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Issue No. 18 – March 21, 2005 Prescott, Arizona Systems@WiserTrader.com

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1.0 Trading

      Look for a new option alert about mid week.  Let me know if there is any additional alert information or follow up that would assist you in deciding to make a trade.  Only 10 days are left in the free period for Option Alerts with a 40% savings on enrollment.  Trading results listed in Section 4 were very encouraging this week.

1.1 The CBOE 10 Year Treasury Yield Index

      The CBOE 10 Year Treasury Yield Index needs more explanation.  The portfolio is long the TNX December $45.00 Call with the symbol TNX LI.  The trade is based on the speculation that 10 year Treasury yields will rise at least one percentage point a month before the option’s expiration.   If this occurs, the trade will profit by more than 100%, as explained in the next section.  Last week’s requirement for a rise to a 6% yield were conservative.  The current TNX index price is $45.11 reflecting a yield on the 10 year US Treasury Note of 4.511%. 

      It was incorrect to state last week that the normal yield curve would be a sufficient force to keep Treasury yields above overnight rates.  Figure 1A shows a 10 year history of inflation, overnight rates (labeled FOMC) and 10 year Treasury rates.  The chart shows that overnight rates actually exceeded the 10 year Treasury yield in 2000.  The condition was referred to as an inverted yield curve. 

      Still the odds that 10 year yields will rise another percentage point by November remain very high due to effective yields on the 10 year note.  The effective yield is obtained by subtracting the current inflation rate of 2.97% from the published yield of 4.511%.  The result is 1.54%.  Rising inflation reduces effective yields, forcing bond holders to sell.  Mass selling causes prices to fall and restore effective yields to some minimum acceptable positive value.  The need to maintain a minimum acceptable effective yield is a strong force that keeps the 10 year yield above the rising inflation rate shown in Figure 1A.  

© 2005 WiserTrader.com, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors.   Trades discussed represent trades made by the editor for the wisertrader.com portfolio.  The newsletter and web site are for information only and should not be considered as personal advice.   While it is believed that the posted information is factual, mistakes can be made in transcription.  Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser

FIGURE 1A

      In addition to inflation, Treasury yields are also being forced upward by international currency exchange forces.  Asian central banks, large holders of US bonds, are reducing their percentage of US bond holdings.  China recently announced a 25% reduction.  Korea and Japan have recently announced plans for diversification, as well.   Newly issued Treasuries will need to carry higher yields to maintain bond sales at the $2 billion/day rate needed to support current deficits.  If bond sales are not maintained, the dollar will fall faster pushing inflation further upward.  This will require Treasury yields to increase anyway.

      The government’s need to raise yields at bond auctions combined with a natural equilibrium that maintains a minimum acceptable effective yield with rising inflation are two factors that make the TNX call option trade worth considering.  The next section focuses on selecting the best option.

1.2 Profit Diagrams

      Profit diagrams are used to estimate returns and analyze the relative advantages of purchasing various options.  There are many ways to draw these diagrams with varying levels of accuracy.  This discussion will focus on three levels of approximation that may be more of interest to the beginning options trader than to those who have more experience.  Once the basic principle is understood, it becomes easier to estimate profits and losses without needing to put anything on paper.  The example option used for this discussion will be the TNX December $45.00 call having the symbol TNX LI. The underlying instrument is the TNX Index that was discussed above.  The discussion will treat the underlying TNX Index exactly as if it were an ordinary stock.  The option is European, meaning that it can only be exercised on the last day before expiration.  Otherwise, it works the same way as the American Style option.

      The option expires in the 3^rd week of December.  At that time the option owner has the right to buy the underlying at the $45 strike price.  If the underlying price is greater than $45, the option is said to be in the money and have an intrinsic value equal to the underlying price minus the $45 strike price.  The current bid and asking premiums for the option are $6.00 and $6.30, respectively. 

      Curve 1, the lower curve, in Figure 1B is a plot of the difference between the intrinsic value and the $6.30 premium.  If the option is purchased when the underlying is less than $45, the option has no intrinsic value.  The flat portion of Curve 1 reflects only the option’s cost of $6.30.  The sloped portion of the curve indicates the option’s increasing intrinsic value as the underlying price increases above the $45 strike. When the underlying price reaches a value of $51.50, a break even point is reached.  Above an underlying price of $51.50, the intrinsic value exceeds the premium.  The kind of diagram represented by Curve 1 gives a reasonable approximation of profit and loss when you are going to exercise an option to buy the underlying at the strike price.  We can refer to Curve 1 as a first approximation.

