The Option Investor Newsletter Thursday 1-21-98 Copyright 1998, All rights reserved. Published three times weekly, Sunday, Tuesday, Thursday evenings. MARKET WRAP (view in courier font for table alignment) ************************************************************ 1-21-98 High Low Volume Advances Decline DOW 9264.08 - 71.83 9377.36 9228.55 870,642k 1,127 1,932 Nasdaq 2344.72 - 70.77 2403.52 2335.75 1084,400k 1,598 2,475 S&P-100 617.08 - 8.93 626.84 615.27 Totals 2,725 4,407 S&P-500 1235.16 - 21.46 1256.94 1232.19 38.2% 61.8% $RUT 424.05 - 6.57 430.79 422.37 $TRAN 3094.81 - 16.61 3132.70 3088.32 VIX 31.95 + 2.52 33.26 29.73 Put/Call Ratio .57 The Internets all suffered from circuit failure with investors today. Bearish comments from George Soros, Ralph Acompora and Barton Biggs along with restrictions placed on trading Internet stocks by the brokerages all worked together to slam the prices back to last years levels. Every other news article on CNBC and in my email today was about the bursting of the Internet price bubble. Think for a minute, how much would have heard about the overvalued Internet bubble if it was never reported on CNBC? I doubt it would even be a topic at the dinner table without their daily "extensive" coverage. Don't get me wrong. They do a good job reporting on the market but they have a negative bias toward these stocks. In any event the leaders all dropped double digit numbers with the exception of AOL. The largest Internet blue chip, AOL, did drop as low as -9.50 but had recovered to -$5.00 until the market drop at the close. It finally settled at -7.50. AOL has firmly established itself as the favorite of analysts who follow this group. With 23,000 new subscribers every day AOL has power. We view this as a buying opportunity before next weeks earnings. The real culprit today was profit taking on worries over the global currency problems. Brazil's lower house passed the pension reform law last night but the Bovespa dropped -6% at the open. The Real lost value again on the open market and started putting pressure on other world currencies. The large market drop at midday was caused by a rumor that China or Hong Kong were going to devalue based on losses in Brazil's currency. The rumor was so strong that China made a formal statement that denied it completely. (remember my comment last week about never believing anything from any country under currency attack. They will say anything to protect their options.) After the denial the market recover significantly from the days lows. Fear of the dark manifested itself with global rumors still circulating and profits still on the table. Another rumor that Greenspan was going to leave office also put a scare into the markets. Even though the market holds it's breath every time My G. speaks, they still respect the work he has done in the last few years. The Nasdaq got hammered. The sixth biggest point loss ever. Down -80 at one time it rebounded in late afternoon to only -38 but when the bottom fell out at the close it sank to -70. Put this in perspective. It had just set another record high yesterday. The Nasdaq was up +215 in the last three weeks. It has been going straight up since the October 8th lows. It was due for a sell off. Chart http://www.OptionInvestor.com/marketwrap/0121nasdaq.gif Remember in the Wednesday commentary on the website we talked about the Microsoft gap open on earnings. I warned again about holding over earnings and the dire consequences. I advised watching LU, IBM and SUNW today for signs of the gap down effect. The results are in! IBM +2.50 in regular trading, beat the street by +.02, failed to announce a split and traded down -7.50 in after hours. Lucent announced earnings that beat the street by +.04 and issued strong profit forecasts for the next two quarters. They did fail to announce a split and analysts felt the current sales were lacking. Lucent dropped -8.56 today after gapping down -6.00 at the open. SUNW announced after the close and beat the street by +.01 and issued a strong profit forecast AND announced a 2:1 split. SUNW had suffered strong profit taking during the Nasdaq sell off today and was down almost -9.00 at the low of the day. The most active stock on the Nasdaq today with 27 million shares, SUNW closed at 98.63 in after hours trading, gaining +.38 after the close. Because SUN suffered so much today and announced a split they did not suffer after hours but could drop tomorrow. The stock split will help but the timing is in March, a long way off. The point here is "everybody beat estimates but IBM and LU got killed in afer hours and SUNW will probably suffer tomorrow." It is just not safe to hold over earnings. The S&P Futures dropped -17 points in the last hour of trading on global worries. Since the close they are only down -.30. If we do not have a negative global currency event overnight then we could get a strong rebound in the morning. The key word here is "could". We could also suffer another round of profit taking in front of the weekend. Many traders will want to get flat before the close so plan your trades accordingly. Good Luck Jim Brown Market Posture ************** As of Market Close - Thursday, January 21, 1999 Key Support Broad Market /Resistance Last Posture/Since Alert DOW Industrials 9,100 9,730 9,264 Neutral 1.15 SPX S&P 500 1,210 1,280 1,235 Neutral 1.12 OEX S&P 100 600 635 617 Neutral 1.12 RUT Russell 2000 420 435 431 Neutral 1.12 NDX NASD 100 1,900 2,010 1,962 Neutral 1.21 * MSH High Tech 930 980 958 Neutral 1.21 * Key Support Technology /Resistance Last Posture/Since Alert **************************************************************** XCI Hardware 830 875 889 BULLISH 1.19 CWX Software 610 665 648 Neutral 1.21 * SOX Semiconductor 360 410 398 Neutral 1.8 NWX Networking 420 450 430 Neutral 1.8 INX Internet 470 570 473 Neutral 1.8 Key Support Financial /Resistance Last Posture/Since Alert **************************************************************** BIX Banking 650 710 658 Neutral 1.15 XBD Brokerage 630 725 661 Neutral 1.14 IUX Insurance 590 620 582 BEARISH 1.21 * Key Support Other /Resistance Last Posture/Since Alert **************************************************************** RLX Retail 800 860 820 Neutral 1.8 DRG Drug 740 795 745 Neutral 1.8 HCX Healthcare 720 780 722 Neutral 1.8 XAL Airline 310 350 310 Neutral 1.12 OIX Oil & Gas 245 260 240 BEARISH 1.14 Posture Alert After selling off at an important benchmark, we have turned Neutral on the hot Technology sector and Bearish on the Insurance sector after breaking below it 50-day moving average. We caution investors that we have received