The Option Investor Newsletter Thursday 5-6-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Published three times weekly, Sunday, Tuesday, Thursday evenings. MARKET WRAP ***** 5-6-99 High Low Volume Advances Decline DOW 10946.82 - 8.59 10980.04 10852.32 878,521k 1,473 1,479 Nasdaq 2472.28 - 62.17 2546.36 2464.57 910,708k 1,920 2,061 S&P-100 674.54 - 7.80 684.31 668.33 Totals 3,393 3,540 S&P-500 1332.05 - 15.26 1348.35 1322.56 49.0% 51.0% $RUT 433.38 - 0.89 435.96 432.16 $TRAN 3735.78 + .52 3729.15 3682.84 VIX 29.27 + 3.29 31.06 16.43 Put/Call Ratio .53 ***** Goldilocks chased by four bears, vultures circling. Three FED bears all took aim at the bull market today. The market, which has been fueled by the Goldilocks economy, had been waiting for Fed chief Greenspan to speak and speak he did. While his actual comments were not as strong as they could have been the impact was still felt. He said that the high tech gains in productivity could not continue on forever and eventually the shrinking pool of trained workers would exert pressure on wages and create inflation. In making the carefully worded pronouncement today Greenspan stepped out of the neutral rut the Fed chief had been following and started the lean into a future interest rate hike posture. Alice Rivlin, another Fed member, said today that in the Fed's opinion the stock market was too high and was giving a false impression of the U.S. economic health. Citing the "wealth effect" that a constantly rising stock market has created she said the Fed was on watch for the real impact to the economy. Robert Terry, San Francisco Fed Chairman, said the economy was much stronger than desired and could not continue to grow at a plus four percent rate without inflation. He did say there were no signs of inflation at present and the Fed did not view the rise in oil prices as a current problem. Richard McCabe with Merrill Lynch, said today that the market was clearly showing signs of topping and he expected a 10-15% correction soon. In all fairness McCabe has been calling for the correction for about 1500 points now and eventually he will be right. Back from the dead? Pummeled for two days now from negative comments and inflation fears the Dow has rebounded both days from triple digit losses in the last hour of trading. Advances which had been trailing declines by as much as 500 during the day surged back at days end to close down only six stocks under decliners at 1473 to 1479. The miraculous recovery on both days in spite of the impending doom of the non-farm payrolls on Friday is remarkable. The Dow is only 89 points below it's record high. The Dow's recovery from the -102 low at 3:PM was remarkable. Some analysts think a strong employment number is already factored into the market and the two major dips this week have already taken all the profit out and the market is poised to move upward unless there is a blowout jobs report in the 350,000 range. Nasdaq funeral not scheduled yet. While the Dow has been remarkable in it's rebounds this week, the Nasdaq has been moved to intensive care. With the sector rotation being defined as "sell tech and buy anything else", the Nasdaq has been sinking deeper and deeper into the summer doldrums abyss. After peaking at 2677 on April 27th the slide has been interrupted by only momentary signs of life to our current 2473. The 2500 level had managed to provide some support but the last two days of selling proved too much. With Internets dropping like a rock as their prices head toward their January lows their appears to be no Internet bottom in sight. Of course as soon as I or anyone else proclaims them dead and starts playing puts on the sector, new life will rush in on the back of numerous upgrades on the sector by noted analysts. Even the giants of the Nasdaq cannot over come the concentrated selling onslaught. CSCO, MSFT, INTC, DELL have all suffered at the hands of the sector flight. Big funds that can remember past summer tech sell offs have been liquidating positions left and right. Fidelity has dropped its stake in DELL by 59% and AOL by 43% to name a couple. Multiply this by hundreds of funds and you see the problem. Even the coming earnings of Dell and CSCO have not been able to sustain their prices. Dell sank to $39.44 at the close today. I may be in Dell denial but I have to believe that the Dell faithful will see this as a last entry point before any Dell earnings run back to $45 and add to their positions Friday and Monday. When the Dow recovered at the close today and Dell had risen to over $40 from its bottom at $39.31 I bit the bullet and bought some Dell options myself. It promptly sank back to the sub $40 level. CSCO which announces on May 11th, has been severely beaten up and may not be able to mount any earnings run at all. One of the reason these stocks are having so much trouble is the number of shares outstanding. Dells recent split resulted in total outstanding shares now being over 2.4 bln. If a fund like Fidelity held 20 mln shares three years ago, and that would not have been a lot for the bigger funds, then today, after splits, they would own over 320 mln shares at an average cost of $6. As we all know, it is not profit until you sell and funds do not like to have huge positions in ANY one stock. A Dell buyer today would be like a fish swimming upstream against the current. Eventually these funds will run out of Dell stock to sell and the stock should reverse course but who knows when. Anybody taking a position in Dell now should plan to be out by May 18th unless you are planning to hold for a long time. If we don't get a major move by Dell before earnings a contrarian play would be to hold over with thoughts of capturing any bounce from the lack of an earnings run if they announce outstanding earnings. This would of course be VERY HIGH RISK. Dell is already down -29% off its recent $55 high. Microsoft buys AT&T Not really but Bill probably could if he felt extravagant. MSFT did invest $5 bln in AT&T today but it was more a bribe than an investment. The lure here is the millions of set top boxes that AT&T will deploy on it's way to being the biggest cable vendor on the planet. AT&T already has a deal with SunMicro to use the Java platform in some of these boxes and a deal with MSFT to use WindowsCE in others. The deal today adds several million to Microsoft's contract and puts them in front of SUNW. Michael Armstrong said they were still in bed with SUNW but the MSFT deal was simply a matter of using software that was already available and not in development. Sure !! Nose ring anyone? With the stock market being led around this week by the bond market it was like a bull with a ring in it's nose. The bonds sank on the inflationary comments by the Fed heads to a 10 month low. The yield rose to 5.79% and at this level it is becoming a problem. At 6.0% we could see a significant flight from the stock market and into bonds as a safe haven from the Y2K problem coming later