The Option Investor Newsletter Thursday 10-21-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Adrenaline Rush Futures Wrap: See Note Index Wrap: Bulls may be BANKING on tech rally Market Sentiment: Friday Could Be Quiet Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-21-2004 High Low Volume Adv/Dcl DJIA 9865.76 - 21.20 9903.15 9800.87 2.04 bln 2164/1050 NASDAQ 1953.62 + 20.70 1957.48 1933.00 2.02 bln 1863/2052 S&P 100 531.26 + 0.54 532.53 527.28 Totals 4027/3102 S&P 500 1106.49 + 2.83 1108.96 1098.47 W5000 10851.86 + 55.06 10870.68 10775.31 SOX 408.98 + 15.60 411.21 393.36 RUS 2000 576.66 + 6.53 576.70 568.38 DJ TRANS 3431.69 + 45.00 3435.52 3381.86 VIX 14.54 - 0.31 15.19 14.28 VXO (VIX-O)14.99 - 0.11 15.97 14.86 VXN 20.36 - 0.29 20.92 20.21 Total Volume 4,397M Total UpVol 3,098M Total DnVol 1,254M Total Adv 4545 Total Dcl 2548 52wk Highs 233 52wk Lows 140 TRIN 1.10 NAZTRIN 0.60 PUT/CALL 0.83 ************************************************************ Adrenaline Rush by Jim Brown Nearly 400 companies reported earnings on Thursday and the results were all over the board. Good news was mixed with bad news and delivered so quickly investors were left dizzy and confused. Strong market moves were made in both directions and outlooks changed faster than traffic lights during rush hour. Welcome to the busiest day in the October earnings schedule. Wilshire-5000 Chart Dow Chart Nasdaq Chart What a day! I hardly know where to start with mixed economics and even more violently mixed earnings. The Jobless Claims fell -25,000 to pre hurricane levels but analysts suggested it might be too early to get excited. The Columbus Day holiday may have impacted number collection and the low number may be in error. Seems to me there is some qualification on every number we get recently. The headline number was 329,000 for the week and heading for levels that translate to job gains on a consistent basis. The Chicago Fed National Activity Index fell -0.01 for September and back into negative territory after posting a high of 0.83 back in March. The decline has been very erratic with a spike from -0.08 in June to +.55 in July only to completely retrace that spike in August. Only 37 of the 85 indicators that make up the CFNAI rose during the month. Employment moved to -.09 from -.02 in August and was the biggest contributor to the decline in the headline number. High oil prices were also a factor in the decline. The Conference Board Leading Indicators fell for the fourth consecutive month with a -0.1% headline number. The Coincident Index also fell -0.2% for the month. These numbers may seem insignificant but the key is the trend and it is clearly down. Declining shipments and narrower yield spreads were two major reasons for the decline along with the pressure from energy prices. This is the only the third time since Jan-2002 that the index has declined more than three months in a row. The outlook is negative for future releases based on the internal trends. The index typically predicts economic trends for the next six months. Not all economics were negative with the Monthly Mass Layoffs falling slightly to 708 events impacting only 68,792 workers. This was only 51 workers less than the August report but both months were significantly below the recent trends. For instance July had 253,939 layoffs and when compared to Aug/Sept there is a significant improvement. Temporary services accounted for 10% of the Sept number and hit the highest level since 2001. This could be a negative sign that the fringe workers are being trimmed in advance of cutting into the long term workers. The best news came from the Philly Fed, which exploded to 28.5 compared to estimates for 19.3 and the September number at 13.4. This was clearly a blowout and renewed faith in manufacturing in general despite being only a regional index. Shipments surged to 28.2 from 22.4 and New orders remained strong at 24.6. On the negative side back orders fell into negative territory at -5.4 from last months already weak +3.1. Employment also fell strongly to 14.1 from 21.5. The six-month outlook dropped significantly from 44.9 to 27.6. The report was bullish on the surface definitely showed some cracks in the foundation. These are not insurmountable and as long new orders remain firm the minor weaknesses will be ignored. That brings us to earnings and this was a monster day with nearly +400 companies reporting. Five Dow components reported with CAT the standout with the best results and the biggest share price loss. CAT earnings more than doubled on strong demand for its products but concerns about high costs knocked -$3.35 of the share price. The basic worry was that continued high oil prices would pressure sales and growth in other countries. Steel prices have doubled and for CAT that is a major expense. Estimates for 2005 saw revenue up +10% compared to +30% gains in 2004. Dow component Merck reported earnings that fell to 60 cents compared to 82 cents for the same period last year. The Q3 earnings contained a 25 cents charge for the VIOXX recall. However, MRK guided analysts to a higher number for Q4 but many analysts were expecting the charge in the current quarter and not on the Q3 earnings so the real continued earnings should not appear until 2005. Merck said it already had over 300 personal injury lawsuits in progress from the VIOXX claims. MRK was flat for the day at $31.28. AIG fell another -1.15 on news a grand jury was looking at products that might have been used to make earnings look better. The probe centers on a contract with CELL claiming the company fraudulently concealed losses on the policy. AIG announced earnings that matched analyst estimates and that was the good news. A JPM analyst said he expected Spitzer to extract more than $2 billion in penalties from the current insurance scandal. Pfizer reported earnings of $3.34 billion for the quarter compared to $2.22 billion for Q3-2003. They beat the street slightly but warned that there would be increased generic competition next year for $5 billion of their products. Considering they will have more than $50B in total revenue next year the minor amount they may lose on generics should more than be made up on Celebrex. The stock appears to have found support at $28.50 and the VIOXX news is slowing. UPS missed estimates by two cents but used the politically correct hurricane excuse and escaped investor wrath. The company said business was strong and 2005 earnings should