Option Investor

Daily Newsletter, Saturday, 03/26/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Rates Do Matter

WE 03-24


WE 03-18

WE 03-11










-  16.73


-  33.81


-  29.01

S&P 100


-  10.23


-    5.61


-    9.68

S&P 500


-  18.23


-  10.43


-  22.04





-  91.78





+   1.75


-  13.75


-    5.50



-    7.31


-    4.27


-  18.11



-    5.91


-  81.51


+   1.12














Rates Do Matter

After a volatile week of conflicting economics and endless sound bites dissecting Fedspeak the markets failed to rebound much from their lows. Interest rates shared the spotlight with crude oil prices and both weighed on the markets. On Wednesday yield on the ten-year rose to a seven-month high at 4.69% while crude retreated from its all time high at $58. Unfortunately both are likely to head higher and fear of that eventuality kept the markets from rebounding into the weekend.

Dow Chart - Daily

Nasdaq Chart - Daily

The economic reports for Thursday followed the same pattern we have seen recently with mixed results. Jobless Claims rose +3000 to 324,000 and the prior week was revised up +3000 as well. With the current three week average around 325,000 it seems to have found a comfortable level above the 310 average it enjoyed for the prior four weeks. This is not a market mover at this level but it is also not producing any positive comments about potential gains in the Payroll report next Friday. Analysts are quiet and not stepping out of the crowd with any high profile whisper numbers. The current consensus estimate is for a gain of +215,000 jobs and down nearly -50K from February. A tame jobs report could be market friendly because a really strong report could stimulate the Fed to raise rates faster.

On the flip side the monthly mass layoffs for February fell to 1,128 down from 1,457 in January. This was the lowest level since October-2000. The number of workers impacted fell to 74,644 and the lowest level since May-2004. The manufacturing sector still led the list and accounted for 28% of all layoffs. Contrary to the lackluster jobless claims numbers the decrease in mass layoffs was positive for next Friday's jobs report.

Durable Goods Orders rose much less than expected at only +0.3% and well below estimates in the +1.0% range. Still this was a rebound from last months drop of -1.1%. Aircraft +3.5% and Computers +2.1% were the only components with decent gains and they kept the headline number from being much worse. Shipments declined -1.6% after four months of gains. I believe the slowdown in orders is due in part to the expiration of the end of year tax benefits for capex spending. There was a flurry of orders in Q4 but when the tax window slammed shut it cutoff further orders.

The most surprising report was a jump in February New Home Sales to an annualized rate of 1.226 million and substantially over the 1.15 estimate. Sales of new homes rose +9.4% and the largest monthly gain in more than four years. January sales were also revised up to 1.121 from 1.106 million units. The builders rebounded slightly but with mortgage rates now averaging 6% they fell far short of the news bounces we have been used to seeing. TOL for instance only gained +1.27 and failed to move off critical support at $76. The bloom is off the rose until we see how buyers react to the new interest rate range. The DHI CEO said previously that the best thing for the homebuilders would be a +250 basis point hike in rates by the Fed. He feels this would mean jobs and the economy were growing strongly and that creates additional demand for houses. I believe he will get his wish. Another analyst said demand was exceeding supply because of the +30 million immigrants over the last 30 years, 30 million baby boomers looking for their last house or a second house and 25 million boomer babies now around their 30s and looking for a new home for their growing families. Yet another analyst pointed to the divorce rate at an all time high which creates new demand for two residences instead of one.

Economics next week are clustered around Thursday and Friday with the GDP on Wednesday the only material early report. On Thursday we get Factory Orders, NAPM, PMI, Personal Income, Help Wanted Index, Monster Index and Jobless Claims. Friday has the Jobs Report, Construction Spending, ISM, Consumer Sentiment, ECRI Inflation and Weekly Leading Index and Semiconductor Billings. This is huge convergence of important reports clustered in a two-day period as the quarter changes. This could be a very pivotal two days for the markets. Funds could window dress right up to Thursday's close and then bail the next day if the reports don't measure up. Considering the weakness this week I would really hesitate to establish new long positions before next Friday.

There were plenty of stocks in the news on Friday with GE leading the list. GE raised earnings estimates to 37-38 cents from 36-37 cents. It was not a big jump but GE has nearly 11 billion shares outstanding. 11 billion pennies is still a lot of money. It was not the magnitude of the move but the market friendly sentiment generated by the announcement. GE is widely seen as a proxy for the economy and an upgrade by them indicates the economy is still growing albeit slowly.

