The Option Investor Newsletter Tuesday 10-19-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Halloween Coming Early? Futures Markets: See Note Index Trader Wrap: A different kind of healthcare reform Market Sentiment: Divided Focus Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-19-2004 High Low Volume Adv/Dcl DJIA 9897.62 - 58.70 10020.55 9894.89 2.16 bln 1124/2079 NASDAQ 1922.90 - 13.60 1952.85 1922.60 1.72 bln 1236/1887 S&P 100 530.99 - 4.19 538.10 530.93 Totals 2360/3966 S&P 500 1103.23 - 10.79 1118.03 1103.15 SOX 388.00 + 3.94 395.63 384.35 RUS 2000 566.67 - 5.36 576.63 566.49 DJ TRANS 3345.34 - 37.34 3392.76 3345.25 VIX 15.13 + 0.42 16.32 14.32 VXO (VIX-O)15.63 + 0.94 15.64 14.46 VXN 20.84 + 0.12 20.89 20.10 Total Volume 4,229M Total UpVol 1,410M Total DnVol 2,750M Total Adv 2723 Total Dcl 4484 52wk Highs 241 52wk Lows 170 TRIN 1.45 NAZTRIN 1.20 PUT/CALL 0.95 ************************************************************ Halloween Coming Early? by Jim Brown The markets may be warning us that Halloween is coming early this year. The markets gave back an early bounce to sink back to critical support and there were no bulls in sight at the close. Dow support at 9900, Wilshire 5000 support at 10800 and SPX support at 1100 all appear to be in danger of failing. Could this be predicting an ugly October surprise? Dow Chart Nasdaq Chart SPX Chart Wilshire-5000 Chart Today was not a good day for economics. The weekly Chain Store Sales fell -0.2% after two weeks of gains. This is not a big drop but shows retail simply can't maintain a positive trend. Debt burdens are nearing record levels and gas prices over $2.00 are cutting into budgets. Not anything we did not already know. Worse news came in the form of the Consumer Price Index which rose +0.2%. If you don't use food or energy the core rate rose +0.3%. These levels would have been much worse but there was actually a -0.4% decline in energy prices during the survey period. This held the headline numbers down but as we all know the small drop in energy prices did not last. The core inflation rate is now at +2.0% for the year and at levels not seen since Oct-2002. Once the rebound in energy prices filter back through the market this will be even higher. This could force the Fed to continue the rate hikes despite a cooling of the economy. New Residential Construction fell to 1.898 million from 2.02 million in August. Starts fell -6% and it was the largest decline since January and they are well below their 12-month average. Multifamily units continue to buck the trend but single family homes are suffering. There could be some benefit underway in the South for hurricane recovery but it is still too early to tell. With long-term rates stabilizing we could see a level housing market for the near future. Permits suggest we have reached a support level where demand could be stable as long as jobs continue to hold. The ten-year yield closed today at 4.04% and bonds could continue to find buyers in a weak equity market. The challenge remains the job market and the Challenger Survey announced on Monday showed 54,701 high tech jobs were lost in Q3. This was up +60% from Q2 and +14% from the same period last year. Challenger said tech companies have no pricing power and they are having to sell for lower margins just to keep market share. After three years of cost cutting the only avenue left to reduce costs is to reduce jobs. Challenger said IBM and BearingPoint are hiring in the U.S. but are becoming increasingly picky about who they hire. Service and consulting businesses like IBM are seeing their backlog increase but tech manufacturing accounted for 56% of the Q3 job losses. IBM roared out of the gate this morning with a +3.50 gain to trade over $89 and contrary to the market did manage to hold those gains. IBM reported profits on Monday night that beat the street and were surprisingly good. Emerging markets such as Brazil, China, India and Russia grew by more than +30% with American revenue up only +8%. IBM said it had more than $110 billion in back orders. Profits for the quarter were $2 billion. Not bad for a blue chip tech that was known for earnings warning fears just a few quarters ago. Texas Instruments also beat the street and jumped +1.50 on the news. The TXN gains were not so spectacular and came in part due to late quarter sales that boosted the prior two months of weak results. This and several other chip stocks helped push the SOX to resistance highs at 395 that were tested last Wednesday after the Intel earnings. Those highs did not hold then and they did not hold again today. The SOX did close in positive territory but well off its highs. It was not techs or software or even Internet stocks that captured the spotlight today. It was the warlock of Wall Street in the person of Elliott Spitzer making headlines once again. The regulatory gargoyle jumped from sector to sector as not only insurance companies like MMC, CB and AOC took the heat but subpoenas spread out to AET, CI, WLP and ATH with monster losses the rule for the day. ATH -7.30, AET -11.57, CI -6.85 and WLP -11.30. The size of the losses and the widening scope of the witch hunt put fear into investors and every sector even remotely related saw selling. Financial stocks suffered because they were not only grouped into the same indexes being dumped but due to fears the carnage would impact current loans and relationships with the banking community. Somebody needs to put a leash on this wild man or maybe use a wooden stake to prevent Count Spitzer from sucking the lifeblood from any new victims. The markets sank from the open and never found a bid. Support levels were not broken sharply they just eroded away with slow steady selling pressure. Although volume on the NYSE was higher than recent levels at 2.16B shares there was not a serious imbalance. Decliners beat the advancers by slightly more than 2:1 and given the hit to three letter insurance stocks listed above this was not unreasonable. There were just very few buyers. The Dow retreated to 9900 at the close and while that is/was strong support the action at the close suggested it may not hold tomorrow. This is the third retest in the last four days and the odds are good this one will not hold. The August low was 9783 and this could be the next target. One analyst is suggesting we could go all the way to 9500 and the bottom of the downtrend channel. The Nasdaq is refusing to crack and holding above 1925 most of the day. The Nasdaq tried to hold the high ground at 1950 but failed and pulled back to the middle of its recent congestion range running from 1900-1950. This divergence from the blue chips has more to do with the insurance implosion than a tech rally. The IBM/TXN earnings helped techs but swimming upstream in a down market is a tough task. Tonight's earnings were a mixed bag with companies beating estimates disappointing on guidance and those that did not disappoint on guidance found some other reason to trade lower. MOT, PLT, STK, STX, CYMI, MNST and SIMG were some of