The Option Investor Newsletter Sunday 09-26-2004 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: October Approaching Futures Wrap: See Note Index Trader Wrap: OIL SHOCKS AGAIN Editor's Plays: Your Fired! Market Sentiment: End of the Quarter Ask the Analyst: Volume doesn't add up. Shareholder dilution? 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 9-24 WE 9-17 WE 9-10 WE 9-03 DOW 10047.24 -237.22 10284 - 28.61 10313 + 52.87 + 65.19 Nasdaq 1879.48 - 30.61 1910.09 + 15.78 1894.31 + 49.83 - 17.61 S&P-100 534.37 - 11.43 545.80 + 2.45 546.25 + 5.19 + 0.18 S&P-500 1110.11 - 18.47 1128.58 + 4.66 1123.92 + 10.29 + 5.86 W5000 10838.30 -155.02 10993 + 57.00 10936 +115.44 + 65.86 SOX 382.55 - 5.95 388.50 + 4.89 383.61 + 25.77 - 24.50 RUT 565.97 - 7.20 573.17 + 3.26 569.91 + 13.67 + 4.57 TRAN 3202.11 - 55.28 3257.39 + 24.00 3224.38 + 82.53 + 33.05 VXO 14.14 13.55 13.49 13.91 VXN 21.10 20.13 19.56 21.06 ****************************************************************** October Approaching by Jim Brown Tough week for the markets but not as bad as it could have been. The Dow lost -2.3% and was the weakest link. Techs had one horrible day but held their ground for the rest of the week losing only -1.5%. The key was not how much the indexes lost but where they closed. All closed very near the lows for the week as September draws to a close with no major market events. Will October be as kind? Dow Chart Nasdaq Chart SPX Chart Crude Oil Chart The markets attempted an oversold relief rally on Friday but conflicting economics and higher oil prices spoiled the rebound. The Durable Goods Orders headline number fell -0.5% and much worse than the +0.1% gain expected. However, don't believe all you see. The headline number was skewed significantly by a sharp drop in aircraft orders. Ex-aircraft, which is a highly volatile sector, the growth in durable goods orders was +2.3%. This is a very strong gain and was led by strong numbers in critical sectors. Computers saw a +4.1% jump and communications equipment rose +6.8%. Overall shipments are up +13.4% year over year and that represents the strongest sustained growth in the last ten years. The May/June dip has been erased and we appear to have growing order strength. The Existing Home Sales fell slightly to 6.54 million units and this was inline with estimates. Analysts had expected this drop due to the higher mortgage rates in May/June, which created a shopping lull. With rates making a new attempt at five month lows we could see a fall bounce but the major buying trend has passed. Analysts want the levels to remain firm but nobody is expecting a new high any time soon. The above economics were far less important to traders on Friday than the rising price of oil. Crude closed at another new high at $48.80 despite announcement of oil draw downs from the SPR. The coming hurricane was cited as a new event risk as well as new pipeline sabotage in Iraq. This may be the stated reasons for the continued push higher but we know it is really event risk speculation in front of the election. Bloomberg cited a survey showing a record number of analysts (59) expected oil to hit $50 next week. The real question is not will we hit it but what will happen when we do? Is this going to be some kind of electric fence that will repel prices back to $40 almost instantly? I seriously doubt it. I do believe we will see some profit taking but the key is really the conditions. Just hitting a $50 price does not change the hurricane status, IRAQ terror attacks, election risk or long term global demand. In the short term passing on $50 oil in the form of higher gas prices will slow consumer demand but a month from now that negativity will ease as we become immune to $2 gas and the demand will pick up again. Several brokers are suggesting that oil stocks have reached extreme valuation levels and traders should lighten up. I miss the reasoning here. Yes oil stocks are high and some are nearly vertical but until the production/demand equation reverses there is still long term upside. Oil stocks tend to trade based on the price of the underlying commodity and that should not surprise anyone. I definitely think we will see some price dips ahead once the election is over but they will only be temporary. I view them as a buying opportunity for the next leg up. Ed Hyman the chairman of ISI Group, named top economist for 24 consecutive years, said oil was the only sector he was considering at present. His forecast for 2005 oil prices is $45 to $55. He claims the emerging economies currently are expanding rapidly and are very energy intensive. The top seven expanding countries are approaching a combined GDP of $7 trillion and together are about equal to the U.S. but growing much more rapidly at nearly a +13% pace. Thus a continued increase in demand for oil. He also predicted the risk of deflation would increase before year end. Hyman also compared 2004 to 1994 as many others have also done. 1993/2003 were the beginning years of a recovery with a strong move higher ending in January. In 1994 the Fed raised rates six times for a whopping +2.50% jump in rates to 5.50% at year-end. Two of the increases were 50 points and the last one was 75 points. The markets refused to die although they did not move higher. In 1995 the economy caught fire and the market exploded. While Ed thinks the 93/03 94/04 comparison is very similar he does not think 2005 will follow the same pattern. His concern was due to the price of oil depressing the economy/market. With his expected price of oil at $45-$55 his economic projections are weak. At $55 oil he felt the GDP would run at only a +2% growth rate. At $45 oil he said a +4% growth rate was possible. This puts the focus right back on oil prices as the most critical piece of the 2005 picture. Remember Ed was voted the economist of the year for 24 consecutive years. We should assume he knows what he is doing. Dow comparison chart 1993-1995 to 2003-2005 The major indexes changed sides on Friday with the Dow closing in positive territory and the Nasdaq losing ground. No surprise here with the Dow in oversold status from the -2.3% drop for the week. We should have seen some profit taking by the shorts. The Dow has been trending down since its recent 10363 high on Sept-7th and closed at 10046 on Friday. This is only 15 points above its low for the week and represents a low level of confidence that next week will be any better. Given the -320 point drop in the last two weeks you would have expected the bulls to put up a better fight this close to 10000. The challenge remains fear of earnings warnings from Dow components with next week the last week in the quarter. The Nasdaq has dropped -2.3% in the last three days from the 1925 high set on the 21st. Friday's close at 1880 was the lowest close since Sept-10th and the low for the week. This definitely does not bode well for next week. The Nasdaq has seen four rallies of +9% or more since December and each was followed by a lower low. This appears to me to be the impact of earnings deceleration in front of the election. Funds are using each rally in the longer term decline to lighten up from the gains made in 2003. The 1880 close today represents the same support levels we saw in Oct/Nov of 2003. Nasdaq 1750-1785 represents very strong support from last September and from the August 04 dip. If we are going to see an October dip event that would be my worst case target. The SOX has been a rock all week but on Friday it began to crumble. The SOX lost traction at 395 and dropped -2.85% back to the 380 support level we saw last week. Much of that loss came in a sell program that hit at 11:20 and knocked off -12 points in one swift drop. Should that 380 support level break it could be a quick return to 350. SOX Chart Next week is the end of the quarter and funds may need to square positions and possibly mark up some stocks but September is not known as a big month for this trend. Funds want to be in cash for the normal October dip and they tend to not shuffle the portfolio much at the end of September. October is the typical portfolio reshuffle month and investors typically dig a little deeper and fire off an extra check to the funds in anticipation of the October dip/rebound. In this market managers are probably losing sleep and hair trying to make the right decision for the next three weeks. On Friday the airwaves were full of speculation on bonds. Rumors abound of several hedge funds that bet on interest rates moving higher once the Fed began its current cycle. As you know they have done just the opposite and are currently just above five month lows. Those that bet rates will rise are in serious pain and the rumor is the current bond rally has been fueled by funds covering shorts. Must be tough to know rates will eventually rise because the Fed will guarantee it but not have enough money or guts to ride the trade to conclusion. I know from experience how painful that is on similar stock trades but with billions at stake in bonds and the outcome guaranteed it must be extremely frustrating. Word to the wise, if you have not refinanced to take advantage of the low rates now is the time. The earnings cycle is nearly upon us. Two more weeks and Alcoa will kick off the reporting cycle on Oct-7th. This makes the coming week an active week for warnings as time before earnings expires. As of Friday we have seen 612 warnings for Q3 which is nearly twice the 356 for this time last year. Negative guidance is running 3:1 over positive guidance. 143 companies have warned in the last 17 days of trading. 54 of those have used the hurricane excuse. That should increase as it gives companies a free pass for some investors as a random event rather than a company problem. The current storm heading towards the east coast will only intensify this trend if it does as expected and moves up the coast line instead of moving inland. This will allow it to retain its strength and inconvenience the maximum number of people. The tech sector has experienced the most warnings by far. 90% of the semiconductor sector has warned according to Thompson Financial. The major reason is a sudden drop in orders across the board that impacted almost every sub sector of the chip market. This is the result of a global IT slow down and while everybody is expecting it to pickup in 2005 there is currently no confirmation. The next 30-45 days is the order window for early 2005 and we should have that guidance soon. Thompson cited the various warnings this week and noted the outlook for Q3 earnings growth fell -0.5% to +14.3% from +14.8% the prior week. This is still strong growth historically but investors have grown accustomed to +20% to +25% or even more over the last year. The tech sector has seen outflows from tech funds for 30 of the last 31 weeks. When evaluating the S&P earnings growth at +14.3% you need to realize that the energy sector is a major part of the S&P. Currently energy makes up about 8% of the S&P and earnings for the S&P energy stocks are up +33.6% for the year. Remember this when you see the talking heads continually listing the S&P estimates. Without energy it would be significantly lower and probably in single digits. Next week it starts out slow economically but picks up beginning with Wednesday's GDP and a heavy schedule on Thursday and Friday. Earnings warnings will be the focus beginning on Monday and of course oil at $50 will attract attention. The terrorist countdown to the election stands at 37 days and counting. The Dow at Friday's 10040 close is nearing strong support at 9900 and a likely stopping point for any further weakness. The Nasdaq has risk to 1755-1785 and that would be my worst-case range unless we see a serious external event like an attack. It is the end of the quarter so volatility should increase. Other than that it should be a normal market week with long periods of boredom interspersed with periods of panic. 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 ******************** OIL SHOCKS AGAIN By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – With the strong rebound in oil prices, the manor indices failed at or near technical resistance areas – surprise! - right at strong down trendlines in the case the S&P 500 (SPX) and the Dow 30 (INDU) and both at the trendline and the 200-day moving average in the case of the S&P 100 (OEX). Hey!, a good market for Index option traders as the market continues to be fairly "technical" – a common situation with uncertainty in the fundamental economic/earnings outlook. The definition of a downtrend is a series of lower rally peaks and we got that, time and time again since the February top – well, January in the case of the Nasdaq Composite (COMP). After a week of being under pressure, the only charts that still look bullish is nearby (November) oil futures and XAU, the Gold & Silver Index. (The Oil Stock Index, OIX, may be at or near a peak however.) The Dow Transportation average (TRAN) was a minor bright spot, but its rally has failed as it dropped back under its prior peak. Bellwethers GE and Microsoft (MSFT) have made double tops and Intel (INTC) and Cisco (CSCO) continue in weak, bearish patterns. The Russell Index (RUT) reversed at its 200- day moving average. I would like to believe that current monetary and fiscal policies will continue to create lift for the economy, but the market doesn't seem to be predicting that, at least for the next few months. THE NUMBERS – The S&P 500 index (SPX) rebounded a bit -1.7 points to 1,110, but fell 1.6% for the week, which broke a 6-week streak of higher weekly closes. The Dow 30 (INDU) gained 8.3 points to 10,047, but for the week decline 2.3%. Dow components Hewlett-Packard (HPQ) and Altria (MO) declined more than 1%. The Nasdaq Composite (COMP) was off by 6.95 to close at 1,879.48. The key semiconductor sector (SOX), which couldn't in the past week hold above the key 400 area for any duration per what was suggested by the charts in my work, put a damper on tech as revenue warnings from Philips Electronics and Cirrus Logic came in. For the week, COMP fell 1.6%. FRIDAY'S TRADING ACTIVITY – Stocks were down and down on the week - the U.S. Federal Fed put out the word of course that it was on track with further interest rate hikes when it announced a quarter-point rise in the Fed Funds rate to 1.75% earlier in the week. This was expected, but may have created a bit of negative backdrop nevertheless as some had been thinking that less than robust economic activity of late might cause them to hold off a while. Time waits for no man, woman or the Fed! Hitting the market like another battering by yet another hurricane, was another record high for oil, some profit warnings from household names like Wendy's and Colgate, and some negative revenue and earnings forecasts from semiconductor group. Two key economic reports gave mixed signals on the U.S. economy. The National Association of Realtors reported that U.S. existing home sales fell a much larger-than-expected 2.7% for August - to 6.54 million units on a seasonally adjusted annual basis. The association said the decline was due to higher mortgage rates. Duh! The latest durable goods report, contained some bullish news. Total orders for new durable goods fell a larger-than-expected 0.5 percent in August, held back by a 42.8% drop in orders for civilian airplanes. But, excluding the 6.8% drop in orders for transportation goods, orders actually rose 2.3%, the biggest increase since March. OTHER MARKETS – Oil prices closed out the week at a record - crude for November delivery rose 42 cents to $48.88 a barrel. In the past week, oil futures rose $3.29, or 7.2%. - the highest closing level since August 19th's close at $48.70. However, nearby futures prices are still below the intraday high of $49.40 set Aug. 20 News of "temporary small loans" to refineries from the U.S. Strategic Petroleum Reserve didn't seem to sway the market as it’s such a small amount. The Energy Department said late Thursday that it was prepared to make available a limited quantity of crude oil, to ease short-term supply concerns. This couldn't have anything to do with the upcoming election – nah! U.S. Treasury bonds ended slightly lower, given the market concerns as to whether the Fed, as I said, would pause in its path and past announced intent to do some further tightening. The 10-year note was down 3/32 at 101 25/32, yielding 4.03%, percent versus 4.02% on Thursday. In the Forex markets, the dollar stabilized just above a 1-month low against the euro, as the latest economic data left currency traders wondering about the course of future interest-rate hikes. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: The reversal right at a high that forms the 3rd point of a down trendline, strongly suggests a reversal of the short-term up trend and puts the S&P 500 (SPX) back in its intermediate trend, which is down. Last week I thought SPX might break out above this line and perhaps challenge the prior rally high and the best I could see it doing. Not even that. I wouldn't say this is a bear market necessarily, but the trend seems clearly down when the rally peaks are continuously hitting lower highs. And, not for nothing have I been writing the last three times in my weekly Trader's Corner on trendlines. Last week, at – http://www.OptionInvestor.com/traderscorner/tc_092304_1.asp Hey, and all you need is a straight edge and a printed out chart. My mentor used to use the cocktail napkin edges or matchbooks if we were out and about in New York and had a chart-book in the briefcase. The chart pattern is bearish, especially with the downside penetration of the 200-day moving average. Buy puts on any rallies back to the 1120-1125 area. Least likely in the coming week would be a quick rebound to resistance at 1130. What was support, at the green arrow, should be the key resistance area. I had figured some support at 1110, then best support at 1100 – then more major support at 1080. The hourly chart below also helps define these areas. I thought that my sentiment indicator would need to show a more bullish extreme before the market would top out. Instead, we had 1 recent day where sentiment got overly bearish – almost at turn around levels but patterns and other indicators don't suggest that the trend will turn back up. The 14-day RSI diverged from price action by not also going to a new high, giving an ideal sell signal once there was not trendline breakout. S&P 500 Index (SPX) – Hourly: There are often things that show up in better detail on intraday charts – I almost always watch the hourly charts. Use of the hourly chart shows the (downside) penetration of the up trendline or lower end of the uptrend channel. After this happened, you'll notice the rebound back to, but not above, this line – what was support has "become" resistance. As the RSI and stochastic model trended lower, the final rally to the 1130 area to make a triple hourly top was a bearish trade indication highlighting the area to buy index puts. S&P 100 Index (OEX) – Daily chart: The S&P 100, like the Nas 100 (NDX) has had the best chart definitions due to the narrowness of the stocks that buyers are interested in, in a select market. You can see this in the trendline which has several points in the cluster of recent highs that touch the area of the down trendline. This gives some more confidence to pulling that trade trigger. The break of the 21-day moving average I find a good secondary indicator that momentum has shifted to the downside – that and a falling momentum indicator like the RSI (or Stochastic). If waiting for a typical "overbought" reading, that has not been happening as much (i.e., overbought extremes) on rallies – which again shows that the buying power has just not been there in the rallies. Option traders have been noticing the low VIX (CBOE Volatility Index) readings and have not been enthusiastic buyers of calls, or stocks either. Support and resistance areas can be better seen on the hourly chart, which is next – S&P 100 Index (OEX) – Hourly: Also seen by use of the OEX hourly chart was the Head & Shoulder's pattern that developed. As I note in my book, some research suggests that the Head and Shoulder formation has good predictive ability for reversals, from short-term to long. In this case, the downside objective implied by the distance from the top of the "head" to the "neckline" has been met already as the index fell to the area of a prior low. Look for resistance and selling pressure coming in on any rebound to the aforementioned neckline at the prior lows there – around 542. 544 is resistance implied by an hourly down trendline (not shown). 530 is the better support I think as the pattern formed by the cluster of recent lows looks to me like it will be penetrated and a more short-term oversold situation shaping up before there is much of a rally attempt. A note on the rally that developed after the highest high that formed the hypothetical "head" – the middle top: There is not always just one rally to form a left or right "shoulder" as there can be 2-3. The key to whether it’s a top pattern is that prices to do not carry to higher than the prior peak. A sure tip off then to buy puts and providing a good indication to not even wait for the neckline break. Clear as mud? E-mail with questions if interested. Dow 30 (INDU) – Hourly chart: Not a lot to say about the Dow 30 (INDU), not already said about the S&P indices. The daily Dow chart has a clear cut down trendline (not shown). Use of the hourly chart is good to highlight support and resistance area – The inability to achieve a decisive upside penetration of the top end of its prior range in the 10,350 area, was the tip off that the Dow could not move higher. That and the break of the down trendline shown at the green arrow on the hourly chart. 10,300 at the prior up swing high is the key resistance, but the trendline intersects lower than that and may turn back any rally attempts a bit lower than this; e.g., 10,270 and lower as the week goes on. 10,000 is potential support implied by it representing a 62% retracement of the last rally. The chart pattern looks bearish (like a bear flag or consolidation before another downswing) and suggests even a possible downside objective to the 9900 area. This much of a further fall, before another rally sets us, will likely depend on whether oil shoots still higher in the week coming up. Nasdaq Composite (COMP) Index – Daily: The Nas Composite (COMP) rally failed and reversed at my upper trading envelope line. The approximate subsequent double top and failure of RSI to confirm the new closing high was the tip off for the fall that followed – that the market would be vulnerable to some shock, some "event" that would drive it down. Failure to stay above the prior high at 1896 and the probability that COMP will break under the 21-day moving average suggests that the Composite may be heading back down to the 1825 area at a minimum – maybe, eventually back to 1800. A close over 1900 is needed to get things looking like bullish potential again. Nasdaq 100 (NDX) Index – Hourly: When a rally can't exceed more than a Fibonacci 62 t0 66% retracement of the prior down swing, look out for a reversal and that is just what happened – the fact that this area was also right at the 200-day moving average gave me more conviction to buy puts, figuring I would exit on any close over this key level. I like trades where there are a few technical suggestions of resistance and the risk to find out if you're right is low – the risk is lower too given the nature of the technicals (include here the RSI in the overbought area and by the economic and political backdrop; e.g., oil was shooting back up again and it seemed unlikely that peace was going to break out in the Mid East. I suggested last week that 1420 as a place to buy NDX puts looked too low, but the 1440 area looked right – I think the intraday high was 1140.8. 1380 looks like a next potential support area, 1417-1420 like near resistance now. Lower and key support I figure at 1350 currently – I would be happy to take my (put) profits and run if 1350-1355 was seen. The first rally to the recent top area initially put the RSI at a new high, "confirming" price action. The second high a few days later was not accompanied by a similar new high in RSI – hey, it rhymes! Given the other signs of a top, this slight or scant divergence was a further clue to take trades playing the downside. With index options I try to pick maximum extensions of rallies to buy against technical resistance, rather than to go in when support areas are broken, which tends to cause premiums to spike up. This style makes for a better risk to reward situation, assuming you are skilled at applying and using technical analysis. There is no one size fits all in trading options however – thank goodness! Nasdaq 100 tracking Stock (QQQ) Hourly chart: And, of course, speaking of buying NDX puts, if I feel like a still lower risk way to play the Nasdaq 100, I can short its tracking stock, QQQ – this was suggested when the hourly up trendline was penetrated or on the return rally to this previously broken (up) trendline, at the first red (resistance) arrow. 35.5 is near technical resistance, around 34.1 looks to be the closest support that can be guessed at from the chart. For those short at 35 or above, I suggesting risking to 35.7 with a buy stop, taking as an objective 33.80. At least with short the stock I don't have to worry about how soon this happens unlike the constant time calculations necessary to keep in mind for (long) options. Occasionally an optimal trade sets up when both the short and longer-term Stochastic indicators both get up, or down, to extremes simultaneously. You can look back at a few such good trades – these two setting (for "length') on the hourly chart is worth watching. 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 ************** Your Fired! That is what Martha Stewart investors should be saying to Martha after the "me first" deals she inked just before heading off to the slammer. First her new contract was announced on Friday and she will receive $900,000 per year for the next five years. Plus a bonus each year of not less than 55% of her salary and up to as much as 150% depending on the whim of the compensation committee. Stewart got a signing bonus of $200,000 when the agreement went into effect. Think that is bad? You have not seen anything yet. For each show she does in the future she will receive a minimum of $500,000 (PER SHOW) or two-thirds of the "talent" fees due to the company for each show. She gets whichever is greater. Previously her show appearances were part of her base salary plus a few perks. She will also get an expense allowance of $100,000 per year. It gets better. Because Stewart will be confined to her house for five months after she gets out of prison she required the company to pay her $500,000 per year for any filming done at her house. That amount increases to $750,000 for the 2nd and 3rd year of the contract. Stewarts new title is Chief Editorial and Media Director and she will have complete control of all TV, radio and print publications. Mark Burnett, the king of reality TV, signed a deal with Stewart to do a reality TV show when she gets out of prison. Reportedly Burnett got $2.5 million in warrants in MSO that jumped +$5 million on the announcement. Stewart, NOT MSO, will reportedly get several million for the deal. Now, I may be wrong but since Martha caused all the heartache and losses for stockholders of MSO doesn't it seem like some of this "compensation" is over the top even for Martha? Shouldn't the stockholders received some benefit of the TV deal. Shouldn't Martha quit gouging the MSO stockholders with her outrageous salary demands? Unbelievably the stock went through the roof on Thursday when all this was announced. Shorts and there are a bunch of them got killed. That was lucky for us. Standard and Poors downgraded the stock to AVOID on the news and said it was over valued for a stock that would lose, not earn, -$1.27 per year for the next two years. The spike over $19 was short lived and the drop back to $17 once the widespread criticism appeared was very quick. There is also widespread doubt the Burnett deal will ever happen because of the opposite personalities involved. I am recommending a March $15 put MSO-OC currently at $2.00. I believe once she goes behind bars and the public will not see her face on TV on a daily basis the news will stop and reality will return. I would target a return to the $12 range by year end. Buy March $15 Put MSO-OC currently $2.00 Stop MSO @ $20.50 MSO Chart ********************** GOOG Put Update $119.91 Monday saw Google bolt out of the gate like a scalded cat to $121.50 and then decline for the next three days. This convinced me the short covering last week was option related and the Monday morning settlement was the last gasp. A broker upgrade to "above average" from "average" did not hurt either. Don't you wish they would standardize those ratings? Maybe Buy, Sell, Hold and Short? On Thursday RBC Capital initiated coverage with a "sector perform" rating and another short squeeze began. That squeeze broke on Friday when it was announced Google may be trying to write its own browser to compete