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Daily Newsletter, Monday, 11/14/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Options 101

Market Wrap

Bulls Hold Ground

Bulls held an exquisitely narrow range at the top of Thursday's rally, the second consecutive session of directionless trading on relatively light volume. Bonds retreated, retracing part of Thursday's gains.

Breadth was mixed, with the number of new lows exceeding new highs on the NYSE and new highs leading on the Nasdaq. Volume breadth was similarly mixed, with advancing shares leading decliners 1.3:1 on the Nasdaq while declining volume led 1.3:1 on the NYSE. Overall volume was weak, with QQQQ trading less than half of its average daily volume, and combined DJIA and Nasdaq volume just over 2.7B shares.

Daily Dow Chart

Despite its weaker breadth, the Dow was the only major index to close green, adding 11.13 to close at 10697.17. The 10710 high marked a new high for what is now a very toppy daily cycle upphase off the October low, testing resistance at the July-August highs. Despite the low volume, tight range and listless tape, today's gains tested upper rising Bollinger resistance, and while the move felt suspect due to its weak internals and lackluster action, it remains an impressive showing from the bulls. All of the Dow's losses from the past 4 months were reversed as of today. The current rise has been holding in a rough rising wedge pattern, but with key resistance now in play, bears will need a close below Friday's low to suggest any hint of weakness. The daily cycle upphase has been stop-and-go for several weeks, but the upward bias has yet to be challenged, let alone reversed.

Daily S&P 500 Chart

The SPX finished with a fractional loss, closing -.96 at 1233.76. The midday low saw a bounce from 1231.78, the high printing at 1237.20. Unlike the Dow, the SPX is not yet testing its summer highs, and continues to respect descending resistance connecting the highs. The daily cycle looks toppy and tired, and today's doji star is unhealthy at the highs of the move- but the light volume doesn't support a major reversal today, and as with the Dow, bears will need to see Friday's lows in the 1231-32 area broken on a closing basis to suggest weakness for the daily cycle.

Daily Nasdaq Chart

The Nasdaq lost 1.52 to close at 2200.95, 6 points off the high and 3 points off the low. As with its peers, the range remains very tight here at the highs, and the daily cycle appears exhausted. If this is a distribution top, it's allowing very little range from which to infer classic topping patterns. A head and shoulders top would require enough movement to trade the head and shoulders, but the price range has been too flat to suggest anything other than a bull flag at the top. Below 2197, next support is at 2175-2180, while a closing break of today's highs on a burst of volume would suggest the bull flag scenario.

Nasdaq announced its semi-annual re-ranking of its Biotech Index (NBI), to take effect at the market's open on November 21, 2005. The re-ranking will result in the removal of AEterna Zentaris, Inc. (AEZS), Corgentech Inc. (CGTK), Ciphergen Biosystems, Inc. (CIPH), GTx, Inc. (GTXI), La Jolla Pharmaceutical Company (LJPC), Novavax, Inc. (NVAX) and PRAECIS PHARMACEUTICALS INCORPORATED (PRCSD). The following companies will be added to the index: ALNY, ANDS, BCRX, CRXLF.PK, CTRX, DRRX, GPRO, HITK, IBB, KOSN, MNTA, NDAQ, NSTK, and PANC.

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Much ado was made last week, not just in the media but also in the debt and equity markets, of the Thursday's record indirect bid in the Treasury's $13 billion ten-year note auction. Indirect bidders are foreign central banks, and they bought more than 55% of the total auctioned. While the absolute number, while containing many zeroes, is not noteworthy for a market accustomed to $5 billion and $10 billion overnight repos from the Fed, it nevertheless caused a splash in the US markets, kicking off the vertical stage of last week's rally and contributing to a sharp move lower in ten-year note yields. The market seemed to be inferring that central banks, while stating that they are diversifying away from US debt, are at least willing to defend their very substantial holdings thereof.

