The Option Investor Newsletter Sunday 5-16-99 1 of 6 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. New plays and market wrap updated daily on the website. ****************************************************************** Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 5-14 WE 5-7 WE 4-30 WE 4-23 DOW 10913.32 -118.27 11031.59 +242.55 10789.04 + 99.37 +193.78 Nasdaq 2527.86 + 24.24 2503.62 - 39.23 2542.85 - 47.84 +106.65 S&P-100 673.57 - 8.17 681.74 + 6.09 675.65 - 11.76 + 18.76 S&P-500 1337.80 - 7.30 1345.00 + 9.82 1335.18 - 21.67 + 37.85 RUT 443.13 + 7.02 436.11 + 3.30 432.81 + 1.08 + 10.15 TRAN 3666.34 - 76.49 3742.83 +95.54 3647.29 + 57.61 + 60.98 VIX 29.66 26.72 26.07 23.96 Put/Call .71 .61 .53 .59 ****************************************************************** Reality check ! I reported last week that eventually an economic report would come out soon that when viewed under a microscope would show traces of inflation. That report would be like yelling fire in a crowded theater. On Fridays CPI report you did not need a microscope. The numbers were shouted by every talking head in analyst land. The market reaction was swift. S&P futures were down -26 at the open and CNBC was warning "look out below, this is going to be bad." Visions of -300, -400 even -500 points were cropping up like old nightmares. I was long in OCT 1997 when the futures were locked down at the open and options did not open on some stocks for an hour after the market. Was I ready to jump out the nearest window on Friday? Heck no! I was long, but I was long DJX puts! More later. The long dreaded sell off on inflation news last Friday was almost a non-event. Yes stocks went down but in most cases they barely went down half as much as they had gained the previous three days. I was impressed. The +1300 points the Dow gained in the last 5 weeks was up for consolidation and we could easily have dropped twice what we lost Friday. While this may not be the end of the sell off story I really think it showed the strength of the broader market. When the economic numbers are with you the analysts just say "good numbers" and we go on. Friday the numbers themselves were called into question all day. "Outdated indicator", "invalid sector ratios", and "just a fluke" were some of the more common excuses. In reality there are some problems. Computers for instance account for less than .1% of the CPI. Tobacco accounts for 1.3% of the number. Tobacco weighting in the CPI is actually 18 times bigger than computers. With tobacco users shrinking daily and computers growing, there is a huge problem here. This is just one example but with tobacco costs growing by leaps and bounds to pay for their court losses and computer prices dropping daily you can see why this number is skewed. The actual numbers came in at a +.7% rise. This was the largest rise in over nine years. The estimates were for only +.4%. After deducting food and energy the core rate was +.4%. What really prompted analysts to start digging was the difference in the PPI on Thursday, which showed zero inflation, and the CPI with a huge inflation rate. The numbers normally move in tandem and caught many off guard. The bond market went hysterical. Yields were in the mid 5.9% range all day, finally settling at 5.92%. A 6% bond yield is almost a given now. The fear that the Fed will do something on Tuesday has grown sharply. Anatomy of a Rate Increase In actuality the sequence of events normally precluding a rate increase have just started. First the Fed (Greenspan) starts trying to talk the markets down by carefully worded suggestions of caution. (sound familiar?) Next the Fed may change their official bias toward rates. The current bias is "neutral". Many now expect the Fed to change the bias on Tuesday to a "tightening" stance. Once the bias changes then more jawboning of the markets will take place. Expect Greenspan or Rivlin to make mention that the Fed is growing more concerned with the growth of the economy and warn that the Fed may have to increase rates. All this takes place over many weeks and gives the markets time to factor in the rate change before it occurs. Most analysts are now predicting August as the date for the next change. A word of warning, this is the normal sequence of events but nothing precludes the Fed from announcing a rate change at any time just like they announced one of the rate cuts last year. While I was impressed by the lack of drop in the market I am still concerned about market direction. The advance/decline line, which has been on a steady upward move since early April, took a dramatic turn downward last week as evidenced by the this chart. The two blips last week were of course the Rubin resignation and the CPI report. Granted these were both news related but we need to confirm upward movement again before getting comfortable about the market again. The numbers on Friday were drastically negative. The NYSE advances were beaten by decliners almost 4:1, 668 to 2399. Nasdaq advancers were stronger at 1560 to 2479 decliners. The Dow traded in a narrow range after the initial drop on Friday and did finish off it's lows. 10,900 could be viewed as support but the weak rebound off the lows at the end of the day needs a lot of confirmation Monday before we can claim it. The previous 10,800 suport from last week would be the next level to test on the downside and Monday could be the day. Since most analysts still feel the economy is getting stronger, then the only real reason for a market drop is the interest rate scare. Most also feel that a +.25% rise is already priced into the market as a result of all the Fed talk recently. No one expects the Fed to do anything on Tuesday except possibly moving to a "tightening bias" and most feel that this too is already factored into the market after Friday. So where is the beef? Investors are still faced with post earnings depression now that most large companies have announced. They will still be cautious about making bets before the results of the FOMC meeting on Tuesday. After the Fed meeting the market will be left to establish direction based on fact not supposition. The facts are still a booming economy, rising earnings and almost no visible signs of inflation if you discount tobacco and gas prices in the CPI. If the Fed maintains a "neutral" bias that would be very positive. Even if they move that up a notch it would not be the end of the world. Where I was leaning to a temporary market decline on profit taking and consolidation last week I am now sitting on the fence. I think the lack of a huge drop Friday shows strength and any lack of downward movement on Monday would confirm this. Monday could be listless in front of the Fed meeting and would not be a trading day in my book. Cautious investors would probably be better off waiting until Wednesday to start new positions. This allows the market to settle, read the Fed, then establish a new direction. The VIX is at the highest point in the last two months and the put/call ratios have spiked up to a .71. These are a direct result of the "news reversal" on Friday and we need to see if they cool this week. As a side note I have a theory that someone knew in advance what the CPI numbers would be. Look at this chart of the Nasdaq. At exactly 1:30 Thursday the Nasdaq was at its high of the day with very positive ticks and advance/decliners. Immediately and for no reason the Nasdaq rally died and dropped -50 points. Why do I think somebody knew? The stocks to be hurt the worst in an interest rate sell off are techs. Techs are first up in a rising market and first down in a falling market. Second, as an astute subscriber pointed out, somebody purchased 25,300 MAY/JUN DJX-110 puts at the close. The entire trade went at the ask price indicating it was a buy and not a sell. The cost of the trade a cool $7.5 mln dollars. If you knew in advance what the number was going to be and you shorted tech/Internet stocks in large numbers and bought Dow puts you could make out like a bandit. Do you think anybody really new? I would bet on it! Maintain your focus, don't buy on impulse, have a great week! Jim Brown Editor ************ JIM'S PLAYS ************ This was what I would describe as a successful week. Every play went more or less in the right direction and some went quickly. I was able to catch COF and IBM before their big runs. My CMGI play is working almost perfectly and I was out of everything before Friday and I bought Puts at the close on Thursday. Waking up to futures at -26 on Friday morning was a pleasant surprise. To recap last Sundays open plays I was able to close the long DJX put position on the dip at the open on Monday for only a $.25 loss and considered my self lucky considering the positive sentiment. The CMGI play is working well. I was short MAY-520 calls at $15.75 and short MAY-210 puts at $15.00 and short CMGI stock at $225. I covered the CMGI short at $227 on Monday and went long on CMGI as it passed through $230 Monday afternoon. When CMGI started rolling over with the Nasdaq on Thursday I sold the CMGI for $245 and planned to short it at $240 but the drop was so fast I missed it. I am now naked protection on the short puts/calls but with CMGI at $230 but with a week to go it could not be better positioned. I will go long again at $235 or short again at $225. As it stands I have made $30.75 in premiums, +$13 in stock ($15-$2) for a total of $43.75 and a week to go. The premiums on each side of the trade have shrunk to about $4 each. I could close the trade now for a net profit of $35.75 but I am going to wait it out. This is the only type of play that I risk the time factor working for me. One of the premiums will expire worthless and the odds of CMGI finishing the week between $210 and $250 are very strong. Dell looked like it was actually going to make a run early in the week but the selling came back in force on Friday. I was happy to get back to positive after spending most of last week in negative territory. I sold too soon on the midday dip Wednesday when it looked like it might be turning over again. I was looking for a top and wanted to sell before the pre-announce flood. In retrospect I got out alive $2 early but just in time to avoid the rush. Capital One worked great. As I said last week I expected a big move from COF in front of their coming split. The Monday closing dip was a great buying opportunity and I opened a new position in the Jun-165 calls. After the big jump on Tuesday and the weakness on Wednesday morning I bailed out on Wednesday afternoon for a $4.38 profit and then watched them jump another +$5 on Thursday morning. Sellers remorse turned into relief when the market opened on Friday and the bottom fell out. Had I been greedy I could have lost money instead. When the bond scare is over I am sure COF will be a play again. IBM had held up well the beginning of the week and I opened a 210-call position on the dip Monday afternoon. After nothing happening on Tuesday I took the big jump on Wednesday as a gift and closed my $11 option for $18. Again, strong sellers remorse on Thursday morning but a +60% profit in two days is more than reasonable. I will be back into IBM after the Fed meeting if the market is positive and I get a chance to trade. IBM splits 2:1 on the 26th and should have room to go with the new $270 price target. After the Dow had rolled over twice before after touching 11,100 and looked like it was going to do it again on Thursday I decided to buy DJX puts again at the close. (This is a story in itself and you can read it in the online broker article below.) This turned out to be a gift more than an intelligent decision. Nobody could have known (could they?) that the CPI was going to be a disaster but you will find if you use good judgement in the market that somedays the results will surprise you. Lucky? Yes.. but I could just as easily been playing calls on the theory that a close over 11100 was bullish. NOT !!! Anyway I sold too soon when the Dow bounced in the afternoon but I pocketed +46% and was a happy camper. SQNT: We received a rumor this week that Sequent Computer systems was going to announce a big deal with IBM in about two weeks. We have no way of confirming this but since the stock had revived from its recent doldrums I figured the rumor could have substance and when it did not go down on Friday I bought some of the stock. This could only be a rumor. We get so many rumors about some big event coming on a stock that is falling every day, mostly from investors trying to pump new life back into a position that is losing badly, that to get a rumor where the stock is rising is refreshing. Rising indicates to us that insiders may be buying. I am in cash except for the SQNT stock and will not be trading this week. OptionInvestor.com is a platinum sponsor for the Omega World Seminar in Vegas this week and as such I will be forced to tear myself away from the PC and attend. Shucks!! Pass line anyone? Calls bought and sold this week. DJX MAY-112 DJV-QH @ $ 3.00 sold $ 2.75 loss $ .25 COF JUN-165 COF-FM @ $13.75 sold $18.13 profit $ 4.38 IBM MAY-210 IBM-EB @ $11.00 sold $18.00 profit $ 7.00 DJX MAY-140 DJV-QJ @ $ 3.25 sold $ 4.75 profit $ 1.50 Stock positions closed. DELL cost $ 41.38 sold $ 43.00 profit $1.69 CMGI cost $230.00 sold $245.00 profit $15.00 CMGI short @ $225.00 covered $227.00 loss $2.00 Open positions: SQNT stock @ $14.00 ************************** ONLINE BROKERS - EDITORIAL ************************** This was possibly the week that marked a turning point in my view of Internet brokers. As most of my readers know I use Etrade as my normal broker but I also have some other accounts as well. On Friday when I wanted to buy the DJX puts at the close I clicked on enter option order at Etrade and got some weird Unix error on the screen. I click back and got the order screen and filled in the info, clicked submit. This time I got a network not responding message. Again, this time a document empty message several times. Again, again, again, time was running out. Finally at 3:59 the system took my order to buy 100 contracts at market. It should be an instant fill. Minutes slip by and I can see on Interquote that the daily volume has not changed and therefore I have not been filled. 