with Netscape and Microsoft. Now that would be a dumb move in my opinion. Seems Google has been hiring software engineers with skills necessary to produce a browser and some that have worked on Explorer and Netscape in the past. The stock quickly dropped from its $124 squeeze high and closed at $119.91. I am beginning to think Google may be another Taser at this point. The general consensus by "conventional investors" is it is vastly over valued. They see every top as an opportunity to short it. However the momentum investors with visions of 1999/2000 all over again take every news item as a reason to buy. Shorts cover, short the top, another news item appears and we repeat. Until this tug of war and artificial inflation stops the volatility will continue. To avoid riding a QCOM style rocket ala 1999 where it went from $40 to $400 in just a few months I am going to put in a stop scenario. If GOOG hits $125 we close the trade and wait. If GOOG falls back to earth we reopen the trade at $120. This protects us from being completely wiped out and keeps us in the game. I believe a drop below $117 will be a death knell and the top will be set. I received many emails from readers who have doubled, tripled or quadrupled down on this play at the higher levels. That is great if it works out as planned but be careful not to over leverage yourself. The more contracts you have the more careful you have to be. Anyone not in the play could be looking at a great entry point but I would want to see the downtick confirm on Monday before jumping on this bobsled. GOOG Chart http://members.OptionInvestor.com/editorplays/edply_082904_1.asp http://members.OptionInvestor.com/editorplays/edply_090504_1.asp ********************** Terrorist Insurance Update Marathon $40.52 The Marathon call play from last Sunday has exploded out of the gate. We entered the calls on a break over resistance at $38 and the stock closed on Friday at $40.50. The concept here is simple. We expect oil prices to continue to move higher as we approach the election as terrorists attempt to cause as much grief for Bush as possible. By going long MRO which has good fundamentals as well as being in the right place at the right time we are capitalizing on this event risk speculation. We are going to close the play the Friday before the election to beat the post election dip in oil. Maybe sooner depending on the coming events. Place a stop at $38 and far enough away to avoid any volatility. The stock has gone up a lot so we could expect profit taking soon. That would be an opportunity for new readers to make an entry. Call Jan-$40 MRO-AH @ $1.45 currently $2.25 Marathon Chart http://members.OptionInvestor.com/editorplays/edply_091904_1.asp **************** MARKET SENTIMENT **************** End of the Quarter - J. Brown The end of the third quarter approaches. That means investors can expect more earnings warnings as we near the October earnings reporting cycle. It also means we can expect some end of the quarter window dressing by money managers. While the end of September does see some window dressing as funds buy the recent winners and dump their losers to make their statements look good the extent of the window dressing tends to be muted compared to the other three quarters. Still if you're interested in watching the short-term pop higher keep an eye on oil/energy stocks, defense, Internets, telecoms and utilities. The rest of the market is likely to trade sluggishly. The end of September, according to the Stock Trader's Almanac, tends to be weak. That should be no surprise. We've already had hundreds of earnings warnings for the third quarter. I know the term "hundreds" seem pretty high but we only hear about the big ones. This past week alone the major earnings warnings came from consumer non-durable giants Colgate and rival Unilever. If the economy is so strong these companies should be doing well but rising material costs and advertising are affecting the bottom line. Plus, we've had even more tech stock/semiconductor sector earnings warnings. Yes, the end of September tends to be weak because we can expect even more earnings warnings ahead of us. I'm sort of counting on the next couple of weeks to be bearish. Our play list is dominated by bearish strategies as the three major indices all start to falter from overbought levels with new MACD sell signals. That's right the Dow Industrials, the NASDAQ Composite and the S&P 500 are all showing MACD sell signal as they trend lower from resistance. It looks like a good spot to consider shorts. If we can see a decent consolidation lower it will provide a great entry point into what should be a positive fourth quarter. Of course if everyone is looking for the same dip it may not show up and/or it may not be a very big dip. Hopefully with crude oil prices nearing $50 a barrel we can get some additional weakness in stocks. At least that's my short- term expectation. Then as October earnings begin to hit we can rotate from bearish plays into bullish ones. Next week has a number of economic reports but the ones Wall Street will really be watching are the Tuesday consumer confidence numbers, the Wednesday GDP numbers, and the Friday ISM manufacturing index and Michigan consumer sentiment index. Keep an eye on oil too. With another hurricane off the east coast and oil traders pricing in a terrorist event to try and disrupt the Presidential election we could see crude push past the $50 mark easier than we might expect. ----------------------------------------------------------------- Market Averages ` DJIA ($INDU) 52-week High: 10753 52-week Low : 9230 Current : 10047 Moving Averages: (Simple) 10-dma: 10224 50-dma: 10113 200-dma: 10294 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 990 Current : 1110 Moving Averages: (Simple) 10-dma: 1121 50-dma: 1100 200-dma: 1117 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1399 Moving Averages: (Simple) 10-dma: 1419 50-dma: 1380 200-dma: 1440 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.28 -0.52 CBOE Mkt Volatility old VIX (VXO) = 14.19 -0.68 Nasdaq Volatility Index (VXN) = 21.10 -0.07 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume The CBOE data was unavailable this weekend. We'll update this on Tuesday. ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63.0 + 0.3 Bear Correction NASDAQ-100 44.0 + 0 Bull Alert Dow Indust. 56.6 + 0 Bear Correction S&P 500 61.4 + 0.4 Bear Correction S&P 100 59.0 + 1 Bear Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.21 10-dma: 1.10 21-dma: 1.13 55-dma: 1.19 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 1546 1439 Decliners 1239 1515 New Highs 122 58 New Lows 34 38 Up Volume 778M 374M Down Vol. 725M 922M Total Vol. 1531M 1329M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 09/21/04 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 The latest COT data shows a big drop in positions for both commercials and small traders but commercials remain slightly net bearish and small traders remain net bullish. Commercials Long Short Net % Of OI 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%) 09/21/04 404,746 425,560 (20,814) (2.5%) 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 08/31/04 144,120 114,343 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% 09/21/04 134,943 108,036 26,907 11.1% 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 The passing of the quadruple-witching Friday cut a large chunk of open positions among long and shorts, big and small. Yet the remain positions still open have sent commercials to their most bearish bias in weeks and the small trader to their most bullish. Commercials Long Short Net % Of OI 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%) 09/21/04 213,014 397,844 (184,830) (30.2%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 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% 09/21/04 256,315 60,275 196,040 61.9% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Wow! It looks like last week's option expiration has produced some major shifts. There is a huge drop in open positions that have produced dramatic changes in bias. Commercials are now strongly bullish and small traders are incredibly bearish. To be honest I'm not sure how much I trust these numbers. Commercials Long Short Net % of OI 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% 09/21/04 54,530 30,827 23,703 27.7% 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 08/31/04 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% 09/21/04 7,417 25,821 (18,404) (55.3%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL The Dow Jones futures show the same dramatic drop in open positions with the recent option/futures expiration. However, the DJ futures do not show a big switch in bias. Commercials Long Short Net % of OI 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% 09/21/04 30,816 27,200 3,616 6.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 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%) 09/21/04 4,467 6,748 (2,281) (20.3%) 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 *************** Volume doesn't add up. Shareholder dilution? I was wondering if you could help me with something. Somebody from my investment club posed a question about volume (block trades) not showing up on charts and I thought you may have the answer because of your previous experience. I’ll just copy and paste first question and then my response. If you have any insight it would be greatly appreciated. Thanks Kat The above question from one investment club buddy to another is one that I (Jeff Bailey) have received several times in month's past, where traders/investors have also asked about a "spot filing." If you're a strictly fundamental-based investor, you may get caught looking at a chart when you see a news item that the company's stock you own may have sold x-number of shares to another company and you don't see the volume spike on the day of the announcement. Sometimes the price of the sale doesn't make sense either. Here's the conversation between "Kat," the trader/investor that sent me today's question and his investment buddy. Oh! If you have EVER thought about, or wanted to join an investment club, you might want to visit the National Association of Investors Corporation (NAIC) at the following link http://www.better-investing.org/ . Kat's Friend says: Something that is bugging me. Why does nasdaq.com show that some institution purchased shares in stock xyz on June 30, but the volume on the chart does not support that large of a volume pattern on any day in June, May, or even July? Can or does some institutional volume get hidden from charts????? If they can, how much of a true value is volume on charts???? Kat's response to his friend: As far as I know charts cover EVERY transaction that takes place during regular hours. Pre- market and AH trading I'm not sure. The only thing I can think of to explain the anomaly you mentioned is this... When an institution wants to take a large position in stock xyz they normally make a call to the floor and tell a MM to work the trade for them. Example: let's say a fund wants to purchase 5M shares of INTC @ $20.00. They call and place the order and the MM goes to work. It may take him several days or even longer to fill the trade. He uses his own inventory to collect INTC shares for the fund. Then at EOD he transfers whatever number of shares he has been able to collect to the fund. That's why you will sometimes see large block trades cross the tape in AH trading. I have also noticed large block trades crossing the tape during regular trading BELOW the bid. I assume this is also a MM either working a large order for a client or transferring some of his inventory to another MM. Bottom line... I'm not sure if after hours trading shows up on charting websites like StockCharts.com. I'll run this question by Jeff Bailey on Monday. He will probably have the answer for you. Jeff's response: Kat - Your response to your friend was excellent and the initial "gathering" or buying by the specialist/market maker would equate to the volume, where at the end of the day, or even during the session, the large block that is eventually recorded, or displayed to market participants, is NOT counted as that would be double counting. Still, the accumulation and eventual "billed price" to the customer must be shown for all market participants to see. Now, there is another explanation that may speak to your friend's question if he/she is talking about a news release of ABC buying 5 million shares of xyz company on a certain date, where that volume may not be reflected on a stock's chart, nor in after hours trade. XYZ company could have approached ABC company (or the other way around) and XYZ said, "We're expanding" or "we want to pay down debt" and if you're interested (ABC company) in taking a stake in our company (ABC and XYZ do a lot of business together), we'd be willing to sell you 5 million shares of AUTHORIZED stock at $20.00 per share. Authorized stock is the maximum number of shares a company is legally permitted to issue under its articles of incorporation and is usually listed in the capital accounts section of the balance sheet. Should a company ever decide in INCREASE the number of authorized shares, it must seek shareholder approval. Now, if ABC company does decide to buy the 5 million shares of XYZ company, it can certainly do so. Once the transaction is completed then those 5 million shares of XYZ stock is immediately recorded as OUTSTANDING shares. Sometimes we will read a company's press release where XYZ issued a SPOT SECONDARY of 5 million shares at a price of $20.00 to ABC. A SPOT SECONDARY is usually made to an institution rather than the public. This method of secondary distribution is faster than a conventional secondary offering that REQUIRES filings with the SEC. Outstanding shares are the number of shares that are currently owned by investors. This includes restricted shares (shares that are owned by the company's officers and insiders) and shares that are held by the public. This transaction would NOT show up as volume on a chart, but this additional number of outstanding shares is used in the calculations of many metrics including EPS and market capitalization. For a fundamental investor, this type of transaction can cause dilution to your shareholder value as you are now sharing revenues and profits, with an additional 5 million shares that are now issued and outstanding. There can be cost benefits for a company like XYZ to sell shares in such a manner as it can reduce the EXPENSE of raising capital via a secondary offering, or issuing of new debt instruments to pay off, or down, existing debt that may carry a higher rate of interest. This might also address your friend's question if he/she is reading a press release that ABC purchased 5 million shares of XYZ at $20.00 per share and did not see any such volume, or trade take place. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- AULT Ault Inc Mon, Sep 27 AFTER THE MARKET n/a EXR Extra Space Storage Mon, Sep 27 BEFORE THE BELL 0.16 TENT Total Entertainment Mon, Sep 27 AFTER THE MARKET 0.04 WAG Walgreens Mon, Sep 27 ---- N/A ---- 0.31 ------------------------- TUESDAY ------------------------------ BSET Bassett Furniture Tue, Sep 28 AFTER THE MARKET 0.18 EMMS Emmis Communications Tue, Sep 28 BEFORE THE BELL 0.20 ICLR ICON (ADS) Tue, Sep 28 ---- N/A ---- 0.52 LNDC Landec Corp Tue, Sep 28 AFTER THE MARKET -0.03 TONS Novamerican Steel Tue, Sep 28 ---- N/A ---- n/a PBG Pepsi Bottling Grp Tue, Sep 28 BEFORE THE BELL 0.70 RMCF Rocky Mtn Chocolate Tue, Sep 28 ---- N/A ---- n/a SLR Solectron Tue, Sep 28 AFTER THE MARKET 0.04 ------------------------ WEDNESDAY ----------------------------- ARRO Arrow Intl Wed, Sep 29 AFTER THE MARKET 0.34 BLUD Immucor Wed, Sep 29 BEFORE THE BELL 0.14 LNR LNR Property Wed, Sep 29 ---- N/A ---- 0.41 MU Micron Technology Wed, Sep 29 ---- N/A ---- 0.21 NEOG Neogen Wed, Sep 29 BEFORE THE BELL 0.18 RECN Resources Connect. Wed, Sep 29 AFTER THE MARKET 0.32 ------------------------- THUSDAY ----------------------------- ATU Actuant Corp Thr, Sep 30 BEFORE THE BELL 0.51 CMN Cantel Medical Thr, Sep 30 ---- N/A ---- 0.27 CMGI CMGI Thr, Sep 30 AFTER THE MARKET n/a LENS Concord Camera Thr, Sep 30 BEFORE THE BELL -0.05 STZ Constellation Brands Thr, Sep 30 AFTER THE MARKET 0.70 FDO Family Dollar Store Thr, Sep 30 BEFORE THE BELL 0.26 FGP Ferrellgas Partners Thr, Sep 30 During the market -0.90 OXM Oxford Industries Thr, Sep 30 AFTER THE MARKET 0.38 PEP PepsiCo Thr, Sep 30 BEFORE THE BELL 0.65 RIMM Research In Motion Thr, Sep 30 AFTER THE MARKET 0.43 WNI Weider Nutrition Thr, Sep 30 BEFORE THE BELL 0.06 ------------------------- 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 ANSS ANSYS Inc 2:1 Oct 4th Oct 5th MIK Michaels Stores 2:1 Oct 12th Oct 13th -------------------------- Economic Reports This Week -------------------------- It's the last week of the quarter so many investors will be watching for heavy mutual fund window dressing. There are a number of economic reports out this week with the big one being the ISM index on Friday. We also have an uptick in earnings announcements. ============================================================== -For- ---------------- Monday, 09/27/04 ---------------- New Home Sales for August Estimate: 1150K ----------------- Tuesday, 09/28/04 ----------------- Consumer Confidence for September Estimate: 100.0 Fed Governor Hoenig speaks on Monetary policy ------------------- Wednesday, 09/29/04 ------------------- Q2 GDP - final reading Estimate: 3.0% Q2 Chain Deflater - final reading Fed Governor McTeer speaks at a Banking conference ------------------ Thursday, 09/30/04 ------------------ Weekly Initial Jobless Claims Last week: 350K Help Wanted Index for August Chicago PMI for September Estimate: 58.0 Last: 57.3 Personal Income for August Personal Spending for August ---------------- Friday, 10/01/04 ---------------- ISM Mfg Index for September Estimate: 58.3 Last: 59.0 Michigan Sentiment for September Estimate: 96.5 Last 95.8 Construction Spending for August Estimate: +0.3% Auto & Truck Sales for September Group of Seven Finance Ministers meet in Wash. DC. Fed Governor Geithner speaks on Banking Fed Governor Stern speaks on Banking Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-26-2004 Sunday 2 of 5 In Section Two: Watch List: Internets to Oil and more Dropped Calls: PD, TDS Dropped Puts: FAST ************************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 ********** Internets to Oil and more ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ eBay Inc - EBAY - close: 89.22 change: -0.88 WHAT TO WATCH: Would you believe we strongly considered adding EBAY to the play list this weekend as a put play? The stock had run almost non-stop from $74 in early August to over $96 a week ago. EBAY was due for some profit taking and now shares have broken round-number support at the $90.00 mark and its MACD has rolled into a new sell signal from overbought levels. Not only that the P&F chart has signaled a "high pole" reversal warning. We would play puts on EBAY if it were not for our concerns that the stock will climb higher next week on window dressing. Chart= --- Ashland Inc - ASH - close: 54.90 change: +0.51 WHAT TO WATCH: Speaking of window dressing the oil sector could see a lot of it next week. We like ASH because shares have held their gains after breaking out over resistance at the $54.00 level. We know the stock looks extended and overbought but it can get more extended and overbought next week. Watch this one for more short-term strength. Chart= --- Allergan Inc - AGN - close: 77.89 change: +2.21 WHAT TO WATCH: Drug stocks have not been the strongest sector this week but AGN is not showing it. The stock has continued to rebound from its August lows and is now challenging the bottom of the gap down from July. If AGN can break into the gap it has a chance of filling the gap. Watch for a move over $78.50. Then again watch out for resistance at the exponential 200-dma near $80.00 and the simple 100 and 200-dma's above that. The P&F chart has turned bullish and points to a $95 target. Chart= --- Kmart Holding - KMRT - close: 86.30 change: +0.71 WHAT TO WATCH: We are very tempted to buy the bounce from $84.00. KMRT has shown a lot of relative strength but now some of its technical oscillators are starting to falter. Its MACD has slipped into a new sell signal. Aggressive traders may want to watch this one for more weakness and but be careful. After any profit taking the bullish reversals tend to be sharp and painful for the bears. It wouldn't surprise us to see KMRT trade higher on window dressing this week. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- GD $99.76 +1.31 - One of the pundits on TV mentioned defense stocks could see some window dressing this week. If GD trades over $100 again it might be a short-term buy. AH $39.60 +1.50 - AH is another defense stock worth watching. A move over $41.00 could be a momentum trader's entry point. DGX $86.39 +1.07 - We like the recent strength in DGX and its new short-term bottom near $84. Watch for a breakout over $87.00. HAL $33.58 +1.34 - We didn't check the news but volume was pretty strong on HAL's 4% rally on Friday. LLTC $36.77 -0.94 - Yet again LLTC has failed at its simple 200- dma for the fourth time in six months. HSIC $60.92 -0.17 - The bounces keep failing for HSIC. We're getting closer to adding this as a put play with a trigger under $60.00. RESP $50.56 -0.26 - We're still watching for a breakdown under $50.00. ************************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 ^^^^^ Phelps Dodge - PD - close: 90.48 chg: +3.50 stop: 82.99 Target achieved! It took almost a month but PD has reached our profit target/exit point at $90.00 after picking the stock at $82.10. We alerted readers in the MarketMonitor throughout the session as PD approached $90 and then finally surpassed the $90.00 level. Per our trading plan we are closing the play. However, more aggressive plays may look at the bullish breakout over resistance at $90 and the heavy volume backing the move as a momentum entry point. We think the stock is a bit overbought here and would prefer to consider new entries on a decent pull back. Yet it certainly possible that PD will consolidate near the $90 level now. Its P&F chart has grown very bullish with a $117 (long-term) price target. You can bet that we'll keep PD on our watch list for new entry points. Picked on August 26th at $82.10 Change since picked: + 8.38 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 2.1 million Chart = --- Telephone & Data Sys - TDS - cls: 84.84 chg: +2.29 stop: 81.25 It's not $85 but it's close enough. Originally our target was the $85 level but the last several days we've been publishing our suggestion to exit if TDS trades at $84 again. The stock surged more than 2.2 percent on Friday with heavy volume (for TDS) backing the move. Shares pushed through the $84 level early in the session and continued to climb higher. We're going to take our own suggestion and close the play. More aggressive players may decide that the high-volume breakout over $84 could be worth hanging on to. After picking TDS near $78 a month ago we're satisfied with the move thus far. Picked on August 24th at $78.05 Change since picked: + 6.79 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 195 thousand Chart = PUTS ^^^^ Fastenal Co - FAST - close: 57.04 chg: -0.47 stop: 60.01 We're choosing an early exit on FAST. We are still bearish on FAST. It's just that the stock hasn't really confirmed the breakdown under support at $57.00 and its simple 100-dma. The short-term trend is still down. The P&F chart still has a relatively new triple-bottom breakdown sell signal and a $49 target. We just don't feel that comfortable with the lack of follow through and potential support at the 200-dma's below. Plan your exit according to your own level of risk. Picked on September 22 at $56.95 Change since picked: + 0.09 Earnings Date 07/13/04 (confirmed) Average Daily Volume = 676 thousand Chart = *********** 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 09-26-2004 Sunday 3 of 5 In Section Three: Current Calls: CMI New Calls: ATH Current Puts: SEPR, PRX, MMM, LXK, KSS, FFH, LLY, BIIB 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 ****************** Cummins Inc - CMI - close: 71.71 change: -0.48 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: It has been a relatively rocky week for CMI even through shares spent the last five sessions in a $3.00 range. We're encouraged by the new all-time high on Wednesday but we're not that excited about the weakness in the latter half of the week. Traders did buy the dip early on Friday suggesting this might be a new entry point for bulls but we're feeling cautious. The next couple of weeks could be tough for the markets and bulls need to see CMI hold support in the $70.00-70.50-71.00 region. We're still willing to buy a bounce from $71 (like Friday's dip) but keep a close eye on that stop loss. Momentum traders may want to wait and see CMI trade back above $72.50 before considering positions. Remember that our short-term immediate target was $75.00 and our secondary target was $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 $7.10 BUY CALL OCT 70 CMI-JN OI=484 current ask $2.95 BUY CALL OCT 75 CMI-JO OI=400 current ask $0.70 Annotated chart: Picked on September 19 at $70.99 Change since picked: + 0.72 Earnings Date 07/23/04 (confirmed) Average Daily Volume = 724 thousand Chart = ************** NEW CALL PLAYS ************** Anthem Inc - ATH - close: 86.81 chg: +1.30 stop: 84.89 Company Description: Anthem's mission is to improve the health of the people it serves. Anthem, Inc. is an Indiana-domiciled publicly traded company that, through its subsidiary companies, provides health care benefits to more than 12.6 million people. Anthem is the fourth largest publicly traded health benefits company in the United States and an independent licensee of the Blue Cross and Blue Shield Association. Anthem is the Blue Cross and Blue Shield licensee for Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado, Nevada, Maine and Virginia, excluding the Northern Virginia suburbs of Washington, D.C. (source: company press release) Why We Like It: We like ATH for its recent bout of strength and bullish breakout over resistance at $85.00 and its simple 200-dma. It's common for a stock to pull back after breaking out over resistance only to test prior resistance as support. That's exactly what we're seeing in ATH. Shares broke through the $85 level and now the stock has tested this level as support for the past four days in a row. Short-term technicals like the RSI and stochastics are curling into bullish formations again. Even the P&F chart is bullish with a $105 price target. Unfortunately, ATH is fighting with P&F resistance right at the $88 level. However, the stock is bouncing from new support and could have enough momentum to push through the $88 level this time. Meanwhile the merger news is not getting any worse. Investor concerns over the merger falling apart appear to be fading. CEOs from both ATH and WLP are working together to deal with objections from California. We're willing to speculate that ATH can trade to the $92-93 region. We'll use an initial stop at $84.89. Suggested Options: We like the October and November calls with the 85 and 90s as our favorites. BUY CALL OCT 85 ATH-JQ OI=5047 current ask $2.95 BUY CALL OCT 90 ATH-JR OI=2058 current ask $0.55 BUY CALL NOV 85 ATH-KQ OI= 101 current ask $4.30 BUY CALL NOV 90 ATH-KR OI= 226 current ask $1.70 Annotated Chart: Picked on September 26 at $86.81 Change since picked: + 0.00 Earnings Date 10/26/04 (unconfirmed) Average Daily Volume = 2.1 million Chart = ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Biogen Idec - BIIB - close: 59.69 change: +0.36 stop: 62.51 Company Description: Biogen Idec creates new standards of care in oncology and immunology. As a global leader in the development, manufacturing, and commercialization of novel therapies, Biogen Idec transforms scientific discoveries into advances in human healthcare. (source: company press release) Why We Like It: Our technical bearish breakdown play in BIIB is stuck at the starting line. There has been little follow through on Wednesday's decline through round-number, psychological support at the $60.00 and its simple 21 and 100-dma's. Instead we've seen BIIB churn sideways the last two sessions. Although if you're bearish one could argue that Friday's action looks like a failed rally at the $60.50 level and its simple 21-dma. The MACD is still in a new sell signal but we are going against the grain on the bullish P&F chart. Be sure to keep an eye on the BTK biotech index. The BTK looks very overbought from its August lows and due for some profit taking. The BTK's MACD has produced a new sell signal but the index needs to break down through the 520 level. Conservative traders may want to consider tightening their stop on BIIB as we target a drop toward support at $55. Suggested Options: This is a short-term play so we're going to suggest the October puts but Novembers are available. BUY PUT OCT 60 IHD-VL OI=6859 current ask $1.90 BUY PUT OCT 55 IHD-VK OI=7417 current ask $0.50 Annotated