Today, Japan's Ministry of Finance announced that Japan's current account surplus grew 6.5% in September y-o-y to 1.858 trillion yen, or approximated $US $15.8 billion. Estimates had been for US $14.5 billion. This news propelled the Nikkei to a new four-year high, although current account deficits have so far not been particularly bearish for US equity markets. Chairman Greenspan, in a speech to the Banco de Mexico's 80th Anniversary International Conference, noted this morning as follows:

"International finance presents us with a number of intriguing anomalies, but the one that seems to bedevil monetary policy makers the most as they seek stability and growth (the topic of this conference) is the seemingly endless ability of the United States to finance its current account deficit. [...] Of course, deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely. At some point investors will balk at further financing. Such a development would be particularly likely should risk-adjusted rates of return on assets outside the United States rise relative to investment opportunities in the United States. Even if such returns on U.S. assets stay high, the rise of concentration risks in foreign official and private portfolios could still induce investors to slow their accumulation of dollar claims and thereby delimit the size of the financeable U.S. current account deficit." These comments were followed up with a statement to the effect that he doesn't see the US Dollar losing its status as the world's reserve currency, and it was that statement that made headlines, contributing to a small bounce within the morning's narrow range.

The Treasury announced at 11AM that it will auction $24 billion at the next auction of 4-week bills, which will refund $13 billion in maturing bills and raise an additional $11 billion. This is a substantial increase in new borrowing for those 4-week notes, but the markets more than easily weathered stepped up Treasury borrowing last week as well. From the time of the 11AM 4-week bill announcement, treasury yields rose to new session highs as equities traded sideways near the lows.

Other liquidity operations included a $4 billion overnight repo from the Fed, which resulted in a net add for the day against no expiries. That was followed up with a permanent market operation, a coupon pass in the amount of $1.096 billion deliverable tomorrow. The Treasury auctioned $34 billion in 13-week and 36-week bills, refunding $31.44 billion in maturing bills and raising $2.56 billion of new cash. This heightened demand was more than covered by the Fed's overnight repo alone, and the coupon pass covered almost half of that new borrowing on a permanent basis.

$9.3 billion of the $34 billion auctioned today was taken up by foreign central banks, a respectable but not exceptional showing. The 13-week bills sold for a 3.91% high-rate yielding 4.004% and drew 2.12 bids for each accepted. The 26-week bills sold for a 4.195% high-rate yielding 4.345% and set a bid to cover ratio of 2.38. The rates on these two auctions set new highs for the year.

Daily TNX Chart

Ten year note yields (TNX) settled back to just above 4.6%, finishing the day +4 bps at 4.604%. Lower rising support was violated in the morning, but the close was back within the rising channel. The daily cycle downphase has so far produced a minor pullback at the top of the rally from the September low, with 4.55% supporting the lows since late October. If this is a bull flag for the TNX, then a break above 4.63% on a closing basis could signal the next leg up.

Daily Chart of Crude oil

Overnight reports of a tropic depression and colder weather saw oil futures catching a bid in the early morning. Later in the morning, Reuters reported that OPEC is waiting for the arrival of winter before it sets oil supply policy for early next year. Kuwaiti oil minister Sheikh Ahmad al-Fahd al-Sabah said that he sees no need to cut output for now. Crude oil had been trading just off the 58.25 session high before that statement was released, but it returned quickly back below 58, proceeding to break the 57.40 overnight low by a nickel before bouncing to close +.10 at 57.625. On the daily chart, the move is tracing sideways beneath 59 confluence, with the daily cycle extended to the downside and the 10-day stochastic holding a bullish kiss.

In corporate news, Wal-Mart (WMT) dominated this morning's headlines, reporting earnings that rose from $2.29 billion or 54 cents in Q3 2004 to $2.37 billion or 57 cents on revenue of $76.25 billion, up from $69.28 billion. Estimates were for EPS of 57 cents and revenue of $76.25 billion. The stock broke 49 in premarket trading following the news, still down on the year as the company deals with labor lawsuits, competition from TGT, threats posed by the Chinese currency appreciation/US tariff issue, and rising energy and transportation costs. Bloomberg reported that this was the smallest profit gain in four years for the world's largest retailer. WMT gained .51% to close at 49.25.

Lowe's (LOW) reported Q3 earnings that rose from $516 million or 65 cents to $649 million or 81 cents in the current quarter, on revenue of $10.6 billion, up from $9.1 billion. The results beat estimates by cents. Same-store sales rose 6.2% in October. The company expects to earn 77-80 cents in Q4. LOW closed higher by 4.62% at 64.83, and HD gained 1.69% to close at 42.62.