Yahoo announced a $3 billion share buyback and saw a +$1 bounce on the news. The buyback is going to take place over the next five years with no immediate impact so the bounce should be brief. AMAT also announced a $4 billion buyback over the next three years and announced a dividend of three cents. Chip maker Lexar won a court victory over Toshiba and the stock jumped over +100% to $7.25 on the news. The court ordered Toshiba to pay more than $380 million in damages to Lexar as the first award. The jury will now consider the punitive damages and based on legal precedent it could be as high as $1.2 billion. Lexar proved that Toshiba stole secrets and then entered into a deal with SanDisk to make chips using the Lexar technology. Pixar saw a +$3 jump to $95 after announcing a 2:1 split but fell by days end to close back under $93. The market weakness weighed on all these stocks and they all closed well off their highs.

Tech stocks remained under pressure with Pacific Crest Securities cutting their outlook for the chip sector. They claim global chip demand is slowing and prices are at risk. They focused on the end user market and said demand was weakening in several sectors. They cut their global chip forecast to a decline of -4% for 2005. They estimated capex spending would decline by -6%. Jumping on this bandwagon IDC also cut their PC growth targets for 2005. Tech investors have not been waiting for these analysts to paint the dreary picture. The Nasdaq has been declining for three weeks and tech funds have seen negative outflows for 15 straight weeks.

Delta Airline continued to play the oil crisis card as the reason it may have to file bankruptcy. Delta said higher oil prices could produce an additional $1 billion loss for 2005. It takes a lot of seat miles to recover an additional $1 billion in fuel costs over a year. This is a symptom of a problem that will impact all airlines and it is only going to get worse. Regardless of the exact timetable for peak oil production to occur, it will occur soon. Once it is documented airlines will be wishing for $55 oil again. If Delta is going to lose an additional billion with oil over $50 how much are they going to lose at $75-$100? I would not own an airline on a bet because they are hostage to oil more than any other industry. Planes consume huge amounts of fuel and they simply do not run on any other alternative energy source.

Oil fell back to near term support at $53.50 on Thursday and well off its $58.20 high from last Thursday. The refinery fire in Texas sent gasoline futures to a new all time high but did nothing to the price of oil. The slight rise on Thursday was due mostly to traders not wanting to be short over the long weekend. Any new problem could easily send it back to its highs given the strong stand at support. The refinery in Texas is one of the largest in the world and one of the most complex. It is unclear how much the explosion will hamper gasoline output as we move into the high demand driving season. With some gas prices already over $3 in California a shortage of gasoline could be a critical problem. Before the explosion we barely had enough refining capacity to meet demand and taking out 450,000 barrels a day is not going to help. We have not had any new refineries built in 30 years for various reasons. It takes about ten years from permit application to production and between $3B-$10B dollars. Refineries have typically returned only about 5% and given the cost, liabilities and future of oil production it is not something oil companies have been interested in doing. This also highlights how fragile our gasoline supply is currently. Should another refinery be taken out by terrorists, gas could instantly jump to $5 instead of $3 and rationing occur. There will be no excess production available once summer demand begins. All eyes will be the Texas plant for news of how production will be impacted.

Oil Chart - Daily

SOX Chart - Daily

Next week will be the key for oil prices. We saw the beginning of a profit taking dip but it was cut short by the unknowns about the refinery explosion. Since the explosion should have no impact on the availability of oil we could see a resumption of the profit taking on Monday. We are treading on thin ice here as we approach the Q2 demand slump this close to the all time highs. It will be a battle by those trying to paint the tape and keep oil prices and oil stocks high through the end of the quarter and those who want to take profits and rotate back into equities before the quarter ends. Either way the first week of April would be my target for another dip as the artificial influences on prices ease. Funds will be free to bail and move to cash in anticipation of picking up some winners from the earnings hit parade. The pressure to pad the portfolio with big names will be over for another 90 days and it will turn into more of a stock pickers market once again. Once oil prices crack it should produce some serious cashflow into equities and offset the impact of higher rates. I emphasize once again that any Q2 dip in oil will be a buying opportunity in my opinion.