FIGURE 1B

      Curve 1 is too conservative if you plan to trade the option before expiration, as most of us will.  Consider that you can sell the option at the bid price of $6.00 immediately after purchasing it at $6.30.  You have not totally lost the purchase price of $6.30, only $0.30 of it.  This situation requires a second approximation using Curve 2 that represents the trading value of the option.  Curve 2 is the same as Curve 1 but is shifted upward by the difference between bid and asking prices.  Curve 2 is the second approximation used for trading options without exercising them.

      Both Curves 1 and 2 assume that each dollar of increase in intrinsic value will increase the value of the option by exactly one dollar.  This is an approximation.   The curves are optimistic in that the sloped portions may increase only $0.6 to $0.99 for each dollar increase in the underlying, as determined by delta, an option parameter that characterizes option price sensitivity to changes in the underlying price.  Delta, ranging from 0 to 1, depends on the time and volatility components of an options value.  The effects of delta are shown by Curve 3 for an option at the money, purchased when the underlying was priced at the $45 strike price.   The dashed portion below the left end of Curve 3 is just to show that the curve is not a straight line.  Delta in this case is 0.59. If the option had been purchased when the underlying was at a lower value, Curve 3 would be shifted to the left so that its vertex would coincide with the point at which the option was purchased.

      All three curves are conservative in that they ignore time and volatility components of an option’s price.  Differences between the three curves in estimating profit-loss are more glaring when percentages are taken into account as shown in Figure 1C.  This chart shows that if the 10 year Treasury yield increases from the current 4.511% to anything above 5.25%, the TNX LI trade can be expected to return greater than 100% profit.  That is a change of only 0.739 percentage points.

FIGURE 1C

      With that in mind, we can compare several options for the same underlying based on the trading value estimated with the second approximation in Figure 1D where four options having different premiums and strike prices are compared.

FIGURE 1D

      The same data in Figure 1D is viewed in terms of percentages by dividing the profit-loss values by the asking premiums.  Now interesting things are seen, as shown in Figure 1E.  Options having lower strike prices tend to have lower bid-ask spreads.  When purchased at the money, they begin to increase in value immediately as the underlying increases in price.

FIGURE 1E

      Options having higher strike prices that are well out of the money tend to have higher bid-ask spreads.  They require a higher underlying price before they begin to show a profit. But when they do show a profit, their rates of increase are greater than lower strike priced options.  Their total profit eventually equals and exceeds the lower strike profits.  This feature is purely due to the fact that out of the money options have a lower premium.  The chart of Figure 1E is easy to produce in an Excel spreadsheet and is helpful when choosing options.  If you need help with this, or would like a copy of the spreadsheet, email me at jaa1@cableone.net .

1.3 Alerts

      An alert will be issued by Wednesday evening.  I need time to assess the market’s reaction, or lack of one, to serious economic news that is due out this week in the form of Monday’s Producer Price Index, Tuesday’s FOMC rate meeting, and Wednesday’s Consumer Price Index.  All of these will have a bearing on the inflation picture.

2.0 Market Analysis

      Industry leadership in Table 1 below continues to take a short term view.  Leading industries are ranked from highest to lowest.   The tendency for gold to advance in all the major trading currencies is an indicator of global inflation.

Table 1

Market Summary

Week Ending 03/19/05
 

Major Indices:
 Dow Jones     -1.3%
 NASDAQ        -1.7%
 S&P500 Index  -0.9%
 Russell 2000  -0.7%
 
 30 Year Bond 4.81%
 10 Year Note 4.51%
 
 Industry Leaders
 For the Past Week
 Coal
 Broadcasting & Entertainment
 Integrated Oil & Gas
 Oil & Gas Producers
 Exploration & Production
 Oil & Gas
 Aerospace & Defense
 Media
 Recreational Services
 Biotechnology
 
 Industry Leaders
 For the Past Month
 Railroads
 Exploration & Production
 Coal
 Nonferrous Metals
 Platinum & Precious Metals
 Oil & Gas Producers
 Forestry
 General Mining
 Integrated Oil & Gas
 Mining
 
 Crude Oil $56.72
 
 Gold for the past 30 days:
 USD    +2.69%
 CAD    +0.28%
 CHF    +1.09%
 GBP    +1.31%
 EUR    +0.81%
 JPY    +1.76%

      Indices declined across the board again this week as the market's focus remained on oil prices, inflation and interest rates with a decidedly negative bent.  There were surprisingly few earnings warnings this week, even considering the GM warning.  There were also not many economic reports of note, but overall they reflected a strong economy as expected.

      Oil ended last week at $54.43 a barrel and this week at $56.72, despite an announcement by OPEC that it would raise production limits by 500,000 barrels a day. 

