The Option Investor Newsletter Sunday 09-19-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: The Stage Is Set Futures Wrap: See Note Index Trader Wrap: EVERY WITCH WAY Editor's Plays: Busted! Market Sentiment: September: To Dip or Not to Dip? Ask the Analyst: Low volatility will try your patience 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 9-17 WE 9-10 WE 9-03 WE 8-27 DOW 10284.46 - 28.61 10313 + 52.87 10260 + 65.19 + 84.91 Nasdaq 1910.09 + 15.78 1894.31 + 49.83 1844.48 - 17.61 + 31.07 S&P-100 545.80 + 2.45 546.25 + 5.19 541.06 + 0.18 + 4.84 S&P-500 1128.58 + 4.66 1123.92 + 10.29 1113.63 + 5.86 + 9.42 W5000 10993.32 + 57.00 10936 +115.44 10820 + 65.86 +106.22 SOX 388.50 + 4.89 383.61 + 25.77 357.84 - 24.50 - 3.66 RUT 573.17 + 3.26 569.91 + 13.67 556.24 + 4.57 + 3.75 TRAN 3257.39 + 24.00 3224.38 + 82.53 3141.85 + 33.05 + 17.93 VXO 13.55 13.49 13.91 14.79 VXN 20.13 19.56 21.06 21.27 ****************************************************************** The Stage Is Set by Jim Brown The indexes clung to the levels reached last week with the tenacity of a rock climber 200 feet up a cliff. The Dow managed to fight off several attempts to break 10250 and closed the week with only a minor loss. The Nasdaq fought off several attempts to break 1900 and posted a gain for the week. This is a very strong performance given the numerous market factors. Dow Chart - 60 min Nasdaq Chart - 30 min SPX Chart - 30 min The only economic report on Friday was the first look at the Michigan Consumer Sentiment and it offered no clues as to the current trend. The headline number at 95.8 was barely below the August reading of 95.9. The current conditions component fell slightly and the expectations component rose slightly. All the changes were technically insignificant. The last four months have flat lined at the 96 level and it suggests consumers are in a wait and see mode as we approach the elections. The bad news did not come from government economics but from private research groups. ISI reported on Friday that retail softness was increasing and may be weaker than previously thought. The International Council of Shopping Centers reported that same store sales increases have slowed in the past two months on a year over year basis. This corresponds with the 2003 tax rebate and the surge in buying in late 2003. This rising tide of negativity toward retailers and the consumer could come back to haunt us as the holiday season approaches. There are conflicting opinions at present on the expected strength of the holiday buying season and the strongest opinions are leaning to a weak holiday. This would lead to weak earnings and missed comps with a long spring and summer ahead. On the earnings front the numbers are starting to appear. The numbers of warnings that is. So far we have had 583 warnings for Q3 compared to only 362 this time last year. 305 companies have given positive or inline guidance compared to 495 at this point in 2003. In just the first 12 days of September we have seen 94 warnings with 30 of those supposedly related to the hurricanes. The current tally of expected earnings growth is rough with an estimate wide enough for Ivan to blow through. Analysts are quoting earnings increases of +13% to +17% for Q3. I think they are afraid to publish the real numbers and inciting a panic. This will be the first time in five quarters that earnings will be under 20% and several of those quarters were well over 20%. Reuters is now quoting only +8.5% revenue growth for the quarter compared to more than +10% last quarter. Hurting earnings are tough comparisons with 2003, lost income due to the hurricanes and higher energy prices. Oil prices jumped +1.71 on Friday to $45.63 and showed no indications of weakening at the close. Those energy prices are not expected to drop back to prior levels any time soon. Andrew Clark, an analyst with Lipper, went public with their oil price forecast on Friday. He said we could see a return to sub $40 oil AFTER the election with the low maybe in the $36-$37 range. Once that post election dip has arrived they expect oil prices to rise to $67 per barrel over the next couple of years. The problem as I have been discussing in this column recently is rising global demand and decreasing global reserves. He noted that the UK had returned to a net importer and rising demand in India, China and Japan would outstrip production increases. We know from commentary last week on OPEC that they are powerless to produce enough oil on demand to lower prices. They can talk a good game but there are no actions to back it up. For the short term most analysts expect terrorist attacks on various OPEC suppliers between now and the elections as a way of putting pressure on the U.S. This should continue to keep the prices high until November. Following that thought Germany issued an "urgent" warning for all German citizens to leave Iraq. When a country uses the word urgent in its warnings it is because they have information suggesting an imminent danger. With the election only six weeks away there is sure to be further escalation of the kidnappings, car bombs, rocket/mortar attacks, pipeline destruction and attacks on American troops. Downgrades replaced earnings warnings on Friday as EBAY was cut to a hold at Leg Mason with a price target of $100. They said recent gains have fully valued EBAY. Cisco was downgraded by Lehman on the basis of uninspiring sales in recent weeks. Lehman cut Cisco to a hold and they said the stock should remain trapped in the $18-$20 range. According to Lehman recent comments from executives of communications chip suppliers like ALTR, BRCM and XLNX suggest that large equipment manufacturers like Cisco are actively rebalancing their inventory. In English that means they are suddenly buying fewer chips from those vendors. Lehman also said that Cisco's increasingly cautious commentary could also be a negative sign. Despite all these negative factors all the major indexes closed in positive territory with the exception of the Russell-2000. Even the lower book to bill could not keep the SOX from closing higher and it added +7 points, nearly +2%. The Dow may have closed negative for the week but it was only slightly negative. Actually the Dow closed almost exactly where it opened on Sept-3rd. We have tried multiple times to crack the long term downtrend at 10350 with no success. We have also held current support at 10250 despite multiple attempts to break it. For three weeks we have traded in this 100 point range despite earnings warnings, high oil prices and the calendar. The Nasdaq did manage to tack on +16 points for the week but that was due mostly to the Monday spike more than the performance for the rest of the week. The Nasdaq has traded in a narrow 20 point range for the week and ended right in the middle at 1909. Considering the negative factors and the heavy tech warnings this should also be considered bullish. The Dow has what appears to be forming a bullish flag as it consolidates its three weeks of gains. The Nasdaq is showing a bullish pennant. The SPX has a solid ascending triangle with 1130 as the upper resistance. This is the same resistance as the downtrend from March. All three indexes are showing bullish patterns in a market that has far more negatives than positives. Traders can't hardly help but be bullish with confirmation on multiple indexes. If there is such a thing as too many positive charts then we are in trouble. The challenge is still the calendar. Next week we will enter the most active period of the warning cycle and the last two weeks of the quarter. Those companies hoping for a miracle to avoid missing estimates are watching the calendar tick away and they will have to make some decisions quick. The next two weeks normally contain the most warnings. Much of that bad news is already baked into the cake. We saw the SOX rise today despite the BTB numbers. One brokerage went public saying they thought the worst was over for chips. They still expect more warnings and slower sales but they felt the majority of the price punishment was over. This gave the chips a bounce but the rebound foundation is still very shaky. While I see traders turning bullish all around me I would still urge caution. I would gladly go long on any SPX move over 1130 but all indexes would have to be firing on better volume than we had this week to make it successful. The closing setup on Friday had the SPX closing at a three day high at 1128.58. The Russell, which I had mentioned as the key for Friday experienced several bouts of expiration related weakness but it still managed to cling to the high ground near 575 resistance. This keeps it in range of a break of that 575 level and a short covering romp to 590. Sounds bullish but that is exactly the way it is setting up. The Russell has joined the big cap party with the identical bullish formation. Russell Chart The cautionary points are still the same. The earnings warnings are likely to increase and the volatility is extremely low. Volume was higher on Friday due to the OpEx but it was evenly matched. The A/D numbers were almost an identical tie across all markets. It is almost scary to have all the positive factors lining up at the same time the negative factors are increasing. With no material economics due out early in the week and the Nikkei closed on Monday we could start out the week in positive territory. Tuesday is the FOMC meeting and the conventional wisdom is for another rate hike. There is a growing thought that the Fed could give some neutral guidance along the lines that they were going to watch the economy for signs of growth before making any more hikes after Tuesday. While I think this is wishful thinking there is a growing contingent of analysts that think there is an outside chance of this happening. This could provide a stronger bullish bid on Monday in hopes of a Fed blessing on Tuesday. This bullish bid could be offset by the normal post OpEx settlement process. Traders who wake up on Monday with stock in their account they did not expect or stock missing they really wanted will scramble to square those positions. This typically provides volume but no direction. Bulls need to get a solid spike over the 10350/1920/1130/575 resistance to start a wave of short covering and have a chance of offsetting the OpEx confusion. Bears are hoping for resistance to hold and some big name company to warn. We all know there are some big name confessions in our future and a Monday warning could set the tone for the week. I think it is important not to lose sight of the big picture regardless of your bias. The indexes are at strong resistance with more negative factors than positive. The bulls have chosen to climb this wall of worry and that is great as long as they don't slip. The strongest rallies appear when bulls power over the strong ranks of protesting bears. It produces a short wave similar to Ivan's storm surge that powers over everything in its path. While that may be overly graphic we have all seen those vertical moon shots in the past when conditions combine to produce the perfect squeeze. TrimTabs.com said equity funds saw the strongest inflows of cash since July for the week ended Sept-15th. $2.6B poured into funds and that was on top of the $1.7B from the first week of September. That cash has to go somewhere and the end of the quarter is only two weeks away. Money is coming to market in anticipation of a either a buying opportunity or a rally. About the only guarantee we have for next week is that we probably will not trade in the same 100 point range on the Dow. We are poised to go directional and the only question is which direction. Logic suggests the negative factors will come to a breaking point when some currently unforeseen event appears to tilt the scales in the favor of profit taking. However, logic is very overrated when determining market direction. Investing is a team sport and the crowd always favors the bulls even more when they are the underdogs. That sentiment has been clearly evident over the last three weeks. The SOX rebounded +10% when chip companies were warning daily. The Dow is within 75 points of its three month high. The stage is set, the props are in place and the audience is ready. Will the next act be reminiscent of a WWF tag team smack down with opposing forces running in circles and going nowhere? Or maybe a replay of the Alamo with a few bulls holding the high ground while waves of bears mount an assault? I think traders would rather see Rocky appear and lead the charge up the wall of worry with his Gonna Fly Now music playing in the background. Trying hard now, Gonna fly now, Flying high now. Is that music I hear? 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 ******************** EVERY WITCH WAY By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – With the Dow Transportation Index (TRAN) going to a new high in a a "what, me worry" about higher costs attitude, keeping strange company with a new high for the Oil stock Index (OIX), as crude prices shot up at week's end - the market seemed a bit be-witched by expiration Friday. A low VIX (CBOE Market Volatility Index) has often accompanied tops this year, but the market still chugs higher. I anticipated two things going into the past week - the Sept. S&P 100 Index options would go out with OEX at between 445 and 450 - enough to rain on the bears parade, at least those holding 445 puts AND that the market would continue to work at least modestly higher as long as traders weren't too bullish - they aren't yet. With bellwether Dow (and S&P) stock GE breaking out, these Indices seem now more likely to at least challenge if not break out above, key overhead technical resistance. The S&P 500 continues to creep further above its 200-day average but also is nearing its downtrend line. An interesting week ahead. Specifics are with the charts below. THE NUMBERS - The S&P 500 Index (SPX) was up 5 points to 1,128.55. SPX tacked on 0.4% for the week. The Dow 30 stock average (INDU) ended up 39.9 points (+ 0.4%) to close at 10,284. For the week, INDU broke a sting of weekly gains by slipping 0.3%. The Nasdaq Composite Index (COMP) rose 6 points (+ 0.3%) to 1,910.09, helped by some gains in semiconductor shares (SOX) even after some negative news on chip orders - for the week, the Nasdaq was up 0.8%. The Russell 2000 (RUT) small-cap index ended 0.2% lower. FRIDAY'S TRADING ACTIVITY – Even with the craziness of quadruple witching (it rolled off the tongue better when it was merely 'triple'), it was hard to figure the Transports (TRAN) going to a new high along with the CBOE Oil Index (OIX), as crude oil prices spiked up sharply on Friday. Stocks in general would have done even better without the jump in oil prices. Nearby crude futures rallied to above $45 a barrel as many oil and gas operations in the Gulf of Mexico were halted and with a few days ahead to ascertain and fix hurricane damage. With much of our imports coming into the U.S. via the Gulf coast states, the heavy storms are making it difficult to ship, produce and refine crude oil. Stocks also dipped some after the University of Michigan reported a drop in its consumer sentiment survey number. U of M's consumer sentiment index dipped slightly, to 95.8, from 95.9 in August, below an improvement to 96.5 that had been anticipated. Never underestimate the power of the blue chips and some positive take on earnings in a market that is trying to find direction - General Electric (GE) shares rallied in early trading after Prudential said it was time to buy the company's stock. Pru's analyst said GE's energy business, which represents nearly one- fifth of sales, is expected to start rebounding in the fourth quarter and continue accelerating throughout 2005. Ford (F) rallied nearly 2% after the company lifted its earnings forecasts for the year, citing financial services and improved costs. Circuit City climbed over 4% after the consumer electronics giant reported a fiscal Q2 loss that was less than expected. The company said average customer spending was higher than last year. On the other hand, there's tech - Qualcomm (QCOM), the 2nd most heavily weighted stock in the Nasdaq 100 (NDX) Index, dropped nearly 4% after the maker of mobile-phone equipment maker warned that accounting errors would result in lowered earnings - opps! The latest survey on orders for chip equipment confirmed a slowdown in the semiconductor industry, which has been hit by earnings warnings from key chip companies like Intel (INTC), National Semi (NSM) and LSI Logic (LSI). However, with all that probably priced into the Semiconductor Index (SOX) and more, SOX rallied some and looks like it might even challenge its key 400 resistance area again. The market "discounts" and OVER-discounts. OTHER MARKETS – Bonds ended lower after a rally this past week had investors taking some profits ahead of the weekend and ahead of next week's widely-anticipated rate hike by the Fed. The 10-year Treasury note closed out the day down 16/32 at 101 to yield 4.13% (up from 4.05% Thursday, the lowest since early-April. The dollar gained slightly against the Euro and Yen - however, sharp gains were seen against the Canadian dollar after inflation data there raised doubts about the extent of further interest- rate hikes in Canada. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: Key near resistance comes in at the down trendline as noted by the first down (red) arrow intersecting around 1133. Based on the still-bullish chart pattern, there could be a move through this area, toward prior highs in the 1146 area. If this kind of advance develops it would also put the S&P 500 (SPX) in the area of my upper trading envelope line. SPX looks like it wants to go a bit higher still. Near support is in the 1115 area down to around 1110. A close under 1112-1110 breaks the current uptrend. I figure that the price move is going to be to whatever it takes to get my sentiment indicator more toward a bearish level - that is, at least a one-day reading at the upper extreme. S&P 100 Index (OEX) – Daily chart: OEX is at a key juncture here, with the Index struggling so to speak to break out above technical resistance implied by the down trendline on the daily chart, which is also the intersection of the 200-day moving average. A move to new highs here, above 548, especially on a closing basis, would set up a target to around 558 as a maximum next and maybe final objective. I give the slight benefit of the doubt to a move through this overhanging resistance and for another 10 point upside. I wouldn't overstay in calls however as downside risk is probably equal to the further upside potential at this point. The low VIX or CBOE Volatility Index number has most often this year occurred in the same time frame as when rallies have reached their peaks. High VIX numbers have tended to occur at bottoms, per the red and green arrows on the Volatility Index chart (middle) below. There may be a bearish RSI divergence shaping up but it's too soon to tell on this - there is not yet a new closing high where we can then see if RSI confirms by also going to a new peak. RSI has not quite gotten up yet to what is typically a high extreme either, which is another use of this indicator. NOTE: I wrote a response to a Subscriber question in my most recent Trader's Corner article on the possible significance of the recent low VIX levels. See - http://www.OptionInvestor.com/traderscorner/tc_091604_1.asp Dow 30 (INDU) – Daily chart: I'm not trying to be redundant, but this next chart looks like a duplicate of the S&P 100. The Dow Industrials (INDU) is holding in what looks to be a tight consolidation just under the top end of its well-defined downtrend channel. If a move higher happens soon and there is a decisive upside penetration of the top end of its 10,230 - 10,350 range, a move to the 10,500 area is possible. After a relatively tight consolidation and back and forth narrow trading range, I usually anticipate a breakout type move, as long as it doesn't take TOO long for it to happen - the longer it goes sideways, the more it looks like a top. It's time for INDU to make its move. Or NOT, in which case the Dow is likely to trend back down toward support in the 10,100 area. If near technical support implied by the low end of the recent price range around 10,230 gives way, then I look to important support coming in at 10,100. The momentum is down now according to the Stochastic process model or indicator - the one above has length set to 21. Based on this indicator, look for prices to break soon. Nasdaq Composite (COMP) Index – Daily: It's looking like the Nasdaq Composite can climb further based on its pattern here - looking at a bull flag measurement, the top end of the uptrend channel and my upper trading envelope, 1950 looks like an upside objective. Near support is at 1890, then in the 1865 area. A close under 1890 would suggest the lower support as an objective rather than the upper target. Based on the upside momentum we're seeing in the daily total Nasdaq up volume, as measured on a 10-day moving average, I would have to judge the Composite as capable of going still higher. Nasdaq 100 (NDX) Index – Hourly: I've taken another look and assessment of upside potential for the Nasdaq 100 (NDX) based on the well-defined uptrend channel being traced out on the hourly chart. While 1440 is resistance that must be overcome - with a move to there and not further would set up a double top - another rally to touch the top of the channel at the down (red) arrow would take NDX to around 1460. I suggested on Thursday that 1420 looked like the area to exit calls and look at put positions – this is now looking like too low for an upside objective as NDX could get to 1440. The 1410 area is support implied by the low end of the uptrend channel, per the up (green) arrow on the chart below. A break of this area, would suggest downside potential back to support in the 1380 area. The sideways move has put the RSI back down out of the overbought territory. Note that the last price peak was both a double top and was accompanied by a lower RSI reading - sure enough, a pullback followed, although just enough so far to "throw off" the overbought reading. Another rally seems likely - stay tuned! Nasdaq 100 tracking Stock (QQQ) Daily: Based on the pattern I'm seeing, I now think there is some potential for QQQ to break out above its resistance overhang at 36 and advance to around 37. Support at 35 needs to hold however. A close under 35 would suggest that the Q's were heading back to 34 support. The stock in the past week approached an overbought extreme in the RSI, but there is tendency for a couple or multiple readings like this before prices break. Stay tuned on this. The On Balance Indicator (OBV) continues to trend steadily higher, suggesting some accumulation of QQQ and provides an ancillary clue for a move still higher also. 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 ************** Busted! The market gapped open on Monday and the low volatility QQQ lottery play I diagrammed last week was busted before we finished our first cup of coffee. The 25-cent QQQ Sept Put turned into 20 cents at the open and went downhill from there. Hopefully as experienced traders you saw the gap open on the Nasdaq buy program and never placed your bet. But that was last week and no good crying over spilled milk money. ********************** DJX Put Update 9/12/04 I would suggest closing the play on Monday on any Dow strength. Dow strength was what we got right out of the gate and our 37 cent puts dropped to 15 cents at the open. Busted again! That buy program on Friday the 10th carried over into Monday's open and it was all over but the whining. ********************** GOOG Put Update $117.40 Jeepers Batman, did you see that rocket? Last Friday papers filed with the SEC showed Fidelity had a 15% stake in Google and the shorts got killed. The stock ran from $102 to $106 in about five candles. The gap up on Monday continued the pain and the short squeeze never stopped. With 25 million shares available to trade and Fidelity with 5 million the float and shares available to short suddenly got a lot tighter. To make matters worse search firm Heidrick & Struggles said it exercised the warrants it held for net proceeds of $128.8 million. The recruitment firm obtained warrants for services in 2001 to purchase 1.2 million shares of Google for the whopping sum of 30 CENTS per share. I don't know how many employees it supplied Google for that sweet deal but the commission was definitely a home run. That $360,000 bill won the lotto at $128.8 million. All this activity is punishing the shorts and the jump in the price is making the valuation question less of an issue on a daily basis. Willing buyers are not finding any willing sellers and everybody has dollar signs in their eyes. Personally I don't think anything has changed and once those lockups begin to expire there will be more than 10 times the current shares available to trade. Once Google has to face the earnings gauntlet in October traders ay be a lot less excited about their prospects. Nov-16th 39,081,106 new shares for sale Dec-15th 24,875,091 new shares for sale Jan-16th 24,874,091 new shares for sale Feb-14th 176,784,389 new shares for sale While I am still positive on the trade I do not want to be stupid. If you feel like it is running away from you then by all means bail now. The March $100 puts closed at $7.00 on Friday. I still think we will see sub $100 levels before the big lockup expires in February. Possibly well below $100 if their earnings fail to impress. Google Chart http://members.OptionInvestor.com/editorplays/edply_082904_1.asp http://members.OptionInvestor.com/editorplays/edply_090504_1.asp ********************** Terrorist Insurance Everybody expects some terrorist activity between now and the elections in an effort to stop oil flow and put pressure on the administration. With oil prices already on the fast track higher the energy companies are all making new highs. I have been trying to wait for a pullback for several weeks to get an entry point for a long play on oil but each week just brings higher prices on every oil stock. My time is running out. If we are going to play a potential jump in oil prices before the election we are going to have to bite the bullet and buy something. There are so many companies that have vertical charts that it is tough finding something not already overpriced in the options. I chose Marathon (MRO) because they just broke resistance on Friday at $38 but are still far enough under $40 for the options to be reasonable. Another reason is their name popping up in almost every oil article I read. They are getting back into Libya. They are involved in Canadian oil sands. Their 250,000 BPD refinery north west of New Orleans was not hit by Ivan and returned to full operation on Friday. They are everywhere and apparently doing great. MRO closed at $38.70 and the January $40 call MRO-AH is only $1.45. The stock has added nearly +6 in the last four weeks and with the breakout over resistance at $38 is poised to run higher on short covering. If we do get a severe terrorist event we could easily see $45. I toyed with the OCT $40 Call for 45 cents but there is just not enough time for any election problem. The January call should retain time premium and weather any dips without losing much value. I am planning on closing the play the day after the election depending on events. If something happens that puts a serious crimp in production we may just ride it. BUY Call Jan-$40 MRO-AH currently $1.45 Oil spiked at the close on Friday so we may get a drop at Monday's open. If so look for a bottom to form before entering the play. I would love to buy it back around support at $36 but that may be wishful thinking. Marathon Chart **************** MARKET SENTIMENT **************** September: To Dip or Not to Dip? - J. Brown Considering September's historical track record as the worst month of the year this one has been pretty mild. Dare we say even bullish? We're more than half way through the month and the S&P 500 index just notched its sixth weekly gain in a row. The NASDAQ has been up four out of the last five weeks while the Industrials just ended a five-week winning streak. That certainly doesn't sound very bearish to us. To be honest I don't trust the market's show of strength these last few weeks. There are plenty of reasons to not be bullish. Crude oil has risen 7 percent in the last week to close over $45 a barrel. The recent semi book-to-bill numbers confirmed a slow down in the semiconductor sector that has unleashed a parade of revenue warnings. The recent rash of earnings warnings are not just coming from tech stocks. Dow-component Coca-Cola (KO) issued an earnings warning this week. There have also been a number of downgrades this week. Economic data shows that growth, while still there, is slowing significantly. Corporate earnings growth is slowing and this upcoming October earnings season is supposed to be the first quarter in five that profit growth will slow to less than 20 percent. Momentum indicators are fading and most are at or near new bearish reversal signals as the major indices and sector indices enter their fourth, fifth and sixth week of the current up trend. The volatility indices are all at or near bearish reversal levels and have been for days. Plus, we have the threat of a terrorist event on home soil as we near the November elections. The markets have been able to shrug off all of this on top of what is typically a weak period in the markets. On the flip side if you're feeling optimistic there are a few things investors can be positive about. Earnings growth is still relatively strong at 15-17 percent. The U.S. is certainly expanding faster than its European counterparts. Our economic growth is still there and we are still growing despite a summer slump. The Dow Transportation average is hitting new five-year highs. Dow Theory suggests that you can't have a sustained market rally without the transports and right now transports are leading the way higher while completely ignoring the rise in oil. The markets have not succumbed to the traditional September weakness (yet). The most recent surveys suggest that business will begin hiring employees at a faster rate. Wall Street appears to be pricing in a win for the incumbent President. Since the markets hate uncertainty just knowing who they think will win gives money managers, politics aside, a stronger sense of confidence. Inflation is under control as evidenced by the recent PPI and CPI indices. Plus, the threat of a terrorist attack may still be there in our collective consciousness but the impending dark cloud seems to have lightened up a bit. Then again that last variable has probably been affected by the lack of media attention. News outlets have been distracted by four weeks of non-stop hurricane reporting. Yes it certainly seems that investors are employing some selective hearing to hear only what they want to. TrimTabs just reported that inflows to equity funds for last week ending September 15th were $2.8 billion. That's the biggest week since early July. The better question is will the market strength last? Consumer confidence numbers were lower than expected on Friday morning. While one report is not alarming if the consumer pulls back then the traditionally stronger fourth-quarter could be disappointing. Fortunately, I don't believe that will be an issue. Historically the markets charge higher after a Presidential election and that's a trend I'd bank on assuming we don't have a terrorist event. Most market pundits are bullish on stocks throughout the rest of this year. I agree. The second half of October through November and December should be positive for stocks. What I'm worried about is the next four weeks. If we can get a decent consolidation now then stocks would be poised for a strong post- earnings season rally. Next week will be somewhat busy. The earnings-warning period should come into full swing as corporations confess before the October reporting season. We'll also hear from several early announcers. Monday brings earnings reports from technology stocks ADBE, PLMO and RHAT in addition to homebuilders KBH and LEN. Tuesday brings earnings from AZO and GIS in addition to brokers GS and LEH. Wednesday we'll hear earnings from BBBY, BSC, DRI and FRX. Thursday has AGE and RAD. Yet the main event next week is Tuesday's FOMC meeting and the expected 1/4-point rise in interest rates to 1.5 percent. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9230 Current : 10284 Moving Averages: (Simple) 10-dma: 10291 50-dma: 10120 200-dma: 10289 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 990 Current : 1128 Moving Averages: (Simple) 10-dma: 1122 50-dma: 1100 200-dma: 1115 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1426 Moving Averages: (Simple) 10-dma: 1405 50-dma: 1382 200-dma: 1440 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.03 -0.36 CBOE Mkt Volatility old VIX (VXO) = 13.55 -0.89 Nasdaq Volatility Index (VXN) = 20.13 +0.21 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.83 905,929 753,552 Equity Only 0.66 742,190 487,054 OEX 1.92 28,118 54,233 QQQ 1.65 42,973 70,976 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 61.6 + 0.5 Bear Correction NASDAQ-100 43.0 + 0 Bull Alert Dow Indust. 56.6 + 0 Bear Correction S&P 500 60.0 + 1 Bear Correction S&P 100 56.0 + 0 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: 1.00 10-dma: 1.01 21-dma: 1.06 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 1447 1522 Decliners 1341 1485 New Highs 125 60 New Lows 14 20 Up Volume 1019M 1008M Down Vol. 697M 589M Total Vol. 1732M 1631M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 09/14/04 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 After the last few weeks of just minor changes we're seeing some heavy volume in the commercials' positions. They added 27K contracts to their longs and 43K contracts to their shorts. This is the most bearish the "smart money" has been in weeks. Small traders also added to positions with a net gain in their bullish bias, naturally. Commercials Long Short Net % Of OI 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%) 09/14/04 442,049 469,982 (27,933) (3.0%) 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 08/24/04 135,151 100,351 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% 09/14/04 167,310 126,513 40,797 13.9% 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 Hmm... it looks like commercials have pulled back a bit on their e-mini short positions but they remain net bearish on the market. Small traders didn't make any big changes and remain strongly net bullish. Commercials Long Short Net % Of OI 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%) 09/14/04 377,643 586,139 (208,496) (21.6%) 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 08/24/04 211,995 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% 09/14/04 289,155 81,314 207,841 56.1% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 There is where it gets interesting. The NDX futures witnessed some huge surges in volume. Commercial traders' long positions rose 25 percent. Yet their short positions rose 34 percent. The overall change was a sharp reduction in their net bullish bias. Small traders also opened their wallets this past report. Long positions more than doubled and short positions surged 125 percent. Yet small traders remain net bullish. Commercials Long Short Net % of OI 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% 09/14/04 64,282 59,808 4,474 3.6% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 25,160 - 06/01/04 Small Traders Long Short Net % of OI 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% 09/14/04 36,372 28,584 7,788 12.0% Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Wow! After weeks of very little action the DJ futures are finally seeing some volume. Long and short positions for commercial traders' both rose 41 percent. Thus their overall bias didn't change. Small traders also raised their bets and remain strongly net bearish. Commercials Long Short Net % of OI 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% 09/14/04 41,951 34,486 7,465 9.7% 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 08/24/04 5,052 7,214 (2,162) (17.6%) 08/31/04 4,929 7,122 (2,193) (18.2%) 09/07/04 5,041 8,656 (3,615) (26.4%) 09/14/04 8,121 14,425 (6,304) (27.9%) 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 *************** Low volatility will try your patience I'm an OptionInvestor.com subscriber and follow the market monitor daily. Can you explain why the FFH Oct $120 put I bought at $4.40 when the stock was trading at $129 is bidding at $4.30 with the stock down almost $7.00 from when I purchased the put? Do I need to get out of these contracts? Please respond in either the Market Monitor or through email. Jim Brown forwarded this trader's question to me, and I thought I'd use it in this weekend's column, as it ties in with some other questions I've had in recent weeks regarding "what's going on with these options (not FFH but others)? This year has been a tougher year for options traders than in years past, where options volatility has been at low levels, and volatility "spikes" aren't what options traders have been accustomed to seeing in years, and I mean more than just the past 5-years. I tried to e-mail the trader back, asking him/her WHEN they purchased the options. I didn't receive a response back at the time of this writing, but I do see where the Fairfax Financial Holding (NYSE:FFH) $122.31 -1.52% did see trade action at $4.40 on Wednesday, September 15, 2004, when FFH's stock was trading just under $129.00 per share. Let's take a quick look at FFH's October Option's chain, where notes will be taken that these options are not actively traded on a daily basis, spreads between the bid and ask are wide, and open interest is low. FFH Option Chain for October strikes I'm assuming that the trader bought the Oct. $120 puts (FFH-VD) on 09/15/04, and with the stock having falling from near the $129 level, but the option "not moving" that the buyer of these puts bought them at the ask/offer. This is normal when a stock you're trading options on, does not trade a lot of volume in the option contracts. If the trader did indeed pay the ask/offer when the stock was higher, then the option has moved as we'd be paying $5.60 at Friday's close. OK. One rule for ACTIVE and SHORT-TERM options traders is to NOT try and trade in options contracts, that don't trade a lot of VOLUME, or have LOW amounts of open interest. Options with low volume and low open interest usually have wider spreads and if you're intention is to get in and out quickly, then this can become a when you want to close the trade out quickly. SPECIAL NOTE: I did NOT say that low volume and low open interest options can't be VERY profitable, but if you're looking for a quick "in and out" trade, then it is oftentimes best to look elsewhere, or plan on having to "work the trade" to get filled in between the bid/ask. This is ONE reason (wide bid/ask) the trader might have thought his/her put option in FFH wasn't moving. OK. Let's quickly cover a way a trader CAN try and "work and order" to get filled in between. Get the options market maker to fill your order, if you decide you want out of the trade. As of tonight's writing, the option trader has roughly one month until the October $120 puts expire. One "trick" I'll use from time to time is a technique I've taught traders before. It's called "flashing." Now, the options market maker has just 58 contracts open at this point, and he/she could probably care less if YOU get filled at $5.00. The options market maker would just as soon you sell them at the bid of $4.20. So..... get under his/her skin! Try to get him/her mad. Let's assume I (Jeff Bailey) bought 10 contracts at $4.40 on 09/15 and now want to close them out, but I would like to get $5.00, instead of the lower $4.20 bid. One way to try and do this, which can also give an options trader a "sense of direction" on the stock is to do this. Place a LIMIT order to sell just 4 of the contracts at $5.00. And let that order sit out there for 5 minutes or so. You should see the ask/offer fall from $5.60 to $5.00. Boom! Did you get filled immediately? If so, you sense that either the market maker, or another market participant is thinking the stock might still be headed lower. Oh good! I've got 6 put options left, I've made a little money, so I'll sit another day or so and see what shakes out. If I still want to sell the remaining 6 options, I might then place a limit order to sell them at $5.20, see if I don't get a taker. What I DO NOT want to do is stick all 10 of them out there at once! REMEMBER, this option has a LOW open interest, and sometimes the options market maker will match YOUR 10 to what he/she sold you at the offer a couple of days ago and think to himself.... "sucker..... you can wait and sell them to me at the bid." Back to "flashing." Let's say I stuck my sell limit order for 4 of the puts out there, and nobody bought them at $5.00. The options market maker knows you're there, as you're now below his/her original offer of $5.60. "Flashing" as it is called is when you don't get filled, cancel your order (the offer should go back to $5.60), then enter a NEW sell 4 contracts limit order, but maybe this time, enter it for a lime of $5.30 (offer now shows $5.30). Sometimes this will start to wear on a market maker's nerves, and he/she will fill your order, so you'll leave him/her alone. If you don't get a fill at $5.30, cancel it, change it to $5.40, try to make the options market maker mad. If no fill at $5.40, go lower, this time to $5.20. Sometimes when you work an order from $5.30 up to $5.40, then back lower the $5.20, the options market maker has had enough of you, figures its worth $5.20 per contract so you'll leave him/her alone. Do you see what you're trying to do here? You're working an order. The market maker isn't CERTAIN that you're the trader that bought them at $4.40, or the trader that bought them at $10.50 back on August 25. This "flashing" technique is up to you, if you want to take the time during a day, but if you've got 10 contracts and the spread is $1.40, that's $1,400 worth of spread, where if you can get half of the spread, that's $700 worth of work. What can be further informative, ESPECIALLY on thinner traded options and the underlying stock is this. If you get filled on 4 contracts "in between" at watch your Level II quotes on the UNDERLYING STOCK, or time and sales. If the MARKET MAKER of the option fills you in between when you're selling a put, what to see if a BID for the stock suddenly appears for 400 shares. If so, this might be hint that the options market maker is BUYING back stock he/she shorted days ago when you BOUGHT the puts from him/her. Remember when the options market maker SELLS you puts, the market maker is OBLIGATING himself/herself to BUY stock you may decide to PUT on them at the specified strike. Volatility has been LOW. Do I hold the trade? Since I think we know why the option doesn't appear to be moving (the spread), I'm going to try and work through this trade, but also cover the Market Volatility Index (VIX.X) so we can try and understand why it is that option trading has been tougher this year, but also combine the VIX.X with the FFH put trade. I like the trader's position as it stands right now, but with October expiration, I'd have an exit plan ready, especially with low volume/open interest options. I checked FFH's point and figure chart, and it currently has a bearish vertical count of $72 associated with its chart. According to Dorsey/Wright and Associates, they've classified the stock as belonging to the FINANCE sector, and here may be a slight problem for a bear as this sector is "BULL CONFIRMED" at 56% bullish. With the SECTOR bull confirmed, a bear needs to be somewhat careful. Let's take a look at the WEEKLY interval chart of both FFH and the VIX.X. Fairfax Financial Holdings (FFH) - WEEKLY Intervals A nice head and shoulder pattern for FFH is apparent, where I've placed a retracement on the FFH chart with 0% at the 52-week high, and then placed the 50% retracement at what would appear the be the neckline at $141. Some observations are that this week, the stock finds suspicious resistance at the resulting 61.8% retracement. That's good for a bear, as it appears market participants are treating that level as resistance, where the recent low of 4-weeks ago, looks to be in play again. Now, what I've done in GREEN is quickly calculated out a "break- even" point of $115.50, where should FFH close at $115.60 on October 15, then the Oct. $120 puts should be trading close to $4.40 per contract. Now.... why FFH seemed to find this derived "break even" point of $115.60 as a recent low 4-week ago, right at/near the $115.60, we can not be sure, but perhaps that's where the MARKET feels a near-term bottom should be found. It could well be the strength of the SECTOR has some bulls willing to try and catch what appears to be a "falling knife," or old bears have started to buy back some of their shorts. According to Yahoo! Finance, FFH has 12.9 million shares in the public float, 1.87 million are short (14.53%) and short ratio as of August 9 was 35.3 days to cover. That's a lot of stock short with average daily volume over the past 3 months of just 66,171. I have not checked to see if FFH has any convertible offerings, but it may considering such high short interest. Again, while I don't know when the trader bought puts on FFH, we can see that for the better part of 2004, the VIX.X has spent a lot of time below some PEAK lows dating clear back to 1998. In fact, I have been using the BLUE retracement shown on the VIX.X to disect levels where the VIX.X has tended to fluctuate over the last NINE years, where EXTREME troughs and peaks have actually come BELOW 20 and ABOVE 40. This year (2004) a SPIKE in volatility has been 20! Just over a month ago, I had noted in an Index Trader Wrap for options traders to be alert that we might see volatility drop as the pattern had been for options market makers to start selling premium given a chance. Obviously, they, or market participants did. What has made option trading difficult this year, is that with volatility so low (premiums low) a move in VIX.X up to 18, from 15, is a 20% move, and that can rake havoc on an options trade, that isn't almost perfectly timed. ESPECIALLY if you're a SHORT- TERM trader of options. In a