the stocks beating estimates after the close. MOT, CYMI, MNST, SIMG all traded down along with ERTS which missed estimates. Very late after the market closed Teradyne, a maker of semiconductor testing equipment, posted a serious warning. TER posted earnings of +0.21 cents but warned that Q4 earnings would drop to only +0.04 cents due to customers significantly slashing orders compared to Q3. They said there was a significant reduction in capital spending as chip makers tried to deal with snowballing inventory levels. Revenue for Q3 was $457.8 million and current Q4 orders are only $284 million. At the same time FSL, Freescale Semi, a recent spin off from Motorola said they were laying off -1000 workers and expected orders to decline through Q4. The negative earnings and guidance from multiple companies after the close sent the futures plunging to below 1100 on the S&P and buyers were just beginning to nibble at 8:PM. Will they return to positive territory by morning? Will it matter? With today's negative session and the nights earnings events you would expect Wednesday to be less than exciting for the bulls. The key for traders is not likely to be the chip woes but the ailing financial sector. Eventually the fear will wear off and investors will tip toe back into the water but they may want to cling to the safety of the bank for a few more days. Spitzer needs to be sighted targeting somebody else before they will feel safe entering the sector again. Since banks are grouped with insurance companies in various funds the financial sector may remain weak. Citibank said after the close three top officials are leaving due to the Japan scandal and Fannie Mae reported the SEC inquiry had turned negative with a formal attack now underway. This sent FNM plunging in late trading. Negative chip earnings, weak financials, an election tie and a calendar month known for volatility. Sure sounds like a recipe for disaster. Helping to lubricate the selling was a firming in oil to near $54 once again and money moving from equities to bonds. While myself and many others were expecting an election rebound to begin this week I believe that potential is quickly eroding. If the Dow trades down to 9800 tomorrow it should be our most likely spot to launch a rebound. Should that level fail the sentiment could turn much uglier and the next stop could be that 9500 I mentioned earlier. Wednesday will clearly be a battle between the technical traders and market sentiment. Should they end up on the same side the outcome could be dangerous. There are no material economic events in the morning but we will get oil and gas inventories at 10:30. A drop in inventories could breathe new life in the lagging oil prices. Earnings before the bell include AMR, BK, CL, CFC, DCN, DAL, EK, FLIR, GD, GENZ, HET, HON, JPM, NITE, LIN, LU, MGG, NTRS, ODP, PFE, SWFT, UTX, WYE. Three of those are components in the Dow and misses could be painful to the market. The airlines are expected to show large losses and the transports should react to their guidance. Look for a bounce at 9800 should we trade that low but enter carefully. Given the weak market breadth and sentiment I would be careful about rushing back into the water too soon or you may end up swimming with the fishes rather than surfing the waves. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* Transfer your account to optionsXpress...We'll cover your fee! * optionsXpress rated "Best" by Barron's, SmartMoney and Forbes * Trade options as low as $1.25/contract, or $12.95 Minimum --NO Hidden Fees! * Access to options specialists via email, phone or live chat online * Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest32 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** INDEX TRADER WRAP ***************** A different kind of healthcare reform I don't think today's decline for the HMO Index (HMO.X) 870.41 -9.37% was what Americans had in mind when discussing the pros and cons of government-initiated healthcare reform. For a second time in less than a week, the insurance industry was rocked, this time health insurers, on news that Eliot Spitzer, New York's Attorney General, was widening his office's inquiry into fees paid by HMOs to brokers, acting as intermediaries between employers and the HMOs. UnumProvident (NYSE:UNM) $12.19 -9.83% got the ball rolling when the nations largest provider of disability insurance said it received a fresh subpoena from Eliot Spitzer's office. UnumProvident pledged to cooperate with the probe and, at the same time, examine its own business practices. "We will further review our compensation policies and procedures to be sure that we appropriately compensate our brokers but do not create any actual or perceived conflict between the broker and the customer," UnumProvident CEO Thomas Watjen stated. Mr. Watjen added that "UnumProvident will not enter into any new compensation agreements until this review is completed." S&P 100 Index (OEX.X) 530.00 -0.78% component Cigna (NYSE:CI) $59.73 -10.28% said it received a new subpoena from the New York Attorney General. Aetna (NYSE:AET) $86.17 -11.8% plunged below $83 intra-day, with rumors circulating that it may have received a new subpoena from Sptizer's office. After today's close, Aetna's shares slipped to $85 when the company confirmed it had indeed received a subpoena. As investors continue to juggle the potential outcomes, several being downright frightening for shareholders, investor confidence toward insurers was dealt further blow when representatives from California and Pennsylvania said they are examining allegations raised in Eliot Spitzer's lawsuit against insurance broker Marsh & McLennan (NYSE:MMC) $24.10 -5.74%. "We are analyzing the allegations and are in touch with the New York regulators that are assisting Attorney General Spitzer to assess what additional actions we can and will engage in," said Melissa Fox, spokeswoman at the Pennsylvania Insurance Department. Goldman Sachs did make comment late this afternoon that they felt the selling among HMOs was "overdone," reminding investors that commissions are not paid under purchasing agreements for the large employer business. In what seemed to be a cautious note, Goldman Sachs did mention that commission payment practices for smaller employer business may come under scrutiny and that the bulk of liability rests with brokers, not HMOs themselves. HMO Index (HMO.X) Chart - WEEKLY Intervals Declines among the health insurers spoiled what may have been an otherwise bullish session as last night's quarterly earnings from IBM (NYSE:IBM) $89.37 +4.01% and Texas Instruments (NYSE:TXN) $22.51 +6.92% were met with a bullish response. According to Standard and Poors, profits for the 17 top U.S. health providers rose 114% to $414 million from $193 million since 2004, while profit margins doubled to 5%, the highest level in at least a decade for the industry's top 10 insurers. By comparison, the S&P 500 (SPX.X) 1,103.23 -0.98% saw profits rise a more modest 5% the past four years. U.S. Market Watch - 10/19/04 