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To: advocatedevil who wrote (9459)	4/16/2003 5:13:43 PM
From: Return to Sender	Read Replies (1) \| Respond to of 95541

INDEX INTELLIGENCE: SOX is Rockin! optionetics.com By Frederic Ruffy, Optionetics.com 4/16/2003 11:30:00 AM The PHLX Semiconductor Index ($SOX) was moving sharply higher early Wednesday following bullish earnings news from Intel (INTC), Texas Instruments (TXN), and Motorola (MOT). While the Dow Jones Industrial Average ($INDU) was sporting a 60-point loss in early trading, the semiconductor index was up more than 5%. Now, many market watchers wonder if semiconductor stocks have finally turned the corner. While it is still too early to tell, the long-term chart of the SOX shows an interesting pattern unfolding that might be a precursor to a major move in the chip stocks. The PHLX Semiconductor Index is an index consisting of seventeen leading companies involved in the various phases of the chip industry including manufacturing, design, and sales semiconductors and semiconductor capital equipment. The index holds familiar names like Intel, Applied Materials (AMAT), and Texas Instruments. The full list is included in the table below. Furthermore, the semiconductor index is price-weighted. Therefore, it favors companies with higher stock prices. For example, KLA-Tencor (KLAC) holds the greatest weighting within the index (12.5%) and LSI Logic (LSI) the smallest (1.5%). Company Ticker Weighting. KLA-Tencor Corp. KLAC 12.48% Maxim Integrated Products, Inc. MXIM 12.38% Linear Technology Corp. LLTC 10.69% Novellus Systems, Inc. NVLS 8.78% Xilinx, Inc. XLNX 8.17% Intel Corp. INTC 5.72% Texas Instruments, Inc. TXN 5.75% National Semiconductor Corp. NSM 5.67% Altera Corp. ALTR 4.88% Applied Materials, Inc. AMAT 4.48% Broadcom Corporation BRCM 4.62% Teradyne, Inc. TER 4.14% Micron Technology, Inc. MU 2.90% Motorola, Inc. MOT 2.65% Lattice Semiconductor Corp. LSCC 2.60% Advanced Micro Devices AMD 2.54% LSI Logic Corp. LSI 1.54% On Wednesday, SOX surged after a number of semiconductor companies reported stronger-than-expected earnings. Intel said late-Tuesday that it earned 14 cents a share on revenues of $6.75 billion in the first quarter. Analysts were expecting the world’s largest chipmaker to earn only 12 cents a share on sales of $6.7 billion. Meanwhile, Texas Instruments reported first quarter profits of 7 cents a share, compared to analyst estimates of only 6 cents. Texas Instruments also said that sales increased 20% and that sales will improve again this quarter. Additionally, Motorola said that second-quarter sales would total $6.4 billion to $6.6 billion, and that is slightly better than previous analyst estimates of $6.48 billion. Taken together, the news from the semiconductor sector was upbeat Wednesday morning and SOX was up 5% in early trading. Figure 1 shows the three-year performance of the semiconductor index. Although the index rose sharply on Wednesday, the rally was not enough to break a long-term downward trend. At the same time, however, since October of last year, SOX has established a seven-month upward trend. The result is the formation of a coil or symmetrical triangle. This pattern often develops during times of uncertainty and when investors are uncertain regarding a stock or index’s future direction. Eventually, however, there is a breakout. That is, a direction is established and there is a major move higher or lower on increasing trading activity. The ultimate direction (whether higher or lower) is often difficult to ascertain prior to the breakout. Figure 1: Weekly Chart, SOX Figure 2 shows the implied volatility [IV] currently priced into SOX options. Implied volatility is that measure of an asset’s (stock or index) volatility that is currently embedded in current option prices. It is computed using an option-pricing model and the current prices of both the underlying asset (in this case SOX) and the current option price. As we can see from Figure 2, IV has fallen sharply over the past few months as option traders react to the relatively quiet trading of the semiconductor index. This type of drop in implied volatility during a coil or symmetrical triangle formation is not uncommon. It also means that options in the semiconductor sector are becoming cheaper. Figure 2: Implied Volatility, SOX In this environment, where an index appears to be coiling ahead of a major breakout, option strategists can attempt to profit from a future move in the semiconductor sector through non-directional trades like straddles, strangles, or call ratio backspreads. These types of strategies work best when options are cheap (i.e. implied volatility is low), but only produce positive results when the underlying asset makes a dramatic move in one direction or the other. Therefore, they are best implemented when a stock or index is experiencing a period of quiet trading, but the strategist expects the stock or index to breakout in the near future. For semiconductors and SOX, that time appears to be now. Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site Visit Fred Ruffy’s Forum Thanks for posting the snip summaries you have been putting on the thread AD. RtS