in the year. A 6% rate would just accelerate the process. Bond analysts say a +.25% rate hike in August is already priced into the bonds and the only uncertainty now is will we make it till August before a hike. The Fed FOMC meeting is not for two more weeks and nobody expects a hike then unless the non-farm payrolls and unemployment numbers really surprise the market tomorrow. The consensus estimates for jobs is 225,000 with estimates as low as 185K and as high as 375K. A number on the high end would be a problem but any number under 250K should result in a relief rally. The unemployment number is expected to be 4.2%, only a +.3% increase. Any increase over that would be welcomed by the market and any significant drop would set off a stampede for the exits. VIX rockets to six week high! The market volatility as measured by the VIX has skyrocketed this week. Traders are acting like timid movie goers in a Friday the 13th sequel. Everyone knows there is a scare coming but nobody is leaving the theater. Traders are expecting the big scare and are pulling the sell trigger at every sudden shout. As soon as they look around and see it was not the mother of all drops they ante back up for another play. As long as traders keep buying the dip we will keep moving up. When that last drop does occur the ones holding the last ticket will get a shock they will not forget any time soon. Fearless Friday Forecast About the only thing I can fearlessly forecast for Friday is that the market will open and trading will occur. Other than that the fate of the market lies squarely in the jobs numbers in the morning. The up volume and down volume tied today, advancers on the NYSE tied decliners and we are only 89 points below the Dow closing record. Market sentiment is still very bullish and we do have the required number of bears to keep a rally going. I just don't see a big sell off on reasonable numbers. Good numbers could propel us to a new record. I only hope the Nasdaq gets caught in the updraft if it occurs. Wait for an entry point, sell too soon. Jim Brown editor Market Posture *************** Thursday, May 6th Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 9,750 11,000 10,947 Neutral 4.30 SPX S&P 500 1,300 1,350 1,332 Neutral 4.29 OEX S&P 100 660 690 675 Neutral 4.29 RUT Russell 2000 390 435 433 Neutral 4.29 NDX NASD 100 2,100 2,250 2,079 BEARISH 5.6 * MSH High Tech 1,000 1,100 986 BEARISH 5.6 * XCI Hardware 900 920 855 BEARISH 4.29 CWX Software 600 650 613 Neutral 4.22 SOX Semiconductor 390 420 380 BEARISH 4.29 NWX Networking 450 490 500 BULLISH 4.22 INX Internet 550 700 538 BEARISH 5.04 BIX Banking 700 720 706 Neutral 4.30 XBD Brokerage 425 540 426 Neutral 4.14 IUX Insurance 630 655 642 Neutral 4.29 RLX Retail 900 970 863 BEARISH 4.29 DRG Drug 390 425 376 BEARISH 4.29 HCX Healthcare 780 850 767 BEARISH 4.29 XAL Airline 170 180 185 BULLISH 5.04 OIX Oil & Gas 260 285 300 BULLISH 3.30 Posture Alert Reaction to Alan Greenspan's speech sparked a volatile day of trading. We have turned Bearish over the near term across NASD 100 and Morgan Stanley High Tech indices after falling under continued pressure. A detailed description of our Market Posture and its applications can be found at: /members/marketposture Market Sentiment Pinnacle Capital Advisors ************************* Don't Be Too Quick to Pull This Trigger Although there are positive developments that could support continued advances (ie., improved market breadth and new highs for the Transportation Index-TRN), other trusted technical and sentiment indicators create a mixed picture and could serve as early warning signs of a precipitous selloff. First, is the declining bond market and rising bond yields. OptionInvestor.com first alerted investors in February that the TYX broke its long term trendline and could prove problematic for the stock market in the months ahead. What's more, strong economic reports may cause the FED to raise rates on or before their August meeting. Next, is the recent rotation out of Technology stocks, considered by many to be a key market leader. Although the Dow has powered into record territory several key technology sectors have violated their short-term moving averages and are beginning to roll over. When option traders pounder the direction of the market over the near term, it's also important to isolate and track the shifting market currents sector by sector. In a period of market volatility, the need for a closer analysis has never been greater. Unlike other firms that only state a broad market posture, Pinnacle states its market posture by industry sector (20) and is the only options advisory website to do so. For example, the firm is currently BULLISH across the transportation sectors but NEUTRAL across broad market indices and BEARISH across select technology sectors. This schematic is one of the most popular links on the website and is helping investors get on the right side of the trade. Finally, Pinnacle is concerned about what option speculators are likely to do over the near term, especially as more and more investors open online trading accounts, take control of their own investment decisions and blindly assume that the market will climb higher. The market is already up 19% for the year. Pinnacle tracks this activity through a contrarian investor sentiment indicator called the Pinnacle Index. This index analyses the cluster of strike price at key turning points in the market and the powerful tool helped presage the market selloff last August ('98) when other generally accepted indicators missed the correction. The Pinnacle Index is simply the ratio of calls to puts at key benchmarks. Unlike other index and equity put-call ratios reported by the trade press, the Pinnacle Index is easy to use and apply because the average index is 2.0 (two calls to every one put. A Pinnacle Index of 5.0, for example, means that there are five times as many calls as there are puts at key overhead benchmark levels (Strike clusters) and has bearish implications. With a current Pinnacle index reading of 4.9, excessive optimism remains in check but this could change quickly and one reason why OptionInvestor.com reports it regularly. Pinnacle also tracks the level of out-of-the-money calls between 680-740 strikes among option speculators for early warning signs of a speculative bubble. As shown below out-of-the-money (OTM) call open interest has been climbing since Aril 16th and may serve as overhead resistance. May Expiration Cycle OEX OTM Call Analysis (Open Interest May 680-750) Date Open Interest Change % Tuesday, May 4 70,112 - Tuesday, May 6 85,162 +21.4% From a sentiment perspective, take a look at what happened during this week's investor's intelligence survey - the Bullish camp jumped 3.5%. This has bearish implications from a contraian viewpoint. Bullish Bearish April 28, 1999 56.1 30.7 May 5, 1999 58.1 27.6 * BULLISH Signs: Advance/Decline Line: Recovering appears to be holding but beginning to roll over