The second-largest US private company, Koch Industries, announced yesterday afternoon its agreement to purchase Georgia-Pacific (GP) in a $21 billion deal pursuant to which Kock will assume $7.8 billion of GP debt and pay $13.2 billion in cash, paying $48 per GP share. This is a 39% premium to Friday's closing price. This deal will add Dixie cups, cardboard and lumber to Koch's existing fuel and chemical business, and make Koch the largest US private company. S&P wasn't impressed, placing GP on credit watch "negative" based on S&P's "...expectations that [GP] is likely to be very aggressively leveraged and financed on a stand-alone basis without guarantees from Koch Industries." GP rose 36.48% to close at 47.29.

Also merging are Host Marriott (HMT) and Starwood (HOT), with HMT announcing that it will acquire HOT for $4.1 billion, $2.33 billion of which in stock, $1.06 billion in cash and $704 million in debt assumption. HMT expects the deal to close in Q1 2006, and will change its name to "Host Hotels and Resorts." HMT closed lower by 4.47% at 16.66, while HOT gained 1.2% to close at 59.97.

Tyson Foods (TSN) reported a Q4 profit that rose from $66mm or 19 cents to $98 million or 28 cents on sales that fell from $7.1 billion to $6.5 billion from Q4 2004. The results missed expectations by 2 cents am came in light on the sales figure, missing by $60 million. The company cited difficulties with export market closures and Canadian beef import issues, and projected 2006 full-year EPS at $.095-$1.25, compared with First Call estimates of $1.33 per share. TSN got smoked for a 10.7% loss to close at 16.52.

Although there were no economic reports released today, it will be a relatively heavy week. Tomorrow will see the November Empire State Index, and the October Retail Sales and PPI figures released. On Wednesday, we get the CPI, Business Inventories for September, Net Foreign Purchases, and the weekly Petroleum Report and Mortgage Bankers Association update. On Thursday, we get Initial Claims, Housing Starts, Building Permits, Industrial Production and Capacity Utilization, and the Philadelphia Fed. Also of note for tomorrow will be the Senate Banking Committee's hearing on the nomination of Ben Bernanke as the new Fed chairman, in Washington. While this shouldn't be a market-moving event, analysts will be attentive to any indications of Bernanke's thinking on inflation, the current round of rate hikes, and Fed transparency, particularly in the wake of last week's announcement regarding the abandonment of the Fed's publication of its M3 figures. Senator Jack Reed of Rhode Island said that he expects the Bernanke nomination to go smoothly and be "non-controversial."

After the bell, Agilent (A) reported Q4 income that fell from 15 cents per share or $74 million to 5 cents or $26 million in the current quarter on restructuring charges related to the divestiture of its semiconductor business and other one-time items. Net of items, the company reported that earnings would have been $193 million. Revenue rose from $1.26 billion in the year-ago quarter to $1.42 billion. The company also announced a stock repurchase plan of up to $2.7 billion via modified "Dutch Auction," at prices of no less than $32 and no greater than $37 per share. The stock closed lower by 3 cents at 32.90 but traded +5.47% at 34.70 as of this writing.

For tomorrow, traders will be watching and hoping for a range break to resolve the narrow range of the past two sessions. The toppy daily cycle is at odds with the sideways/bull-flaggish pattern at the top of Thursday's rise. Day traders have been robbed of the majority of their intraday indicators by the flat, sideways action, and with so many bets placed in so narrow a range, a single buy or sell program can change the landscape very quickly. The fact that it's op-ex week for November contracts only adds to the confusion. I will be watching the highs and lows of the past two sessions, and will continue to avoid the middle of the range. We'll be following the action tick-by-tick in the live Market and Futures Monitors. See you there!
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

AutoZone - AZO - close: 86.07 chg: -0.67 stop: 84.95

We didn't see the continuation of the bounce we expected but traders where ready to buy the dip to AZO's simple 10-dma today. The stock was moving higher into the closing bell so this looks like a new bullish entry point. We are targeting a move into the $89.90-90.00 range.

Picked on November 13 at $ 86.74
Change since picked: - 0.67
Earnings Date 12/08/05 (unconfirmed)
Average Daily Volume = 1.1 million

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Intl. Bus. Mach. - IBM - cls: 84.36 chg: -0.19 stop: 81.95

IBM tried to breakout over the $85.00 level this morning but the market malaise seemed to hold it back. The stock spent the session churning between $84 and $85. We remain optimistic but our strategy calls for a trigger to buy calls at $85.25. If we are triggered our immediate target will be the $89.90-90.00 range.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/16/06 (unconfirmed)
Average Daily Volume = million

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Intel Corp. - NTC - close: 25.38 chg: +0.25 stop: 23.45

INTC continues to display relative strength and out performed the NASDAQ composite today. Shares remain under short-term resistance at the 100-dma near the $25.50 level. If you're looking for a new bullish entry point we'd watch the simple 10-dma. Our year-end target is the $26.00-26.50 range.

