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Daily Newsletter, Saturday, 12/03/2005

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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

Market Wrap


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CTX MGA BCSI

New Calls

Centex Corp. - CTX - close: 73.86 chg: +1.38 stop: 71.39

Company Description:
Centex, a Fortune 250 company founded in 1950, is one of the nation's leading home building companies. Centex Homes operates in major U.S. markets in 25 states and delivered more than 33,000 homes in the United States in its most recent fiscal year ended March 31, 2005. (source: company press release or website)

Why We Like It:
It doesn't matter if you think real estate is a bubble about to burst, has already burst, or is still in a bull market. There is no denying the recent strength in shares of CTX. The stock has been a relative strength leader in a sector that in the last few weeks has broken out from a three-month bearish consolidation. We like CTX as a bullish candidate because the stock has just begun to bounce from the bottom of its rising channel. We can enter here with a relatively tight stop to limit our risk. We would suggest calls with CTX above $72.50. Our six-week target is the $78.50-80.00 range. The Point & Figure chart has a triple-top breakout buy signal pointing to a $95 target.

Suggested Options:
We are suggesting the January calls. We do not want to hold over the late January earnings report.

BUY CALL JAN 70 CTX-AN open interest=2532 current ask $6.10
BUY CALL JAN 75 CTX-AO open interest=3588 current ask $3.10

Picked on December 04 at $ 73.86
Change since picked: + 0.00
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 2.6 million
 

New Puts

Magna Int. - MGA - close: 68.14 chg: -0.90 stop: 70.31

Company Description:
Magna, the most diversified automotive supplier in the world, designs, develops and manufactures automotive systems, assemblies, modules and components, and engineers and assembles complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks in North America, Europe, Asia and South America. Our capabilities include the design, engineering, testing and manufacture of automotive interior and closure systems; metal body and structural systems; exterior and interior mirror and engineered glass systems; exterior systems, including front and rear end modules, plastic body panels, exterior trim and other systems; various powertrain and drivetrain systems; as well as complete vehicle engineering and assembly. (source: company press release or website)

Why We Like It:
Investors are worried about the auto industry. Makers like GM and Ford have seen the stocks in addition to parts suppliers like LEA and MGA. It doesn't help that Wall Street is worried over a potential bankruptcy from Delphi. We like MGA as a put candidate because its oversold bounce from the October lows has stalled under the descending trendline of resistance and its 50-dma and 200-dma. Technicals are bearish with its MACD producing a new sell signal. We are going to suggest buying puts here under $69. More conservative traders might want to wait for a little more confirmation that the next leg lower has begun by waiting for a decline under $67. The daily chart does show short-term support near $66 but we believe MGA can sink toward the $63.00-62 range before January options expire. We'll put our stop at $70.31, just over the simple 200-dma.

Suggested Options:
We are going to suggest the January puts.

BUY PUT JAN 70 YVG-MN open interest= 96 current ask $3.30

Picked on December 04 at $ 68.14
Change since picked: + 0.00
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 318 thousand
 

New Strangles

Blue Coat Sys. - BCSI - cls: 45.43 chg: -0.56 stop: n/a

Company Description:
Blue Coat helps organizations make the Web safe and productive for business. Blue Coat proxy appliances provide visibility and control of Web communications to protect against risks from spyware, Web viruses, inappropriate Web surfing, instant messaging (IM), video streaming and peer- to-peer (P2P) file sharing -- while actually improving Web performance. Trusted by many of the world's largest organizations, Blue Coat has shipped more than 25,000 proxy appliances. Blue Coat is headquartered in Sunnyvale, California. (source: company press release or website)

Why We Like It:
Shares of BCSI have been stuck in a very narrow, sideways consolidation over the past nine sessions and we suspect that a breakout (either direction) is nearing. The stock has been a big winner with a rally from its May lows. Yet last month BCSI displayed some volatility. The stock gapped lower after posting earnings that beat estimates by 2 cents but the company issued a mixed earnings forecast. A week later BCSI gapped higher after an analyst upgraded the stock to a "strong buy". Shares have been range bound ever since. BCSI has an analyst meeting coming up on December 8th and this might provide the needed catalyst to jar the stock out of its trading range. With the current strangle strategy proposed we're betting that BCSI will move at least eight dollars in the next seven weeks. We're going to suggest a $46-44 entry window but the closer to $45.00 the better.