again. BEARISH Signs: Interest Rates: Trading ABOVE 200dma and 5.50 Benchmark. (5.720%) Market Volatility (VIX): After consolidating below its 50-day moving average (25.94), the VIX closed up sharply and closed above its 50-day moving breaking the current bullish trend. Investor Intelligence: As a contraian indicator, the pecent of Bullish investor spiked from a week ago suggesting bullish sentiment picking up steam. Pinnacle Index: Our Pinnacle Index has spiked to 4.9 on the OEX (680-750) suggesting that option speculators are expecting the market to advance higher. Russell 2000: Closed below key 435 level. If small cap sells off from here, the technical move will be viewed by many as negative since the Russell 2000 could not take out its prior high resulting in a "failed rally" OTM Call Analysis As we move through May's expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 680-740 among option speculators. As we have been documenting, excessive out-of-the- money (OTM) call may serve as overhead resistance. April Expiration Cycle OEX OTM Call Analysis (Open Interest Apr 650-700) Date Open Interest Change % Alert Friday, March 19 35,626 - Friday, March 26 60,266 +69.2% Friday, April 2 70,952 +99.2% Friday, April 9 74,028 +107.8% May Expiration Cycle Friday, April 16 30,697 - Friday, April 23 53,887 +75.5% Friday, April 30 65,936 +114.8% Tuesday, May 4 70,112 +128.4% Thursday, May 6 85,162 +177.4% * Market Sentiment at a Glance Friday Tues Thurs Indicator (4/23) (4/27) (4/29) Alert ************************************************************ Pinnacle Index (OEX): Overhead Resistance (680-695) 1.6 1.2 2.1 Underlying Support (645-660) 2.2 2.3 2.6 Put/Call Ratios: CBOE Total P/C Ratio .5 .6 .5 CBOE Equity P/C Ratio .4 .4 .4 OEX P/C Ratio 1.9 2.0 1.5 Peak Open Interest (OEX): Puts 650 650 650 Calls 720 720 700 P/C Ratio 1.18 1.16 .88 * Market Volatility Index (VIX): CBOE VIX 26.07 27.32 29.45 * Investors Intelligence: Bullish 56.1% 56.1% 58.6% * Bearish 30.7% 30.7% 27.6% * The Power of Sentiment 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 (4/30) (5/4) (5/6) ------------------------------------------------------------ Overhead Resistance (680-695) 1.6 1.2 2.1 OEX Close 675.65 673.20 674.54 Underlying Support (645-660) 2.2 2.3 2.6 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 680/695 level while the underlying support is holding at the OEX 645/660 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (4/30) (5/4) (5/6) CBOE Total P/C Ratio .53 .58 .54 CBOE Equity P/C Ratio .38 .42 . 39 OEX P/C Ratio 1.92 2.02 1.49 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (4/30) (5/4) (5/6) Puts 650 / 11,650 650 / 12,935 650 / 13,094 Calls 720 / 9,915 720 / 11,068 700 / 14,834 Put/Call Ratio 1.18 1.16 .88 Market Volatility Index VIX Date Major 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 March 4, 1999 Bottom 28.15 April 30, 1999 26.07 May 4, 1999 27.32 May 5, 1999 29.45 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 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 7, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 5, 1999 58.1 27.6 * CHANGES THIS WEEK ****************** Please view this in COURIER 10 font for alignment Index Last Mon Tue Wed Thur Week Dow 10946.82 225.65 -128.58 69.30 -8.59 157.78 Nasdaq 2472.28 -7.27 -50.46 49.33-62.17 -70.57 $OEX 674.54 9.43 -11.80 9.06 -7.80 -1.11 $SPX 1332.05 19.45 -22.63 15.31-15.26 -3.13 $RUT 433.38 0.47 -0.69 1.68 -0.89 0.57 $TRAN 3735.78 49.30 35.29 3.38 0.52 88.49 $VIX 29.27 -0.68 2.44 -0.79 3.29 4.26 Stock Mon Tue Wed Thur Week QCOM 216.06 18.38 -8.50 14.75 -8.56 16.07 Trend is still up BRCM 84.88 4.38 -2.50 1.50 4.38 7.76 Looking strong AET 93.38 3.81 -1.00 3.06 -0.19 5.69 New, hitting new highs TMX 81.00 4.25 -1.25 0.50 1.75 5.25 Looking strong UNP 64.63 1.62 1.06 1.38 0.69 4.75 New, momentum looks good CMVT 67.00 2.88 1.88 1.00 -2.88 2.88 Normal profit taking FD 48.00 3.31 -0.94 -0.56 -0.50 1.31 Strong numbers IBM 209.25 3.06 -0.25 0.13 -2.64 0.30 Buying opportunity CTXS 40.94 1.88 -1.19 0.06 -2.31 -1.56 Wounded tech stock HWP 77.31 1.06 -0.44 0.75 -2.94 -1.57 Wounded tech stock DELL 39.44 0.88 -1.25 0.50 -1.88 -1.75 Buying opportunity FNM 68.56 -1.81 -2.88 1.81 0.50 -2.38 Channelling up! WMT 42.88 0.13 -2.13 1.06 -2.19 -3.13 Dropped, broke support LU 56.50 -0.50 -1.63 0.06 -1.44 -3.51 Upgraded After Bell SUNW 55.63 -0.25 -2.38 0.63 -2.19 -4.19 Dropped, outgunned? ANF 90.50 0.81 -3.50 -2.44 0.81 -4.32 Upgraded After Bell MDT 67.19 0.06 -3.06 0.31 -2.06 -4.75 Dropped, broke pattern COF 168.75 -3.69 -0.75 2.56 -3.06 -4.94 Entry point? CSCO 106.94 -0.44 -5.00 2.34 -4.03 -7.13 Ouch! When will it stop? VISX 120.88 4.75 -11.63 6.38 -7.38 -7.88 What is your target? MFNX 74.75 -5.56 -2.69 -1.75 0.50 -9.50 Still time left EGRP 105.06 -4.00 -8.50 9.00 -6.94 -10.44 Day trader's dream NITE 140.13 0.19 -21.38 16.50 -8.38 -13.07 More volatility NTBK 170.50 8.38 -24.31 3.94 -6.50 -18.49 Split is coming RNWK 197.75 -21.44 1.50 4.19 -8.00 -23.75 Target shoot Puts NSOL 67.00 -5.63 -2.63 -1.31 -1.19 -10.76 Dropped, successful play MSPG 86.56 -5.69 -3.25 6.38 -7.81 -10.37 Trend is still down BVSN 48.06 -1.69 -1.38 -0.94 -6.00 -10.00 New, looking for bottom SFE 73.88 -3.88 -1.50 2.87 -4.63 -7.12 New, too far too fast SEEK 50.63 -3.25 -2.88 10.19 -4.50 -0.44 Buying opportunity LOW 52.75 0.94 -0.44 -0.19 -0.31 0.00 A real inspiring upgrade JNJ 97.63 0.25 -2.75 -1.00 3.63 0.13 Ouch! Confirm direction GIS 74.44 1.38 -0.75 0.38 0.31 1.32 Tech alternative DD 72.69 1.06 -2.06 1.25 1.75 2.00 Confirm direction 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: ****** WMT $42.88 -2.19 (-3.13) We had been waiting and waiting for WMT to break out on an earnings run. On Wednesday, our hopes seemed justified when the stock gained +$1.06 and bounced off its price support of $44. However, we are dropping WMT as a call due to its actions on Thursday. WMT dropped below its support on news of "lackluster" same store sales. They were up 4.6% but some analysts were looking for numbers ranging from 5-6%. (What is worse, the company reported a +13.2% increase last year in the same quarter.) Even though WMT is still expected to beat analyst expectations when it announces its earnings on May 11th, we feel there are better plays to be in. MDT $67.19 -2.06 (-4.75) We are dropping MDT as a channeling stock. Though it is possible the bottom has been reached, we don't like the fact that it broke below the projected bottom of about $69-$70. If $67 is the new lower range of the channel, then the upper range will be around $73. We'll keep an eye on MDT to see if it resumes a consistent channel. SUNW $55.63 -2.38 (-4.18) In the words of Barry Diller after a failed buyout attempt, "They won; we lost. Next." Scott McNealy, Sun's chairman has to be thinking the same thing as he was just trumped (again) by Bill Gates of Microsoft, whose new motto seems to be "talk softly and carry a big wallet." Here's the deal: Microsoft agreed to make a $5 billion investment in