TrimTabs reported on Thursday that equities were seeing $3 billion a day in corporate buying based on the current buyback plans in place and the acquisitions in progress. $1.5B of that is replaced by insider selling, a rate not seen in many years. Mutual funds are seeing $.5B in positive cash flows each day and money market funds are surging. This combines to represent +$2 bil per day in inflows but you would be hard pressed to find out where they are putting it if not in the energy stocks. Payroll tax flows are rising at a very strong +8% indicating more people working and wages are growing. There is plenty of cash available but it is not going into the broad equity market. Energy, commodities and metals are the only constant winners and the broader market is languishing for lack of cash.

Ironically the semiconductor index was the only index to close the week with a gain. Support at 410 was defended by buyers despite the almost daily cautions by various analysts. I am encouraged that 410 did not break since 400 is much stronger support. This gives the chip stocks a potential floor as we move into earnings. We moved into the warnings cycle with hardly a noticeable increase in confessions. So far the Q2 earnings cycle appears to be right on target. Unfortunately Q3 and Q4 are starting to weaken as analysts take down their optimistic targets a notch or two.

The Dow rebounded back over 10500 from its Wednesday lows at 10430 but it could not hold the gains. The Dow closed at 10442 on Thursday and just a sound bite away from critical support at 10400 and the 200-day average at 10375. If there were ever a level that should be bought given our current calendar, sentiment and setup, this would be it. It gives the funds a comfort base heading into the month/quarter end and removes some of the risk in their minds. Once into April it will be up to earnings and guidance to hold that level.

The Nasdaq dipped back below the 2000 level and closed exactly on support at the 200-day average at 1992. This is the trigger switch that could void the Dow setup I mentioned above. Should the Nasdaq fall below the 200-day it is typically a sell signal for funds. The longer-term uptrend support is around 1965 but once under the 200-day it may not matter. Like the Dow, the 200-day at 1992 could provide a launching point for any end of quarter window dressing but I would be cautious about any bounce once we get to April.

Nasdaq Chart - Weekly

SPX Chart - Weekly

We are entering the "sell in May and go away" period where investors put their money on the shelf during the summer doldrums in anticipation of reentering the market on the October dip. With rates rising it puts additional pressure on those part time investors. I heard three separate analysts on Thursday comment about a rising concern that the Fed could jump to +50 points at the May meeting based on the rapid increase in inflation and still retain the measured pace profile. Whether they do or not is not the problem. The key is what the market thinks they might do. If this mindset gains acceptance and April guidance is flat then there could be a rush for the exits. Given the market weakness over the last several weeks we could be seeing the early adopters already taking an early exit.

The markets for March have been terrible despite testing new relative highs early in the months. The Nasdaq is down -8% for the month, Dow -2.6%, Russell -5.1%, S&P -2.9%, SOX -3%, TRAN -1.1%, Biotechs -7% and leading the losers list, Internets -14%. This is not what you would expect from stronger than expected earnings over the last five quarters and a growing economy. Thursday was the five-year anniversary of the all time high on the S&P at 1552. October 2002 was the cycle low at 768 and March 7th was the cycle high at 1229. That was a -48% drop from the highs and a +60% rebound from the lows. That rebound was a 29-month bull market that is showing some extreme volatility at the upper end of its range. Could it be that we have reached the end of this bull move? The long-term support from the March 2003 triple bottom low on the S&P is currently at 1160 and that is exactly where it converges with the horizontal support from Jan-2004.

There is another train of thought for the current market with buybacks and dividends hitting records each month. So far in March we have seen 111 dividend increases and an all time record for one month. Only three stocks cut their dividend. Multiple buybacks are being announced nearly every day. Most see this as market positive but there is another view. When this many companies announce buybacks it suggests we are at the end of this growth cycle. When companies like MSFT, YHOO and AMAT start giving their cash back to shareholders in large amounts instead of expanding their businesses through acquisitions, new products and capital expenditures it means they can't find anything to buy. Using this train of thought, the record buybacks could be a sign that we have reached a major market top. Add in the rising interest rates and the coming crisis in oil and there is definitely higher than normal market risk ahead.

The market is clearly setting up for a pivotal decision point over the next six weeks. Now more than ever investors need to ask themselves "why buy" and take extra pains not to let the perma-bulls impact their thinking. This may sound heretical but markets can decline on strong earnings. This may sound contrary to the current drivel you hear on stock TV but it is true. Stocks go up in ADVANCE of earnings not because of them. The age-old market axiom is still true. "Buy stocks when nobody else wants them and exit when everybody loves them." The perma-bulls are pounding the table on equities now for multiple reasons. They are trying so hard to get investors to buy that it should be a warning signal. Unless the picture changes I would be looking to buy more puts than calls on any end of quarter bounce. If SPX 1160 fails I would be 100% short instead of long, except for energy stocks. That level should be your key for the next quarter. A break there is confirmation the bull is headed for the butcher's case and the bears are lining up for a steak dinner. Definitely enter passively and exit aggressively.