Suggested Options:
We'd like to buy February strikes but there aren't any available yet. That leaves us with January or April strikes and the Aprils are too expensive for us. As a strangle we want to buy an out of the money call and an out of the money put. At current prices our cost would be $3.25. We'll aim for a rise to $5.50.

BUY CALL JAN 50 IYU-AJ open interest=575 current ask $1.90
-and-
BUY PUT JAN 40 IYU-MH open interest=271 current ask $1.35

Picked on December 04 at $ 45.43
Change since picked: + 0.00
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 416 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Cummins Inc. - CMI - close: 90.06 chg: -1.26 stop: 87.75

CMI is a new bullish candidate from our Thursday night newsletter. The pull back on Friday looks like a new bullish entry point although more conservative traders may want to wait for another move over $90.50 or $91.00 before initiating new positions. We do not see any changes from our previous update so we're reposting it here:

Cyclical stocks have been pretty strong this fall and CMI looks like a tempting bullish candidate given today's breakout over resistance at $90.00. Looking at CMI's daily chart you can quickly see that shares rebounded from its exponential 200-dma in October. The rally stalled under the $90 level in November and shares consolidated sideways for the entire month. Now CMI is rested and poised to hit new highs. The Point & Figure chart has produced a new buy signal that now points to a $102 target. We would suggest new call plays with CMI above the $90 level. Our six-week target is the $97-100 range. Readers can choose to go long calls here or look for a dip back to the $90 level. We'll put our stop under the bottom of its recent trading range. One of the biggest risk here is the CYC cyclical index is very overbought with a near non-stop rally from its October lows and is nearing resistance at its late 2004 highs near 790. The second risk here is a downgrade as the median analyst target is currently at $90.

Suggested Options:
We are going to suggest the January calls. We do not plan on holding past CMI's late January earnings report. For our new readers, please note, we are not suggesting you buy all of the calls listed below. This is a quick reference for the calls we would consider buying.

BUY CALL JAN 85 CMI-AQ open interest= 227 current ask $7.20
BUY CALL JAN 90 CMI-AR open interest= 294 current ask $4.00
BUY CALL JAN 95 CMI-AS open interest=1182 current ask $1.85

Picked on December 01 at $ 91.32
Change since picked: - 1.26
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 611 thousand

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Dominion Res. - D - close: 75.98 chg: -0.33 stop: 74.75

The relative weakness in D has become a concern. Natural gas prices have rebounded out of their recent trading range. Expectations are rising again that natural gas prices could hit new highs above the hurricane-induced peak now that winter is finally settling in. D's failure to rally with the rise in natural gas makes this play more dangerous. The stock did bounce from its lows on Friday near the 200-dma but some of the technical indicators on its daily chart (like the MACD) are leaning toward bearish signals. We would not suggest new bullish positions at this time. We might change our mind if D can bounce back above the $77.25 level. At the moment the simple 50-dma is nearing additional resistance near $78.30, which is just one more thing to worry about. If D does not produce a bounce on Monday or Tuesday we'll probably exit early to limit our losses. FYI: the Point & Figure chart for D is still bullish and points to an $89 target.