Close I can't say that the recent declines for insurance brokers and now health insurers have had a significant "fundamental" impact on the broader S&P 500 Index (SPX.X), but I do think the UNCERTAINTY surrounding the eventual outcome of Eliot Spitzer's investigation provides negative, if not cautious sentiment among investors. Market Snapshot / Internals - 10/19/04 Close While the health insurers started their decline just after the opening bell, the major indices reached their intra-day highs about 40-minutes into the session. Strength among semiconductors and broader tech lasted longer. Uncertainty is such a difficult trade. Some things I saw, or perhaps heard, is what can often times happen when one concern suddenly becomes a second concern. Let's call it "Eliot Wave." For example, with news of an insurance broker investigation last week, building to further investigation of the health insurers, brokers came under selling pressure on RUMOR that Mr. Spitzer's office might be investigating brokers and their dealings with various derivatives. Dow component JP Morgan (NYSE:JPM) $37.98 -2.61% fell from the $39.20 level just prior to 11:00 AM EDT, as it was one of the brokers RUMORED as being a target. Similar RUMORS circulated that Fannie Mae (NYSE:FNM) $67.67 -1.51% might be under greater scrutiny from the SEC, where an informal probe has been underway as to some of its accounting methods. After the closing bell, the mortgage lender confirmed that the SEC had changed the status of its investigation of the company's accounting to formal from informal. The Washington, D.C.-based company, which stands behind more than $2 trillion in mortgages, said it will continue to cooperate fully with the SEC. A formal SEC investigation implies that the SEC has now assigned staff, budget and subpoena power to the ongoing investigation. S&P 500 Index (SPX.X) Chart - Daily Intervals The SPX has really gone nowhere the past 4 sessions, and whether any of us fully understand the implications of Mr. Spitzer's probe, it may be broader market psychology that dictates trade, with the though being it best to either take profits, or play things conservatively, let things cool down a bit, and get more information before committing new capital. While it has been somewhat refreshing to discuss something other than oil prices, today's main driver was the widening probe of Mr. Spitzer. Things can change quickly though. We've got oil inventories tomorrow, and while oil prices remained firm after yesterday's decline, oil didn't trade new highs either and the SPX.X still holds above MONTHLY S1 and 1,100. Pivot Matrix - The VIX.X traded a session low of 14.32 and high of 15.20, which comes just shy of its WEEKLY Pivot. Traders might keep tabs on VIX.X 15.25 tomorrow should the SPX.X edge under the 1,100 level and near 3 levels of correlative support at 1,098 in tomorrow's trade. Especially into the 10:30 AM EDT mark, when we should get weekly oil inventory data. The NDX/QQQ came within fractions of their WEEKLY R2, with the SOX.X providing a push to its WEEKLY R1. Jeff Bailey **************** MARKET SENTIMENT **************** Divided Focus - J. Brown Investors have a lot on their minds these days. Normally investors would turn a white-hot spotlight on corporate earnings. They remain center stage today, especially as Wall Street ponders future earnings growth and just how fast or how slow earnings will grow in the fourth quarter and beyond. Unfortunately, record high oil prices continue to upstage the Q3 earnings performance. Yes, crude has slipped two days in a row now (whoa! is that a trend?) but oil remains near its highs. Plus, the markets and individual investors are starting to grow more concerned about the rise in heating oil. That's especially true now that winter's chill is not that far away. If you read most of the financial media tonight they'll probably suggest to you that tech stocks turned in a decent day. That may be true for the likes of IBM and TXN who soared higher after beating earnings estimates. Whether these two stocks gained on short-covering or investors breathing a sigh of relief that things were not worse than expected is up for grabs. The bears will have to concede that the earnings numbers were indeed positive. Unfortunately the NASDAQ Composite closed in the red and the SOX semiconductor index was the only major tech index to close in the green. Overall market internals were negative today. Declining stocks outnumbered advancers by 2-to-1 on the NYSE and 18-to-11 on the NASDAQ. Down volume was 2.5 times up volume on the NYSE and with a heavy volume day overall for the Big Board. So far we're seeing stocks affected by the age-old tradition of "sell the news". If earnings are inline or just slightly better than expected investors are still hitting the sell button - at least short-term. Speaking of earnings we're going to see a huge number of earnings on Wednesday and Thursday this week. Tomorrow alone brings reports from Dow-components HON, JPM and UTX. Plus, we'll hear from the likes of AMGN, COF, CHIR, DAL, and EBAY. Overshadowing both the earnings numbers and the rise in oil is probably the upcoming election. Many feel that stocks are likely to churn sideways in choppy fashion between here and November 2nd. That's not a surprise given the incredible cacophony being generated by both sides. Whether you think it's a good thing or a bad thing so far the media appears to be focusing on just the election itself and not the terror threat it was acknowledged to be just a few weeks ago. Yup, investors definitely have a lot on their minds right now. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9497 Current : 9897 Moving Averages: (Simple) 10-dma: 10026 50-dma: 10116 200-dma: 10282 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 1018 Current : 1103 Moving Averages: (Simple) 10-dma: 1118 50-dma: 1109 200-dma: 1119 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1443 Moving Averages: (Simple) 10-dma: 1442 50-dma: 1399 200-dma: 1440 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 15.13 +0.42 CBOE Mkt Volatility old VIX (VXO) = 15.63 +0.94 Nasdaq Volatility Index (VXN) = 20.84 +0.12 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.95 856,237 810,611 Equity Only 0.87 728,489 633,400 OEX 1.39 15,123 21,170 QQQ 5.38 30,026 161,746 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63.1 - 1 Bear Correction NASDAQ-100 47.0 + 3 Bull Alert Dow Indust. 