grow +13% to +17%. They said the holiday shipping season was shaping up to be a strong season. After the bell Microsoft beat estimates by +2 cents and said Q4 could be weaker than expected but raised estimates for all of 2005. The company said it was seeing more business decisions on software purchases being postponed by companies from Q4 and into 2005. Unearned income fell unexpectedly and suggests Linux is cutting into their subscription revenue base. MSFT fell -14 cents at the close and about -70 cents in after hours before the call produced some minor buying. MSFT has that monster $32B dividend that will be paid next month and $9 billion of that is expected to be received by retail investors. The rest will be collected by funds and insiders like Bill Gates. The $9 billion is expected to provide a retail bounce for the holiday season and some analysts suggest it could add 25-30 points to the GDP. I assume that was before the nearly $100 billion haircut in the insurance industry. AMZN dropped -3.46 in after hours after missing estimates by a penny and giving disappointing guidance. The +17 cent earnings were significantly over the +4 cents from Q3-2003 but the bar is pretty high for the online firm. AMZN did say they were well positioned to go into the DVD rental space. The problem came from revenue growth that was less than analysts had hoped. Competition is growing and growth is slowing as the business matures. I bought my first online book from Barnes and Nobel last week because Amazon did not have it. In the past Amazon always had everything and this could be a symptom of the future of their retail model. Skinny the inventory and ignore the slow sellers. With their reputation built as the worlds greatest marketplace it will be interesting to see how this plays out. I might also note I bought 12 other books from Amazon last week so the defection to BN.com for the one they did not have was only a minor detail. The big news after the bell was Google, which brought back the Internet volatility of yesteryear. When GOOG announced earnings of only 45 cents when analysts were expecting 56 cents the crowd went wild. The stock dropped from $149 to $140 as traders dumped the stock but then rallied back to $162 after they disclosed in the call that there was in fact some hidden charges in the number. The clean number was reported to be 70 cents and a beat. The volatility was huge and analysts could not say enough good things about the stock. However, nobody seemed to want to buy it at the current range. GOOG was touted as having a better growth rate than YHOO, EBAY and AMZN and while that may be true based on today's numbers the field is about to become very crowded. The Google model is not yet fully understood and once understood it will be widely copied. Microsoft is expected to make an announcement soon and Yahoo and Amazon already have products in place and growing. GOOG has a whopping 250 million shares coming eight times the current shares available for trading. With GOOG adding to the share price each day whether on valid assumptions or not the market cap continues to grow. Eventually this stock will be included in the various major indexes and at the current nearly $50 billion market cap will mean index funds will need to buy large quantities when that happens. This could be months away and after the last lockup release on Feb-15th of 176 million shares. Currently there are slightly more than 30 million shares in circulation and another 40 mil will be released on Nov-16th a little more than three weeks from now. Additional releases of 25M each will occur on Dec-15th and Jan-15th. The bad news came from numerous chip stock earnings. There were several today including BRCM, HLIT, IDTI, KLAC, MCHP, TQNT and XLNX to name a few. Led by BRCM several warned about Q4 and the amount of orders being pushed into 2005. BRCM warned that sales could drop as much as -18% in Q4 on delayed customer orders. They blamed excessive chip inventories still held by their customers due to weak Q3 demand. They said weaker sales of networking and satellite equipment had rippled back to them through the supply chain. XLNX warned that revenue would be down for the quarter based on increasing inventory levels at customers. The average inventory level at quarter end was 156 days, up from 131 days in the prior quarter. KLAC also said they saw a decline in Q3 and another decline is expected for Q4. They said sales to foundries had slowed significantly. TQNT warned that they would have a bigger loss than they previously expected for Q4, sales were slowing and their book to bill had dropped to only 0.81. MCHP warned that despite record sales in Q3 their expectations for Q4 had fallen. IDTI repeated the claims that Q4 would also be a challenge as customers wade through excess inventory. Sounds like they have the excuse committed to memory. That pretty well makes it unanimous that chip inventory has not improved and is not expected to improve for Q4. Based on dozens of company forecasts this situation is expected to pass by Q1-2005. The warnings tonight were nothing new and exactly like the warnings we have seen from chip companies for the last two months. Despite those warnings the SOX rose to a three week high today and the SMH did not lose any ground in after hours trading. The bad news appears to be fully priced in and traders are buying chips six months ahead of when they believe the next demand bounce will occur. Those buying today are looking at the April earnings as an exit point if the current tech scenario completes as expected. SOX chart Today was the largest earnings schedule for the Q3 cycle with nearly 400 companies reporting. As of yesterday's close 223 S&P companies had reported with an average increase in revenue of +9.2% and an average earnings increase of +10.8%. Analysts expect the final total to show earnings growth of +14.8% but as you can see by the current total there is a big gap. The breakdown of the results so far is shown in the following table and it is still not that bad. 2004-Q4 Comparisons Partial list of companies reporting after the close: KO earnings est +0.47, actual = +0.50 ACF earnings est +0.39, actual = +0.43 ACS earnings est +0.71, actual = +0.72 CLS earnings est +0.08, actual = +0.11 ELX earnings est +0.10, actual = +0.11 GNW earnings est +0.54, actual = +0.55 MCK earnings est +0.24, actual = +0.29 RHI earnings est +0.21, actual = +0.24 SFA earnings est +0.36, actual = +0.36 AMZN earnings est +0.18, actual = +0.17 BRCM earnings est +0.34, actual = +0.36 CAMD earnings est +0.09, actual = +0.10 CPKI earnings est +0.25, actual = +0.27 EPNY earnings est -0.07, actual = -0.06 FDRY earnings est +0.12, actual = +0.11 GILD earnings est +0.21, actual = +0.25 GOOG earnings est +0.56, actual = +0.70 HLIT earnings est -0.03, actual = -0.03 NSIT earnings est +0.29, actual = +0.30 IDTI earnings est +0.07, actual = +0.09 KLAC earnings est +0.57, actual = +0.58 MENT earnings est +0.07, actual = +0.05 MCRL earnings est +0.07, actual = +0.08 MCHP earnings est +0.29, actual = +0.29 MSFT earnings est +0.30, actual = +0.32 OSTK earnings est -0.20, actual = -0.16 PSFT earnings est +0.14, actual = +0.17 PLCM earnings est +0.19, actual = +0.19 RSAS earnings est +0.14, actual = +0.15 SIAL earnings est +0.81, actual = +0.81 TQNT earnings est -0.04, actual = -0.03 WEBX earnings est +0.24, actual = +0.26 XLNX earnings est +0.24, actual = +0.24 YELL earnings est +1.34, actual = +1.38 The obvious question is where do we go from here. The overall earnings are not that bad although expectations from techs for the next quarter are falling. The SOX is telling us the bad news is priced in despite the pummeling the Dow has taken over the last several sessions. However, was it really that bad? The Dow is only composed of 30 stocks and there have been some monumental blowups over the last several weeks. Drugs and insurance aside the weakness we have seen has been due mostly to the huge impact of individual stocks on the Dow. Using the broader indexes of the Wilshire-5000 and the Russell the markets are not in that bad of shape. The Wilshire is comfortably holding the high ground above 10800 support and only -300 points from a new high for the year. The Russell is also holding the high ground over 560 support and only 25 points from the breakout 600 level. This is not bad news despite what the Dow appears to be showing. The Dow has tested 9800 for two consecutive days and saw nearly a +100 point rebound on both days. Neither stuck due to individual stock issues. Today it was CAT and its -3.35 drop taking nearly -30 points off the Dow along with the continued AIG weakness. They were the only two Dow components losing more than $1 for the day. Dow 9800 is the conversational low of the year from August with the actual low 9783 but close enough for most. This 9800 retest is exactly where an October bottom should occur if it is in the cards. A break of the 9800 level would change all the rules but I will wait to cover that if it happens. Bulls really want to see the Dow rebound from this level and tomorrow would be nice. There are no economic reports to confuse the issue. The Nasdaq has actually been rising since the Oct-15th lows at 1900. The close today at 1952 is just one good day away from a potential breakout over 1975. It appears the October low was already made and the bad news bulls are back. This will of course be tested again tomorrow after the multiple chip warnings tonight. The futures are well off their lows and nearly positive as I type this and they appear to be indicating another bounce at the open. With the election only seven trading days away and October almost over there is a rising bid beginning to appear. Unfortunately every bounce is sold so there is still major resistance to be overcome. Any fund portfolio shuffling for their October year end should be over and if anything they should have cash to spend. TrimTabs reported tonight that fund flows for the week were positive to the tune of +$1.5B on top of +$1.4B last week. The tide may be turning and hopefully the worst is behind us. For Friday I think traders will be watching oil and chips and nothing else. Oil closed at $54.50 again and is higher overnight. Like the chip warnings I think investors have decided to ignore oil and consider it a "transitory event" using the Greenspan terminology. That sets up Friday as a possibly bullish day assuming chips don't suddenly implode. Watch the Wilshire, Russell and SOX for the real market direction. Enter Passively, Exit Aggressively. Jim Brown Editor ************ FUTURES WRAP ************ Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* Quit paying fees for limit orders or minimum equity * No hidden fees for limit orders or balances * $1.50 /contract (10+ contracts) or $14.95 minimum. * Zero minimum deposit required to open an account * Free streaming quotes and Dow Jones news Go to http://www.optionsxpress.com/marketing.asp?source=oinvest34 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Bulls may be BANKING on tech rally The very broad NASDAQ Composite (COMPX) rose more than 1%, where for the first time since July 21, volume breached the 2 billion share mark with chips, networkers, software internet sectors all recording 3% gains. While not listed at the NASDAQ, Dow component SBC Communications (NYSE:SBC) $25.68 -2.95% provided today's catalyst for technology sectors when the telecommunication service provider said it was accelerating plans to spend as much as $6 billion to connect 18 million households within the next three years. SBC had previously said to would continue to build out its high speed fiber-optic network over a 5-year period. But the stepped-up rollout comes after the company reported quarterly net income of $2.1 billion, or 63 cents a share, up from $1.22 billion, or 37 cents, a year ago. SBC's stepped up plans had the company awarding Alcatel (NYSE:ALA) $14.24 +11.25% a 5-year contract worth $1.7 billion, to build out SBC's Project. The Networking Index (NWX.X) 226.01 +3.09%, which Alcatel is a component, lifted from curling higher 21-day and 50-day SMA's with CIEN $2.39 +9.13%, ADCT $2.23 +7.21% and CMVT $20.75 +5.7% leading the sector's gains. Bulls that were looking to add some fiber to their diet bid up shares of JDS Uniphase (NASDAQ:JDSU) $3.56 +7.22% and Corning (NYSE:GLW) $10.73 +2.77%. The AMEX-listed Internet Infrastructure HOLDRs (AMEX:IIH) $3.95 +10.33% surged above their 200-day SMA ($3.66) on unusually heavy volume of 174, 500 shares. In SBC's conference call, the company said earnings were primarily drive by the addition of 402,000 high-speed DSL customers in the third quarter. As SBC was adding customers to its high-speed DSL service, online auctioneer $99.59 +9.00% added to its string of new all-time highs to trade as high as $100.18 and have the CBOE Internet Index (INX.X) 186.02 +3.10% springing higher from its 200-day