The Option Investor Newsletter Tuesday 09-21-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Surprise, No Surprise Futures Markets: See Note Index Trader Wrap: Summer doldrums ends as the big board breaks out Market Sentiment: Mixed Signals Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 09-21-2004 High Low Volume Adv/Dcl DJIA 10244.93 + 40.00 10270.52 10200.25 1.62 bln 2238/ 979 NASDAQ 1921.18 + 13.10 1925.85 1909.43 1.56 bln 2023/1108 S&P 100 544.74 + 2.81 546.08 541.93 Totals 4261/2087 S&P 500 1129.30 + 7.10 1131.54 1122.20 SOX 403.75 + 3.90 406.66 399.90 RUS 2000 576.92 + 6.18 577.15 570.74 DJ TRANS 3271.22 + 28.90 3271.62 3243.11 VIX 13.66 - 0.77 15.97 13.39 VXO (VIX-O)12.86 - 0.92 14.15 12.66 VXN 20.30 - 0.26 20.70 19.88 Total Volume 3,472M Total UpVol 2,519M Total DnVol 892M Total Adv 4821 Total Dcl 2403 52wk Highs 270 52wk Lows 71 TRIN 0.72 NAZTRIN 0.86 PUT/CALL 0.76 ************************************************************ Surprise, No Surprise by Jim Brown The FOMC meeting has passed into the history books and there was very little change from the last meeting. The Fed hiked rates and kept the "measured pace" language. Traders hoping for a break in the pace were disappointed that the expected surprise was not delivered. Dow Chart Nasdaq Chart NDX Chart Russell Chart SOX Chart The markets started out positive with traders cheering the jump in Residential Construction and ignoring the now routine drop in Chain Store Sales. The Chain Store Sales number fell -1.1% for the week and continued the weak back to school season. The drop was the sharpest decline since June and analysts suggested improper seasonal adjustments were the problem. The falling mortgage interest rates continued to push New Home Construction back to the two million level in August. This continued the growth from July where the headline number jumped +171,000 to 1.988M. The single family starts are growing slower than multifamily units but both are growing and that is good news for the economy. Building permits did drop -114,000 in August but with fall weather ahead this is a normal seasonal occurrence. Builders are taking a page from the auto dealer play book and they are offering cash back, upgrades, furniture, cheap interest and even vacations to induce buyers to make the commitment now and not hold inventory over the winter. Despite the Fed raising rates to 1.75% today the real rates fell with bonds jumping on the Fed announcement. The ten-year rate fell to 4.04% and a new five-month low. This is a reaction to the weak economics and the slow and measured pace comments. Bond traders still expect the Fed to take a pass at the November meeting. As I stated above the Fed meeting was a non-event with the quarter point hike as expected. The statement was mixed on economic comments. The Fed said output growth appears to have regained some traction after moderating earlier in the year. They felt labor conditions had improved only modestly and inflation expectations have eased. They said the risk of inflation and deflation were still roughly equal. The committee kept its "pace that will likely be measured" language and raised the rate to remove the current over accommodative posture. Yawn, no surprise and no change with the exception of the possibly slightly stronger language about the economy. You would have to look hard to see it. Traders initially thought it was a concession to the future and a potentially softer side of the Fed but once the full statement saw the light of day the excitement faded. The markets spiked on the news as they always do then faded as is the norm. Once the smoke cleared a buy program tried to break the overhead resistance but all they got for their effort was a failed rally. The Dow fell back below 10250 which has become short term resistance. The Nasdaq fell back to 1920 and the upper end of its range for the last two weeks, also strong resistance. The SPX broke 1130 for about 20 min before slipping back below that strong resistance level at the close. The only index to really close above its recent resistance was the Russell at 576.80 and that was tenuous at best. After the close the various futures contracts bled a few more points despite some decent earnings and no real warnings. Adobe beat the street and raised guidance. PAYX reported inline with estimates as well as CBK. JBL beat analysts by a penny and traded up about +1.60 in after hours. The markets had traded higher early in the day after Lehman and Goldman both beat estimates by a mile. General Mills was a slight drag on the market after it reported earnings that fell -19% due to higher prices for its ingredients. It was amazing we moved higher at all with oil reaching a new five week high and trading over $47 for most of the day. The futures closed at $46.90 but fear of more terrorist acts, Yukos and production slowdowns due to the hurricanes is keeping it higher. Tomorrow at 10:30 we get the oil and gas inventories for the week and we have seen drops in inventories for the last seven weeks. It appears traders are speculating that trend will continue. The drop in inventory levels has been due to refineries reluctance to buy the high priced oil according to analysts. With the summer driving season over they are playing chicken with supplies and hoping to produce only as much gasoline as necessary to avoid passing the high prices up the chain. Eventually we will reach a level where gasoline inventories will force them to add to crude supplies. The XOI Oil Index rose +20 for the day and it was the largest one day jump since July 29th 2002. The 695.75 close is a seven-year high. In a complete disconnect from reality the Dow transports also hit a new five year high at 3271. Something is definitely wrong with this picture. The earnings picture took another turn south today with Abby Joseph Cohen predicting profit growth of only +5% for all of 2005. That is the lowest level I have heard and even lower than the +8.5% Reuters number from last week. Seems we are faced with a race to quote lower for this cycle instead of the constantly increasing quotes for the last couple quarters. According to Zachs 85% of companies met or exceeded earnings in Q2 and that quarter finished with +34% earnings growth. Zachs current estimate for the 3Q earnings growth is +14% to +15%. This is below the +13% to +17% range given by Reuters just last Friday. Assuming the numbers are close and will not get worse is that still confirmation of a growing economy and justification for a bull market? In most cases the answer is yes. We are just spoiled by the huge gains over the last year. I mentioned earlier that the bonds soared on the Fed announcement. Does that strike you as strange? It should because there are only two real reasons for bonds to be soaring. Either inflation is dead for the foreseeable future or the economy is slipping back into recession. The Fed