a near term reversal signal across many sectors and that many are trading at 50-day moving averages. A detailed description of our Market Posture and its applications can be found at: www.OptionInvestor.com/marketposture Market Sentiment - By Pinnacle Capital Advisors **************** Thursday, January 21, 1999 Are you Complacent? Are you Fearless Buying the Dip? Are any of your long positions unprotected? If you answered yes to any of these questions, you are among the growing number who will feel the sting of the next market sell-off. Many of our trusted sentiment indicators are suggesting that if a sell-off materializes, the general investing community will have NO fear of buying the dip, particularly after the favorable experience of last October's strong and profitable advance. But if the rallies DON'T hold, most investors won't recognize the trap until it's too late. Write these numbers down and commit them to memory. Dow Jones Industrial Average / 9,400 Market Volatility (VIX) / 30.0% First, If the Dow Jones Industrial average has trouble getting back over 9,400, begin developing a balanced attack and build some hedge positions. The market broke into record territory in the first week of January on strong volume, yet failed to hold the gain. This is a bearish development. Next, the Market Volatility Index (VIX) is a powerful short-term sentiment indicator that will help presage what will happen next in the market. The VIX closed Thursday at 31.95 - above the 50 day moving average. Everyday above 30% means that the recent declining trend on the VIX has been broken. Pinnacle Capital Advisors was among the first advisory firm to alert investors that the VIX had violated a key benchmark on Monday, January 11, 1999 which preceded the 145 point sell-off the next day. Pinnacle believes that this action marked the near-term top. The final straw will be the value of our Pinnacle Index on the S&P 100 (OEX) and S&P 500 (SPX). If these begin to climb, it means that option speculators are ignoring early warning signs and buying excessive out-of-the-money call options believing th at the market will reach higher levels. This is when savvy and experienced investors will know its time to go to cash and get short. Pinnacle's short-term indicators are still flashing BEARISH overtones over the near-term so we advise subscribers to tightly protect their long positions. Any questions regarding market sentiment can be directed at: pinnacle@OptionInvestor.com Market Sentiment at a Glance Friday Tues Thurs Indicator (1/15) (1/19) (1/21) Alert Pinnacle Index (OEX): ----------------------------------------------------------------- Overhead Resistance (620-635) 1.7 1.8 1.5 Underlying Support (595-610) 1.0 1.1 1.2 Put/Call Ratios: ----------------------------------------------------------------- CBOE Total P/C Ratio .5 .5 .5 CBOE Equity P/C Ratio .4 .4 .4 * OEX P/C Ratio 1.2 1.2 1.1 Peak Open Interest (OEX): ----------------------------------------------------------------- Puts 610 610 610 Calls 610 610 610 P/C Ratio 1.0 .8 1.1 Market Volatility Index (VIX): ----------------------------------------------------------------- CBOE VIX 29.75 31.42 30.66 * Investors Intelligence: ----------------------------------------------------------------- Bullish 60.0% 60.0% 60.0% * Bearish 30.0% 30.0% 30.0% The Power of Expectation Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index OEX Friday Tues Thurs Benchmark (1/15) (1/19) (1/21) (630-635) 2.6 3.0 2.6 (620-625) 1.1 1.3 1.0 Overhead Resistance (620-635) 1.7 1.8 1.5 OEX Close 616.5 622.12 616.21 Underlying Support (595-610) 1.0 1.1 1.2 (605-610) .9 .9 1.0 (595-600) 1.0 1.7 1.9 Average ratings: Resistance levels 2.0 / Support .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is Moderately weak at the OEX 620/635 level while the underlying support is moderately weak. Put/Call Ratio Friday Tues Thurs Strike/Contracts (1/15) (1/17) (1/19) ----------------------------------------------------------------- CBOE Total P/C Ratio .52 .54 .52 CBOE Equity P/C Ratio .38 .39 .39 OEX P/C Ratio 1.23 1.19 1.10 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (1/15) (1/17) (1/21) ----------------------------------------------------------------- Puts 610 / 8,152 610 / 9,959 610 / 11,553 Calls 610 / 8,360 610 / 11,799 610 / 12,036 Put/Call Ratio .97 .84 .96 Volatility Index (VIX) ----------------------------------------------------------------- Major Date Turning Point VIX ----------------------------------------------------------------- October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 January 15, 1999 29.75 January 19, 1999 31.42 January 21, 1999 31.42 Investors Intelligence Survey ----------------------------------------------------------------- Major Percent Percent Date Turning Point Bullish Bearish ----------------------------------------------------------------- October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top ? 58.3 30.0 January 21, 1999 60.0 30.0 * Great Expectations - By Pinnacle Capital Advisors ****************** Thursday, January 21, 1999 The Power of Sentiment Analysis On Tuesday (1/19), we provided a closer sentiment analysis on companies reporting earnings this week and alerted subscribers that several companies revealed excessive optimism as reflected by our Pinnacle Index. It's worth taking a minute and looking at how each of the following stock's reacted after they released their numbers. All the companies gapped down or sold off precipitously even though many reported favorable news. The bottom line: It's all about expectations. Pinnacle Capital Advisors will be providing another analysis this weekend. Reporting Estimated Pinnacle Date Company EPS Index -------------------------------------------------------------- Hardware: 1/21 SUNW Sun Microsystems, Inc. 0.66 10.6 1/21 IOM Iomega Corp. 0.05 8.3 1/20 QNTM Quantum Corp. 0.24 6.2 1/19 WDC Western Digital Corp. -1.01 5.4 Software: 1/19 CTXS Citrix Systems Inc 0.49 15.1 1/20 CHKPE Check Point Software 0.47 13.0 1/19 CPWR Compuware Corp. 0.45 11.6 Semiconductor: 1/19 XLNX Xilinx 0.40 13.2 1/20 CRUS Cirrus Logic 0.04 6.6 1/20 TXN Texas Instruments 0.54 6.5 1/21 LSCC Lattice Semiconductor Corp 0.43 9.9 Networking: 1/19 FORE FORE Systems 0.10 9.5 1/19 QCOM Qualcom Inc. 0.59 8.7 1/19 ASND Ascend Communications 0.31 5.3 1/21 LU Lucent Technologies 1.00 4.5 1/19 NVLS Novellus Systems 0.23 3.0 1/19 NETA Network Associates 0.46 1.3 Internet: 1/19 ONSL Onsale Inc -0.16 7.0 1/20 SPYG SpyGlass Inc. -0.15 5.2 1/21 XCIT Excite Inc. 0.04 5.0 1/20 ATHM At Home Corporation -0.06 4.4 RESULTS THIS WEEK Please view this in COURIER 10 font for