taking. Odds are growing that we could see TDS hit our exit point at $85.00 in the next couple of sessions. We're not suggesting new bullish plays at this time. Picked on August 24th at $78.05 Change since picked: + 5.05 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 195 thousand Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Apollo Group - APOL - close: 78.82 change: +0.14 stop: 82.67 We have good news and bad news. The good news is that APOL is still under resistance at the $80.00 mark and appears to be building a new trend of lower highs. There is more good news as the MACD indicator nears a new "sell" signal. The bad news is that APOL has found support at the $78.00 level. Plus, there were some positive comments on APOL in the Wall Street Journal. Fortunately, the comments didn't spark any sort of rebound today. We're still willing to consider new bearish plays here but traders may want to wait for APOL to break the $78.00 mark. Picked on September 14 at $78.88 Change since picked: - 0.06 Earnings Date 10/05/04 (unconfirmed) Average Daily Volume = 3.3 million Chart = --- FairFax Financial - FFH - cls: 124.21 chg: -1.84 stop: 133.00*new* After a small bounce early in the week FFH has rolled over under the $130 level and is now slipping under a new trend of lower highs. Volume continues to be above average and the stock is hitting new relative lows not counting its intraday spike down in late August. It's not too late to consider positions here but remember this is a higher-risk more aggressive play due to extremely low stock and option volume. We're lowering our stop loss to $133.00 above the 21-dma. Picked on September 12 at $126.50 Change since picked: - 2.29 Earnings Date 00/00/00 (confirmed) Average Daily Volume = 59 thousand Chart = --- Knight-Ridder - KRI - close: 63.59 change: -0.26 stop: 65.51 Our put play in KRI is not off to a screaming start but it is moving our direction. The stock dipped toward the $63.50 level this morning then bounced back toward $64 and rolled over again. We're encouraged to see its MACD indicator that much closer to a new "sell" signal. This looks like an entry point to buy puts. Picked on September 15 at $63.85 Change since picked: - 0.26 Earnings Date 07/22/04 (confirmed) Average Daily Volume = 491 thousand Chart = --- Lexmark Intl - LXK - close: 83.62 chg: +0.92 stop: 86.01 No surprise here. If you caught our comments last night we noted the bounce from LXK's rising long-term trendline of support. Bulls tried to produce some follow through on yesterday's rebound but it didn't very far. We imagine that if LXK can break that rising trendline we'd see some significant profit taking but there's not guarantee it will happen. Fortunately, LXK has plenty of short-term resistance overhead at the 10-dma, exponential 200-dma and the $85.00 mark. Picked on September 5th at $86.10 Change since picked: - 2.48 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 1.2 million Chart = --- 3M Co - MMM - close: 82.05 change: +0.05 stop: 84.51 It was a slow day but bears did not fail to notice the bounce in the Dow Industrials failed at its simple 200-dma. Likewise the bounce in the MMM failed at its 200-dma (and 50-dma). The MACD indicator is inching ever closer to a new "sell" signal. This looks like an entry point to buy puts. If you missed MMM's original update we added it as a put on Wednesday night. Picked on September 15 at $82.00 Change since picked: + 0.05 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 2.5 million Chart = ************* NEW PUT PLAYS ************* Kohl's - KSS - close: 49.48 change: -1.28 stop: 52.01 Company Description: The Menomonee Falls, Wisconsin-based department store was a strong growth play a few years ago. Stores provide shoes, apparel, and home products all targeted at middle-income families. KSS currently runs over 560 stores. Why We Like It: We like KSS as a short-term put play with an emphasis on short- term. For months anyone following the stock already knows that investors and analysts alike have been calling for the stock price to improve based on the stores upcoming Q3 and Q4 results. KSS' results last year were terrible but now that gives them easy same-store and year over year sales comparisons. It is this belief that sales will drastically improve and the six-week rally in the retail sector that has powered KSS through multiple layers of heavy resistance. Now we're starting to see some weakness. The RLX retail index has rallied for six weeks and just touched resistance at its all time highs from June before slipping backward this afternoon. We feel it could be time for some profit taking. The weakness has already begun in KSS. Shares of KSS peaked at $52 on Tuesday and now shares