      Next week brings greater risks on the economic calendar.  PPI is due on Monday and CPI on Wednesday.  Any sign of unexpected inflation could roil the markets.  The earnings calendar is light with Oracle's earnings on Tuesday the highlight.  There is a Federal Reserve FOMC meeting on Tuesday.  The market is expected yet another 1/4% hike in the fed funds rate target.  The Fed has raised rates at each of the past six meetings, and almost every time the stock market went up that day.  So, that is not necessarily a worrisome event, but the backdrop of rising rates is a concern.  Over the past week, the yield on the 10-year note fell from 4.53% to 4.51% but that hardly alleviated concerns about rising rates. Underlying concerns about inflation, interest rates and oil prices are dragging on the market, while there is concern that earnings growth is slowing down and the higher interest rates will eventually slow down the booming economy.

      The 5 day RSI for the DOW and the NASDAQ are oversold while for the S&P500 it is neutral.  The 5 week RSI for the DOW and S&P500 are neutral while for the NASDAQ it is oversold.  Commercial hedge funds (so-called smart money) are net shorts by 6,703, 25,661 and 15,917 contracts for the DOW, S&P500 and NASDAQ, respectively.  Other sentiment indicators are given in Table 2.

Table 2

Sentiment Indicators 03/19/05

Sentiment Indicator	Value	Last Week	2 Weeks Ago	Complacent	Cautious
VIX	13.14	12.80	11.94	< 20	> 50
VXN	17.88	18.57	18.13	< 30	> 70
Put/Call Ratio	0.721	0.621	0.608	< 0.6	> 0.7
%Bulls - %Bears	30.2	34.1	32.6	> 29%	< 25%

3.0 Procedure

      The following stock screens were generated with tools from AAII.   The short term trading filter used for Table 3A looks for optionable stocks whose percentage relative strength over the past 6 months is greater than 90%, EPS Growth over the past 12 months is greater than 80% and are within 5% of their 52 week  high  with  a  minimum  price  of  $50.   When a trigger, price gap up or unusually high up volume occurs, call options are supplied. 

Key

Open Trade

Passed Recent Filter

"0"       = No discernable trend

"GAP" = Price gap

"V"      = Higher than average volume

"+T"    = Positive trend

"-T"     = Negative trend

"TT"    = Trigger received

"TTC" = Confirmation received

      One exception is BHP that does not really fit the filter but is a promising basic materials play.  CME, GGC and MDC were removed due to weak price action and relative strength.

Table 3A

Short Term Call Options (Original Stock Candidate Filter) as of   03/19/05

Stock	Reference	% Chg	Company	Sector	Industry	OPTION	Key
AAPL	01/10/05	24.6%	Apple Computer, Inc.	Technology	Computer Hardware	-	+T
AEOS	02/07/05	7.8%	American Eagle Outfitters	Services	Retail (Apparel)	-	+T
AET	01/03/05	20.4%	Aetna Inc.	Financial	Insurance (Accident & Health)	AET JK AUG 155.00 CALL	+TT
APA	03/10/05	3.9%	Apache Corporation	Energy	Oil & Gas Operations	YWA AL JAN 60.00 CALL	+TTC
BHP	02/24/05	3.3%	BHP Billiton Limited (ADR)	Basic Materials	Metal Mining	BHP HF AUG 30.00 CALL	+TTC
BRY	03/01/05	-5.8%	Berry Petroleum Company	Energy	Oil & Gas Operations	-	+T
BTU	11/22/04	25.0%	Peabody Energy Corporation	Energy	Coal	BTU IT SEP 100.00 CALL	+TTC
BYD	02/21/05	13.6%	Boyd Gaming Corporation	Services	Casinos & Gaming	-	+T
CDIS	03/01/05	-2.3%	Cal Dive International, Inc.	Energy	Oil Well Services & Equipment	KPQ FK JUN 55.00 CALL	+TTC
CRS	02/14/05	-2.3%	Carpenter Technology Corp	Basic Materials	Iron & Steel	-	0
DO	03/04/05	-3.3%	Diamond Offshore Drilling Inc.	Energy	Oil Well Services & Equipment	DO IJ SEP 50.00 CALL	+TT
FFIV	02/14/05	0.0%	F5 Networks Inc.	Technology	Computer Networks	FLK JK OCT 55.00 CALL	+TTC
GMR	02/25/05	-8.4%	General Maritime Corp.	Transportation	Water Transportation	-	0
MGG	12/27/04	9.4%	MGM MIRAGE	Services	Casinos & Gaming	-	0
MON	12/20/04	15.0%	Monsanto Company	Basic Materials	Chemical Manufacturing	MON JM OCT 65.00 CALL	+TT
PCO	02/14/05	8.9%	Premcor Inc.	Energy	Oil & Gas Operations	PCO IL SEP 60.00 CALL	+TTC
PCU	03/10/05	3.7%	Southern Peru Copper Corp (USA)	Basic Materials	Metal Mining	-	0
POT	12/20/04	5.4%	Potash Corp./Saskatchewan (USA)	Basic Materials	Non-Metallic Mining	-	+T
SIE	02/14/05	5.0%	Sierra Health Services, Inc.	Financial	Insurance (Accident & Health)	-	+T
SM	03/10/05	6.2%	St. Mary Land & Exploration Co.	Energy	Oil & Gas Operations	SM HJ AUG 50.00 CALL	+TTC
SUN	03/04/05	-1.4%	Sunoco, Inc.	Energy	Oil & Gas Operations	SUN HA AUG 105.00 CALL	+TTC
SWN	11/22/04	16.1%	Southwestern Energy Company	Energy	Oil & Gas Operations	SWN IL SEP 60.00 CALL	+TTC
TS	01/10/05	37.7%	Tenaris S.A.  (ADR)	Capital Goods	Construction - Supplies and Fixtures	QAA GT JUL 100.00 CALL	+TTC
TXI	12/20/04	6.9%	Texas Industries, Inc.	Capital Goods	Construction - Raw Materials	-	0
TXU	11/22/04	23.9%	TXU Corporation	Utilities	Electric Utilities	-	+T
VLO	02/07/05	19.1%	Valero Energy Corp.	Energy	Oil & Gas Operations	YGY AP JAN 80.00 CALL	+TTC
X	12/20/04	7.3%	United States Steel Corp.	Basic Materials	Iron & Steel	-	0
YELL	03/10/05	-5.8%	Yellow Roadway Corp.	Transportation	Trucking	-	0