Picked on November 06 at $ 23.99
Change since picked: + 1.39
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 51.6 million

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Legg Mason - LM - cls: 117.85 change: +1.69 stop: 109.95*new*

The broker-dealers continue to show leadership. LM added another 1.45% and temporarily broke through resistance at the $118 level today. Our target is the $119-120 range but traders may want to seriously consider exiting right here for a profit! We are raising our stop loss to $109.95.

Picked on November 02 at $111.69
Change since picked: + 6.16
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 904 thousand

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NovAtel Inc. - NGPS - close: 28.87 chg: -0.98 stop: 27.75

NGPS pulled back this morning and spent the session trading between short-term support at $28.00 and resistance at $30. Our strategy is to buy calls on a breakout above the $30.00 level. Our trigger is at $30.45 (over Friday's high). If triggered we'll target a move into the $35.00-36.00 range.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 292 thousand

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Rockwell Autom. - ROK - cls: 56.62 chg: +0.31 stop: 53.49

ROK continues to consolidate sideways but the intraday chart shows the slow bullish creep higher. It looks like ROK is poised to breakout over the $57.00 level soon. We are only targeting a move into the $61-62 range.

Picked on November 03 at $ 55.90
Change since picked: + 0.72
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand
 

Put Updates

Sears Holding - SHLD - cls: 113.52 chg: -1.28 stop: 119.01

This morning rival Wal-Mart (WMT) issued its Q3 earnings report, which was largely inline with Wall Street's estimates and there was no change with the company's guidance. This news seemed to weigh on shares of SHLD, which spiked lower this morning and hit $112.24. Our trigger to buy puts in SHLD was at $112.99, which is under the bottom of its eight-week trading range and support in the $113.50-114.00 region. The play is now open and we're targeting a decline into the $100.50-100.00 range. However, keep in mind that SHLD is short-term oversold and due for a bounce. Such a bounce could prove to be an attractive entry point for new put positions but you'll want to watch for signs that the rally is fading. We'll be sure to point out new entry points in the newsletter.

Picked on November 14 at $112.99
Change since picked: + 0.53
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume = 3.2 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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AmerisourceBergen - ABC - cls: 76.74 chg: -0.24 stop: n/a

Today's lifeless market action did absolutely nothing to help our play in ABC, which has been fatally wounded by the stock's narrow sideways consolidation. ABC continued to churn sideways today. Over the weekend we made a mistake in our ABC update. The Sunday update said that the November $80 calls were trading at $1.10bid/$1.25 ask. This is incorrect. The Nov. $80 calls are actually trading at $0.05/$0.15. What we listed was the value for the December $80 calls by accident. Our estimated cost on the November strangle was $2.10. We would suggest exiting for almost any amount if ABC were to make a move before Friday's expiration. The December strangle still has five weeks left with an estimated cost of $2.80 using the December $80 calls (ABC-LP) and the December $70 puts (ABC-XN). Our target for the December strangle is $5.00.

Picked on October 16 at $ 74.81
Change since picked: + 1.93
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 24.35 chg: -1.12 stop: n/a

AEOS hit some volatility today. The stock gapped down at the open after WMT's lackluster earnings report and a broker downgrade to "hold" for AEOS. There was a bounce back to the $25.00 level offering us a great entry point to launch a strangle before tomorrow's earnings report for the company. Wall Street expects AEOS to report earnings of $0.46 per share. We are no longer suggesting new strangle positions. The current strangle has an estimated cost of $2.35 with the January $27.50 calls (AQU-AY) and the January $22.50 puts (AQU-MX). We are targeting a rise to $4.70.

Picked on November 13 at $ 25.47
Change since picked: - 1.12
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 59.53 chg: -0.14 stop: n/a

ANF continues to consolidate sideways near the $60.00 level as investors wait for the company to report earnings after the closing bell tomorrow. That gives us another day to open strangle positions. Our suggested entry window is the $59.00-61.00 range but the closer to $60.00 the better. We are suggesting the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our estimated cost was $5.15. We're looking for a rise to $8.50.