4:05 I use the power Etrade number to get an Etrade broker on the phone. She checks on status, says the order was entered too late. I explain the problem and ask her to check with the real broker again. On hold. While holding I click on another broker I use, Preferred Capital Markets, login, enter an order for 50 contracts, submit, fill, 15 seconds. Etrade comes back on the line. Sorry can't help me it is too late. I explain that I bought 50 contracts while she was gone. She explains it is impossible. While she holds I buy 20 more, 10 seconds. I talk her through the process. She goes away again. Comes back 5 min later and says OH! It looks like we just got a fill for 100 contracts!!!! It is 4:15PM. Not knowing that Friday would be a disaster I now have 170 contracts which is 70 more than I wanted. My point here is that maybe bigger is not better and the personal attention I get at Preferred Capital is worth far more than I pay for it. We have many customers that use them and all seem to be happy which is more than I can say for Etrade. I called Preferred Capital and asked them if they would mind me writing about them today. Just checking, you never know. They expressed a strong desire to be able to offer our readers what they feel is a better system. They offer two different web based trading systems. One works with your browser and the other is a stand alone system that works great without all the overhead of the Internet browser. I strongly recommend the non-browser version. The fills and confirmations on market orders are instant. I mean instant, from 5 seconds to 15 seconds. Etrade confirmations are from 5 to 15 minutes. The main screen is very easy to read and everything is right there. No changing screens and having to drill down to get the info. The phone is answered by a real broker on the second or third ring with no hold time. Also they offer naked call writing and you can't get that at Etrade without an act of God. You know we do not advertise on Optioninvestor but I might make an exception for Preferred Capital. I have been impressed with their system and their customer service. $7.75 stock trades also. You can reach them at http://www.preferredtrade.com or call them at 888-889-9178 Sign me: tired of waiting on Etrade Jim ************************* Market Sentiment Pinnacle Capital Advisors ************************* Sunday, May 16, 1999 Key Moment in the Market There comes a time when major economic news converge with technical and sentiment indicators to create key moments is the market; that time has arrived. After a stronger than expect CPI report sent shock waves through the bond market sending the 30-year bond yields knocking on the 6% door, the equity markets have raced to key benchmarks. Pinnacle has been alerting investors about raising yields on the 30 year bond since March 1st when it got above 5.50. This marked the end of declining rates that has lasted more than two years. A closer look at our technical indicators has the following industry sector indices trading at or near their 50-day moving average. If these leading industry sectors CANNOT hold above near-term moving averages, we may be in for more sell off. Keep in mind that Retail, Drug and Healthcare have already violated their short-term benchmarks (One reason for our Bearish market posture). SPX S&P 500 OEX S&P 100 NDX Nasd 100 MSH Morgan Stanley High Tech XCI Hardware CWX Software INX Internet We are also concerned about the Advance/decline line. After recovering from its low on April 1st, the A/D line is beginning to roll over. And although there has been a resurgence in small cap stocks, it is unclear if investors will stay committed to this sector if the broad market begins to crack. On a positive note, take a look at where the DJIA found support during its precipitous sell off on Friday (5/15) -- 10,800. If you recall, this was essentially the low of the day on Wednesday (5/13) when news of Treasury Secretary Robert Rubin's resignation hit the wires. In our article last Thursday night (5/13), Pinnacle advised readers that this is likely the place where many traders have their sell stops. Therefore, if the DJIA trades below 10,800 make sure you have your hedge strategies in place. May Expiration Cycle OEX OTM Call Analysis (Open Interest May 680-750) -------------------------------------------------------------------- Date Open Interest Change % Friday, April 30 65,936 - Friday, May 7 89,736 +36.0% Friday, May 14 97,861 +48.4% These indicators suggest that option speculators are betting that the S&P 500 and 100 will climb to new heights. This could still happen but if it doesn't, savvy investors have hedge strategies in place. BULLISH Signs Mixed Signs: Russell 2000: Could prove problematic from atechnical standpoint if the Russell 2000 fails at the 450 benchmark. Although the index advanced above its prior high of 425-430 in January '99, the RUT 52-week high is 480 and a sell off from here could represent a failed rally (lower high) across a two year view. Investor Intelligence: As a contraian indicator, the percent of Bullish investors spiked from a week ago suggesting Bullish sentiment is picking up steam. Advance/Decline Line: After recovering from its low on April 1st, the A/D line is beginning to flatten and roll over. BEARISH Signs: Interest Rates: Trading ABOVE 200dma and 5.50 Benchmark (5.911%) -- the highest in more than a year. Market Volatility (VIX): Trading ABOVE its 50-day moving average (25.60) indicating the end of a the recent bullish trend which began on March 5th. Pinnacle Index: Although off its peak (5.5) on Tuesday (5/11), our Pinnacle Index is clocking in moderately high at 3.5 suggesting that option speculators are expecting the market to advance higher. Peak Open Interest: A contraian put-call ratio clocking in at .80 suggesting bullish sentiment picking up steam. OTM Call Analysis As we move through May's expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 680-750 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 OEX OTM Call Analysis (Open Interest May 680-750) ----------------------------------------------------------------- Date Open Interest Change % Alert ----------------------------------------------------------------- Friday, April 16 30,697 - Friday, April 23 53,887 +75.5% Friday, April 30 65,936 +114.8% Friday, May 7 89,736 +192.3% Friday, May 14 97,861 +218.8% Market Sentiment at a Glance Friday Tues Thurs Indicator (5/14) (5/18) (5/20)Alert ***************************************************************** Pinnacle Index (OEX): Overhead Resistance (680-700) 1.7 Underlying Support (645-660) 3.2 Put/Call Ratios: CBOE Total P/C Ratio .6 CBOE Equity P/C Ratio .4 OEX P/C Ratio 1.7 Peak Open Interest (OEX): Puts 650 Calls 700 P/C Ratio .81 Market Volatility Index (VIX): CBOE VIX 29.66 Investors Intelligence: Bullish 56.9%* Bearish 31.0%* 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 (5/14) (5/18) (5/20) Overhead Resistance (680-695) 1.7 OEX Close 673.57 Underlying Support (645-660) 3.2 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 (5/14) (5/18) (5/20) CBOE Total P/C Ratio .67 CBOE Equity P/C Ratio .43 OEX P/C Ratio 2.44 Peak Open Interest Friday Tues Thurs Strike/Contracts (5/14) (5/18) (5/20) OEX-Puts 650 / 14,250 OEX-Calls 700 / 17,593 Put/Call Ratio .80 VIX Market Volatility 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 March 4, 1999 Bottom 28.15 April 30, 1999 26.07 May 11, 1999 26.72 May 13, 1999 26.28 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 May 12, 1999 56.9 31.0 **************** HOW TO SUBSCRIBE **************** 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. 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 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 *********** 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 5-16-99 Sunday 2 of 6 *************** Market Posture *************** As of Market Close Friday, May 14, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,000 10,913 Neutral 5.14 * SPX S&P 500 1,325 1,360 1,338 Neutral 5.14 * OEX S&P 100 660 690 674 Neutral 4.29 RUT Russell 2000 435 450 443 Neutral 5.14 * NDX NASD 100 2,100 2,250 2,125 Neutral 5.7 MSH High Tech 1,000 1,100 1,028 Neutral 5.11 XCI Hardware 900 920 890 BEARISH 5.14 * CWX Software 625 650 629 Neutral 4.22 SOX Semiconductor 390 420 397 Neutral 5.11 NWX Networking 450 490 520 BULLISH 4.22 INX Internet 550 650 547 BEARISH 5.14 * BIX Banking 700 720 706 Neutral 5.14 * XBD Brokerage 425 475 451 Neutral 5.14 * IUX Insurance 630 660 655 Neutral 5.14 * RLX Retail 900 970 882 BEARISH 4.29 DRG Drug 390 425 370 BEARISH 4.29 HCX Healthcare 780 850 755 BEARISH 4.29 XAL Airline 170 210 182 Neutral 5.14 * OIX Oil & Gas 285 310 294 Neutral 5.13 Posture Alert Stronger than expected CPI numbers rekindled inflationary worries which prompted a precipitous sell off across major market averages. We have turned Neutral across select industry sectors and Bearish across the Hardware and Internet sectors after falling below key short-term benchmarks ************* Coming Events ************* Monday: None scheduled Tuesday: FOMC meeting to determine interest rate policy LJR Redbook 5/15 Forecast: -- Previous: 0.5% API Oil Stocks 5/14 Forecast: -- Previous: -2.30M Housing Starts Apr Forecast: 1.76M Previous: 1.76M Housing Permits Apr Forecast: 1.67M Previous: 1.63M Wednesday: None scheduled Thursday: Jobless Claims 5/15 Forecast: -- Previous: 303K Money Supply(M2) 5/10 Forecast: -- Previous: -$26B International Trade Mar Forecast: -18.7B Previous: -19.4B Phil Fed Survey May Forecast: -- Previous: 26.4 Friday: None scheduled *************************************** Last weeks change for this weeks picks: Index Last Week Dow 10913.32 -118.27 Nasdaq 2527.86 24.24 $OEX 673.57 -8.17 $SPX 1337.80 -7.20 $RUT 443.13 7.02 $TRAN 3666.34 -76.49 $VIX 29.66 2.94 Considering the Friday disaster we are pretty happy with these results. Stock Week IBM 239.25 22.01 Another dip another buy? VRSN 128.06 21.06 New, the recovery of the day! SWS 65.69 12.13 New, possible entry point here. RMBS 74.88 11.13 New, is that good news coming? BRCM 93.56 9.87 Pick your entry carefully NEON 49.00 7.62 New, momentum is still intact. DLJ 72.75 6.88 New, looks like an entry point. SUNW 64.63 6.57 New, showed great strength Friday EMC 103.75 6.44 Still 2 weeks to run with split. CTXS 47.88 5.24 Is this your entry point? ROK 62.88 4.24 Showing amazing strength. KEA 29.00 4.06 New, in recovery mode. CB 74.13 3.82 New, is this a buyable dip? TBH 102.00 3.10 Look for the breakout over $104. ETH 54.38 2.88 New, 5 days left before the split. NXTL 38.31 1.94 New, with a new price target! PEP 38.19 1.44 New, may the force be with you. SQNT 13.69 1.12 New, everyone loves a rumor. LU 58.50 0.93 Confirm market direction first. COF 169.56 0.28 Ouch! Another lesson on Stops. PPG 69.38 -0.07 Dropped, not going up CMVT 67.13 -0.31 Dropped, still consolidating MCHP 43.50 -0.82 Another stock showing strength Friday. AET 94.06 -0.95 Dropped, not performing TV 46.69 -2.19 Tried hard to recover on Friday BA 43.00 -2.61 Up in a down market looks good. GT 63.19 -3.26 Dropped, bad timing LVLT 84.56 -3.94 Rolling stock, was a put, now a call. QWST 84.75 -5.37 Dropped, too Nasdaq sensitive. Puts AXP 120.75 -13.94 Tuesday will be the key VO 54.00 -5.38 New, new offering not appreciated MSPG 83.00 -5.00 More lagging Internets LVLT 84.56 -3.94 Time to switch to calls. GM 83.13 -3.50 New, another interest rate target SEEK 47.94 -3.19 And another. FNM 70.50 -1.63 Channeling stock on the way down BVSN 46.50 -1.50 Those troubled Internets TBFC 92.25 -0.88 Competition + Interest rates PICK SUMMARY ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. STOCKS ADDED TO THE PICK LIST ***************************** CALLS: RMBS - Rambus SQNT - Sequent (news play) ETH - Ethan Allen CB - Chubb Corp VRSN - VeriSign SWS - Southwest Securities NXTL - Nextel Comm. NEON - New Era of Networks SUNW - SunMicro DLJ - Donaldson Lufkin & Jenrette KEA - Keane Inc PEP - PepsiCo PUTS: GM - General Motors VO - Seagrams PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS: CMVT $67.13 (-.31) We are dropping CMVT this week. The stock has taken a hit the last few days and it looks like it is in the midst of a mild correction. Earnings are in a few weeks so we will keep an eye on this one, but for the moment we feel it is best to let it go. PPG $69.44 (-.06) PPG is another stock we are dropping this week. It is not that the stock went down, it just didn't go up. The stock is having a hard time breaking the $70 level, and has under performed many other similar stocks. GT $63.19 (-3.26) Bad timing! That is what our pick of GT has been. We picked the stock at a top and it proceeded to go down every day this week. Though this stock seems under valued, cyclicals have been rolling over lately. AET $94.06 (-.95) AET is another stock that has suffered this week even before the inflationary news on Friday. We don't like the looks of this one over the short term, so we are going to let it go. How quick news can change the outlook of a stock. QWST $84.75 (-3.75) After losing $4.61 on Thursday and closing at its low of the day, Qwest lost another $3.75 on Friday and closed very near that day's low. This is a little too much for us to stomach in a stock that should be well into its split run. For those of you in the stock, it is possible that QWST's behavior was more market-related than due to weakness in the individual stock. You have until May 24th to wait for a split run. However, note that support is $6 to $7 below Friday's closing price and it just slipped below its 10 dma. We are dropping QWST now in favor of more promising plays. This was another good example of why we play with stop losses. PUTS: NO DROPS STOCK SPLIT CANDIDATES *********************** PVN - Providian MWD - Dean Witter ANF - Abercrombie & Fitch ** announced ** YHOO - Yahoo STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date AOC - Aon Corp 3:2 05-17-99 ex-date 05-18 MEL - Mellon Bank 2:1 05-17-99 ex-date 05-18 TLAB - Tellabs 2:1 05-17-99 ex-date 05-18 COVD - Covad Comms 3:2 05-18-99 ex-date 05-19 ALTR - Altera Corp 2:1 05-19-99 ex-date 05-20 CDWC - CDW Computer 2:1 05-19-99 ex-date 05-20 MFNX - Metromedia 2:1 05-19-99 ex-date 05-20 ISSX - ISS Group 2:1 05-19-99 ex-date 05-20 CNCX - Concentric Net. 2:1 05-21-99 ex-date 05-24 EGRP - E*Trade 2:1 05-21-99 ex-date 05-24 ETH - Ethan Allen 3:2 05-21-99 ex-date 05-24 current play QWST - Qwest Comm 2:1 05-24-99 ex-date 05-25 IBM - IBM 2:1 05-26-99 ex-date 05-27 current play CMGI - CMGI Inc 2:1 05-27-99 ex-date 05-28 EMC - EMC Corp 2:1 05-28-99 ex-date 06-01 current play C - Citigroup 3:2 05-28-99 ex-date 06-01 CNET - CNET Inc 2:1 05-28-99 ex-date 06-01 VRSN - VeriSign 2:1 05-28-99 ex-date 06-01 current play APCC - Amer Pwr Conv 2:1 05-28-99 ex-date 06-01 JWA - John Wiley 2:1 05-28-99 ex-date 06-01 VRSN - VeriSign 2:1 05-28-99 ex-date 06-01 COF - Capital One 3:1 06-01-99 ex-date 06-02 current play EL - Estee Lauder 2:1 06-02-99 ex-date 06-03 FON - Sprint 2:1 06-04-99 ex-date 06-07 TBFC - Telebanc 2:1 06-08-99 ex-date 06-09 LXK - Lexmark 2:1 06-10-99 ex-date 06-11 BGEN - Biogen 2:1 06-25-99 ex-date 06-28 PFE - Pfizer Corp 3:1 06-30-99 ex-date 07-01 SCH - Schwab 2:1 07-01-99 ex-date 07-02 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. SPECIAL SHORT TERM SPLIT PLAYS ******************************* We always recommend selling the day of the actual split or earlier. Profit taking will drive down the price on an average of 7 of 10 splitters immediately after the split. They may come back in a week or two but why risk it ! ****** ETH - Ethan Allen $54.38 (+2.88) See details in sector list Chart = http://quote.yahoo.com/q?s=ETH&d=3m ****** IBM - IBM Corp. $239.25 (+22.00)(+8.06)(+9.44)(P4W+27.37) See details in sector list Chart = http://quote.yahoo.com/q?s=IBM&d=3m ****** EMC - EMC Corp. $103.75 (+6.44) See details in sector list Chart = http://quote.yahoo.com/q?s=EMC&d=3m ****** VRSN - VeriSign, Inc. $128.06 (+21.06) See details in sector list Chart = http://quote.yahoo.com/q?s=VRSN&d=3m ***** THE PLAYS OF THE DAY -CALLS ONLY PLAY IN RISING MARKET ***** ROK - Rockwell International $62.88 (+4.25)(+7.00)(P4W+9.44) Great chart !! See details in sector list Chart = http://quote.yahoo.com/q?s=ROK&d=3m ****** IBM - IBM Corp. $239.25 (+22.00)(+8.06)(+9.44)(P4W+27.37) See details in sector list Chart = http://quote.yahoo.com/q?s=IBM&d=3m ****** ************** ROLLING STOCK ************** FNM - Fannie Mae $70.50 (-1.63)(+1.18)(-1.37) Fannie Mae (formerly the Federal National Mortgage Association) is a public company whose existence is mandated by the US government. Its purpose is to provide liquidity in the mortgage market by buying mortgages from lenders and packaging them for resale as bond-like securities. This cushions lenders from the worst effects of fluctuations in interest rates and allows them to offer mortgages to people who would not otherwise be considered. FNM's status as a government corporation has become controversial because of the business advantage its federal hybrid status gives it over its private rivals. We have been playing FNM as a channeling stock between $66 and $72. So far so good. FNM gave us a drop the last three days of the week to start its move to the lower end of the channel. We are targeting a price of about $66-67 on the bottom end. Don't be too greedy. If we see FNM hit this level, sell the put and look for an opportunity to buy a call on the bounce up. FNM started down on Wednesday, and continued down with the news of a possible interest rate hike. The Fed meeting is on Tuesday, though the consensus is that rates will not be raised at this meeting. BUY PUT JUN-70 FNM-RN OI=7243 at $3.00 SL=1.50 BUY PUT JUN-75 FNM-RO OI=1359 at $5.88 SL=4.50 ITM $2.77 Average daily volume = 2.65 mln. Chart = http://quote.yahoo.com/q?s=FNM&d=3m ***** LVLT - Level 3 Communications $84.56 (-3.94)(-1.56)(P4W+17.81) Not to be confused with Intel's recent purchase (Level One Communications, a high-speed networking chip manufacturer), LVLT is the new breed of international phone company offering all the bandwidth you can use over its facilities-based Internet Protocol fiber network, parts of which are still under construction. They offer local service, long distance, data transport and Internet access. Interestingly, as a spin-off from Peter Kiewit & Sons, an Omaha-based construction giant, LVLT still derives a nice chunk of income from coal mining investments (must be something in that Omaha water that makes the cash flow as well). Craig McCaw through Nextel and Nextlink has made a sizable investment in LVLT in exchange for a piece of future capacity. The long-term prospects for LVLT are good, but we are playing them as a call this week since they are currently stuck in a channel between $84 and $93, up from $83 and $90, respectively, last week. From the chart, note Fridays strong bounce off $84 near the open and the close. Also note that Friday's $2.56 loss came on less than average volume and closed off its low for the day, telling us we may be at the bottom of the channel. This is still a tricky, HIGH RISK play. Be careful, channeling stocks are always prone to break their pattern if the market makes a drastic move or the company has some dramatic news. LVLT is part of an alliance with Cisco, Nortel, Hewlett Packard and Lucent to promote "soft-switch" technology, which more easily allows IP and traditional phone networks to work together. While it won't move the price, it helps to understand the technology a bit better. BUY CALL JUN-80 QHN-FP OI=868 at $10.00 SL=7.50 BUY CALL JUN-85 QHN-FQ OI=508 at $ 7.25 SL=5.25 Picked on May 2 at $88.50 PE = n/a Change since picked -3.94 52 week low =$ 22.38 Analysts Ratings 1-4-0-0-0 52 week high=$100.12 Last earnings 04/99 est -0.37 actual -0.33 Surprise=10.81% Next earnings 08-11 est -0.40 versus -0.01 Average Daily Volume = 1.7 mln. Chart = http://quote.yahoo.com/q?s=LVLT&d=3m ***** CONTINUED IN SECTION THREE. ***** SEE DISCLAIMER IN SECTION ONE *****