comment today suggests the inflation monster is not dead but at least contained for the near term. The other side of that coin is the economic strength. I just profiled the earnings deceleration for you above. We have been getting daily tech warnings and the chip sector could be on the verge of yet another round of order push outs. Could it be that BOTH possibilities are possible. Could inflation be dropping along with the economy because we are heading into a depression? Scary thought but how else do you justify the four month drop in real interest rates and the rise in bond prices? Doesn't the Fed want rates to go higher and bonds to weaken? With "real" rates falling the Fed may be forced to raise rates even faster to slow the descent. The various possibilities here for the economic forecast are numerous enough to make your head spin. Those analysts that get paid the big bucks are not quite as positive about the markets chances as they were just a couple weeks ago. They are now claiming the market rallied on the post convention Bush bounce, the drop in oil prices from the 8/20 August highs and the recovery in the Jobs numbers. The Arnold speech was given as the turning point in the market. That was August 31st and well after the price of oil began to drop and long after the 8/16 beginning of the current rally. It was however the rebirth of the current rally which had failed for two days before that 8/31 Arnold speech. August 31st was also the turning point in oil prices at their $41.40 low. The march higher was choppy as the various Yukos/IRAQ scenarios played out but for the last week there has been no hesitation. The prices are nearing the August highs and the equity markets are not paying attention. I believe this cannot continue indefinitely. The current warning ratio is nearly 3:1 compared to those who have affirmed guidance. We are hearing on all fronts that profits are decelerating and analysts are racing to post the lowest estimate. Money is pouring into bonds while overall economics are less than inspiring. My point to all of this is what will push traders to chase prices higher? Abby said it best today. She said the early stages of a bull market are full of vim and vigor. Once that initial stage has passed and the consolidation begins the next stage of the market is marked by durability. The sex appeal has gone and the lure of doubling your money has passed. Now traders have to decide is the potential for another +10% to +20% is worth the risk. Is it worth buying more at three-month highs and at strong resistance? That brings us to tomorrow and the rest of the week. The SPX, Nasdaq and Russell are all right at very strong resistance and are either poised to break out or break down. I know you have heard this before but if you are a bear this is exactly where you want to enter your next short. If you are a bull this is the resistance that must break for any material move to succeed. What if this resistance does break? What then? The SPX has even stronger resistance at 1140 and 1150. The odds of those breaking before the election are very slim. The S&P is the strongest of the major indexes with the Dow and Nasdaq still in a down trend even if they break their current resistance levels. I don't want to belabor the facts but the markets are not as bullish as some would have you think. I do believe we will move higher before the end of the year and we should move higher into the election. How much higher is the question, when and why? With the earnings warning season due to increase in intensity as each day passes the bears are getting excited. The bulls are saying so what? We know that already, buy more, there is always a post election rally. I fear that is exactly the sentiment that we should worry about. Is it just the expectation of the post election bounce that is really powering all the bad news rallies we are seeing? The Stock Traders Almanac does a great job in telling us how the markets have moved both before and after every election cycle for the last fifty years. The trend is well known and every four years traders try to capitalize on it. I have seen several other trends of late fail to appear once the masses begin to depend on them. I am beginning to think this post election cycle may leave something to be desired. I will be happy to ride any wave higher but I am going to be looking for the sharks behind me. This week should be the key for me. Economic reports are few and there should be nothing for the market to focus on other than stocks. If we can move higher this week it would mean strong resistance had failed and bulls found the conviction and volume necessary to overcome not only the resistance but the declining sentiment. Next week the calendar heats up and the road becomes more bumpy. The closer we get to October the more uncomfortable traders will become because the October dip is the longest running trend around. That dip is produced by a weak earnings cycle and mutual fund rebalancing before the typical year end rally. Do the bulls have the conviction to push us higher in front of that trend? We should have that answer really soon. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* 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 ************************************************************** ***************** INDEX TRADER WRAP ***************** Summer doldrums ends as the big board breaks out While today's FOMC decision on interest rates was eagerly awaited, it may have been the autumnal equinox that big board traders looked forward to most as gains for energy stocks, miners and homebuilders had the very broad and institutionally held NYSE Composite (NYA.X) 6,633.22 +1.02% rising more than 67 points and breaking above this summer's highs. I'm certain today's break above June's relative highs for the NYSE Composite is purely coincidental, but with today being the last day of summer in the northern hemisphere, as marked by the autumnal equinox, it is a fascinating coincidence indeed. The Federal Open Market Committee (FOMC) didn't offer up any surprises with today's decision to raise it target for fed funds to 1.75% from 1.50%, and the FOMC's brief statement read nearly verbatim to the June 30 release http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm and August 10 release http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040810/default.htm . As I read today's statement more closely, there were a couple of and words missing. "Transitory factors," which the FOMC had used to describe incoming inflation data in June and August was stricken from today's minutes. "Softness," which was used to describe output growth and pace of the labor market in August, was also missing from today's brief statement. Here's a link to today's FOMC statement. U.S. Market Watch - 09/21/04 Close While the autumnal equinox marks the end of summer and the beginning of autumn as