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

Picked on November 27 at $ 78.24
Change since picked: - 2.26
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million

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FMC Corp. - FMC - close: 55.41 chg: +0.37 stop: 51.95

FMC is a new bullish candidate from our Thursday newsletter. We don't see any changes from our previous update so we're reposting it here:

FMC is a bullish candidate based on its technical breakout. The stock has been declining for the last four months in a descending channel. On November 23rd the stock broke out to the upside on an intraday basis but failed to push past the simple 200-dma. The breakout was fueled by an analyst upgrade who said the stock was undervalued and its weakness was a buying opportunity. The analysts might be right. As a chemical company oil prices are a significant expense for them. While oil remains near historic highs crude has been coming down from its peak the last several weeks. Therefore investor expectations for the company's earnings may be set too low. Today's rally in FMC was fueled by stronger than average volume and the stock pushed past resistance at the 200-dma and the $55.00 mark. The Point & Figure chart has reversed its sell signal into a new buy signal that points to a $68 target. We would suggest bullish positions with the stock above $54. More conservative traders may want to wait for more confirmation and look for a move over its 100-dma before initiating positions. We'll stick our stop loss at $51.95, since the top of the gap (near 52.00) should act as support. Our six-week target is the $59.85-60.00 range.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 50 FMC-AJ open interest= 6 current ask $6.40
BUY CALL JAN 55 FMC-AK open interest=529 current ask $2.70
BUY CALL JAN 60 FMC-AL open interest= 73 current ask $0.90

Picked on December 01 at $ 55.04
Change since picked: + 0.37
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 270 thousand

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Hovnanian - HOV - close: 50.70 change: +0.61 stop: 48.99 *new*

The DJUSHB home construction index is starting to bounce after testing support at its simple 200-dma this past week. This sector index broke through the top of its descending channel a couple of weeks ago and now after a brief rest it looks ready for another leg higher. HOV is in a similar position with a breakout over significant resistance before Thanksgiving. Now after a brief consolidation the stock is inching higher again. This looks like a new bullish entry point. Unfortunately, we're running out of time before HOV reports earnings. The company is expected to report on Wednesday, December 7th after the market's close. That only gives us three trading days to see HOV post any gains. Therefore we'd probably not launch new positions here. We'll plan to exit on Wednesday afternoon at the closing bell. We're going to raise our stop loss to $48.99. Our target is the $54.50-55.00 range. The Point & Figure chart points to a $66 target.

Suggested Options:
We're running out of time with HOV. Therefore we're not suggesting new positions.

Picked on November 21 at $ 49.25
Change since picked: + 1.45
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume = 1.5 million

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Kerr Mcgee - KMG - close: 90.30 chg: +0.71 stop: 84.99

KMG has been triggered. Our suggested entry point to buy calls in KMG was on a breakout over resistance at $90.00 and a move at or above our trigger at $90.26. We do not see any changes from our original play description from Thursday night so we're reposting it here:

We're going to try again with the energy stocks. The OIX oil index and XNG natural gas index both look poised for a breakout from their two-month consolidation. Meanwhile the OSX oil services index is trading near new all-time highs. KMG is a natural gas play and natural gas futures have bounced strongly the last couple of days suggesting the commodity have put in its bottom for the fourth quarter. Shares of KMG have been consolidating between $80 and $90 for the last two months but the last three weeks have seen a steady trend of higher lows. It's daily chart has the stock under resistance at the $90.00 mark and poised for a bullish breakout. Meanwhile the P&F chart has already broken out above resistance and points to a $106 price target. We are going to suggest a trigger at $90.26 to open positions. If triggered we'll target a rise into the $98.50-100.00 range by mid January.

Suggested Options:
We do not want to hold over KMG's late January earnings report so we're suggesting the January calls.

BUY CALL JAN 85 KMG-AQ open interest= 959 current ask $7.60
BUY CALL JAN 90 KMG-AR open interest=1303 current ask $4.40
BUY CALL JAN 95 KMG-AS open interest=1851 current ask $2.25

Picked on December 02 at $ 90.26
Change since picked: + 0.04
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Kinder Morgan - KMI - close: 93.00 chg: +0.76 stop: 87.45

KMI has been triggered. Our suggested entry point to buy calls in KMI was on a breakout over resistance in the 92.50 region and a move at or above our trigger $92.75. We do not see any changes from our original play description from Thursday night so we're reposting it here:

We are going to double up on the natural gas stocks. If you didn't like the KMG play then consider KMI as an alternative candidate. KMI's two-month consolidation looks a bit more bullish than KMG's and the stock has already broken out above technical resistance at its 50-dma and 100-dma. The P&F chart for KMI points to a $104 price target. Aggressive traders could open positions right here. We want to see some confirmation. Our strategy is to use a trigger at $92.75 to open call positions. If triggered we'll target a rally into the $98.50-100.00 range before KMI's mid January earnings report.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 90 KMI-AR open interest=1792 current ask $5.10
BUY CALL JAN 95 KMI-AS open interest=1701 current ask $2.25

Picked on December 02 at $ 92.75
Change since picked: + 0.25
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 749 thousand

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NovAtel Inc. - NGPS - close: 30.12 chg: +0.26 stop: 27.75

NGPS did manage a rebound on Friday but it wasn't very convincing. The stock added just 26 cents but closed back above round-number, psychological support/resistance at the $30.00 mark. We are not suggesting new plays right here. The MACD on the daily chart has turned into a new sell signal and closer inspection of the intraday charts suggests that NGPS may pull back toward the $29.00 level or lower toward stronger support near $28.00. Meanwhile the P&F chart, which eliminates a lot of the noise on a daily chart, is still bullish and points to a $50 target. Our target is the $35.00-36.00 range by year-end.

Suggested Options:
We are not suggesting new plays in NGPS at this time.

Picked on November 21 at $ 30.45
Change since picked: - 0.33
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 292 thousand

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Polaris Ind. - PII - close: 53.24 change: +0.34 stop: 48.49 *new*

PII has almost reached our target. The stock produced a big breakout over multiple levels of resistance on Thursday and Friday's gain pushed it over the exponential 200-dma. Our target is the $54.00-55.00 range and PII hit a high of $53.73 on Friday. More conservative traders may want to exit right here for a win. We're going to raise our stop loss to $48.49.

Suggested Options:
PII is nearing our target. We are not suggesting new positions.

Picked on November 21 at $ 48.47
Change since picked: + 4.77
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand

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Companhia Vale de Rio - RIO - close: 45.08 chg: +0.14 stop: 41.85

RIO has been triggered. Our suggested entry point to buy calls in RIO was on a breakout over resistance at the 45.00 level and a move at or above our trigger $45.45. We do not see any changes from our original play description from Thursday night so we're reposting it here:

Metal and mining stocks have been one of the bright spots in the market. Following some positive analyst comments for the sector we think the group still has more gains ahead of it. Shares of RIO have rallied up to resistance at the $45.00 level and look poised to break out. We are going to suggest a trigger at $45.45, above last week's high (45.30). If triggered our six-week target will be the $49.50-50.00 range.

Suggested Options:
We are suggesting the January calls but traders might want to consider March calls and exit ahead of RIO's March earnings report.

BUY CALL JAN 40 RIO-AH open interest=4149 current ask $5.90
BUY CALL JAN 45 RIO-AI open interest=3495 current ask $2.55
BUY CALL JAN 50 RIO-AJ open interest= 881 current ask $0.75

Picked on December 02 at $ 45.45
Change since picked: - 0.37
Earnings Date 03/14/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Rockwell Autom. - ROK - cls: 59.01 chg: -0.41 stop: 55.75

ROK experienced a little bit of profit taking on Friday but for the most part is holding its gains. Although a quick look at the daily chart shows a lot more volatility than what really occurred. The daily chart shows a spike down to $55.96 but what we see there is just a bad tick near the opening bell. It looks like ROK never traded below 58.38, which makes more sense since broken resistance near $58 should become new short-term support. ROK is a couple of points away from our target in the $61.00-62.00 range so we're not suggesting new positions at this time.

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

Picked on November 03 at $ 55.90
Change since picked: + 3.11
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

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Sunoco Inc. - SUN - close: 82.82 chg: +2.13 stop: 76.45

SUN has been triggered. Our suggested entry point to buy calls in SUN was on a breakout over resistance at the 81.50 level and a move at or above our trigger $81.75. We do not see any changes from our original play description from Thursday night so we're reposting it here:

If we're going to consider some energy stocks as bullish candidates we can't forget the refiners. SUN has rebounded strongly from its October lows off the 100-dma. Currently shares are challenging resistance near its all-time highs. The P&F chart for SUN points to a $93 target. We are going to suggest a trigger at $81.75, above its September high of $81.49. If triggered we'll target a run into the $89.90-90.00 range over the next six weeks.