      Stocks selected by the put option filter are listed in Table 3B.  This filter looks for stocks having the potential to decline in a down market.  They are optionable stocks priced above $30 having less than 20% year over year EPS growth, a 26 week %Rank Relative Strength of less than 20% and are within 5% of their 52 week lows.  The status of this experimental filter is discussed in Section 4.  MTG, NBIX and SSP were removed due to their price action and relative strength being too strong for this filter.

Table 3B

Put Option Screen as of   03/19/05

Stock	Reference	% Chg	Company	Sector	Industry	OPTION	Key
BUD	02/21/05	-0.7%	Anheuser-Busch Companies, Inc.	Consumer Non-Cyclical	Beverages (Alcoholic)	-	-T
CPS	03/04/05	4.0%	ChoicePoint Inc.	Services	Business Services	CPS VG OCT 35.00 PUT	-TTC
DJ	02/24/05	-1.5%	Dow Jones & Co.	Services	Printing & Publishing	-	-T
FITB	02/21/05	-7.3%	Fifth Third Bancorp	Financial	Regional Banks	YJF MI JAN 54.00 PUT	-TV
FRX	03/18/05	0.0%	Forest Laboratories, Inc.	Health Care	Biotechnology & Drugs	-	-T
GM	02/07/05	-24.3%	General Motors Corporation	Consumer Cyclical	Auto & Truck Manufacturers	-	-T
LLY	03/18/05	0.0%	Eli Lilly & Co.	Health Care	Major Drugs	-	-T
MIL	02/07/05	-1.6%	Millipore Corporation	Technology	Scientific & Technical Instruments	-	0
NYT	02/21/05	-2.7%	The New York Times Company	Services	Printing & Publishing	NYT SH JUL 40.00 PUT	-TV
WL	02/24/05	4.0%	Wilmington Trust Corp.	Financial	Regional Banks	WL TG AUG 35.00 PUT	-TTC

      The stock filter resulting in Table 3C is for the potential to write covered call options.  The filter looks for optionable stocks whose percentage relative strength over the past 6 months is greater than 90%, EPS Growth over the past 12 months is greater than 80% and are within 5% of their 52 week highs  with  a  maximum stock price is $20.  AKS and BEV were removed due to weak price action and EPS growth, respectively.