SMA (180.64) and moving above its April high-August low 61.8% retracement of 183.45. In a very confusing, yet highly anticipated earnings report, Internet search giant Google (NASDAQ:GOOG) $149.38 +6.32% slid to $140 when it reported headline revenues (ex-traffic acquisition costs) of $503 million and adjusted EBITDA of $321 million. Nobody really knew what to expect, but the stock now ticks at $161.30 as it was confirmed that analysts' consensus estimate of $284.51 million was comparable. GOOG's mysterious management team would not speculate on the ad market, but said demand for their advertising is large and unmet. Analysts reported kept asking GOOG execs to break down the divisions to get metrics for performance, but GOOG officials had their own itinerary to follow, saying that Adsense is half of revenues and is an "incredible success" and content portion is now becoming significant contributor. As far as CapEx is concerned, management said historical investment rates will likely prevail and utilization rate is "very high." How's that for some fundamental analysis? Are tech bulls BANKING on a continued rally? They may be. While the S&P Banks Index (BIX.X) 354.41 -0.07% finished down fractions, some may have noted that Silicon Valley Bankshares (NASDAQ:SIVB) $39.10 +3.3%, while not a component of the BIX.X, jumped higher in today's session. While that regional bank fund manager has not yet returned my phone call (10/10/04 Ask the Analyst), he may well be busy accumulating shares of SIVB on thought that a second leg of capital investment does present itself with telecom spending suddenly accelerating. U.S. Market Watch - 10/21/04 Close Chip giant Intel (NASDAQ:INTC) $21.69 +1.11% closed at its highest level in more than a month, where I think it was Analog Devices' (NYSE:ADI) $40.30 +5.33% management saying this year's slowdown in profits has been largely due to industry inventory corrections, not necessarily an economic slowdown. We'll remember Intel (INTC) being slammed lower this summer when it said margins were under pressure after the company misjudged demand and ramped production and misjudged customer demand. ADI also said that in China, an inventory buildup in handsets combined with a government-engineered credit squeeze had a considerable impact on sales. But CEO Jerald Fishman added that "feedback from customers in China indicates inventory levels are low and government constraints are likely to end later this year or early next year," factors that could signal better growth prospects ahead. Analog Devices' comments seemed to echo those of Intel's CEO Andy Bryant when Intel reported its recent quarterly results, where Mr. Bryant noted that inventory builds had started to abate, and he was hopeful that improved margins would return by the end of the year. Market Snapshot / Internals - 10/21/04 Close The Dow Industrials (INDU), which has been leading decline, lagged gains in today's session. Price heavyweight Caterpillar (NYSE:CAT) $77.03 -4.16% turned lower at the open, after bidding as high as $83.75 in this morning's pre-market. The heavy equipment giant said business was the strongest it has seen in years, but was cautious going forward due to higher materials prices potentially being a negative should an expected slowdown present itself in 2005. Insurer American International Group (NYSE:AIG) $56.45 -1.99% also weighed on the Dow after saying a federal grand jury is investigating products it sold that companies might have used to make their earnings look better. That continued the fallout in the insurance sector that began a week ago when New York Attorney General Eliot Spitzer sued insurance broker Marsh & McLennan (NYSE:MMC) $24.85 -0.28% and said the company involved other insurers in a bid-rigging scheme. Pivot Matrix - Index Trader Wrap Correlative near-term support for the NDX/QQQ moves higher to WEEKLY R1 and MONTHLY R1, where broader technology gains had the NDX/QQQ as well as the SOX.X trading and closing at, or slightly above their WEEKLY R2s. NASDAQ-100 heavyweight Microsoft (MSFT) $28.56 -0.48% slid to $28.10 in tonight's extended session after saying profits rose to $2.9 billion, or 27 cents per share, including stock-based compensation, which compared to a profit of $2.6 billion, or 24 cents per share, a year earlier. The Redmond, Washington-based software maker said revenue rose to $9.19 billion from $8.22 billion. For the current quarter, Microsoft forecast a profit of $0.28 per share, including stock-based compensation. The company said it expected to record revenue of $10.3 billion to $10.5 billion, which was shy of Wall Street's consensus estimate of $10.63 billion. NYSE Composite ($NYA.X) Chart - Daily Interval Last night we looked at the 10-year YIELD Chart ($TNX.X) as the benchmark bond's yield was sitting at a level I felt/feel is rather important. As I review the NYSE Composite Chart ($NYA.X) it too is sitting on a rather important near-term level of support and its 50% retracement of 6,505. When we look at the NASDAQ Composite (COMPX) 1,953.62 +1.06% we will see it sitting just BELOW its 200-day SMA, but just recapturing its 50% retracement from its January highs to recent August lows. More on this in a minute, but let's take a quick look at the BIX.X, as I want to tie it with the NYSE and the 10- year yield chart. S&P Banks Index (BIX.X) Chart - Daily Intervals We can make a tie between the NYSE pullback and "double bottom" it is trying to find at its 50% retracement, with the S&P Banks (BIX.X). One comment I've seen more than a couple of times in recent quarterly earnings is that the decline in Treasury YIELD, which sets the interest rate for CONSUMER borrowing, is starting to narrow the spread between what a bank is borrowing at and what they're generating new loans at. As the 10-year YIELD ($TNX.X) pulls back into a "zone of support", so has the BIX.X. As noted back in May, we can't necessarily tie a "finite level" of Treasury YIELD to the BIX.X, but we should understand its impact on the banking industry. It was a partial negative that YIELD rose, as it made it a little more difficult to entice consumers to borrow. Conversely, the main reason the banks surged from their May lows, is because the spread between what they were borrowing at, and lending at, widened considerably. Think of that "widening" of the spread as a technology company's "gross margin." NASDAQ Composite Index (COMPX) Chart - Daily Intervals Now, the COMPX looks nothing