New Plays

New Option Plays

Call Options Plays
Put Options Plays

New Calls

None today.

New Puts

Fedex Corp - FDX - close: 93.89 chg: +0.02 stop: 96.01

Company Description:
FedEx Corp. provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $29 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 250,000 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:
Both FDX and the Dow Transportation index have been pillars of strength in this market for months. Yet in the last couple of weeks both have shown signs of weakness and both look poised for more weakness ahead. If you look at FDX's daily chart the stock has produced a possible double-top pattern near $101. The last three days has produced a breakdown below FDX's trendline of support dating back to May 2004. It is true that one could argue FDX is short-term oversold and due for a bounce but the action on the intraday chart suggests otherwise. Plus, its P&F chart is bearish with a $79 target. We are only suggesting short-term plays for a decline to the $90.00 level, which is round-number support that's also underpinned by its rising 200-dma. Our actual target will be the $90.25-90.50 range. We're going to use a stop loss at $96.01 but conservative traders might be able to get away with a tighter stop. Confirm market direction and the direction of the Transportation average before opening new positions.

Suggested Options:
We're expecting this to be a relatively quick play so we would prefer the April puts but the May puts would also work well.

BUY PUT APR 95.00 FDX-PS OI=2279 current ask $2.25
BUY PUT APR 90.00 FDX-PR OI=3229 current ask $0.45

BUY PUT MAY 95.00 FDX-QS OI= 80 current ask $3.30
BUY PUT MAY 90.00 FDX-QR OI= 309 current ask $1.25

Picked on March 27 at $ 93.89
Change since picked: - 0.00
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 1.8 million

Play Updates

In Play Updates and Reviews

Call Updates

Cleveland Cliffs - CLF - cls: 77.25 chg: -1.02 stop: 74.49

No change from Thursday's update. Traders should be careful here. The major indices continue to look weak and with Thursday's failed rally stocks could see trouble next week. If that's the case then CLF is likely to retest the $75.00 level as support. We would not suggest new bullish positions until CLF traded back over the $80.00 mark. More aggressive traders could try buying a bounce from the $75.00 level.

Suggested Options:
We are not suggesting new bullish positions at this time.

Picked on March 21 at $ 77.06
Change since picked: + 0.19
Earnings Date 02/16/05 (confirmed)
Average Daily Volume = 1.2 million


PalmOne - PLMO - close: 26.60 chg: +0.89 stop: 22.99

No change from Thursday's update. Good news! PLMO continued to show strength on Thursday and the stock added another 3.6 percent on decent volume. Thursday's gain also produced a new buy signal on the P&F chart with a $35.00 target. We are only targeting a move into the $29-30 range. There are no changes to our strategy outlined on Wednesday. If PLMO surprises us with a dip look for the $25.00 level to act as support.

Suggested Options:
We are going to suggest the May calls.

BUY CALL MAY 22.50 UPY-EX OI=2327 current ask $4.90
BUY CALL MAY 25.00 UPY-EE OI=3322 current ask $3.20
BUY CALL MAY 30.00 UPY-EF OI=6337 current ask $1.10

Picked on March 23 at $ 25.71
Change since picked: + 0.89
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million


Parker-Hannifin - PH - close: 67.55 change: +1.06 stop: 63.99

No change from Thursday's update. PH is providing us some good news as well. The stock bounced from the dip to $66.50 and is back over the 50-dma. However, we would remain cautious until PH traded back above the $68.50-69.00 level, which would suggest there is more strength behind the current bounce. Currently the MACD indicator is negative but the short-term RSI and stochastic oscillators are starting to turn positive.

Suggested Options:
We are suggesting the May calls although we will not hold over the April earnings report.