53.3 - 0 Bear Confirmed S&P 500 61.4 - 0.8 Bear Correction S&P 100 61.0 + 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: 1.06 10-dma: 1.18 21-dma: 1.11 55-dma: 1.15 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 929 1169 Decliners 1874 1845 New Highs 58 52 New Lows 55 48 Up Volume 571M 731M Down Vol. 1531M 942M Total Vol. 2150M 1689M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 10/12/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders continue to hedge their bets on the large S&P contracts as longs and shorts move closer to parity. Small traders didn't move much money either but remain net bullish. Commercials Long Short Net % Of OI 09/21/04 404,746 425,560 (20,814) (2.5%) 09/28/04 404,773 434,441 (29,668) (3.5%) 10/05/04 421,217 435,736 (14,519) (1.7%) 10/12/04 423,472 436,780 (13,308) (1.5%) 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 09/21/04 134,943 108,036 26,907 11.1% 09/28/04 135,317 107,173 28,144 11.6% 10/05/04 137,210 114,489 22,721 9.0% 10/12/04 139,175 113,903 25,272 9.9% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Uh-oh! This could spell trouble for stocks. Commecials, who are normally on the "right" side of the trade are upping their short positions. Meanwhile, small traders decreased their short positions leaving them strongly net bullish. This alone is a contrarian indicator for a market top. Just remember that these readings were taken before the Wednesday-Thursday sell-off this past week. Commercials Long Short Net % Of OI 09/21/04 213,014 397,844 (184,830) (30.2%) 09/28/04 226,020 420,714 (194,694) (30.1%) 10/05/04 248,190 476,608 (228,418) (31.5%) 10/12/04 258,457 517,805 (259,348) (33.4%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 09/21/04 256,315 60,275 196,040 61.9% 09/28/04 262,501 68,255 194,246 58.7% 10/05/04 308,021 80,373 227,648 58.6% 10/12/04 309,720 62,502 247,218 66.4% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders aren't changing their bets. They remain net bullish on the NDX. Small trades have significantly reduced positions in both longs and shorts but remain strongly net bearish, which of course is bullish for the NDX if you're a contrarian. Commercials Long Short Net % of OI 09/21/04 54,530 30,827 23,703 27.7% 09/28/04 55,045 32,319 22,726 26.0% 10/05/04 55,640 32,872 22,768 25.7% 10/12/04 52,572 32,775 19,797 23.2% 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 09/21/04 7,417 25,821 (18,404) (55.3%) 09/28/04 10,078 22,917 (12,839) (38.9%) 10/05/04 12,254 30,693 (18,439) (42.9%) 10/12/04 8,756 24,400 (15,644) (47.2%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders reduced both long and short positions but remained net bullish. In contrast small traders significantly increased both their longs and their shorts on the Dow Industrials but in essence remain rather neutral. Commercials Long Short Net % of OI 09/21/04 30,816 27,200 3,616 6.2% 09/28/04 29,714 26,877 2,837 5.0% 10/05/04 27,498 25,772 1,726 3.2% 10/12/04 24,150 22,849 1,301 2.7% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 09/21/04 4,467 6,748 (2,281) (20.3%) 09/28/04 5,143 5,988 ( 845) ( 7.6%) 10/05/04 5,531 5,539 ( 8) ( 0.0%) 10/12/04 8,814 9,167 ( 353) ( 1.9%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ************************Advertisement************************* Insiders are Buying these 6 Rocket Stocks. In the last few weeks, we have pinpointed insider buying on six stocks that have the potential to deliver stratospheric gains. 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The Option Investor Newsletter Tuesday 10-19-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: CMI, GDW Dropped Puts: FLIR, SEPR, WHR, Call Play Updates: MTB, OSIP, PGR, SBUX New Calls Plays: None Put Play Updates: APOL, HSIC, New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Cummins Inc - CMI - close: 73.64 change: +0.74 stop: 71.49 Per our previous comments we are closing CMI as of Tuesday's close to avoid the company's Wednesday earnings report. The stock traded to $74.95 this morning giving nimble traders another chance to exit near the $75 mark if they missed it the first time. Wall Street will be looking for $1.51 a share when CMI reports tomorrow morning. Picked on September 19 at $70.99 Change since picked: + 2.63 Earnings Date 10/20/04 (confirmed) Average Daily Volume = 724 thousand Chart = --- Golden West Financial - GDW - cls: 112.81 chg: +0.96 stop: 111.65 Uh-oh! The banking indices took a dive again on Tuesday. The BKX dropped 1.5 percent and fell under its simple 200-dma. Shares of GDW slipped just over 2 percent and hit our stop loss at $111.65 late in the session. We are stopped out just two days before GDW is due to report earnings. Picked on September 30 at $110.95 Change since picked: + 0.60 Earnings Date 10/21/04 (confirmed) Average Daily Volume = 512 thousand Chart = PUTS: ***** FLIR Systems - FLIR - close: 53.38 chg: -0.87 stop: 56.35 Time's up! It's too bad too. Shares of FLIR continue to sink lower as investors sell each little bounce. The stock is producing a nice trend of lower highs over the last few weeks. However, per our previous comments we are exiting as of Tuesday's close to avoid FLIR's Wednesday morning earnings report. Analysts estimates are for 47 cents a share. So far FLIR has fallen almost six points from our entry point. Picked on September 29 at $59.35 Change since picked: - 5.97 Earnings Date 10/20/04 (confirmed) Average Daily Volume = 577 thousand Chart = --- Sepracor Inc - SEPR - close: 43.80 chg: -1.05 stop: 48.01 Close enough for government work. SEPR broke down under the $44.00 level and its simple 200-dma to hit a low of $43.52 this afternoon. We've been watching and waiting for SEPR to hit $43.50 so we could exit before its earnings report. Fortunately, earnings are not expected until Oct. 26th and given today's close under $44 SEPR could see more weakness tomorrow. We're just choosing to exit now. Watch the exponential 200-dma at $43.30 as possible support. Picked on September 22 at $48.94 Change since picked: - 5.14 Earnings Date 10/26/04 (confirmed) Average Daily Volume = 1.8 million Chart = --- Whirlpool - WHR - close: 59.31 change: +1.03 stop: 60.55 WHR is not cooperating. The stock managed a 1.76 percent bounce on Tuesday just one day before its earnings report. The move was fueled by above average volume and WHR broke its short-term trend of lower highs. Technical traders will note that its MACD is hinting at a new buy signal soon and short-term oscillators like the RSI and stochastics are suddenly looking stronger. Not helping the bears was news out today that WHR had declared a quarterly cash dividend of 43 cents per share payable on Dec. 15th, 2004 to shareholders on record as of Nov. 18th. Wall Street will be looking for earnings of $1.52 a share tomorrow morning. Picked on October 07 at $59.03 Change since picked: + 0.28 Earnings Date 10/20/04 (confirmed) Average Daily Volume = 854 thousand Chart = ************************Advertisement************************* Transfer your account to optionsXpress...We'll cover your fee! * optionsXpress rated "Best" by Barron's, SmartMoney and Forbes * Trade options as low as $1.25/contract, or $12.95 Minimum --NO Hidden Fees! * Access to options specialists via email, phone or live chat online * Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest32 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************** PLAY UPDATES - CALLS ******************** M&T Bank - MTB - close: 99.50 change: -1.33 stop: 98.00 A down day in the markets was a bummer for bank stocks. The BKX slipped under its simple 200-dma and the BIX fell back under the 360 level. Likewise