alignment Index Last Tue Wed Thu Week Dow 9264.08 14.67-19.31 -71.83-76.47 Nasdq 2344.72 59.97 7.32 -70.72 -3.43 $OEX 617.08 6.86 2.69 -8.93 0.62 $SPX 1235.16 8.74 4.62 -21.46 -8.1 $RUT 424.05 3.84 -0.27 -6.57 -3 $TRAN 3094.81 29.32-66.43 -16.61-53.72 $VIX 31.95 0.05 -0.37 2.52 Stock Price Tue Wed Thu Week VOD 190.31 8.50 10.50 -4.31 14.31 Replacing ATI & Split candidate ATI 94.13 9.25 5.25 -3.75 10.75 Dropped to play VOD MSFT 158.31 5.88 7.00 -4.31 8.57 New target $200 NOK/A 145.00 5.38 6.00 -5.00 6.38 Split candidate for Jan. 29th. DELL 84.19 3.13 3.19 -1.13 5.19 Showed lots of strength UTX 113.94 -0.69 3.00 1.94 4.25 Beat earnings by a nickel T 88.13 7.13 0.13 -3.38 3.88 New target $105 QWST 59.38 2.88 1.06 -0.88 3.07 New Play LXK 99.88 4.31 1.31 -3.81 1.81 Split candidate for Monday PRIA 36.25 1.00 1.44 -0.69 1.75 Held up very well FTL 17.81 1.31 0.13 -0.31 1.13 Hanging on to support XIRC 40.75 2.13 -1.38 0.13 0.88 Beat earnings and the Nasdaq COF 131.00 1.06 3.50 -4.00 0.56 Profit taking ETH 48.75 0.63 -0.88 0.06 -0.19 Showing strength CSCO 101.31 4.69 -0.25 -4.81 -0.37 Gave into Nasdaq weakness CCU 60.00 2.69 1.13 -4.25 -0.43 Has it's own Internet play now MYG 63.75 0.44 -0.75 -0.19 -0.50 Wearing thin? JBL 73.13 -0.13 -0.56 -0.06 -0.75 Showing strength WCOM 73.88 2.19 0.25 -3.63 -1.19 Still beating the Bells DIS 34.56 0.50 -0.50 -1.44 -1.44 Dropped MU 69.81 1.69 0.00 -3.19 -1.50 Market weakness TLAB 84.25 -1.31 -0.88 0.50 -1.69 Bucking the trend SUNW 98.25 4.88 0.06 -6.75 -1.81 Announced 2:1 split LU 106.63 3.81 1.44 -8.88 -3.63 Dropped EMC 96.00 2.06 -2.13 -4.00 -4.07 Profit taking, no split QCOM 59.50 2.63 -4.50 -2.50 -4.37 Dropped AOL 141.00 4.00 -2.00 -7.50 -5.50 Best of the Internets CHKPF 40.25 4.25-10.50 -4.75-11.00 Dropped YHOO 265.00 6.00-35.81 -22.19-52.00 Dropped PUTS MCHP 31.19 -1.75 -0.63 -1.56 -3.94 EK 65.25 -0.25 -0.63 -2.88 -3.76 HSY 58.00 -0.38 -1.13 -1.75 -3.26 LLY 78.06 -1.75 2.75 -4.19 -3.19 DD 54.00 -1.06 -1.44 -0.50 -3.00 BDX 36.81 -1.38 -3.13 1.56 -2.95 RMBS 86.75 -2.25 2.69 -3.19 -2.75 WLA 67.19 -3.38 -1.38 2.13 -2.63 PKN 94.19 -1.38 0.25 -0.06 -1.19 CPB 44.06 -0.88 -0.63 0.44 -1.07 MRK 146.31 0.63 1.13 -2.56 -0.80 AVT 45.50 -0.25 0.31 -0.81 -0.75 CBE 44.13 -0.19 -0.50 0.00 -0.69 ERTS 46.50 0.50 -1.44 0.44 -0.50 BAC 65.50 -0.56 2.00 -0.50 0.94 PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** QCOM $59.50 –2.50 (-4.38) Go figure. QCOM announces great earnings and beat estimates, and then trades down after the announcement. The downgrade QCOM received Wednesday morning certainly didn't help the situation. A weak market today added to the losses. Since the run into the earnings announcement wasn't followed through, we are going to drop QCOM as a pick. DIS $34.56 –1.44 (-1.44) We picked up Disney last week because of its multiple upgrades and because it had become a bit of an Internet play with its GO Network portal site launch. Unfortunately, Disney came late to the party in the Internet game. The internets have been selling off all week, and analysts are talking about the bubble bursting. Although Disney hit $36.00 today, it ended the day at only $34.56 - down $1.44. We are dropping it for lack of performance. YHOO $265.00 –22.19 (-52.00) It doesn't seem that YHOO is ready to reverse paths as of yet. We just don't see any news pending that will possibly start YHOO up again other than its stock split coming up. This could change at any time, but a few internet earnings announcements of late have just met estimates and this just isn't enough to keep these stocks afloat. We'll watch for a reversal and possibly add YHOO back when the split run starts, if ever CHKPF $40.25 -4.75 (-11.00) Watch out below!!! CHKPF is being dropped. CHKPF met earnings estimates on the 20th. This just didn't cut it. CHKPF has a history of destroying earning estimates and this just took the wind out of their sails. The company also sees 1Q revenues in the single digits. Though this may be an extreme sell-off, the near term prospects just don't seem positive. CHKPF hopefully didn't catch any of you off guard when it moved it's earnings announcement up a day. LU $106.94 -8.56 (-3.31) We can't seem to get this one right. We have decided to drop LU in case the big drop today was more than an over reaction. LU announced earnings before the open today and beat analyst estimates by a nickel, then proceeded to go down close to $9. Go figure. It seems that investors are concerned about the addition to income because of some accounting issues with the pension play. What people are failing to realize is that this practice was figured into the estimates and also caused LU to show better earnings in the past to keep up with competitors accounting methods. We feel it's too risky to guess on this falling knife. For those that like LU, waiting for a bounce off the bottom could be very profitable. ATI $94.13 –3.75 (+10.75) Since ATI's price is basically contingent on the price of VOD, we have decided to drop ATI and pick VOD. ATI will increase approximately 1/2 of what VOD increases. We feel ATI is a still a good play, so don't sell current holding in ATI just because we are dropping it. We just feel we might as well get more bang for the buck. PUTS: ****** NONE PICK NEWS - CALLS ***************** UTX $113.94 +1.94 (+4.25) UTX reported earnings today of $1.16 per share which beat the estimates of $1.11 per share. This represented an 18% increase above the same quarter a year ago. Strong showings in its aircraft and refrigeration businesses were factors in the increase. What probably helped the stock more than the earnings announcement was UTX saying that it has hired Goldman Sachs to explore strategic alternatives for its automotive components business. The automotive components business is consolidating, operating profits are falling and revenues are flat. The Street liked that announcement. After the gap up this morning, UTX traded down in what looked like profit taking. We would wait for some upward movement before initiating any new trades CCU $60.00 -$4.25 (-$0.43) Well now everyone is getting into the act. CCU announced this week, they had opened up their 3D interactive mall which allows shopping from your desktop for just about anything. Actually, it is not really CCU, but National Media. National Media is owned by Jacor who in turn is merging with CCU. So in an indirect way, CCU has got it's own Internet play. They expect 15,000 stores to join them. The difference in their mall compared to the others is, each store is downloadable separately, saving disc space on your PC and your time at the mall. You will stroll into the mall, go to