way, the current technical in FFH, look somewhat similar to two very good put trades traders may have experienced in July and August, in OSI Pharmaceuticals (NASDAQ:OSIP) $62.60 +0.69%, as the stock traded its 52-week low around $51.00 on July 26, and Whole Foods Market (NASDAQ:WFMI) $86.24 +1.10%, as it plunged to lows below $75? Both trades were trades where the stock fell sharply, then "rebounded" a bit, to then juuuust undercut the prior low. We were trading OUT THE MONEY near-month contracts in both of those trades and didn't question things when a new low was found. Good thing too, as I think those options would have expired worthless at expiration. In both of those trades, we didn't sell all the originally bought put options at once either. We sold parts of the position first, then the remaining position. In a way, we were booking some profit just in case a sudden rebound took place, but one pattern for the success was to close out some of the options for a profit as we approached the relative low after the failed rebound. With these FFH puts being LOW volume and LOW open interest, think to yourself.... "when might there be some volume interest?" I (Jeff Bailey) might think.... when the stock looks like it's going to break the recent low. Remember, an options market maker may still have to offset his/her exposure to being NAKED the Oct. $120 puts a trader BOUGHT from him/her. If the stock looks like it may break the recent lows, the market maker may become a more eager buyer of the puts he/she sold the trader. What about other market participants that bought the UNDERLYING STOCK of FFH from $116 to $130. What are they looking at? What are they thinking right now? To answer this, put YOURSELF in their shoes. I (Jeff Bailey) would have to think THEY are either looking form some insurance (a protective put), or cutting out. Unless they know FOR SURE the stock is about to reverse course and move higher. However, that trade action this week, where FFH didn't see the light of day above $130 doesn't depict a market participant that is CERTAIN of a higher price right now. Where do you think a bunch of LONGS/BULLS that did buy from $116 to $130 might have their stop losses at? I'd think they might have some lined up UNDER $116. Maybe this week, the FFH specialist is going to try and find out. Additional notes: Fairfax Financial Holding's "Max Pain" Theory level for September expiration (Friday, Sept. 17) was $130. FFH closed BEARISH, or below that level on Friday's expiration. October's "Max Pain" Theory level currently calculated at $140 ($5 increments). Is that the gravitational point into next month's expiration? Look at your chart. It ($140) might have been the big "hedge the loss point." Don't immediately think that the open interest at the October $135 and $140 strikes was BOUGHT by a bull. Let's face it. Right now, those calls are the LOSING trade. Those may have been COVERED CALLS that were SOLD by an institution that couldn't either get liquidity to sell the underlying stock without crushing it and turned to the options market and sold the Oct. $140 and $135 calls, took what premium they got and bought some protective puts. Look at the $130 level on your chart again. The FFH Sep $130 puts (FFHUF) had open interest of 383 contracts. You want it at $130? Here... take 38,300 shares off my hands. The FFH Sep $125 puts (FFHUE) had open interest of 128 contracts. Here, you take another 12,800 shares down to $122.31. I can't say this is exactly what is happening, but might be as it relates to the chart and this week's expiration. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- ADBE Adobe Systems Mon, Sep 20 After the close 0.39 KMX CarMax Inc Mon, Sep 20 Before the bell 0.28 KBH KB Home Mon, Sep 20 After the close 2.73 LEN Lennar Corp Mon, Sep 20 Before the bell 1.34 NKE Nike Mon, Sep 20 Before the bell 1.11 PLMO PalmOne Mon, Sep 20 After the close 0.20 RHAT Red Hat, Inc. Mon, Sep 20 After the close 0.05 SMSC SMSC Mon, Sep 20 Before the bell 0.04 ------------------------- TUESDAY ------------------------------ AZO AutoZone Inc. Tue, Sep 21 After the close 2.55 CBK Christopher & Banks Tue, Sep 21 After the close 0.15 FDS FactSet Research Tue, Sep 21 ---- N/A ---- 0.46 GIS General Mills Tue, Sep 21 Before the bell 0.60 GS Goldman Sachs Tue, Sep 21 Before the bell 1.46 GTK GTech Holdings Tue, Sep 21 Before the bell 0.37 JBL Jabil Circuit Tue, Sep 21 After the close 0.26 LEH Lehman Brothers Tue, Sep 21 ---- N/A ---- 1.55 TIBX TIBCO Software Tue, Sep 21 After the close 0.05 ------------------------ WEDNESDAY ----------------------------- BSC Bear Stearns Wed, Sep 22 Before the bell 1.98 BBBY Bed Bath & Beyond Wed, Sep 22 After the close 0.38 COGN Cognos Wed, Sep 22 After the close 0.26 CAG ConAgra Foods Inc Wed, Sep 22 Before the bell 0.27 DRI Darden Restaurants Wed, Sep 22 After the close 0.43 DBRN Dress Barn Wed, Sep 22 ---- N/A ---- 0.37 FDX Fedex Wed, Sep 22 Before the bell 1.08 PAYX Paychex Wed, Sep 22 Before the bell 0.23 WOR Worthington Ind. Wed, Sep 22 ---- N/A ---- 0.44 ------------------------- THUSDAY ----------------------------- AGE A.G.Edwards Thr, Sep 23 Before the bell 0.55 MANU Manugistics Inc Thr, Sep 23 After the close -0.04 PSRC PalmSource Inc Thr, Sep 23 After the close -0.02 RAD Rite Aid Corp Thr, Sep 23 ---- N/A ---- -0.02 TOPP Topps Thr, Sep 23 ---- N/A ---- 0.12 ------------------------- FRIDAY ------------------------------- - No Major Earnings Announcements - ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable AMWD American Woodmark 2:1 Sep 24th Sep 27th LM Legg Mason Inc 3:2 Sep 24th Sep 27th CATY Cathay General Bancorp 2:1 Sep 28th Sep 29th WST West Pharma 2:1 Sep 29th Sep 30th NPBC National Penn 5:4 Sep 30th Oct 1st WBNK Waccamaw Bank 2:1 Sep 30th Oct 1st -------------------------- Economic Reports This Week -------------------------- It's another busy week. Not only will Wall Street be wading through more corporate earnings warnings but we get to hear from some early announcers as well. Tuesday will be a big but probably anticlimatic day with the FOMC meeting on interest rates. ============================================================== -For- ---------------- Monday, 09/20/04 ---------------- Treasury Secretary Snow speaks at the National Press Club NAHB Housing market index for September ----------------- Tuesday, 09/21/04 ----------------- FOMC meeting and decision on Interest Rates (2:15 pm ET) Housing Starts for August (last reading 1,978K) Building Permits for August (last reading 2,066K) ------------------- Wednesday, 09/22/04 ------------------- MBA Refinancing index Crude oil inventories Gasoline inventories ------------------ Thursday, 09/23/04 ------------------ FOMC minutes from the August 10th meeting Fed governor Gramlich speaks on monetary policy in Michigan Weekly initial jobless claims (last reading 333,000) Leading Economic Indicators for August (last reading -0.3%) Money Supply numbers Natural Gas inventories ---------------- Friday, 09/24/04 ---------------- Durable Goods orders for August (last reading +1.6%) Existing Home Sales for August (last reading 6.72 mln) 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. 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The Option Investor Newsletter Sunday 09-19-2004 Sunday 2 of 5 In Section Two: Watch List: ITT, FO, DD, UPS Dropped Calls: BOL Dropped Puts: None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ********** Watch List ********** A Mixed Bag of Candidates ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ ITT Industries - ITT - close: 80.91 change: +0.90 WHAT TO WATCH: We came very close to adding ITT to the play list this weekend as a new call. The stock has bounced strongly from the $75.00 level and its rising 200-dma. Traders bought the recent dip and ITT is challenging resistance at the gap down near $81.50. Plus, if you squint your eyes a bit it looks like ITT has formed an inverse (bullish) head & shoulders pattern. The P&F chart is bullish and points to a $92 target. We watch for the bullish breakout over $81.50. Chart= --- Fortune Brands - FO - close: 74.85 change: +0.80 WHAT TO WATCH: We recently had FO on the play list as a call but pulled it because momentum was fading and the stock couldn't breakout over resistance at the $75.00 mark. Well now FO is back for another try. Shares have coiled up under the $75 mark and look ready to explode higher. Traders can use a breakout as an entry point and we'd target the $78-80 range. Right now our main concern is the MACD indicator, which is really close to a new sell signal. Chart= --- Du Pont - DD - close: 42.66 change: -0.33 WHAT TO WATCH: Dow-component DD has been suffering under a long- term trend of lower highs for months. The stock has a tendency for these big swings but each new high is lower than the last. It would appear that DD has topped out again and its technical oscillators are suggesting new bearish positions. Its MACD is super close to a new sell signal. Traders could target a drop to $40 or look for a new relative low. The P&F chart is bearish and points to a $35 target. Chart= --- United Parcel Service - UPS - close: 75.04 change: +1.02 WHAT TO WATCH: Keep an eye on UPS. The stock's rebound just got a big boost on Friday with a huge flood of volume. The rally could continue next week of rival FDX turns out a good earnings report on Wednesday. Currently the P&F chart for UPS points to a $90 target but more aggressive players could go long now with a stop under support at $74. We're not that excited about the technical oscillators since they look a bit overbought. Don't forget if FDX disappoints on Wednesday UPS could react negatively. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- NEM $41.55 -1.23 - NEM just broke down through support at $42 and its simple 200-dma on big volume. NUE $89.67 +1.57 - NUE still show plenty of relative strength but we'd be careful here. It remains extended. POT $60.05 +0.82 - POT is another relative strength candidate but we wouldn't want to chase it here. CME $143.30 +2.50 - Traders have bought the dip back to $140 again. This looks like an entry point. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Bausch Lomb - BOL - close: 67.80 change: -0.76 stop: 66.99 Danger! We have a reversal alert on BOL. Shares gapped higher on Friday and then proceeded to trade lower the rest of the session. Volume was very strong while BOL produced a bearish engulfing candlestick. Now it's not a huge bearish pattern but the combination of the strong volume and the bearish sell signals in the fading momentum indicators is enough to have us looking for the exits. Longer-term looking at the weekly and P&F charts of BOL we're still optimistic. However, we'd rather watch for the sidelines and consider buying another bounce from $65.00 than see BOL fade and potentially break $65. We've been cautious on BOL for days and we're going to exit here. Picked on September 01 at $66.51 Change since picked: + 1.29 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 397 thousand Chart = PUTS ^^^^ None *********** DEFINITIONS *********** OI = Open Interest - the number of open contracts outstanding. Last Trade @ = Indicates where the option traded last. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-19-2004 Sunday 3 of 5 In Section Three: Current Calls: AHC, PD, TDS New Calls: CMI Current Puts: APOL, FFH, KRI, KSS, LXK, MMM 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 ****************** Amerada Hess - AHC - close: 83.99 chg: +1.97 stop: 81.00 Company Description: Amerada Hess Corporation is a leading global independent energy company, engaged in the exploration and production of crude oil and natural gas, as well as in refining and in marketing refined petroleum products, natural gas, and electricity. (source: company website) Why We Like It: We have good news to report on AHC. After more than two weeks of churning sideways in a tight range AHC has finally broken out to the upside. Friday's surge in crude oil and the OIX and OSX oil- related indices helped inspire a 2.4 percent rally in AHC. This has stalled and partially reversed the impending sell signal in the stock's MACD indicator. The next challenge is the $85.00 mark. We would suggest that short-term traders prepare to exit for a profit as AHC moves into the $84.50-85.00 range. The $85.00 level is overhead resistance and it could be a major challenge for AHC. Yet if the stock can breakout here it would produce a new triple-top breakout by signal on its P&F chart. Suggested Options: We like the October and November strikes. Our favorites would be the 80s and 85s. We would not suggest new positions at this time unless AHC broke through the $85.00 level. BUY CALL OCT 80 AHC-JP OI=337 current ask $5.10 BUY CALL OCT 85 AHC-JQ OI=413 current ask $1.90 BUY CALL NOV 80 AHC-KP OI=1293 current ask $6.30 BUY CALL NOV 85 AHC-KQ OI= 827 current ask $3.30 Annotated Chart: Picked on August 31st at $80.50 Change since picked: + 3.49 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 1.0 million Chart = --- Phelps Dodge - PD - close: 83.15 chg: -0.63 stop: 81.99 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: Uh-oh! Traders need to be ready to act here. PD did not follow the price of copper higher in the last couple of sessions. Instead we're seeing what looks like a short-term bearish reversal after more than a week of trying to breakout over the $85-86 level. PD's momentum oscillators have all turned negative and its MACD has produced a new sell signal. That's not an environment to be considering new bullish positions. We strongly considered closing the play here but with our stop loss essentially at breakeven we're going to give PD one last chance to bounce from the $82.00 level. As we have suggested earlier more aggressive traders willing to handle the volatility can keep their stop under stronger support at $80.00. We do think PD can bounce from the $80 level and if we're stopped out near $82.00 we may consider new positions if PD does rebound. More conservative traders may want to exit now. Suggested Options: We are not suggesting new positions at this time. Annotated Chart: Picked on August 26th at $82.10 Change since picked: + 1.05 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 2.1 million Chart = --- Telephone & Data Sys - TDS - cls: 82.48 chg: -0.62 stop: 79.50 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: The Monday-Tuesday rally from $80 to $84 is starting to fade a bit but we're encouraged that the profit taking hasn't been stronger. Our profit target/exit point has been the $85.00 region but it's okay for traders to consider taking profits now or on another bounce back toward $84. This close to our target and with TDS looking a little over bought we would not suggest new bullish positions at this time. We would keep TDS on our personal watch list for a potential dip back toward $80.00 and then re-evaluate buying a bounce. We're going to leave our stop loss under $80.00 but if TDS breaks $81.00 we might close the play early. Suggested Options: We are not suggesting new bullish entries at this time. Annotated Chart: Picked on August 24th at $78.05 Change since picked: + 4.43 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 195 thousand Chart = ************** NEW CALL PLAYS ************** Cummins Inc - CMI - close: 70.99 change: +0.73 stop: 69.40 Company Description: Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins serves its customers through more than 680 company-owned and independent distributor locations in 137 countries and territories. Cummins