chart: Picked on September 22 at $59.57 Change since picked: + 0.12 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 3.0 million Chart = --- Eli Lilly & Co - LLY - close: 63.66 change: +0.16 stop: 67.01 Company Description: Lilly, a leading innovation-driven corporation, is developing a growing portfolio of first-in-class and best-in-class pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Ind., Lilly provides answers -- through medicines and information -- for some of the world's most urgent medical needs (source: company press release) Why We Like It: The DRG drug index has been a major sector of weakness in the market these past several days. The bounce from the August lows failed near 325 and the group slowly turned lower. Now the sector is in a full-fledged retreat. As one of the largest drug companies out there LLY is both leading and following the group lower. The recent breakdown through support at $64.00 and its simple 40 and 50-dma's has been able to thwart any rebound attempts. Technicals are weak and its MACD is in a new sell signal. The P&F chart for LLY is bearish and points to a $44 target. Currently we're targeting a drop toward support at $60.00. It's very possible that LLY will be extra weak next week as funds do some window "undressing" as they exit their losers. Suggested Options: We like the October and November puts. Our favorites are the 65s and 60s. BUY PUT OCT 65 LLY-VM OI=28864 current ask $2.40 BUY PUT OCT 60 LLY-VL OI=51586 current ask $0.85 BUY PUT NOV 65 LLY-WM OI= 336 current ask $3.90 BUY PUT NOV 60 LLY-WL OI=1244 current ask $2.10 Annotated chart: Picked on September 22 at $63.92 Change since picked: - 0.26 Earnings Date 07/22/04 (confirmed) Average Daily Volume = 3.1 million Chart = --- FairFax Financial - FFH - cls: 125.75 chg: -0.11 stop: 130.01 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: We warned readers from the start that this was a high risk, speculative play. Volume is too low. Option volumes are low and the stock has been volatile. FFH proved again how volatile it was this past week with a bounce from $120 on Monday to $129.50 on Friday. Fortunately, the $130.00 proved to be round-number resistance and the stock sank toward its low of the session by the closing bell. The candle on Friday looks like a bearish reversal/failed rally and a potential new entry point for bearish positions. Be sure you're comfortable with the risks involved before opening any positions. The low option volume and volatility is playing havoc with the spread and option prices. For those who don't remember the original update we added FFH despite its oversold condition because of concerns the insurance company was having liquidity issues and could face bankruptcy. 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= 22 current ask $ 7.30 BUY PUT OCT 125.00 FFH-VE OI= 28 current ask $ 4.50 BUY PUT OCT 120.00 FFH-VD OI= 58 current ask $ 2.65 BUY PUT OCT 115.00 FFH-VC OI= 45 current ask $ 1.65 BUY PUT OCT 110.00 FFH-VB OI=104 current ask $ 1.15 BUY PUT OCT 100.00 FFH-VT OI=462 current ask $ 0.65 Annotated Chart: Picked on September 12 at $126.50 Change since picked: - 0.75 Earnings Date 00/00/00 (confirmed) Average Daily Volume = 59 thousand Chart = --- Kohl's - KSS - close: 49.43 change: -0.08 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: The lack of follow through on KSS' bearish breakdown a week ago is disappointing but we're encouraged to see the $50.00 mark holding as resistance. KSS has tried to breakout above $50.00 almost every day the past week and can't. Now with the RLX retail index looking overbought, with a new MACD sell signal, and poised to turn lower we're willing to stick it out with KSS and give it a few more days. More conservative traders can probably tighten their stop loss on KSS and still be fine. Remember that this is just a short-term play to capture a dip to $46.00. We are bullish on KSS between mid-October through January. 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=6992 current ask $1.55 BUY PUT OCT 45 KSS-VI OI=5504 current ask $0.20 Annotated chart: Picked on September 16 at $49.48 Change since picked: - 0.05 Earnings Date 08/12/04 (confirmed) Average Daily Volume = 3.1 million Chart = --- Lexmark Intl - LXK - close: 82.95 chg: -1.45 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: LXK continues to churn within its $82-86 trading range. There is a tug-of-war going on between the bulls and the bears as LXK consolidates above its long-term trendline of support (see weekly chart below). We are NOT suggesting new plays at this time. Short-term traders may want to consider exiting as LXK trades near the $82.00 level again before it bounces back. For that matter nimble traders may want to buy calls and trade the bounce from $82 back to $85.50-86.00 but we'd use a very tight stop. If by some chance that LXK breaks down and trades under $80.00 we will be suggesting new bearish positions because this would be a huge technical breakdown. Suggested Options: We are not suggesting new positions at this time. Annotated Chart: Picked on September 5th at $86.10 Change since picked: - 3.15 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 1.2 million Chart = --- 3M Co - MMM - close: 78.68 change: -0.02 stop: 81.51*new* 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: Attention traders! MMM is approaching our initial target/exit point at $77.50. The stock has continued its decline and has now broken multiple levels of support in the last two weeks. We are not suggesting new bearish positions unless you believe MMM can trade under the $75.00 level. As you can see from our chart below MMM does have potential support right at the $77.50 region. We are suggesting that short-term traders prepare to exit at $77.50. More aggressive types may want to consider closing half their position at $77.50 and holding the other half for a possible drop to $75.00. Suggested Options: We are not suggesting new positions at this time as MMM is very close to our initial profit target. Annotated chart: Picked on September 15 at $82.00 Change since picked: - 3.32 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 2.5 million Chart = --- Par Pharma. Co - PRX - close: 36.07 chg: -0.28 stop: 40.01*new* 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: While we'd like to see more follow through on the bearish breakdown in PRX we can't complain with the lack of bounce. The best oversold bounce bulls could mount was a rebound to $37.00 on Thursday morning that quickly faded. The intraday chart on PRX looks ready to breakdown under the $36.00 level. This is a tough spot to consider new positions. PRX looks a little oversold here and due for a bounce. Readers may want to consider momentum entries on a new low or an entry on a failed rally under $38.50 near its simple 100-dma, which should act as overhead resistance. We are feeling a little overexposed with a wide stop at $40.01 but until we see where the bounce, if any, does occur it's a bit dangerous to lower the stop under round-number resistance at $40. We will lower the stop to $40.01. We still believe there is potential support near $35.00 but our target remains $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=1116 current ask $4.30 BUY PUT OCT 35 PRX-VG OI= 329 current ask $1.00 BUY PUT NOV 40 PRX-WH OI= 684 current ask $5.10 BUY PUT NOV 35 PRX-WG OI=2170 current ask $2.00 Annotated chart: Picked on September 21 at $37.80 Change since picked: - 1.73 Earnings Date 07/19/04 (confirmed) Average Daily Volume = 743 thousand Chart = --- Sepracor Inc - SEPR - close: 48.68 chg: +0.14 stop: 52.01 Company Description: Sepracor Inc. is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of innovative pharmaceutical products that are directed toward serving unmet medical needs. Sepracor's drug development program has yielded an extensive portfolio of pharmaceutical compound candidates with a focus on respiratory and central nervous system disorders. Sepracor's corporate headquarters are located in Marlborough, Massachusetts. (source: company press release) Why We Like It: SEPR is another trading range play. On top of being stuck between $42.50 and $53.00 for the last several months SEPR's strength is being undermined by weakness in the DRG drug index. Plus, there is new evidence that SEPR may be negatively impacted by competition overseas. The recent failed rally near $53.00 looked like a bearish entry point but we didn't like it until shares broke down under mild support at $49.00. Currently SEPR has found some support at its simple 40, 50, and 100-dma's, which have all converged near $48.00. A breakdown under $48.00 and the stock should be on its way toward the bottom of its trading range near $42.50 and its 200-dma. Suggested Options: We like the October and November puts. Our favorites are the 50s 47.50s and 45s. BUY PUT OCT 50.00 ERU-VJ OI=8818 current ask $2.35 BUY PUT OCT 47.50 ERU-VW OI=2146 current ask $1.05 BUY PUT OCT 45.00 ERU-VI OI=4881 current ask $0.45 BUY PUT NOV 50.00 ERU-WJ OI= 167 current ask $3.60 BUY PUT NOV 47.50 ERU-WW OI= 40 current ask $2.25 BUY PUT NOV 45.00 ERU-WI OI=1050 current ask $1.35 Annotated chart: Picked on September 22 at $48.94 Change since picked: - 0.26 Earnings Date 07/13/04 (confirmed) Average Daily Volume = 1.8 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. 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The Option Investor Newsletter Sunday 09-26-2004 Sunday 4 of 5 In Section Four: Leaps: Good News, Bad News Option Spreads: Trade Within The Trade or "DFWI" ************************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 ***** Good News, Bad News The good news is the beginning of a pullback in the markets that could give us some good entries for any end of year rally. The bad news is this pullback has impacted those plays we were already long. This is a fact of life and one traders have faced since trading began. We may be stopped on some good plays and be forced to reenter them on a rebound. If we are stopped we will trail a buy stop behind them and look for a new entry at a cheaper level. The dynamics of the market is changing. Consumer stocks suffered a significant blow with the dual warnings from Colgate and Unilever and they have failed to rebound. Several analysts have suggested the consumer stocks are also reacting to the apparent slowdown in consumer spending. While consumers may be spending more for gas and less on frivolous items I still believe they will continue to buy consumer staples. Diapers, shampoo, soap, bathroom tissue, etc will continue to fill the baskets at the market. Because of this anti recessionary trend I am adding Proctor Gamble as a play this weekend. We can benefit here from the consumer products hit from CL/UN and buy the dip. Oil stocks continue to rocket higher and if you have been reading my columns you know I don't think they will ever change back to prior levels. With the peak in world oil production expected in 2007-2008 I believe oil prices will continue higher. I believe we are seeing an election event risk premium in prices today and we will see a pullback once the election passes. Reuters feels the drop could break the $40 level but not by much. I considered dropping OXY from the watch list as we are already oil heavy with COP, XLE and UPL but decided against it. I am leaving it with a low entry price. If we get a drop after the election we will take profits in those we are currently long and look to reenter when oil finds a temporary bottom. I am looking forward to the next three weeks because they could see a sharp pullback in the indexes and an opportunity for leap buyers. I am going to load up the watch list over the next two weeks with some low entries and just like in fishing we will see what we can catch. Our nice set of plays from last week with several showing very nice profits have all turned to dust with only a little market weakness. COP, TYC and JNPR are still strongly in the green but the rest have fallen back to minor losses in most cases. We knew there might be some weakness ahead and this is the price of doing business. We expected weakness but nobody could guarantee it so we took our chances with the long entries. I have adjusted the stops to try and prevent being whipsawed out of our positions but nothing is ever guaranteed. Manage your own risk according to your risk profile. **** STRONG CAUTION *** I would strongly caution everyone that a terrorist event in the U.S. prior to the election could drastically change the market outlook. Should an event occur I would think twice before making an entry. Secondly, these LEAP plays are based on the current conventional wisdom that Bush will win the election and the market will celebrate with a post election rally into January. Oil will still be a wild card and once the election is over traders will look at January earnings and guidance very critically to see if 2005 is going up or down. It could be a great year or a dud. We just cannot tell that now. By purchasing these LEAPs we are betting on a positive outcome and a growing 2005 economy. Those may not be safe bets but it is either that or crawl under a rock. We will adjust the portfolio as time passes and the outlook become clearer. ******************* New Plays ******************* Proctor & Gamble $54.00 Colgate (NYSE:CL) and Unilever (NYSE:UN) confessed to the investing public in a surprise announcement on Monday that sales would disappoint for the current quarter. For Colgate the reasons were given as the rising cost of raw materials and increased marketing costs. For Unilever it was blamed on rain in Spain or at least in Europe. Seems the cold wet weather depresses Ben and Jerry's ice cream sales, Lipton tea and Dove soap. Sounds fishy to me but it was the reason given. There may be another cause. Take a quick look at the chart for Proctor & Gamble (NYSE:PG) and then think about those excuses once again. PG has been on a steady move higher as it steals market share from CL and UN and the outlook is for more of the same. Actually PG is continuing to take market share not only from CL and UN but also Kimberly Clark (NYSE:KMB) and Alberto Culver (NYSE:ACV). The warnings may have shocked a drop in the consumer products sector but it may not actually be sector wide weakness. ACV was quick to issue a press release saying that the current quarter would meet or beat analysts estimates but the damage had already been done. ACV was already on a downward path from $49 back in early September and the twin warnings on Monday pushed it to $42. KMB hit $69 back on the 7th and fell to just over $64 today. Neither of those companies have warned but the stocks