shares of MTB fell back under the round- number support/resistance level at the $100 mark. This is not good news for bulls in the stock. MTB is still above historical support/resistance at the $99 level but we had hoped to avoid any more consolidation by buying the bounce formed on Friday-Monday. If you're still looking for an entry point we suggest waiting. At this time it may be more prudent to see a new short-term high above $101.50 or $102 before initiating new positions. Looking more closely at MTB's chart it is possible that MTB is building a bull-flag pattern but that's probably more wishful thinking right now. The MACD is looking weaker on the daily chart. Again, we want to reiterate our suggestion to be cautious here! Picked on October 18 at $100.83 Change since picked: - 1.33 Earnings Date 10/12/04 (confirmed) Average Daily Volume = 327 thousand Chart = --- OSI Pharma - OSIP - close: 64.08 change: -2.02 stop: 61.99 Tuesday had to be a frustrating day for OSIP bulls too. Yesterday the stock broke out from its consolidation pattern and pushed through resistance at $64.60 and its simple 100-dma. OSIP was looking pretty strong and its MACD had produced a new buy signal on its daily chart. Today (Tuesday) the stock completely reverses yesterday's gains with a 3 percent loss. There is no news on the move and OSIP under performs the BTK biotech indices 1.3 percent decline. At this time we would not suggest new positions until OSIP traded back above the $65.00 mark. Yesterday we moved our stop loss up to $61.99. Picked on October 03 at $63.45 Change since picked: + 0.63 Earnings Date 08/10/04 (confirmed) Average Daily Volume = 1.6 million Chart = --- Progressive - PGR - close: 87.60 chg: -1.25 stop: 84.75*new* If you caught Monday night's OptionInvestor.com email newsletter then you already know that PGR gapped higher on Monday. The move was fueled by positive news that the company reported a successful Dutch auction to buy 16.9 million shares of its own stock at $88 a share. PGR soared to $89.59, almost our initial profit target at $90. Seeing some profit taking today was probably expected and PGR's 1.4 percent decline may have been hastened by the Spitzer-influenced downdraft in the insurance sector. PGR is mainly car insurance and at this time not one of the industries under investigation by the New York Attorney General. Hopefully, PGR will remain free and clear of this insurance-disaster cause by Spitzer's probing. Thus we don't expect the news to have any significant affect on PGR but readers should be aware of the risk. We are raising our stop loss to $84.75. Picked on October 13 at $85.65 Change since picked: + 1.95 Earnings Date 10/13/04 (confirmed) Average Daily Volume = 700 thousand Chart = --- Starbucks - SBUX - close: 50.31 chg: +0.01 stop: 45.99 The momentum in SBUX may be taking a breather today. Monday saw shares breakout above round-number, psychological resistance at the $50.00 mark. We were encouraged to see some follow through today with SBUX challenging the $51.50 level three times earlier in the session. Then the rally began to fade in the last two hours. Fortunately, you can see that volume surged as buyers rushed into buy the dip at the $50 mark. Still, we wouldn't be rushing to open bullish positions. Yes, SBUX still has great relative strength but if the broader indices continue to sink then SBUX may retest support at the $48-49 levels before moving higher. Picked on October 17 at $49.47 Change since picked: + 0.84 Earnings Date 11/10/04 (confirmed) Average Daily Volume = 3.3 million Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* SEE WARREN BUFFETT'S LATEST DISCLOSED STOCK PORTFOLIO Now you can follow the investment master's actual moves. To get a FREE report that details Warren Buffett's strategy and reveals his most recently disclosed, ACTUAL stock picks, Click HERE! http://www.bigmoneywatch.com/default.asp?aid=626 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Apollo Group - APOL - close: 70.10 chg: -1.22 stop: 73.01 This is a pivotal spot for shares of APOL. Yesterday the stock rallied sharply after Morgan Stanley started coverage on the stock with an "out perform". APOL pushed back above round-number resistance at the $70 mark but couldn't breakout over the September lows near $71.75. We suggested that conservative traders may want to exit to keep losses at a minimum. We were willing to stick it out and see if the September lows would hold as resistance. Thus far resistance is working but we're surprised to see APOL still trading above $70. The stock is naturally oversold but we think this could just be an oversold bounce with some short-covering involved. Readers may want to consider new bearish positions if APOL trades back below the $69 mark. Picked on October 10 at $69.81 Change since picked: + 0.29 Earnings Date 10/05/04 (confirmed) Average Daily Volume = 3.3 million Chart = --- Henry Schein - HSIC - close: 57.60 change: -1.34 stop: 62.01 Heads up! We have a significant change in strategy or at least our time frame in HSIC. Previously our research showed that HSIC was due to report earnings in November. The company has not reported that it would announce Q3 earnings on Tuesday, October 26th. We do not want to hold over the event and will either exit this weekend or on Monday afternoon before the closing bell. So far the bearish trend continues with lower highs and lower lows but HSIC is descending slower than we expected. We are encouraged to see HSIC closing near its lows today after the failed rally under $59.50. Picked on October 14 at $58.35 Change since picked: - 0.75 Earnings Date 10/26/04 (confirmed) Average Daily Volume = 655 thousand Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* Trade Smarter Using the latest Insider Trades Is the CEO selling off? Has a key insider loaded up on shares before a big price jump? Find out now. 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The Option Investor Newsletter Tuesday 10-19-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Retailers, Software and more! Spreads & Straddles: Stocks Plunge Amid Widening Insurance Industry Probe Premium Selling Plays: Naked Puts & Calls ********** WATCH LIST ********** Retailers, Software 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. ___________________________________________________________________ Harley Davidson - HDI - close: 56.60 change: -1.09 WHAT TO WATCH: This could be a pivotal test for HDI. The stock has not done very well with five down days in a row. The company reported earnings about four sessions ago. Investors were not impressed and shares are now testing technical support at the simple and exponential 200-dma's. We can also see that a drop under the $56 mark would reverse HDI's P&F chart into a sell signal. HDI's daily chart appears to have produced a double-top near $63 so it's not surprising to see a potential trend change. Consider bearish positions under $56 or under $55. Chart= --- Kohl's - KSS - close: 50.98 change: +1.29 WHAT TO WATCH: We've mentioned KSS before. There is