have fallen through the bottom if its narrow channel and its simple 10-dma. Please note - this is somewhat aggressive. Even though the daily and weekly oscillators confirm that KSS is overbought and that the momentum is fading we're still calling a top here. That's a bad habit to get into. Fortunately, we do see a new "sell" signal in the MACD. Our plan is to catch any drop toward the $46.00 level, which looks like support. It would also represent a 50 percent retracement of its July to September rally. If KSS achieves our target we may actually switch to calls to play the bounce since we do expect the stock to out perform over the next few months. Suggested Options: We're only expecting this to be a short-term play so we're suggesting the October puts. Our favorites are the 50s. BUY PUT OCT 50 KSS-VJ OI=4928 current ask $1.95 BUY PUT OCT 45 KSS-VI OI=5488 current ask $0.35 Annotated chart: Picked on September 16 at $49.48 Change since picked: - 0.00 Earnings Date 08/12/04 (confirmed) Average Daily Volume = 3.1 million Chart = ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** 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 Thursday 09-16-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Hogs to Homes and more! Traders Corner: VIX question and Trendlines, Part 2 Combos/Straddles: October Position Preview -- Going Out With A Bang!! ********** WATCH LIST ********** Hogs to Homes 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. ___________________________________________________________________ Mohawk Industries - MHK - close: 80.28 change: +1.88 WHAT TO WATCH: We don't feel this is the safest environment for bullish plays but MHK certainly looks tempting. Not only does the stock show decent relative strength but it would appear to be building a bull flag pattern. Traders bought the dip to $78 and now MHK is back above the $80.00 mark. Aggressive players might want to consider some bullish strategies if MHK trades over $81.00 or $82.00. The P&F chart is very bullish with a $102 target. Watch out for possible resistance at $84-85. Chart= --- Harley-Davidson - HDI - close: 59.94 change: -1.61 WHAT TO WATCH: We strongly considered adding HDI as a put play tonight. The high volume breakdown under support at its 40 and 50-dma's and the $60.00 mark doesn't look good. Plus the MACD indicator has produced a new sell signal and it's been a consistent indicator in the past. Two things made us pause. First the P&F chart is still in a bullish uptrend that is not yet broken. Second, HDI has a couple of rising trendlines of support. Just stretch them out from the lows dating back to March and you'll see it. A drop under $58.00 might be enough to crack these uptrends but then we'd have to deal with round-number support at $55.00 and its simple 200-dma. Chart= --- Avid Technology - AVID - close: 45.54 change: +1.67 WHAT TO WATCH: We like the short-term action in AVID. The stock is building a new trend of higher lows after its sharp rebound in August. Today's move was powered by better than average volume and pushed AVID above its simple 50-dma. We'd like to consider bullish positions if AVID can breakout over the $46.00 level but its P&F chart shows overhead resistance at $47.00. This just happens to correspond with technical resistance on the daily chart at the simple 100 and 200-dma's. Watch for a move over $48 and target the $54 region. Chart= --- Centex Corp - CTX - close: 50.42 change: +1.00 WHAT TO WATCH: Some of the homebuilders still look strong and we like the breakout over $50.00 and the simple 200-dma in CTX. Unfortunately, the rally here is getting a little long in the tooth. Yet if CTX can trade above $51.00 it should produce a new double-top breakout buy signal on its P&F chart. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- IMDC $48.78 -2.23 - That didn't take long. IMDC broke support at $50.00 on big volume and its MACD has produced a new sell signal but we're still worried about P&F support near $47. EBAY $92.33 -1.72 - Is it possible? Could EBAY really be showing some weakness here? We'd look for shares to retest the $90 level soon. AMZN $42.57 +0.36 - AMZN also appears to have produced a bearish reversal pattern at its simple 100 and exponential 200-dma today. ************************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 ************************************************************** *************** Traders Corner *************** VIX question and Trendlines, Part 2 By Leigh Stevens lstevens@OptionInvestor.com SUBSCRIBER QUESTION: "ANALYSTS ARE TALKING ABOUT LOW VOLATILITY INDEX AS AN INDICATION OF INFLECTION POINT. HOWEVER AS AN ANALYST WHO FOCUSSES ON POSITION TRADES - PLAESE PROVIDE YOUR INSIGHT/MUSINGS ABOUT THIS