Table 3C

Short Term Covered Call Writing Screen as of   03/19/05

Stock	Reference	% Chg	Company	Sector	Industry	Covered Calls	Key
AES	02/24/05	5.5%	The AES Corporation	Utilities	Electric Utilities	-	+T
CCK	03/18/05	0.0%	Crown Holdings Inc	Basic Materials	Containters & Packaging	-	+T
GLBL	02/24/05	-6.2%	Global Industries, Ltd.	Energy	Oil Well Services & Equipment	GQO DV APR 12.50 CALL	+TTC
MDR	03/18/05	0.0%	McDermott International	Energy	Oil Well Services & Equipment	-	+T
MDRX	02/07/05	28.6%	Allscripts Healthcare Solutions, Inc.	Technology	Software & Programming	-	+T
MXT	12/20/04	-5.8%	Metris Companies Inc.	Financial	Consumer Financial Services	-	0
OS	12/20/04	20.1%	Oregon Steel Mills, Inc.	Basic Materials	Iron & Steel	-	0
RETK	03/04/05	35.1%	Retek Inc.	Technology	Software & Programming	QRD DB APR 10.00 CALL	+GAP
SGR	02/07/05	23.2%	The Shaw Group Inc.	Basic Materials	Misc. Fabricated Products	SGR DE APR 25.00 CALL	+TTC
SID	12/20/04	29.7%	Companhia Siderurgica Nacional (ADR)	Basic Materials	Iron & Steel	SID DF APR 30.00 CALL	+TT
TIWI	02/14/05	0.2%	Telesystem International Wireless (USA)	Services	Communications Services	-	0
USU	03/18/05	0.0%	USEC Inc.	Basic Materials	Non-Metallic Mining	USU DD APR 20.00 CALL	+TV
WFR	03/04/05	-2.9%	MEMC Electronic Materials	Technology	Semiconductors	WFR DC APR15.00 CALL	+TT
XXIA	01/02/05	4.4%	Ixia	Technology	Electronic Instruments & Controls	UJCDD APR 20.00 CALL	+TT

      For the screen in Table 3D, the number of selections is reduced by eliminating stocks having P/E’s greater than 30.  MT and MTH were removed due to weak price action and relative strength.

Table 3D

Growth Momentum (Intermediate Term) Screen as of   03/19/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
CRAI	03/18/05	0.0%	Charles River Associates Incorporated	Services	Business Services	-
ELBO	12/13/04	8.4%	Electronics Boutique Holdings Corp.	Services	Retail (Technology)	-
ELK	02/24/05	-0.1%	ElkCorp	Capital Goods	Construction - Supplies and Fixtures	-
KBH	01/10/05	11.2%	KB Home	Capital Goods	Construction Services	OHK AX JAN07 130.00 CALL
OSK	03/12/05	3.0%	Oshkosh Truck Corporation	Consumer Cyclical	Auto & Truck Manufacturers	-
PTRY	02/07/05	0.2%	The Pantry, Inc.	Services	Retail (Grocery)	-
SFY	03/18/05	0.0%	Swift Energy Company	Energy	Oil & Gas Operations	-
SPF	02/14/05	-0.6%	Standard Pacific Corp.	Capital Goods	Construction Services	-
SYT	03/18/05	0.0%	Syngenta AG (ADR)	Basic Materials	Chemical Manufacturing	-
TDY	03/18/05	0.0%	Teledyne Technologies Incorporated	Services	Business Services	-
USNA	02/21/05	5.5%	USANA Health Sciences, Inc.	Consumer Non-Cyclical	Personal & Household Products	-
WFR	03/18/05	0.0%	MEMC Electronic Materials	Technology	Semiconductors	-
ZQK	03/12/05	-1.7%	Quiksilver, Inc.	Consumer Cyclical	Apparel/Accessories	-

      For the Peter Lynch screen in Table 3E, again the number of selections for this screen is reduced by eliminating stocks having P/E’s greater than 30.   IMY, UGP and VGP were removed due to price declines.

Table 3E

Peter Lynch Value (Intermediate Term) Screen as of   03/19/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
BLSC	12/13/04	-2.2%	Bio-Logic Systems Corp.	Health Care	Medical Equipment & Supplies	-
CAJ	01/31/05	1.3%	Canon Inc. (ADR)	Technology	Computer Peripherals	-
CHL	03/18/05	0.0%	China Mobile (Hong Kong) Limited (ADR)	Services	Communications Services	-
CSLMF	12/13/04	-5.0%	Consolidated Mercantile (USA)	Basic Materials	Containters & Packaging	-
GMK	03/04/05	-9.1%	Gruma S.A. de C.V. (ADR)	Consumer Non-Cyclical	Food Processing	-
KEP	12/13/04	6.5%	Korea Electric Power Corporation (ADR)	Utilities	Electric Utilities	-
LFL	12/13/04	15.0%	Lan Airlines S.A. (ADR)	Transportation	Airline	-
MBT	01/10/05	6.0%	Mobile TeleSystems OJSC (ADR)	Services	Communications Services	OVD AI JAN07 45.00 CALL
MKTAY	02/07/05	3.7%	Makita Corporation (ADR)	Consumer Cyclical	Appliances & Tools	-
NOLD	12/13/04	11.6%	Noland Company	Capital Goods	Misc. Capital Goods	-
PCU	12/13/04	31.2%	Southern Peru Copper Corp	Basic Materials	Metal Mining	-
SHI	12/13/04	23.1%	Sinopec Shanghai Petrochemical Co. (ADR)	Energy	Oil & Gas Operations	-
SKM	02/07/05	2.5%	SK Telecom Co., Ltd. (ADR)	Services	Communications Services	-
TM	12/13/04	2.1%	Toyota Motor Corporation (ADR)	Consumer Cyclical	Auto & Truck Manufacturers	-
TMIC	02/21/05	-1.4%	Trend Micro Incorporated (ADR)	Technology	Software & Programming	-
VLCCF	12/13/04	9.6%	Knightsbridge Tankers Limited	Transportation	Water Transportation	-

      The filter for Warren Buffet style stock picking in Table 3F is for the intermediate to long term.  Two requirements were added.  One was to include only optionable stocks in order to find LEAPS opportunities.  The other requirement was to include only those stocks having a PE of 17 or less.  STLD was removed due to weak price action.