night and day are nearly of the same length, Treasury yields trade just the INVERSE of what normal logic would have them doing with the FOMC raising rates, while the same would be true for TRANSPORTS as energy prices are back on the rise. October Crude Oil futures (cl04v) rose above the $47.00 level and trade $47.10 ahead of tomorrow morning's 10:30 AM EDT release of weekly inventory reports, but that didn't stop the transports as depicted by the economically sensitive Dow Transportation Average (TRAN) 3,271.22 +0.89% from closing at new 5-year highs! The trade in Treasuries remains perplexing with NOBODY having the etched-in-stone affirmative answer to what is going on. Low inflation, hedge fund buying or slowing economy are three scenarios for the benchmark 10-year yield ($TNX.X) hovering just above 4%, but trading at 6-month lows. With low Treasury yields, comes lower mortgage rates. Strong earnings from Lennar (NYSE:LEN) $47.24 +2.8% as well as KB Homes (NYSE:KBH) $83.36 +9.32%, which raised fiscal 2004 and 2005 earnings estimates set the Dow Jones Home Construction Index (DJUSHB) 671.89 +4.01% surging to the top of today's sector winner's list. Gold bugs glowed as the HUI finally broke above its 200-day SMA (209.43) after falling below this longer-term simple moving average on April 20. While the HUI makes a move above its 200-day SMA, the Dow Industrials (INDU) continues to battle with downward trend and its 200-day SMA (10,293). Both the NASDAQ-100 Index (NDX.X) and broader NASDAQ Composite ($COMPX) remain just below their respective 200-day SMAs of 1,441 and 1,966. Sectors I see very near their 200-day SMA's at today close have the CBOE Internet Index (INX.X) challenging its 200-day SMA for a sixth-straight session, while the Combined Telecom Index (QCharts: IXTCX) 177.68 +1.51%, which is comprised of wireless and land telecom service providers found a bounce higher from its rising 21-day SMA today, and looks set for another challenge of its 200-day SMA (181) after a failed first try on Monday of last week, September 13. Hmmmm... the Securities Broker Dealer Index (XBD.X) 129.55 +2.55% looks technically similar to the Combined Telecom Index, where stronger than expected earnings from Goldman Sachs (NYSE:GS) $94.90 +3.51% and Lehman Brothers (NYSE:LEH) $79.75 +4.9% provided a lift in today's session. Tomorrow morning, Morgan Stanley (NYSE:MWD) $52.38 +2.78% and Bear Stearns (NYSE:BSC) $90.09 +2.67% report quarterly results. Market Snapshot / Internals - 09/21/04 Close Advance/decline lines were bullish from the opening bell and built stronger to the close. Volumes were brisk, but not overly heavy and while the S&P 500 Index (SPX.X) looked ready to erupt when a buy program premium was generated at 03:00 PM EDT as the SPX lifted to a session high of 1,131.54, it would appear to me that some 4 and 5-lettered stocks created somewhat of a drag in the final hour of trade. At 03:00 PM EDT, NASDAQ-100 heavyweight Microsoft (NASDAQ:MSFT) $27.28 was ticking above $27.50, but faded to the close. I can find no news to explain a sudden drop from $27.43 to $27.29 in the final 5-minutes of trade, where 2.6 million shares where traded, and this action looks like some type of program initiated trade to its close. MSFT's final hour decline had the QQQ moving back from its session high of $35.84 found at 03:00 PM EDT. NYSE Composite ($NYA.X) - Daily Intervals The NYSE Composite ($NYA.X) faced a formidable test of strength on September 2 in our 03:15 PM EDT update as it approached the conventional 50% (blue) retracement and our "cheater's trend" (dashed red). Since the conventional 61.8% retracement couldn't fully explain the June resistance just above 6,574, I slapped a PINK "fitted retracement" at a high close of 6,611, a level buyers were unable to break on a closing basis. As the last days of summer draws to an end, so has this summer's resistance in the NYSE Composite. You've probably been noticing the NYSE 5-day NH/NL ratio wavering of late. Today's expansion of new highs gets a little kick and with Stochastics confirming a break of a range, I think the NYSE Composite most likely moves higher into the next upper zone of resistance, which would correlate with this Spring's relative highs. Today's trade is bullish for the NYSE as it would make for a HIGHER high compared to June's bounce highs, from a massive double bottom marked by May and August's lows near 6,211. Dow Jones Home Construction Index (DJUSHB) - Daily Intervals The homebuilder sector is not necessarily a sector a trader trades, but I've mentioned bullish trades in two of my "favorites" that I hold in DR Horton (NYSE:DHI) $33.75 +5.07% and Toll Brother (NYSE:TOL) $47.80 +3.55%. Other sector bulls will still trade DHI, TOL and other "like stocks" using the DJUSHB as a guide. Tomorrow morning we'll get the Mortgage Bankers Association weekly figures for purchases, refinancings, etc. I'm looking to sell 1/2 position profits regardless of the figures as the homebuilders have made a very nice move higher, but trade the upper end of the a bullish regression channel. A near-term "blow off" move could see the rally extend to 700. Bulls and bears that have traded this sector will have noticed that the DJUSHB has shown the ability to trade outside of its bullish regression channels in the past. AMEX Gold Bugs Index ($HUI.X) - Daily Intervals Gut feel is that we saw a lot of "gold bears" and "gold bugs/bulls" doing some aggressive buying today. All day the $HUI.X was pinned just under 211.20, but when the Dollar Index (dx00y) 88.12 -0.97% broke back under its WEEKLY S1 of 88.32, buyers pressed the $HUI.X firmly higher. Pivot Analysis Matrix - One can never be certain, but I feel as if Treasuries are way "overbought" and we're reading for a reversal after a very bullish move from May's YIELD highs. One trade I'd be alert to is for the 10-year yield ($TNX.X) to print under 4.0%, which for bond trader's is almost equivalent to "Dow 10,000." I could see some Treasury bears capitulate here, drive YIELD under, or NEAR the three correlative YIELD supports (Daily S2, WEEKLY S2 and MONTHLY S1), where a REVERSAL could then take place on a snap back above DAILY Pivot and WEEKLY S1. I don't think a mortgage refinancer, or a "lock'em in" mortgage originator could go too wrong should the benchmark bond dip under 4.0%. The QQQ printed a session low early this morning at $35.44, just two cents above the WEEKLY Pivot, which has NOT been traded at this point. The SOX.X finds buyers just above the psychological 400.00 level, but was unimpressive in today's trade. Darned, I missed marking the SOX.X correlative resistance of DAILY R1 406.80 and MONTHLY R1 of 406.58. MONTHLY R1 in the SOX.X has not been traded all month. If it does get traded, today's move in the HUI.X could be small in comparison to potential short- covering in the chips, on a break much above 407. According to