Picked on November 13 at $ 59.67
Change since picked: - 0.14
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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D.R.Horton - DHI - close: 32.41 chg: -0.15 stop: n/a

DHI continues to consolidate sideways as investors wait for the company's earnings report on November 16th. We are suggesting an entry window of $32.00-33.00 but the closer to $32.50 the better. Our strangle strategy involves the January $35 calls (DHI-AG) and the January $30 puts (DHI-MF). Our estimated cost was $3.15. We're aiming for a rise to $6.00.

Picked on November 13 at $ 32.56
Change since picked: - 0.15
Earnings Date 11/16/05 (confirmed)
Average Daily Volume = 3.2 million

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eBay Inc. - EBAY - close: 43.53 chg: -0.36 stop: n/a

Gosh, the news that Dell has added PayPal (owned by EBAY) as a payment option on Dell.com sounds bullish to us. Unfortunately, shares of EBAY were too overbought to rise on the news and hit some profit taking on Monday instead. We have four days left before November options expire. Our estimated cost was about $1.05. The November $35 puts (XBA-WG) are virtually worthless so we would not waste the commission trying to sell them - just let them expire. The November $45 calls (XBA-KI) are currently selling at $0.15bid/$0.20ask. It's up to you, the individual trader, to decide at what price do you try and salvage some capital from this play. We're going to lower our target to $0.50.

Picked on October 18 at $ 40.42
Change since picked: + 3.11
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 18.3 million

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Four Seasons - FS - close: 50.80 chg: +1.00 stop: n/a

FS produced an oversold bounce today. Watch for this bounce to hit potential resistance in the $52 region. We are not suggesting new strangles at this time. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). Our estimated cost was about $2.60. We're aiming for a rise to $5.00 or more.

Picked on November 08 at $ 55.37
Change since picked: - 4.57
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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General Dynamics - GD - cls: 115.95 chg: -0.40 stop: n/a

We only have four days left before November options expire. GD need to see a breakdown under support at the 100-dma near the $115.00 level. The options in our strangle are the November $125 calls (GD-KE) and the November $115 puts (GD-WC). Our estimated cost was about $2.00. Currently the Nov. 115 puts are trading at $0.35bid/$0.50ask. A move to the $115 level will certainly help but time decay is going to speed up this week. We're going to adjust our target to $1.00 and try and salvage some trading capital here.

Picked on October 09 at $119.59
Change since picked: - 3.64
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 713 thousand

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Harman Intl - HAR - cls: 100.00 chg: -2.54 stop: n/a

We see no change from our previous updates on HAR. Yes, the stock did breakout from last week's trading range but unless the stock produced a big move in the next couple of days this strangle is going to expire for a loss. The options in our strangle were the November $110 calls (HAR-KB) and the November $90 puts (HAR-WR). Traders should try to salvage what they can if HAR makes any attempt at a breakout either direction.

Picked on October 18 at $100.80
Change since picked: - 0.80
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 739 thousand

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Hutchinson Tech. - HTCH - cls: 25.17 chg: -0.17 stop: n/a

We see no changes from our weekend update on HTCH. We are not suggesting new strangles at this time. The options in our strangle were the January $30 calls (UTQ-AF) and the January $20 puts (UTQ-MD). Our estimated cost was $1.65. We are adjusting our target from $3.00 to breakeven at $1.65.

Picked on October 26 at $ 24.89
Change since picked: + 0.28
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 666 thousand

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Inamed Corp. - IMDC - close: 74.44 change: -0.29 stop: n/a

We see no changes from our weekend update on IMDC. We are not suggesting new strangles. We have five weeks left before the December options expire. The options in our strangle are the December $75 calls (UZI-LO) and the December $65 puts (UZI-XM)). Our target is for a rise to $5.00 or more.

Picked on October 30 at $ 70.63
Change since picked: + 3.79
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 533 thousand

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Kos Pharma - KOSP - close: 58.28 chg: -0.64 stop: n/a

We are running out of time with our November strangle using the November $65 calls (KQW-KM) and the November $55 puts (KQW-WK). We need to be planning to exit on any spike (probably down) that might breathe new life into the options so we can salvage some trading capital.

Picked on October 20 at $ 59.80
Change since picked: - 1.52
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 460 thousand

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Lear Corp - LEA - close: 28.42 chg: +0.09 stop: n/a

We see no changes from our weekend update on LEA. We're not suggesting new strangles at this time. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). We are targeting a rise to $3.20 or more.