BUY CALL MAY 65.00 PH-EM OI= 220 current ask $4.40
BUY CALL MAY 70.00 PH-EN OI=1083 current ask $1.65

Picked on March 03 at $ 68.11
Change since picked: - 0.56
Earnings Date 01/18/05 (confirmed)
Average Daily Volume = 1.0 million


Red Robin Burger - RRGB - cls: 49.80 chg: +0.52 stop: 44.99

RRGB continues to out perform the market even if it's just consolidating sideways instead of drifting lower. We noticed that RRGB traded above round-number resistance at the $50.00 level on Friday morning. This could have been attributed to strength in larger rival YUM Brands (YUM), which re-affirmed earnings guidance and surged to a new high. Actually there are several restaurant stocks that are at or near one-year or all-time highs and the group could see more strength next week as fund managers do some window dressing with the winners. Readers can use dips toward $48.00 as entry points or a new relative high over $50.50.

Suggested Options:
We are suggesting the June options because they have the most open interest.

BUY CALL JUN 45.00 QZR-FI OI= 49 current ask $6.80
BUY CALL JUN 50.00 QZR-FJ OI= 67 current ask $3.50

Picked on March 10 at $ 48.00
Change since picked: + 1.80
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

Put Updates

Allergan - AGN - close: 70.80 chg: -0.15 stop: 76.05

AGN continues to under perform the markets and now the stock is under performing the DRG drug index. The DRG managed a decent bounce in the last couple of sessions but not so for shares of AGN. Instead AGN is testing support at the $70.00 level. The stock is due for an oversold bounce so traders should be prepared. Watch the $72.00-72.50 area as potential overhead resistance. Our target remains the $67.50 level. The P&F chart remains bearish with a $61.00 target.

Suggested Options:
We are suggesting the April puts.

BUY PUT APR 75 AGN-PO OI=2421 current ask $4.70
BUY PUT APR 70 AGN-PN OI= 695 current ask $1.35

Picked on March 13 at $ 73.09
Change since picked: - 2.29
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 777 thousand


Beazer Homes - BZH - close: 52.27 chg: +0.46 stop: 54.01

The Commerce Dept. announced that new home sales soared again in February to a very strong pace. Yet the positive news only produced a short-term blip higher in shares of BZH. However, we do not like the shape things are taking in BZH's technical oscillators. Some of the technicals are starting to suggest that BZH could rebound from oversold relatively soon. If we don't see some follow through to the downside in the next couple of days we'll probably exit BZH early.

Suggested Options:
We're not suggesting new plays at this time.

Picked on March 17 at $ 51.43
Change since picked: + 0.84
Earnings Date 01/27/05 (confirmed)
Average Daily Volume = 742 thousand


Google Inc - GOOG - close: 179.25 chg: +0.27 stop: 185.01

Our aggressive, higher-risk play in GOOG is showing some very un-GOOG like characteristics. The stock has been very non-volatile the last few days as shares consolidate sideways above and below the $180.00 level. We believe the prevailing eight-week downtrend will overcome however this may hinge on if the NASDAQ continues to breakdown or bounces. More conservative traders can tighten their stop loss toward the $182.51 mark. We do find it interesting that the bearish P&F chart has extended its downside target to $148. Yet we would not suggest new bearish positions until GOOG traded under $177.50 again. Our target remains the $165.00 region but we may adjust this as time begins to run out.

Suggested Options:
We are suggesting the April puts because we do not plan to hold over the April earnings report.

BUY PUT APR 185.00 GOU-PQ OI=3834 current ask $8.50
BUY PUT APR 180.00 GOU-PP OI=6935 current ask $5.30
BUY PUT APR 175.00 GOU-PO OI=9540 current ask $3.10
BUY PUT APR 170.00 GOQ-PW OI=7653 current ask $1.70*symbol change

Picked on March 10 at $179.49
Change since picked: - 0.24
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 10.9 million


Cheniere Energy - LNG - close: 67.36 chg: +0.66 stop: 72.01

No change from Thursday's update. LNG managed a bounce on yesterday's potential (bullish) reversal but the bounce began to fail as well with LNG turning lower in the afternoon. We remain bearish and expect the $70.00 level to act as overhead resistance. Our target remains the $62.00-60.00 range but watch carefully for potential support near the 100-dma.

Suggested Options:
We are still suggesting the April puts but time is going to start growing short for April options. Traders may want to consider May options.