The Option Investor Newsletter 5-16-99 Sunday Part 3 of 6 ********* Internet ********* VRSN - VeriSign, Inc. $128.06 (+21.06) Do you ever worry about making credit card purchases or other secure transactions on the Internet? VeriSign, Inc. is trying provide the security you need. It provides Internet trust services and digital certificate solutions used by websites, enterprises, electronic commerce service providers and individuals to conduct trusted and secure electronic commerce and communications over IP networks. This is basically a split play. On March 31st, a few weeks before earnings, VeriSign declared a 2:1 stock split for May 28th with an ex-date of May 31st. With e-commerce and e-services in the early stages of an expected explosion, Internet security is a much-needed commodity. VRSN is one of several companies in a new industry working on solutions to address this need. As an Internet stock, VeriSign sees a lot of volatility. (See the 52 week price range below.) A downgrade can sink options in a hurry. For example, on 4/13, the day after VRSN reported a quarterly loss of $.08 versus $-.27 the year before, Morgan Stanley Dean Witter downgraded the stock. The analyst, Mary Meeker, said the fundamentals were "outstanding" and the company was "executing superbly", and based her downgrade solely on valuation. The stock was around $150.00 and promptly dropped 16%. Six days later when it was as low as $100.00, BB Robertson Stephens upgraded VRSN, saying it was undervalued when compared to other Internet Infrastructure companies. It now trades in the middle of that range, has positive MACD, and is above its 10 dma. On Friday, with most stocks down on the day, VSRN showed signs of strength by tacking on $1.25. The split 2 weeks from now should help to insulate it from big losses, but choose your entry carefully and use stops. On May 12th, VeriSign signed a deal with Visa U.S.A. to enable secure, encrypted transactions and communications using the Secure Sockets Layer (SSL) protocol. Proprietary VeriSign technology has been pre-installed in most Microsoft, AOL, and Netscape Web browsers used today that lets them recognize VeriSign Web site certificates when consumers connect to a merchant. According to the company, VeriSign is the only digital certificate provider in the world to currently have a license from the Department of Commerce to issue very strong, 128-bit certificates to online merchants (the strongest encryption technology for Internet transactions). VeriSign was up a big $21.06 last week, so watch out for profit-taking. VRSN did show amazing strength on Friday. After gapping down about 10 points with the Nasdaq's weakness, it fought its way back all the way to positive territory. BUY CALL JUN-125 YVR-FE OI=192 at $19.13 SL=15.00 BUY CALL JUN-130*YVR-FF OI=165 at $16.88 SL=13.00 BUY CALL JUN-135 YVR-FG OI= 66 at $14.88 SL=11.75 BUY CALL SEP-135 YVR-IG OI= 34 at $28.63 SL=22.25 Picked on May 16th at $128.06 PE = n/a Change since picked +$ 0.00 52 week low =$ 19.38 Analysts Ratings 4-4-3-0-0 52 week high=$188.35 Last earnings 4/21 est -.10 actual -.08 surprise=+20% Next earnings 07-26 est -.03 versus -.23 Average daily volume = 767.8 k Chart = http://quote.yahoo.com/q?s=vrsn&d=3m ***** BRCM - Broadcom $93.56 (+9.87)(+6.56)(+2.63) Frustrated with how slow the internet can be at times? Here is a stock for you. Broadcom Corporation, a semiconductor company based in Irvine, CA, supplies highly integrated, system-level silicon solutions that enable broadband communications delivery to homes and businesses. Its products enable high-speed transmission of data over existing wires not originally designed for digital data transmission. BRCM dominates the broadband cable set-top box market as well as the xDSL(digital subscriber line) broadband side, so it is playing BOTH sides of the faster Internet game at the same time. It has developed integrated circuits for cable modems, high speed networking, and satellite and terrestrial digital broadcast. BRCM chips provide a better image on the TV screen, eliminating fuzziness, sharpening graphics, and providing studio-quality text. BRCM has been on a run since April 21st, when it reported earnings that were $.05 above expectations on revenue growth of 173% and received an upgrade from Preferred Capital Markets. Since then, Broadcom has purchased Epigram, which makes chipsets for high speed networking over ordinary phone lines for $316 mln in stock. Epigram's chips can supply large amounts of voice, video, and data transmission simultaneously, and at high speeds. Because Epigram's technology (which is better than its competitors) will probably become the next networking standard, BRCM now has the inside track to dominate the emerging high growth home networking market. The latest good news was on May 11th, when BRCM unveiled its new Ethernet chip that is 10 times faster than any previous networking chip. It can deliver video, voice, and data over ordinary copper wire at 1 gigabit/second without the need for expensive fiber optic cable. It can also correct transmission errors, sort out interference, and send 2-way data transmissions over wires that currently only carry 1-way traffic. This breakthrough product is the latest example of BRCM's cutting edge technology and the reason for continued investor interest in this stock. At a convention on Tuesday last week, BRCM announced news of its latest high-speed networking chip, and the stock set a new high of $100.63 the next day. Late Wednesday and again on Thursday, BRCM saw a little profit-taking. (Like most stocks, BRCM tends to move up for a few days, pull back for a day or two, and then resume its climb.) It might have started up again on Friday, but inflation fears got in the way and it lost $2.88. Even so, BRCM was up $9.87 on the week! We expect BRCM to continue its climb once the market gets back on track (if not before). Confirm direction and remember that this chip maker is part Internet stock so it can be volatile. Beware of profit taking. Current resistance is at $99. BUY CALL JUN- 90 RCQ-FR OI=271 at $11.00 SL= 8.75 BUY CALL JUN- 95*RCQ-FS OI=368 at $ 8.63 SL= 6.50 BUY CALL JUN-100 RCQ-FT OI=408 at $ 6.63 SL= 5.00 BUY CALL AUG-100 RCQ-HT OI= 84 at $12.88 SL=10.25 Picked on Apr 25th at $77.13 PE = 142 Change since picked +$16.43 52 week low =$ 23.50 Analysts Ratings 3-6-1-0-0 52 week high=$100.63 Last earnings 4/21 est 0.14 actual 0.19 surprise=+36% Next earnings 07-21 est 0.18 versus 0.08 Average daily volume = 1.58 mln Chart = http://quote.yahoo.com/q?s=brcm&d=3m *********************** PC Hardware Software Electronics *********************** RMBS - Rambus $74.88 (+11.13)(P3W-2.00) "Rambus keeps computer chips from rambling when they communicate with each other. The company makes an interface that accelerates the exchange of signals between a computer's memory and logic chips, alleviating a bottleneck that hampered the development of faster computers. Rambus targets its products to multimedia, networking equipment, and digital TV markets. (Nintendo uses Rambus technology in its Nintendo 64 video game system.) Rambus licenses its designs to semiconductor makers, including NEC, Samsung, and Intel, and earns royalties on the sale of these manufacturers' Rambus-based products. The top 14 dynamic random-access memory makers have all licensed Rambus' interface." We're not disposed to plagiarism at all, but Hoover's description of Rambus from Microsoft Investor web site is tough to improve. Well, everyone in the processor and DRAM business (not to mention investors) is anxious to see if Intel will use the Rambus interface on its new chipsets. Lately, talk from Intel is that they may not support Rambus on its newest chipsets to be shipped in September. However, as an analyst from the Gartner Group explains, "The potential there still is that Intel would change their direction and either stay with the older technology that is already out there on PCs or look at something else. But the closer we get to the end of the year with no change in direction, the better for Rambus." Actually, if the Rambus interface is to be shipped on schedule, Intel will have to test them within the next 2 weeks, with samples shipped to the likes of Hewlett Packard, Compaq and IBM shortly thereafter. Hold that thought. An article from TheStreet.com also states "Over the next several weeks, those keeping an eye on the new Rambus-based chips can see early signs of progress". The expectation is that when a couple of memory module makers announce support for Rambus, that will be enough to show the market that Rambus will happen and that they are on track for a September roll-out. In short, memory makers' orders will confirm Intel's adoption of Rambus in its newest processor. Technically, the chart is maximum positive MACD, momentum, stochastic and RSI. With the expectation of Intel's adoption coming, the strong chart and Friday's buying activity at $73, the dip could prove to be a buying opportunity. Nonetheless, RMBS is a volatile character, heavily influenced by Intel news. Friday's NASDAQ action was not inspiring either. As always, confirm market direction before playing and keep stops in place in case the trade moves against you. ***caution, some strike prices thinly traded BUY CALL JUN-70*BNQ-FN OI=431 at $10.13 SL=7.75 BUY CALL JUN-75 BNQ-FO OI= 7 at $ 7.75 SL=5.50 BUY CALL JUN-80 BNQ-FP OI= 8 at $ 5.63 SL=3.75 BUY CALL AUG-80 BNQ-HP OI=310 at $10.50 SL=8.00 BUY CALL AUG-85 BNQ-HQ OI=734 at $ 8.88 SL=6.75 Picked on May 16 at $74.88 PE = 262 Change since picked +0.00 52 week low =$ 35.50 Analysts Ratings 1-3-1-0-0 52 week high=$109.94 Last earnings 04/99 est 0.08 actual 0.06 surprise=-25% Next earnings 07-14 est 0.06 versus 0.07 Average Daily Volume = 1.1 mln. Chart = http://quote.yahoo.com/q?s=RMBS&d=3m ***** SQNT - Sequent Computer $13.69 (+1.12)(P3W+3.56) 70% of SQNT's sales come from Sequent's NUMA-Q technology, which provides a more efficient way of linking symmetric multiprocessing (SMP) technology, a technology in which their high-end open system servers are based. Internet business communications and on-line transaction processing are types of applications that call for the power and reliability that Sequent's systems provide. Prominent users of Sequent's products include Carlson Hospitality (cruises) and Boeing. Among others, they are allied with 3 of the big 4 software heavyweights, including Microsoft, Oracle and Sun (Digital Equipment), whom they also stated in yesterday's shareholder meeting was their biggest competitor. (Hmmm. . .who is the fourth one? IBM?) Slightly less than 50% of the company's sales are made internationally. There's nothing like a good old-fashioned rumor to pique the interest of a swash-buckling high-risk trader. To that end, we offer up this play on the rumor that SQNT will announce an alliance or an OEM agreement with IBM in the next 2 weeks. SQNT's products would certainly be a nice fit with IBM's e-commerce goals for the future (they are already working on a project to be delivered in 2000). Though the play could be a real winner, it also falls into the EXTREME RISK category. If the alliance or OEM agreement never happens, or is delayed, you could lose your money. Also, though it's been mentioned in the Yahoo! message boards, it isn't getting much play right now. However, lending some credibility to the rumor, volume has been unusually high. The point is that the rumor is unsubstantiated, making this an EXTREMELY RISKY play! There has been nothing in the news since May 10. BUY CALL JUN-10 SQQ-FB OI=271 at $4.25 SL=2.50 BUY CALL JUN-15*SQQ-FC OI=410 at $1.56 SL=0.75 Picked on May 16 at $13.69 PE = na Change since picked +0.00 52 week low =$ 5.69 Analysts Ratings 3-5-4-0-0 52 week high=$19.62 Last earnings 04/99 est 0.03 actual 0.03 Next earnings 07-23 est 0.08 versus -0.35 Average Daily Volume = 543 K Chart = http://quote.yahoo.com/q?s=SQNT&d=3m ***** IBM - IBM Corp. $239.25 (+22.00)(+8.06)(+9.44)(P4W+27.37) Anybody not know what IBM does? No? Good. Just in case, IBM is the granddaddy of the modern-day technology business. They develop, make and sell new technology, solutions, products including mainframes and PC's, computer services, software and finance all of it. Can't you just feel the love? As if awesome earnings, a 9% dividend increase, $3.5 bln. stock repurchase and a stock split due on May 26 were not enough. What could be better? How about 5 analyst reiterations or upgrades to "buy" or better, with new price targets of $260-$280. In analysts' and investors' eyes, IBM is on top of the world and can do no wrong. Thanks to this investor-induced, meteoric rise, it's also an easy target for profit taking and unfavorable news. Thursday, after jumping over $20 on more than twice normal volume following an IBM analyst conference, IBM gave back -$6.75 on 80% greater than average volume. The fact that it didn't lose more as the DOW staggered under its own weight is testimony to its relative strength. While the chart is maxxed out positive on every indicator, giving us every indication that it will continue its run, profits are quite juicy and ripe for a harvest. The only bad news is that there is no bad news, which tells us that the slightest hint of negativism can quickly take the wind out of IBM's sails. Keep your trailing stops set and confirm market direction before starting a new play. Just what's causing the euphoria? It can be boiled down to one thing. While slyly stating that IBM should not be considered an Internet company, Lou Gerstner, IBM's CEO speaking to analysts last week rattled off comments that the $82 bln. (sales) company garnered 25% of its revenue from e-commerce and booked more profits from e-commerce "than the top 25 Internet companies combined". Merrill Lynch analyst, Steve Mulunovich nails it for all investors when he states, "With 25 percent of revenue from e- business, IBM is becoming a quasi-Internet company". However, there appear to be no immediate plans to rename the company IBM.com. BUY CALL JUN-230 IBM-FU OI=1954 at $18.13 SL=14.25 BUY CALL JUN-240*IBM-FC OI=2267 at $12.50 SL= 9.75 BUY CALL JUN-250 IBM-FV OI=1507 at $ 8.13 SL= 6.25 BUY CALL JUL-240 IBM-GC OI= 934 at $16.13 SL=12.50 BUY CALL JUL-250 IBM-GV OI= 509 at $11.75 SL= 9.50 Picked on May 2 at $209.19 PE = 35 Change since picked +30.06 52 week low =$106.00 Analysts Ratings 13-7-4-0-0 52 week high=$246.00 Last earnings 04/99 est 1.41 actual 1.55 Surprise=9.9% Next earnings 07-20 est 1.75 versus 1.50 Average Daily Volume = 5.0 mln. Chart = http://quote.yahoo.com/q?s=IBM&d=3m ****** MCHP - Microchip Manufacturing Inc. $43.50 (-.83)(+9.31) Microchip Technology develops, manufactures and markets field programmable 8-bit microcontrollers, application-specific standard products (ASSPs) and related memory products for high-volume embedded control applications in the consumer, automotive, office automation, communications and industrial markets. They provide cost-effective field programmability for high-volume applications and believes that its PIC(R) product family is a price/performance leader in the worldwide 8-bit microcontroller market. MCHP had a slightly negative week, but showed great strength of Friday as the stock closed positive in a very negative market. There is some resistance at the $44 range and we would like to see a break above this level on strong volume. Though the overall semiconductor sector was week on Friday, there were several stocks in this sector that held pretty strong, MCHP being one of them. If this industry turns up again then MCHP should be a strong benefactor. However if the Nasdaq continues to sell-off, MCHP may not be able to hold up under the pressure. Play with caution. Like we mentioned Thursday, MCHP announced last week that orders are coming in strong and the trend looks very positive. Watch for any mid-day weakness as a possible buying opportunity. BUY CALL JUN-40 QMT-FH OI= 97 at $7.13 SL=5.25 ITM $3.50 BUY CALL JUN-45*QMT-FI OI=256 at $4.88 SL=3.25 BUY CALL JUL-45 QMT-GI OI=306 at $6.88 SL=4.75 BUY