Picked on November 06 at $ 30.24
Change since picked: - 1.82
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 97.06 change: +0.70 close: n/a

LTR continues to show strength and the stock hit another new high today. We're not suggesting new strangle positions in LTR. The options in our strategy are the December $95 calls (LTR-LS) and the December $85 puts (LTR-XQ). Our estimated cost is about $3.05. We'll plan to exit if either option rises to $5.00 or more.

Picked on October 23 at $ 89.94
Change since picked: + 7.12
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Microsoft - MSFT - close: 27.35 change: +0.07 stop: n/a

MSFT continues to defy gravity but the rally does look like its getting tired. We are not suggesting new positions here. Our strangle is based on the December $27.50 call (MSQ-LY) and the December $22.50 put (MSQ-XX). Our estimated cost was $0.30 for the entire position. We are aiming for a rise to $0.80-0.90 for either side of the strangle. Currently the December $27.50 calls are already trading at $0.45bid/$0.50ask, which is a 50% rise in value for our position. More conservative traders may want to exit early right here.

Picked on October 25 at $ 25.03
Change since picked: + 2.32
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 64 million

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O'Reilly Auto. - ORLY - close: 30.60 chg: -0.29 stop: n/a

ORLY hit some profit taking today but traders bought the dip near $30.30 stemming its losses above the simple 10-dma. The stock was rising into the close so ORLY might make another attempt at the $31 level tomorrow. We only have a few days left before November options expire. Our cost for the strangle was about $0.75. Currently the November $30 calls (OQR-KF) are trading at $0.50/0.65. Our current target is $1.25.

Picked on October 09 at $ 28.23
Change since picked: + 2.39
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 513 thousand

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Verifone Holdings - PAY - cls: 24.30 chg: -0.16 stop: n/a

We see no changes from our weekend update on PAY. We are targeting a rise to $4.50 for our January strangle. Currently the January $22.50 calls (PAY-AX) appear to be the winning side.

Picked on October 12 at $ 19.98
Change since picked: + 4.32
Earnings Date 11/18/05 (unconfirmed)
Average Daily Volume = 259 thousand

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Protein Design Labs - PDLI - cls: 25.49 chg: -0.07 stop: n/a

We see no changes from our weekend update on PDLI. We are not suggesting new positions at this time. The options in our hypothetical strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). We'll plan to sell if either side rises to $3.25. We have five weeks left before December options expire.

Picked on October 30 at $ 27.70
Change since picked: - 2.21
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

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Spectrum Brands - SPC - close: 16.39 change: -1.61 stop: n/a

News that a government investigation into its recent earnings results has sent shares of SPC plummeting almost nine percent today. Volume was very heavy at three times the norm. We are not suggesting new strangle positions. Our estimated cost for this strangle was $1.25. The options in our suggested strangle are the December $22.50 calls (SPC-LX) and the December $17.50 puts (SPC-XW). We are aiming for a rise to $2.50 or more. Currently the Dec. $17.50 puts are trading at $1.55bid/$1.70ask.

Picked on November 08 at $ 20.63
Change since picked: - 4.24
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand
 

Dropped Calls

Phelps Dodge - PD - cls: 124.16 chg: -6.15 stop: 123.69

Wow! Talk about a whipsaw. Friday's breakout looked like it had plenty of bullish signals to back it up. Monday proved us wrong. PD gapped lower to open at $126.50 and then traded down to $123.61 on an intraday basis. The cause of the sudden weakness is unknown. One source suggested the drop in PD was due to weakness in copper prices but a quick check of the copper futures shows the commodity hit another new multi-year high today. Then there is the oddity with PD's price and change for the day. The stock closed at $130.31 on Friday and shares closed at $124.16 today but all the data services we checked show PD's change for the day at a minus 77 cents (-0.77) not the -6.15 we see. We set our stop loss at $123.69 if anyone opened positions this morning on the gap down we've already been stopped out. The question one might ask is whether or not we had our stop too tight or not tight enough. A 10% stop loss rule would have put our stop in the $117 area. If PD bounces from here traders might want to use it as a new bullish entry point but the $130 level will probably be short-term resistance. The simple 50-dma looks like short-term support (currently at 121.88). We're going to close this play at a loss but we'll keep our eyes on PD for another opportunity.