like the BIX.X, but after looking at the NYSE Comp chart, and its BLUE conventional retracement, we're looking at the NASDAQ Comp. and its conventional retracement. Both very near their 200-day SMAs and 50% retracement. I've noted that the INX.X has broken above its recent high, which would equate to the recent NASDAQ Comp high of 1,970. Great! Oh shoot! The Disk Drive Index (DDX.X) 101.51, rather representative of "storage," was looking so strong a couple of weeks ago as it broke above its 200-day SMA after a strong move from then 100 resistance. We get the distinct feeling that momentum players are in, then they're out, then they're back in again, rotating quickly from sector to sector. Now the SOX.X is back to challenge its recent 412 relative high set on 10/04/04, which came days after the COMPX had that one-day close above its 200-day SMA. Software continues to show up as the stronger sector, not only on its bar chart, but its sector bullish % from Dorsey/Wright. Software, software, software.... internet, internet, internet.... telecom spending on fiber for broadband, broadband, broadband. While there's plenty of cash in the nations M2 supply (see this morning leading indicators and 10/17/04 Ask the Analyst) I still think equity markets want to see some selling in Treasuries. Jeff Bailey **************** MARKET SENTIMENT **************** Friday Could Be Quiet - J. Brown You wouldn't know it from looking at the major indices but the markets were generally positive today. The Dow Industrials ended the session lower under weakness from drug stocks, insurance, and a negative reaction to Caterpillar's earnings. The tech-heavy NASDAQ moved the opposite direction as investors bid up shares of EBAY for a 9 percent gain to $99.50. EBAY reported earnings last night with a 77 percent jump in profits. After the bell Internet stocks continued to command the spotlight. Shares of Google (GOOG) took traders on a wild ride as everyone struggled to discern whether or not the earnings miss was more or less important than the upside revenue surprise. GOOG closed at $149.38 in the regular session and initially dipped to $140 before soaring to $161 in the after-hours market. GOOG may grab the headlines tonight and tomorrow but it will be lackluster earnings numbers and comments from the likes of Amazon.com (AMZN), Broadcom (BRCM) and Microsoft (MSFT) that are likely to lead the NASDAQ and most of the tech sector lower on Friday. This will likely be a drag on the already weak Dow and S&P. Not helping matters today were comments from Federal Reserve governor Ben Bernanke who said that the days of cheap oil were likely behind us. He did say that the U.S. economy would be able to manage but the initial reaction to his words were not positive. Whether you believe the market is going to head up or down it's worth noting that the Dow Transports have broken out to another new five-year high over the 3400 level. I know some investors find this unbelievable given the high cost of fuel but it's happening anyway. Plus, the RLX retail index just hit a new all- time closing high. The strength in retailers could have been boosted by a CNN article that said consumers were not going to let higher interest rates and higher gasoline prices impact their holiday spending. The latest poll suggested that the average American consumer plans to spend about $702 in holiday shopping. That's a 4.5 percent increase over last year. The big story on everyone's mind is the election. Some market pundits feel that the stock market is likely to trade sideways for the next twelve days until after the November 2nd election. Tomorrow's schedule is light. There aren't any major economic reports due out and the Q3 earnings parade is relatively quiet after this week's deluge of numbers. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9497 Current : 9865 Moving Averages: (Simple) 10-dma: 9965 50-dma: 10114 200-dma: 10275 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 1018 Current : 1106 Moving Averages: (Simple) 10-dma: 1118 50-dma: 1109 200-dma: 1119 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1474 Moving Averages: (Simple) 10-dma: 1442 50-dma: 1404 200-dma: 1440 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.54 -0.31 CBOE Mkt Volatility old VIX (VXO) = 14.99 -0.11 Nasdaq Volatility Index (VXN) = 20.36 -0.29 ----------------------------------------------------------------- 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 62.7 - 0.4 Bear Correction NASDAQ-100 49.0 + 2 Bull Alert Dow Indust. 50.0 - 3 Bear Confirmed S&P 500 60.0 - 1.4 Bear Correction S&P 100 59.0 - 2 Bear Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 0.93 10-dma: 1.19 21-dma: 1.07 55-dma: 1.12 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 1947 1824 Decliners 862 1105 New Highs 104 88 New Lows 49 50 Up Volume 1326M 1490M Down Vol. 701M 485M Total Vol. 2034M 2001M 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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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 Thursday 10-21-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: APC, OSIP, PGR, SBUX New Calls Plays: FDX Put Play Updates: APOL, HSIC, TDS 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: ***** None PUTS: ***** None ************************Advertisement************************* Quit paying fees for limit orders or minimum equity * No hidden fees for limit orders or balances * $1.50 /contract (10+ contracts) or $14.95 minimum. * Zero minimum deposit required to open an account * Free streaming quotes and Dow Jones news Go to http://www.optionsxpress.com/marketing.asp?source=oinvest34 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Anadarko Petroleum - APC - close: 69.67 chg: -0.20 stop: 66.99 Almost! We saw several oil-related stocks tick higher today and APC did trade back above the $70 level but it failed to hold any gains. APC also failed to hit our TRIGGER to go long at $70.40. More aggressive traders may consider longs here or on a dip back toward $69.00. The rest of are going to wait for the breakout. Remember, we don't have a lot of time on this play so consider that as part of the risks involved. Picked on October xx at $xx.xx <-- see TRIGGER Change since picked: + 0.00 Earnings Date 10/29/04 (confirmed) Average Daily Volume = 1.6 million Chart = --- OSI Pharma - OSIP - close: 63.47 change: -0.12 stop: 61.99 The last three days have erased the rally from Monday and left us right