also provides service through a dealer network of more than 5,000 facilities in 197 countries and territories. With more than 24,000 employees worldwide, Cummins reported sales of $6.3 billion in 2003. (source: company press release) Why We Like It: Business is booming at diesel engine maker CMI. This company's fortunes ride high and low on the economic cycles and right now they are hitting them out of the ballpark. Earnings back in July beat estimates by 45 cents. Management then guided higher for the third quarter and the whole year. Investors sent shares of CMI soaring back in July. Now that it's seen some consolidation the stock looks ready to march higher again. The steady economic growth coupled by strong business in the transport sector appears to be driving a lot of the interest in CMI. Considering that the Dow Transports are at new five-year highs we shouldn't be too surprised. We like how traders bought the recent dip toward $70.00-69.50 and we're willing to buy the bounce. However, considering the current market environment we're going to use a tight stop at $69.40. The P&F chart for CMI shows an ascending triple-top buy signal and an $85 target. We're going to set an immediate target of $75.00 and a secondary target of $77.50. Suggested Options: Short-term traders can choose from the October and December strikes. We like the Octobers. Our favorites are the 70s although the 75s have more open interest. BUY CALL OCT 65 CMI-JM OI= 7 current ask $6.70 BUY CALL OCT 70 CMI-JN OI= 68 current ask $2.95 BUY CALL OCT 75 CMI-JO OI=188 current ask $0.75 Annotated chart: Picked on September 19 at $70.99 Change since picked: + 0.00 Earnings Date 07/23/04 (confirmed) Average Daily Volume = 724 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 ***************** Apollo Group - APOL - close: 78.35 change: -0.47 stop: 82.67 Company Description Apollo Group Inc. has been providing higher education programs to working adults for over 25 years. Apollo Group Inc. operates through its subsidiaries The University of Phoenix Inc., Institute for Professional Development, The College for Financial Planning Institutes Corp., and Western International University Inc. The consolidated enrollment in its educational programs makes it the largest private institution of higher education in the United States. It offers educational programs and services at 78 campuses and 133 learning centers in 38 states, Puerto Rico and Vancouver, British Columbia. Combined degree enrollment was 239,300 students as of May 31, 2004. (source: company press release) Why We Like It: If you consider the bullish action in the major indices the past couple of weeks then bears should feel comfortable with APOL's relative weakness. The stock's failure at $85.00 in early September has lead to the drop under support at $80.00. Now APOL has spent the last few days attempting to break back above $80 and failing every time. The $80 level is tough resistance because it's bolstered by the exponential 200-dma. The MACD indicator on APOL is extremely close to a new "sell" signal and its P&F chart continues to show a potential bearish reversal. We were encouraged to see a new two-week low on Friday but be warned. The last hour of trading saw a small spike higher with decent volume but it could have been related to option expiration. Suggested Options: We're going to suggest the October and November puts. Our favorites will be the $80 and $75 strikes. DOUBLE-CHECK your option symbols with your broker! BUY PUT OCT 80 OAQ-VP OI=1249 current ask $4.70 BUY PUT OCT 75 OAQ-VO OI=1121 current ask $2.35 BUY PUT NOV 80 OAQ-WP OI=1600 current ask $5.90 BUY PUT NOV 75 OAQ-WO OI=2274 current ask $3.70 Annotated Chart: Picked on September 14 at $78.88 Change since picked: - 0.53 Earnings Date 10/05/04 (unconfirmed) Average Daily Volume = 3.3 million Chart = --- FairFax Financial - FFH - cls: 122.30 chg: -1.91 stop: 131.00*new* Company Description Fairfax Financial Holdings Limited is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance, investment management and insurance claims management. (source: company press release) Why We Like It: If you've been doing your homework on FFH then you'd know that not everyone believes the rumors that the company could be facing a liquidity crisis. Yet a quick look at the stock certainly shows how investors are betting. After a couple of quickly failing attempts to break back above the $130 level FFH has fallen three sessions in a row. Volume remains above average, even if still abysmally low. We want to reiterate that this is a higher-risk speculative play. The extremely low volume on the stock and the options makes this more dangerous to play. Shares are subject to big swings and the options are experiencing wide spreads. Fortunately, FFH is moving our direction and if it can break round-number support at the $120 level we should be in good shape. The P&F chart continues to look very bearish with its $72 target. Our target remains the $110-100 range. We're lowering our stop loss to $131. Suggested Options: We're going to suggest the October options but Januarys are available for the longer-term trader. BUY PUT OCT 130.00 FFH-VF OI= 14 current ask $11.40 BUY PUT OCT 125.00 FFH-VE OI= 12 current ask $ 8.10 BUY PUT OCT 120.00 FFH-VD OI= 50 current ask $ 5.60 BUY PUT OCT 115.00 FFH-VC OI= 21 current ask $ 3.80 BUY PUT OCT 110.00 FFH-VB OI=104 current ask $ 2.55 BUY PUT OCT 100.00 FFH-VT OI=456 current ask $ 1.15 Annotated Chart: Picked on September 12 at $126.50 Change since picked: - 4.20 Earnings Date 00/00/00 (confirmed) Average Daily Volume = 59 thousand Chart = --- Knight-Ridder - KRI - close: 63.50 change: -0.09 stop: 65.51 Company Description: Knight Ridder is the nation's second-largest newspaper publisher, with products in print and online. The company publishes 32 daily newspapers in 28 U.S. markets, with a readership of 8.7 million daily and 12.6 million Sunday. Knight Ridder also has investments in a variety of Internet and technology companies and two newsprint companies. The company's Internet operation, Knight Ridder Digital, develops and manages the company's online properties. It is the founder and operator of Real Cities (www.RealCities.com), the largest national network of city and regional Web sites in more than 100 U.S. markets. Knight Ridder and Knight Ridder Digital are headquartered in San Jose, Calif. (source: company press release) Why We Like It: Hmm... we have both good news and bad news on the KRI put play. The good news is that KRI issued an earnings warning on Thursday night. Wall Street is looking for 90 cents a share for the third quarter and KRI says it will come in under expectations. The company is blaming lost ad revenue in Florida due to the hurricanes. The bad news is that while shares gapped higher and immediately sank the end result was a 9-cent loss. Normally we would expect a bigger reaction to an earnings warning. Fortunately KRI is still sinking under a trend of lower highs and volume was pretty big on the failed rally. Technical oscillators remain bearish and its MACD has finally produced a new "sell" signal. Suggested Options: We only have October and January puts to choose from at this time. We're going to suggest the October's. Our favorites would be the 65s and 60s. If you'd like more open interest try the Januarys. BUY PUT OCT 65 KRI-VM OI= 48 current ask $2.15 BUY PUT OCT 60 KRI-VL OI= 37 current ask $0.50 Annotated Chart: Picked on September 15 at $63.85 Change since picked: - 0.35 Earnings Date 07/22/04 (confirmed) Average Daily Volume = 491 thousand Chart = --- Kohl's - KSS - close: 49.48 change: -0.00 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: (Thursday's original play update) 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. WEEKEND UPDATE: The action in KSS was a bit peculiar on Friday. Earlier in the session the stock was trading lower in what looked like a follow through to Thursday's breakdown of the narrow rising channel. Yet as Friday wore on the stock consolidated into a tighter and tighter range. We suspect this was due to option expiration and market makers were trying to pin KSS as close to the $50.00 strike price as possible. We will remain bearish if KSS stays under $50. 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=4888 current ask $1.95 BUY PUT OCT 45 KSS-VI OI=5490 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 = --- Lexmark Intl - LXK - close: 83.70 chg: +0.08 stop: 86.01 Company Description: Lexmark International, Inc. is a leading developer, manufacturer and supplier of printing solutions -- including laser and inkjet printers, multifunction products, associated supplies and services -- for offices and homes in more than 150 countries. Founded in 1991, Lexmark reported more than $4.8 billion in revenue in 2003. (source: company press release) Why We Like It: We're not making a lot of progress on our LXK put. The initial reaction to the printer recall has faded and LXK is still bouncing from its long-term trendline of support. If you're not sure which trendline we're referring to look at last Sunday's update and view the weekly chart. The good news here is that LXK has not been able to mount a decent rebound from this long-term support line. As a matter of fact LXK is still suffering under a trend of lower highs that would suggest a possible bearish breakdown. That's good news for us considering the strength in tech stocks and the market these past two weeks. The P&F chart is bearish with a sell signal that points to a $70 target. We'd still be happy with a drop to $80.00 but if LXK breaks its long- term support it could easily sink lower and more aggressive traders might want to target the $75-76 region. Editor's note: if you take a step back it would seem like LXK is almost coiling for a big move. The challenge is that with LXK right at long-term support that big move could be either direction. Make sure you're comfortable with your stops. Suggested Options: Right now traders can choose from the October or January puts. We believe November strikes will be added eventually. We're going to suggest the October's. BUY PUT OCT 90 LXK-VR OI=1244 current ask $7.20 BUY PUT OCT 85 LXK-VQ OI=4902 current ask $3.90 BUY PUT OCT 80 LXK-VP OI=4585 current ask $1.85 Annotated Chart: Picked on September 5th at $86.10 Change since picked: - 2.40 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 1.2 million Chart = --- 3M Co - MMM - close: 82.32 change: +0.27 stop: 84.51 Company Description: Every day, 3M people find new ways to make amazing things happen. Wherever they are, whatever they do, the company's customers know they can rely on 3M to help make their lives better. 3M's brands include Scotch, Post-it, Scotchgard, Thinsulate, Scotch-Brite, Filtrete, Command and Vikuiti. Serving customers in more than 200 countries around the world, the company's 67,000 people use their expertise, technologies and global strength to lead in major markets including consumer and office; display and graphics; electronics and telecommunications; safety, security and protection services; health care; industrial and transportation. (source: company press release) Why We Like It: Our MMM put play is not off to a roaring start. There's been no follow through on Wednesday's bearish drop through the 50 and 200-dma's. Yet on the other hand there has been no bounce either and MMM has not been able to trade back above the simple 200-dma. The MACD remains in a sell signal and the next move still looks like it should be down. Remember that this is a short-term technical play with an immediate target of $77.50. If we're lucky MMM could hit $75.00. The P&F chart is much more bearish with a $65 target. Suggested Options: Short-term traders can choose from the October and January puts. We like the Octobers and would probably play the 85s or 80s. BUY PUT OCT 85 MNZ-VQ OI=4988 current ask $3.40 BUY PUT OCT 80 MMM-VP OI=6132 current ask $0.95 BUY PUT OCT 75 MMM-VO OI=3426 current ask $0.25 Annotated chart: Picked on September 15 at $82.00 Change since picked: + 0.32 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 2.5 million 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 09-19-2004 Sunday 4 of 5 In Section Four: Leaps: Patience Hell, Let's Buy Something Option Spreads: Open The Vault, We're On Our Way! ************************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 ***** Patience Hell, Let's Buy Something After several weeks of watching the companies on our watch list rocket higher I am running out of patience. MMM fell back to our initial entry point of $82 on the Alcoa and KO warnings as traders tried to decide who the next Dow confessor was going to be. This gave us our first entry and we are going to double up if we get to $78. Citigroup fell to 46.76 on the news from Japan that their private banking division had acted improperly. Our entry point was $46.50 and I am going to call that a leaner and enter the position this weekend. I tried very hard to find an energy stock to add to the portfolio to accompany COP higher but they are all at 52-week highs or even all time highs and I just could not bring myself to do it with a single stock. I tried to find a chip stock that looked healthy but the majority of them were either over extended already or had not made the trip higher with the SOX. There are so many stocks charging higher right now I was becoming more frustrated as each day passed and our watch list continued without a pullback. I believe it is very critical NOT to buy leaps after a market bounce. Leaps should be bought at bottoms. Unfortunately this is a weekly column and telling everyone to come back next May would probably not go over too well. I finally settled on QLGC and XLE as a new entries. Love it or hate it QLGC did have the best qualities of a semi stock for the current market. XLE is the Energy Spdr and represents 8% of the SPX. I am going to list some of the other stocks I looked at and passed on for various reasons. The list is not a suggestion but maybe something to spark your memory and interest level. Put them on your personal watch list and who knows maybe one of them will work for you. UNH, DHR, LEN, SNDK, ADI, OVTI, MRO, PTEN, SLB, HAL, ESST, LRCX, MRVL, KLAC, BDK, BA, LLL, DVN, PDS, TXU ******************* New Plays ******************* XLE - S&P Energy SPDR $33.92 The XLE SPDR is composed of 27 energy stocks and represents about 8% of the SPX. This is the 8% that has been holding the SPX at the current levels. In fact the XLE has far exceeded the SPX in performance over the past year. The question is whether it will continue to outperform. The price of oil is not expected to decline materially until after the election and then Lipper says only to about $36-$37. Lipper is targeting $67 per bbl over the next two years. This is +22 over the $45 closing price on Friday. This is a simple play. Go LONG with a stop at $32.25. The 2006 $32 LEAP Call WHA-AF is $4.00 and is nearly $2.00 in the money. The 2006 $35 LEAP Call WHA-AI is $2.40. That is about the same premium as you would pay for the $32 call after the ITM portion is removed. For my money I would go with the $32 LEAP. Buy 2006 $32 LEAP Call WHA-AF currently at $4.00 Buy 2006 $35 LEAP Call WHA-AI currently at $2.40 Stop 32.25 XLE/SPX Comparison chart Components of the XLE **************************** QLGC - Qlogic Corp - $30.33 QLGC designs chips for high performance interfaces between computer systems and data storage subsystems. Earnings are growing at about +20% per year with a historical growth rate of +51% over the last five years. QLGC fell on hard times back in March when it warned that earnings were going to miss estimates. Up until then it had been the darling of the storage sector. Since then the road has been rough and it was not until mid August before QLGC quit falling. Much of the problem was the result of soft sales by HPQ of their top line products. ELX, BRCD, QLGC, OVRL and MCDT all suffered the same fate. Of the group QLGC has rebounded the most and has the best prospects. Over the last year QLGC has had its PE cut in half from 43 to 21 yet it retains the highest level rating from the mechanical stock screen programs based on growth, earnings and relative strength. I like QLGC because it barely even blinked when the SOX paused for profit taking this week. There is a long way to go for QLGC to retrace its former glory and while it probably will not get there on this option it could easily see $40-$45. If we get a post election bounce there is ample opportunity to move even higher. It is obvious QLGC has found some buyers and there is no selling pressure. The pause at 30.50 this week corresponds with the resistance from early June but a break over that level could move quickly. Unfortunately LEAPs are not cheap. The upside potential has ramped the prices and we will have to pay up for this opportunity. The $30 LEAP is $4.10 and the $30 LEAP is $6.10. With QLGC at 30.50 that represents about an equal risk reward ratio. For the extra $2 bucks I would go for the $30 entry. Once QLGC hits $35 you would already be $5 ITM and $1 away from fully intrinsic. BUY 2006 $30 LEAP YIO-AF currently $6.10 BUY 2006 $35 LEAP YIO-AG currently $4.10 Stop $27.50 QLGC Chart **************************** Current Portfolio: **************************** Position Summary Graph **************************** Play Updates **************************** MMM - 3M Company - $82.32, Stop $76.00 Entry at $82 on 9/15, add to position at $78. MMM took a serious header off the high board and plunged right back to $82 from the sprint to $85 last week. This enabled us to finally get an entry at the September low. $81.00 is decent support but should we see a continued drop we would be happy to add to the position at $78 and just above even stronger support. 