CALL JUL-50 QMT-GJ OI=305 at $4.88 SL=3.25 Picked on May 8th at $44.31 PE = 27 Change since picked -0.81 52 week low =$17.00 Analysts Ratings 7-4-2-0-0 52 week high=$45.13 Last Earnings 04/99 est .35 actual .36 Next Earnings 07-22 est .38 versus .31 Average daily volume = 641.5K Chart = http://quote.yahoo.com/q?s=MCHP&d=3m ***** CTXS - Citrix Systems, Inc $47.88 (+5.25)(+0.13)(+3.81)(P4W+7.75) Citrix provides application server products and technologies that allows networked computers to run Windows-based programs from a central server. This gives their clients effective and efficient management of their applications. Its WinFrame software is used by well-known companies such as Sears Tire Centers and Hewlett-Packard Europe. CTXS performed well advancing over 12% this week. On Monday, the stock gained $2.81 and broke through its proximate resistance at $43-44. It persisted through the next few days tacking on an additional $2.75. Friday's market pressure was a strain on this momentum play, but CTXS held its own. It shed -1.88 points but on relatively low volume. This is a good sign. CTXS is well above its 13 dma of $45 and it's less than 10 points away from overhead resistance at $53.75. This dip may be a sensible entry point to begin a new play, but look for a burst of volume and positive direction to confirm. Expect regular stock cycles. Two coveted "buy" ratings certainly helped set this stock off on the right foot Monday. Lehman Brothers and Hambrecht & Quist both reiterated their "buy" position on CTXS. Also, Michael Stanek, analyst for Lehman Brothers, set a 12-month target price of $63. BUY CALL JUN-45 XSQ-FI OI=962 at $5.88 SL=4.25 BUY CALL JUN-50*XSQ-FJ OI=775 at $3.88 SL=2.50 BUY CALL JUN-55 XSQ-FK OI=351 at $1.56 SL=0.75 BUY CALL SEP-50 XSQ-IJ OI=242 at $7.00 SL=5.25 BUY CALL SEP-55 XSQ-IK OI- 81 at $5.00 SL=3.25 Picked on April 25th at $38.69 PE = 46 Change since picked +9.19 52 week low =$23.12 Analysts Ratings 7-1-0-0-0 52 week high=$53.75 Last earnings 3/99 est= .14 actual= .28 Next earnings 7-20 est= .28 versus= .19 Average daily volume = 2.64 mln Chart = http://quote.yahoo.com/q?s=ctxs&d=3m ***** EMC - EMC Corp. $103.75 (+6.44) EMC can emcee your memory. EMC is the #1 maker (ahead of IBM) of mainframe computer disk memory hardware and software. The company makes RAID (redundant array of independent disks) memory storage and retrieval systems for larger mainframe computers as well as desktop PCs. EMC markets its memory products under the name Symmetrix. Other products let users manage remote data and share information across networks of different computers. EMC continues to broaden its product portfolio, strengthen alliances, and expand its global presence to create more platform-independent systems. (from Hoovers) EMC struggled the last few days of the week, but still managed to gain over $6 over the last five days. Unfortunately, we picked the stock at $107.25. The stock is still a prime candidate for a nice move. With a split scheduled for June 1st, and with any help from the market, EMC could see some nice gains. We do like the fact that EMC closed higher than it opened on Friday. Buyers finally stepped in late afternoon when the stock slipped to $102. Support should be at $100 with strong support at $95. On Rukeyser's show Friday night, Frank Cappiello of McCullough, Andrews & Cappiello, suggested Fridays drop could be a nice buying opportunity and that EMC is one stock he really likes going forward. We need to make sure the drop was just a blip in the road and not the beginning of a correction. Be patient, and wait for confirmation of a new move up. BUY CALL JUN-100 EMB-FT OI= 970 at $10.88 SL= 8.50 ITM $3.75 BUY CALL JUN-105*EMB-FA OI=1168 at $ 8.50 SL= 6.50 BUY CALL JUL-100 EMB-GT OI=2140 at $13.63 SL=10.75 ITM $3.75 BUY CALL JUL-105 EMB-GA OI= 857 at $11.25 SL= 8.75 Picked on May 11th at $107.25 PE = 54 Change since picked -3.50 52 week low =$ 40.19 Analysts Ratings 9-6-2-0-0 52 week high=$134.94 Last earnings 04/99 est 0.40 actual 0.41 Next earnings 07-22 est 0.48 versus 0.36 Average daily volume = 4.78 mln Chart = http://quote.yahoo.com/q?s=EMC&d=3m ***** KEA - Keane, Inc. $29.00 (+4.06) Keane, Inc. is in the software and programming business. It has two business units. One deals mainly with information services to help corporations and the government with software design, development, integration, and management issues. The other unit assists healthcare facilities develop financial, patient care, and clinical applications. Some of the company's clients include IBM, Microsoft, GE, the US Department of Justice, and Johns Hopkins Hospital. KEA has been on the move. It has been consistently gaining ground since mid-April when it announced its quarterly earnings. It matched the estimates and reported a 32% increase in net income. However, its co-president warned that 1999 results won't meet expectations due to the fact that the company's year-2000 services are declining faster than expected. By the time the news was out of the bag, investors had already sold off extensively and humbled KEA to its lowest point in two years. KEA now seems to be well on its way to recovery. What we have heard about KEA is that they have a growing number of repeat customers. Repeat customers mean a higher profit margin. The chart is a little ugly. The bottom in April can be interpreted as a double bottom or a single bottom depending on who is talking. We believe that this is a more conservative and slower moving plays. Confirm stock direction before playing. KEA's 200 DMA may be resistance at $34. Part of the rebound could be boosted by recent news of new insider buying in KEA. Both John Jr. and Brian Keane purchased thousands of shares as KEA hit its April lows. Which is always a good sign that management believes in the company's future. BUY CALL JUN-25*KEA-FE OI= 121 at $4.63 SL=2.75 BUY CALL JUN-30 KEA-FF OI= 671 at $1.69 SL=1.00 BUY CALL AUG-25 KEA-HE OI= 451 at $5.75 SL=4.25 BUY CALL AUG-30 KEA-HF OI=1345 at $3.25 SL=1.75 Picked on May 16th at $29.00 PE =21 Change since picked +$0.00 52 week low =$17.25 Analysts Ratings 2-12-4-0-0 52 week high=$60.94 Last earnings 04/99 est 0.32 actual 0.42 Next earnings 07-15 est 0.42 versus 0.36 Average Daily Volume = 753.3 K Chart = http://quote.yahoo.com/q?s=KEA&d=3m ***** SUNW - Sun Microsystems Inc. $64.63 (+6.57) Sun Microsystems, Inc. supplies enterprise network computing products. The Company's products include desktop systems, servers, storage subsystems, network switches, software, microprocessors, and a full range of services and support. Sun's products are used for many demanding commercial and technical applications in various industries located around the world. (from Bloomberg.com) SUNW had a very nice week, in spite of the Tech wreck on Friday. We are adding the stock for this very reason. On Friday, SUNW closed near its high of the day, and lost only $.56. There should be support, if needed, at the site of SUNW 10-dma and 50-dma at around $60. When two moving averages consolidate, it usually is a strong support line. SUNW did achieve a double top at about $66, so be aware of this resistance point. SUNW split in early April, and it seems the post split depression is behind us. Watch for confirmation, but SUNW looks poised to gain strongly with any help from the market. SUNW announced that they will unify their software divisions. The changes are necessary to help the company strengthen its efforts in the software market as it moves away from being known only as a midrange hardware vendor. No jobs are scheduled to be lost, but some employees might be re-deployed. This just shows the marketing that SUNW is putting out, that it is an Internet-software company, as much as it is a hardware supplier. BUY CALL JUN-60 SUQ-FL OI= 1541 at $7.50 SL=5.75 ITM $4.63 BUY CALL JUN-65 SUQ-FM OI= 3690 at $4.75 SL=3.50 BUY CALL JUL-65*SUQ-GM OI= 5534 at $6.50 SL=5.00 BUY CALL JUL-70 SUQ-GN OI=11397 at $4.50 SL=3.50 Picked on May 15th at $64.63 PE = 46 Change since picked +0.00 52 week low =$19.19 Analysts Ratings 9-9-4-0-0 52 week high=$72.50 Last earnings 04/99 est 0.35 actual 0.36 Next earnings 07-16 est 0.47 versus 0.37 Average daily volume = 14.5 mln Chart = http://quote.yahoo.com/q?s=SUNW&d=3m **** NEON - New Era of Networks Inc. $49.00 (+7.62) New Era of Networks, Inc. develops, markets, and supports application integration software and services. The Company's architectural platform provides a structured software platform for the integration and maintenance of disparate systems and applications. (from Bloomberg.com) We are adding NEON as a new call this week. The stock was very strong last week and bounced substantially of its lows on Friday. NEON built up a strong base at $34 in late April, early May and has since bounced strongly. A little profit taking is expected after close to a 50% gain in less than a month, but we feel the trend up will continue. The software industry has not done much of late, but seems poised to come back strong. Just hope the Nasdaq cooperates. Not much news on NEON lately, but the company was awarded a patent back on May 5th for its Rules Engine technology. This is the technology that runs its Enterprise Application Integration (EAI) products. BUY CALL JUN-45 QNO-FI OI=258 at $8.88 SL=7.00 ITM $4.00 BUY CALL JUN-50 QNO-FJ OI=192 at $6.50 SL=5.00 BUY CALL JUL-50*QNO-GJ OI=338 at $8.50 SL=6.75 BUY CALL JUL-55 QNO-GK OI=141 at $6.88 SL=5.25 Picked on May 15th at $49.00 PE = 96 Change since picked +0.00 52 week low =$11.50 Analysts Ratings 7-1-0-0-0 52 week high=$78.38 Last earnings 04/99 est 0.09 actual 0.11 Next earnings 07-22 est 0.11 versus 0.06 Average daily volume = 1.09 mln Chart = http://quote.yahoo.com/q?s=NEON&d=3m ************** NETWORKING & COMMUNICATIONS ************** TBH - Telecomunicacoes Brasileiras, SA $102.00 (+2.50)(+7.87) Telebras was a holding company for the telecommunications sector in Brazil. On September 21, 1998, the Company spun off its telecommunications businesses as 12 new holding companies. This security is a receipt which represents ownership in the 12 new companies. (Bloomberg.com) Monday's surge of 4.5 points propelled this Brazilian ADR over the $100 hurdle and the stock closed right near its daily high at $104. The rest of the week proved volatile. TBH offered intraday dips for solid entry points and on some days, daily highs reaching into in the $104-105 range. The stock has formed new support right around $100-101 and even in yesterday's downdraft, TBH never ducked below this comfort level. There is overhead resistance now at $104, but once through it TBH can shoot for its 52-week high of $127.93. Two major events took place in Latin America that sweetened up this play on Thursday. The Nations Central Bank cut the key market rate to 27% from 29.5% and the Brazilian GDP 1Q measurement came in at a higher-than-expected 1.02%. Benchmark Telebras responded well to this news. But remember, this is a momentum play, confirm direction and volume before opening a new position. BUY CALL JUN-100 TBH-FT OI=3857 at $7.63 SL=6.00 BUY CALL JUN-105*TBH-FA OI=4478 at $5.00 SL=3.25 BUY CALL JUN-110 TBH-FB OI=2389 at $2.94 SL=1.50 BUY CALL JUL-105 TBH-GA OI= 683 at $6.88 SL=5.25 BUY CALL JUL-110 TBH-GB OI=1926 at $4.88 SL=3.25 Picked on May 9th at $99.50 PE = 8 Change since picked +2.50 52 week low =$50.12 Analysts Ratings N/A 52 week high=$127.93 Last earnings N/A Next earnings N/A Average daily volume = approximately 1.7 mln Chart = http://quote.yahoo.com/q?s=tbh&d=3m ***************************** PLAYS CONTINUED IN SECTION FOUR. ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 5-16-99 Sunday 4 of 6 ************** NETWORKING & COMMUNICATIONS - continued ************** LU - Lucent Technologies, Inc $58.50 (+0.75)(-2.25)(+1.75) Lucent Technologies is the world's largest telecommunication equipment and software maker. They are a spin-off of AT&T. Lucent furnishes wireline and wireless access, local, long distance, and international voice, data and video services and even cable. AT&T presently accounts for about 15% of Lucent's sales. Lucent gave us hope the previous Friday that it could climb back up towards its recent high of $67. Well the stock didn't let us down and by Tuesday was closing above the $60 mark. On Wednesday and Thursday LU was butting heads with its resistance in $62-63 range trying to reach for that brass ring. Unfortunately Friday was its own entity. The negative pressure of the market did effect the stock and it gave up -2.50 points at the finish. Nonetheless, LU managed to close off its lows and a couple of points above its support at $56. Hambrecht & Quist showed their confidence in Lucent stock on Friday and started new coverage with a "buy" rating. Also, rumors are resurfacing and Lucent Technologies, along with Sweden's Ericsson, are again being named as possible buyers of 3COM (the world's 2nd largest networking company behind Cisco). Either company would reap great benefits from 3COM's leading edge technology in voice and data transfer. BUY CALL JUN-55 LU-FK OI= 1270 at $5.88 SL=4.25 BUY CALL JUN-60*LU-FL OI= 3189 at $3.13 SL=1.50 BUY CALL JUN-65 LU-FM OI= 4265 at $1.44 SL=0.75 BUY CALL JUL-60 LU-GL OI=11654 at $4.63 SL=3.00 BUY CALL JUL-65 LU-GM OI=14822 at $2.75 SL=1.50 Picked on May 2nd at $60.00 PE = 80 Change since picked -1.50 52 week low =$26.68 Analysts Ratings 9-13-9-0-0 52 week high=$67.00 Last earnings 3/99 est= .15 actual= .17 surprise= 13.33% Next earnings 7-22 est= .23 versus= .16 Average daily volume = 14.1 mln Chart = http://quote.yahoo.com/q?s=lu&d=3m ***** NXTL - Nextel Communications Inc. $38.31 (+1.94) NXTL provides a wide array of digital and analog wireless communications services primarily to the business users. The company also operates analog wireless networks which provide analog specialized mobile radio ("SMR") services. NXTL's digital network is developed to replace traditional analog SMR systems with advance mobile communication systems using digital technology. The services of the company are provided principally in metropolitan markets throughout the United States. The company also owns and operates wireless communications systems in Latin America, Asia and Canada and provide services in ten of the world's 25 largest cities. (from StockSmart.com) NXTL is part of a booming telecom industry and recently announced an agreement with software giant Microsoft. The deal is that Microsoft will buy $600 million in NXTL stock and NXTL will develop a wireless Internet connection using the MSN portal. This comes after rumors were extinguished that MCI WorldCom was interested in buying NXTL. NXTL stayed in a very narrow range on Friday, and looks ready to trend higher, market permitting. This industry has a lot of future growth and NXTL seems to have positioned itself well for the future. There also is a possibility that another company might step up and want to purchase the company. Last Wednesday, SoundView raised its 6-month target price to $45 and raised the stock to a strong buy. BUY CALL JUN-35 FQC-FG OI=2773 at $5.00 SL=3.75 ITM $3.31 BUY CALL JUN-40*FQC-FH OI=2583 at $2.38 SL=1.25 BUY CALL AUG-35 FQC-HG OI=1984 at $6.88 SL=5.50 ITM $3.31 BUY CALL AUG-40 FQC-HH OI=7563 at $4.38 SL=3.25 Picked on May 15th at $38.31 PE = 96 Change since picked +0.00 52 week low =$15.38 Analysts Ratings 10-6-6-0-0 52 week high=$42.50 Last earnings 04/99 est -1.43 actual -1.37 Next earnings 07-15 est -1.35 versus -1.45 Average daily volume = 4.64 mln Chart = http://quote.yahoo.com/q?s=NXTL&d=3m ****** TV - Grupo Televisa, S.A. $46.69 (-2.19)(+7.88) Grupo Televisa is the largest Spanish-language media company in the world. 