back where we started. Currently OSIP continues to channel higher but the angle of OSIP's ascent isn't very steep. We're willing to hold on to OSIP for now but our patience is growing thin. Watch the BTK biotech index. If the BTK can build on today's intraday rebound into a more sustainable bounce then OSIP might get the boost higher it needs. Picked on October 03 at $63.45 Change since picked: + 0.02 Earnings Date 08/10/04 (confirmed) Average Daily Volume = 1.6 million Chart = --- Progressive - PGR - close: 88.54 chg: +1.12 stop: 84.75 Thus far PGR has completely ignored the dramatic declines in the IUX insurance index. The news that Spitzer is investigating the insurance industry has not yet spread to car insurance providers like PGR. At this time we don't expect it to. It would appear that Wednesday's intraday low to $86.80 was enough to satisfy the "fill the gap" crowd and shares took off on Thursday. P&F chart readers will notice that Monday's big gap higher produced a new P&F buy signal with a $120 (long-term) price target. We're still targeting a short-term move to $90.00. No change in stop. Picked on October 13 at $85.65 Change since picked: + 2.89 Earnings Date 10/13/04 (confirmed) Average Daily Volume = 700 thousand Chart = --- Starbucks - SBUX - close: 50.76 chg: +0.50 stop: 46.95*new* Another day, another new closing high (yawn). Such is the life for SBUX shareholders these days. The momentum machine just keeps on chugging. We're encouraged to see traders buy the dip to $49.40 this morning and push SBUX back above the $50 mark. We are going to raise our stop loss to $46.95. Picked on October 17 at $49.47 Change since picked: + 1.29 Earnings Date 11/10/04 (confirmed) Average Daily Volume = 3.3 million Chart = ************** NEW CALL PLAYS ************** Fedex Corp - FDX - close: 89.45 change: +1.58 stop: 84.99 Company Description: FedEx Corp. provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $26 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world's most admired and trusted employers, FedEx inspires its more than 240,000 employees and contractors to remain "absolutely, positively" focused on safety, the highest ethical and professional standards and the needs of their customers and communities. (source: company press release) Why We Like It: Investors are obviously not worried about the impact of record oil prices and the costs of higher fuel on the transportation sector. If they were the Dow Jones Transportation average would not be breaking out over the 3400 level and hitting new five-year highs. Neither would Fedex Corp be breaking out to new all-time highs. Right now it's a stock pickers market. Momentum and relative strength traders are reinforcing the maxim that the trend is your friend. We like the momentum in FDX and the bullish breakout over resistance at $88 and $89 on Thursday was fueled by very strong volume. The move actually produced a new triple-top breakout buy signal on its P&F chart. Short-term technicals are strong and its MACD just produced a new buy signal. We're willing to speculate on a run toward the $100 level. The stock last split 2-for-1 in May of 1999 near the $120 level and shares are approaching levels where the company can announce a new stock split at any time. Suggested Options: Traders can choose from the Novembers, Decembers and January calls. Currently the Novembers have a lot of open interest and volume but we'd suggest the Decembers too. Both months will work. BUY CALL NOV 85 FDX-KQ OI=1872 current ask $5.10 BUY CALL NOV 90 FDX-KR OI=2866 current ask $1.55 BUY CALL NOV 95 FDX-KS OI= 298 current ask $0.30 BUY CALL DEC 85 FDX-LQ OI= 24 current ask $5.80 BUY CALL DEC 90 FDX-LR OI= 539 current ask $2.55 BUY CALL DEC 95 FDX-LS OI= 60 current ask $0.80 Annotated Chart: Picked on October 21 at $89.45 Change since picked: + 0.00 Earnings Date 09/22/04 (confirmed) Average Daily Volume = 1.5 million Chart = ************************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. Get your free download of Real Time insider trades: http://www.realtimeinsider.com/default.asp?aid=637 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Apollo Group - APOL - close: 69.99 chg: -0.55 stop: 73.01 The tug of war continues in APOL near the $70 level. The stock continues to suffer under a trend of lower highs and failed under support/resistance at its October lows. APOL gapped lower this morning and hit $68.44. That could have been used as an entry point. However, if APOL trades back over $71.50 we might use that as an early warning system and/or conservative stop loss. We're going to leave our stop at $73.01 for now. Picked on October 10 at $69.81 Change since picked: + 0.18 Earnings Date 10/05/04 (confirmed) Average Daily Volume = 3.3 million Chart = -- Henry Schein - HSIC - close: 58.62 change: +0.53 stop: 60.01*new* Bears saw a little bit of excitement on Wednesday. Shares of HSIC dipped to $56.15 early in the session before quickly rebounding. Thus far HSIC continues to decline in a trend of lower highs and lower lows. Despite this trend we're a little concerned. Yesterday's candlestick looks like a potential one- day reversal pattern. Today's gain is arguably the technical follow through bulls are looking for. Given that earnings are next Tuesday we may end up exiting this play tomorrow before the closing bell. Plan your exits now. We're lowering our stop loss to $60.01. Picked on October 14 at $58.35 Change since picked: + 0.27 Earnings Date 10/26/04 (confirmed) Average Daily Volume = 655 thousand Chart = --- Telephone Data Sys - TDS - close: 75.85 chg: -3.90 stop: 79.01*new* Wow! That was quick. TDS has already traded into our exit, profit target region near $75. We knew that yesterday's drop looked like a nasty breakdown but we didn't really expect TDS to fall so quickly. Volume was extremely high at more than four times the average. We are suggesting anyone who actually entered this play this morning consider exiting for a quick pop. We are going to keep the play open and target the $73 level above the 200-dma. However, this is not the best spot to consider new positions. We are lowering our stop loss to $79.01. Picked on October 20 at $79.75 Change since picked: - 3.90 Earnings Date 10/20/04 (confirmed) Average Daily Volume = 155 thousand Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* Get your FREE weekly charts of the NASDAQ! Hot Stix’ stock market report reveals simple, powerful strategies for profiting from the