Table 3F

Warren Buffett Value (Long Term) Screen as of   03/19/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
ABFS	02/07/05	1.4%	Arkansas Best Corporation	Transportation	Trucking	-
COLM	01/10/05	-1.2%	Columbia Sportswear Company	Consumer Cyclical	Apparel/Accessories	-
DHI	12/27/04	2.8%	D.R. Horton Inc.	Capital Goods	Construction Services	VEI AH JAN07 40.00 CALL
DSPG	02/07/05	2.0%	DSP Group, Inc.	Technology	Communications Equipment	-
ELBO	01/31/05	18.0%	Electronics Boutique Holdings Corp.	Services	Retail (Technology)	-
HOV	12/27/04	8.3%	Hovnanian Enterprises	Capital Goods	Construction Services	OZW AL JAN07 60.00 CALL
LNCR	12/27/04	-1.6%	Lincare Holdings Inc.	Health Care	Healthcare Facilities	OUN AI JAN07 45.00 CALL
PGR	12/27/04	7.2%	The Progressive Corp.	Financial	Insurance (Property & Casualty)	-
RS	12/27/04	9.3%	Reliance Steel & Aluminum	Basic Materials	Misc. Fabricated Products	-
RS	02/24/05	-4.5%	Reliance Steel & Aluminum	Basic Materials	Misc. Fabricated Products	-
VLCCF	02/21/05	-2.6%	Knightsbridge Tankers Limited	Transportation	Water Transportation	-

      The stocks from Benjamin Graham’s style of utility investing are listed in Table 3G.  A requirement was added to include only those stocks having a PE of 17 or less.

Table 3G

Benjamin Graham Value (Long Term) Screen as of   03/19/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
KEP	01/10/05	15.0%	Korea Electric Power Corporation (ADR)	Utilities	Electric Utilities	-
PGN	01/10/05	-4.2%	Progress Energy, Inc.	Utilities	Electric Utilities	OPM AJ JAN07 50.00 CALL
PNW	01/10/05	-1.8%	Pinnacle West Capital	Utilities	Electric Utilities	-
SRE	01/10/05	12.2%	Sempra Energy	Utilities	Natural Gas Utilities	-
WPS	02/07/05	5.7%	WPS Resources Corp	Utilities	Electric Utilities	-

4.0 Results

4.1 Trades This Week

      The GM SEP 32.50 PUT with the symbol GM UZ was closed out for a 163.6% profit.  Due to the excitement I inadvertently referred to this trade as alert number 9 when it was actually alert number 8.  The trade lasted 8 days. 

      Alert number 9 was the TNX DEC 45.00 CALL with the symbol TNX LI.  This trade is down -7.4% and remains open.

      The BHP August 30.00 Call with the symbol BHP HF is up 22.2%.  This trade has been open since 2/24/05.

      A VLO January 80.00 CALL with the symbol YGY AP was opened on Thursday.  The stock showed unexpected weakness and the trade was closed on Friday for a small profit of 13.6%.

      A PCO September 60.00 CALL with the symbol PCO IL was also opened on Thursday.  Although the stock shows strength, this trade has gone nowhere.  The trade remains open. 

4.2 Trading History

The portfolio trading history in Table 4A lists all trades since the newsletter’s inception.