Suggested Options:
We're going to suggest the January options. Be sure to double-check your option symbol. There are some odd symbols out there due to SUN's 2-for-1 split back in August.

BUY CALL JAN 80 SUN-AP open interest=2481 current ask $6.40
BUY CALL JAN 85 SUN-AQ open interest=2313 current ask $3.80
BUY CALL JAN 90 SUN-AA open interest= 964 current ask $2.00

Picked on December 02 at $ 81.75
Change since picked: + 1.07
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 2.8 million

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Tractor Supply - TSCO - cls: 55.15 chg: +0.87 stop: 51.45 *new*

The rally in shares of TSCO continued on Friday and the stock closed at its high for the session, which normally bodes well for the next day. It's also noteworthy that TSCO broke through and closed above what could have been round-number resistance at the $55 mark. We would not suggest new positions here. If TSCO pulls back then the $53.00-52.50 level should act as support. A bounce from this support could be used as a new bullish entry point. We're raising our stop loss to $51.45.
Our five-week target is the $57-58 range.

Suggested Options:
TSCO is within a couple of points of our target. We're not suggesting new plays at this time.

Picked on November 30 at $ 52.75
Change since picked: + 2.40
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 428 thousand

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Walter Inds. - WLT - close: 51.81 change: +0.48 stop: 45.95

So far so good. WLT continues to rebound from its recent test of support near the $50.00 level. We would use this bounce as a new bullish entry point to buy calls. WLT's P&F chart points to a $67 target. We are targeting a run into the $57-58 range by year-end.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 50 WLT-AJ open interest=3348 current ask $4.00
BUY CALL JAN 55 WLT-AK open interest=4075 current ask $2.20

Picked on November 20 at $ 51.50
Change since picked: + 0.31
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 927 thousand
 

Put Updates

Netflix - NFLX - close: 27.69 chg: +0.58 stop: 28.55

NFLX managed a bounce from the $27.00 level on Friday but the stock remains stuck in a short-term sideways trading range near the bottom of its eight-month rising channel. Positive comments from J.P.Morgan lifted shares of rivals Blockbuster and Movie Gallery and this may have weighed a bit on NFLX. NFLX's lack of participation in the market's recent strength would suggest that the stock's momentum may have run out. However, until the trend changes, and the trend is still bullish, we need to sit on the sidelines. Currently our strategy is to catch any breakdown with a trigger to buy puts at $25.99. If triggered we'll target a drop to the $22.50 mark. Alternatively, traders might want to consider buying calls if NFLX continues to bounce from its channel and passes the $29.50 or $30.00 levels. The biggest risk for our put play is an intraday spike down that is reversed and followed with a short-squeeze.

Suggested Options:
If NFLX hits our trigger we like the January puts. We plan to exit ahead of the mid January earnings report.

BUY PUT JAN 30.00 QNQ-MF open interest= 430 current ask $3.80
BUY PUT JAN 27.50 QNQ-MY open interest=3378 current ask $2.25
BUY PUT JAN 25.00 QNQ-ME open interest=3162 current ask $1.15

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 1.4 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: 79.46 chg: +0.05 stop: n/a

It's do or die time for ABC. We have just two weeks left before December options expire. The good news is that ABC is trading near the $80 level and the trend remains bullish. ABC's Point & Figure chart looks very positive with a bullish triangle breakout buy signal with a $114 target. The bad news is that ABC's momentum is running out and its technical indicators are suggesting the stock needs to pull back and rest some more. Readers have choice to make. With just two weeks left do you aim for our target at $5.00 or aim for breakeven at $2.80 or something even less just to salvage something from the position. Currently the December $80 calls (ABC-LP) are trading at $0.80bid/$0.90ask. If ABC pulls back at all these calls could erode even more in a heartbeat. December is historically the best month for stocks but usually most of the strength happens in the second half of the month, which would not help us here.