QQQ - whether down or up! http://www.hotstix.com/public/weekly.asp?aid=755 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 10-21-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Poised to Breakout Combos/Straddles: A Speed Bump On The Path To Profits ********** WATCH LIST ********** Poised to Breakout ___________________________________________________________________ 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. ___________________________________________________________________ Pixar - PIXR - close: 81.32 change: +1.78 WHAT TO WATCH: We strongly considered adding PIXR to the play list tonight. The stock has been digesting its August and September gains in a sideways trading range between $78 and $82. The stock added 2.2 percent on Thursday after a broker upgrade. The short-term technicals are looking positive and its MACD is hinting at a new buy signal soon. We would consider aggressive bullish plays if PIXR can break through the $82 level. Earnings are not expected until November 11th. Chart= --- Kmart Holdings - KMRT - close: 91.04 change: +0.73 WHAT TO WATCH: We are still watching KMRT for a breakout over resistance at the $92.00 level. Shares came awfully close today with a high of $91.94. The MACD is very close to a new buy signal. With the RLX retail index at new closing highs the sector is supporting more upside for this stock. KMRT doesn't have earnings until Nov. 15th (or so) and a breakout over $92 could/should lead toward a run at the $100 mark. Chart= --- Timberland Co - TBL - close: 63.35 change: +5.54 WHAT TO WATCH: Wow! TBL announced earnings Thursday morning and beat estimates by 16 cents. The stock gapped higher to $59.60 and then soared. This is a breakout over its simple 100-dma, the simple 200-dma and the round-number resistance level at the $60 mark. Volume was huge. We would not chase it here but we would watch for a pull back toward the $61-62 area and look for a bounce. The move has produced an ascending triple-top breakout buy signal on its P&F chart with a $69 target. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- BRCM $30.47 +2.25 - BRCM was in rally mode today ahead of its earnings but the earnings news and guidance wasn't so hot. Look for shares to reverse on Friday. FFH $127.85 -5.15 - We played FFH a few weeks ago and now shares are rolling over again. The next stop could be the $120 level. NKE $80.79 +1.14 - NKE is one again trading near new all-time highs over the $80 mark. TXT $67.01 +2.61 - TXT's 4 percent rally was inspired by its earnings report today. The move is a breakout to new 4 1/2 year highs. EXM $36.92 +3.51 - EXM doesn't have options (yet) but the volatile stock looks ready to rebound higher again with a short- term base of support near $30. This would be a very high risk play! ************************Advertisement************************* Quit paying fees for limit orders or minimum equity * No hidden fees for limit orders or balances * $1.50 /contract (10+ contracts) or $14.95 minimum. * Zero minimum deposit required to open an account * Free streaming quotes and Dow Jones news Go to http://www.optionsxpress.com/marketing.asp?source=oinvest34 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** **************** Combos/Straddles **************** A Speed Bump On The Path To Profits By Mike Parnos When the phone rings, you never know what to expect. The glass- is-half-full crowd expects it to be Ed McMahon with news from Publisher's Clearing House. Realists will tell you that with three out of four calls, you'll probably wish you never picked up the phone. Early this week, one of my private students called me to report he had just received a margin call from his broker (OptionsXpress). "Impossible," I thought. There must be a mistake. Either that, or my student had made some ill-advised trades without my knowledge. Then, the phone rang again -- another student with a similar problem. In the next two hours I heard from three more students – all of them having received margin calls. I also began receiving emails from traders who were trying to place Iron Condor trades (see below). I reviewed the respective accounts and vowed to get to the bottom of it. I picked up the phone and called OptionsXpress. They probably wish they hadn't answered it. ________________________________________________________________ Dear Mike, I tried to place an Iron Condor trade with OptionsXpress and they required maintenance margin for both sides of the trade. They said this was a new requirement by the exchange. For a $2,500 potential profit they required $46,000 maintenance margin. This high requirement makes the Iron Condor strategy less attractive. Is there a way around this requirement? Thanks. ________________________________________________________________ When I called OptionsXpress, they explained that, a few days ago, they had changed their maintenance policy. Recently, OptionsXpress had changed clearing firms -- from Legent to Spear Leeds. In the past, OptionsXpress would hold only the maintenance on the higher spread of an Iron Condor. That's a logical progressive stance and, for as long as I have been associated with them, has enabled spread traders to maximize the use of their trading capital. Changing The Rules Now, according to the new plan, in order to qualify to have only one side held, both the bear call spread and the bull put spread have to be the same size. For instance, if you had an SPX 1165/1180 (a 15-point) bear call spread and a 1055/1040 (15-point) bull put spread, you would qualify for maintenance to be held only on one side. In the past we could have 5 contracts of a 20-point bear call spread and then 4 contracts of a bull put spread. Both add up to $10,000 maintenance. In the past, OptionsXpress would hold only one side. But, NO MORE. Now the spreads have to be equal. The new clearing company (Spear Leeds) seems to have a real bug up its ass about it. This new policy will apply primarily to the SPX because of its availability (or lack of availability) of strike prices. As you are already aware, there are not a lot of SPX strike prices from which to choose -- until the next month becomes the current month. Then, the market makers open up additional strikes (still not all) and make it a little easier to put together a sensible spread or two. The Problem OK, so they changed their rules and now we understand what we have to do for future trades. From this point forward, we'll abide by the new policy. But