60% of its revenues come from its TV businesses. However, the company also produces and broadcasts radio programming, music records, and feature films. It promotes sports and special events, provides outdoor advertising services and publishes magazines and newspapers as well. Two weeks ago, TV added an incredible +$7.88. This past week TV settled back some by losing -$2.19. We feel that this is simple profit taking. When the markets sold off on Friday, TV initially fell to as low as $45.50. However, as the day progressed, TV started to pair its losses. Even though it lost -$0.81, TV actually closed at its high for the day. It seemed to be making a come back as shown on its intraday chart. We see this is a positive sign. However, we would still like to see TV close with a gain before feeling comfortable that its next run has begun. News: Salomon Smith Barney increased their 12 month price target for TV to $61, up form the previous $38. BUY CALL JUN-45*TV-FI OI= 538 at $4.25 SL=2.75 BUY CALL JUN-50 TV-FJ OI=2608 at $1.81 SL=1.00 Picked on May 9th at $48.88 PE = 42 Change since picked -$2.19 52 week low =$14.88 Analysts Ratings 2-4-0-0-0 52 week high=$50.13 Last earnings 04/99 est 0.62 actual 0.02 Next earnings 10-01 est -0.06 versus -0.57 Average Daily Volume = 500.9 K Chart = http://quote.yahoo.com/q?s=TV&d=3m ********** FINANCIAL ********** COF - Capital One Financial Corp. $169.56 (+0.28)(-4.31)(+9.44) Capital One is a financial holding company for Capital One bank F.S.B., one of the top 10 credit card companies in the US. COF advertises to its Visa and MasterCard customers over 3,000 combinations of annual percentage rates, credit limits, finance charges, and fees that are available on several of its different credit cards. As you probably well know, it often solicits by mail. COF was working like a well oiled machine. It even set a new all time high of $180.75 on Thursday. Step in the Consumer Price Index. Investors interpreted the numbers as way too high and threw a wrench in the engine. As a result, the financials sold off like mad. COF was hit for an -$8.50 loss. In Thursday's write up, we suggested setting those stop losses tight to protect those profits and warned that a pullback could be around the corner. Unfortunately, we were right on the money with the prediction. The sell-off was fast and furious. Hopefully, you heeded our advice and got stopped out. If not, it was a hard lesson learned. USE YOUR STOP LOSSES! If you are still holding positions, the sell-off may not be over. The Fed meets on Tuesday. Although we don't feel they will raise rates at this time, the Fed can still put a negative bias in the air. However, for those of us waiting to buy on the dip, this could be our chance. COF is one of the few financials with a reason to recover. COF will split 3:1 on June 2nd. Although the financials may head lower in the next few days, we feel that COF could still make a split run into June 2nd. Pick your entry point carefully. No new news. BUY CALL JUN-165 COF-FM OI=188 at $16.13 SL=12.50 BUY CALL JUN-170*COF-FU OI=397 at $13.88 SL=11.25 BUY CALL JUN-175 COF-FV OI=201 at $10.63 SL= 8.75 Picked on May 2nd at $173.69 PE = 41 Change since picked -$4.13 52 week low =$ 51.75 Analysts Ratings 11-6-1-0-1 52 week high=$180.75 Last earnings 04/99 est 0.96 actual 1.18 Next earnings 07-16 est 1.23 versus 0.96 Average Daily Volume = 443.4 K Chart = http://quote.yahoo.com/q?s=COF&d=3m ***** DLJ - Donaldson, Lufkin & Jenrette, Inc. $72.75 (+6.88) DLJ is one of the top investment firms in the United States. It is primarily involved with investment and merchant banking, providing funding for companies through direct investment, and managing/underwriting securities. DLJdirect is considered one of the top online brokerages. DLJ is 70% owned by The Equitable Companies. We are initiating coverage of DLJ as one of our call plays. Yep, that's right- a call. We feel that investors over-reacted on Friday to the Consumer Price Index numbers. The Fed meets on Tuesday but we are betting that they won't raise rates, yet. One indicator usually isn't enough for a rate hike. However, you just never know! In any case, we feel that this is the dip to buy. Keep your eye on DLJ and look for the first signs of life. It may not come until Thursday. Monday could be a ho-hum day without much action. Tuesday could be full of volatility. The day after a Fed meeting is usually down (but we hope to break that pattern this week). Thursday could be the day. Use caution with this play and definitely wait for both the markets and DLJ to move higher. No new news, but support is at $70 and strong support at $60. BUY CALL JUN-70*DLJ-FN OI=291 at $ 8.75 SL=6.75 BUY CALL JUN-75 DLJ-FO OI=936 at $ 6.50 SL=4.75 BUY CALL JUL-70 DLJ-GN OI=125 at $11.50 SL=9.50 BUY CALL JUL-75 DLJ-GO OI=135 at $ 9.13 SL=6.75 Picked on May 16th at $72.75 PE = 29 Change since picked +$0.00 52 week low =$ 20.38 Analysts Ratings 0-2-4-0-0 52 week high=$100.75 Last earnings 04/99 est 1.00 actual 0.84 Next earnings 07-14 est 0.82 versus 1.05 Average Daily Volume = 642.4 K Chart = http://quote.yahoo.com/q?s=DLJ&d=3m ***** SWS - Southwest Securities Group, Inc $65.69 (+12.13) Southwest Securities Group is a Dallas-based holding company that provides transaction processing, investment banking, brokerage, and asset management support. Its clients include individuals, corporations, and even municipalities. I bet quite a few of you have heard of Mydiscountbroker.com - its a subsidiary of SWS too. The investment banking end of the group is primarily focused in the southwestern US and is geared towards governments and corporations. The company also provides computer processing and programming services as SWST Computer Corporation. SWS spike ahead this week increasing its share price by over 22% in very heavy trading. Monday it tacked on a notable +4.5 and followed up the next two days by adding on another +3.5 points. Thursday SWS put on the glitz. It hit $69.13 by lunchtime to set a new $52-week high and persisted in keeping almost all of its gains to close $7.19 in the black. The stock had found support at the beginning of May around $52-54. But that mark is now in the shadows. There's no real resistance ahead. SWS did take a step back on Friday (-3.06). However, it's likely a result of the negative market pressure and of course, necessary profit-taking. The play caught our eye because of the real lack of true profit taking on Friday. Considering the strength of its recent run up, traders could have hammered it on Friday but did not. Nevertheless, stocks move in cycles. Please confirm direction before you initiate a new play and remember, stop losses are a wonderful thing. Besides the increasing volume of the past weeks, the surge on Monday may have been spurred on by company news events. For the 3rd consecutive year, SWS announced they would pay a 10% stock dividend to its shareholders on August 2nd. According to CEO, David Glatstein, this will "help increase market liquidity and broaden the shareholder base". Also, SWS reported they will invest $40 mln to expand Mydiscountbroker.com using shares of Knight/Trimark (NITE). The funds will not be taken out of SWS earnings, but instead small amounts of NITE stock will be sold on an as needed basis. And more recently, this Thursday the company pledged that they will offer Mydiscountbroker.com clients access to IPO's via Wit Capital by the 3Q 1999! BUY CALL JUN-60 SWS-FL OI=263 at $11.25 SL=9.00 BUY CALL JUN-65*SWS-FM OI= 68 at $ 8.63 SL=6.50 BUY CALL JUN-70 SWS-FN OI= 68 at $ 6.50 SL=4.75 BUY CALL SEP-70 SWS-IN OI= 53 at $11.88 SL=9.50 Picked on May 16th at $65.69 PE = 28 Change since picked +0.00 52 week low =$15.62 Analysts Ratings 1-0-0-0-0 52 week high=$69.13 Last earnings 3/99 est= .59 actual= .70 surprise= 18.64% Next earnings 8-3 est= .60 versus= .50 Average daily volume = 292.3K Chart = http://quote.yahoo.com/q?s=sws&d=3m ***** CB - Chubb Corporation $74.13 (+3.82) Chubb Corporation is a holding company with three subsidiaries that provide property and casualty insurance, life and health insurance, and real estate investments. It operates more than 110 offices in 30 countries worldwide. For fiscal 1998, Chubb saw a 5% decrease in revenues and an 8% decrease in income due to a restructuring charge, increased insurance claims, and the sale of some real estate properties. This year is already looking better, however. Chubb spent over 2 months in a very narrow trading range right around $60/share, but, after its 1st quarter beat earnings estimates of $.99/share by $.03 on April 27th, CB broke out of its trading range, and it has climbed $10.00 in price in the last 2 weeks. Investors are happy to see Chubb back on track. Even on Friday, when the market reacted badly to renewed inflation fears, CB only lost $1.81. We see that as a sign of strength. It had been up the previous 5 days in a row, and was probably due for a down day or 2 anyway. Technically, the stock looks great and momentum is still building. Resistance is way up at $88.81, its 52-week high. Friday's dip represents an entry point, unless the whole market gets hurt with bad financial news. This stock should resume its climb, especially if investors are reassured after Tuesday's FOMC meeting. Don't rush in, but pick your entry point carefully. Is this your dip to buy? BUY CALL JUN-70 CB-FN OI=112 at $5.88 SL=4.00 BUY CALL JUN-75*CB-FO OI=103 at $3.38 SL=1.75 BUY CALL JUL-70 CB-GN OI=337 at $7.13 SL=5.50 BUY CALL JUL-75 CB-GO OI=234 at $4.00 SL=2.50 Picked on May 16th at $74.13 PE = 18 Change since picked +$ 0.00 52 week low =$54.00 Analysts Ratings 4-3-7-0-0 52 week high=$88.81 Last earnings 3/99 est 0.99 actual 1.02 surprise=+03% Next earnings 07-27 est 1.05 versus 0.90 Average daily volume = 911.5 k Chart = http://quote.yahoo.com/q?s=cb&d=3m ***** Misc ***** BA - Boeing Company $43.00 (-2.61)(+5.13) Boeing is the world's leading maker of commercial jet airplanes. After acquiring McDonnell Douglas (the world's #1 military aircraft maker) in 1997, BA became the #1 aerospace company too. Boeing now designs and manufactures jets, military aircraft, helicopters, and space and missile systems. On Thursday, we suggested waiting for BA to post another gain before initiating any new plays. Even though BA only added +$0.19 in trading on Friday, we considered the move as encouraging. The overall markets had a terrible day. The DOW had been down over -200 points before finally closing down -193.87. Few stocks managed to finish in the green as decliners far outweighed the advancers. In light of the circumstances, it was re-assuring to see BA up for the day. BA might have held firm due to its efforts to be cost effective. Greece recently announced that it would be going with Lockheed Martin's fighter planes instead of BA's F-15 planes. On Friday, mainly as a result of Greece's decision, BA announced that it will cut up to 7,000 jobs by mid-2001. Although it is sad to see people lose their jobs, it is good that BA is committed to cutting out what is not needed. At this point, earnings are still in line for the next quarter. Look for BA to edge higher but make sure to confirm market and stock direction first. News: Israel could possibly decide whether to go with Lockheed Martin planes or Boeing's models as early as this week. The decision is still "up in the air." BUY CALL JUN-40 BA-FH OI= 725 at $4.13 SL=2.50 BUY CALL JUN-45*BA-FI OI=2522 at $1.25 SL=0.00 BUY CALL AUG-40 BA-HH OI=9070 at $5.25 SL=3.75 BUY CALL AUG-45 BA-HI OI=5237 at $2.50 SL=1.25 Picked on May 9th at $45.75 PE = 27 Change since picked -$2.75 52 week low =$29.50 Analysts Ratings 4-7-13-0-0 52 week high=$52.38 Last earnings 04/99 est 0.05 actual 0.50 Next earnings 07-23 est 0.48 versus 0.26 Average Daily Volume = 3.57 mln Chart = http://quote.yahoo.com/q?s=BA&d=3m ****** ROK - Rockwell International $62.88 (+4.25)(+7.00)(P4W+9.44) Once a defense industry giant before selling off its defense division to Boeing, Rockwell is now one of the largest industrial automation companies in the world. They make power transmission products, programmable logic controllers, industrial motors and worker-machine interface devices. In addition, they also manufacture avionics, global positioning, flight control and cockpit display equipment. They also designed the previous generation 56K flex modem technology through their semiconductor unit, which was sold off as Conexant, now the world's largest maker of DSL chips. This is a technical momentum play born of sector rotation into cyclical stocks, which began in mid-April. In short, ROK is a beneficiary of the perception of worldwide economic recovery. It's not a fast mover and offers a bit more stability than a technology play. Technical indicators are all in maximum positive territory telling us that ROK likely has room to run, market willing. It's particularly impressive that ROK closed at a new 52-week high, just $0.12 of its intra-day high of $63.00, while the rest of the market crumbled around it. Daily trading volume of almost double the daily average is driving the price. If volume dries up or falls back to the average, that's a clue that demand, and thus price gains may soon cease. Use stops to protect profits and confirm stock direction before playing. Thursday, ROK released its 10Q showing income from continuing operations, up 17% over same quarter last year from $122 mln. to $143 mln. Otherwise, price-moving news is scarce on ROK. BUY CALL JUN-60*ROK-FL OI=100 at $4.75 SL=3.00 BUY CALL JUN-65 ROK-FM OI= 14 at $2.19 SL=1.00 BUY CALL JUL-60 ROK-GL OI= 44 at $5.63 SL=3.75 BUY CALL JUL-65 ROK-GM OI= 50 at $3.13 SL=1.50 Picked on May 2 at $58.63 PE = na Change since picked +4.25 52 week low =$32.12 Analysts Ratings 0-5-6-0-0 52 week high=$63.00 Last earnings 04/99 est 0.71 actual 0.74 Surprise=4.23% Next earnings 07-20 est 0.75 versus 0.45 Average Daily Volume = 480 K Chart = http://quote.yahoo.com/q?s=ROK&d=3m ***** PEP - PepsiCo, Inc. $38.19 (+1.44) PepsiCo makes, markets, and sells soft drinks like Pepsi-Cola, Mountain Dew, and Slice which account for one third of the company's sales. Known mostly for its soda, it may be hard to believe that now over half of Pepsi's sales come from Frito-Lay, the #1 snack maker in the world. Every time you dig into a bag of Fritos, Doritos, Lay's or Ruffles, think of Pepsi. Aquafina bottled water, All Sport, Lipton, Rold Gold pretzels, Grandma's cookies, and Tropicana orange juice are also some of Pepsi's products. Pepsi's strength on Friday caught our attention. As the markets crumbled, Pepsi was one of the few companies that managed to finish the day of trading with a gain. We are now adding Pepsi as a "conservative" call. By looking at its graph, it doesn't look particularly steady. PEP likes to move up and down, up and down. So why are we adding it? Star Wars. "Three years ago, PepsiCo signed a multi-year deal with Lucasfilm Ltd. to secure promotional tie-ins for the Star Wars films." (-The Motley Fool) Pepsi paid $2 billion for the exclusive use of Star Wars characters on its products worldwide. Pepsi is planning to use Star Wars hype to boost its sales. Back on April 22nd, Pepsi beat First Call predictions by a penny with its better than expected earnings. We feel that PEP has the opportunity to beat the estimates again when it reports its next quarter's numbers on July 16th. Star Wars opens on Wednesday May 19th. As the excitement increases, so may PEP. Check out a ten day graph. Tuesday looks like a clear reversal and Friday showed no weakness. Don't be greedy, only aim for a reasonable profit. ITM options have a higher Delta and thus might present an attractive play on a slower mover. Remember nothing is immune if the market really decides to profit take! BUY CALL JUN-35 PEP-FG OI= 276 at $3.63 SL=1.75 BUY CALL JUN-40 PEP-FH OI=1481 at $0.88 SL=0.00 BUY CALL JUL-35*PEP-GG OI=2371 at $4.25 SL=2.75 BUY CALL JUL-40 PEP-GH OI=3797 at $1.38 SL=0.00 Picked on May 16th at $38.19 PE = 30 Change since picked +$0.00 52 week low =$27.56 Analysts Ratings 9-8-1-1-0 52 week high=$43.75 Last earnings 04/99 est 0.25 actual 0.00 Next earnings 07-16 est 0.29 versus 0.29 Average Daily Volume = 3.81 mln Chart = http://quote.yahoo.com/q?s=PEP&d=3m ***** ETH - Ethan Allen $54.38 (+2.88) Ethan Allen designs, manufactures, and sells home furnishings. With over 300 stores, 21 plants, and 3 sawmills with 10,000 employees, it controls its products from start to finish. This is a short split play. Home construction has been booming for some time and people need furniture to put in those new homes and additions. Ethan Allen is benefiting from this need, but it has taken other steps to improve its business, too. It has relocated and opened new stores, and it is responding to consumers changing tastes in style. It has also reduced debt and increased advertising. These steps have paid off and on April 14th, ETH reported earnings of $.76/share, beating estimates of $.73 and topping 1998's 3rd quarter by $.12. The stock took off on the strong earnings and 2 weeks later, ETH declared that it would split 3:2 on May 21st with an ex-date of May 24th. The board also approved a 50% increase in its cash dividend. Friday's dip gives a chance to play this one. While it is a short play, you should still use caution ahead of Tuesday's FOMC meeting and the current Inflation climate. Higher interest rates would hamper consumers' ability to borrow the necessary money to pay for home furnishings. Housing starts are released the same morning. Very Aggressive players can play MAYs since we don't recommend holding over a split. BUY CALL JUN-50 ETH-FJ OI= 21 at $6.00 SL=4.25 BUY CALL JUN-55*ETH-FK OI=112 at $3.13 SL=1.50 BUY CALL AUG-50 ETH-HJ OI=108 at $7.75 SL=6.00 BUY CALL AUG-55 ETH-HK OI= 65 at $4.88 SL=3.00 Picked on May 16th at $54.38 PE = 19 Change since picked +$ 0.00 52 week low =$23.63 Analysts Ratings 3-7-1-0-0 52 week high=$54.25 Last