2006 $80 LEAP Call WMU-AP @ $10.40 2006 $85 LEAP Call WMU-AQ @ $ 6.80 http://members.OptionInvestor.com/leaps/Lp_080804_1.asp MMM Chart ********************** C - Citigroup $46.95 LEAP Call **Stop $43.00** Entry 46.95 9/17 We are close enough on Citigroup to the $46.50 entry point that I am going to initiate the position today. Citigroup paused its advance at $47.50 and we may be setting up for another test of support at the 100dma at $46. There is strong support at $44 and I am placing the stop at $43.00. News from Japan knocked the bloom off its rebound right at $47 resistance. Enter 1/2 position at $46.50 ($46.95 on 9.17) Enter 1/2 position at $45.00 2006 $50 LEAP Call WRV-AJ @ $2.45 http://members.OptionInvestor.com/leaps/Lp_080804_1.asp Citigroup Chart ********************** INTC - Intel Corp $20.60 **Stop $17.00** Entry $20.00 Sept 3rd Intel rebounded all the way back to $21.15 last Monday before continued chip warnings and profit taking on the SOX in general pushed it back to $20 once again. This is a long-term position and we really do not expect it to post any material gains until Q1-2005. $20 is very strong support. Current position: 2006 $22 LEAP Call WNL-AX at $2.20 currently $2.20 2006 $25 LEAP Call WNL-AE at $1.45 currently $1.40 Initial play description: http://members.OptionInvestor.com/leaps/Lp_071804_1.asp Intel Chart ********************** TYC - Tyco Intl. $30.50 **Stop $28.00** Entry 5/18 $28.32 Tyco is still holding just above support at $30.50 after the news last week about a big debt buyback. No challenge here with the 200dma at 29.18 and the 100dma at 30.78. The 100dma has provided support since last April. 2005 $30 LEAP Call TYC-AF cost $2.15 current $2.15 2006 $30 LEAP Call WPA-AF cost $4.00 current $4.30 July $25 insurance put - expired - cost $.55 Tyco Chart ********************** JNPR - Juniper Networks $24.14 **Stop $20.00** Entry $20.19 (8/16) Juniper is still holding the high ground just under $25 and has traded in the $24-$25 range all week. The chip warnings are dragging on the network stocks and a downgrade on Cisco on Friday blunted a JNPR recovery. We have a nice cushion on JNPR from our $20 entry and we just need to get past any further Sep/Oct weakness. 2006 $25 LEAP Call WBW-AE cost $3.50 current $5.60 Insurance = Sept-$17.50 Put (expired) cost 50 cents. http://members.OptionInvestor.com/leaps/Lp_081504_1.asp JNPR Chart ********************** COP - Conoco Phillips $79.13 **Stop 75.50** Entry $73.30 August 30th Raise stop to $75.50 COP continues to power ahead as news from Libya and Russia is favorable to the big oil company. COP was one of only two oil companies Prudential is keeping at "overweight" after the strong recent gains. PRU reiterated a "neutral" rating on the major oil and refining companies with the exception of COP and TSO. Libya said this week that COP, MRO and AHC could return to their oil fields next month. They were shut out when the U.S. imposed sanctions in 1982. This is a very positive event for COP and the stock neared an all time high at $80 on the news. COP is expected to win a 7.6% stake in Lukoil when the share is auctioned off on Sept-29th. This will give COP a huge increase in proven reserves. We need to break resistance at $80 and it is blue sky above that. Current position: Jan-2006 $75 LEAP Call YRO-AO at $6.70 currently $9.30 Initial play description: http://members.OptionInvestor.com/leaps/Lp_082904_1.asp COP Chart ********************** NWS - News Corp $33.71 **Stop 29.00** Finally the NWS move to the U.S. is beginning to take shape. News Corp said on Wednesday that the Australian Federal Court clear objections for NWS to put the move to a vote. The shareholder vote is now scheduled for Oct-26th and is expected to pass. NWS would reincorporate in the U.S. and move its primary listing to the NYSE. It could continue to retain secondary listings on the Australian and London exchanges. This move would allow inclusion in the various U.S. indexes and could produce a strong move higher in the stock as fund managers begin entering positions. If the move is approved by shareholders NWS will seek formal approval from the regulators and the move is expected to be completed in November. NWS owns FOX as well as many other networks around the globe. Current position: 2006 $40 LEAP Call WLN-AH at $3.83 currently $1.85 Initial play description: http://members.OptionInvestor.com/editorplays/edply_041104_1.asp http://members.OptionInvestor.com/editorplays/edply_041804_1.asp NWS Chart **************************** LEAPS Watch List **************************** No new entries this week. We are building up a strong portfolio and I do not want to get too crowded. We still have some good companies on the watch list and any market dip should hit several. We are reaching the point where we do not want a dip as it would stop us out on some existing plays. We are in that neutral zone between wanting a buying opportunity and a rally. I continue to feel that a buying opportunity is coming and we will take full advantage of it when it comes. Until then the pickings are still hard to find. Most good stocks are up strongly and the ones still down we don't want. *********************** UPL - Ultra Petroleum $44.32 **Target $43.00 or $45.50** I would like to get a small dip to $43 as an entry but I do not want to miss a take off opportunity should we break resistance at 44.50. We will make the entry on a breakout or pullback and take whatever the market gives us. UPL has a strong ascending triangle at $44.50 and we could explode out any day now. JAN-2006 $45 LEAP Call WSS-AI $10.80 JAN-2006 $50 LEAP Call WSS-AJ $9.00 http://members.OptionInvestor.com/leaps/Lp_091904_1.asp UPL Chart *********************** OXY - Occidental Petroleum $54.68 Target $53.50 I thought with the weakness last week we might have a chance at an OXY entry but after the gap open on Monday it never looked back. Friday alone saw a jump of nearly +$1. Instead of seeing oil prices drop after the hurricane missed most oil installations we saw prices soar +1.71 on Friday. This is making oil stocks like chasing wind and very hard to enter. I do NOT want to enter OXY at the highs and will keep raising the entry point in hopes of an entry on the next oil price drop. We know it will not go straight up and any dip could fill us. Uptrend support is $53.50. 2006 $50 LEAP Calls WXY-AJ currently $8.40 2006 $55 LEAP Calls WXY-AK currently $5.60 2006 $60 LEAP Calls WXY-AL currently $3.60 http://members.OptionInvestor.com/leaps/Lp_082904_1.asp OXY Chart EBAY - EBAY $93.00 target entry $90.00 and $94.00 EBAY was the victim of a downgrade on Thursday and it crashed from $96 back to $91 and I thought for a few minutes we could see some profit taking take hold. No such luck. EBAY rebounded to 93.00 on Friday. I should probably take the entry and count myself lucky but I keep thinking we could see some weakness ahead. The indexes are not setting up that way and are showing a strong bullish breakout ahead. We do know that most pullbacks come without warning and it is too soon to tell if the EBAY rebound was a dead cat bounce or the first signs of some profit taking. I changed the entry to $90 on the hopes we do see some light selling on Monday before any rally begins. I also put on a $94 entry just in case we explode out of the gate Monday morning. Enter on breakdown to $90.00 Enter on breakout to $94.00 2006 $90 LEAP Call YRL-AR 2006 $100 LEAP Call YRL-AP http://members.OptionInvestor.com/leaps/Lp_072504_1.asp EBAY Chart MER - Merrill Lynch $51.45 target entry $51.00 MER pulled back again to close the week just above our target entry price at $51. I think we have a good chance of filling on this stock next week. $51 is decent support and could be where Merrill will try and form a bottom. 2006 $50 LEAP Call WZM-AJ currently $7.30 2006 $55 LEAP Call WZM-AK currently $4.90 http://members.OptionInvestor.com/leaps/Lp_071804_1.asp MER Chart SYMC - Symantec - $52.05 Target $49.00 on breakdown Target $53.00 on breakout We have chased SYMC for about +8 points and I am tired of running. I would love to see a pullback but it does not appear to be in the cards. I am going to leave a breakdown entry at $49 just in case weakness appears but I am putting a $53 breakout entry on it as well. We could be very close to a strong year end rally and I do not want to miss this top performer. 2006 $50 LEAP Call YAG-AJ current $10.30 2006 $55 LEAP Call YAG-AK current $7.90 2006 $60 LEAP Call YAG-AL current $6.00 http://members.OptionInvestor.com/leaps/Lp_080804_1.asp SYMC Chart GE $34.16 LEAP Call Target $32.50 GE trended down all week from its $34 high last Friday. Just when it appeared it would crack support and move closer to our $32.50 entry point there was a huge spike on Friday to a new seven month high at $34.10. This was in result to positive comments made by Prudential about the prospects for their energy businesses. With plenty of September ahead I am still willing to stick with our target. 2006 $30 LEAP Call WGE-AF 2006 $35 LEAP Call WGE-AG 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. 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 ************************************************************** ************************ Option Spread Strategies ************************ Open The Vault, We're On Our Way! By Mike Parnos Unquestionably my favorite time of the month. The path to profits has become a familiar road for CPTI students. This month (September) we kept our profit streak going (so what else is new?). It was another impressive month, second only to May when we made $8,430 hypothetical, but deliciously spendable dollars. Even with the market was trending in different directions for the last two months, we've come out smelling like fresh printed currency. ____________________________________________________________ September CPTI Portfolio Results The September option cycle was the eleventh cycle in the second year of tracking our Couch Potato Trading Institute portfolio. With our $8,030 of profits, we've now accumulated a total of $54,400 in only eleven months - on a trading account size of about $40-45,000. Trade Summary SPX - Iron Condor - Profit: $2,500 RUT - Iron Condor - Profit: $2,000 OEX - Iron Condor - Profit: $1,400 SPX - Sure Thing - Profit: $2,130 TOTAL AUGUST PROFITS: $8,030 (See position summary below) Happy Returns Of The Day (Month) Report - Once again, I calculated our hypothetical return on risk for this month's portfolio trades. The total amount of maintenance in the above three closed trades was $57,500. If we subtract the $8,030 of premium we originally took in, our real risk was only $49,470. When we divide $49,470 into our $8,030 profit, we show a return on our risk of 16.2% _________________________________________________________________ SEPTEMBER QUICKIE RESULTS OEX Iron Condor - Finished comfortably within our range. Profit: $1,650 SPX Iron Condor - Finished comfortably within our range. Profit: $2,650 RUT Siamese Condor - Settled at 578.83. That would make our trade a wash. However, on Thursday, RUT closed at about $574. The prudent move would have been to close it out for about $5-6 and lock in a $3+ profit. Remember, playing that Friday opening is a real crapshoot. Three dollars of profit in hand is worth locking in. Don't be greedy. Pigs get slaughtered -- and then all you may have to show for your trade is a ham sandwich and another story about the profit that got away. ____________________________________________________________ OCTOBER CPTI HYPOTHETICAL POSITIONS October Position #1 - SPX Iron Condor - 1128.55 We sold 10 SPX October 1160 calls and bought 10 SPX October 1175 calls for a net credit of about $1.75 ($1,750). Then we sold 10 SPX October 1075 puts and bought 10 SPX October 1060 puts for a credit of about $1.30 ($1,300). Total net credit of appx. $3.05 ($3,050). Maximum profit range is 1075 to 1160. Maintenance is $15,000. Position #2 -- RUT Iron Condor - 573.17 We sold 10 RUT Oct. 610 calls and bought 10 RUT Oct. 620 calls for a credit of about $.65 ($650). Then we sold 10 RUT Oct 530 puts and bought 10 RUT Oct 520 puts for a 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. Position #3 - OEX Iron Condor - 545.80 We sold 10 OEX October 520 puts and bought 10 OEX October 510 puts for a credit of about $.70 ($700). Then we sold 10 OEX October 565 calls and bought 10 OEX October 575 calls for a 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. Position #4 - BBH Iron Condor - $145.68 We sold 10 BBH October $150 calls and bought 10 BBH October $160 calls for a credit of about $.95 ($950). Then we sold 10 BBH October $135 puts and bought 10 BBH October $125 puts for a 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 - 1128.55 Formerly called the "Credit Spread Boogie." The market seems to be in an uptrend since mid-August. Let's go with the flow until the market tells us otherwise. We sold 3 SPX 1120 October puts and bought 3 SPX 1095 October puts for a net credit of about $6.50 ($1,950). 