AT&T, which will put Microsoft's CE operating system on 2.5 mln. to 5 mln. set- top boxes (a non-exclusive deal) that AT&T will use for its broadband communications service. That leaves Sun and Java as just another competitor that will have to win business from AT&T in the future. As much as anything, this is a moral defeat for Sun, which already has, and will affect the stock price in the near future. Thus we are dropping this play tonight. PUTS: ****** NSOL $67.00 -1.19 (-10.75) More bad news hit the wire on Wednesday for NSOL. The Justice Department has apparently revived its probe into NSOL for antitrust violations. A spokesman for NSOL confirmed that the government has recently asked for more information under the probe that began in 1997. This sent shares plummeting again on a day when the Internets were already weak. The stock hit $60, which was the short-term low established a few weeks ago. That gave the stock support and it bounced up to end the day only down a few points. This may be the beginning of the bottom since it didn't follow through Thursday when the NASDAQ took a beating. Its tough to abandon such a successful play but it looks like time to lock in profits and move to another. ***** 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. To subscribe you may go to our website at http://www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 5-6-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. PICK NEWS - CALLS ******************************************************* COF $168.75 -3.06 (-4.94) The financials were hit hard on Thursday as Greenspan's speech put fear into the hearts of investors that there are possibilities of a rate hike in the future. COF crashed and burned to a -$3.06 loss on the day. Looks like COF is consolidating further as we had predicted in Tuesday's write-up. If it breaks through its support of $168, it could fall all the way to its 30 dma at the $162 level. That is OK by us though. COF will be cheaper to get into before it makes its split run. The ex-date is June 2nd. Be patient with this one. We have plenty of time to wait out the rough waters. FD $48.00 -0.50 (+1.31) Even though the markets were weak on Thursday due to concerns over Greenspan's future actions involving rates, FD only lost -$0.50. Sales figures for the major retailers were released on Thursday. FD reported that its total sales for April were up 12.9% over that of last year's sales. Some more good news, same store sales increased 1.5%, ahead of the previously expected 1% decline. FD will announce its earning on May 12th. Before opening any new positions, wait for the FD to resume its upward trek. Don't try to pick the reversal point. Let it come to you. QCOM $216.06 -8.56 (+16.07) Up. Down. Up. Down. What's next? Probably another up. Even though trading QCOM has been nothing but a rocky ride in the past week, its general trend is up. It is climbing higher even though there are huge day to day fluctuations. We feel that QCOM still has nice chances of heading higher overall. It will split is stock 2:1 on May 11th. Thursday's dip could be an entry point if it is followed by green on Friday. (That fact that QCOM set an intraday high of $229.50 on Thursday before the markets sold off could be a sign of good things to come.) TMX $81.00 +1.75 (+5.25) TMX managed to set a new all time high on Thursday even though a scare for the bond markets caused the overall markets to stumble. TMX's strength could be stemming from the fact that it departed from its alliance with Sprint. Now, Telmex can increase its level of investment in the US by finding other partners. As an example, its relationship with SBC Communications is expected to greatly increase especially since SBC has a 9.8% stake in Telmex. Watch for TMX to ascend higher if the markets can stabilize. BRCM $84.88 +4.38 (+7.75) After losing over 5 points yesterday morning, BRCM came right back to post a small gain on the day (along with the rest of the market). Today it added another $4.38 on nearly double its average volume. With heavyweights like AT&T signaling intentions to make high speed Internet access more widely available, this young market is ready to explode. BRCM is positioned to benefit from the coming growth because it develops and manufactures the chips that make high speed data transmission possible--over BOTH ordinary telephone lines AND cable wires. The deals currently being made by AT&T will help to call investor attention to companies like BRCM. HWP $77.31 -2.94 (-1.57) After a $.54 gain yesterday, HWP dropped $2.94 today, but thankfully, volume was a little light. Most of the computer stocks were down today after Greenspan's speech raised fears of an interest rate hike. The high growth tech sector (especially PC makers) would suffer more than many other sectors if rates climbed. Meanwhile, HWP's earnings date (5-17) creeps ever closer. With only 11 days left for an earnings run, we don't need the specter of higher rates spoiling this play. Watch the payroll report tomorrow, and look for positive news (i.e. unemployment not TOO low) before starting new positions. In the news: Yesterday, as expected, HWP signed a deal with Hitachi to sell its high-end storage products under the H-P name. (EMC had been supplying these storage products.) Also, Electronic Identification, Inc. and HWP have agreed to jointly provide a complete electronic identification solution to the marketplace. Finally, HWP has agreed to acquire Dazel, a privately held maker of electronic information-delivery software. VISX $120.88 -7.38 (-7.88) After dropping to $116 yesterday, VISX came back with the market's recovery to close at $128.25, up $6.37 on the day. Today, however, it lost $7.38 on fairly light volume. The seesawing action in this stock allows for repeated profit-taking and re-entries, if you are a nimble trader. The volatility is not for everyone, though. Today Wade H. King, M.D., of BancBoston Robertson Stephens reiterated his 'buy' rating on the stock, saying the "company's business momentum remains very strong, both in terms of LVC procedure volume and system sales. Any significant weakness should be viewed as a buying opportunity." He also said VISX stands out from its competitors due to its broad regulatory approval and its established track record. Look at a 10 day chart and try and target shoot. ANF $90.50 +.81 (-4.31) ANF closed positive today after a roller coaster ride. ANF opened at $93.75, well above its prior day close. As the day went on, ANF trended downward and reached a day low of $88.38. With the buying in the Dow toward the end of the day, ANF finished positive, though well off its intra-day high. After the market close, ANF was upgraded from "attractive" to "buy". This should provide some strength in the stock on Friday. We don't like the fact that ANF broke below its 30-dma, but it has bounced and never did break support at the 50-dma. CMVT $67.00 -2.88 (+2.87) CMVT reached another 52 week high on Thursday, as