earnings 3/99 est 0.73 actual 0.76 surprise=+04% Next earnings 08-06 est 0.77 versus 0.68 Average daily volume = 208.3 k Chart = http://quote.yahoo.com/q?s=eth&d=3m ***************** PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **************** MSPG - MindSpring Enterprises, Inc. $83.00 (-5.00)(-8.93)(-11.31) MindSpring is now the fourth largest Internet service provider behind only AOL, the Microsoft Network, and AT&T. Not bad company to be ranked against! MSPG has boosted its standings by making several acquisitions. The company now has more than one million subscribers. MSPG focuses on serving individual users and small businesses through dial-up Internet access and business services. Thank-you markets. Puts can be wonderful in times of market insanity. MSPG continued its descent on Friday as investors fled the markets. From looking at a 10 day chart for MSPG, it looks like MSPG could head lower. However, it seems to have some support at the $80 level. Please set those stop-losses in case the turnaround comes sooner. It is a horrible feeling to lose hard earned money when it could have been avoided by setting a simple stop loss. No new news. BUY PUT JUN-85 MQD-RQ OI=113 at $11.50 SL=9.50 BUY PUT JUN-80*MQD-RP OI=288 at $ 8.63 SL=6.50 Average Daily Volume = 1.35 mln Chart = http://quote.yahoo.com/q?s=MSPG&d=3m **** AXP - American Express $120.75 (-13.94) American Express is one of the oldest travel and financial services companies in the U.S. It deals in credit cards, Travelers cheques, financial planning, travel, small business products and services, insurance and international banking. The company is broken into three segments to separate their diversified product line. Travel Related Services (TRS), American Express Financial Corporation (AEFC), and American Express Bank. The stock is also a component of the Dow Industrials. Friday's announcement of a larger than expected rise in CPI numbers caused a sell-off in the bond market. Maybe inflation is looming around the corner! This in turn caused financials to be sold due to higher interest rates. Just what we were counting on to open a new play. AXP hit a low of $119 before closing at support around $120. This is the support level that we mentioned Thursday. At this point, you should tighten up your stops to lock in profits and wait for the market to confirm direction on Monday. The FOMC meets to decide on interest rates on Tuesday so we would expect see lots of volatility ahead of the announcement. BUY PUT JUN-125 AXP-RE OI=156 at $8.75 SL=6.50 BUY PUT JUN-120*AXP-RD OI=507 at $5.75 SL=4.00 Average Daily Volume = 1.57 mln Chart = http://quote.yahoo.com/q?s=AXP&d=3m **** BVSN - Broadvision $46.50 (-1.50)(-10.06) 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 failed to hold on to support established earlier this week and ended lower. The stock had created support around $47 after holding that level twice before moving higher. But the Internet group is still lagging, causing most stocks in the sector to break support lines. This creates opportunities to open plays on the underperformers such as BVSN. The key to success here is choosing entry points on the rallies and using stops to lock in profits once its fallen. BVSN didn't have any meaningful news to trade on this week and volume has been light as investors abandon the stock. The technical pattern in place is calling for more dips until Broadvision can establish a bottom. Pick your entry point carefully. BUY PUT JUN-40*QVB-RH OI=1748 at $3.50 SL=1.75 BUY PUT JUN-45 QVB-RI OI= 96 at $5.62 SL=3.75 Average Daily Volume = 446 K Chart = http://quote.yahoo.com/q?s=BVSN&d=3m **** SEEK - Infoseek Corp. $47.94 (-3.18)(+.06) Infoseek develops and services Internet software products and services. The company provides Web-based navigational services that helps users access resources on the Internet. They produce the GO network and the Infoseek Service comprehensive gateways. They combine content from search and navigational capabilities, directories of relevant information and content from media leaders. They also produce Internet sites in a joint venture with Disney such as ESPN and ABCNEWS. What a difference a week makes. SEEK has returned to its down trend as the upgrade from Warburg Dillon last week has worn off. The stock has had little in the way of news recently and been left to trend with the sector. SEEK traded in a fairly tight range today, holding just above support. We are watching the $46 to $47 dollar level as having potential support due to the 200-dma. Tighten up your stops in case we get an Internet rebound. But we expect SEEK to fall through and initiate a new down move. Its anyone's guess from there how low it may go before bottoming. BUY PUT JUN-50 QI-RJ OI=497 at $6.75 SL=4.50 BUY PUT JUN-45 QI-RI OI=288 at $4.12 SL=2.50 Average Daily Volume = 2.33 mln Chart = http://quote.yahoo.com/q?s=SEEK&d=3m ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 5-16-99 Sunday 5 of 6 ******* PUTS - Continued ******* TBFC - Telebanc Financial Corp $92.25 (-.88)(-4.88) Telebank is the largest electronic bank in the U.S. that has no tellers and no branches. The company does most of its transactions over the Internet, along with phone and mail interaction with their customers. The bank's loan portfolio is made up primarily of fixed-rate and adjustable mortgages. At the company's Web site, you can open accounts, transfer between accounts, pay bills and view balances. Customers can also access over 430,000 ATMs worldwide. Telebank also sells insurance products, CDs and investment advice through their site. TBFC took us on a roller coaster ride this week before settling out lower due to interest rate worries. The stock traded up to the top of the current range just above $100 before faltering late in the week thanks to the stronger than expected CPI. Trading was volatile Friday as TBFC produced an intra-day move of more than seven points. We still expect to see further entry into their online banking model as being inevitable. Competitors have seen the success of TBFC and are anxious to adopt their own version. COF could be the next to make such an announcement. Technical indicators are still pointing to the 50-dma at $82 to be the next support. Confirm market direction on Monday before opening new plays and watch out for a rally if the FOMC leaves rates unchanged on Tuesday. Caution! Option volume is getting low. Traders are playing reckless with the MAYs. JUNE options are expensive. BUY PUT JUN-95 TFU-RS OI= 8 at $19.25 SL=15.00 BUY PUT JUN-90*TFU-RR OI=57 at $15.75 SL=12.25 Average Daily Volume = 347 K Chart = http://quote.yahoo.com/q?s=TBFC&d=3m ******** NEW PUTS ******** VO - Seagram Company LTD $54.00 (-5.38) Seagram is a Canadian company made up of two primary business segments: drinks and entertainment. Seagram produces and markets distilled spirits, wines, coolers, beers, and mixers in over 190 countries and territories. Through its Universal Studios, VO produces and distributes recorded music, home entertainment videos & television, and motion pictures. Seagram also operates theme parks and retail stores. News of the company's plan for a $2.5 bln secondary offering didn't go over very well with investors yesterday. Shareholders couldn't dump VO stock fast enough. The stock plummeted $4.56 (8%) in very heavy trading. Coupled with the negative market pressure and the consumer sector starting to rollover, VO is lucky to have survived at all. Overall, VO has been in a tight trading range of $58-60 all month. The breakout on Friday was sharp and distinctive. The technicals MACD, MOM, and STO are all in downtick mode and the stock is perched right on its 50 dma. On Monday, watch for stock direction and market sentiment for confirmation before you open a new position. It is possible that we might get a small technical bounce off its 50 dma considering the 8% drop. However, if it breaks down (past its 50 dma) then the drop could be substantial. BUY PUT JUN-55*VO-RK OI=843 at $3.63 SL=2.00 BUY PUT JUN-60 VO-RL OI=279 at $7.13 SL=5.50 Average daily volume = 1.08 mln Chart = http://quote.yahoo.com/q?s=vo&d=3m **** GM - General Motors Corp $83.13 (-3.50) General Motors is the #1 manufacturer of cars and trucks in the world. They design, build, and market vehicles under the brand names Chevrolet, Buick, Cadillac, Oldsmobile, Pontiac, Saturn, and GMC. If you need financing or insurance for that new car or truck, GMAC is there to take care of those details. And if you need a new part, GM runs the world's #1 auto parts company through Delphi Automotive Systems. They even design and manufacture locomotives and heavy-duty transmissions. The sharp rise in the Consumer Price Index for April set the stage. Amid fears of rising inflation and possible hikes in the interest rates, GM spiked down -2.88 points on Friday. The drop pushed the stock right out of its newly found support of $85-87. GM is now situated about half way between its 50 and 200 dma and other technical indicators are negative. The Fed meeting is next week and the apprehension about its outcome may drive GM down a little farther. In other words, this is a quick play. Grab a couple points and get out. BUY PUT JUN-80*GM-RP OI=2463 at $2.81 SL=1.50 BUY PUT JUN-85 GM-RQ OI=2082 at $5.13 SL=3.25 Average daily volume = 2.29 mln Chart = http://quote.yahoo.com/q?s=gm&d=3m *********************************************************** Combos *********************************************************** Inflation Fears Dominate U.S. Markets... Friday, May 14 U.S. markets crumbled Friday after a consumer prices report sent investors scurrying for the exits on fears that the Fed may raise interest rates to head off inflationary pressures. The Dow ended down 193 points at 10,913; the third-biggest loss this year. The Nasdaq index of technology stocks fell 54 points to 2,527. In the broader market, declining issues led advances almost 4-to-1 on active trading of 727 million shares on the NYSE. Thursday's new plays (positions/prices): CSE JUN35C/JUN40C $3.25 debit (unable to achieve target) EGRP MAY95C/MAY105C $6.00 debit (dropped $7 at the open) KEY JUN30C/JUN35C $3.75 debit (slightly below our target) The market tumble took EGRP down significantly at the open and with the initial debit reduced by $1.50, we jumped at the discounted opportunity. In the end, it didn't help much as EGRP closed almost as low as it opened. KEY also dropped along with the financials but the entry price was basically unaffected. CSE was a big mover, gapping up $2 as speculation continued on the merger. We were unable to achieve the target debit and had to settle for a slightly higher entry price. Portfolio plays: Shares of COMS surged $2 Friday as takeover talk resurfaced. This time some new suitors are emerging and potential acquirers include Ericsson and Lucent. Even with today's volatility, our long-term calendar spread is still trading at a small credit. We decided to hold the current positions because we think the hype is once again overdone. A simple buy-to-close STOP on the short option will protect our position unless the stock 'gaps' on news of a buy-out. CNTO made a small recovery from its recent slump and our buy-back on the June call adjusted the overall cost of the play to $3.38. We will try to sell a new short option as the stock recovers. TXN made a nice move back into the middle of our credit strangle and that play should easily hold up through next week. The option premiums have eroded enough to allow the play to be closed early for a small profit, if you want to avoid the stress of 'strike week'. Next Sunday we will publish the monthly summary of current spread and combination positions. Good Luck! ****************************************************************** - NEW PLAYS - Competition is fierce in the hi-technology sectors and mergers continue to flood the telecommunications industry as companies attempt to gain infrastructure and maintain market share. The short-term option premiums in these speculation plays are almost always inflated and we can use the disparities in various series to enter favorable positions at a lower cost basis. ****************************************************************** SKYT - Skytel $20.87 *** Merger/Takeover *** SkyTel is a leader in wireless messaging and is moving toward true nationwide messaging through a series of innovations that culminated in SKYT's two-way interactive messaging service. This enables customers to exchange messages with the Internet and other pagers, receive messages via email and send messages to any telephone in the United States. The company recently announced a new nationwide wireless email product for customers who send and receive large amounts of information. Another new agreement, with Internet auctioneer eBay, involves a service allowing eBay users to receive auction updates over pagers, cell phones and personal digital assistants. Skytel has been the subject of periodic takeover rumors in the past and we have played this stock with volatility spreads for the last few months. Recently, Warburg Dillon Read was hired to help SKYT evaluate 'strategic alternatives' and the rumors just started all over again. Implied volatility surged & call option volume increased last week with a slight bias to the buy side. We favor the company as a long-term telecom issue and the merger speculation should continue until something actually happens. A disparity in the front-month options will allow us to enter a conservative, slightly bullish position at small discount. PLAY (conservative/calendar spread): BUY CALL SEP-22.50 MMQ-IX OI=276 A=$3.87 SELL CALL MAY-22.50 MMQ-EX OI=1777 B=$1.12 INITIAL NET DEBIT TARGET=$2.50 TARGET ROI=100% Note: In the long-term calendar spread, we are reducing the net cost of the long option by the amount of credit from the sale of the nearer-term option. If the near-term call expires worthless, we will sell the June call to further reduce our debit. In most cases, if the short-term position is ITM on the last day of the strike, you need to buy it back to avoid being exercised. Your long position 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 there is a good possibility you will be ahead in the play even after you buy it back. Chart = http://quote.yahoo.com/q?s=SKYT&d=3m ****************************************************************** USW - U S West $62.25 *** Telecom Mergers Abound! *** U S WEST provides integrated, one-stop communications solutions to 25 million customers in the midwestern United States. Their primary products and services include: local telephone services; long distance services; high-speed data networking and Internet access; wireless personal communications services; directories; operators and video services. U S West and Global Crossing are in merger discussions to create a company in which both groups of shareholders would own a 50% stake of the new entity. The company would have two separately traded stocks. One stock for the high-growth businesses such as fiber optics, Internet and data operations, and the other stock would reflect the more traditional businesses such as local and long distance phone operations. The purchase of US West would extend Global Crossing's reach into the residential market and create a formidable rival to companies such as AT&T and MCI WorldCom. Their ultimate goal would be to erect global networks, particularly focused on the high speed data markets that can handle multiple communications tasks. There are some complications including Global Crossing's plan to buy Frontier Corp (local & long distance phone) and other regulatory hurdles. U S West does yet not have permission to offer long distance service in its home territory, thus the new company would have to get a waiver or shed the business that Frontier operates in their territory. Regardless of the outcome, there is a small disparity in the front-month options and we will use the excess premium to speculate aggressively on the future price of the stock. The sold strike is ITM but there is only 1 week until expiration. Plan to buy-back the sold call next Friday and sell the June position at a small profit, if the stock price is relatively unchanged. PLAY (aggressive/calendar spread): BUY CALL JUN-60 USW-FL OI=132 A=$4.75 SELL CALL MAY-60 USW-EL OI=292 B=$3.25 INITIAL NET DEBIT TARGET=$1.38 TARGET ROI=25% - Or - Buy one more month of time (risk?) and expect to sell a new short position to further reduce the cost of the July option. PLAY (aggressive/calendar spread): BUY CALL JUL-60 USW-GL OI=2556 A=$6.00 SELL CALL MAY-60 USW-EL OI=292 B=$3.25 INITIAL NET DEBIT TARGET=$2.50 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=USW&d=3m ****************************************************************** PCS - Sprint PCS $47.31 ***** Consolidating? *** Sprint PCS operates the largest 100% digital, 100% PCS nationwide wireless network in the United States, serving the majority of the nation's metropolitan areas including more than 4,000 cities and communities across the country. Sprint PCS has licensed PCS coverage of nearly 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. Sprint PCS is a wholly-owned tracking group of Sprint Corporation. In the first quarter of this year, Sprint PCS recorded the second largest quarter for subscriber growth in U.S. wireless industry history. This followed the company's wireless industry record in the fourth quarter of last year for the most subscribers added in any one quarter. PCS also recently announced it has awarded a new contract to Motorola's Network Solutions Sector (NSS). The award is part of Sprint's Phase III wireless network plan which will expand the PCS network in the Midwest & other parts of the country with more more than 1,200 new cell sites, additional RF capacity, base station controllers and interconnect switching equipment. The company is doing well but the technicals reflect the need for a short consolidation at the current price. The recent ceiling at $50 should provide the necessary resistance for a profitable, one week position. PLAY (conservative/credit spread): BUY CALL MAY-55 PCS-EK OI=499 A=$0.25 SELL CALL MAY-50 PCS-EJ OI=1101 B=$0.68 INITIAL NET CREDIT TARGET=$0.50 ROI=11% (1 week) Chart = http://quote.yahoo.com/q?s=PCS&d=3m ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock price. ****************************************************************** LHSP - Lernout & Hauspie $37.00 *** Spin The Wheel! *** Lernout & Hauspie (L&H) is a global leader in advanced speech and language solutions for vertical markets, computers, automobiles, telecommunications, embedded products, consumer goods and the Internet. The company is making speech - user interface the focus of simple, convenient interaction between humans and technology, and is using advanced translation technology to reduce language barriers. LHSP provides a range of offerings: customized solutions for corporations; core speech technologies marketed to OEMs; retail applications for continuous speech products; and document creation, human and machine translation services, Internet translation and linguistic tools. L&H's products and services originate in four basic areas: automatic speech recognition, text-to-speech, digital speech and music compression and text-to-text translation. Last week, a BancBoston Robertson Stephens analyst, whose firm was an underwriter of Lernout & Hauspie's secondary stock offering, downgraded LHSP's stock to a 'long-term attractive' rating. The change was based on 'external and internal business concerns' and growing competition from the recent partnership of IBM and Philips. He was also concerned with LHSP's ability to integrate acquisitions and the status of their current relationship with Microsoft. The stock reacted quickly and Friday's market downturn just made things worse. Our opinion is that the stock will remain in the recent range from $30-$40 for the next few days and the volatility has presented us with favorable option prices for a credit strangle. We prefer the aggressive position with extreme downside protection but if the market opens higher on Monday and the stock price firms, you may want to speculate with the May-35P @ $1.81 for a higher return. PLAY (aggressive/credit strangle): SELL CALL MAY-40 XQL-EH OI=1097 A=$1.06 SELL PUT MAY-30 XQL-QF OI=398 B=$0.56 INITIAL NET CREDIT TARGET=$1.75 ROI=25% PROFIT RANGE = $28.25 - $41.75 Chart = http://quote.yahoo.com/q?s=LHSP&d=3m ***************************************************** Please send questions and comments to: ray@OptionInvestor.com ***************************************************** ***************************************************** Option Station - by Omega Research ***************************************************** (advertisement) Looking for an easy way to trade options? OptionStation 2000i, from Omega Research, finds you the top 50 choices for a trade in seconds. 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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 5-16-99 Sunday 6 of 6 ********************* COVERED CALL SECTION ********************* Emotion Rules The Market... To be a successful investor, it is necessary to have a fundamental understanding of the philosophy that drives the stock market. The mass psychology of human nature is the biggest single factor you must comprehend if you expect to trade profitably on a consistent basis. This emotional and psychological ingredient has absolutely nothing to do with the state of the economy, but it does have an overwhelming affect on the movement of the market. The first unwritten rule is that rumors are the prime movers of the stock market. It's amazing how quickly speculation of upcoming events can change the character of the current trend. In recent weeks, just the mention of inflation causes investors to rush for the exits in order to dump their holdings. This type of activity will often precipitate a general market decline long before the economy actually changes into that state or condition. The market anticipates the movement of the economy and shows us in advance what we can expect with regard to corporate health, unemployment, interest rates and other financial trends. It is also said that a crash in the market is foretold by events that are mostly psychological, not economic. When investors and analysts begin to discuss bearish trends, the market generally reacts negatively because the public believes it is destined for a downturn. In contrast, when a major financial report is rumored as favorable, the market erupts far in advance of the actual announcement. The most important underlying factor is the power of human nature on the movement of stocks and other investment vehicles. When you understand the changes produced by emotional factors, you can begin to discern the broader, more technical movements in the market. The key is to avoid the impulse to buy at the height of the rally just because the market is up and everyone is talking about their successes. Learn to trade on your own terms, not the market's. Good Luck! *********************************************************** SUMMARY OF PREVIOUS PICKS (1 week until the May expiration) *********************************************************** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI LBFC 11.81 12.25 May 12.50 0.44 $ 0.88 7.7% 16.8% EDFY 12.00 15.56 May 10.00 2.63 *$ 0.63 6.7% 14.6% GSTX 12.69 12.50 May 12.50 1.38 $ 1.19 10.5% 11.4% AND 7.75 7.94 May 7.50 1.25 *$ 1.00 15.4% 11.1% ETV 7.56 7.25 May 7.50 1.13 $ 0.82 12.8% 11.1% HRBC 10.94 11.13 May 10.00 1.63 *$ 0.69 7.4% 10.7% SATH 11.81 10.75 May 10.00 2.63 *$ 0.82 8.9% 9.7% OMKT 13.75 12.75 May 12.50 2.19 *$ 0.94 8.1% 8.8% MI 18.38 17.25 May 12.50 7.00 *$ 1.12 9.8% 8.6% DBCC 17.75 15.75 May 15.00 4.00 *$ 1.25 9.1% 7.9% IDTC 28.50 27.38 May 22.50 7.13 *$ 1.13 5.3% 7.7% DBCC 16.63 15.75 May 15.00 2.38 *$ 0.75 5.3% 7.6% SPYG 18.13 18.75 May 15.00 3.88 *$ 0.75 5.3% 7.6% CDNW 16.88 19.75 May 15.00 2.38 *$ 0.50 3.4% 7.5% GSTX 11.06 12.50 May 10.00 2.13 *$ 1.07 12.0% 7.4% CYCH 18.19 15.81 May 15.00 4.13 *$ 0.94 6.7% 7.3% QGLY 5.13 4.94 May 5.00 0.63 $ 0.44 9.8% 7.1% HYPT 12.50 15.88 May 10.00 3.38 *$ 0.88 9.6% 7.0% CELG 19.31 19.44 May 17.50 2.81 *$ 1.00 6.1% 6.6% OMKT 15.00 12.75 May 12.50 3.38 *$ 0.88 7.6% 6.6% NAVR 15.88 15.00 May 12.50 4.25 *$ 0.87 7.5% 6.5% LBFC 10.69 12.25 May 10.00 1.50 *$ 0.81 8.8% 6.4% KLOC 13.75 12.75 May 10.00 4.75 *$ 1.00 11.1% 6.0% ARTT 13.00 12.56 May 10.00 3.75 *$ 0.75 8.1% 5.9% HDL 13.88 13.06 May 12.50 2.31 *$ 0.93 8.0% 5.8% BEAM 17.44 16.38 May 15.00 3.00 *$ 0.56 3.9% 5.6% OMKT 16.13 12.75 May 12.50 4.50 *$ 0.87 7.5% 5.4% EXCA 14.25 16.94 May 12.50 2.75 *$ 1.00 8.7% 5.4% IDTC 30.44 27.38 May 22.50 9.00 *$ 1.06 4.9% 5.4% HDL 14.06 13.06 May 12.50 2.13 *$ 0.57 4.8% 5.2% TX 67.75 67.69 May 60.00 9.00 *$ 1.25 2.1% 4.6% GCTI 17.00 19.88 May 12.50 5.13 *$ 0.63 5.3% 4.6% ADPT 24.06 26.88 May 22.50 2.25 *$ 0.69 3.2% 4.6% BNYN 15.88 12.69 May 12.50 4.00 *$ 0.62 5.2% 4.5% CENT 15.13 14.19 May 12.50 3.13 *$ 0.50 4.2% 4.5% TWMC 14.38 11.81 May 12.50 2.75 $ 0.18 1.5% 1.7% PILL 19.00 13.56 May 15.00 5.50 $ 0.06 0.4% 0.4% DIGE 13.13 11.94 May 12.50 1.19 $ 0.00 0.0% 0.0% PILL 16.88 13.56 May 15.00 3.25 $ -0.07 -0.5% 0.0% EGGS 17.63 13.56 May 15.00 3.63 $ -0.44 -3.1% 0.0% -------------------------------------------------------------- VTEL 5.16 5.25 Jun 5.00 1.13 *$ 0.97 24.1% 14.9% VVUS 4.75 5.00 Jun 5.00 0.63 $ 0.88 21.4% 13.3% DMRK 10.38 9.63 Jun 10.00 1.81 $ 1.06 12.4% 7.7% MCOM 9.31 9.00 Jun 7.50 2.50 *$ 0.69 10.1% 7.3% OMPT 17.06 17.56 Jun 15.00 3.25 *$ 1.19 8.6% 6.2% PAIR 15.06 14.19 Jun 12.50 3.25 *$ 0.69 5.8% 4.2% TWRS 20.56 19.50 Jun 17.50 4.00 *$ 0.94 5.7% 4.1% Plays Dropped: FIBR -ROI is equal to the profit (or loss) divided by the cost-basis. Monthly ROI represents the return on a monthly basis. Example: a 10% return in 20 days equals 15.2% ROI for a month). -Margin is not used in any calculations. -Profit/Loss Column: Asterisk indicates stock price above strike price and should be called. Stock that will not be called is assumed sold at current price (for tracking purposes). ********** NEW PICKS ********** Definitions: OI - Open Interest CB - Cost Basis (Prc pd - Prm rec'd = CB, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) ******************** Sequenced by Company ******************** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis BEAS 17.25 Jun 15.00 BRQ FC 3.00 1050 14.25 5.26% 5.26% COMS 28.63 Jun 25.00 THQ FE 4.75 3412 23.88 4.69% 4.69% MCNS 13.88 Jun 10.00 UCS FB 4.63 42 9.25 8.11% 8.11% PAMC 34.25 Jun 22.50 QMC FX 13.00 3 21.25 5.88% 5.88% SATH 10.75 Jun 10.00 SQR FB 2.19 202 8.56 16.82% 16.82% SKYT 20.88 Jun 17.50 MMQ FW 4.75 2632 16.13 8.49% 8.49% VIRS 17.31 Jun 15.00 VQP FC 3.13 348 14.18 5.78% 5.78% XCED 22.00 Jun 17.50 XCU FW 5.63 143 16.37 6.90% 6.90% *************************** Sequenced by Return Called *************************** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis SATH 10.75 Jun 10.00 SQR FB 2.19 202 8.56 16.82% 16.82% SKYT 20.88 Jun 17.50 MMQ FW 4.75 2632 16.13 8.49% 8.49% MCNS 13.88 Jun 10.00 UCS FB 4.63 42 9.25 8.11% 8.11% XCED 22.00 Jun 17.50 XCU FW 5.63 143 16.37 6.90% 6.90% PAMC 34.25 Jun 22.50 QMC FX 13.00 3 21.25 5.88% 5.88% VIRS 17.31 Jun 15.00 VQP FC 3.13 348 14.18 5.78% 5.78% BEAS 17.25 Jun 15.00 BRQ FC 3.00 1050 14.25 5.26% 5.26% COMS 28.63 Jun 25.00 THQ FE 4.75 3412 23.88 4.69% 4.69% ********************* Company Descriptions ********************* BEAS - BEA Systems $17.25 *** Internet Solutions *** BEA Systems is a leading provider of mission-critical middleware and Internet solutions for the world's largest enterprises. BEA's product line enables integrated solutions for electronic-commerce. BEA also provides a comprehensive suite of consulting, education, and customer support offerings. An upgrade on Friday & favorable earnings are due next week. We like the recent technical support near our cost basis and the positive outlook for the company. Jun 15.00 BRQ-FC Bid=3.00 OI=1050 CB=14.25 RC=5.26% RNC=5.26% Chart = http://quote.yahoo.com/q?s=BEAS&d=3m ***** COMS - 3Com Corporation $28.63 *** Take-over Candidate *** 3Com Corp. is a broad-based supplier of local area network (LAN) and wide area network (WAN) systems for the large enterprise, small business, home and service provider markets. 3Com fell over 50% from its January highs but has found new life as speculation increases on a possible buy-out (again!). We like the short term bullish chart with recent support above our cost basis and the increased momentum supplied by the take-over speculation. Jun 25.00 THQ-FE Bid=4.75 OI=3412 CB=23.88 RC=4.69% RNC=4.69% Chart = http://quote.yahoo.com/q?s=COMS&d=3m ***** MCNS - Mediconsult.com, Inc. $13.88 *** Speculators Only *** Mediconsult.com provides patient-oriented healthcare information and services on the World Wide Web. After being listed on the NASDAQ in early April, Mediconsult.com erupted plus $10. Volpe Brown and ING Barings both initiated coverage and after a 340% increase in revenues for the 1Q, the outlook is interesting. Now that the price has returned towards earth, we see an entry point that provides a cost basis near previous support. Jun 10.00 UCS-FB Bid=4.63 OI=42 CB=9.25 RC=8.11% RNC=8.11% Chart = http://quote.yahoo.com/q?s=MCNS&d=3m ***** PAMC - Provident American $34.25 *** Internet Insurance *** Provident American through its subsidiaries, Provident Indemnity Life Insurance and HealthAxis.com Inc., markets and underwrites life and medical insurance under ordinary and group plans. PAMC plans to merger with its subsidiary, HealthAxis.com, an Internet insurance provider that has distribution agreements with AOL, Lycos, CNet and Snap. Buying pressure is still evident (BOP) but PAMC is somewhat over-extended so we will play deep in-the-money. Jun 22.50 QMC-FX Bid=13.00 OI=3 CB=21.25 RC=5.88% RNC=5.88% Chart = http://quote.yahoo.com/q?s=PAMC&d=3m ***** SATH - Shop At Home $10.75 *** Internet Auctions Galore *** Shop At Home Network is one of the country's oldest and fastest growing home shopping networks. SATH reaches 60 million TV's each day through its network of broadcast systems. They provide online shopping at www.shopathomeonline.com and are launching another site, www.collectibles.com later this year. A new agreement with Yahoo! includes co-branded auctions and other promotions. Record earnings reported in early May with revenues up 40% and excellent future forecasts. We like the cost basis well below support and the 150 dma. Jun 10.00 SQR-FB Bid=2.19 OI=202 CB=8.56 RC=16.82% RNC=16.82% Chart = http://quote.yahoo.com/q?s=SATH&d=3m ***** SKYT - Skytel $20.88 *** Merger Rumors Abound *** SkyTel is a leader in wireless messaging and is moving toward true nationwide messaging through a series of innovations that culminated in SKYT's two-way interactive messaging service. This enables customers to exchange messages with the Internet & other pagers, receive messages via email and the Internet, and send messages to any telephone in the United States. Just announced a new nationwide wireless email product for customers who send and receive large amounts of information. Also launched service allowing eBay users to receive auction updates over pagers, cell phones and personal digital assistants. Still a takeover target! Jun 17.50 MMQ-FW Bid=4.75 OI=2632 CB=16.13 RC=8.49% RNC=8.49% Chart = http://quote.yahoo.com/q?s=SKYT&d=3m ***** VIRS - Triangle Pharmaceuticals $17.31 *** Drug Research *** Triangle Pharmaceuticals Inc. is a pharmaceutical company engaged in the development of new drug candidates primarily in the antiviral area, with a particular focus on therapies for HIV. Triangle settled their dispute with Glaxo Wellcome Inc. and Emory University giving them access to development and clinical data, drug substance and patent property associated with Coviracil. Triangle is currently conducting pivotal Phase II/III clinical trials with Coviracil. The chart looks fairly bullish as VIRS recently completed a double bottom formation. Jun 15.00 VQP-FC Bid=3.13 OI=348 CB=14.18 RC=5.78% RNC=5.78% Chart = http://quote.yahoo.com/q?s=VIRS&d=3m ***** XCED - X-Ceed $22.00 *** Still Climbing! *** X-Ceed is a specialist in corporate services. Their subsidiary, Journeycraft Performance Group provides performance improvement and employee incentive programs, while its Journeycorp Division provides corporate travel services. XCED recently completed the first half of a private offering that will raise up to $10M. After Friday's close, Paine Webber initiated coverage with a buy. The chart is very bullish (but over-extended) and we like the cost basis at near term technical support. Jun 17.50 XCU-FW Bid=5.63 OI=143 CB=16.37 RC=6.90% RNC=6.90% Chart = http://quote.yahoo.com/q?s=XCED&d=3m ******************************* CALLS STRICTLY PERCENTAGE LIST ******************************* These Pct are not calculated using margin. These are pure returns. Margin will increase the percentages. No recommendation is made on these plays. This is only a numerically produced list of the options with the highest percentage of return for dollars invested. If you want to do your own research this is where to start. Stock Price Month Strike Symbol Price PctRtn Vol OpnInt SRCM 19.88 Jun 20.00 SQFD 3.50 17.61 50 268 PTEK 14.94 Jun 15.00 TQOFC 2.50 16.74 955 1781 PCMS 4.94 Jun 5.00 PQPFA 0.81 16.46 24 461 BDT 4.06 Jun 5.00 BDTFA 0.63 15.38 20 486 IHS 5.00 Jun 5.00 IHSFA 0.75 15.00 20 214 JBAK 7.31 Jun 7.50 JBQFU 1.06 14.53 30 832 EGHT 4.34 Jun 5.00 EDQFA 0.63 14.39 10 160 PCTL 9.69 Jun 10.00 PTQFB 1.38 14.19 