a strong camp of analysts and investors who believe KSS will out perform the market over the next several months as the company moves into the next few quarters of easy year over year earnings comparisons. The stock appears to have produced a new short-term bottom at the $48 level near its exponential 200-dma. This could be a bullish entry point given today's above average volume rally toward the $51 mark. Or wait for a new high over $52. The MACD is in a new buy signal. Earnings are in November. Chart= --- Electronic Arts - ERTS - close: 46.66 change: +0.14 WHAT TO WATCH: Bulls were trying to mount a rally in shares of ERTS before its afternoon, post-close earnings report but the rally failed. Now shares are going to gap down tomorrow as investors react to its earnings miss and lowered guidance. We've had ERTS on the watch list before. The key level to watch is the $44 mark. If ERTS trades under $44 it could be a bearish entry point with a $40 target. Chart= --- Symantec - SYMC - close: 55.36 change: -0.21 WHAT TO WATCH: On the eve before its earnings report shares of SYMC didn't see much action. The stock is stuck trading near the $55 strike price. If you squint your eyes a bit it looks like SYMC has been creating a bull-flag pattern. However, if they don't knock the ball out of the park on earnings tomorrow shares will easily see some profit taking. We're watching for a dip toward round-number support at the $50 level. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- BIIB $57.06 -0.94 - BIIB is looking weak here and could be challenging support near $55 and its exponential 200-dma soon. AMZN $38.33 -0.94 - AMZN is looking weak here with a failed rally under the $40.00 mark. AMZN reports earnings on Thursday. BDK $79.20 +2.39 - BDK still showing strength with another new high before its Oct. 27th earnings. EBAY $92.45 -2.26 - EBAY is slipping toward minor support at $92 ahead of its earnings tomorrow after the closing bell. ************************Advertisement************************* Transfer your account to optionsXpress...We'll cover your fee! * optionsXpress rated "Best" by Barron's, SmartMoney and Forbes * Trade options as low as $1.25/contract, or $12.95 Minimum --NO Hidden Fees! * Access to options specialists via email, phone or live chat online * Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest32 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************* SPREADS & STRADDLES ******************* Stocks Plunge Amid Widening Insurance Industry Probe By Ray Cummins The major equity averages retreated sharply Tuesday after the New York Attorney General expanded his "price-fixing" probe into the health insurance industry. The Dow Jones Industrial Average closed down 58 points at 9,897, with weakness in American International Group (NYSE:AIG), Alcoa (NYSE:AA), Citigroup (NYSE:C), General Motors (NYSE:GM), and JP Morgan (NYSE:JPM). Technology companies on the NASDAQ avoided most of the selling pressure, and the index fell only 13 points to 1,922. The S&P 500 index slumped 10 points to 1,103, with a sell-off in the health insurance segment weighing heavily on the broader market. Decliners outpaced gainers by nearly 2 to 1 on the New York Stock Exchange and by 3 to 2 on the NASDAQ. Volume was 1.7 billion on the Big Board and 1.7 billion on the hi-tech exchange. In the bond market, treasury prices reclaimed most of the day's earlier losses to end nearly unchanged for the session. The benchmark 10-year note was up 1/32 at 101 22/32, while its yield closed at 4.04%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 10/17/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT-CREDIT SPREADS Stock Pick Last Mon L/P S/P Credit CB G/L Status BSC 94.16 91.81 NOV 80.0 85.0 0.65 84.35 0.65 Open PHS 37.23 36.31 NOV 30.0 32.5 0.35 32.15 0.35 Open? BTU 60.07 60.78 NOV 50.0 55.0 0.60 54.40 0.60 Open MRVL 28.84 28.69 NOV 22.5 25.0 0.35 24.65 0.35 Open COST 44.69 45.60 NOV 40.0 42.5 0.30 42.20 0.30 Open NEM 46.25 44.78 NOV 40.0 42.5 0.30 42.20 0.30 Open INSP 47.25 46.70 NOV 35.0 40.0 0.85 39.15 0.85 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Special Tuesday Note: Pacificare Health Systems (NYSE:PHS) became an "early-exit" candidate after today's decline on reports of the New York Attorney General's new probe into the health insurance industry. CALL-CREDIT SPREADS Stock Pick Last Mon L/C S/C Credit CB G/L Status AMZN 40.47 38.55 NOV 50.0 45.0 0.65 45.65 0.65 Open PDX 55.00 54.45 NOV 65.0 60.0 0.60 60.60 0.60 Open BZH 103.14 100.39 NOV 115.0 110.0 1.10 111.10 1.10 Open CHIR 37.98 32.47 NOV 45.0 42.5 0.30 42.80 0.30 Open FLIR 54.52 54.50 NOV 65.0 60.0 0.70 60.70 0.70 Open MERQ 37.97 37.22 NOV 45.0 42.5 0.35 42.85 0.35 Open BIIB 59.82 58.02 NOV 70.0 65.0 0.65 65.65 0.65 Open MCHP 27.56 27.65 NOV 35.0 30.0 0.60 30.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status QLGC 29.12 27.78 OCT 30.0 30.0 2.40 2.60 Closed MDC 74.96 71.76 OCT 75.0 75.0 3.50 8.00 Closed ETN 64.82 62.70 OCT 65.0 65.0 2.05 5.50 Closed RMBS 15.23 15.80 OCT 15.0 15.0 1.10 1.45 Closed Debit straddles in MDC Holdings (NYSE:MDC) and Eaton (NYSE:ETN) were the best performers during the October expiration period. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ADBE - Adobe Systems $53.57 *** New "All-Time" High! *** Adobe Systems (NASDAQ:ADBE) offers a line of software products that allow consumers, businesses and creative professional customers to create, manage and deliver visually rich, compelling and reliable content. Adobe has four business segments: Creative Professional, which provides software for professional page layout, professional Web page layout, technical document and business publishing; Digital Imaging and Video, which provides users with software for creating, editing and enhancing digital images and photographs, digital video, animations, graphics and illustrations; ePaper Solutions, which provides electronic document distribution software that allows users to create, enhance, annotate and securely send Adobe PDF files that can be shared, viewed, navigated and printed, and OEM PostScript and Other, which includes printing technology to create and print simple or visually rich documents with precision. ADBE - Adobe Systems $53.57 PLAY (conservative - bullish/credit spread): BUY PUT NOV-45.00 AEQ-WI OI=1413 ASK=$0.25 SELL PUT NOV-50.00 AEQ-WJ OI=1790 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$49.50 __________________________________________________________________ VRNT - Verint Systems $37.73 *** Testing 2004 Highs! *** Verint Systems (NASDAQ:VRNT) is a global provider of analytic software-based solutions for security and business intelligence markets. The firm's solutions for the security market consist primarily of communications interception solutions used by law enforcement agencies, government agencies and telecom carriers, and networked video solutions used by government agencies and public and private organizations for use in airports, public buildings, financial institutions, retail stores, correctional facilities and corporate sites. Verint's solutions for the business intelligence market consist primarily of solutions for enterprises that rely on contact centers for voice, e-mail and Internet interactions with their customers. VRNT - Verint Systems $37.73 PLAY (conservative - bullish/credit spread): BUY PUT NOV-30.00 JOQ-WF OI=24 ASK=$0.25 SELL PUT NOV-35.00 JOQ-WG OI=5 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$34.