it traded as high as $71.00. Unfortunately, CMVT fell with the market and closed down close to $3. We still like CMVT, especially with its earnings coming up the first of June. CMVT should be a top performer once the NASDAQ decides to head higher. There isn't any news to report. FNM $68.56 +.50 (-1.38) FNM has done as planned so far. (knock on wood) FNM hit $66 a few days ago and immediately started heading up. It now has gained $2.56 since hitting the bottom of the channel. The plan is for FNM to continue higher and reach its upper channel at about $73. Don't try to catch the whole channel, just get a few dollars profit and get out. RNWK $197.75 -8.00 (-23.75) RNWK fell a bit on Thursday, but did close about $9 above its intra-day low. RNWK is sitting just above its 10-dma and is still above its strong support at $180. RNWK is right in the middle of its conference in San Francisco, and market permitting, could give the stock a boost on Friday, which is the last day of the conference. NITE $140.12 -8.38 (-13.06) Its hard to keep a hot stock down. That's what traders learned on Wednesday as NITE recovered from a morning pullback that put the stock at $119. That is just under where we have talked about support before in the mid $120's so if you used this as an entry point, then pat yourself on the back. The stock came right back despite the market. Chief Equity analyst Art Hogan at Jefferies & Co. reiterated his outlook on NITE with a price target of $220 within the next 12 months. Hogan told Stockhouse.com "It has the sexiness of the Internet and the safety of being able to get business as an off-shoot of the Internet." The stock ran into resistance around $148 which previously provided support but with the stock split set for an ex-date of May 17, we see more upside to go. MFNX $74.75 +0.50 (-9.50) No news; just momentum. Target shooters could have nailed this one yesterday all the way down to $67. Having lost all that value, then recovered it by the end of the yesterday to close just over $74, MFNX eked out only $0.50 today on low volume. As we noted Tuesday, "low volume has settled into this stock telling us the demand isn't there right now, and that basing could continue. Split and earnings run? Maybe, market willing." MFNX splits on May 18 and will likely announce earnings then too. (We'll pass on the exact date when we get it) Support was at $78, but in this market, we may drift more. Like Tuesday, "investors with higher risk profiles will try to catch the falling knife (target shoot); more conservative types should wait for volume and price to rise again." Either way, confirm market direction before playing. DELL $39.44 -1.88 (-1.75) OK, that's it. We are tired of so many buying opportunities. Dell will be the last of the large techs to report earnings on May 18, and we are waiting for it to move up into earnings, wherein lots of hopes are pinned. As we mentioned Tuesday, if earnings are stellar, Dell could pull the whole NASDAQ with it, but it won't happen in this turbulent environment. Short-term support was $40.50, now it's looking like $39.25. Resistance has been met at $42.50 +/- in the last 5 trading days. We'd really like to see more volume in this stock. That said, if the market is willing, Dell could get to $45 by earnings. But, we need to let Dell come to us. There is no need to force this play. If it never meets your entry criteria consistent with your risk profile, don't enter this play. Just because it's Dell doesn't mean it always comes back. Take your ball ($$$) and find another game. See the commentary for a couple of comments on Dell. EGRP $105.06 -6.94 (-10.44) With $15 intraday swings, daytraders have got to love EGRP. Since our last update, EGRP has had a trading range of $97.13 to $116.00, which has given us some good trading opportunities. But like other Internet-related issues it's not for the weak-kneed. In the news, EGRP as part of its media blitz for mind-share renewed its contract with AOL and upped its presence in the process. It also helps that "Pacific Crest Securities raised FY00 EPS estimate to $0.55 from $0.49. They also raised FY99 and FY00 revenue estimates to $524 mln. and $897 mln. from $511 mln. and $860 mln., respectively (briefing.com). None of this will matter however, if tomorrow's non-farm jobs numbers are greeted unenthusiastically by investors. Even if the numbers are not that bad, general pessimism over Greenspan's comments today could submarine this high-flyer. Internet = Risk! Of course, confirm market direction before playing IBM $209.25 -2.75 (+0.06) After IBM blew away earnings estimates, increased its dividend, announced a $3.5 bln. share repurchase and a 2:1 split due on May 26, you have to take your hat off for this senior statesman of technology. IBM is one of the few tech stocks keeping its head above water in rough seas. No wonder investors love it. Still, it's a tech stock and we urge caution given the greater than usual possibility of market meltdown that could result from the non-farm jobs numbers tomorrow. Even IBM won't be safe. Technically, IBM's chart is still positive, with support moving up to $207. Wait for the non-farm job news before you play. Brave soles will target shoot their way in while more conservative traders will wait to confirm market direction first. Careful, it's Friday and there is a lot of profit to wring out of IBM on any pessimistic news before the weekend. CSCO $106.94 -4.03 (-7.12) CSCO rallied yesterday afternoon to close up +2.34 points. Today the stock didn't fare as well. It opened above $110 and even bounced up there again mid-morning, but then steadily fell to finally close just under $107. CSCO is in a high-growth group that is known for "lofty" valuations and the rising interest rates in the bond market is causing concern among the analysts. Thus, the high volume of sellers. Earnings are due Tuesday after the bell. If you're still in the market, consider closing out your positions by then. It's too risky to hold over an earnings report. Even if they do announce a 3:2 split, you can always jump in at a more appropriate time. CTXS $40.94 -2.31 (-1.56) Yesterday CTXS exhibited some vigor and closed near its daily high at $43.25. But today the story had a different ending. The stock did maintain a solid intraday range above $42 for the first part of the day. Then came the pressure and CTXS lost its grip and started to slide. In a last minute effort to finish positive, CTXS bounced back off its low of $40.88, but just couldn't hold the momentum. CTXS is presently positioned just under its 10 dma. Look for upward confirmation before you initiate a new play. LU $56.38 -1.56 (-3.62) Mr. Greenspan warned of tight labor markets and rising interest rates; and analysts are squirmy about the "lofty" tech group, but someone still likes this stock. AG Edwards stepped in (after the bell) and upgraded LU from a "maintain" to an "accumulate. LU needed a boost. Today it crept just below its new support