Picked on November 13 at $130.31
Change since picked: - 6.15
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 2.7 million
 

Dropped Puts

None
 

Dropped Strangles

Genentech - DNA - close: 96.50 chg: +1.76 stop: n/a

Target achieved! Shares of DNA ignored weakness in the biotech sector and broke out over resistance at the $95.00 mark to close with a 1.85% gain. This move pushed the call side of our strangle to our target, which was $4.50 or better. The December $95 calls (DWN-LS) hit a high of $4.50 and are currently trading at $4.40bid/$4.50 ask. This represents an 87.5% rise in value from our estimated cost of $2.40 for the strangle. Please note that while we are closing the play at our target this breakout in DNA looks very bullish. There are five weeks left before December options expire and DNA could easily rally to the $100 level in the next few days. More aggressive traders may want to think about keeping their strangle position open.

Picked on October 20 at $ 84.83
Change since picked: +11.67
Earnings Date 10/10/05 (confirmed)
Average Daily Volume = 3.9 million

---

Lowes Cos. - LOW - close: 64.89 chg: +2.92 stop: n/a

Target achieved! LOW reported earnings this morning that were better than expected and the stock gapped higher and ran to an intraday high of $66.05 before paring its gains. This big move in the stock price pushed the December $65 calls (LOW-LM) to an intraday high of $2.55. Our target was $2.40 or better. Our estimated cost was $1.20 so an exit at $2.40 would have been a 100% rise in value. There are still five weeks left before December options expire and more aggressive, experienced traders might want to consider holding their position longer to see if LOW continues higher. Bear in mind that gaps, like this morning's, tend to get filled.

Picked on November 09 at $ 60.33
Change since picked: + 4.56
Earnings Date 11/14/05 (confirmed)
Average Daily Volume = 4.3 million
 


Options 101

Currency Markets and the use of Options

Hedging investment risk is one thing, hedging currency conversion is another.

The Theory Behind the Practice

Financial futures contracts have always been the center of the marketplace and are traded on various exchanges. Currency trading is probably the oldest trading of all the commodities, starting back in 1972. Options on these currencies are available to trade as well. Institutional investors with large portfolio positions that are invested overseas face the risk of currency fluctuations. These institutions invest in the buying or selling of currency options on the various currencies of the countries where there money is invested. When institutions invest in foreign markets they are not only faced with the task of picking successful investments, but the ultimate value of their investment success depends on the relationship between the dollar and the currency of the country that they are investing in.

The Currency exchange rate is essentially the exchanging of one foreign currency for another. The problems that this exchange created brought about the necessity of currency futures and eventually the introduction of currency traded options.

The problems created by currency exchanges

1. The foreign exchange exposure (just the conversion process alone from one currency to another is a problem)
2. What the exchange rate will be between the two currencies
3. The time that the transaction between the two (2) currencies occurred

Currency Options have become important investment derivatives in managing foreign currency conversion risks.

These options are quoted in two ways.

1. In American terms - in which a currency is quoted in terms of the U.S. dollar per unit of foreign currency (USD/NZD)
2. In European-terms (inverse terms), in which the dollar is quoted in terms of units of foreign currency per dollar. (EUR/USD)

FIGURE 1-1: CURRENCY CONVERSION COMPARISON

This same quotation can be used when utilizing two currencies in which the US dollar is not involved (e.g. New Zealand Dollar/Australian Dollar)

NOTE: Either currency can be expressed in relationship to the other currency.
(Example: NZD/Australian Dollar or Australian Dollar/NZD)


The Real World

Currency options are no different from any other type of option (stocks, index, interest rate, LEAP, etc.). Mutual fund managers and institutions that invest in stocks of other countries are exposed to changes between the two currencies, the currency of the country that is investing in the security and the currency of the country where the assets are invested.

The problems occur when the fund companies sell their assets at a rate that could have a negative impact on the currency of the mutual funds home currency exchange rate.

(Ex. Aim, Fidelity investing with U.S dollars in the assets of South Africa, Asia, Europe, etc.)


Bottom Line

Currency options give the investor an opportunity to hedge his or her investments that are held in foreign countries against changes in the relationship between the currency of his or her country and the country where the assets are being invested. Once again, this could be a hedge against any currency

Bank Treasury divisions usually have the ability to offer currency options. They generally have minimum deal sizes usually over $200,000 in face value of U.S. Dollars.

Currency options can also be bought on various exchanges. As with any investment that is purchased or sold, always stick to a company or organization that has a good reputation in the industry.

Until next time
 

Today's Newsletter Notes: Market Wrap by Jonathan Levinson, Options 101 by Steven Gail, and all other plays and content by the Option Investor staff.

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