the store of choice, pull an item from the shelf and purchase it on line. Weakness in today's market didn't help us take any big steps up again, but CCU showed strength anyway. CCU opened at its high of $63.50, dropping to $59.00. The rest of the market held it back and made it rest on it's support at a close of $60.00 for the day. F $62.06 -2.63 (+$0.06) Ford announced it's earnings today, nearly a 7% rise in 4th Qtr earnings. F posted its 11th consecutive quarter of beating the street estimates and reporting earnings of $1.35 a fully diluted share. Up from $1.6 billion or $1.27 a share a year ago. Ford says, they more than doubled their cost cutting goal by reducing costs by $2.2 billion last year. Ford's operating profit was up 10%, this means about 160,000 U.S. employees will receive profit sharing checks averaging $6,100 on March 3rd. Stocks did close generally lower today and F was no exception. F opened at $64.00 just below it's high of $64.31 finished off of it's low of $61.56 to $62.06. We may see a continued up trend after the market digests the figures and regains it's momentum. FTL $17.81 -$0.31 (+1.13) What is going on with FTL? We're asking the same question. Wednesday's and Thursday's call options again, showed signs of increased volatility. Some take over plays happen over night, and others want to tease you into doing something rash. We peeked in on the insider trading and found none to speak of. In some cases the principles are advised not to do anything that would cast suspicion, one way or the other if something is in the works. On todays' trading, FTL had a good open at $18.25, clawed its way to $18.75 amidst a downturn in the S&P and settled at $17.81 for the close. Be careful, with a weak market, even if this is a takeout, it could be postponed for a better time and price. EMC $96.00 –4.00 (-4.06) EMC set a new 52 week high on Wednesday, and then started trading down. It tried to recover towards the end of the day today, but to no avail. In the news, Staples, the world's largest operator of office superstores, announced that they have standardized their data storage needs on an EMC system. The reasons they gave were to more effectively manage rapid business growth, reduce information management costs, and improve customer service. We have done some more research into EMC announcing a split with earnings next week, and it doesn't appear likely. They do not have enough shares authorized and their shareholder meeting is not expected until April. Repeat – No split announcement with earnings. MU $69.81 –3.19 (-1.50) Almost the entire tech sector was down today. Intel, Texas Instruments, and Micron Technology all lost ground. ALTR suffered from two downgrades, even though it's earnings beat consensus estimates, and that helped pull the sector lower. Even upgrades today on both TXN and MU did not help these stocks. Warburg Dillon Read raised MU from hold to buy. It's analyst, Gregory Mischou, upped his 1999 earnings estimate to $.12 from a loss of $.11, and his fiscal 2000 forecast from $1.95 to $2.31. He believes MU could trade up into the mid-90s in the current market. Intel, which has already invested in MU, has just established a relationship with Samsung, and may do so with Hyundai as well. It wants to insure Direct Rambus DRAM production in the future, and hopes to expand cooperation in the next-generation memory chip industry. The Koreans have been drastically cutting production. The chip sector is still recovering from a dismal year, and its turn-around is showing up in increasing chip stock prices. They may trend lower with the Internet stocks. However, confirm upward movement in the sector and in MU before initiating new plays. Current quarter ends in February. JBL $73.13 -.06 (-.75) JBL actually held up pretty well today. As we discussed on Tuesday, its chart is starting to flatten, and it looks like its momentum is slowing. JBL's 3, 10, and 21 day moving averages have all converged at this point. A lot of times a momentum stock will base for a period, and then start its move again. Wait for confirmation of upward movement before initiating any new trades. ***** Play updates continued in section two ***** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server. You may also call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ****** Please see the disclaimer on the website ******
The Option Investor Newsletter Thursday 1-21-98 Copyright 1999, All rights reserved. PICK NEWS - CALLS, continued PRIA $36.25 -.69 (+1.75) Yesterday, PRIA gapped up and set a new 52 week high of $37.50 shortly after the open. It finished slightly higher on the day. Today, however, it succumbed to market pressure and headed lower with the rest of the chip sector. (We are including PRIA in the chip sector, since it makes the automation systems that chip makers use in their clean-room manufacturing operations.) Even though PRI Automation was lower today, it is still up from its close on Tuesday, and that shows a lot more strength than many of the other technology stocks are showing. This stock keeps a low news profile – it's momentum is what we are watching. Earnings are January 28th. NOKA $145.00 –5.00 (+6.38) After rising to a another new 52 week high of $155.38 by mid-day yesterday, Nokia sold off, along with the rest of the market. Today, though, it lost $5.00 in a market that saw most of the telecommunication and tech stocks sell off sharply. There was no bad news on Nokia to point a finger at; investors simply wanted to lock in profits when they saw the market moving down. Nokia is supplying the products that will hasten the coming wave of digital data transmission over mobile phones. We are playing Nokia both on momentum, and as a split candidate. Earnings are due out before the open on January 29th, and that represents a strong possibility for a split announcement. If it doesn't occur then, we may have to wait until the shareholders meeting at the end of March. (We doubt we'll have to wait for the shareholder meeting. NOKA has unlimited authorization for shares outstanding). DELL Computer $84.19 -1.13 (+5.19) Pump up the volume! The market got that message in yesterday's action sent Dell up over $3 on 25 million shares. Average is 19 million. If Microsoft has blowout earnings, Dell is partially responsible and should have big earnings too. Today, Dell lost just $1.13 on 20 million shares; actually a victory in light of the 70 point loss on the NASDAQ today (remember Dell is the 4th most weighted stock in the NASDAQ 100). Dell still offering little news. When they do, the news is big, though (recently) sometimes