have been punished in advance. Let's go back to that PG chart. Proctor and Gamble has been stronger than Mike Tyson since August of 2003. The steady climb for this Dow component has been remarkable and the drop in July was the only time the 100 day average has been touched all year. The rebound was quick because of Proctor's strength in the sector. The warning by CL and UN knocked PG back to that 100 day average at $54.50 but it was only a minor -4% drop. I believe it is a buying opportunity. In times of market stress you only want to buy the strongest stocks in a sector and a sector that will continue to see growth. Hair care, soap, diapers and bathroom tissue are not going to remain on grocers shelves just because the economy is weak. This is a recession proof company and the strongest of all the competitors. For those who like to buy and forget the January-2006 $55 LEAP Call is only $4.30 and gives you more than a year to profit from Proctor's steady rise higher. This would be my choice for a long-term investment. Just be sure to check the label on your consumer items for the next 15 months and make sure you are helping PG succeed. BUY Jan-2006 $55 LEAP Call WPG-AK currently $4.20 BUY Jan-2006 $57 LEAP Call WPG-AY currently $3.00 PG Chart: **************************** New Plays Triggered **************************** EBAY $89.20 EBAY was triggered on Wednesday morning when it dropped to $90. The LEAPs profiled were: 2006 $90 LEAP Call YRL-AR $14.70 2006 $100 LEAP Call YRL-AT $10.40 **************************** UPL - Ultra Petroleum $46.33 UPL was triggered on Tuesday when it exploded at the open and through our upside breakout trigger at $45.50. JAN-2006 $45 LEAP Call WSS-AI $11.30 JAN-2006 $50 LEAP Call WSS-AJ $9.20 **************************** MER - Merrill Lynch $50.41 Merrill hit $51 on Monday to trigger the play and then rebounded to $53 on Tuesday before falling on the Morgan Stanley earnings miss. 2006 $50 LEAP Call WZM-AJ currently $7.30 2006 $55 LEAP Call WZM-AK currently $4.80 **************************** Current Portfolio: **************************** Position Summary Graph **************************** Play Updates **************************** XLE - S&P Energy SPDR $34.59 ** Stop 32.25 ** The XLE roared out of the gate on Monday and hit a high of $34.85 on Tuesday. We saw a dip on Wednesday when several big oil stocks were downgraded on valuation but the rise resumed as oil neared $50. 2006 $32 LEAP Call WHA-AF currently at $4.60 2006 $35 LEAP Call WHA-AI currently at $2.85 Entry $33.92 on 9/20 http://members.OptionInvestor.com/leaps/Lp_092604_1.asp XLE Chart **************************** QLGC - Qlogic Corp - $29.12 ** Stop $27.50 ** QLGC hit $31.36 on Monday with the rebound in the SOX but gave it back up late in the week when the SOX retreated. If the SOX breaks 380 support we could get stopped on QLGC pretty quickly. The resistance at $31 just happened to correspond to the rebound level for the SOX. There was no negative news on QLGC to cause the decline and is was simply market/resistance motivated. 2006 $30 LEAP YIO-AF currently $5.30 2006 $35 LEAP YIO-AG currently $3.43 Entry $30.36 9/20 http://members.OptionInvestor.com/leaps/Lp_092604_1.asp QLGC Chart ************************ MMM - 3M Company - $78.68, ** Stop $74.00 ** Entry at $82 on 9/15, add to position at $78. MMM is the ugliest chart in the portfolio. The Alcoa warning has put fear into MMM shareholders and the stock has been punished severely. We are nearing the second entry point at $78 where we can add to the position. I pressed the entry two weeks ago because it appeared MMM was going to leave the station without us and now I am regretting it. We went for weeks chasing prices higher without any fills and the desire to tackle something was strong. I liked MMM at $80 and I still like it at $78. I changed the stop to $74.00 to get under the March and August lows. 2006 $80 LEAP Call WMU-AP currently $7.40 2006 $85 LEAP Call WMU-AQ currently $4.50 http://members.OptionInvestor.com/leaps/Lp_080804_1.asp MMM Chart ********************** C - Citigroup $44.05 LEAP Call **Stop $41.00** Entry 1/2 46.00 9/20 1/2 45.00 9/22 That hurt! The Japan news came out on Friday the 17th with no material impact on Citigroup. On Monday the bottom fell out and we gapped down to $46 at the open. That would be the official entry point for the first 1/2 position. The stock took another drop on Wednesday despite an upgrade from S&P. Citigroup is now tied to the market and after the last couple of earnings misses from brokers the bloom is off the rose. Citigroup is still a leading financial and we are into the position cheap at an average cost of $45.50 and $2.00. Stop was changed to $41 in light of the market weakness. 1/2 position at $46.00 9/20 1/2 position at $45.00 9/22 2006 $50 LEAP Call WRV-AJ currently $1.75 http://members.OptionInvestor.com/leaps/Lp_080804_1.asp Citigroup Chart ********************** INTC - Intel Corp $20.12 **Stop $17.00** Entry $20.00 Sept 3rd Intel continues to be at the mercy of the SOX but is holding above support at $20. Intel has tried several times to rebound from this level but the overhead SOX resistance and chip earnings warnings have been too strong. Intel is being held down by the market at this point and should do fine once the Sep/Oct dip has passed. Current position: 2006 $22 LEAP Call WNL-AX at $2.20 currently $2.05 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. $30.20 **Stop $25.00** Entry 5/18 $28.32 Tyco is hanging in despite the market weakness but I lowered the stop to $25 to get under the early 2004 support. I still like TYC and I think it is one of the strongest stocks in the portfolio but in a down market even good stocks go down. Current position: 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 http://members.OptionInvestor.com/leaps/Lp_051604_1.asp Tyco Chart ********************** JNPR - Juniper Networks $24.68 **Stop $19.00** Entry $20.19 (8/16) Juniper shook off the Cisco downgrade and is holding right at the $25 resistance highs. I still expect some profit taking if we have a serious market dip so I lowered the stop to $19. Given the tech weakness this is a strong performer. We are still abut +$5 over our entry point. 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 $81.75 **Stop 75.50** Entry $73.30 August 30th COP continues to power ahead as oil continues to rise. Conoco is one of the oil favorites and it receives good press almost daily. It is still favored to win the auction for the shares of Russian oil giant Lukoil on Monday. As of Friday no bids had been made and COP is expected to bid on Monday and could be the only bidder. 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 have no idea how the Russian bid announcement will impact the price. Traders could be excited about the +25% increase in reserves or disappointed in the amount paid. You might tighten up the stops and reenter on any material drop. We cleared resistance at $80 and are in blue sky territory. Current position: Jan-2006 $75 LEAP Call YRO-AO at $6.70 currently $11.40 Initial play description: http://members.OptionInvestor.com/leaps/Lp_082904_1.asp COP Chart ********************** NWS - News Corp $32.63 **Stop 29.00** No additional news on the News Corp move to the U.S. 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 **************************** UPL - Ultra Petroleum $46.33 **Stop $43.00** Entry $45.50 9/21 That did not work out as I expected. We saw UPL building an ascending triangle at $45 and I had hoped to see a dip to $43 before it broke out. Unfortunately two upgrades triggered a blast off and our breakout entry was triggered on Tuesday. UPL is very strong and held the high ground despite the +$3 jump. If oil hits $50 next week this stock may hit $50 as well. JAN-2006 $45 LEAP Call WSS-AI $11.30 JAN-2006 $50 LEAP Call WSS-AJ $10.20 http://members.OptionInvestor.com/leaps/Lp_090504_1.asp UPL Chart **************************** EBAY - EBAY $89.20 ** Stop $84.00 ** Entry $90.00 on 9/22 Amazing! EBAY actually declined for five out of seven days. Just enough to trigger our entry at $90 on 9/22. Now the race will be to find some Nasdaq strength before we get a real breakdown. In news this week EBAY said it decided not to shut down half.com as planned in October because it was doing better than expected in sales. It also became election fodder when Edwards compared it to a sidewalk lemonade stand. 2006 $90 LEAP Call YRL-AR 2006 $100 LEAP Call YRL-AT http://members.OptionInvestor.com/leaps/Lp_072504_1.asp EBAY Chart **************************** MER - Merrill Lynch $50.41 ** Stop $46.00 ** Entry $51.00 We finally got the completed pull back on Merrill to our target entry of $51 on Monday. The good earnings news from brokers on Tuesday sent it soaring back to $53 but the following day a high profile earnings miss by Morgan Stanley set it back to the dugout. Merrill reports earnings in mid October and they are expected to do well. The market is our worst enemy now as we try to tiptoe through the next three weeks without a major disaster. 2006 $50 LEAP Call WZM-AJ currently $7.30 2006 $55 LEAP Call WZM-AK currently $4.50 http://members.OptionInvestor.com/leaps/Lp_071804_1.asp MER Chart **************************** LEAPS Watch List **************************** Time to load the boat? With market weakness appearing and a market event possible over the next three weeks I am going to load up the watch list and hope we can get some index plays going as well as a couple more stocks. If we are going to see an October dip it should be early and over by mid October unless we have a terrorist event. The index plays are cheap leaps and far less critical to earnings and news stories. If we can get all four of them they would make a good portfolio by themselves. *********************** Dropped Entries *********************** GE $33.41 Too many better candidates *********************** New Entries *********************** I am running out of space to add big descriptions to the watch list entries. With the potential to add 5-7 stocks to the LEAPs section over the next three weeks I am going to keep it brief. RIMM $74.63 Research in Motion BA $53.15 Boeing Aerospace SMH $30.20 Semiconductor Holders DIA $100.68 Dow Diamonds Trust QQQ $34.79 Nasdaq 100 Tracking Stock IWM $112.70 Russell-2000 Index Ishares ************************ RIMM $74.63 Research in Motion Breakdown target $70.00 Breakout target $77.00 RIMM is a leading designer and manufacturer of wireless communications devices for the mobile market. The key product is the Blackberry and various model variations. RIMM has seen a remarkable run with gains from $55 to $75 since mid August. The last week RIMM has paused to consolidate at $75 and could be about ready to push higher. There have been no real attempt to take profits in the last two weeks despite some Nasdaq weakness and the big gains. RIMM and SYMC are almost identical charts. They both sprinted higher on the August rally and then have clung to those highs in the face of mixed markets. Fortunately this has give the options time to cool and prices fade slightly. I am using a breakout and breakdown trigger on RIMM because I do not want to chase this one to $100. If it was any other October I would be looking to enter at $60 on a pullback but the potential for a post election rally is keeping the bid strong on any dip. Buy 2006 $80 LEAP Call WLJ-AP currently $15.90 Buy 2006 $90 LEAP Call WLJ-AR currently $12.30 Sell 2006 $120 LEAP Put WLJ-MD currently $47.70 RIMM Chart ************************ BA $53.15 Boeing Aerospace Target $52 Boeing has an excellent chart and excellent prospects. Not only do they have the 7E7 in process but they are continuing to win government contracts for high tech systems for the next decade. On Monday BA and IBM announced a joint effort to increase efforts to computerize the battlefield. Boeing has moved from $25 to $55 since March of 2003 and has not lost any momentum in the process. They raise guidance with their last earnings and the CEO affirmed that guidance last week. No warnings here. BA has pulled back slightly with the market weakness and I would love to get an entry in the $50 range. However I think $52 would still be reasonable and possibly attainable. $50 might be overly optimistic and the difference in option prices will not be material. Buy 2006 $55 LEAP Call WBO-AK currently $5.50 Buy 2006 $60 LEAP Call WBO-AL currently $3.60 Boeing Chart ************************ SMH $30.20 Semiconductor Holders **Target $28.50** This may be wishful thinking on the semiconductor holders but $28 is the level the SMH should hit if the SOX retests 350. A pause at $28.50 could give a convincing reverse H&S and take about a week to achieve. This would set us up for a semi rebound into the election. You saw the last rebound of +15% from the September lows and the next time we could move even faster. Buy 2006 $30 LEAP Call YRH-AF currently $5.30 Buy 2006 $35 LEAP Call YRH-AG currently $3.20 Sell 2006 $55 LEAP Put YRH-MA currently $25.00 SMH Chart ************************ DIA $100.68 Dow Diamonds Trust **Target 99.00** No magic here. This is simply a long play designed to capitalize on any Dow rebound from a sub 10000 test over the next three weeks. The odds are good we could retest 9900 and possibly 9800 but I do not want to miss the entry by a point if we end up with a reverse head and shoulders at 9900. Options are a tossup as there are several strange strikes. They go in four point increments rather than five or one as in the QQQ. They also seem expensive but the difference between a 104 and 108 strike is only 400 Dow points. With many estimates of Dow 12500 by end of 2005 there is plenty of room for profit. The DIA options move $1 for every 100 Dow points if they are in the money. For instance a move to Dow 12500 (DIA 125) would put the $108 leap call 17 points in the money or $17. That would be four times the current $4 price. Buy 2006 $100 LEAP Call YGF-AV currently $7.80 Buy 2006 $104 LEAP Call YGF-AZ currently $5.70 Buy 2006 $108 LEAP Call YGF-AD currently $4.00 Buy 2006 $112 LEAP Call YGF-AH currently $2.65 DIA Chart ************************ QQQ $34.79 Nasdaq 100 Tracking Stock Target 1/2 at $34.00 Target 1/2 at $33.00 The Nasdaq 100 tracking stock has strong support at $34 but it still managed to break to just below $33 on the August dip. I would like to get a long entry at $33 but I think we would be pressing our luck. To compromise lets try to enter 1/2 at $34 and 1/2 at $33 and average down. If we never get to $33 there is no harm done. The QQQ has traded as high as $120 back in 2000 but I doubt we will see that again this decade. The QQQ has strong