of $57-58. It'll be interesting tomorrow to see how the investors react. If upward confirmation presents itself, you have a solid entry point. But remember, LU has opposition at $62-63. NTBK $170.50 -6.50 (-18.50) This Internet stock is certainly giving us a roller coaster ride so hang on tight. After amateur hour yesterday morning, NTBK offered great entry points in the 150s and then climbed all day to peak at an intraday high of $182.50. The stock opened strong this morning, but along with others in the Internet Financial Services it sank deeper as the day progressed. NTBK is perched right on its 13 dma. This tends to indicate bullish sentiment, yet the MACD, STO, and MOM are all in downtick mode. In other words: BEWARE OF EXTREME VOLATILITY. If you want in on this HIGH RISK SPLIT-PLAY consider target shooting. The 3:1 stock split is Friday, May 14th. Please give your position undivided attention and keep a firm rein on those stops. PICK NEWS - PUTS ******************************************************* MSPG $86.56 -7.81 (-10.37) We warned on Tuesday that "MSPG could try to fight its way back up since it has been down for 5 consecutive trading days. No stock is immune to cycling." MSPG did exactly as we had forewarned and recovered +$6.38 in trading on Wednesday. However, the rebound was cut short. We felt MSPG could rally for at least 2 days before resuming its downward path. But, the markets folded on Thursday and MSPG dropped -$7.81. If the markets remain skeptical, MSPG could continue lower. Keep in mind that it could have some support at the $80 level so set those stop losses tight. SEEK $50.63 -4.50 (-.44) Investors of Infoseek are cheering for Warburg Dillon Reed who jumped in to save the sinking company. On Wednesday, Warburg announced an upgrade from hold to buy for the Internet services provider. They based the change on valuation and the prospects for the quarter. From revenues to sponsorship, they expect SEEK to be turning the corner. The stock reacted as you would expect with a big move to the upside. Fortunately the comments were made before market open and prevented us from even getting started on a play. In fact, it has created on opportunity to open a play as the stock could only buck the trend for one day before sinking with the NASDAQ. We still see the 50-dma at $45 being the next stop for the stock. Keep you stops set tight due the volatile market and Internet sector. LOW $52.75 -.31 (0.00) Lowe's received an upgrade on Wednesday from a Schroder analyst. They moved the rating to an Outperform Significantly from an Outperform. But this was unable to push the stock above its 10-dma. We are encouraged by lack of strength the stock has shown in reversing the current downtrend. It has been consolidating after a big fall last week and looks poised to start another move lower. Keep your stops in place as an exit strategy in case of a reversal. GIS $74.43 +.31 (+1.31) General Mills is struggling to start a basing pattern and move back above resistance. The stock has rallied as investors leave high growth stocks for more secure investments. We are watching the $75 range carefully as being resistance and any break above that area might be viewed as a turn around. So far it can't find the strength to break through. We may be seeing a top here and a new move down ahead. DD $72.69 +1.75 (+2.00) Another shake out in the NASDAQ has caused the push to cyclicals to continue. DD flirted with key support levels on Wednesday after a downgrade from HBSC Securities Tuesday afternoon but the rotation out of technology into safe haven stocks such as DuPont has kept the stock afloat. There is no particular news driving the stock as industry data shows continued weakness. Watch for a rally in the NASDAQ to trigger a sell-off in DD. Most investors will take a high growth technology stock over a cyclical any day. JNJ $97.63 +3.63 (+2.73). The stock dipped as low as $92.81 on Wednesday and closed off a point for the day. The trading today had a bullish twist. JNJ opened low at $94, but once it got going the momentum never let up. By the time all was said and done it had tacked on $3.63. This behavior doesn't seem to be related to any earth-shattering news event. All is quiet on the Street. There hasn't been anymore whispering about the merger talks with Centacor since Tuesday. Yet according to rumors, negotiations could reach agreement within the next few days. Confirm the direction before you begin a new play. ****************** NEW CALL PLAYS ****************** AET - Aetna $93.38 -.19 (+5.69this week)(+3.31) Aetna is traditionally known as one of the leading providers of insurance in the U.S. It also has diversified to become one of the largest financial services, health insurance, and managed-care providers. Aetna's products include retirement services, variable life annuities, long-term care insurance, and pension administration just to name a few. These products and services are offered in countries all over the world. AET set a new 52 week high today at $93.94 and closed just below this level. AET has been following the fluctuations of the Dow and with a move up, we feel AET will perform well. AET had outstanding earnings on April 28th, which has provided a boost to the stock. The $90 level had been prior resistance and we feel by breaking out above this level, AET is poised for more gains. We need to be cautious with any stock that is sensitive to interest rates on Friday. If indicators show that the Fed will be biased to raise rates, AET or any other financial stock will suffer. We feel that the bias will not be to raise rates, but we won't know until we see the non-farm payroll report. (about 2 weeks left for May options) BUY CALL MAY-90 AET-ER OI=1031 at $4.75 SL=3.50 ITM $3.38 BUY CALL MAY-95 AET-ES OI= 75 at $1.88 SL=1.00 BUY CALL JUN-90 AET-FR OI= 27 at $6.00 SL=4.50 ITM $3.38 BUY CALL JUN-95 AET-FS OI= 53 at $3.38 SL=1.50 Picked on May 6th at $93.38 PE = 80 Change since picked +0.00 52 week low =$60.19 Analysts Ratings 5-3-7-0-0 52 week high=$93.94 Last earnings 4/99 est=1.01 actual=1.08 Next earnings 8-06 est=1.09 versus= .95 Average daily volume = 561.1K Chart = http://quote.yahoo.com/q?s=AET&d=3m ****** UNP - Union Pacific Corp $64.63 +0.69 (+4.75 this week)(+2.88) Union Pacific Railroad is the largest railroad in the US with almost 40,000 rail miles in 23 states. Their territory is primarily west of the Mississippi, but extends into Mexico and Canada. The UNP operates its rail transportation through its subsidiary Union Pacific Railroad and its trucking venture is by a secondary business, Overnite Transportation. Not only has UNP been making consistent advances since last Friday, but it's been setting new 52-week highs everyday too! The latest record is $64.63. The interest has been growing in the transportation sector and in UNP's case, it can be seen in the high volume levels. The charts show a steep ascent since leaving its comfortable support of $51-52 at the