BUY PUT APR 70.00 LNG-PO OI= 206 current ask $5.00
BUY PUT APR 65.00 LNG-PM OI=1025 current ask $2.55

Picked on March 11 at $ 69.49
Change since picked: - 2.13
Earnings Date 03/10/05 (confirmed)
Average Daily Volume = 517 thousand


Intl Bus. Mach. - IBM - close: 90.70 chg: +0.18 stop 92.15

No change from Thursday's update. IBM continued to rise with its oversold bounce but the rally began to fail near the $91.50 level this afternoon. This could be a new bearish entry point but we would want to see IBM confirm the failed rally with a drop back under the $90.00 mark.

Suggested Options:
We are going to suggest the April puts because we do not plan to hold over the April earnings report.

BUY PUT APR 95.00 IBM-PS OI=25843 current ask $4.50
BUY PUT APR 90.00 IBM-PR OI=27018 current ask $1.00
BUY PUT APR 85.00 IBM-PQ OI=16019 current ask $0.15

Picked on March 17 at $ 89.86
Change since picked: + 0.84
Earnings Date 04/14/05 (unconfirmed)
Average Daily Volume = 4.8 million


Mcgraw Hill Cos - MHP - close: 87.79 chg: -0.60 stop: 90.21

Unfortunately we have little to report on for MHP. The stock broke down on March 9th; confirmed the breakdown on the 10th with huge volume behind the move. The oversold bounce failed at round-number at the $90.00 level bolstered by its 100-dma. Yet there has not been any more follow through to the downside. Shares have been stuck consolidating sideways for the last several days. Our short-term target was the 200-dma's, which at the time were in the $84-85 region. Now the 200-dma's are rising. We'd be happy with a drop to the $85.00 mark. At this point we'd hesitate to open new positions even though the P&F chart points to a $76 target.

Suggested Options:
We're not suggesting new positions.

Picked on March 15 at $ 88.40
Change since picked: - 0.61
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand


Millipore - MIL - close: 44.70 chg: +0.24 stop: 46.05

The nine-month trend in MIL has been a consistent one of lower highs. Now that the stock has effectively filled the gap from late January we expected a continuation of the decline. MIL broke down under its short-term trend of support a few days ago but has since rebounded. Currently the stock is testing resistance at its 50-dma. We would wait for shares to trade back under the $44.00 level before considering new bearish positions. If shares do trade over the $45.00 level we may close the play early.

Suggested Options:
We are suggesting the April puts because we do not plan to hold over the April earnings report.

BUY PUT APR 45.00 MIL-PI OI=341 current ask $1.30
BUY PUT APR 40.00 MIL-PH OI=184 current ask $0.25

Picked on March 16 at $ 43.95
Change since picked: + 0.75
Earnings Date 04/19/05 (unconfirmed)
Average Daily Volume = 358 thousand


Pacificare Health - PHS - close: 58.43 chg: +0.33 stop: 62.01

PHS continues to look bearish and vulnerable following its high-volume breakdown on March 18th. Since then PHS has tried to produce a short-term oversold rally but each has been met with new selling pressure. The stock remains longer-term overbought and due for a steeper correction. Our target remains the $55.00-54.00 range. Traders can use failed rallies under $60.00 as new bearish entry points. Keep an eye on the rising 100-dma, which could try and act as support.

Suggested Options:
We are suggesting the May puts but we do not plan to hold over the late April earnings report.

BUY PUT MAY 65.00 PHS-QM OI= 373 current ask $7.40
BUY PUT MAY 60.00 PHS-QL OI=2276 current ask $3.90
BUY PUT MAY 55.00 PHS-QK OI= 553 current ask $1.80

Picked on March 20 at $ 59.04
Change since picked: - 0.61
Earnings Date 04/28/05 (unconfirmed)
Average Daily Volume = 1.1 million


Toll Brothers - TOL - close: 77.27 chg: +1.27 stop: 81.50

No change from Thursday's update. TOL bounced a bit after the Commerce Dept. announced strong new home sales for February. The lack of a bigger, more positive reaction could be taken as confirmation that the group is getting tired and in need of more consolidation. The $80.00 mark should be overhead resistance. Short-term technical oscillators are suggesting another bounce soon so watch for a rebound towards $80.00.

Suggested Options:
We are suggesting the April and May puts.