Dorsey/Wright and Associates, their Semiconductor Bullish % (BPSEMI) fell 0.63% today, but remains in "bull alert" status at 20.89%. Jeff Bailey **************** MARKET SENTIMENT **************** Mixed Signals - J. Brown The market continues to flash investors mixed signals. The Dow Industrials did rally but the bounce began to fail this afternoon. Meanwhile the NASDAQ Composite continued to climb and broke through its simple 100-dma. The S&P 500 is out performing the Dow today but it too is stuck under resistance. Overall the market turned in a rather bullish session. Every sector closed in the green with homebuilders, networking and oil stocks as the strongest sectors. Market internals were very bullish. Advancers beat decliners by 20-to-7 on the NYSE and 2-to-1 on the NASDAQ. Up volume was about 3 times down volume on the NYSE and about 2.5 times down volume on the NASDAQ. Investors appeared to interpret the FOMC's interest rate hike to 1.75 percent, the third hike this year, as a positive vote of confidence on the economy. Yet bonds continued to climb even as stocks ticked higher. If the economy is improving why are investors moving money into the "safety" of bonds? Jim goes into more depth in tonight's market wrap. Another boost to investor confidence today was the housing starts, which came in above economists' expectations. Homebuilders were the best performers today with a 4 percent rally in the DJUSHB index. Adding fuel to the move was KBH and LEN who both reported earnings and beat estimates last night. Sounds like a bunch of good news doesn't it? Somehow traders are turning a blind eye to the rise in crude oil. Prices climbed to over $47 a barrel today and closed at $46.26 up 1.46 percent. The OIX oil index soared 2.77 percent to hit new all-time highs. Rising oil prices may be good for the producers and refiners but it takes a heavy toll on the rest of the economy from manufacturers to consumers. If the oil issue wasn't bad enough Wall Street seems to be ignoring the steady stream of earnings warnings as well. There was a truck load of bad news from the technology sector today but the group still churned higher. Of course some of today's earnings news was positive but it didn't come from the technology sector. Besides I don't believe that a couple of strong earnings reports from Goldman Sachs (GS) and Lehman Brothers (LEH) was enough to inspire a new wave of confidence. The brokers almost always beat the estimates and the earnings warnings are only supposed to grow in number as we near the next earnings season. Speaking of confidence I don't have much confidence in bullish plays with the VIX/VXO volatility indices trading so low today. The VXO hit new multi-year lows at 12.86 this afternoon. We don't have to tell you just how bearish that is on a contrarian basis. Then again as Art Cashin reiterated on CNBC today the market tends to fool the greatest number of people as often as possible and if you've been watching the volume of puts on the QQQs lately then the market should be heading higher to confound the hordes of put owners looking for a decline on the NASDAQ. Yes, we have plenty of mixed signals. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9230 Current : 10244 Moving Averages: (Simple) 10-dma: 10250 50-dma: 10128 200-dma: 10272 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 990 Current : 1129 Moving Averages: (Simple) 10-dma: 1123 50-dma: 1101 200-dma: 1116 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1435 Moving Averages: (Simple) 10-dma: 1416 50-dma: 1381 200-dma: 1440 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 13.66 -0.77 CBOE Mkt Volatility old VIX (VXO) = 12.86 -0.92 Nasdaq Volatility Index (VXN) = 20.30 -0.26 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 834,590 631,199 Equity Only 0.72 672,724 483,557 OEX 0.92 20,512 18,944 QQQ 1.39 67,466 94,183 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 62.6 + 1 Bear Correction NASDAQ-100 45.0 + 2 Bull Alert Dow Indust. 56.6 + 0 Bear Correction S&P 500 61.4 + 1.4 Bear Correction S&P 100 58.0 + 2 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: 1.02 10-dma: 0.87 21-dma: 1.03 55-dma: 1.20 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 2015 1984 Decliners 798 1025 New Highs 169 80 New Lows 18 31 Up Volume 1181M 1050M Down Vol. 407M 425M Total Vol. 1607M 1508M 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************************* 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 Tuesday 09-21-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: AHC, CMI, PD, TDS New Calls Plays: None Put Play Updates: APOL, FFH, KRI, KSS, LXK, MMM New Put Plays: FAST, PRX **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amerada Hess - AHC - close: 87.79 chg: +2.57 stop: 85.95*new* We have good news for AHC bulls. The oil sector has been very strong this week. The OIX oil index is hitting new all-time highs as crude oil climbs to $46.27 a barrel. AHC has finally been awakened from its slumber and is breaking out to new highs as well. Yesterday AHC broke through the $85.00 level and we suggested that short-term traders consider taking profits. We're suggesting the same thing tonight. When we picked AHC the stock was at $80.50 and the October 75 calls were $6.50, the 80 calls were $3.20 and the 85 calls were $1.30. Now AHC is more than seven points higher and the 75 calls are $13.20, the 80 calls are $8.30 and the 85 calls are $4.10. While we are suggesting some profit taking one could choose to leave the play open but merely tighten your stop. We're going to tighten our stop to $85.95 but that may not be close enough for you. Take note! It's easy to get greedy here. How many times have you heard "plan your trade and trade your plan"? Right now AHC has exceeded our expectations. We're going to keep the play open for now. However, we're going to set a hard exit at $89.00. We assume that $90.00 will offer some round-number resistance. Therefore we're going to close this play if AHC trades at $89.00. We can always choose to jump back in after AHC sees some profit taking. Picked on August 31st at $80.50 Change since picked: + 7.29 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 1.0 million Chart = --- Cummins Inc - CMI - close: 72.33 change: +0.75 stop: 69.40 Traders continue to buy the bounce in CMI. Yesterday the bounce was supported by Prudential who reiterated their "over weight" outlook on the stock. Shares of CMI are up four days in a row and challenging its all-time highs near $72.50. Readers can use a new high as a momentum entry or look for a dip back toward $70.50-71.00 as an entry point. No change in our stop yet. Picked on September 19 at $70.99 Change since picked: + 1.34 Earnings Date 07/23/04 (confirmed) Average Daily Volume = 724 thousand Chart = --- Phelps Dodge - PD - close: 85.89 chg: +2.15 stop: 82.49*new* We also have good news to report for PD. The stock has turned around and added 2.56 percent on decent volume today. The move was partially fueled by a big breakout in copper prices. The December contract for copper rose 1.55 percent to $1.34 a pound. We don't have the exact number but this is a new multi-year high for the metal and a bullish technical breakout over resistance. This lead PD to a new five-month closing high today but the stock remains under the $86.00 level. However, if PD can breakout we would expect it to trade towards $90 rather quickly. We are going to raise our stop loss to $82.49. 