INDICATOR" RESPONSE: I may not always focus on things that "all" analysts are talking about. Also, I assume by "inflection point", its meaning is what I might call a "turning point". Low volatility, such as measured by VIX, is sometimes seen at intermediate tops (e.g., early-March; late-June) and high VIX readings, at bottoms (e.g., late-March, late-May, mid-Aug.), but there is not always a reliable connection (e.g., high VIX at late-Sept. '03 intermediate low and low VIX in mid-July). I see another top ahead but have not commented on a correlation to low VIX readings (around 14) of late, but will include mention and chart of it from time to time as part of the mix of things I comment on. Seems like a useful add since, as you note, its commonly commented on – Plotting the CBOE Market Volatility Index (VIX) under the OEX in the chart above, shows that several prior tops in the overall downtrend from the market peak early this year, occurred with a low VIX reading as pointed to or highlighted by the blue (down) arrows. I use a 5-day average to better show clusters of such low Index values; e.g., in the 14.5 area. After the possible recent OEX top at the resistance (down) trendline (at red down arrow), VIX has jumped from its recent lows. The VIX pattern here is consistent with a what has been seen in the prior up swing highs over the period shown above. My impression has been that (stock) market timers in general, as opposed to option traders and analysts, find volatility indicators of interest but don't necessarily rely on them for market timing, perhaps because it's not always as precise as other tools and indicators. An example would be taken from the S&P 100 (OEX) chart above that shows a possible rally top coming in precisely at resistance implied both by the down trendline and at the 200-day moving average. Stay tuned as to whether this was a rally peak! VIX is consistent with other patterns (e.g., the down trendline) and indicators (e.g., the moving average) too if the low volatility pattern continues to show where the S&P is again topping out. TRENDLINES – Part 2: Effective Uses in Trading The basic construction of chart trendlines was described in my previous Trader’s Corner article at – http://www.OptionInvestor.com/traderscorner/tc_082604_1.asp I find many occasions where I use the "best fit" technique connecting the most number of highs or lows – this technique may cause some extreme highs or low bars to be "cut" through. This method of constructing "internal" trendlines is different than the convention understanding of how to draw them – point #1 in my prior Trader’s Corner article was that there are some variations in drawing trendlines, but guidelines for USE are the same. Point #2 is that trendlines are, in effect, "angular measures of Momentum" shown visually on a price chart. If you remember this point regarding the nature of what trendlines are, you will also probably recognize that a rate of momentum is a quality of the trend that is sometimes hard to measure exactly. So, trendlines are not always precise, as seen from an historical index chart from the 90's – the principles are always the same whether a steep angle is seen on the way down or up, whether on an hourly chart, daily or weekly. The chart below is weekly and like the others (except the last) are taken from my book (Essential Technical Analysis) and you don't even have to pay for it! - Related to point #2 - within the exceptions and limitations, trendlines are nevertheless sometimes so accurate in depicting the trend that it’s easy to forget this cautionary reminder – Trendlines show, in effect, the "rate of change" for prices in an up or down direction as expressed as an angle line. If prices are going up an average of 3% a month, this mathematical progression can be shown as a line. However, drawing trendlines must also take into account the extreme highs and lows (above or below the "mean" or average change), which are emotional points of excess in the market. Therefore, we can expect that there will be some false signals given by trendline breaks and breakouts – that is, downside or upside penetrations of the line that you are drawing – because points of excess go further than is normally predictable. You can anticipate that you will need to periodically or even frequently re-draw trendlines to account for some new extremes if you want the most accurate visual depiction of the trend momentum. There is the axiom in technical analysis, like many disciplines, that you must put in time and work if you expect rewards from the technique. Getting in early on trends, for which trendlines will be of considerable help, provides the best opportunity for capturing the most profit from a