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 - 1128.55 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. Profit: $2,500. September Position #2 - RUT Iron Condor - 573.17 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. Profit: $2,000. September Position #3 - SPX "Sure Thing" - 1128.55 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. Profit: $2,130. September Position #4 - OEX Iron Condor - 545.80 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). Profit: $1,400. ONGOING POSITIONS QQQ ITM Strangle - Ongoing Long Term -- $35.43 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 - 545.80 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 August expiration was $8,390. In September we added another $975 for a new total of $9,365. New Zero Plus Positions For October Not a lot of credit available this month. October bull put spread 520/510 for credit of $.65 x 5 contracts = $325. October bear call spread 565/575 for another credit of $.65 x 5 contracts = $325. If all goes well, we'll be able to add $650 to our cash position. __________________________________________________________ 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. ********** 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 09-19-2004 Sunday 5 of 5 In Section Five: Covered Calls: Conservative Stock Ownership Spreads and Straddles: Stocks Rise Despite Economic Concerns Premium-Selling Plays: Naked Puts and Calls ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************** COVERED CALLS ************** ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CONSERVATIVE STOCK OWNERSHIP: COVERED-CALLS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Many investors find that writing "in-the-money" covered-calls fits their criteria for a conservative, easy-to-manage options strategy. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW COVERED-CALL CANDIDATES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following group of issues is a list of potential candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. _________________________________________________________________ Sequenced by Target Yield (monthly basis/no margin) Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield IDEV 7.73 OCT 7.50 QUF-JU 0.60 1824 7.13 26 6.1% PSRC 26.63 OCT 25.00 MQS-JE 2.70 196 23.93 26 5.2% PTIE 7.99 OCT 7.50 UQ-JU 0.80 570 7.19 26 5.0% NTMD 22.39 OCT 20.00 QNR-JD 3.20 7 19.19 26 4.9% WTZ 8.25 OCT 7.50 WTZ-JU 1.05 178 7.20 26 4.9% SNDA 24.03 OCT 22.50 QKU-JX 2.40 84 21.63 26 4.7% MICU 16.49 OCT 15.00 UMO-JC 2.05 43 14.44 26 4.5% IFLO 15.90 OCT 15.00 QIF-JC 1.40 15 14.50 26 4.0% ENZN 15.76 OCT 15.00 QYZ-JC 1.25 4733 14.51 26 4.0% ULCM 13.26 OCT 12.50 UUL-JV 1.15 105 12.11 26 3.8% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). _________________________________________________________________ IDEV - Indevus Pharmaceuticals $7.73 Indevus Pharmaceuticals (NASDAQ:IDEV) is a biopharmaceutical company engaged in the development and commercialization of a diversified portfolio of product candidates, including multiple compounds in late-stage clinical development. The company has six compounds in development: trospium for overactive bladder, pagoclone for panic/anxiety disorders, citicoline for ischemic stroke, IP 751 for pain and inflammatory disorders, PRO 2000 for the prevention of infection by the human immunodeficiency virus and other sexually transmitted pathogens and aminocandin for treatment of systemic fungal infections. IDEV - Indevus Pharmaceuticals $7.73 OCT 7.50 QUF-JU LB=0.60 OI=1824 CB=7.13 DE=26 TY=6.1% _________________________________________________________________ PSRC - PalmSource $26.63 PalmSource (NASDAQ:PSRC) is a developer and licensor of software that enables mobile information devices. The company's software platform consists of the Palm operating system and software development tools that mobile information device manufacturers use to develop products from PalmSource's platform. PalmSource also extended its platform with applications including personal information management software, Web browsers and e-mail. The platform enables manufacturers to rapidly and efficiently create mobile information devices. PSRC - PalmSource $26.63 OCT 25.00 MQS-JE LB=2.70 OI=196 CB=23.93 DE=26 TY=5.2% _________________________________________________________________ PTIE - Pain Therapeutics $7.99 Pain Therapeutics (NASDAQ:PTIE) is a biopharmaceutical company engaged in the development of drugs that target severe chronic pain, such as pain associated with advanced osteoarthritis, low-back pain or irritable bowel syndrome. The company has three proprietary drug candidates in clinical development: Oxytrex, Remoxy and PTI-901. Its two most advanced drugs, Oxytrex and PTI-901, are in Phase III clinical trials. Remoxy is in Phase I clinical trials in the United Kingdom. PTIE - Pain Therapeutics $7.99 OCT 7.50 UQ-JU LB=0.80 OI=570 CB=7.19 DE=26 TY=5.0% _________________________________________________________________ NTMD - NitroMed $22.39 NitroMed (NASDAQ:NTMD) is an emerging pharmaceutical company with substantial expertise and intellectual property in nitric oxide-based drug development. The firm is applying its nitric oxide technology to develop new pharmaceuticals, as well as safer and more effective versions of existing pharmaceuticals to target diseases and commercial markets. Its lead nitric oxide-enhancing medicine, BiDil, which is being developed to reduce mortality and hospitalization and improve the quality of life of African Americans diagnosed with heart failure, is the subject of a Phase III confirmatory clinical trial. NTMD - NitroMed $22.39 OCT 20.00 QNR-JD LB=3.20 OI=7 CB=19.19 DE=26 TY=4.9% _________________________________________________________________ WTZ - Western Silver $8.25 Western Silver (NYSE:WTZ) is engaged, directly and through joint ventures and subsidiaries, in exploring and the development of mineral properties in Mexico and Canada. The company's primary projects are the Penasquito Project, the El Salvador Project and the San Nicolas Deposit in the State of Zacatecas, Mexico, and the Carmacks Property in Yukon Territory, Canada. The company's Penasquito Project, Western's primary property, is a silver, gold, lead and zinc property located in the Concepcion del Oro district in the northeast corner of the State of Zacatecas. WTZ - Western Silver $8.25 OCT 7.50 WTZ-JU LB=1.05 OI=178 CB=7.20 DE=26 TY=4.9% _________________________________________________________________ SNDA - Shanda Interactive Ent. $24.03 Shanda Interactive Entertainment (NASDAQ:SNDA) is an operator of online games in China. The games, licensed from third parties, as well as developed in-house by the company, include The Legend of Mir II and The World of Legend. The company's commercially launched games have approximately 1.4 million peak concurrent users and 931,570 average concurrent users. Shanda also provides multiplayer online games, including role-playing games and casual online games, which allow thousands of users to interact in a virtual world by assuming ongoing roles or characters with many different features. SNDA - Shanda Interactive Ent. $24.03 OCT 22.50 QKU-JX LB=2.40 OI=84 CB=21.63 DE=26 TY=4.7% _________________________________________________________________ MICU - Vicuron Pharmaceuticals $16.49 Vicuron Pharmaceuticals (NASDAQ:MICU) is a biopharmaceutical company focused on the discovery, development, manufacturing and marketing of pharmaceutical products. The company's lead antifungal product candidate, Anidulafungin, is intended for the intravenous treatment of fungal infections. Dalbavancin is a next-generation antibiotic belonging to the same class as vancomycin, one of the widely used injectable antibiotics for Staphylococcal infections. MICU - Vicuron Pharmaceuticals $16.49 OCT 15.00 UMO-JC LB=2.05 OI=43 CB=14.44 DE=26 TY=4.5% _________________________________________________________________ IFLO - I-Flow $15.90 I-Flow (NASDAQ:IFLO) manufactures a line of compact, portable infusion pumps, catheters and pain kits that dose medication directly to the wound site, as well as administer anesthetics, chemotherapies, antibiotics, diagnostic agents, nutritional supplements and other medications. I-Flow sells its products throughout the United States, Canada, Europe, Asia, Mexico, Brazil, Australia, New Zealand and the Middle East. Through InfuSystem, a wholly owned subsidiary, I-Flow is also engaged in the rental of infusion pumps on a month-to-month basis for the treatment of cancer. IFLO - I-Flow $15.90 OCT 15.00 QIF-JC LB=1.40 OI=15 CB=14.50 DE=26 TY=4.0% _________________________________________________________________ ENZN - Enzon Pharmaceuticals $15.76 Enzon Pharmaceuticals (NASDAQ:ENZN) is a biopharmaceutical firm that develops, manufactures and markets human therapeutics for life-threatening diseases on its own and through strategic partnerships. The company markets human therapeutic products through two specialized sales forces and also receive royalties on sales of PEG-INTRON, an enhanced version of Schering-Plough's alpha-interferon 2a product, INTRON A, which uses Enzon's PEG technology, as well as a share of certain revenues received by Nektar Therapeutics on sales of Hoffmann-La Roche's PEG-enhanced version of alpha-interferon 2b, PEGASYS. ENZN - Enzon Pharmaceuticals $15.76 OCT 15.00 QYZ-JC LB=1.25 OI=4733 CB=14.51 DE=26 TY=4.0% _________________________________________________________________ ULCM - Ulticom $13.26 Ulticom (NASDAQ:ULCM) is a global provider of service enabling signaling software for wireline, wireless and Internet-based communications. The company's signalware family of products is used by equipment manufacturers, application developers and communication service providers to deploy infrastructure and services within the mobility, messaging, payment and location markets. Signalware products are also embedded in a range of packet softswitching products to interoperate or converge voice and data networks and facilitate voice-over Internet protocol, hosted Internet Protocol telephony and virtual private networks. ULCM - Ulticom $13.26 OCT 12.50 UUL-JV LB=1.15 OI=105 CB=12.11 DE=26 TY=3.8% ******************* SPREADS & STRADDLES ******************* Stocks Rise Despite Economic Concerns By Ray Cummins U.S. equity values drifted higher Friday, closing the week on a bullish note, even as crude prices rose and consumer sentiment waned. The Dow Jones industrial average added 39 points to finish at 10,284 on strength in General Electric (NYSE:GE) and Exxon-Mobil (NYSE:XOM). The NASDAQ composite gained 6 points to 1,910, with semiconductor and biotechnology shares among the best performers. The broader Standard & Poor's 500 index was up 5 points to 1,128, despite weakness in gold, managed healthcare and paper packaging stocks. Advancing issues slightly outnumbered decliners on both the New York Stock Exchange and the NASDAQ. Big board volume was 1.44 billion shares, while 1.62 billion shares changed hands on the technology exchange. The bond market moved lower on renewed expectations of a rate hike. The 10-year note closed down 11/32, with its yield at 4.12%. For the week, the Dow fell 0.3%, while the S&P 500 was up 0.4% percent and the NASDAQ rose 0.8%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 09/17/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 68.20 SEP 55.0 60.0 0.40 59.60 0.40 Closed FPL 67.73 67.96 SEP 60.0 65.0 0.45 64.55 0.45 Closed MCO 67.33 71.00 SEP 60.0 65.0 0.65 64.35 0.65 Closed BSTE 44.14 50.20 SEP 35.0 40.0 0.55 39.45 0.55 Closed ISCA 53.40 49.53 SEP 45.0 50.0 0.55 49.45 0.08 Closed LEND 33.89 40.54 SEP 25.0 30.0 0.60 29.40 0.60 Closed PIXR 69.93 79.97 SEP 60.0 65.0 0.45 64.55 0.45 Closed PD 80.77 83.15 SEP 65.0 70.0 0.40 69.60 0.40 Closed RYL 86.01 91.73 SEP 75.0 80.0 0.65 79.35 0.65 Closed FRO 40.05 41.26 SEP 30.0 35.0 0.60 34.40 0.60 Closed NIHD 37.59 40.71 SEP 33.4 35.0 0.20 34.80 0.20 Closed NCEN 53.10 58.29 SEP 45.0 50.0 0.60 49.40 0.60 Closed SEPR 49.35 50.47 SEP 42.5 45.0 0.30 44.70 0.30 Closed GILD 34.70 36.89 SEP 30.0 32.5 0.27 32.23 0.27 Closed PCU 43.29 43.55 SEP 35.0 40.0 0.50 39.50 0.50 Closed MUR 75.51 84.52 OCT 65.0 70.0 0.70 69.30 0.70 Open RYL 88.15 91.73 OCT 75.0 80.0 0.75 79.25 0.75 Open GIVN 38.72 38.84 OCT 30.0 35.0 0.70 34.30 0.70 Open MBT 140.75 139.90 OCT 120.0 125.0 0.50 124.50 0.50 Open COGN 34.58 33.56 OCT 30.0 32.5 0.30 32.20 0.30 Open SCSC 66.22 66.46 OCT 55.0 60.0 0.50 59.50 0.50 Open CCMP 38.29 37.12 OCT 30.0 35.0 0.75 34.25 0.75 Open ONXX 41.99 41.14 OCT 30.0 35.0 0.50 34.50 0.50 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 74.93 SEP 85.0 80.0 0.55 80.55 0.55 Closed CDWC 59.25 59.50 SEP 65.0 60.0 0.45 60.45 0.45 Closed EASI 43.53 47.64 SEP 55.0 50.0 0.40 50.40 0.40 Closed VLO 64.36 72.10 SEP 75.0 70.0 0.60 70.60 (1.50) Closed FD 44.60 46.10 SEP 50.0 47.5 0.30 47.80 0.30 Closed PHS 32.42 35.41 SEP 37.5 35.0 0.30 35.30 (0.11) Closed OSTK 31.03 33.80 SEP 40.0 35.0 0.60 35.60 0.60 Closed AMZN 39.90 42.96 SEP 45.0 42.5 0.30 42.80 (0.16) Closed CHIR 43.41 45.30 SEP 47.5 45.0 0.30 45.30 0.00 Closed AZO 74.06 76.05 OCT 85.0 80.0 0.55 80.55 0.55 Open MXIM 40.94 42.40 OCT 50.0 45.0 0.50 45.50 0.50 Open PLMO 32.30 35.65 OCT 45.0 40.0 0.55 40.55 0.55 Open LEN 46.75 47.56 OCT 55.0 50.0 0.60 50.60 0.60 Open NTES 35.51 38.99 OCT 45.0 40.0 0.60 40.60 0.60 Open NBIX 50.65 50.96 OCT 60.0 55.0 0.55 55.55 0.55 Open SSP 49.66 50.16 OCT 52.5 50.0 0.50 50.50 0.34 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss Netease.com (NASDAQ:NTES), E.W. Scripps (NYSE:SSP) and palmOne (NASDAQ:PLMO) are on the "watch" list. As mentioned Tuesday, Amazon.com (NASDAQ:AMZN) and Valero (NYSE:VLO) should have been closed earlier in the week. Briggs & Stratton (NYSE:BGG), Genentech (NYSE:DNA), Guidant (NYSE:GDT), Kmart (NASDAQ:KMRT), Research In Motion (NASDAQ:RIMM) and Vimple Communications (NYSE:VIP) have previously been closed to limit potential losses. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status DITC 17.97 21.92 SEP 17.5 17.5 3.00 5.50 Closed CAH 45.79 45.85 SEP 45.0 45.0 3.00 3.60 Closed VTS 20.34 20.70 SEP 20.0 20.0 1.75 1.55 Closed KBH 75.31 77.21 SEP 75.0 75.0 2.10 2.60 Closed KB Home (NYSE:KBH) offered a viable short-term profit for traders who participated in the speculative straddle. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AHC - Amerada Hess $83.99 *** Oil Shares Surge! *** Amerada Hess (NYSE:AHC) explores for, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place around the globe. The company also manufactures, purchases, trades and markets refined petroleum and other energy products through a joint-venture refinery in the United States Virgin Islands, and another refining facility, terminals and retail gasoline stations located on the East Coast of the United States. AHC - Amerada Hess $83.99 PLAY (conservative - bullish/credit spread): BUY PUT OCT-75.00 AHC-VO OI=224 ASK=$0.30 SELL PUT OCT-80.00 AHC-VP OI=519 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$79.45 __________________________________________________________________ CELG - Celgene $59.39 *** Drug Speculation! *** Celgene (NASDAQ:CELG) is an integrated biopharmaceutical firm engaged in the discovery, development and commercialization of therapies designed to treat cancer and immunological diseases through regulation of cellular, genomic and proteomic targets. Celgene has built a discovery, development and commercialization platform for drug- and cell-based therapies that allows it to both create and retain significant value within its therapeutic franchise areas of cancer and immune/inflammatory diseases. The company's target-to-therapeutic platform integrates both small molecule and cell-based therapies and spans the key functions required to generate a pipeline of new drugs and cell therapy candidates. CELG - Celgene $59.39 PLAY (conservative - bullish/credit spread): BUY PUT OCT-50.00 LQH-VJ OI=2831 ASK=$0.55 SELL PUT OCT-55.00 LQH-VK OI=4314 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$54.