Monday’s Options Alerts

November 15, 2002
Chris Tyler

Throwing caution into
the wind, it seems investors are regaining confidence in the markets. Dismissing
downgrades of General Electric
(
GE |
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News |
PowerRating) and Intel
(
INTC |
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PowerRating), a
mildly disappointing earnings report from Dell
(
DELL |
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PowerRating), as well as a
vague, but “spectacular” warning from the FBI on a potential terrorist attack,
the market was able to maintain inspiration from an upbeat Consumer Sentiment
number and rally, to close well on the session. The report wasn’t really all
that surprising considering that the previous numbers reflected the multiyear
lows and corresponding investors’ woes prior to our
month-long rally.

Today’s action sets the stage for a potential
rally out of our established trading ranges in both equities and the highly
correlated volatility indices. Under normal circumstances, as we’ve been
pointing out the last couple of reports, (under new micro management, feel
free to email me with any questions) we can expect volatility to break out to
the downside out of its recent trading range, if indeed a price recovery in
equities is in the making. For investors this would be a welcome sign of relief,
as we haven’t seen this type of move since last Fall.

In reading Tony Saliba’s latest column it seems
that we’re seeing evidence that volatility could indeed go lower, and hence
higher equity prices as the next significant move. While treading gently, and
not forcing my own opinion on the market, my own analysis has been leaning
towards this direction in my recent nightly reports.

Closing prices for today reversed early selling
pressure to end up in the plus column for all of the broader indices. In this
report, I’ll be using the Exchange Traded Funds (ETFs) and HOLDRs as my proxies for market action. I personally like to trade these
products, and most have listed options attached to the underlying product. This
makes these products a nice fit for a column whose focus is options.

With the markets up at their best levels since
our recent highs were set in the first week of November, the VIX
(
$VIX |
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News |
PowerRating) has
broken through its trading range to test the August lows. The VIX closed at
30.83, down -1.77, while the VXN
(
$VXN |
Quote |
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News |
PowerRating) traded down -2.72 to 49.68, and is
currently flirting with the bottom of its consolidation. As Tony Saliba points
out, seasonally the odds favor a continuation of this action, until we’re told
otherwise. That of course will happen when price and volume tell us that the
game is up. Without sounding like the title to the movie “Raging
Bull,” we do need to acknowledge that prices from the October lows have
come off a more supportable double bottom formation. This is also a much
stronger pattern than the rally that occurred last Fall.

At the moment, the market is saying that we might not even be through half
time yet, and the second half could be a big one. However, intermediate players aren’t yet smitten with the market, as
leadership has yet to be firmly established. My advice is: Keep it tight, go with the flow, learn to keep your
trading decisions based on the charts, not your individual opinion, and you’ll
find whichever direction the market decides to take, you’ll be prepared to
profit.

Points of Significance:

Volatility Index	Close	Net Change	Signals/Direction	% Above/Below 10 Day Moving Average	Significance
VIX	30.83	DOWN -1.77	CVR 3,6 Sell	10.16% Below	At An Extreme
VXN	52.40	DOWN -2.06	NONE	5.15% Below	Not At Extreme

Abnormal Options Volume With Price Movement —
Abnormal options volume (calls and puts) with stock price movement

Name	Symbol	Net % Change	Volume	Avg. Volume
Fifth Third Bancorp	FITB	-8%	8924	1118
Broadcom	BRCM	+6%	18330	3618
Panera Bread	PNRA	+5%	2203	671
Newmont Mining	NEM	+4%	11500	3517
Allied Capital	ALD	+2%	14504	763

Stocks With Biggest Spikes in Implied
Volatility — Stocks with biggest increases or decreases in implied
volatility compared to previous day

Spike Up

Name	Symbol	IV	Previous IV	High IV	Low IV
Fifth Third Bancorp	FITB	43.2	32.3	47.1	17.9
Cephalon	CEPH	51.8	46.9	81.2	48.7
Pixar	PIXR	41.4	37.9	53.5	30.7
Avocent	AVCT	62.3	57.5	77.7	47.3

Spike Down

Name	Symbol	IV	Previous IV	High IV	Low IV
Healthcare	HCA	43.1	51.5	45.7	21.0
Dell	DELL	37.7	43.6	66.1	38.3
Citigroup	C	38.6	44.3	65.0	23.6

Please use stops on every trade!

Monday’s Options Alerts

BUY THE FEAR, SELL THE GREED

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