resistance at 38, 42 and 49. I think everybody reading this would be very happy to see $49 or even $42 again over the next year. Buy 2006 $35 LEAP Call YWZ-AI currently $4.30 Buy 2006 $37 LEAP Call YWZ-AD currently $3.30 These prices should drop about 50 cents at $34 and 65 cents at $33. QQQ Chart ************************ IWM $112.70 Russell-2000 Index Ishares Target 1/2 108.00 Target 1/2 106.00 If you thought the QQQ was wishful thinking then this is positively pie in the sky. In a perfect world we would return to 106 to form a reverse H&S and then rocket off into the wild blue yonder. Unfortunately there is a heck of a lot of selling and buying that would have to occur to make this happen. BUT, we are headed into October and a month known for dip. While I think 106 could be a stretch I think we could see 108 or somewhere in that range. I would be happy to take a fill there and hold it for a year. The downtrend resistance at 115 and falling will be the first major hurdle followed by very strong resistance at 120. If the scenario turns out as expected with no terrorist attacks and a Bush win then a break of 120 could be met with very strong short covering and new highs all the way around. This is a strong play for me because I believe the small caps will lead any post election rally. There are one point increments on the IWM LEAPS so pick the lowest strike you can afford when the entry point is hit. Since the IWM has to move 4-6 points to hit our entry point the current price on the options will change drastically. I would estimate the 115 to be around $9 and the 120 to be around $7. An at the money option is around $13 so if we assume the minimum level reached in 2005 is 120 the 120 strike at a 108 entry would probably double in value. ($7 to $14) 2006 $110 LEAP Call WOI-AF currently $14.30 est 12.00 2006 $115 LEAP Call WOI-AK currently $11.60 est 9.50 2006 $120 LEAP Call WOI-AP currently $ 9.20 est 7.00 IWM Russell Chart ************************ OXY - Occidental Petroleum $55.00 Target $53.50 breakdown, $55.50 breakout We already have three oils but OXY is rated so highly and doing so well I am keeping it on the watch list. Hopefully we will get a drop in prices once $50 is reached and we can get a profit taking entry. The stock looked like it might pull back last week but roared out of the gate on Monday to a new high. If you are managing your own trades I would be very careful not to let this one get away on the next bounce. There was some confusion about a contract in Ecuador on Thursday that stole some OXY excitement but the fire is still burning. Starmine expects OXY to beat earnings by +0.15 cents when it reports in the 3Q. 2006 $50 LEAP Calls WXY-AJ currently $8.50 2006 $55 LEAP Calls WXY-AK currently $5.40 2006 $60 LEAP Calls WXY-AL currently $3.40 http://members.OptionInvestor.com/leaps/Lp_082904_1.asp OXY Chart ************************ SYMC - Symantec - $51.84 Target $49.00 on breakdown Target $53.00 on breakout Still holding at resistance. SYMC refuses to move lower despite the weakness in techs. This is a very strong stock and I probably should just take the entry here at $52 but I would really like to hold out for a potential dip next week. We will continue to bracket the price and catch the entry regardless of which way it moves. If we get the $49 drop it could take more than $1 off the option premiums. Add to the position with a -$3 drop below any fill. 2006 $50 LEAP Call YAG-AJ current $10.10 2006 $55 LEAP Call YAG-AK current $7.70 2006 $60 LEAP Call YAG-AL current $5.80 http://members.OptionInvestor.com/leaps/Lp_080804_1.asp SYMC 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 ************************ Trade Within The Trade or "DFWI" By Mike Parnos Temptation is everywhere -- whether it's in the form of Twinkies, Trixies or trading. Each is hovering out there waiting to satisfy its own specific appetite. We have to beware of seemingly simple solutions that may provide us with instant gratification. The gratification, though yummy and exciting, is only temporary. The longer term effects can be less than positive -- but nothing that liposuction, a shot of penicillin or an inheritance can't fix. The CPTI is structured pretty much for option traders who do not have the flexibility to monitor their trades all day long. Most CPTI students have jobs and/or other responsibilities that keep them away from the computer screen. Our method works quite well, as is demonstrated by our track record and the emails I receive. We put on a trade and adjust it only when necessary. The "DFWI" couch potato approach works. However, for those who tend to be a touch more aggressive -- and those who can keep a closer eye on their trades, opportunities do present themselves during the trading day. On Friday I got a call from one of my students who has an October Iron Condor on the SPX. He got in a little earlier and has the 1165/1180 bear call spread and the 1075/1060 bull put spread, having taken in a nice credit of $3.10. After two significant down days on higher than average volume, he said he believes the market doesn't have any good reason to move up. Since the market moved down a bunch, he saw an opportunity to close out his bear call spread. So, he put in an order to buy back the Oct. 1165 call and sell the Oct. 1180 call for a debit of $.25. The posted prices for those options would only have required a debit of $.40. He figured he'd shave off a dime here and a nickel there from the bid/ask spreads. A quarter is pretty cheap, but damned if he didn't get filled. And there are still three weeks left in the option cycle!! One of the nice things about trading is that it doesn't cost anything to put an order out there. What did that accomplish? By closing out the bear call spread, he a) no longer had an obligation to perform if the SPX spiked higher and threatened 1065. b) he locked in a profit on the bear call spread. c) he freed up $15,000 of maintenance requirements. If he was using a brokerage firm that requires maintenance on both sides, he could now use that $15,000 for other purposes d) and, with three weeks left, he has the time and financial flexibility to explore other ways to generate money. We looked at a chart of the SPX to find a secondary resistance level. There looks to be reasonable resistance between 1145 & 1150. Then we consulted the SPX option chain. He put in an order to sell the Oct. 1145 call and buy the Oct. 1160 call for a credit of $.90. It didn't get filled and he had to settle for $.85, but it was still worthwhile. He spend $.25 to close the initial bear call spread. Then, he rolled down to second bear call spread and took in $.85. He took in an additional $.60 x 15 contracts ($900) into his account. If he had wanted to be five points more conservative, the new bear call spread of 1150/1165 would have yielded a credit of about $.65 -- with a net credit of $.40 ($600). With the SPX trading at about 1110, he now has a cushion of about 35 points. Normally, when we first initiate an Iron Condor position, we like to have a 40-45 point cushion. But, remember, there are only three weeks left until expiration. His exposure to the market is a week less. That, along with his bearish outlook for the market, enabled him to justify the 35-point cushion. Is it riskier? Sure. Is it worth it? It certainly can be -- if you're right. If you're wrong and the market reverses, it can present a whole other set of problems. It's a personal choice. If you're in a position to take advantage of these kinds of these opportunities, you don't have to do it with your entire position. You could always just do a few contracts and get a feel for what's involved -- both the rewards and the risks. Just don't jump in head first without checking the water level. The instant gratification isn't worth it, if you can't handle the consequences. If you don't want to need liposuction, penicillin or lose a relative, just stick with the "DFWI" approach. It was Baretta who said, "Don't do the crime if you can't do the time." ____________________________________________________________ OCTOBER CPTI HYPOTHETICAL POSITIONS October Position #1 - SPX Iron Condor - 1110.11 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 - 565.97 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 - 534.37 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 - $143.80 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 - 1110.11 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. _________________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle - Ongoing Long Term -- $34.80 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 - 534.37 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). 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 09-26-2004 Sunday 5 of 5 In Section Five: Spreads and Straddles: Crude Prices Curb Stock Buying 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 ************************************************************** ******************* SPREADS & STRADDLES ******************* Crude Prices Curb Stock Buying By Ray Cummins U.S. equities ended mixed Friday, despite a midday rally, as the cost of oil climbed to record levels. Investor optimism over a Commerce Department report on durable goods orders for August faded in late trading as crude renewed its efforts to eclipse the $50-per-barrel mark. The blue-chip Dow Jones industrial average ended up 8 points at 10,047, with McDonald's (NYSE:MCD) leading the 30-component group higher on rumors it might be interested in acquiring Krispy Kreme Donuts (NYSE:KKD). The NASDAQ composite index fell 6 points to 1,879 as networking, internet, computer hardware, and semiconductor shares drifted lower. The broader Standard & Poor's 500 index gained 1 point to finish at 1,110, with retail issues among the best performers. Advancing issues outnumbered decliners 5 to 4 on the New York Stock Exchange, where volume was 1.26 billion shares. Losers paced winners by a small margin on the NASDAQ, where trading volume amounted to 1.36 billion shares. The bond market ended nearly unchanged with the 10-year note down 3/32, while its yield rose to 4.03%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 09/24/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 85.06 OCT 65.0 70.0 0.70 69.30 0.70 Open RYL 88.15 91.65 OCT 75.0 80.0 0.75 79.25 0.75 Open GIVN 38.72 38.49 OCT 30.0 35.0 0.70 34.30 0.70 Open MBT 140.75 136.97 OCT 120.0 125.0 0.50 124.50 0.50 Open COGN 34.58 34.55 OCT 30.0 32.5 0.30 32.20 0.30 Open SCSC 66.22 64.00 OCT 55.0 60.0 0.50 59.50 0.50 Open CCMP 38.29 35.26 OCT 30.0 35.0 0.75 34.25 0.75 Open? ONXX 41.99 43.16 OCT 30.0 35.0 0.50 34.50 0.50 Open AHC 83.99 86.48 OCT 75.0 80.0 0.55 79.45 0.55 Open CELG 59.39 58.17 OCT 50.0 55.0 0.55 54.45 0.55 Open GDT 64.02 63.66 OCT 55.0 60.0 0.65 59.35 0.65 Open PHM 63.70 62.00 OCT 55.0 60.0 0.60 59.40 0.60 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Cabot Micro (NASDAQ:CCMP) is an "early-exit" candidate in the wake of the renewed decline in semiconductor-related shares. CALL-CREDIT SPREADS Stock Pick Last Mon L/C S/C Credit CB G/L Status AZO 74.06 75.73 OCT 85.0 80.0 0.55 80.55 0.55 Open MXIM 40.94 41.59 OCT 50.0 45.0 0.50 45.50 0.50 Open PLMO 32.30 29.29 OCT 45.0 40.0 0.55 40.55 0.55 Open LEN 46.75 47.61 OCT 55.0 50.0 0.60 50.60 0.60 Open NTES 35.51 38.17 OCT 45.0 40.0 0.60 40.60 0.60 Open NBIX 50.65 48.09 OCT 60.0 55.0 0.55 55.55 0.55 Open SSP 49.66 49.45 OCT 52.5 50.0 0.50 50.50 0.50 Open APOL 78.35 72.82 OCT 90.0 85.0 0.25 85.25 0.25 Open STJ 70.73 73.43 OCT 80.0 75.0 0.55 75.55 0.55 Open APOL 72.00 72.82 OCT 85.0 80.0 0.45 80.45 0.45 Open PRX 37.80 36.07 OCT 45.0 40.0 0.60 40.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss St. Jude Medical (NYSE:STJ) is on the "watch" list after Friday's rally and Netease.com (NASDAQ:NTES) warrants further attention as it hovers slightly below the sold (call) strike at $40. 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ PD - Phelps Dodge $90.48 *** The Copper King! *** Phelps Dodge (NYSE:PD) is engaged in the production of copper, carbon black, magnet wire, continuous-cast copper rod and also molybdenum products. The firm consists of two major divisions: Phelps Dodge Mining, which is an international business for its vertically integrated copper operations, and Phelps Dodge Industries, which is the manufacturing division, comprising two individual business segments that produce engineered products for the global energy, telecommunications, transportation and specialty chemicals sectors. PD - Phelps Dodge $90.48 PLAY (conservative - bullish/credit spread): BUY PUT OCT-80.00 PD-VP OI=3812 ASK=$0.30 SELL PUT OCT-85.00 PD-VQ OI=3910 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$84.50 __________________________________________________________________ RTP - Rio Tinto $104.28 *** Natural Resources In Demand! *** Rio Tinto plc (NYSE:RTP), and Rio Tinto Limited, operate as a single business organization engaged in discovering, mining and processing the Earth's mineral resources. Its major products include aluminum, copper, diamonds, energy products (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt and talc) and iron ore. Its activities are represented in Australia and North America, with significant businesses in South America, Asia, Europe and southern Africa. RTP - Rio Tinto $104.28 PLAY (conservative - bullish/credit spread): BUY PUT OCT-95.00 RTP-VS OI=47 ASK=$0.35 SELL PUT OCT-100.00 RTP-VT OI=47 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$99.