trend. Accomplishing this objective more often than not tends to make up for periodic losses along the way. The idea is to keep using trendlines - they’ll work over time if you just keep using them and don’t expect more than the tool can provide. Point #3 – trendlines look like they make identifying every trend and trend reversal easy AFTER the fact. Once the price action has unfolded it’s easy to see the dominant trendlines as is apparent in the next charts. This chart looks like there a trend reversal after a major run up, but there were some other technical considerations - the break did not take out the prior downswing low, at least not on two back to back days. I often indicate that if a new closing low lacks downside follow through the next day, it may be a false signal. THE FOLLOW ON CHART STORY IS BELOW – The downside price action shown above did not take out the prior downswing low on two back-to-back days. I often indicate that if a new closing low lacks downside follow through the next day, it may be a false signal. The sideways consolidation above – really a "rectangle" pattern - was merely a pause in the trend before a next up leg. Trendlines are not the sole technical tool that was needed to profit from the trend shown above. Of course, the break of Trendline T3 above was fine as an exit point to stand aside awaiting a next move; then, re-entry made on the upside move above the minor down trendline which suggested that the consolidation had run its course. ANOTHER CHART STORY – AND, THE “LOOK BACK” CHART –- AND, STILL LATER --- It takes some time to make nearly as good of use of trendlines going forward, as looking backwards! When market action is unfolding and you are in an Index or stock option play that you identified as having begun an uptrend due to its breakout above a down trendline, along come points where it’s hard to figure how to draw or redraw a trendline – and, they do need to be adjusted as market action unfolds. Some traders will apply a rule that a trendline must be penetrated by a certain percentage or dollar amount to "confirm" the penetration. Then there is the question of whether to draw a trendline "through" an apparent extreme (cutting through a bar) or not and so on. There is also the risk that setting a stop under a trendline will result in exiting a position because prices dipped under the line, then resumed an upward course. For this reason, exiting only on a close above or below the trendline, could be a method used to "confirm" that a trend reversal has occurred. This assumes that you can check in on the close, which is not always possible. Also, exiting on a closing basis means you may not be adequately protected against a severe price move against you, where a close is far above or below the trendline in question. Here’s where it is important to know not to adopt too "loose" of a risk control strategy in a very "overbought" or very "oversold" market – to define overbought or oversold could be to use a 14-day RSI when the readings are at 70/75 on the upside extreme or 25/30 on the downside. BACK TO THE FUTURE – UP and DOWN trendlines make up the Trend Channel. The lower (downtrend) channel in the Dow 30 (INDU) chart is a good example of an internal trendline as it cuts through the middle cluster of lows. **************** Combos/Straddles **************** October Position Preview -- Going Out With A Bang!! By Mike Parnos We're going to close out the second year of tracking our CPTI portfolio with a month to remember. I've put together an interesting array of new hypothetical positions. Remember, the premiums are based on Thursday's closing prices. You may get a little less if you attempt to place your trades on Friday. Accepting less premium does not mean it's a bad trade. Just be careful. It's better to be safe than sorry. In the meantime, I'm looking forward to writing Sunday's column. Unless we get an outrageous Friday morning open, it appears that all of our regular CPTI positions, along with our Quickies, are going to be profitable. Making money never gets old. Deciding on how to spend it can get a bit tedious . . . but it's something we can all live with. ________________________________________________________________ One of the funny things about the stock market is that every time one man buys, another sells and both think they are astute. ________________________________________________________________ In Sunday's column I posted the first of our positions. I will repeat it again for those of you who may have missed it. Obviously, the amount of premium available will be down significantly. PREVIEW OF OCTOBER HYPOTHETICAL POSITIONS October Position #1 - SPX Iron Condor - 1123.50 Sell 10 SPX October 1160 calls Buy 10 