that's not how the OptionXpress margin department looks at it. They expect traders to respond to the margin calls by either a) bringing in money to cover the new requirements based on the new policy, or b) adjusting their current position to make the spreads equal in size. There seems to be a solution missing -- one that doesn't require the OptionsXpress client to come up with additional money or absorb the costs of adjusting the positions. Why should OptionsXpress clients have to carry the financial burden of adjusting their portfolio to adapt to a policy that wasn't in effect when the positions were initiated? We Did Nothing Wrong We live in a world where the majority of people refuse to take responsibility for their actions. We live in a "the dog ate my homework" society. When something goes wrong, there are fingers pointing everywhere imaginable -- except in the one direction that counts. However, in this instance, my students didn't do anything wrong. We all played by the rules as we knew them to be. The trades were placed with the blessings and the assistance of OptionsXpresss representatives (on their recorded phone lines). Now, it's up to OptionsXpress to step up and take responsibility. All That Being Said . . . I recognize that OptionsXpress is in a tough position. They have to answer to Spear Leeds, but what's right is right. I don't know how this situation will be resolved, but I truly hope they come to their senses. If they get just a little creative, there are solutions that would satisfy everyone. All that being said, OptionsXpress still is at the top of my list of options brokers. They offer real time streaming quotes, streaming charts, virtual trading, and an easy to navigate trading platform that allows for complex trades to be sent from a single screen. Their phone brokers are pleasant and easy to work with. My students and I do hundreds of trades every month with OptionsXpress. I sincerely hope we can continue working with them indefinitely. ____________________________________________________________ T-Shirts I Wish I Had "I'm right 98% of the time & who gives a crap about the other 3%? "To err is human, to blame it on someone else shows management potential." ____________________________________________________________ NOVEMBER CPTI POSITIONS November Position #1 - SPX Iron Condor - 1106.49 We sold 12 SPX November 1185 calls and bought 12 SPX November 1200 calls with a credit of about $1.25 ($1,500). Then we sold 9 SPX November 1070 puts and bought 9 SPX November 1050 puts for a credit of about $1.65 ($1,485). Total credit and potential profit of about $2,985. The maximum profit range is from 1070 to 1185. Can this 115-point range withstand the market's emotional highs and lows? Let's hope so. The maintenance is $18,000. The potential return on risk is about 20%. New November Position #2 - SPX Iron Condor - 1106.49 Considering the downward market movement, I felt it is appropriate to initiate a SPX position with different parameters. We sold 10 SPX Nov. 1160 calls and bought 10 SPX Nov. 1180 calls for a credit of about $1.40 ($1,400). Then we sold 13 SPX Nov. 1025 puts and bought 13 SPX Nov. 1005 puts for a credit of about $1.20 ($1,560). Maximum profit potential of about $2,960. Max profit range of 1025 - 1160. Maintenance: $20,000. November Position #3 - OEX Iron Condor - 531.26 We sold 10 OEX Nov. 500 puts and bought 10 OEX Nov. 490 puts for a credit of about $.70 ($700). Then we sold 10 OEX Nov. 555 calls and bought 10 OEX Nov. 565 calls for a credit of about $.60 ($600). Total net credit and maximum profit of $1.30 ($1,300). Max profit trading range of 500 to 555. Maintenance $10,000. November Position #4 - RUT - Iron Condor - 576.66 We sold 10 RUT Nov. 520 puts and bought 10 RUT Nov. 510 puts for a credit of about $.70 ($700). Then we sold 10 RUT Nov. 610 calls and bought 10 RUT Nov. 620 calls for a credit of about $.60 ($600). Total net credit and maximum profit of $1.30 ($1,300). Max profit range of 520 to 610. Maintenance $10,000. ____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.60 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. We rolled to the Sept. $34 calls and $37 puts for a total of $.70 ($700). Our new total credit is now $12,900. 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 conservative cash flow generating strategy. ZERO-PLUS Strategy. OEX – 531.26 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. We own 3 OEX December 2006 540 calls @ $81 (x 300 = $24,300). Our cash position as of August expiration was $8,390. In September we added another $975 for a total of $9,365. In October we added $650 for a new total of $10,015. New Zero-Plus Position For November November bull put spread 500/490 for credit of $.70 x 5 = $350. November bear call spread 555/565 for credit of $.60 x 5 = $300. If all goes well, we'll be able to add another $650 to our cash position. __________________________________________________________ SPX "Sure Thing" Strategy - 1106.49 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 was $7,500. When the SPX traded in the low 1100s, it was time for an adjustment. We closed out the original bull put spread for $13.20 ($3,960). We then opened a seven-contract position of a 1115/1140 bear call spread, taking in $6.35 ($4,445). That means we've taken in some extra premium. Our new profit potential is $2,435 -- if SPX closes below 1115. We've been getting whipsawed. Our most recent position was a November 14-contract 1120/1095 bull put spread (coincidentally, right back where we started) at $7.00 ($9,800). The maintenance is getting pricey at $35,000. That's why this strategy is not for everyone. Our potential profit is still $2,435. Here we go again. We had to close the 1120/1095 bull put spread and we initiated a new 1115/1140 bear call spread. We picked up another $350 in premium to $2,785, but our maintenance is now $70,000. ____________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Mike Parnos, Options Therapist and CPTI Master Strategist Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************************Advertisement************************* 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. Get your free download of Real Time insider trades: http://www.realtimeinsider.com/default.asp?aid=637 ************************************************************** ********** 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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