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: 81.98 chg: +0.36 stop: 79.50 We do not have much new to report on for TDS. Shares continue to consolidate after peaking near $84 a few days ago. Currently TDS is testing support near its simple 10-dma. We are growing worried again because the technical oscillators have all turned bearish again. We are not suggesting new bullish entries and if TDS trades under $81.00 we may consider closing the play earlier. If TDS trades back to $84 we would consider exiting earlier as well. Picked on August 24th at $78.05 Change since picked: + 3.93 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 195 thousand Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Apollo Group - APOL - close: 72.00 change: -3.82 stop: 74.10*new* Heads up! This is your exit alert. We added APOL to the play list back on September 12th with a trigger to buy puts at $79.50. Shares gapped down a couple of days later to $78.88 entering the play. Shares gapped down again two days ago and now the stock is plummeting lower with a 5 percent decline on very big volume today. Our original target was $73.50 and APOL has surpassed our expectations. The original October options we suggested have risen from $3.40 to $8.70 on the $80 strikes and $1.70 to $4.90 on the $75 strikes. Now we know that our readers probably didn't get to enter at those prices but that's the closest we can come to showing the change in option values. We are suggesting that traders exit now for a profit. However, we're going to be a little greedy here. The big volume and APOL's close near the low of the day in the face of a market-wide rally is pretty bearish. We're going to hold out for a drop to $70.50. If APOL trades at $70.50 we will exit the play. In the meantime we're lowering our stop loss to $74.10 since the $74 level was minor resistance in August it should become resistance again. Picked on September 14 at $78.88 Change since picked: - 6.88 Earnings Date 10/05/04 (unconfirmed) Average Daily Volume = 3.3 million Chart = --- FairFax Financial - FFH - cls: 126.73 chg: +5.98 stop: 131.00 Our aggressive high-risk put play in FFH is proving to us just how risky it is. The stock rallied almost 5 percent and erased four days of losses with an announcement last night. If we're reading the press release correctly (as we're not familiar with all the Canadian terms) it looks like FFH has announced a stock buy back program. FFH plans to buy back up to 950,000 shares of the 13 million shares in float over the next twelve months as the company sees its shares as "an attractive investment opportunity". This could be a smart move by FFH management or it could be a one or two day pop that shorts merely use as a new entry point. Be careful here. We are expecting the $128-129 level to act as resistance. Picked on September 12 at $126.50 Change since picked: + 0.23 Earnings Date 00/00/00 (confirmed) Average Daily Volume = 59 thousand Chart = --- Knight-Ridder - KRI - close: 64.37 change: +1.18 stop: 65.51 Hmm... yesterday the New York Times cut its profit forecast and shares of KRI dipped under the $63.00 level in response. Unfortunately, KRI didn't stay under the $63 level and the market-wide rally on Tuesday fueled the rebound back to resistance at the simple 40-dma. We would not suggest new positions until KRI traded back under the $64 mark. Picked on September 15 at $63.85 Change since picked: + 0.52 Earnings Date 07/22/04 (confirmed) Average Daily Volume = 491 thousand Chart = --- Kohl's - KSS - close: 49.73 change: +0.23 stop: 52.01 The $50.00 level is proving to be tougher resistance than we thought and that's good news. KSS has tried three times in the last three sessions to break back above the $50 mark and it has failed each time. Granted today it did make it to $50.12 on an intraday basis. We feel that this is a good show of relative weakness for KSS considering the market's wide-spread strength today. However, we would not suggesting new bearish positions until KSS traded under $49.00 again. Picked on September 16 at $49.48 Change since picked: + 0.25 Earnings Date 08/12/04 (confirmed) Average Daily Volume = 3.1 million Chart = --- Lexmark Intl - LXK - close: 84.95 chg: +0.10 stop: 86.01 If you noticed our comments last night in the newsletter we're growing exceedingly cautious here on LXK. The stock's latest bounce from its long-term trendline of support has sent shares to challenge overhead resistance at $85.00 and its exponential 200- dma. Thus far resistance is holding but we're losing confidence. Although we do have to say that LXK's 10-cent gain today is not very inspiring. We're willing to leave the play open but we're not suggesting new positions. Even if we're stopped out we would keep LXK on our watch list should shares ever break that long- term trendline. Picked on September 5th at $86.10 Change since picked: - 1.15 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 1.2 million Chart = --- 3M Co - MMM - close: 81.57 change: +0.63 stop: 84.51 A gain in MMM is to be expected when the Industrials post a gain. Fortunately for us MMM began to roll over late this afternoon under support/resistance at $82.00. Look for confirmation (a.k.a. more weakness) tomorrow if you're considering new positions. Picked on September 15 at $82.00 Change since picked: - 0.43 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 2.5 million Chart = ************* NEW PUT PLAYS ************* Fastenal Co - FAST - close: 57.85 chg: -0.26 stop: 60.01 Company Description: Fastenal Company sells different types of industrial and construction supplies in ten product categories. These include different types of: threaded fasteners and miscellaneous supplies; tools; metal cutting tool blades; fluid transfer components and accessories for hydraulic and pneumatic power; material handling and storage products; janitorial and paper products; electrical supplies; welding supplies; safety supplies; and raw materials (metals). As of June 30, 2004, the Company operated 1,441 stores in all 50 U.S. states, Canada, Puerto Rico, Mexico and Singapore selling to the general public. The Company operates 12 distribution centers located in Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina, Kansas, and in Ontario, Canada. (source: company press release) Why We Like It: We like FAST for its relative weakness. The