unnoticed. For those with patience, Dell should ultimately give us one of the better plays, market willing. Wait for pullbacks, then the bounce to scale into a position. Earnings to be announced February 16th. CSCO - Cisco Systems $101.13 -4.81 (-0.38) What goes up must come down, or so the cliché goes. We stated Tuesday, "looking strong, but after 3 days of higher closings, keep an eye out for the dip". Dip happens. CSCO closed flat yesterday at $106.13 after rising as high as $109 inter-day, at what looked like would be an excellent week. CSCO couldn't hold the new high yesterday and gave up all of this week's profits on 19 million shares in today's trading. No analyst has chosen to downgrade CSCO, but off-handed remarks, like "overextended", pop into news service comments. Still an excellent play when fund managers put that 401K cash to work. Resistance is $108. Still a split candidate. Look for earnings February 2. AOL - America Online $141.00 -7.50 (-5.50) Whoosh! That's the sound of the rug being pulled from underneath the Internet stocks. AOL suffered too. Honestly, it could be a lot worse. AMZN and YHOO are down approximately 46% and 40% respectively from their highs, while AOL's price looks more like consolidation. AOL is sitting near its 30 day moving average and should bounce off it if the internet sector doesn't experience complete meltdown from here. With internets already well off their highs, a lot of air has now escaped the bubble. A further huge sell-off is not as likely. Bottom line: AOL has rapidly growing real earnings from an outstanding Christmas and is a split candidate at these price levels (over $120). We anticipate a split along with earnings to be announced January 27 after 5:00pm ET. Only 4 trading days left. We think an earnings run has got to start soon. Confirm market direction backed by strong volume before playing, or target shoot for a better entry. Still an Internet; iron stomach and ice in the veins required. [almost every commentator about the internet stock meltdown today made an exception for AOL. They all felt that AOL would comeback and was the best play in the entire sector] WCOM - MCIWorldCom $73.88 -3.63 (-1.18) Not much news to report, just Brazil/China/Greenspan jitters and profit taking. We still like WCOM as a fast growing internet/broadband play. Big Three long distance providers, WCOM included, are winning court battles against Baby Bells and eating their lunch in the process. WCOM is sitting above support of $72. Real resistance is at $79. Weighted at number 5 in the NASDAQ 100 makes WCOM a target for fund managers with $9 billion in fresh cash. Today, Morgan Stanley upped the price target to $95. Confirm market direction before playing. As we said Tuesday, don't try to catch a falling knife if (more) profit taking sets in. T - AT&T $88.06 -3.44 (+3.81) Tuesday, we cautioned, "Watch out for profit taking on such a large 1-day run-up, and buy the dip". We hope you protected your profits. The dip may not yet be over. AT&T held up relatively well in yesterday afternoon's and today's sell-off by gaining $0.38 yesterday and losing only $3.44 today, both on heavy volume. This indicates real strength since T was up $7.50 in Tuesday's trading - the market could have taken it all back, but didn't. Though largely forgotten today, AT&T is a big beneficiary of @Home's offer to purchase Excite. Here's why: @Home's largest shareholder is TCI who is about to be absorbed into AT&T. With Excite, AT&T now has a substantial "portal" to the internet which can be delivered over TCI's cable infrastructure. Today Morgan Stanley raised their price target to $105. Near term resistance is $91.75, it's all-time closing high; $96 thereafter. Wait for market reversal and confirm direction before playing. MSFT - Microsoft $158.31 -4.31 (+8.56) What a day for MSFT on Wednesday in the wake of blow-out earnings; up as much as $12 to $167.75 inter-day from Tuesday's closing price of $155.63. Justice Depart or not, MSFT is firing on all cylinders. Look mom! No material effect on earnings! Despite giving some back in today's down-draft, fund managers can't argue with a 73% earnings increase and will put new cash to work shortly, keeping demand (and volume) high, which should push the price further. Salomon Smith Barney raised their price target to $200 while reiterating their "buy" rating. We view this pullback as a buying opportunity. As always, confirm market direction before playing. TLAB - Tellabs $84.25 +0.50 (-0.31) No news again, but we'll take trading volume with a price increase in the face of overall market loss any day. That's what we got with TLAB. TLAB had a bad day yesterday, giving up a $4 gain inter-day, to close with a loss of $0.88. Today was a different story as TLAB experienced a 21% increase in volume with a small gain while the rest of the market headed bearishly south. Since Lucent exceeded earnings, TLAB should have a strong showing too, when they announce after the closing bell January 25. We surmise that Lucent's earnings news ($.05 over estimates) coupled with yesterday's dip presented a buying opportunity continuing the earnings run. We think it will run further but caution against holding through earnings since, 70% of the time, they fall back after the announcement. Confirm market direction before playing MYG $63.75 -0.19 (-0.50) Maytag really needs the market to string a few positive finishes together. Our rock is weathering. Its resistance level of $66.00 isn't far away. But, market weakness is making the breakthrough a real challenge. Maytag is on our split candidate list and earnings are approaching. Feb. 4th is the expected date. Wait for market momentum to aid MYG in ascending to new heights before scaling into new plays. SUNW $98.25 -7.13 (-2.19) Do you want the good news or the bad news first? We will go with the good news. As we predicted, SUNW announced a 2:1 stock split along with it's earnings that beat the street by a penny and crushed last year's Q2 number. Their net income for the second quarter also increased 22% over last year's results. The bad news is profit taking in anticipation of the announcements dropped SUNW -$7.13 on Thursday at a trade volume level that was four times its norm of 6.88 million. In after hours trading, the stock continued to fall. As reported by Joe Kernen from CNBC, the additional plunge may have been due to confusion. Some thought that SUNW would miss the estimates and sold. In an article published just today, their CFO predicted months ago not to expect SUNW to have earnings that beat their first fiscal quarter. Others thought that SUNW would