BUY PUT APR 80.00 TOL-PP OI=4706 current ask $4.70
BUY PUT APR 75.00 TOL-PO OI=7670 current ask $2.25
BUY PUT APR 70.00 TOL-PN OI=5668 current ask $0.95

BUY PUT MAY 80.00 TOL-QP OI= 105 current ask $6.70
BUY PUT MAY 75.00 TOL-QO OI= 276 current ask $4.30

Picked on March 17 at $ 76.81
Change since picked: + 0.46
Earnings Date 02/23/05 (confirmed)
Average Daily Volume = 2.1 million

Dropped Calls


Dropped Puts


Trader's Corner

Maintaining Control

A subscriber recently submitted two suggestions for separate Traders Corner articles. A central theme connected the two: maintaining control. The subscriber commented on a situation with limit buys and sells that he had noticed more often with options than with stocks. "It seems that the market makers bounce their price temporarily in order to hit these limits and make a few extra dollars. Then they allow the price to return back to normal. How do we get around this?"

Is there a way to wrest that control away from market makers? One method employed by some traders is to set up a conditional order. Interactive Brokers, one of the online brokers offering this type of order, explains that such conditional orders are "submitted automatically ONLY IF specified criteria for one or more defined contracts are met." This means that your limit order will not be a sitting duck for market makers to target, but instead will be submitted by IB only if the conditions you've set up are met. IB allows setting up to three conditions. A logical one might be setting an options order based on movement in the underlying security. However, if traders wanted to submit a limit buy order on an OEX call option only if the OEX and BIX reached certain levels, they should be able to do that.

Employing conditional trades allows traders to maintain some control, but no method proves fail safe. All traders get caught in stop-running moves, even experienced traders. This subscriber's question displayed his experience, and that experience has perhaps taught him how to handle trades once they go bad. No one likes exiting a trade right after entry, but sometimes that's exactly what's needed. Maintaining control also extends to deciding how to handle a trade when prices reverse immediately after the entry. At what point does the original entry no longer make sense? If traders make exit plans before entering any order, even a conditional one, that plan helps manage the fear or worry that arises when prices immediately reverse after getting into a trade.

Fear was the subject of the subscriber's second question. "I purchase an option at the recommended level," the subscriber writes. "Then, the option drops 15 cents. I go into panic mode, and it's all I can do to keep myself from not going and selling it before it goes down further."

All traders experience fear. The March 2005 issue of ACTIVE TRADER featured an interview with Daniel Gramza, president of trading, consulting and education firms Gramza Capital Management Inc. and DMG Advisors LLC. In addition to discussing the technical trading tools he uses, Gramza discussed emotional reactions to trades, extending the dialogue to those traders who have difficulty placing trades, letting profits run and reacting to losses. He believes that such emotional reactions can get in the way of traders' success. Traders need to create effortless action, he believes.

How do traders create such effortless action, so that they click the trading button when it should be clicked? Gramza believes that traders should employ two tactics. One involves methodical testing of the methods traders tend to employ. Whether trading range-bound markets with stochastics signals, trending markets with CCI zero-line rejections, or candlestick patterns, set up parameters for entries and exits. Either back-test them or test them real-time using a simulator package, Gramza suggests.

If an online broker does not offer backtesting, traders using that service can still paper trade, keeping rigorous records. Calculations of the maximum number of losing trades in a row encountered during the test period and the total drawdown during that stretch of losing trades should be included. This fine-tunes the decision, allowing traders to reject those types of plays that do not fit their trading styles. For example, trading breakout plays tend to produce gains over the long run, but often produce a large number of failed plays in a row. Some traders could not handle a large number of failed plays in a row. The fear and worry would overwhelm such traders, and they might take profits too soon on a winning play because of the fear engendered by the previous run of losing ones. Conversely, antsy traders might not be able to manage the boredom that arises during slowly unfolding plays such as credit or debit spreads. Maintaining control includes fitting trade types to trading style.

Once a trading plan has been tested and its parameters established, traders feel more confidence. Losing remains a necessary part of trading, however, and Gramza offers advice for the self-castigation that sometimes comes along with those losing trades. He counsels that traders should be aware of negative thoughts. He advises using a stop-sign method, replacing those negative thoughts with reassurances that the loss was an expected consequence of trading. He does advise taking responsibility for trades, with that responsibility encompassing any needed fine tuning of trading plans.

Gramza mentions a problem that some traders experience with winning trades, already noted above. Just as fear can cause traders to bail out ahead of their stops, it can also cause them to bail out ahead of the planned profit target. The same tactics to control fear of losses can help manage this fear.

Education, testing, planning, and actively stopping negative and unproductive thoughts help traders maintain control. The subscriber's two questions turned out to be related to control issues, issues we all ought to consider in our own trading plans.

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.


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