Table 4A

Option Portfolio Trading History as of 03/19/05
 

Stock	Buy Date	Buy Price	Last	Action	P/L(%)	Option
URBN	11/23	11.50	$9.00	Sold 11/30	-21.7%	URQ FG JUN 35.00 CALL
TXU	11/23	11.30	$6.30	Sold 12/2	-44.2%	TXU DK APR 55.00 CALL
USG	11/23	8.40	$12.80	Sold 12/15	52.4%	MAY 25.00 CALL
ADSK	12/20	8.20	$9.20	Sold 12/23	12.2%	ADQ GN JUL 70.00 CALL
MON	12/20	3.80	$4.80	Sold 12/23	26.3%	MON GJ JUL 50.00 CALL
POT	12/20	7.00	$8.00	Sold 12/23	14.3%	POT FP JUN 80.00 CALL
TXI	12/20	5.50	$9.00	Sold 12/23	63.6%	TXI GL JUL 60.00 CALL
AET	1/7	5.70	$7.10	Sold 01/19	24.6%	AET GX JUL 135.00 CALL
CLF	1/7	7.30	$9.20	Sold 01/19	26.0%	CLF GJ JUL 50.00 CALL
MTH	1/21	6.80	$9.20	Sold 02/01	35.3%	MTH FZ JUN 62.50 CALL
BZH	1/31	13.70	$17.30	Sold 02/01	26.3%	BZH HJ AUG 150.00 CALL
KBH	1/31	9.20	$11.10	Sold 02/01	20.7%	KBH GU JUL 110.00 CALL
BHP	1/28	2.25	$2.70	Sold 02/01	20.0%	BHP HE AUG 25.00 CALL
X	1/25	5.30	$4.90	Sold 02/02	-7.5%	X GK JUL 55.00 CALL
SFI	1/24	0.75	$0.30	Sold 02/04	-60.0%	SFI PH APR 40.00 PUT
EBAY	2/7	6.80	$5.60	Sold 02/08	-17.6%	XBA SO JUL 75.00 PUT
CCJ	2/4	6.60	$10.20	Sold 02/11	54.5%	CCJ IG SEP 35.00 CALL
MON	2/4	8.00	$8.20	Sold  02/15	2.5%	MON GJ JUL 50.00 CALL
TOL	1/2	7.10	$7.30	Sold 02/17	2.8%	TOL IR SEP 90.00 CALL
BZH	2/9	14.60	$16.90	Sold 02/17	15.8%	BZH HN AUG 170.00 CALL
KBH	2/7	11.10	$10.40	Sold 02/18	-6.3%	KBH GC JUL 115.00 CALL
VLO	2/24	6.98	$8.70	Sold 03/02	24.6%	VLO IN SEP 70.00 CALL
TXU	2/25	3.55	$4.70	Sold 03/04	32.4%	TXU GP JUL 80.00 CALL
SWN	3/3	6.50	$5.00	Sold 03/11	-23.1%	SWN IL SEP 60.00 CALL
GM	3/9	2.20	$5.80	Sold 03/17	163.6%	GM UZ SEP 32.50 PUT
VLO	3/17	6.60	$7.50	Sold 03/18	13.6%	YGY AP JAN 80.00 CALL
TNX	3/14	6.80	$6.30	Long	-7.4%	TNX LI DEC 45.00 CALL
BHP	2/24	2.25	$2.75	Long	22.2%	BHP HF AUG 30.00 CALL
PCO	3/17	5.00	$5.00	Long	0.0%	PCO IL SEP 60.00 CALL

Overall Average Profit = 16.06% per trade.

4.3 Experimental Filter Results

      The goal of the filter tracking experiment is to observe the use of stock candidate filters to buy call options and write covered calls in rising and sideways markets and the down-market filter for use in buying put options in declining and sideways markets.  So far we have not had a significant sustained down market environment in which to test the down-market filter.  Essential features of the 3 filters are described in Table 4B.

Table 4B

Filter Criteria

Description	(1) Stock Candidate	(2) Down-market	(3) Stock Candidate
Purpose	Buy Calls & Puts	Buy Put Options	Write Covered Calls
Market direction	All	Down, Sideways	All
Price	> $50	> $30	< $20
12 m EPS growth	> 80%	< 20%	> 80%
Relative Strength	26 wk >90%	26 wk < 20%	26 wk >90%
Price within	5% of 52wk high	5% of 52 wk low	5% of 52wk high
Exchanges	NASDAQ, NYSE	NASDAQ, NYSE	NASDAQ, NYSE

      The relative average filter performance for the three groups of filtered stocks is compared with proxies for the major averages in Table 4C.  Filter 1 stocks are those listed in Table 3A and filter 2 stocks, for the experimental filter, are listed in Table 3B.  Filter 3 stocks are listed in Table 3C.  Filter 2 stocks did not decline as much as filter 1 and 3 stocks a week ago but its underperformance returned to normal this past week.

Table 4C

Average Filter Performance as of 03/19/05

Instrument	Past month	1 Week ago	2 weeks ago	3 weeks ago	4 weeks ago
SPY (S&P500)	-1.5%	-1.5%	-1.9%	1.1%	0.9%
DIA (DOW)	-1.7%	-1.7%	-1.6%	1.1%	0.5%
QQQQ (NASDAQ)	-2.2%	-1.8%	-0.9%	-0.3%	0.7%
IWN (Russell 2000)	-1.4%	-1.0%	-2.8%	1.3%	1.2%
Filter 1 > $50	2.8%	0.9%	-4.1%	1.7%	4.6%
Filter 2 > $30	-4.0%	-1.5%	-0.9%	-0.7%	-1.0%
Filter 3 < $20	8.3%	0.0%	-2.5%	4.7%	5.0%

5.0 Conclusion

      There is a growing need to keep an eye on inflation, not only because of the TNX trade but because if inflation continues to increase, it will take down utilities and any fixed income investments.  Also, be kind of cautious with options on oil stocks as the RSI for oil is reaching the overbought level.  Oil, clearly in an up trend, may pull back before pressing forward.