beginning of April. The stock consolidation mid-month at around $56-57 and so far hasn't looked back. Take a look at the 5-day chart and it's easy to recognize a pattern of opening low and closing high. This is very bullish. However, use discipline when entering a new play. Consider waiting for a dip (which could be intraday). April 20th marked the beginning of upgrades and good reports. Merrill Lynch upgraded UNP and on two accounts. For the long term it raised its rating from "accumulate" to "buy" and for the near term it went from "neutral" to "accumulate". Two days later, Union Pacific came with better-than-expected earnings at .56 p/s; beating the Street estimates by 27%! Gruntal & Co followed up the next day by raising its estimates for 1999 and 2000, increasing its target price for UNP to $77 from $70, and reiterated its "strong buy" rating. Just last week, Business Week reported Joseph Battipaglia, from Gruntal & Co, listed UNP among its "favorites" out of the larger transportation stocks. (about 2 weeks left for May options) BUY CALL MAY-55 UNP-EK OI=1466 at $9.00 SL=6.75 *No Volume BUY CALL MAY-60 UNP-EL OI= 208 at $5.13 SL=3.25 BUY CALL MAY-65 UNP-EM OI= 85 at $1.69 SL=1.00 BUY CALL JUN-65 UNP-FM OI= 121 at $3.13 SL=1.50 BUY CALL AUG-60 UNP-HL OI= 144 at $7.00 SL=5.25 Picked on May 6th at $64.63 PE = 21 Change since picked +0.00 52 week low =$37.31 Analysts Ratings 3-6-6-0-0 52 week high=$64.63 Last earnings 3/99 est= .44 actual= .56 surprise= 27.27% Next earnings 7-29 est= .70 versus= -.60 Average daily volume = 819.4K Chart = http://quote.com/q?s=unp&d=3m ****************** NEW PUT PLAYS ****************** BVSN - Broadvision $48.06 -6.00 (-10.00 this wk) Broadvision provides integrated software application systems. These systems enable users to create applications for marketing and selling their services on the World Wide Web. Broadvision's software is designed as a platform to conduct e-commerce transactions, offer online financial services, and deliver information to customers. Their One-to-One software enables venders to tailor their marketing efforts directly to each visitor based on a set of business rules. Thus making it easier for both parties to interact. BVSN made a nice run ahead of their earnings report in mid-April. But as usually is the case, the stock has given back most of it as the earnings were only slightly above average. With a correction in the Internets in full swing, BVSN appears over priced. Momentum has taken the stock below its 50-dma at $56. The stock closed right near the day-low and the technical pattern indicates further losses ahead. The 200-dma is the next clearly defined support but due to the steep run up, it is down in the low $30 range. Pick your entry points carefully as the stock will continue to be volatile until the market establishes some direction. BUY PUT MAY-50 QVB-QJ OI=158 at $5.88 SL=4.25 BUY PUT MAY-45 QVB-QI OI= 91 at $3.13 SL=1.50 Average Daily Volume = 446 K Chart = http://quote.yahoo.com/q?s=BVSN&d=3m ****** SFE - Safeguard Scientifics $73.88 -4.63 (-7.12this wk)(-7.00) SFE's business practices revolve around the information technology business. The company identifies, invests in, and develops primarily high-tech ventures. SFE's stockholders profit mainly through rights offerings (where they have the right to buy shares in the companies Safeguard invests in.) SFE has been nose diving ever since it announced its earnings back on April 21st. After handily beating 0.15 from the year before by reporting a big 0.71, SFE has fallen back considerably. Part of the sell off could be from simple profit taking on a stock that has moved too far too fast. The rest could be stemming from Michael Miles' comments. The CFO of Safeguard Scientifics stated, "We expect to see more volatility in our earnings as we continue to increase our holdings of Internet companies." (-PRNewswire) Looks like a warning that the next quarter could hold some turbulence. SFE is now resting below 30 dma. Its next support is at its 50 dma of $67.75. Look for SFE to sink further especially if the Internet sector continues to take a beating like it did on Thursday. BUY PUT MAY-75 SFE-QO OI=266 at $7.63 SL=5.75 BUY PUT MAY-70 SFE-QN OI=343 at $5.00 SL=3.25 Average Daily Volume = 776.6 K Chart = http://quote.yahoo.com/q?s=SFE&d=3m ***************************************************** COMBINATION PLAYS (in section three) ***************************************************** ***************************************************** 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 $10 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 or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 5-6-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************************************************** COMBINATION PLAYS ***************************************************** Greenspans Silences The Crowds... Wednesday, May 5 U.S. stocks moved higher Wednesday, recovering from big intraday losses as investors' worries over rising interest rates subsided. The Blue-chip average closed up 69 points at 10,955. The Nasdaq index ended higher for the first time this week, moving up 49 points to 2,534. In the broader market, advancers led decliners by a thin margin on active volume of 893 million shares on the New York Stock Exchange. Tuesday's new plays (positions/prices): TOM LJAN70/MAY75C $11.12 debit IBI OCT55C/MAY55C $4.00 debit ORCL LJAN25/MAY25C $4.00 debit Portfolio plays: Murphy's law lives! WCOM made a nice recovery today, just three days after we closed the play for a small loss. I hope some of our readers benefitted from the move. XCIT is another play that we closed early, for small profits, only to watch it climb back into the clouds. NSM was the big attraction, moving up almost $3 on news that it will sell its PC chip business (Cyrix) and lay-off about 500 employees. This strategic move will save the company millions of dollars and they now see a return to profitability by the second half of the year 2000. Analysts responded with numerous upgrades & revised earnings estimates, causing the stock price to gap-up, through recent resistance near $15, at the open. It consolidated somewhat around 10 AM and we took that opportunity exit the short position for a debit of $2; a small loss. We expect to sell the long position when the current rally fades, to cover the expenses from rolling-out of the MAY15C. Thursday, May 6 U.S. markets fell Thursday as another jump in bond interest rates increased investor's worries over lofty valuations in the Internet and tech sectors. The Nasdaq index plunged 61 points to 2,473 and the Dow closed down 8 points at 10,946. In the broader market, declining issues led advances by a small margin on active volume of 878 million shares on the New York Stock Exchange. Portfolio plays: NSM continued its recent rally, climbing another $2 to the next resistance level near $20. The stock bounced-off $19.62 three times at mid-day and with that short-term