crush estimates since they are in such a hot sector. Built up expectations led to disappointment in the reality and may have contributed to the sell-off. In any case, SUNW is now way off its intraday high of $115.75 hit on Wednesday. Once investors realize that SUNW is still in great shape, the stock should resume its upward course. If the market turns and works its way uphill again, this pull back could be to our advantage and a great time to buy on the dip. Wait to see Sun's upward trend re-established. LXK $99.88 –3.81 (+1.82) LXK held up reasonably well for most of the day, but couldn't hold on at the end and lost over 3%. LXK will announce earnings before market on Monday the 25th. This date has been confirmed with LXK's investor relations. We feel there is a good chance of a stock split announcement, though there are no guarantees. For those of you that have watched the earnings announcements this last week, you have probably noticed the punishment many stocks have taken on the announcement. It seems many have bought the anticipation and when a stock fails to beat the expectation, they are being punished. This makes holding LXK over earnings a risky play. XIRC $40.75 +.13 (+.87) XIRC held up extremely well today considering the carnage the NASDAQ took. XIRC traded as high as 41.88 before falling off for a small gain. XIRC did gap open on Wednesday, but fell with the market. After announcing great earnings on Tuesday, XIRC should continue to trend higher, market permitting. XIRC's 10-dma is around $39.00. XIRC option prices should deflate slightly for those interested in buying in. This tends to happen after an anticipated event like earnings. COF $131.00 –4.00 (+.56) COF has held up extremely well in comparison to the market. On Wednesday, COF traded as high as $140 before closing at $135. COF is an example of a stock that didn't have the huge expectation to blow away earnings. This, in turn, gave COF the opportunity to rise after the earnings announcement. When the market firms, COF should continue to move higher and should eclipse its high of $140. COF's 10-dma is around $129.00. COF's sector sidekick PVN did well today after beating estimates yesterday. ETH $48.75 +.06 (-.19) ETH hasn't done much this week, but did hold strong in a negative market on Thursday. This strength was possibly derived from the statements from the CEO that there is a "tremendous pent-up demand". ETH also stated they are targeting a strategy to have quicker delivery. This all points toward a positive future. ETH is still $18 from its 52-week high. PICK NEWS - PUTS AVT $45.50 -.81 (.75) Stock experiencing continued weakness off of recent earnings warning. Stock now under short and long-term moving averages. Lots of overhead. Could to retest 52 week lows at $35 if the stock trades below $45. Tighten protective stop loss - $48. BAC $65.69 -.31 (1.13) The financial sector under pressure because of Brazil. Stock gave up -.56 on Tuesday (1/19). Recommend staying with position while BAC stays below $65. BDX $36.81 1.56 (2.95) Medical device maker reported a 16 percent rise in fiscal first-quarter profits, matching wall street expectations. The company also forecasted faster sales growth in fiscal 1999, fueled by its prefillable syringe and infusion therapy business. BDX upgraded by Merrill Lynch. Tighten protective stop loss - $38. CPB $44.06 .44 (-1.07) Moved up over key $44 level during DOW sell-off but still under pressure and overhead at $49. Tighten protective stop at $46.25. DD $54.25 .25 (2.75) Stock beginning to break down again under its declining moving average. Tighten protective sell stop to $56.25. EK $65.25 2.88 (3.25) Stock gave up another 2.88 today after Polaroid reported Thursday a 4Q98 loss of more than $75 million, closing out a difficult year for the stuggling maker of instant cameras. Stock still trading below key benchmark support of $70. Stock also downgraded by Morgan Stanley Dean Witter. ERTS $46.50 +.44 (-.00) The stock up fractionally during Thursdayıs tech sell-off. Still sitting precariously at it 200-day moving average. Tighten protective sell stop to $49.25. ERTS Thursday reported 3Q98 results of $1.15 vs. .84. Whisper number of $1.18 per share for earnings due. Pinnacle believes that holiday enthusiasm, if any, will be short-lived by the realities of an increasing complex and competitive market for entertainment software. If ERTS trades below $44, could retest prior low of $34-39. HSY $58.00 -1.75 (3.26) Stock breaking down again and trading below key $62 benchmark. Tighten protective stop to $62.25 LLY $78.06 4.19 (-2.94) A leading healthcare management services provider recent topped out at its 52-week high of $91.31 and showing classic signs of a failed rally trading above its 50, 100 and 200-day moving averages. Stock breaking down again after recent rally. Stock now just trading above key $77 benchmark. Tighten protective sell stop to $80.25. MCHP $31.18 1.56 (3.94) Stock breaking down again and now trading below $33. Tighten protective stop to $35.25. MRK $146.31 -2.56 (-.81) Keep an eye on MRKıs key benchmark at $145. If MRK trades below this key benchmark, it could re-test support at $136 at its 200-day moving average. MRK trading very close to key benchmark level after Thursdayıs market sell-off. PKN $94.19 -.06 (-1.19) Beginning to sell off after consolidating tightly in upper range ($90-98). We still anticipate a sell-off and retracement to $86. RMBS $86.75 3.19 (2.75). Stock traded lower today after the high flying chip company whose technology speeds the action of Nintendo game machines, said its near-term earnings faced a slowdown. WLA $67.19 2.13 (2.63). Stock traded higher after gapping down Tuesday (1/19) following Salomon Smith Barneyıs downgrade. Stock trading near key $67 support benchmark. Tighten protective sell stop to $70.25. NEW CALL PLAYS ************** VOD – Vodafone Group PLC $190.31 –4.31 (+14.31) The vote is in, and Vodafone Group is the UK's #1 mobile telecommunications company, serving about four million customers. It operates analog and digital cellular networks offering voice communications, messaging, paging, and mobile data services. Vodafone sells its cellular phone services through three distribution businesses: Vodafone Retail, Vodafone Connect, and Vodafone Corporate. The company provides cellular services in 12 countries outside the UK; international operations account for 28% of total revenues. Vodafone will nearly double its size with the purchase of US-based AirTouch Communications. For those of you living in a cave or that were abducted by aliens, VOD recently merged with ATI. The