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AET - Aetna $87.26 *** Industry Probe! *** Aetna (NYSE:AET) is a health benefits company whose business operations are conducted in the Health Care, Group Insurance and Large Case Pensions segments. On December 13, 2000, the company was spun off, with the remaining entity merged into a subsidiary of ING Group N.V. The Health Care segment consists of health and dental benefit products including health maintenance organization, point-of-service, preferred provider organization and indemnity products, and group insurance products including life, disability and long-term care insurance products. The Group Life Insurance segment consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Large Case Pensions manages a variety of retirement products, including pension and annuity products, offered to qualified defined benefit and contribution plans. AET - Aetna $87.26 PLAY (very conservative - bearish/credit spread): BUY CALL NOV-100.00 AET-KT OI=5260 ASK=$0.35 SELL CALL NOV-95.00 AET-KS OI=532 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$95.40 __________________________________________________________________ CI - Cigna $60.65 *** Sell-Off In Progress! *** Cigna Corporation (NYSE:CI) and its subsidiaries are investor- owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and other services, life, accident and disability insurance, retirement products and services and investment management. CIGNA's main operating divisions include Employee Health Care, Disability and Life Benefits, CIGNA Group Insurance, Employee Retirement, and Investment Services, and International Life, Health and Employee Benefits. CI - Cigna $60.65 PLAY (less conservative - bearish/credit spread): BUY CALL NOV-70.00 CI-KN OI=951 ASK=$0.30 SELL CALL NOV-65.00 CI-KM OI=1104 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.75-$0.80 POTENTIAL PROFIT(max)=17% B/E=$65.75 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ STRADDLES AND STRANGLES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. _________________________________________________________________ No straddles or strangles today... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ***************************************** PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS ***************************************** All of these issues have robust option premiums and favorable technical indications. However, current news and events, as well as market sentiment, will have an effect on these stocks so review each position thoroughly and make your own decision about its outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 10/17/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield NCRX NOV 25.00 24.30 25.67 0.70 5.52% 2.88% ANF NOV 32.50 32.10 36.50 0.40 2.78% 1.25% STTX NOV 25.00 24.60 25.61 0.40 3.89% 1.63% * SNDA NOV 22.50 21.85 27.95 0.65 7.78% 2.97% PMTI NOV 20.00 19.15 23.09 0.85 9.23% 4.44% IDBE NOV 12.50 12.15 15.16 0.35 6.44% 2.88% BVF NOV 17.50 17.05 18.56 0.45 5.40% 2.64% USG NOV 17.50 16.90 21.22 0.60 6.84% 3.55% SNDA NOV 25.00 24.50 27.95 0.50 5.67% 2.04% WEBX NOV 20.00 19.60 25.17 0.40 5.75% 2.04% ENER NOV 15.00 14.40 19.75 0.60 8.11% 4.17% DRIV NOV 25.00 24.35 29.70 0.65 6.81% 2.67% PLMD NOV 30.00 29.55 32.32 0.45 3.33% 1.52% CNCT NOV 22.50 22.10 26.07 0.40 4.68% 1.81% CCBI NOV 22.50 21.90 23.20 0.60 5.51% 2.74% Special Tuesday Note: Steel Technologies (NASDAQ:STTX) became an "early-exit" candidate today after a steep decline in the stock price. A CIBC downgrade of the Steel sector was likely the cause of the selling pressure. NAKED CALLS Stock Strike Strike Break Current Gain Max Simple Symbol Month Price Even Price (Loss) Yield Yield BRCM NOV 35.00 35.35 28.20 0.35 4.44% 0.99% LLTC NOV 40.00 40.60 36.09 0.60 3.74% 1.48% SINA NOV 35.00 35.35 28.00 0.35 4.56% 0.99% LRCX NOV 25.00 25.40 21.75 0.40 5.37% 1.57% IVX NOV 20.00 20.75 18.25 0.75 9.51% 3.61% PLMO NOV 40.00 40.45 26.95 0.45 5.62% 1.11% SLXP NOV 20.00 20.65 18.00 0.65 8.83% 3.15% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 SSNC 21.59 NOV 20.00 QUN-WD 0.45 5 19.55 32 2.2% 5.7% MRVL 28.91 NOV 23.75 UVM-WT 0.40 2086 23.35 32 1.6% 5.6% DITC 25.43 NOV 20.00 QZD-WD 0.30 329 19.70 32 1.4% 5.3% GBBK 32.02 NOV 30.00 BBU-WF 0.60 2217 29.40 32 1.9% 5.0% CKFR 31.66 NOV 30.00 FCQ-WF 0.60 416 29.40 32 1.9% 4.9% AGIX 30.16 NOV 20.00 AUB-WD 0.30 1477 19.70 32 1.4% 4.5% OSTK 44.35 NOV 35.00 QKT-WG 0.40 744 34.60 32 1.1% 4.1% KRON 50.29 NOV 45.00 KUE-WI 0.50 20 44.50 32 1.1% 3.1% 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. _________________________________________________________________ SSNC - SS&C Technologies $21.59 *** Trend Reversal! *** SS&C Technologies (NASDAQ:SSNC) is a provider of client/server based investment and financial management software, application service provider solutions and business process outsourcing solutions. The company's products and related services compete in a variety of vertical markets in the institutional investment management marketplace, including commercial lending, financial institutions, hedge funds and family offices, institutional asset management, insurance entities, pension funds, municipal finance and real estate property management. SSNC - SS&C Technologies $21.59 NOV 20.00 QUN-WD LB=0.45 OI=5 CB=19.55 DE=32 TY=2.2% MY=5.7% _________________________________________________________________ MRVL - Marvell Technology $28.91 *** In A Trading Range? *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. Earnings are due 8/19/04. MRVL - Marvell Technology $28.91 NOV 23.75 UVM-WT LB=0.40 OI=2086 CB=23.35 DE=32 TY=1.6% MY=5.6% _________________________________________________________________ DITC - Ditech Communications $25.43 *** Technical Break-Out? *** Ditech Communications (NASDAQ:DITC) is a global telecom equipment supplier for voice networks. The firm's voice-processing products focus on echo cancellers, used to eliminate echo, a common problem in existing and emerging voice networks. The company's newest voice-processing products not only provide customers with the traditional echo cancellation features, but also can be used to provide voice quality assurance features that address issues such as background noise and other voice quality issues in wireline and wireless communications. DITC - Ditech Communications $25.43 NOV 20.00 QZD-WD LB=0.30 OI=329 CB=19.70 DE=32 TY=1.4% MY=5.3% _________________________________________________________________ GBBK - Greater Bay Bancorp $32.02 *** Buyout Target? *** Greater Bay Bancorp (NASDAQ:GBBK) is a financial holding company with one bank subsidiary, Greater Bay Bank, National Association, and