stock completely ignored the market's rally today. Considering the recent history we see more weakness ahead. The stock broke out to the upside to new highs in early September only to promptly reverse course. After breaking down under support at $60.00 and its simple 50-dma shares of FAST managed to bounce from its simple 100-dma but that rebound failed at the $60 level and its 50-dma. This is typical as broken support usually becomes new resistance. We like the new triple-bottom breakdown sell signal on its P&F chart with a $51 price target. We're willing to speculate that FAST can break technical support at its 200-dma's near $53.00. However, first it needs to break support at $57.00 and its simple 100-dma. We're going to use a TRIGGER at $56.95. Until FAST trades at or below this level we're just spectators. Once triggered we'll use an initial stop at $60.01 and then target a drop to $51-50. Suggested Options: We're going to suggest the October and November puts. Our favorites are the 60 and 55 strikes. BUY PUT OCT 60 FQA-VL OI=363 current ask $3.10 BUY PUT OCT 55 FQA-VK OI=705 current ask $0.95 BUY PUT NOV 60 FQA-WL OI=4184 current ask $4.10 BUY PUT NOV 55 FQA-WK OI=2539 current ask $1.85 Annotated chart: Picked on September xx at $xx.xx <-- see TRIGGER Change since picked: - 0.00 Earnings Date 07/13/04 (confirmed) Average Daily Volume = 676 thousand Chart = --- Par Pharma. Co - PRX - close: 37.80 chg: -2.93 stop: 40.15 Company Description: Par Pharmaceutical Companies, Inc. develops, manufactures and markets generic pharmaceuticals through its principal subsidiary, Par Pharmaceutical, Inc., and its recently acquired subsidiary, Kali Laboratories, Inc. The company is also developing an additional line of branded pharmaceutical products for specialty markets and expects to introduce the first of these in 2005. Through its FineTech subsidiary, Par also develops and utilizes synthetic chemical processes to design and develop intermediate ingredients used in the production of finished products for the pharmaceutical industry. Par currently manufactures, markets or licenses more than 80 prescription drugs. (source: company press release) Why We Like It: This is purely a technical breakdown play. A month ago we were watching PRX because of its breakout over resistance at the $40.00 mark. Yet once it broke out it was never able to mount much of a rally and traded sideways for weeks. Now the stock has broken down through round-number, psychological support at $40.00 and its simple 40, 50 and 100-dma's. Furthermore the breakdown came on almost four times the normal volume. That's pretty bearish! We normally don't like to chase a stock that's made a big move like this. PRX dropped more than 7 percent today. There are multiple reasons but one of them is that the options tend to get inflated. If PRX offers a small bounce back to $39.00 we'd take it as a better entry point but it looks like we'll have to enter here as the intraday chart looks pretty nasty. There is potential support near $35.00 but we suspect that PRX can hit its lows near $32.50. Suggested Options: We're going to suggest the October and November puts. Our favorites are the 40s and 35s. BUY PUT OCT 40 PRX-VH OI=1250 current ask $3.10 BUY PUT OCT 35 PRX-VG OI= 142 current ask $0.75 BUY PUT NOV 40 PRX-WH OI= 744 current ask $4.10 BUY PUT NOV 35 PRX-WG OI=2164 current ask $1.60 Annotated chart: Picked on September 21 at $37.80 Change since picked: - 0.00 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 743 thousand Chart = ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 09-21-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: A Big Radar Screen Spreads & Straddles: Fed Comments Spur Rally! Premium Selling Plays: Naked Puts & Calls ********** WATCH LIST ********** A Big Radar Screen ___________________________________________________________________ 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. ___________________________________________________________________ Schlumberger Ltd - SLB - close: 66.35 change: +1.16 WHAT TO WATCH: We strongly considered adding SLB to the play list tonight as a call. The strength in the oil and oil service sectors is very tempting. However, we chose to wait and see if there is any profit taking in the oil group tomorrow. We would watch for a breakout over resistance at $66.50-66.75 in shares of SLB before considering new bullish positions. The P&F chart is bullish and points to an $81 price target. Chart= --- Nike Inc - NKE - close: 79.35 change: +1.35 WHAT TO WATCH: We mentioned NKE and its bullish breakout in the MarketMonitor this afternoon. The stock has broken out over resistance at $78.00 to hit new all-time highs. Volume has been pretty strong the last couple of sessions. The move has extended its P&F chart buy signal and its target is now at $100. We would watch for a dip back to $78 and consider a bounce or consider longs on a breakout over $80.00. Chart= --- Pulte Homes Inc - PHM - close: 63.70 change: +1.90 WHAT TO WATCH: The DJUSHB home construction index was the best performing sector today up more than four percent. The move was fueled by strong earnings from KBH and LEN last night and the strong housing starts this morning. PHM managed a three percent rally and broke out over minor resistance at $63.00 to hit new highs. Volume was very strong on today's gain. Aggressive players may want to consider bullish positions now and target the $70 level. Our only concern is that PHM is so extended. The stock has been rising for about nine weeks straight. The P&F chart is bullish and points to an $87 target. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- COP $82.18 +2.72 - We haven't played any of the super big oil companies recently but we considered adding COP with today's breakout over $80.00. MCO $72.32 +1.01 - MCO has been a consistent climber the last several weeks and the recent breakout and follow through over $70-71 looks tempting. BSC $90.09 +2.35 - BSC rose strongly as rivals GS and LEH turned in positive earnings numbers today. BSC gets its chance tomorrow with earnings before the bell. We're expecting more good news. CME $151.17 +5.08 - Gosh, now we're wishing we'd taken that bounce from the $140 level a few days ago. This is a new all- time high. EXM $59.00 +10.50 - It doesn't have options and the latest short interest data says there is virtually zero short interest. It still looks like a short squeeze to us. Remember, nothing goes up forever but wow look at the volume. BDK $74.65 +1.40 - BDK might be an aggressive buy if it breaks out over $75.00. ************************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 ************************************************************** ******************* SPREADS & STRADDLES ******************* Fed Comments Spur Rally! By Ray Cummins Stocks soared Tuesday afternoon in the wake of bullish comments from the Federal