deal calls for ATI shareholders to receive 1/2 share of VOD plus $9 in cash. Simple math says it's better to trade the stock that moves point for point, not a half for a point. Vodafone's phones are owned by 1 in 15 people in the U.K. The deal with ATI has been applauded by most, thus the nice run that VOD has had even though it was the purchaser. VOD took a dip today and this might present a good buying opportunity. Watch for a direction on Friday. A European official stated that the VOD-ATI merger is a perfect fit. The only problem seemed to be in Germany, where both companies have ownership in competing firms. VOD has mentioned they are willing to sell the ownership they have in one of the companies. Projected annual sales for the combined company is around $10 billion. Pretty impressive. *OI is low because the stock moves so quickly. BUY CALL FEB-190 VOD-BR OI=31 at $ 9.50 SL= 7.25 BUY CALL FEB-195 VOD-BS OI= 0 at $ 7.38 SL= 5.75 BUY CALL MAR-190 VOD-CR OI=22 at $13.13 SL= 9.00 BUY CALL APR-190 VOD-DR OI= 3 at $15.88 SL=12.00 Picked on Jan 21st at $190.31 PE=66 Change since picked +0.00 52 week low =$ 75.19 Analysts Ratings 3-2-2-0-0 52 week high=$197.00 NEXT earnings 01/99 est= ? actual=.61 Future earnings 05-27 est= 1.56 versus= 1.21 Chart = http://quote.yahoo.com/q?s=VOD&d=3m ***** QWST - Qwest Communications $59.38 -.88 (+3.07) The Colorado based Qwest Communications International is the fifth largest local and long distance telephone company in the United States. It is also secures broadband Internet-based data and provides voice and image communication capabilities to businesses and consumers. It is currently expanding its reach into Mexico and most of Europe. In the US, QWST is building its Internet Protocol-based fiber-optic network which will connect over 130 cities by mid 1999. The telecom service sector has been on Wall Street's good side as of late. U.S. telecommunication companies are expected to meet or slightly beat estimates due to the increased demand for phone lines, Internet access, and other phone services. Qwest is projected to announce its earnings in three weeks on February 11th. Even though QWST was set back slightly on Thursday in a weak market, we feel Qwest has the potential to make a run. Wait for confirmation of positive movement before positioning yourself for earnings movement. [note: Zack's has earnings date as the 11th. QWST's investor relations said they have not released a date yet.] News: Qwest has recently formed relationships with several companies. The most recent is with Verio Inc. QWST was awarded a contract worth up to $60 million to provide Verio with additional broadband capabilities. Qwest will also help Ford, the car company, with its domestic and international communication needs. Hometown Connections and Qwest will work together to provide community owned electric utilities voice and data telecommunication services. Qwest will also invest $15 million in Covad Communications Group Inc, a company that provides high-speed digital communication services, to extend its ability to provide users with nationwide connectivity. BUY CALL FEB-55 QWA-BK OI=921 at $6.88 SL=5.25 BUY CALL FEB-60 QWA-BL OI=801 at $4.00 SL=2.50 BUY CALL MAR-55 QWA-CK OI= 80 at $8.25 SL=6.50 BUY CALL MAR-60 QWA-CL OI=242 at $5.75 SL=4.25 Picked on January 21st at $59.38 PE= N/A Change since picked +$ 0.00 52 week low =$22.00 Analysts Ratings 7-6-3-0-0 52 week high=$63.37 Last earnings 09/98 est -0.06 actual -0.02 Next earnings 02-11 est 0.02 actual 0.07 Chart = http://quote.yahoo.com/q?s=qwst&d=3m COMBO PLAYS *********** U.S. stocks ended mixed on Wednesday, as technology issues rallied on Microsoft Corp.'s strong earnings report, but the Dow fell back from early gains to close with a loss. Investors grew cautious in the trading session when Federal Reserve Chairman Alan Greenspan warned that financial markets were still fragile and a drop in U.S. exports posed a risk to the economy. He said that recent gains in stock prices may be difficult to sustain, based on the relative growth of corporate profits. The late session sell-off was boosted by computer driven trading programs and some technical selling as the market dropped through support levels. Strong earnings at MSFT helped push the Nasdaq to a record high. The Nasdaq index closed with a gain of 7 points after being up 59 points in early trading. The strength of MSFT's earnings was surprising and welcomed news. Our Tuesday spreads were all available near the recommended entry points. PTEK was the first of the speculation plays and the debit for the MAR12C/FEB12C was $0.50. OMPT was the next position and the MAR15C/FEB15C spread traded near $0.87 debit for much of the morning. Our initial entry was slightly better at $0.81. SCUR was a bullish debit spread and the FEB20C/25C opened and traded near the target price of $3.50. Our position was not quite as good at $3.75. The last position was RHD and although the stock price fell, the debit for the MAR15C/17C bull-call spread remained near $1.12. Other portfolio activities: LEVL shot up almost $3, allowing us to take the early exit at $4.38 credit and a $1.12 profit. PCS also moved $3 higher but that won't help us as it is now in danger of closing well above the sold strike for this month. Remember, we lose our edge (in a calendar spread) when the stock price moves significantly higher in a short time. Both positions become deep in-the-money with little time value and we have to roll-up to the next higher strike at the end of the month. Wall Street stocks fell Thursday as fears over the global economy reined in the U.S. bull market. High technology issues suffered as a sell-off in Internet stocks sent the Nasdaq tumbling. The DJIA closed unofficially down 71 points to 9264.08 and the Nasdaq index fell 70 points to 2344.89. The Dow had mounted a late rally from the day's lows, cutting losses by half, before succumbing to the general malaise. Worries about Brazil, earnings and the trade deficit got the better of stocks and profit-taking also had an affect on the downward movement. On Thursday, the spreads portfolio weathered the storm as did most of us traders. Some of the positions were obvious candidates for "double-downs" but none were in danger of being closed-out. The most significant moves came from AOL, AAPL, and DIS. Although some positions were down, (SUNW and WCOM) those were actually favorable when compared to our "sold strikes". Others that survived the day included GM, PCS and OMPT. Hopefully, it will get better tomorrow! NEW PLAYS - Diagonal Spreads - In these plays, the purchased position has a longer