one commercial insurance brokerage subsidiary, ABD Insurance and Financial Services. The Bank provides commercial banking and financial services to small and medium-sized businesses, property managers, business executives, property developers, professionals and other individuals. The company operates community banking offices throughout the San Francisco Bay Area. ABD also provides commercial insurance brokerage, employee benefits consulting and risk management solutions to business clients across the United States. The company also owns a broker-dealer, which executes mutual fund transactions on behalf of its clients' employee benefit plans. GBBK - Greater Bay Bancorp $32.02 NOV 30.00 BBU-WF LB=0.60 OI=2217 CB=29.40 DE=32 TY=1.9% MY=5.0% _________________________________________________________________ CKFR - CheckFree $31.66 *** Entry Point? *** CheckFree (NASDAQ:CKFR) is an electronic payment processing company. The company provides financial electronic commerce products and services and is divided in to three divisions: Electronic Commerce, Investment Services and Software. With the Electronic Commerce division, the company allows consumers to receive and pay bills. The Investment Services division provides a range of portfolio management services to financial institutions, including broker dealers, money managers and investment advisors. The Software segment delivers software, maintenance, support and professional services to financial service providers and other companies in various industries. CKFR - CheckFree $31.66 NOV 30.00 FCQ-WF LB=0.60 OI=416 CB=29.40 DE=32 TY=1.9% MY=4.9% _________________________________________________________________ AGIX - AtheroGenics $30.16 *** Pure Premium-Selling! *** AtheroGenics (NASDAQ:AGIX) is a research-based pharmaceutical company, focused on the discovery, development and eventual commercialization of novel drugs for the treatment of chronic inflammatory diseases, including heart disease, rheumatoid arthritis, organ transplant rejection and asthma. The company has developed a vascular protectant (v-protectant) technology platform to discover drugs to treat these types of diseases. Based on this v-protectant platform, it has four primary drug development programs in the clinic and is pursuing a number of other preclinical programs. AGIX - AtheroGenics $30.16 NOV 20.00 AUB-WD LB=0.30 OI=1477 CB=19.70 DE=32 TY=1.4% MY=4.5% _________________________________________________________________ OSTK - Overstock.com $44.35 *** Uptrend Resumes! *** Overstock.com (NASDAQ:OSTK) is an online retailer offering discount, brand-name merchandise for sale primarily over the Internet. Its merchandise offerings include bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods and designer accessories. The company also sells books, magazines, CDs, DVDs, videocassettes and video games. Overstock offers its customers an opportunity to shop for bargains conveniently, while providing suppliers an alternative inventory liquidation distribution channel. The company also offers travel services, including airline tickets, hotel reservations and car rentals. OSTK - Overstock.com $44.35 NOV 35.00 QKT-WG LB=0.40 OI=744 CB=34.60 DE=32 TY=1.1% MY=4.1% _________________________________________________________________ KRON - Kronos $50.29 *** Rally Mode! *** Kronos (NASDAQ:KRON) is a single-source provider of human resources, payroll, scheduling and time and labor solutions. The company's employee relationship management (ERM) solutions are the Workforce Central Suite, Kronos iSeries Central Suite and Timekeeper Central System. These unique solutions enable organizations to reduce costs and increase productivity, improve employee satisfaction, align employee performance with organizational objectives and put real-time information in the hands of decision makers. In addition to its core products, Kronos offers a variety of complementary products designed to help maximize ERM capabilities. Kronos maintains service and technical support organization that maintains systems and also provides professional and educational services. KRON - Kronos $50.29 NOV 45.00 KUE-WI LB=0.50 OI=20 CB=44.50 DE=32 TY=1.1% MY=3.1% TS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ HYSL - Hyperion Solutions $37.21 *** Earnings Speculation *** Hyperion Solutions (NASDAQ:HYSL) is a provider of Business Performance Management software that enables companies to translate strategies into plans, monitor execution and provide insight to manage financial and operational performance. The company provides customers with solutions that include analysis and reporting tools, a business intelligence platform, packaged and tailored applications, and related services. Its solutions support the enterprise-wide processes for proactively managing any business toward optimal performance against goals and for anticipating and forecasting results. Earnings are due 10/21/04. HYSL - Hyperion Solutions $37.21 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 40 WQE-KH 2611 0.85 40.85 6.2% 2.1% _________________________________________________________________ RNR - RenaissanceRe Holdings $47.54 *** Next Leg Down? *** RenaissanceRe Holdings (NYSE:RNR) provides reinsurance and insurance through its subsidiaries. The company's subsidiary, Reinsurance Ltd., provides property catastrophe reinsurance coverage to insurers and reinsurers. Reinsurance also writes specialty reinsurance in lines including catastrophe-exposed workers' compensation coverage, surety and property per risk, terrorism, aviation and finite reinsurance. Within this area, the company also manages property catastrophe reinsurance written by joint ventures including Top Layer Reinsurance and Advance Reinsurance. The company also has an individual risk segment that provides insurance for commercial and homeowners' catastrophe-exposed property business. Earnings are due on or about 10/27/04. RNR - RenaissanceRe Holdings $47.54 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 50 RNR-KJ 1822 0.65 50.65 3.5% 1.3% TS _________________________________________________________________ X - United States Steel $32.82 *** Sector Downgrade! *** United States Steel Corporation (NYSE:X) is an integrated steel producer with major production operations in the United States and central Europe. An integrated producer uses iron ore and coke as primary raw materials for steel production. The firm has annual raw steel production capability of 26 million tons. U. S. Steel is also engaged in several other activities, most of which are related to steel manufacturing. These include the production of iron-bearing taconite pellets and coke in the United States and central Europe; transportation services; real estate operations, and engineering and consulting services. X - United States Steel $32.82 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 40 X-KH 13525 0.25 40.25 3.5% 0.6% TS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* Get your FREE weekly charts of the NASDAQ! 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