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ APOL - Apollo Group $78.35 *** Sector Slump? *** Apollo Group (NASDAQ:APOL) provides higher education to working adults. The company operates through its subsidiaries, The University of Phoenix, University of Phoenix Online, Institute for Professional Development, The College for Financial Planning Institutes Corporation and Western International University. The company offers its programs and services at 71 campuses and 121 learning centers in 37 states, Puerto Rico and Vancouver, British Columbia. APOL - Apollo Group $78.35 PLAY (less conservative - bearish/credit spread): BUY CALL OCT-90.00 OAQ-JR OI=378 ASK=$0.35 SELL CALL OCT-85.00 OAQ-JQ OI=645 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$85.65 __________________________________________________________________ STJ - St. Jude Medical $70.73 *** In A Trading Range? *** St. Jude Medical (NYSE:STJ), together with its subsidiaries, develops, manufactures and distributes cardiovascular medical devices for the global cardiac rhythm management, cardiac surgery and cardiology and vascular access therapy areas. The company's products include bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator systems, electrophysiology catheters, heart valves, and valve repair products, vascular closure devices, angiography catheters, guidewires and hemostasis introducers. STJ - St. Jude Medical $70.73 PLAY (conservative - bearish/credit spread): BUY CALL OCT-80.00 STJ-JP OI=1230 ASK=$0.25 SELL CALL OCT-75.00 STJ-JO OI=1377 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$75.55 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ No straddles or strangles today... ************************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 ***************************************** ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 09/17/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 20.08 0.36 5.52% 2.30% MCIP SEP 15.00 14.30 17.20 0.70 8.50% 4.90% PAAS SEP 12.50 12.05 14.35 0.45 6.87% 3.73% UTHR SEP 25.00 24.70 33.02 0.30 3.01% 1.21% AMED SEP 25.00 24.25 28.20 0.75 6.54% 3.09% PHM SEP 50.00 49.25 62.71 0.75 3.32% 1.52% KOSP SEP 30.00 29.25 36.47 0.75 5.48% 2.56% GLBCE SEP 12.50 11.90 15.03 0.60 11.90% 5.04% ECLP SEP 12.50 12.10 15.30 0.40 6.90% 3.31% OMM SEP 12.50 12.10 14.85 0.40 6.51% 3.31% CNCT SEP 25.00 24.10 26.63 0.90 7.11% 3.73% TOY SEP 15.00 14.45 17.14 0.55 7.51% 3.81% ACF SEP 20.00 19.25 20.97 0.75 7.16% 3.90% ION SEP 25.00 24.50 27.24 0.50 4.17% 2.04% ESLT SEP 20.00 19.20 20.09 0.80 7.95% 4.17% WBSN SEP 35.00 33.75 42.54 1.25 8.46% 3.70% NTMD SEP 12.50 12.15 22.39 0.35 8.12% 2.88% UTHR SEP 25.00 24.30 33.02 0.70 7.30% 2.88% CNCT SEP 25.00 24.30 26.63 0.70 6.65% 2.88% DDS SEP 20.00 19.50 20.26 0.50 6.31% 2.56% MEE SEP 22.50 22.00 27.52 0.50 5.93% 2.27% FOSL SEP 25.00 24.35 28.83 0.65 5.95% 2.67% HUM SEP 17.50 17.10 19.45 0.40 5.34% 2.34% SCSC SEP 50.00 49.40 66.46 0.60 3.30% 1.21% JOSB SEP 24.00 23.52 30.65 0.48 5.27% 2.04% ECLP SEP 12.50 12.20 15.30 0.30 6.57% 2.46% WBSN SEP 35.00 34.05 42.54 0.95 7.44% 2.79% ARO SEP 30.00 29.05 30.07 0.95 7.67% 3.27% MW SEP 25.00 24.60 29.33 0.40 4.22% 1.63% TOL SEP 40.00 39.05 47.27 0.95 6.19% 2.43% SEAC SEP 15.00 14.40 16.57 0.60 12.11% 4.17% CLHB SEP 10.00 9.60 12.08 0.40 10.87% 4.17% NTMD SEP 15.00 14.65 22.39 0.35 8.62% 2.39% ESLT SEP 20.00 19.20 20.09 0.80 10.61% 4.17% MYGN SEP 15.00 14.55 17.50 0.45 8.06% 3.09% NAVR SEP 12.50 12.15 14.98 0.35 9.14% 2.88% IVX SEP 18.00 17.56 20.08 0.44 7.02% 2.51% UTHR SEP 25.00 24.40 33.02 0.60 8.89% 2.46% AAPL SEP 30.00 29.50 37.14 0.50 5.37% 1.69% ARO SEP 30.00 29.50 30.07 0.50 5.51% 1.69% SONO SEP 22.50 22.05 27.13 0.45 6.40% 2.04% ESLT SEP 20.00 19.30 20.09 0.70 10.92% 3.63% MEE SEP 25.00 24.45 27.52 0.55 7.13% 2.25% SRDX SEP 22.50 21.90 24.50 0.60 8.40% 2.74% IVX SEP 18.00 17.52 20.08 0.48 8.94% 2.74% BSTE SEP 45.00 44.45 50.20 0.55 4.16% 1.24% FCN SEP 17.50 17.05 19.34 0.45 7.56% 2.64% PSRC SEP 20.00 19.35 26.63 0.65 16.45% 3.36% MYGN SEP 15.00 14.70 17.50 0.30 8.01% 2.04% LCAV SEP 22.50 21.95 26.84 0.55 10.09% 2.51% ATI SEP 17.50 17.10 19.64 0.40 9.15% 2.34% LNG SEP 15.00 14.70 19.12 0.30 9.15% 2.04% DITC SEP 20.00 19.55 21.92 0.45 9.32% 2.30% ICOS SEP 25.00 24.60 24.69 0.09 1.45% 1.63% WNC SEP 25.00 24.60 30.06 0.40 6.62% 1.63% BEIQ SEP 25.00 24.70 27.02 0.30 5.32% 1.21% DITC SEP 20.00 19.55 21.92 0.45 10.09% 2.30% SHFL SEP 30.00 29.35 35.69 0.65 10.20% 2.21% ATI SEP 17.50 17.20 19.64 0.30 7.78% 1.74% SNDA SEP 20.00 19.70 24.03 0.30 7.46% 1.52% GMR SEP 25.00 24.65 31.40 0.35 6.58% 1.42% AAPL SEP 32.50 32.05 37.14 0.45 6.20% 1.40% SONO SEP 22.50 22.10 27.13 0.40 8.03% 1.81% BLUD SEP 20.00 19.50 22.11 0.50 5.28% 2.56% MOGN SEP 25.00 24.60 27.38 0.40 3.98% 1.63% EPIX SEP 20.00 19.75 20.98 0.25 8.64% 1.27% SSYS SEP 22.50 22.10 29.32 0.40 4.66% 1.81% MDCC SEP 22.50 21.75 24.14 0.75 6.60% 3.45% NIHD SEP 35.00 34.75 40.71 0.25 5.07% 0.72% FLE SEP 12.50 12.25 14.72 0.25 13.35% 2.04% CC SEP 12.50 12.15 14.72 0.35 5.85% 2.88% OS OCT 15.00 14.60 15.64 0.40 7.19% 2.74% FHRX OCT 17.50 17.05 19.43 0.45 6.31% 2.64% SNDK OCT 22.50 22.00 26.30 0.50 5.86% 2.27% SSYS OCT 25.00 24.45 29.32 0.55 5.91% 2.25% JNPR OCT 22.50 22.00 24.14 0.50 5.73% 2.27% CREE OCT 22.50 22.15 28.37 0.35 5.28% 1.58% FFIV OCT 22.50 22.20 30.05 0.30 4.45% 1.35% AMZN OCT 37.50 37.00 42.96 0.50 3.96% 1.35% ASKJ OCT 25.00 24.45 31.63 0.55 7.42% 2.25% USNA OCT 30.00 29.30 33.33 0.70 6.10% 2.39% YHOO OCT 30.00 29.40 33.46 0.60 5.51% 2.04% CELL OCT 15.00 14.50 16.79 0.50 8.28% 3.45% CREE OCT 25.00 24.35 28.37 0.65 7.26% 2.67% CLHB OCT 10.00 9.75 12.08 0.25 7.98% 2.56% PalmOne (NASDAQ:PLMO), which is currently profitable, Possis Medical (NASDAQ:POSS) and Kyphon (NASDAQ:KYPH) have previously been closed to limit losses. NAKED CALLS Stock Strike Strike Break Current Gain Max Simple Symbol Month Price Even Price (Loss) Yield Yield SWIR SEP 35.00 35.60 17.63 0.60 7.40% 1.69% AVID SEP 50.00 50.50 46.00 0.50 3.56% 0.99% USPI SEP 37.50 38.05 35.74 0.55 3.90% 1.45% BDY SEP 25.00 25.75 23.25 0.75 7.42% 2.91% DRIV SEP 30.00 30.30 28.27 0.30 4.51% 0.99% SINA SEP 30.00 30.35 25.31 0.35 5.84% 1.15% ERES SEP 22.50 22.80 18.97 0.30 6.66% 1.32% ICUI SEP 30.00 30.65 27.60 0.65 7.56% 2.12% SWIR SEP 30.00 30.30 17.63 0.30 5.90% 0.99% UPL SEP 45.00 45.40 44.32 0.40 4.90% 0.88% MCHP SEP 30.00 30.65 27.35 0.65 6.97% 2.12% EYET SEP 45.00 45.75 33.68 0.75 10.85% 1.64% CMX SEP 30.00 30.45 29.98 0.45 4.86% 1.48% BRCM SEP 32.50 32.90 28.86 0.40 5.76% 1.22% ELAB SEP 30.00 30.55 25.03 0.55 8.34% 1.80% RSTI SEP 30.00 30.65 29.18 0.65 10.87% 2.12% PSFT SEP 20.00 20.35 19.72 0.35 11.10% 1.72% PLMO SEP 40.00 40.25 35.65 0.25 6.23% 0.62% ASTE SEP 17.50 17.95 18.85 (0.90) 0.00% 0.00% OSTK SEP 35.00 35.30 33.80 0.30 8.17% 0.85% ESIO OCT 22.50 23.00 21.33 0.50 6.99% 2.17% LNCR OCT 32.50 33.30 30.18 0.80 7.12% 2.40% ADTN OCT 30.00 30.30 24.80 0.30 3.79% 0.99% DIGE OCT 30.00 30.35 26.45 0.35 6.05% 1.15% CTB OCT 22.50 22.85 20.86 0.35 4.25% 1.53% MDCO OCT 30.00 30.80 28.14 0.80 8.33% 2.60% CECO OCT 40.00 40.50 30.50 0.50 6.34% 1.23% Electro-Scientific (NASDAQ:ESIO) remains on the "watch" list. Ask Jeeves (NASDAQ:ASKJ), IDX Systems (NASDAQ:IDXC), Ceradyne (NASDAQ:CRDN), Dick's Sporting Goods (NYSE:DKS), Marvell Electronics (NASDAQ:MRVL) and Resources Connection (NASDAQ:RECN) have previously been closed to limit potential losses. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 ASTE 18.85 OCT 17.50 QXA-VW 0.55 20 16.95 26 3.8% 9.5% LCAV 26.84 OCT 25.00 JVQ-VE 0.65 20 24.35 26 3.1% 8.0% ALO 18.95 OCT 17.50 ALO-VW 0.40 10 17.10 26 2.7% 7.2% PDII 27.21 OCT 25.00 PKU-VE 0.55 68 24.45 26 2.6% 7.0% BOBJ 22.00 OCT 20.00 BBQ-VD 0.35 664 19.65 26 2.1% 5.7% APPX 32.50 OCT 27.50 AQO-VY 0.40 5125 27.10 26 1.7% 5.6% GILD 36.84 OCT 35.00 GDQ-VG 0.65 1138 34.35 26 2.2% 5.6% 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. _________________________________________________________________ ASTE - Astec Industries $18.85 *** Revenge Play! *** Astec Industries (NASDAQ:ASTE) designs, engineers, manufactures and markets equipment and components used in road building and related construction activities. The company's products are used in each major phase of road building, from quarrying and crushing the aggregate to testing the mix for application of the road surface. Astec also makes equipment and components unrelated to road construction, such as trenching, auger boring, directional drilling, environmental remediation and industrial heat transfer equipment. ASTE - Astec Industries $18.85 OCT 17.50 QXA-VW LB=0.55 OI=20 CB=16.95 DE=26 TY=3.8% MY=9.5% _________________________________________________________________ LCAV - LCA-Vision $26.84 *** Seeing Is Believing! *** 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 utilizes fixed-site excimer lasers and its vision centers are supported mainly by full-time, board-certified ophthalmologists and optometrists, as well as other healthcare professionals. LCAV - LCA-Vision $26.84 OCT 25.00 JVQ-VE LB=0.65 OI=20 CB=24.35 DE=26 TY=3.1% MY=8.0% _________________________________________________________________ ALO - Alpharma $18.95 *** Favorable Neurontin Ruling! *** Alpharma (NYSE:ALO) is a global specialty pharmaceutical firm that develops, manufactures and markets pharmaceutical products for humans and animals. The company offers generic human drug products in tablet, capsule, liquid and topical formulations and dosage forms. Alpharma makes and markets fermentation-based active pharmaceutical ingredients that are used primarily by third parties in the manufacturing of generic and branded pharmaceutical products. The company also makes and markets animal health products in various formulations and dosage forms. ALO - Alpharma $18.95 OCT 17.50 ALO-VW LB=0.40 OI=10 CB=17.10 DE=26 TY=2.7% MY=7.2% _________________________________________________________________ PDII - PDI Inc. $27.21 *** Rally Mode! *** PDI Inc. (NASDAQ:PDII) is a healthcare sales and marketing company serving the biopharmaceutical and medical devices and diagnostics industries. The firm creates and executes sales and marketing campaigns intended to improve the profitability of pharmaceutical and related products. PDI partners with companies that own the intellectual property rights to these products and recognize their ability to commercialize these products and maximize their sales performance. PDI has a variety of agreement types, from fee-for-service arrangements to equity investments in a product or company. PDII - PDI Inc. $27.21 OCT 25.00 PKU-VE LB=0.55 OI=68 CB=24.45 DE=26 TY=2.6% MY=7.0% _________________________________________________________________ BOBJ - Business Objects S.A. $22.00 *** Bottom-Fishing! *** Business Objects S.A. (NASDAQ:BOBJ) is a worldwide provider of business intelligence solutions. The company develops, markets and distributes software that enables organizations to track, understand and manage enterprise performance. The company's products include data integration, query, reporting, online analytical processing, information broadcasting, business alerts, analytical application frameworks and pre-packaged analytic applications. Its products also include administration tools that enable information technology professionals to set up and deploy its products across an enterprise. BOBJ - Business Objects S.A. $22.00 OCT 20.00 BBQ-VD LB=0.35 OI=664 CB=19.65 DE=26 TY=2.1% MY=5.7% _________________________________________________________________ APPX - American Pharma Partners $32.50 *** Entry Point? *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. The company manufactures products in each of the three basic forms, in which injectable products are sold, including liquid, powder and lyophilized or freeze-dried. vIts products are generally used in hospitals, long-term care facilities, alternate care sites and clinics within North America. American Pharmaceutical has a number of product candidates under development in the areas of oncology, anti-infective and critical care. APPX - American Pharma Partners $32.50 OCT 27.50 AQO-VY LB=0.40 OI=5125 CB=27.10 DE=26 TY=1.7% MY=5.6% _________________________________________________________________ GILD - Gilead Sciences $36.84 *** 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 $36.84 OCT 35.00 GDQ-VG LB=0.65 OI=1138 CB=34.35 DE=26 TY=2.2% MY=5.6% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CPRT - Copart $18.23 *** Sell-Off In Progress! *** Copart (NASDAQ:CPRT) is a provider of salvage vehicle auction services in the United States. It provides vehicle suppliers, primarily insurance companies, with a wide range of services to process and sell salvage vehicles through auctions, principally to licensed vehicle dismantlers, rebuilders, repair licensees and used vehicle dealers. The company offers vehicle suppliers a range of services, which expedite each stage of the salvage vehicle auction process, maximize proceeds and minimize costs. These services are online supplier access, salvage estimation services, transportation services, vehicle inspection stations, on-demand reporting, DMV processing and other vehicle processing programs. CPRT - Copart $18.23 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 20 KQJ-JD 140 0.35 20.35 7.0% 1.7% _________________________________________________________________ FLML - Flamel Technologies $14.68 *** A Big "Down" Day! *** Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company engaged mainly in the development of two polymer-based delivery technologies for medical applications. The company's Micro-pump technology is a multi-particulate technology for oral ingestion of small molecule drugs with applications in controlled release, tastemasking and bioavailability enhancement. The company has three major products based on its Micropump technology: Asacard, a controlled-release formulation of aspirin for the treatment of cardiovascular disease; Metformin XL, a controlled-release form of Metformin that is in development for use for the treatment of Type II diabetes, and Genvir, a controlled-release acyclovir for the treatment of genital herpes. In addition, FLML has developed new herbicide delivery systems and has patented a biomaterial, ColCys. FLML - Flamel Technologies $14.68 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 17.5 FLU-JW 1989 0.30 17.80 10.5% 1.7% _________________________________________________________________ SSNC - SS&C Technologies $17.85 *** Downtrend Intact! *** SS&C Technologies (NASDAQ:SSNC) provides software, business process outsourcing services and application service provider solutions to the financial services industry primarily in the United States. The company delivers a range of specialized software products and services that provide mission-critical processing for information management, analysis, trading, accounting, reporting and compliance. SS&C provides its products and related services in seven vertical markets in the financial services industry: insurance entities and pension funds; institutional asset management; hedge funds and family offices; financial institutions, such as retail banks and credit unions; commercial lending; real estate property management, and municipal finance. SSNC - SS&C Technologies $17.85 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 20 QUN-JD 85 0.35 20.35 7.7% 1.7% ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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