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

Picked on October 16 at $ 74.81
Change since picked: + 4.70
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 21.00 chg: +0.18 stop: n/a

AEOS managed an oversold bounce after Thursday's gap down following its earnings warning. The trend is certainly bearish but we don't know if AEOS will try and fill the gap from Thursday before continuing lower. We have about seven weeks to go before January options expire. We are not suggesting new strangle positions at this time. 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. FYI: currently the January $22.50 puts are trading at $2.25bid/$2.40ask.

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

Picked on November 13 at $ 25.47
Change since picked: - 4.47
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 62.10 chg: +0.36 stop: n/a

ANF is still bouncing after Thursday's intraday rebound. Some of the oscillators look bearish but we wouldn't be surprised by a continued rally following last week's pull back toward support near $60. We have about seven weeks to go before January options expire. We are not suggesting new strangle positions at this time. The options in our strangle are 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.

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

Picked on November 13 at $ 59.67
Change since picked: + 2.43
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Chicago Merc. Exchg. - CME - cls: 369.80 chg: +1.30 stop: n/a

Friday proved to be another volatile day for CME. The stock had a $16 range. Now that shares have virtually tested the $350 level and the $400 level, we need to see it pick a direction. What we don't want to see is CME churn sideways inside this range. We have about seven weeks left before January options expire. We are not suggesting new strangle positions at this time. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA). Our estimated cost was $26.70. We're aiming for a rise to $40.00 in the strangle before January options expire.

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

Picked on November 20 at $375.90
Change since picked: - 6.10
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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D.R.Horton - DHI - close: 36.52 chg: +0.51 stop: n/a

Homebuilders are starting to grind higher again after last week's consolidation. DHI looks poised to post more gains into December. We are not suggesting new strangles at this time. Our current play 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. Currently the DHI-AG calls are trading at $2.95bid/$3.20ask.

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

Picked on November 13 at $ 32.56
Change since picked: + 3.96
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 3.2 million

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Four Seasons - FS - close: 49.68 chg: -0.54 stop: n/a

FS continues to churn sideways near the $50 level but the lack of participation in the market's rally remains a sure sign of relative weakness. The trend in FS is clearly bearish but we're losing patience with this sideways trading. More conservative traders may want to exit here with a small loss. If we keep the play open we're betting that FS will drop toward $46 or lower before these options expire. We're going to keep FS as an active play for a few more days even though we have seven weeks left before January options expire. 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. FYI: the FS-MJ puts are trading at $2.10bid/$2.30ask.

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

Picked on November 08 at $ 55.37
Change since picked: - 4.43
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Lear Corp - LEA - close: 27.09 chg: -0.76 stop: n/a

Finally! We're starting to see some movement in LEA. The stock has been consolidating sideways for the last couple of weeks but Friday's 2.7% decline looks like the beginning of a new leg lower. We have about seven weeks left and by keeping the play open we're betting that LEA will trade near $24-23 before the options expire. We are no longer suggesting new strangle positions. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). Our estimated cost was $1.60. We are targeting a rise to $3.20 or more. FYI: the LEA-ME puts are trading at $1.05bid/$1.25ask.

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

Picked on November 06 at $ 30.24
Change since picked: - 3.15
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 97.52 change: +0.12 close: n/a

Good news! LTR is rebounding after bouncing twice from the $96.40 region. Technicals had turned bearish on the stock after the momentum faded but LTR is showing some resilience. The stock does still have resistance near $98 but there is now a better chance that the stock will reach our target. We're not suggesting new plays. 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 plan to exit if our strangle rises to $5.00 or if shares of LTR hit 99.90. Currently the LTR-LS calls are trading at $$2.95bid/$3.10ask.