      Average fractional profit for 29 trades, F_P = 16.06% per trade.

      Fraction of trades chosen in the correct direction, F_C = 72.4%

      Average fractional gain for 21 winning trades, F_G = 31.13% per trade.

      Average fractional loss for 8 losing trades, F_L = -23.43% per trade.

      The dollar profit goal D_G is set equal to the average capital used per trade C such that
N = 1 / F_P = 6.2 becomes the average number of trades to earn the average traded amount.

The Profit Factor for the trading system, F_G F_C / [F_L (1 - F_C)] = 2.88
      Gross Profits divided by Gross Losses (includes 1% commission)

Appendix

Investment Conference Schedule

      Below are links to conference registration sites where you can sign up.  

• 04-10-05 Calgary, Alberta "Calgary Resource Investment Conference"
• 04-10-05 Calgary, Alberta "Calgary Resource Investment Conference"
• 05-02-05 Chicago, IL "2005 Healthcare M&A & Corporate Development"
• 05-03-05 Acapulco, Mexico "SRI Conference on Foreign Investment Opportunities in Mexico's New Consumer and Small Business Lending Industry "
• 05-04-05 Atlanta, GA "Global Debt Collection Summit"
• 05-11-05 Minneapolis , MN "Medtech Investing Conference (4th Annual)"
• 05-11-05 New York, NY " IIR's Inaugural Forum on IP Rights Protection in Financial Services - Strategies for Building Patent Portfolios and Managing IP Risk "
• 05-17-05 London, United Kingdom "Corporate Venturing & Spinouts Conference "
• 05-17-05 New York, NY "Hedge Funds Regulation and Compliance 2005 - Gain Advanced Operational, Legal and Accounting Strategies to Achieve full Compliance in Today's Regulatory Environment "
• 05-23-05 New York, NY -Both professional and sophisticated private investors meet with the world's leaders in gold, silver, precious metals, copper and oil and gas exploration and production "New York Institutional Gold Conference"
• 06-01-05 San Francisco, CA "Venture Capital Investing Conference"
• 06-12-05 Vancouver, BC "World Gold, PGM & Diamond Investment Conference" Resource Investment Conferences featuring small cap opportunities in gold, diamonds, oil & gas, industrial and emerging growth situations are being presented in Canada. Pre-registration is complimentary to: investors who are clients of sponsoring firms which include discount and full service brokerage houses; subscribers of participating newsletters, sponsoring media and sponsoring internet investment services; shareholders of participating exhibitors; accredited investment advisors and investors who take an interest in managing their own personal portfolios.
• 09-07-05 Las Vegas, Nevada "Gold and Precious Metals Investment Conference" The gold and metal resource market has demonstrated its strength and longevity, achieving sustained growth and multi-decade highs in the last year. Explore the shining prospects of gold, silver, copper, uranium and other fast-rising commodities. Realize your full potential in this sustained bull market, with Natural Resources the clear profit leaders.
• 09-29-05 Las Vegas, Nevada  "Tradestation World Users Conference" Trade Station World Conference and Expo, the premier conference for TradeStation users, is coming to the Venetian Hotel in Las Vegas, September 29 - October 2, 2005. Here's where you learn about how to design your personal trading strategies, and to test those strategies against historical data.
• 10-02-05 Toronto, Ontario "Toronto Resource Investment Conference"
• 10-30-05 New Orleans, LA "New Orleans Investment Conference"
• 11-10-05 Millbrae, CA "Biotech Investing Conference" Continuing advances in genomics, proteomics and enabling technologies makes the Biotech sector a favorite among private equity investors and venture capitalists. The Biotech Investing Conference is an industry gathering of the leading private equity investors, venture capitalists, biotech companies, pharmaceutical companies, corporate investors and institutional investors. 
• 11-27-05 San Francisco, CA "Gold and Precious Metals Conference"
  Both professional and sophisticated private investors meet with the world's leaders in gold, silver, precious metals, copper and oil and gas exploration and production. The Natural Resource industry's newest opportunities are presented, together with educational seminars, executive panels and investment workshops led by top finance specialists, economic analysts and newsletter editors. Admission is complimentary with pre-registration.

Conference Search

• By Date, Category, Country and Organizer
  
• By Topic and Region
  
• Financial reporting and corporate news - "Corporate News Announcements"

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