failure, we decided to sell the JUN15C to close the speculation play. We also rolled the long-term spread forward and up to a higher strike price; the new position is NOV15C/JUN17C at a debit of $0.62. As expected, NSM went on to close at another 'new high' after we sold our options. Other current plays we are watching closely include CNCX, DRIV & WCII. All of these bullish spreads are trading near break-even but the charts are less than outstanding. You might consider any rally as an opportunity to exit these positions and move your money into more profitable plays. Good Luck! Please send questions and comments to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - ****************************************************************** CS - Cabletron Systems $11.12 *** Volatility Play *** Cabletron Systems, a premier provider of enterprise networking solutions, delivers dependable network access and communications to millions of people worldwide. With scaleable products designed for Fortune 1000 enterprise networks, service providers and small businesses, Cabletron is the e-business communications specialist for the information age. Today, Cabletron stock moved higher after the company said it is considering selling off parts of its business. CS is considering spinning off a stake in its prize Spectrum unit, which makes network-management software, and possibly a portion of its other services business. They are considering the action based on the successful initial public offering recently of a similar company, Extreme Networks. Cabletron's share value has slumped over the past year as their earnings widened to $240 million, almost double the $127 million from the previous period. Last month, the company said it would sell its manufacturing division and further reduce its workforce, which would save the company $50 million in its first year. This will certainly help the small rebound in Cabletron's bottom line. One analyst suggested the spin-off should be done sooner, rather than later but the company confirmed that this divestiture is not a 'done deal', just another option they are considering. We will speculate on the short-term outcome of the stock activity with a favorable entry based on the overpriced May options. BUY CALL JUL-12.50 CS-GV OI=2666 A=$1.43 SELL CALL MAY-12.50 CS-EV OI=966 B=$0.38 INITIAL NET TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=CS&d=3m ****************************************************************** AOL - American Online $119.75 *** AOL Free-fall? *** America Online is the world's leader in interactive services, Web brands, Internet technologies, and e-commerce services. The company operates two worldwide Internet services; America Online, with more than 16 million members, and CompuServe, with 2 million members; several leading Internet brands including ICQ & Digital City; the Netscape Netcenter & AOL.com portals; and the Netscape Navigator and Communicator browsers. AOL also develops and offers end-to-end e-commerce and enterprise solutions for new companies operating in the Net Economy. Today America Online fell $9 as investors wondered about the plans to offer broadband services to its 17 million customers. The recent purchase of Comcast by AT&T is the "big" problem for AOL but most experts agree that the development of broadband is in its infancy, and any meaningful impact on AOL is years away. A leading company executive, Bob Pittman, assured investors that AOL is prepared for a broadband world, but added that these high-speed services are not yet ready to become a widespread reality. To help offset the loss in market share, AOL is considering several ways to increase its offline media presence. Last month, rumors circulated that AOL was interested in aquiring CBS. Previously, AOL was reportedly in talks to invest in Chancellor Media, one of the nation's largest radio broadcasters. This week, AOL took another step out of the online world by announcing a new partnership with IDG Books to release a line of AOL-branded books. AOL is covered at length on a regular basis in the main section of the OIN and our conclusion is that AOL is still the #1 long-term Internet stock. The recent pummeling should end soon and we can speculate on the bottom of the current sell-off with a favorable OTM put-credit spread. PLAY (conservative/credit spread): BUY PUT MAY-100 AOO-QT OI=11094 A=$1.87 SELL PUT MAY-105 AOO-QA OI=4736 B=$2.75 INITIAL NET CREDIT TARGET=$1.00 ROI=25% Chart = http://quote.yahoo.com/q?s=AOL&d=3m ****************************************************************** CPQ - Compaq Computers $24.62 *** LEAPS / Covered-calls *** Compaq Computer Corporation is the 2nd largest computer company in the world & the largest global supplier of personal computers. Their products are sold and supported in more than 100 countries through a network of marketing partners. CPQ develops and markets hardware, software, solutions, and services, including industry leading enterprise computing solutions, fault-tolerant business critical solutions, enterprise and network storage solutions, commercial desktop and portable products and consumer PCs. The company is also an industry leader in environmentally friendly programs and business practices. The rubble is finally being cleared after an earnings warning from the PC giant roiled the entire technology sector and also destroyed the companies' share value. Optimistic investors are starting to pick up the pieces. CPQ has significantly changed many of their internal practices inluding a housecleaning of management (the CEO took the fall for sour sales and the drop in the share value in very public departure) and they appear poised to attempt a comeback. One of the areas that may help is the service division. Compaq services include installation, system management and business critical services. Compaq services currently account for about $7 billion of the company's annual revenue and they are now expecting to more than double its revenue in services by the year 2002. CPQ was also recently chosen, for the second straight year, to receive Novell's Support Connection Service Excellence Award; recognizing partners who consistently deliver high value to their customers. Maybe their long standing reputation for good service will help turn the company around. PLAY (long-term/calendar spread): BUY CALL JAN00-25 LKP-AE OI=29226 A=$4.75 SELL CALL MAY-25 CPQ-EE OI=29002 B=$1.06 INITIAL NET DEBIT TARGET=$3.50 TARGET ROI=80% Chart = http://quote.yahoo.com/q?s=CPQ&d=3m ***************************************************** Please send your questions on spreads and combination plays to: ray@OptionInvestor.com ***************************************************** ***************************************************** 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 $10 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 or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
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