Reserve. In its third interest-rate hike this year, the FOMC raised the cost of fed funds to 1.75%, saying that rate hikes can proceed at a "measured" pace. The FOMC noted that the economy appears to have "regained some traction" and investors seem confident of a recovery when energy prices decline. The Dow Industrial Average ended up 40 points at 10,244 on strength in ExxonMobil (NYSE:XOM) and JP Morgan Chase (NYSE:JPM). The NASDAQ Composite Index closed 13 points higher at 1,921, despite some negative profit reports from the technology sector. The S&P 500 rose 7 points to 1,129 amid a rally in brokerage shares, which climbed on better-than-expected earnings from Goldman Sachs (NYSE:GS) and Lehman Brothers (NYSE:LEH). In broader market, advancers led decliners by 2 to 1 on the New York Stock Exchange and by 3 to 2 on the NASDAQ. Big Board volume was about 1.32 billion shares, while some 1.51 billion shares traded on the technology exchange. Treasury prices were trading slightly higher in the wake of the Federal Reserve's rate adjustment. The benchmark 10-year note rose 3/32 to 101 19/32, with its yield at 4.05%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 09/19/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 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 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) is on the "watch" list. DEBIT STRADDLES No Open Positions ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ GDT - Guidant $64.02 *** On The Rebound! *** Guidant Corporation (NASDAQ:GDT) provides therapeutic medical solutions of distinctive value for customers, patients and healthcare systems worldwide. The company develops, makes and markets implantable defibrillator systems, implantable pacemaker systems, coronary stent systems, angioplasty systems and cardiac surgery systems. Guidant's lifesaving medical technologies are designed to extend the lives and improve the quality of life of millions of patients suffering from life-threatening cardiac and vascular disease. Its products treat the heart, managing its rhythms, clearing its arteries and permitting less-invasive surgeries. GDT - Guidant $64.02 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-55.00 GDT-VK OI=4585 ASK=$0.40 SELL PUT OCT-60.00 GDT-VL OI=3324 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$59.35 __________________________________________________________________ PHM - Pulte Homes $63.70 *** Sector Rally! *** Pulte Homes (NYSE:PHM) is a holding company whose subsidiaries engage in the homebuilding and financial services businesses. The Homebuilding segment consists of two major business units: Domestic Homebuilding and International Homebuilding. Domestic Homebuilding, the company's core business, is engaged in the acquisition and development of land principally for residential purposes within the United States, and also the construction of housing on such land targeted for the first-time, first and second move-up and active adult home buyers. PHM - Pulte Homes $63.70 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-55.00 PHM-VK OI=3496 ASK=$0.30 SELL PUT OCT-60.00 PHM-VL OI=8490 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$59.40 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 $72.00 *** A Second Try! *** 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. Earnings are due 10/5/04. APOL - Apollo Group $72.00 PLAY (conservative - bearish/credit spread): BUY CALL OCT-85.00 OAQ-JQ OI=1222 ASK=$0.25 SELL CALL OCT-80.00 OAQ-JP OI=2505 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$80.45 __________________________________________________________________ PRX - Par Pharmaceutical $37.80 *** Next Leg Down? *** Par Pharmaceutical (NYSE:PRX) is in the business of manufacturing and distributing generic drugs in the United States. The company also develops and manufactures, in small quantities, complex synthetic-active pharmaceutical ingredients through its wholly owned subsidiary, FineTech Laboratories, based in Haifa, Israel. It also sells a limited number of mature-brand name drugs through an agreement between Par and Bristol-Myers Squibb Company. PRX - Par Pharmaceutical $37.80 PLAY (less conservative - bearish/credit spread): BUY CALL OCT-45.00 PRX-JI OI=393 ASK=$0.15 SELL CALL OCT-40.00 PRX-JH OI=62 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$40.60 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ***************************************** 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 09/19/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 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% NAKED CALLS Stock Strike Strike Break Current Gain Max Simple Symbol Month Price Even Price (Loss) Yield Yield 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) is at a key moment (technically) and remains on the "watch" list. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW NAKED-PUT CANDIDATES Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield GNSS 13.43 OCT 12.50 QFE-VV 0.30 257 12.20 24 3.1% 8.0% FHRX 19.65 OCT 17.50 FUF-VW 0.30 312 17.20 24 2.2% 6.3% COGN 34.56 OCT 32.50 CRQ-VZ 0.60 590 31.90 24 2.4% 6.2% PSFT 19.36 OCT 17.50 PQO-VW 0.30 40K+ 17.20 24 2.2% 6.1% YHOO 33.26 OCT 30.00 YHQ-VF 0.50 16K+ 29.50 24 2.1% 6.0% ATYT 16.47 OCT 15.00 QFY-VC 0.25 695 14.75 24 2.1% 5.9% NAVR 16.37 OCT 15.00 QIG-VC 0.25 117 14.75 24 2.1% 5.8% LF 21.90 OCT 20.00 LF-VD 0.25 259 19.75 24 1.6% 4.5% 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. _________________________________________________________________ GNSS - Genesis Microchip $13.43 *** Bottom-Fishing! *** Genesis Microchip (NASDAQ:GNSS) designs, develops and markets integrated circuits called display controllers that receive and process digital video and graphic images for viewing on a flat-panel display. The company's display controllers are located inside a flat-panel display device such as a computer monitor or television. The company is targeting flat-panel computer monitor, liquid crystal display television and digital television through subsidiaries and offices in the U.S., Canada, China, India, Japan, South Korea and Taiwan. GNSS - Genesis Microchip $13.43 OCT 12.50 QFE-VV LB=0.30 OI=257 CB=12.20 DE=24 TY=3.1% MY=8.0% _________________________________________________________________ FHRX - First Horizon $19.65 *** Uptrend Intact! *** First Horizon Pharmaceutical (NASDAQ:FHRX) is a specialty drug company that markets and sells brand name prescription products. The company markets and sells 14 primary products, six of which are actively promoted and were accounted for approximately 92% of its total sales in 2003. Its key drug products are Sular, Nitrolingual, the Prenate line, the Tanafed line, the Robinul line and Ponstel. Most of these products treat recurring or chronic conditions or disorders, which results in repeated use over an extended period of time. FHRX - First Horizon $19.65 