maturity than the written option as well as a different strike price. Be sure your understand the necessary collateral requirements (if any) before opening a position. **** CTXS - Citrix Systems $89.00 *** Earnings Slam! *** Citrix Systems is a supplier of thin client/server application server products and technologies that enable the effective and efficient enterprise-wide deployment of applications designed for Windows operating systems. The WinFrame software allows networked computers, (even non-Windows-based computers such as Macintoshes, UNIX machines, pre-Windows PCs, and stripped-down "thin clients") to run Windows-based applications from a central server. Citrix's 3,000 clients include Sears Tire Centers, Hewlett-Packard Europe, and Canadian wireless telecommunications provider Bell Mobility. IBM, Sharp Electronics and Microsoft, (which owns about 6% of the company) also licenses Citrix's technology. On Wednesday, Citrix said it earned $0.52 a share in the fourth quarter, $0.03 more than the consensus estimate from analysts. The report came after CS First Boston reiterated its "strong buy" on the compnay but the stock fell $13 anyway. The stock held ground on Thursday is now trading right at the 30 dma. This stock should eventually rebound and continue its upward momentum. PLAY (aggressive): BUY CALL MAR-90 XSQ-CR OI=197 A=$11.00 SELL CALL FEB-95 XSQ-BX OI=718 B=$5.75 NET DEBIT TARGET=$5.00 TARGET ROI=35% Chart = http://quote.yahoo.com/q?s=CTXS&d=3m **** RDRT - Read-Rite $18.93 *** Positive Earnings *** Read-Rite is the world's #1 maker of magnetic recording heads used in hard disk drives. It also makes thin-film magnetoresistive (MR) tape heads used in quarter-inch cartridge tape drives. Read-Rite's heads, which record and retrieve information from the surface of computer disks, are sold to disk drive makers as head gimbal assemblies (recording heads combined with suspension arms) or headstack assemblies (modules of multiple-head gimbal assemblies). Read-Rite is increasingly basing its products on high-capacity technologies such as MR. Key customers include Western Digital (its largest customer), Quantum, and Maxtor. On Wednesday, the company posted a profit of $0.02 a share in the fiscal first quarter. Analysts expected a loss of $0.17, according to the consensus of six brokers polled by First Call. The company also reported strong sequential growth in the quarter, with sales up 31% from the third quarter. Some consolidation is in order but the stock price looks poised for further upward movement. PLAY (aggressive): BUY CALL MAR-17.50 RDQ-CW OI=53 A=$3.25 SELL CALL FEB-20.00 RDQ-BD OI=2725 B=$1.12 NET DEBIT TARGET=$1.87 ROI TARGET=30% Chart = http://quote.yahoo.com/q?s=RDRT&d=3m **** LVLT - Level 3 Communications $44.19 *** Telecom *** LVLT is a telecommunications and information services company that plans to build and operate advanced fiber networks across the U.S. using Internet technology. Acting as a stepping stone for Craig McCaw will take Level 3 Communications to the next level. Level 3 is developing a national fiber-optic network, which an investment firm and McCaw-controlled Nextel and Nextlink will stake for $700 million in return for network capacity. Level 3 will use Internet technology to offer local and long-distance services, provided initially through an 8,000-mile network leased from Frontier. LVLT also provides computer outsourcing and systems integration through subsidiary PKS Information Services. A spinoff of a construction firm, the company owns large stakes in Kiewit Coal, Commonwealth Telephone Enterprises of Pennsylvania, and RCN (telecom provider). The company just announced Tuesday that it will begin providing select telecommunications services in the Boston metropolitan area as part of its national city roll-out. The plan is to construct local city networks that directly serve businesses in 25 cities within the next three years. The company plans to offer service capabilities over its own fiber facilities in 50 U.S. cities. Additionally, the company is currently building an approximately 16,000 mile long distance national network to interconnect these cities. Coverage was initiated by Salomon Smith Barney in early January with an "Outperform" rating. PLAY (conservative/debit-spread): BUY CALL MAR-37.50 QHN-CU OI=240 A=$8.62 SELL CALL MAR-45.00 QHN-CI OI=2062 B=$3.75 NET DEBIT TARGET=$4.62 ROI(max)=62% Chart = http://quote.yahoo.com/q?s=LVLT&d=3m **** SEPR - Sepracor $99.62 *** LEAPS/Covered-Calls *** Sepracor develops and commercializes improved chemical entities that are new, patented forms of existing pharmaceuticals. These products can offer reduced side effects, improved safety, new uses, and improved dosage forms over traditional compounds. Sepracor is developing pharmaceuticals to address asthma, allergies, pain, urological disorders, sleep disorders, periodontal disease, and depression. It developed Allegra as an alternative to Seldane (the FDA withdrew its approval of Seldane in 1997). The company is also developing antihistamines similar to Claritin and Hismanal. SEPR has licensed to J&J the rights to an improved version of Propulsid heartburn medication. Sepracor said last week, it planned to begin clinical trials on hopefully safer versions of drugs now on the market, including obesity drug Meridia and J&J's antifungal drug Sporanox. They also said the ambitious plan signaled determination by Sepracor, which previously has licensed its patented drug formulations to large pharmaceutical companies, to conduct its own clinical trials and thereby become an independent drug developer and marketer. The fundamental outlook for 1999 is very good and the long-term chart reflects an excellent bullish pattern. PLAY (conservative/long-term): BUY CALL JAN00-100 LGD-AT OI=4 A=$25.25 SELL CALL FEB-100 ERQ-BT OI=361 B=$5.25 NET DEBIT TARGET=$19.50 TARGET ROI=100% Note: In the long-term calendar spread, we are reducing the net cost of the LEAP by the amount of credit from the sale of the nearer term call. If the near-term call expires worthless, we will sell the MAR call to further reduce our debit. If your short-term position is ITM on the last day of the strike, you need to buy it back so that you DON'T have to exercise the long-term position. In that case, your LEAP is going up in value also and on the last day of the strike period, the short call will shrink down to intrinsic value so you will be ahead in the play even after you buy it back. Chart = http://quote.yahoo.com/q?s=SEPR&d=3m ****** Please see the disclaimer on the website ******
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