SPX October 1175 calls Credit of about $1.75 ($1,750) Sell 10 SPX October 1075 puts Buy 10 SPX October 1060 puts Credit of about $1.30 ($1,300) Total net credit of appx. $3.05 ($3,050). By putting on the position now, we will be exposed for five weeks, but it enables us to take in a little more premium. Maximum profit range is 1075 to 1160. Maintenance is $15,000. If you put on this same position tomorrow (Friday), you could likely take in about $2.70 ($2,700). You might give some consideration to using the 1165-1180 for the bear call spread and take in about $1.30. It's a little less premium, but also a little safer. Position #2 -- RUT Iron Condor - 574.54 There are two versions of this trade -- conservative and aggressive. I'm going to take the conservative approach. Why? Because basically I'm a chicken. Sell 10 RUT Oct. 610 calls Buy 10 RUT Oct. 620 calls Credit of about $.65 ($650) Sell 10 RUT Oct 530 puts Buy 10 RUT Oct 520 puts Credit of about $.55 ($550) Total net credit of about $1.20 ($1,200). Maximum profit range is 530 to 610. Maintenance is $10,000. If you want to generate more income, do a few extra contracts rather than bring in the strike prices. Don't forget that the market makers on RUT are very stingy (I'm being diplomatic). You may have to settle for less premium if you want to put on this position. Position #3 - OEX Iron Condor - 543.35 Sell 10 OEX October 520 puts Buy 10 OEX October 510 puts Credit of about $.70 ($700) Sell 10 OEX October 565 calls But 10 OEX October 575 calls Credit of about $.50 ($500) Total net credit of about $1.20 ($1,200). Maximum profit range is 520 to 565. Maintenance is $10,000. Again, if you want to generate more income, put on a few more contracts rather than bring in the strike prices. Position #4 - BBH Iron Condor - 144.44 This one is a little riskier than the others. Our bear call spread is going to use $150 as the short strike. The resistance looks respectable, but it's only 5 1/2 points away. Let your risk tolerance be your guide. Sell 10 BBH October $150 calls Buy 10 BBH October $160 calls Credit of about $.95 ($950) Sell 10 BBH October $135 puts Buy 10 BBH October $125 puts Credit of about $.55 ($550) Total net credit of about $1.50 ($1,500). Maximum profit range is $135 to $150. Maintenance is $10,000. Be careful. Position #5 -- SPX "Sure Thing" Strategy - $1123.50 This was formerly called the "Credit Spread Boogie." We know there are no "sure things," but the name sure is catchy. The market seems to be in an uptrend since mid-August. Let's go with the flow until the market tells us otherwise. Sell 3 SPX 1120 October puts Buy 3 SPX 1095 October puts Net credit of about $6.50 ($1,950) This is a riskier strategy. The initial maintenance is $7,500. Before trying this, make sure you have a large brokerage account that will accommodate a lot more maintenance -- just in case. Remember, the "Sure Thing" strategy involves the possibility of doubling the number of contracts and going in the opposite direction, if the trend does not continue. _________________________________________________________________ SEPTEMBER CPTI POSITIONS September Position #1 – SPX Iron Condor – 1123.52 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 – 574.54 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 “Sure Thing” – 1123.50 We sold 3 September SPX 1105 calls and bought 3 September SPX 1130 calls for a credit of about $7.00 ($2,100). When the market moved up quickly, we closed out our Sept. 1105/1130 bear call spread at a cost of $13.90 ($4,170). We then put on 7 contracts a bull put spread (1110/1085) at $6, taking in $4,200. Our new maintenance requirement is $17,500. Potential profit: $2,130. September Position #4 – OEX Iron Condor – 543.35 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%. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $35.32 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. We rolled to the Sept. $34 calls and $37 puts, yielding $.45 or $450 for the cycle. For October we were again limited to a $.45 ($450) rollout. Our new total credit is now $12,200. 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 – 543.35 In my Feb. 8th column, I outlined a strategy based on an initial investment of $100,000. $74,000 was spent on zero coupon bonds maturing in seven years at a value of $100,000. The principal $100,000 investment is guaranteed. We’re trading the remaining $26,000 to generate a "risk free" return on the original investment. 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, Options Therapist and 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************************* 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. 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