OCT 17.50 FUF-VW LB=0.30 OI=312 CB=17.20 DE=24 TY=2.2% MY=6.3% _________________________________________________________________ COGN - Cognos $34.56 *** Merger/Takeover Target? *** Cognos (NASDAQ:COGN) is a provider of business intelligence software. The company's solution helps improve business performance by enabling planned performance management, supported by effective decision-making at all levels of the organization through the consistent reporting and analysis of data derived from various sources. Using its software, customers can plan and manage the performance of all aspects of their business and gain valuable insights to help improve operational effectiveness, enhance customer satisfaction and accelerate corporate response times. Earnings are due 9/22/04. COGN - Cognos $34.56 OCT 32.50 CRQ-VZ LB=0.60 OI=590 CB=31.90 DE=24 TY=2.4% MY=6.2% _________________________________________________________________ PSFT - PeopleSoft $19.36 *** Oracle Buyout Speculation! *** PeopleSoft (NASDAQ:PSFT) designs, develops, sells and supports enterprise application software products for use in large and medium-sized organizations worldwide. The company provides enterprise application software for customer relationship management, human capital management, financial management and supply chain management, each with a range of industry-specific features and functions. Within each of its application suites, it offers embedded analytics and portal applications. The firm also offers a suite of products for application integration and analytic capability. PSFT - PeopleSoft $19.36 OCT 17.50 PQO-VW LB=0.30 OI=40675 CB=17.20 DE=24 TY=2.2% MY=6.1% _________________________________________________________________ YHOO - Yahoo! $33.26 *** Internet Retail Giant! *** Yahoo! (NASDAQ:YHOO) is a worldwide Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 200 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the firm also provides many business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. YHOO - Yahoo! $33.26 OCT 30.00 YHQ-VF LB=0.50 OI=16904 CB=29.50 DE=24 TY=2.1% MY=6.0% _________________________________________________________________ ATYT - ATI Technologies $16.47 *** In A Trading Range! *** ATI Technologies (NASDAQ:ATYT) supplies graphics processing products and technology for desktop and notebook personal computers, consumer electronic devices, digital televisions (including set-top boxes) and video game consoles. The firm's main product lines, visual and graphics processors, increase the speed and complexity of the images that can be displayed on PC monitors and improve resolution and color definition. ATYT - ATI Technologies $16.47 OCT 15.00 QFY-VC LB=0.25 OI=695 CB=14.75 DE=24 TY=2.1% MY=5.9% _________________________________________________________________ NAVR - Navarre $16.37 *** New 2004 High! *** Navarre Corporation (NASDAQ:NAVR) publishes and distributes a range of home entertainment and multimedia products, including personal computer software, audio and video titles and various interactive games. The company's business is divided into two business segments: Distribution, which it operates solely, and Publishing, which is operated through Encore Software, and BCI Eclipse, LLC entities. NAVR - Navarre $16.37 OCT 15.00 QIG-VC LB=0.25 OI=117 CB=14.75 DE=24 TY=2.1% MY=5.8% _________________________________________________________________ LF - LeapFrog Enterprises $21.90 *** On The Rebound! *** LeapFrog Enterprises (NYSE:LF) is a designer, developer and marketer of technology-based educational products and related proprietary content. LeapFrog designs its products to help infants and toddlers through high school students learn age and skill-appropriate subject matter, including phonics, reading, writing, math, spelling, science, geography, history and music. LeapFrog's product line includes learning platforms, which are portable, affordable hardware devices; educational software-based content including interactive books designed for use with LeapFrog's learning platforms, and stand-alone educational products. LF - LeapFrog Enterprises $21.90 OCT 20.00 LF-VD LB=0.25 OI=259 CB=19.75 DE=24 TY=1.6% MY=4.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BDY - Bradley Pharmaceuticals $20.53 *** Sell-Off Underway! *** Bradley Pharmaceuticals (NASDAQ:BDY) is a pharmaceutical firm that acquires, develops and sells over-the-counter products and prescription drugs in select markets. The company's subsidiary, Doak Dermatologics, promotes its core branded dermatologic and podiatric products including Bradley Pharmaceuticals' Carmol40, Lidamantle, Rosula and Zoderm product lines, to dermatologists and podiatrists. Its Kenwood Therapeutics division promotes the company's core branded gastrointestinal products including Anamantle HC, Pamine, Pamine Forte and Flora-Q, primarily to gastroenterologists and colon and rectal surgeons, and, to a lesser extent, it also markets nutritional supplements and respiratory products. BDY - Bradley Pharmaceuticals $20.53 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 22.5 BDY-JX 577 0.40 22.90 7.6% 1.7% _________________________________________________________________ PLMO - palmOne $31.60 *** Another Trend Reversal? *** palmOne (NASDAQ:PLMO), formerly Palm, develops, designs and sells Palm-branded, hand-held devices, accessories and the operating system Palm OS. The company was historically organized into two operating segments: the Solutions Group and PalmSource. Now the Solutions Group develops and markets hand-held devices and other accessories to provide the user with a simple, elegant and useful productivity tool. PalmSource developed and licensed the Palm OS and related software, which is referred to as the Palm platform. The Palm platform is the foundation for Palm devices, as well as for devices manufactured by other third-party licensees. PLMO - palmOne $31.60 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 35 UPY-JG 5540 0.90 35.90 11.2% 2.5% _________________________________________________________________ USPI - United Surgical Partners $33.79 ** Downtrend Resumes! ** United Surgical Partners (NASDAQ:USPI) owns and operates a number of short-stay surgical facilities including surgery centers and private surgical hospitals in the United States, Spain and the United Kingdom. The firm focuses on providing surgical facilities that meet the combined needs of patients, physicians and payors better than hospital-based and other outpatient surgical facilities. USPI acquires and develops its facilities through the formation of relationships with physicians and healthcare systems to better access and serve the communities in its markets. USPI - United Surgical Partners $33.79 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 35 QPJ-JG 2 0.65 35.65 6.4% 1.8% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. 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