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

Picked on October 23 at $ 89.94
Change since picked: + 7.61
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Verifone Holdings - PAY - cls: 24.20 chg: +0.95 stop: n/a

After the bell on Thursday PAY reported earnings that came in better than Wall Street estimates. The stock reacted by gapping higher on Friday morning and breaking out over its three-week trend of lower highs. The rally on Friday did stall at resistance near $25 but the earnings news has given new life to the stock's chance to climb. We have about seven weeks left before January options expire. We're not suggesting new positions. Our current strangle involves the January $22.50 calls (PAY-AX) and the January $17.50 puts (PAY-MW). Our estimated cost was $2.60 and we're aiming for a rise to $4.50 or more. Currently the PAY-AX calls are trading at $2.70bid/$3.10ask.

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

Picked on October 12 at $ 19.98
Change since picked: + 4.22
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand

---

Protein Design Labs - PDLI - cls: 28.40 chg: +0.65 stop: n/a

Our strangle is PDLI is not shaping up to be a winner. The stock has oscillated between $25 and $29 over the last month without any clear direction and this has killed the option prices. We have two weeks left before December options expire. If there is any hope of making a profit here PDLI needs to trade near $32 or $23 in the next two weeks. More conservative traders ought to be looking for an early exit, probably on a spike higher, to try and salvage some trading capital. We are not suggesting new strangle positions. The options in our strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). Our estimated cost was at $1.80. We're going to adjust our target to breakeven at $1.80.

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

Picked on October 30 at $ 27.70
Change since picked: + 0.70
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

---

Spectrum Brands - SPC - close: 18.07 change: -0.18 stop: n/a

SPC remains stuck in its downtrend so we expect the put side of our strangle to be the winning side. We did find it interesting that volume surged to almost three times the average on Friday even though shares only fell less than one percent. We have two weeks left before December options expire. To make this play a winner we need to see SPC trade under the $16 level in the next couple of weeks. More conservative traders may want to plan an exit near breakeven. We are not suggesting new strangle positions at this time. 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 SPC-XW puts are trading at $0.45bid/0.50ask.

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

Picked on November 08 at $ 20.63
Change since picked: - 2.37
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

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Questar Corp. - STR - close: 75.79 chg: -0.20 stop: n/a

We find it interesting that shares of STR have not rallied with the bullish breakout in natural gas prices this week. The stock has moved higher but not by much and shares remain stuck inside their month-long, slowly descending channel. There are seven weeks left before January options expire. We are no longer suggesting strangle positions in the stock. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN). Our estimated cost was $5.10 and we're aiming for a rise to $9.50 or more.

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

Picked on November 20 at $ 76.25
Change since picked: - 0.46
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

---

Texas Ind. - TXI - close: 52.85 chg: +0.38 stop: n/a

TXI continues to inch higher following Thursday's breakout. The stock does appear to be testing the 100-dma near 52.87. Traders need to remember that we have less than two weeks before TXI reports earnings and that could reverse the recent bullish move. We are not suggesting new strangle positions. The options in our strangle are the January $55 calls (TXI-AK) and the January $45 puts (TXI-MI). Our estimated cost is $2.70. We're looking for a rise to $5.00 or more. TXI is due to report earnings around December 15th.

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

Picked on November 27 at $ 49.57
Change since picked: + 3.28
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand

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Valero Energy - VLO - close: 101.80 chg: +0.70 stop: n/a

VLO produced a little bit of follow through on Thursday's rally but the stock remains under the simple 50-dma. If the energy sector continues to rally then we'll obviously be looking for the call side of our strangle to be the winner. We are not suggesting new strangle plays any longer. Our current play involves the January $110 calls (VLO-AB) and the January $90 puts (VLO-MR). Our estimated cost was $5.85 and we're aiming for a rise to $9.50. VLO is due to split 2-for-1 on December 16th so our post-split target will be a rise to $4.75.

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

Picked on November 21 at $101.00
Change since picked: + 0.80
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Old School, New School

If asked to identify market gurus seemingly poles apart in their approaches, I'd know whom to name: Tom Williams, chairman of TraderGuider Systems Ltd. and former U.S. Syndicate Trader, and Richard Olsen, chairman and CEO of Zurich-based Olsen Group and co-founder of online forex brokerage and market maker OANDA.