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CERN - Cerner $42.99 *** New Downtrend Underway! *** Cerner (NASDAQ:CERN) designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and consumers. The firm's solutions give end users secure access to clinical, administrative and other financial data in real-time. Consumers retrieve appropriate care information and educational resources via the Internet. The firm implements these solutions as stand-alone, combined or enterprise wide systems. Cerner solutions can be managed by the company's clients or via an application outsourcing/hosting model. Cerner provides hosted solutions from its data center in Lee's Summit, Missouri. Earnings are due after the close of trading on 7/21. CERN - Cerner $42.99 PLAY (conservative - bearish/credit spread): BUY CALL OCT-50.00 CQN-JJ OI=104 ASK=$0.15 SELL CALL OCT-45.00 CQN-JI OI=515 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=12% B/E=$45.50 __________________________________________________________________ IMCL - ImClone Systems $50.35 *** Erbitux Sales Decline? *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company involved in advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with cancer. It focuses on three strategies for treating cancer: growth factor blockers, angiogenesis inhibitors and cancer vaccines. The company's lead product, ERBITUX (Cetuximab), is an antibody which has been approved for use in combination with irinotecan in the treatment of patients with a unique type of colorectal cancer. IMCL - ImClone Systems $50.35 PLAY (conservative - bearish/credit spread): BUY CALL OCT-60.00 QCI-JL OI=4141 ASK=$0.20 SELL CALL OCT-55.00 QCI-JK OI=4246 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$55.40 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ QLGC - Qlogic $29.12 *** Earnings Speculation! *** QLogic (NASDAQ:QLGC) designs and develops storage networking infrastructure components for original equipment manufacturers, distributors, resellers and system integrators. The company produces the controller chips, management enclosure chips, host bus adapters, fabric switches and management software that provide the connectivity infrastructure for every size of storage network. It serves customers with solutions based on various storage area network, technologies, including small computer systems interface, Internet SCSI and fibre channel. Quarterly earnings are due on or about 10/13/04. QLGC - Qlogic $29.12 PLAY (very speculative - neutral/debit strangle): BUY CALL OCT-30.00 QLC-JF OI=8378 ASK=$0.80 BUY PUT OCT-30.00 QLC-VF OI=5071 ASK=$1.70 INITIAL NET-DEBIT TARGET=$2.30-$2.40 INITIAL TARGET PROFIT=$1.05-$1.50 Note: The position Delta or "hedge ratio" suggests we should purchase more calls than puts to maintain a neutral outlook. However, any reasonable movement in the issue next week should allow both sides of the position to be purchased at similar prices (possibly at a lower strike). ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ***************************************** PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS ***************************************** All of these issues have robust option premiums and favorable technical indications. However, current news and events, as well as market sentiment, will have an effect on these stocks so review each position thoroughly and make your own decision about its outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 09/24/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 16.02 0.40 7.19% 2.74% FHRX OCT 17.50 17.05 19.30 0.45 6.31% 2.64% SNDK OCT 22.50 22.00 27.38 0.50 5.86% 2.27% SSYS OCT 25.00 24.45 28.56 0.55 5.91% 2.25% JNPR OCT 22.50 22.00 24.65 0.50 5.73% 2.27% CREE OCT 22.50 22.15 28.70 0.35 5.28% 1.58% FFIV OCT 22.50 22.20 29.84 0.30 4.45% 1.35% AMZN OCT 37.50 37.00 40.94 0.50 3.96% 1.35% ASKJ OCT 25.00 24.45 33.00 0.55 7.42% 2.25% USNA OCT 30.00 29.30 34.62 0.70 6.10% 2.39% YHOO OCT 30.00 29.40 32.58 0.60 5.51% 2.04% CELL OCT 15.00 14.50 16.13 0.50 8.28% 3.45% CREE OCT 25.00 24.35 28.70 0.65 7.26% 2.67% CLHB OCT 10.00 9.75 11.63 0.25 7.98% 2.56% PDII OCT 25.00 24.45 26.53 0.55 6.98% 2.25% APPX OCT 27.50 27.10 27.72 0.40 5.57% 1.48% * GILD OCT 35.00 34.35 36.50 0.65 5.61% 1.89% BOBJ OCT 20.00 19.65 22.58 0.35 5.73% 1.78% ASTE OCT 17.50 16.95 18.78 0.55 9.55% 3.24% LCAV OCT 25.00 24.35 25.23 0.65 7.97% 2.67% ALO OCT 17.50 17.10 18.13 0.40 7.17% 2.34% FHRX OCT 17.50 17.20 19.30 0.30 6.33% 1.74% GNSS OCT 12.50 12.20 12.82 0.30 8.02% 2.46% NAVR OCT 15.00 14.75 14.87 0.12 2.80% 1.69% COGN OCT 32.50 31.90 34.55 0.60 6.15% 1.88% PSFT OCT 17.50 17.20 19.99 0.30 6.15% 1.74% LF OCT 20.00 19.75 20.76 0.25 4.46% 1.27% ATYT OCT 15.00 14.75 15.76 0.25 5.90% 1.69% YHOO OCT 30.00 29.50 32.58 0.50 6.01% 1.69% American Pharmaceutical Partners (NASDAQ:APPX) became an early exit candidate Thursday after the Wall Street Journal reported that the company is facing a probe by regulators over whether it misled investors about the progress of a key cancer drug it is developing. In addition, a number of other issues are on the "watch" list after the recent retreat in technology shares. Remember, the key to success in "premium-selling" strategies is limiting draw-downs in losing positions. NAKED CALLS Stock Strike Strike Break Current Gain Max Simple Symbol Month Price Even Price (Loss) Yield Yield ESIO OCT 22.50 23.00 17.58 0.50 6.99% 2.17% LNCR OCT 32.50 33.30 30.30 0.80 7.12% 2.40% ADTN OCT 30.00 30.30 23.71 0.30 3.79% 0.99% DIGE OCT 30.00 30.35 26.21 0.35 6.05% 1.15% CTB OCT 22.50 22.85 20.02 0.35 4.25% 1.53% MDCO OCT 30.00 30.80 25.52 0.80 8.33% 2.60% CECO OCT 40.00 40.50 28.65 0.50 6.34% 1.23% CPRT OCT 20.00 20.35 18.89 0.35 6.97% 1.72% FLML OCT 17.50 17.80 15.12 0.30 10.47% 1.69% SSNC OCT 20.00 20.35 20.10 0.25 5.48% 1.72% USPI OCT 35.00 35.65 33.55 0.65 6.36% 1.82% BDY OCT 22.50 22.90 21.10 0.40 7.63% 1.75% PLMO OCT 35.00 35.90 29.29 0.90 11.25% 2.51% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 AGIX 23.59 OCT 12.50 AUB-VV 0.75 3754 11.75 19 10.2% 22.0% DHB 13.51 OCT 12.50 DHB-VV 0.40 764 12.10 19 5.3% 13.4% INTV 10.55 OCT 10.00 VQN-VB 0.30 70 9.70 19 5.0% 12.1% NVTL 24.27 OCT 22.50 NVU-VX 0.55 144 21.95 19 4.0% 10.4% SFL 21.40 OCT 20.00 SFL-VD 0.45 40 19.55 19 3.7% 9.5% FHRX 19.30 OCT 17.50 FUF-VW 0.35 326 17.15 19 3.3% 8.9% PAAS 15.94 OCT 15.00 USP-VC 0.25 2545 14.75 19 2.7% 7.0% BLUD 23.53 OCT 20.00 QMQ-VD 0.25 8 19.75 19 2.0% 6.5% 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. _________________________________________________________________ AGIX - AtheroGenics $23.59 *** Big Risk - Big Reward! *** AtheroGenics (NASDAQ:AGIX) is a research-based pharmaceutical firm focused on the discovery, development and commercialization of novel drugs used to treat chronic inflammatory diseases, including heart disease (atherosclerosis), rheumatoid arthritis, organ transplant rejection and asthma. The company has developed a vascular protectant technology platform to discover drugs to treat these types of diseases. Based on this platform, it has four drug development programs in the clinic and is pursuing a number of other preclinical programs. AGIX - AtheroGenics $23.59 (Note: This play is SPECULATIVE with large potential losses!) OCT 12.50 AUB-VV LB=0.75 OI=3754 CB=11.75 DE=19 TY=10.2% MY=22.0% _________________________________________________________________ DHB - DHB Industries $13.51 *** Upgrade = Rally! *** DHB Industries (NYSE:DHB) is a holding company with two major divisions: DHB Armor Group and DHB Sports Group. The Armor Group includes Point Blank Body Armor and Protective Apparel Corporation of America and they manufacture various types of body armor. The Sports Group, which consists of NDL Products, manufactures and distributes protective athletic apparel and equipment, including elbow, breast, hip, groin, knee, shin and ankle supports and braces, as well as a line of therapy products. DHB - DHB Industries $13.51 OCT 12.50 DHB-VV LB=0.40 OI=764 CB=12.10 DE=19 TY=5.3% MY=13.4% _________________________________________________________________ INTV - Intervoice $10.55 *** Bottom-Fishing! *** Intervoice (NASDAQ:INTV) provides converged voice and data solutions for network and enterprise operators. Their Omvia Voice Framework is built on an open-standard, distributed architecture and provides a comprehensive platform allowing organizations to connect, develop, run, manage and report on voice-driven solutions. Intervoice offers a wide range of voice-driven technology, including messaging, payment and portal solutions with focus on voice development, management and application solutions. The company also offers solutions that include professional services, such as speech prototyping, remote monitoring, disaster recovery, system installation and integration, technical training and solutions tuning. INTV - Intervoice $10.55 OCT 10.00 VQN-VB LB=0.30 OI=70 CB=9.70 DE=19 TY=5.0% MY=12.1% _________________________________________________________________ NVTL - Novatel Wireless $24.27 *** Next Leg Up? *** Novatel Wireless (NASDAQ:NVTL) is a provider of wireless broadband access solutions for the mobile communications market. The company's range of products includes wireless data modems and software for laptop personal computers, embedded wireless modules for OEMs, and ruggedized wireless data modems for public safety and telemetry applications. Through the integration of hardware and software, Novatel's products are designed to operate on most global wireless networks, and provide mobile subscribers with secure access to data, including corporate, public and personal information through the Internet and enterprise networks. NVTL - Novatel Wireless $24.27 OCT 22.50 NVU-VX LB=0.55 OI=144 CB=21.95 DE=19 TY=4.0% MY=10.4% _________________________________________________________________ SFL - Ship Finance International $21.40 *** Strong Sector! *** Ship Finance International (NYSE:SFL) operates through a number of vessel-owning subsidiaries in the Bahamas, the Isle of Man, Liberia, Panama and Singapore. The company purchased a fleet of 46 crude oil tankers from Frontline, its parent company, which it has chartered under long-term, fixed-rate charters to Frontline Shipping Limited, a wholly owned subsidiary of Frontline (the Charterer). The company also acquired from Frontline an option to purchase one additional very large crude carrier tanker, which it expects to exercise before the end of 2004. Ship Finance also entered into fixed-rate management and administrative services agreements with Frontline Management to provide for the operation and maintenance of its vessels and administrative support. SFL - Ship Finance International $21.40 OCT 20.00 SFL-VD LB=0.45 OI=40 CB=19.55 DE=19 TY=3.7% MY=9.5% _________________________________________________________________ FHRX - First Horizon $19.30 *** 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 $19.30 OCT 17.50 FUF-VW LB=0.35 OI=326 CB=17.15 DE=19 TY=3.3% MY=8.9% _________________________________________________________________ PAAS - Pan American Silver $15.94 *** Precious Metals Hedge! *** Pan American Silver (NASDAQ:PAAS) is principally engaged in the exploration for, and the acquisition, development and operation of, silver properties primarily in Peru, Mexico, Bolivia and Argentina, with a secondary focus on the United States and the Americas. Pan American's principal products and sources of revenue are silver-rich zinc, lead and copper concentrates. It transports and sells silver-rich pyrite stockpiles at a small-scale operation in central Peru. These stockpiles were accumulated over several years by Volcan, a mining company in the Cerro de Pasco mining district in central Peru. PAAS - Pan American Silver $15.94 OCT 15.00 USP-VC LB=0.25 OI=2545 CB=14.75 DE=19 TY=2.7% MY=7.0% _________________________________________________________________ BLUD - Immucor $23.53 *** Who Can Live Without BLUD? *** Immucor (NASDAQ:BLUD) develops, manufactures and markets a complete line of reagents and automated systems used primarily by hospitals, clinical laboratories and blood banks in a number of tests performed to detect and identify certain properties of the cell and serum components of human blood prior to blood transfusion. Immucor also sells a complete family of automated instrumentation for all of their market segments. Earnings are due on 9/29/04. BLUD - Immucor $23.53 OCT 20.00 QMQ-VD LB=0.25 OI=8 CB=19.75 DE=19 TY=2.0% MY=6.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ALTR - Altera $19.30 *** Chip Sector Slump! *** Altera (NASDAQ:ALTR) designs, builds, and sells programmable logic devices, HardCopy devices, pre-defined design building blocks known as intellectual property cores and associated development tools. The company's programmable logic devices are semiconductor integrated circuits that are manufactured as standard chips to perform desired logic functions within their electronic systems. Altera's HardCopy devices enable its customers to move from a PLD to a low-cost, high-volume, non-programmable implementation of their designs. Customers can license IP cores from the Company for implementation of standard functions in their PLD designs. Customers develop, compile and verify their PLD designs, and then program their designs into Altera's PLDs using its proprietary development software, which operates on personal computers and engineering workstations. ALTR - Altera $19.30 "AGGRESSIVE" 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 LTQ-JD 6648 0.50 20.50 10.6% 2.4% _________________________________________________________________ APPX - American Pharma Partners $27.72 *** Trend Reversal! *** 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 $27.72 "AGGRESSIVE" PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 30 AQO-JF 6531 0.50 30.50 8.6% 1.6% _________________________________________________________________ CYMI - Cymer $27.89 *** Downtrend Intact! *** Cymer (NASADQ:CYMI) is a supplier of excimer light sources, the essential light source for deep ultraviolet photolithography systems. DUV lithography is a key technology that has allowed the semiconductor industry to meet the exact specifications and manufacturing requirements for volume production of advanced semiconductor chips. The firm's light sources are incorporated into step-and-repeat (steppers) and step-and-scan (scanners) photolithography systems for use in the manufacture of various semiconductors with critical feature sizes below 0.35 microns. Cymer's products consist of photolithography light sources, replacement parts and service. The firm maintains a worldwide service organization that supports its installed base of light sources. CYMI - Cymer $27.89 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 30 CQG-JF 390 0.40 30.40 6.8% 1.3% _________________________________________________________________ XLNX - Xilinx $27.66 *** Consolidation In Progress? *** Xilinx (NASDAQ:XLNX) designs, develops and markets complete programmable logic solutions, including advanced integrated circuits, software design tools, predefined system functions delivered as intellectual property cores, design services, customer training, field engineering and technical support. The programmable logic devices include field programmable gate arrays and complex programmable logic devices. These devices are standard products that its customers program to perform desired logic functions. Its products are designed to provide high integration and quick time-to-market for electronic equipment manufacturers primarily in the telecommunications, networking, computing, industrial and consumer markets. XLNX - Xilinx $27.66 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 30 XLQ-JF 3736 0.25 30.25 4.5% 0.8% TS ************************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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