84 436 IDTC 27.38 Jun 30.00 IQJFF 3.88 14.16 309 1351 ATRX 9.88 Jun 10.00 OQFFB 1.38 13.92 70 20 MCHM 8.31 Jun 10.00 QQFB 1.13 13.53 23 1681 GSTX 12.50 Jun 12.50 QGSFV 1.69 13.50 10 616 ENMD 24.50 Jun 25.00 QMAFE 3.25 13.27 1 133 ATIS 4.81 Jun 5.00 TIQFA 0.63 12.99 55 7990 BCU 7.31 Jun 7.50 BCUFU 0.94 12.82 172 642 CATP 14.75 Jun 15.00 TQPFC 1.88 12.71 79 969 IMNR 11.81 Jun 12.50 IMQFV 1.50 12.70 178 1160 CYCH 15.81 Jun 17.50 KBQFW 2.00 12.65 64 1273 SKYT 20.88 Jun 22.50 MMQFX 2.63 12.57 230 1654 TDFX 17.00 Jun 17.50 FQFW 2.13 12.50 10 389 GMGC 4.03 Jun 5.00 GGQFA 0.50 12.40 156 3050 WSTL 6.34 Jun 7.50 QLWFU 0.75 11.82 20 322 RDRT 7.50 Jun 7.50 RDQFU 0.88 11.67 22 642 TWMC 11.81 Jun 12.50 TQTFV 1.38 11.64 39 386 HNCS 24.75 Jun 25.00 NSQFE 2.88 11.62 10 16 KMAG 4.31 Jun 5.00 KMQFA 0.50 11.59 17 571 VRC 9.81 Jun 10.00 VRCFB 1.13 11.46 80 673 EAII 24.13 Jun 25.00 QNEFE 2.75 11.40 13 148 VLNC 7.13 Jun 7.50 VHQFU 0.81 11.40 20 1227 PRGN 19.75 Jun 20.00 GQPFD 2.25 11.39 42 135 DCTM 13.25 Jun 15.00 QDCFC 1.50 11.32 50 315 GCTI 19.88 Jun 20.00 QHFFD 2.25 11.32 5 292 SRCM 19.88 Jun 22.50 SQFX 2.25 11.32 10 216 TQNT 29.88 Jun 30.00 TQNFF 3.38 11.30 10 38 LIPO 13.88 Jun 15.00 LPQFC 1.56 11.26 2 208 BAANF 10.00 Jun 10.00 BQFFB 1.13 11.25 10 560 DGN 12.25 Jun 12.50 DGNFV 1.38 11.22 9 1017 BEAS 17.31 Jun 17.50 BRQFW 1.94 11.19 40 1453 VIRS 17.31 Jun 17.50 VQPFW 1.94 11.19 100 304 IMRS 19.25 Jun 20.00 QIQFD 2.13 11.04 5 58 MOGN 12.06 Jun 12.50 QOGFV 1.31 10.88 27 74 SAVLY 15.75 Jun 17.50 QVYFW 1.69 10.71 61 685 SPYG 18.75 Jun 20.00 YQGFD 2.00 10.67 12 129 GEMS 4.13 Jun 5.00 GQMFA 0.44 10.61 14 980 HPH 9.44 Jun 10.00 HPHFB 1.00 10.60 10 385 CWC 5.94 Jun 7.50 CWCFU 0.63 10.53 61 87 DIGE 11.94 Jun 12.50 QDGFV 1.25 10.47 2 45 PTEK 14.94 Jun 17.50 TQOFW 1.56 10.46 961 1622 PTVL 22.75 Jun 25.00 QUTFE 2.38 10.44 25 410 IGEN 30.00 Jun 30.00 GQFF 3.13 10.42 2 255 ALXN 12.00 Jun 12.50 XQNFV 1.25 10.42 3 8 ONSL 22.81 Jun 25.00 QOLFE 2.38 10.41 2 238 BTIM 11.44 Jun 12.50 QBOFV 1.19 10.38 13 303 PLAT 24.13 Jun 25.00 FLQFE 2.50 10.36 1269 7660 DIMD 4.88 Jun 5.00 DAQFA 0.50 10.26 11 296 UPR 14.69 Jun 15.00 UPRFC 1.50 10.21 2 1826 NMGC 9.19 Jun 10.00 GJQFB 0.94 10.20 50 134 LBFC 12.25 Jun 12.50 QBBFV 1.25 10.20 10 335 TALK 12.25 Jun 12.50 QQKFV 1.25 10.20 38 4484 PRST 7.38 Jun 7.50 PQKFU 0.75 10.17 21 1 Z 11.06 Jun 12.50 ZFV 1.13 10.17 171 569 TGX 7.44 Jun 7.50 TGXFU 0.75 10.08 4 1164 KLIC 22.38 Jun 22.50 KQSFX 2.25 10.06 1 93 GLFD 12.44 Jun 12.50 GQFFV 1.25 10.05 14 94 MTIC 10.00 Jun 10.00 QTXFB 1.00 10.00 10 349 VVUS 5.00 Jun 5.00 VVQFA 0.50 10.00 44 3319 DIMD 4.88 Jul 5.00 DAQGA 1.00 20.51 10 1066 PCTL 9.69 Jul 10.00 PTQGB 1.94 20.00 51 955 SRCM 19.88 Jul 20.00 SQGD 3.88 19.50 50 561 HS 4.63 Jul 5.00 HSGA 0.81 17.57 68 3400 DCTM 13.25 Jul 15.00 QDCGC 2.06 15.57 15 290 ERTH 8.13 Jul 10.00 QERGB 1.25 15.38 25 819 SPYG 18.75 Jul 20.00 YQGGD 2.88 15.33 12 890 MCOM 9.00 Jul 10.00 MQMGB 1.38 15.28 70 453 ABTX 6.53 Jul 7.50 QXQGU 0.94 14.35 10 4439 TALK 12.25 Jul 12.50 QQKGV 1.75 14.29 30 3398 RDRT 7.50 Jul 7.50 RDQGU 1.06 14.17 27 527 RRC 4.50 Jul 5.00 RRCGA 0.63 13.89 20 273 BDT 4.06 Jul 5.00 BDTGA 0.56 13.85 101 1279 SQNT 13.69 Jul 15.00 SQQGC 1.88 13.70 26 284 NMGC 9.19 Jul 10.00 GJQGB 1.25 13.61 15 276 PRST 7.38 Jul 7.50 PQKGU 1.00 13.56 3 446 ZD 14.38 Jul 15.00 ZDGC 1.94 13.48 20 572 POSS 12.13 Jul 12.50 UPQGV 1.63 13.40 5 147 ORG 12.31 Jul 12.50 ORGGV 1.63 13.20 5 454 SDTI 19.13 Jul 20.00 QSDGD 2.50 13.07 30 229 IMG 8.63 Jul 10.00 IMGGB 1.13 13.04 5 1293 USWB 26.88 Jul 30.00 QWBGF 3.50 13.02 61 576 CELG 19.44 Jul 20.00 LQHGD 2.50 12.86 20 550 ARQL 4.41 Jul 5.00 QETGA 0.56 12.77 10 185 ICO 12.50 Jul 12.50 ICOGV 1.56 12.50 47 333 WDC 9.00 Jul 10.00 WDCGB 1.13 12.50 58 2166 MMCN 26.50 Jul 30.00 CMQGF 3.25 12.26 10 21 APM 3.06 Jul 5.00 APMGA 0.38 12.24 15 24192 WFR 8.31 Jul 10.00 WFRGB 1.00 12.03 20 103 NSTA 16.88 Jul 17.50 NQBGW 2.00 11.85 50 14 SFAM 16.69 Jul 17.50 FQFGW 1.94 11.61 7 54 MAVK 9.72 Jul 10.00 KQGGB 1.13 11.58 5 380 PAIR 14.19 Jul 15.00 PQGGC 1.63 11.45 155 1728 SPYG 18.75 Jul 22.50 YQGGX 2.13 11.33 16 202 DCTM 13.25 Jul 17.50 QDCGW 1.50 11.32 66 250 PDE 10.00 Jul 10.00 PDEGB 1.13 11.25 3 492 COMS 28.56 Jul 30.00 THQGF 3.13 10.94 1400 8169 GTIS 4.03 Jul 5.00 GQBGA 0.44 10.85 20 3345 ERTH 8.13 Jul 12.50 QERGV 0.88 10.77 1 648 CS 11.63 Jul 12.50 CSGV 1.25 10.75 1663 3457 CIEN 24.25 Jul 25.00 EUQGE 2.56 10.57 29 5025 VNT 29.88 Jul 30.00 VNTGF 3.13 10.46 2 229 BNE 18.00 Jul 20.00 BNEGD 1.88 10.42 6 59 BBRC 29.13 Jul 30.00 BQBGF 3.00 10.30 7 126 NAUT 14.56 Jul 15.00 NQTGC 1.50 10.30 20 290 DAOU 5.50 Jul 7.50 QQXGU 0.56 10.23 40 612 CBSI 23.88 Jul 25.00 CQQGE 2.44 10.21 20 446 WIT 18.63 Jul 20.00 WITGD 1.88 10.07 15 770 GLM 14.31 Jul 15.00 GLMGC 1.44 10.04 77 1934 GNCI 17.50 Jul 17.50 GQNGW 1.75 10.00 3 595 ****************** NAKED PUT SECTION ****************** Market Cycles The stock market historically moves in identifiable cycles. To be a successful investor, you must be able to determine the current phase of activity. Many traders will try to spot the top & bottom of each cycle but the truth is, nobody can do this on a regular basis. The key is to have an accurate perception of the overall trend and manage your portfolio with the appropriate strategies. Economists are always busy studying what happened in the past but they are rarely capable of accurately predicting what will happen in the future. The reason is, market cycles usually precede economic cycles. The many facets of our economy, including the political & business elements that determine the overall financial health of the nation are anticipated by the emotion of the market. The most common example is when stock prices move higher in expectation of rising profits and down in anticipation of greater losses. Any study of a detailed chart that compares key historical events with the movement of a major stock index will demonstrate how war, recession, or a presidential election can influence the current market cycle. It is important to become familiar with the common investment indicators used to determine the overall movement of the market and apply this knowledge as a practical part of your trading strategy. The most accurate index for measuring broad based trends is Standard & Poor's list of 500 stocks. One of the favorite indicators for technicians is the high/low list on the New York Stock Exchange. Another common trend-analysis measurement is the advance/decline line. There are many other useful indicators and the successful trader will learn how to utilize all of the available tools and resources to gain an accurate sense of the current market cycle. Good Luck! ------------------------------------------------------------------ *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. ****************************************************************** SUMMARY OF PREVIOUS PICKS (1 week until the May expiration) ****************************************************************** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI SKYT 18.00 20.88 May 15.00 0.50 *$ 0.50 10.6% 23.1% DBCC 16.63 15.75 May 15.00 0.88 *$ 0.88 14.9% 21.6% PTVL 22.63 22.75 May 20.00 0.69 *$ 0.69 9.7% 21.1% CYCH 15.94 15.81 May 15.00 1.63 *$ 1.63 23.1% 16.7% STII 19.13 18.50 May 17.50 0.50 *$ 0.50 7.7% 16.7% ENMD 24.75 24.50 May 20.00 1.50 *$ 1.50 22.6% 16.3% IMG 11.25 8.63 May 7.50 0.38 *$ 0.38 14.4% 15.7% PTEK 16.25 14.94 May 12.50 0.63 *$ 0.63 16.2% 14.1% MAST 14.75 16.88 May 12.50 0.38 *$ 0.38 9.4% 13.7% CUST 34.88 42.97 May 22.50 1.00 *$ 1.00 12.5% 13.6% PAIR 9.63 14.19 May 7.50 0.44 *$ 0.44 18.6% 13.4% NETG 40.50 24.88 May 25.00 0.94 $ 0.82 9.1% 13.1% PTVL 22.94 22.75 May 17.50 0.81 *$ 0.81 15.0% 13.0% AEIS 30.00 30.25 May 25.00 0.44 *$ 0.44 5.9% 12.8% IDTC 28.50 27.38 May 20.00 0.50 *$ 0.50 8.1% 11.7% HLYW 25.00 25.31 May 20.00 0.44 *$ 0.44 8.0% 11.6% CMTO 29.94 30.25 May 22.50 0.69 *$ 0.69 10.3% 11.2% XCED 18.50 21.88 May 15.00 0.56 *$ 0.56 12.6% 10.9% CYCH 18.88 15.81 May 12.50 0.50 *$ 0.50 11.7% 10.2% BNYN 17.38 12.69 May 12.50 0.56 *$ 0.56 13.9% 10.0% VRIO 62.88 67.75 May 40.00 1.56 *$ 1.56 11.0% 9.6% CDIS 29.63 30.75 May 25.00 0.69 *$ 0.69 8.7% 9.5% PAMC 33.25 34.25 May 20.00 0.63 *$ 0.63 8.7% 9.4% NAV 54.81 53.31 May 50.00 0.75 *$ 0.75 4.2% 9.1% NSIT 27.75 26.00 May 20.00 0.50 *$ 0.50 8.3% 9.0% PAMC 34.50 34.25 May 22.50 0.44 *$ 0.44 6.0% 8.7% AEIS 32.63 30.25 May 25.00 0.56 *$ 0.56 7.9% 8.6% VWRX 25.63 26.25 May 20.00 0.31 *$ 0.31 5.7% 8.3% IDTC 30.44 27.38 May 20.00 0.50 *$ 0.50 7.6% 8.2% AEIS 28.00 30.25 May 22.50 0.31 *$ 0.31 5.2% 7.5% NETG 44.94 24.88 May 25.00 0.94 $ 0.82 8.3% 7.2% NAV 43.56 53.31 May 35.00 0.75 *$ 0.75 7.8% 6.8% DELL 38.25 41.19 May 30.00 0.63 *$ 0.63 7.6% 6.6% DELL 43.63 41.19 May 35.00 0.88 *$ 0.88 9.1% 6.6% NMR 27.81 25.44 May 22.50 0.44 *$ 0.44 7.0% 5.1% NWAC 29.25 31.81 May 25.00 0.50 *$ 0.50 6.3% 4.6% TWMC 15.44 11.81 May 12.50 0.50 $ -0.19 -5.1% 0.0% -------------------------------------------------------------- IMG 9.81 8.63 Jun 7.50 0.75 *$ 0.75 27.7% 20.0% GSTX 12.50 12.50 Jun 10.00 0.56 *$ 0.56 18.3% 13.3% CMOS 24.81 26.94 Jun 20.00 0.88 *$ 0.88 14.7% 10.6% Plays Dropped: ONSL -ROI is equal to the profit (or loss) divided by the original investment requirement (varies broker to broker). -Monthly ROI represents the return on a monthly basis. Example: a 10% return in 20 days equals 15.2% ROI for a month). -Profit/Loss Column: Asterisk indicates stock price above strike price and put option should expire - not be exercised. Stock to be exercised assumed sold at current price.(for tracking) ********** NEW PICKS ********** Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment - formula: premium received divided by the collateral required by the broker (the greater of 40% of the current price of the stock plus the premium, minus the difference between the cost of the stock and the strike price; or 20% of the current price of the stock plus the premium.) As you move further from the stock price, the 20% requirement will take precedence. ROI may vary based on equity required by each individual broker. ********************* Sequenced by Company ********************* Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CMOS 26.94 May 22.50 CQS QX 0.38 430 22.12 5.66% IDTC 27.38 May 22.50 IQJ QX 0.31 422 22.19 4.86% KLOC 12.81 May 12.50 KCU QV 0.94 2640 11.56 16.34% LHSP 37.06 May 30.00 XQL QF 0.56 498 29.44 6.73% SKYT 20.88 May 17.50 MMQ QW 0.56 1422 16.94 10.12% ---------------------------------------------------------- BEAS 17.25 Jun 15.00 BRQ RC 0.94 562 14.06 16.82% PTVL 23.00 Jun 17.50 QUT RW 0.75 19 16.75 14.02% SATH 10.75 Jun 7.50 SQR RU 0.44 65 7.06 16.99% ********************************** Sequenced by Return on Investment ********************************** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired KLOC 12.81 May 12.50 KCU QV 0.94 2640 11.56 16.34% SKYT 20.88 May 17.50 MMQ QW 0.56 1422 16.94 10.12% LHSP 37.06 May 30.00 XQL QF 0.56 498 29.44 6.73% CMOS 26.94 May 22.50 CQS QX 0.38 430 22.12 5.66% IDTC 27.38 May 22.50 IQJ QX 0.31 422 22.19 4.86% ---------------------------------------------------------- SATH 10.75 Jun 7.50 SQR RU 0.44 65 7.06 16.99% BEAS 17.25 Jun 15.00 BRQ RC 0.94 562 14.06 16.82% PTVL 23.00 Jun 17.50 QUT RW 0.75 19 16.75 14.02% ********************* Company Descriptions ********************* CMOS - Credence Systems $26.94 Credence Systems Corporation is a leader in the manufacture of automatic test equipment (ATE) for the worldwide semiconductor industry. Credence offers a wide range of products with test capabilities for digital, mixed-signal & memory semiconductors. Utilizing its patented CMOS technologies, Credence products are designed to meet the strict time-to-market and cost of ownership requirements of its customers. A rebound in the industry and two upgrades in April should help this stock remain in the $20 range. May 22.50 CQS QX Bid=0.38 OI=430 CB=22.12 ROI=5.66% Chart = http://quote.yahoo.com/q?s=CMOS&d=3m ***** IDTC - IDT Corporation $27.38 *** Net2Phone IPO *** IDT Corporation is a telecommunications company which offers a broad range of integrated long-distance telephone and Internet access services. The speculation on the Net2Phone IPO has caused the recent rally. Recent bond buy-back is complete and the offering is ready to go. The company is already in talks with America Online and At Home about providing Net2Phone service to their respective members. New coverage in early April and the overpriced options allow us to speculate favorably for 1 week. May 22.50 IQJ QX Bid=0.31 OI=422 CB=22.19 ROI=4.86% Chart = http://quote.yahoo.com/q?s=IDTC&d=3m ***** KLOC - Kushner Locke Company $12.81 *** Movie Makers *** The Kushner-Locke Company is a leading independent producer and distributor of feature films, direct to video films, television series, made for television movies, mini-series, and animated programming for theaters, network, and cable TV. Production has begun on "Picking Up the Pieces," a new mystical comedy with a a gaggle of headlining stars. Also launching a Spanish language animation channel in Latin America. Recently completed redemption of warrants improving the capital structure of the company. An aggressive ATM play to own the stock for future covered-calls. May 12.50 KCU QV Bid=0.94 OI=2640 CB=11.56 ROI=16.34% Chart = http://quote.yahoo.com/q?s=KLOC&d=3m ***** LHSP - Lernout & Hauspie $37.06 *** Speculation Only *** LHSP is leader in advanced speech and language solutions for computers, automobiles, telecom, consumer goods and the Internet. The company is developing the speech user interface and is using advanced translation technology to break down language barriers. The company provides customized solutions for corporations; core speech technologies marketed to OEMs; retail applications for continuous speech products and document creation, translation services, Internet translation offerings, and linguistic tools. A downgrade started the fall, support at $29, where will it end? May 30.00 XQL QF Bid=0.56 OI=498 CB=29.44 ROI=6.73% Chart = http://quote.yahoo.com/q?s=LHSP&d=3m ***** SKYT - Skytel $20.88 *** Merger Rumors Abound *** SkyTel is a leader in wireless messaging and is moving toward true nationwide messaging through a series of innovations that culminated in SKYT's two-way interactive messaging service. This enables customers to exchange messages with the Internet & other pagers, receive messages via email and the Internet, and send messages to any telephone in the United States. Just announced a new nationwide wireless email product for customers who send and receive large amounts of information. Also launched service allowing eBay users to receive auction updates over pagers, cell phones and personal digital assistants. Still a takeover target! May 17.50 MMQ QW Bid=0.56 OI=1422 CB=16.94 ROI=10.12% Chart = http://quote.yahoo.com/q?s=SKYT&d=3m ***** BEAS - BEA Systems $17.25 *** Internet Solutions *** BEA Systems is a leading provider of mission-critical middleware and Internet solutions for the world's largest enterprises. BEA's product line enables integrated solutions for electronic-commerce. BEA also provides a comprehensive suite of consulting, education, and customer support offerings. An upgrade on Friday & favorable earnings are due next week. We like the recent technical support near our cost basis and the positive outlook for the company. Jun 15.00 BRQ RC Bid=0.94 OI=562 CB=14.06 ROI=16.82% Chart = http://quote.yahoo.com/q?s=BEAS&d=3m ***** PTVL - Preview Travel $23.00 *** Internet Commerce *** Preview Travel is a leading provider of branded online travel services offering one-stop shopping for tickets and vacations as well as integrated access to travel information, merchandise, news and resources. One of the Top 50 most visited web sites and ranked the #1 online travel service by Gomez Advisors. Also one of the Forbes ASAP Dynamic 100 Top Technology Companies. They operate the primary travel service on America Online, Excite, Lycos, Snap and USA Today. Record earnings reported in mid-April. Jun 17.50 QUT RW Bid=0.75 OI=19 CB=16.75 ROI=14.02% Chart = http://quote.yahoo.com/q?s=PTVL&d=3m ***** SATH - Shop At Home $10.75 *** Internet Auctions Galore *** Shop At Home Network is one of the country's oldest and fastest growing home shopping networks. SATH reaches 60 million TV's each day through its network of broadcast systems. They provide online shopping at www.shopathomeonline.com and are launching another site, www.collectibles.com later this year. A new agreement with Yahoo! includes co-branded auctions and other promotions. Record earnings reported in early May with revenues up 40% and excellent future forecasts. Jun 7.50 SQR RU Bid=0.44 OI=65 CB=7.06 ROI=16.99% Chart = http://quote.yahoo.com/q?s=SATH&d=3m ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
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