Olsen asserts his intention to re-engineer finance. In an interview republished in December's ACTIVE TRADER, he peppers his comments with terms such as "fractals," "high-frequency tick data," and "seasonality of volatility." He warns that the role of the small investor will change, and that the indicators they use must evolve from the primitive overbought and oversold indicators now employed into increasingly sophisticated indicators calculated on a high-frequency tick basis. Moving averages, for example, would be rescaled according to the seasonality of the volatility. Traders would calculate the seasonality of the volatility through data amassed from studying high-frequency tick data, using statistical analysis. Olsen believes that low-frequency data, that obtained by studying daily and weekly data, can miss important market dynamics. That seasonality of volatility occurs on intraday time periods, for example. Volatility on the forex markets peaks between the hours of 12 and 18 GMT (7:00 am - 1:00 pm EST), he contends.

Reading Olsen's comments, I wonder if my physics and mathematics background will be sufficient to keep up with the new demands on the ordinary retail trader. Olsen's emphasis on quantitative, statistical analysis of high-frequency tick price data sounds as if it requires a few more hours of statistics than I took during college.

Listening to Tom Williams lecture or reading something he's written calms the anxiety. Williams created a strategy called Volume Spread Analysis. In free seminars offered occasionally through the CBOT and other sources, Williams explains his strategy of combining studies of volume with the price spread to determine accumulation or distribution, signs of strength and weakness. Charts are simple, requiring only price bars with the closing value indicated, volume and a maybe few trendlines. Williams uses no "mathematical formulas," by which he means stochastics or other formulas derived from mathematical computations on the price movements.

In a highly liquid security, Williams claims that high volume indicates that professionals were active during that period, and Williams says you want to know what they were doing. Olsen would probably suggest the same, but Williams' method remains relatively simple. If prices have been marked down on high volume but the period closed well off its low, professionals have been accumulating, for example, although that's probably an oversimplification of Williams' methodology. News will have been terrible, and the herd has been shorting as a result, but the accumulation is obvious to anyone who understands the correlation of volume and price spreads, Williams declares. Other just-as-obvious and easy-to-spot patterns can mark distribution at the top of a climb. His proprietary software identifies certain patterns, but he points out that the descriptions of these patterns haven't changed in a decade because "the herd does the same thing all the time, and professionals take full advantage."

So which market guru has it right? Both, I suspect. Herd mentality will always play a part in the behavior of the markets and probably contributes to the seasonality of volatility that Olsen mentions. Volatility expands or contracts depending on times when professionals and retail traders might be more active in the markets. Williams insists on the importance of studying varying time frames, as does Olsen, and, although Williams doesn't advise concentrating solely on short-term intraday charts, he agrees that fractals of daily charts show the same patterns as do those daily charts. He illustrated his CBOT webinar with intraday charts, for example. And Williams certainly takes full advantage of the ability to write software that capitalizes on the logic behind his assertions, just as Olsen does.

The month in which Olsen's republished interview appeared, market-related magazines included articles on incorporating the speed of movements into one's study of the markets or on the need for traders to quickly assess masses of information being thrown their direction, comparing the traders' occupation to that of a fighter pilot. It's true that traders must now assess much more information than whether they like the way Jack Welch runs a company, and assess it quickly. However, beginning in March, 2000, many traders found that the "this time it's different" paradigm fell apart. It's never different. The waxing and waning psychology that drives many market moves hasn't been different since the development of the Japanese rice futures market in the 1600s led to candlestick charting, and probably since before that.

While it's true that we traders must assimilate more data than ever before, don't despair when you spot an article on neural net software, singular spectrum analysis, or even my or Jonathan's comments on nested Keltner channels, and realize that the terms don't even make sense to you. There will always be a place for retail traders in the markets, and, I suspect, for rather simple methodologies. I've heard that pit traders don't use those "mathematical formulas" that Williams so disdains, and I bet they don't use neural net software, singular spectrum analysis or even nested Keltner channels, either. Don't overcomplicate trading. Find a methodology that makes sense to you and get to know it well.
 

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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