The Option Investor Newsletter Tuesday 5-18-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Also provided as a service to The Online Investor Advantage Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 5-18-99 High Low Volume Advances Decline DOW 10836.95 - 16.52 10930.75 10740.80 741,082k 1,364 1,577 Nasdaq 2558.36 - 3.48 2576.43 2543.32 861,731k 1,987 1,977 S&P-100 673.01 - 2.05 679.68 667.06 Totals 3,351 3,554 S&P-500 1333.32 - 6.17 1345.46 1323.37 48.5% 51.5% $RUT 442.45 + 1.10 443.99 440.90 $TRAN 3650.16 - .96 3652.23 3598.29 VIX 28.21 - .03 31.89 27.80 Put/Call Ratio .54 ************************************************************* The currency knights prepare for battle with the inflation dragon. The Fed heads shot the bull market in the foot today with the change in bias to a "tightening" stance. The Dow, up +60 at the announcement, quickly dropped -170 points to -108 before recovering to close almost even for the day at -16. The Feds fired the warning shot in the inflation war just to make sure everybody knew they were on watch and to reinforce their harsher rhetoric in the future. The good news was the quick recovery. After bouncing off support in the 10,750 range three times in the last two weeks the bull does not look ready to go quietly to slaughter. The Nasdaq dropped -30 points in about three minutes but quickly recovered to also close within 3 points of even. Again, I was impressed. In the last three weeks Rubin resigned, the CPI was a blowout, the Fed changed their bias to "tighten" and the long bond yield has traded over 5.9% repeatedly. In spite of these market killing news events the market refused to die. Yes, we have had some selling but even today the volume was anemic. If fact the volume would have been really low except for a last hour buying binge that lifted the markets +65 points off the bottom. Why did the markets behave so badly and then recover so quickly. First, nobody expected the Fed to change their bias on the basis of only one CPI report. Secondly the drop in housing starts this morning was a sign of a possible cooling of the robust economy. When the Fed raised their bias it simply caught the market off guard. The change had already been factored in but the market was in denial that it would really occur. The -170 points from the high was simply a knee jerk reaction to the announcement. Most Fed watchers will agree that the change in bias was a non-event. News worthy, but the moment of fame has passed. Historians who cared to research it know that the Fed has met 26 times since March of 1996. Fifteen times they raised the bias to "tighten." Only once, in March of 1997 did they actually raise rates after the change. What is all the noise about? It is just that, noise. Remember the "anatomy of a rate hike" from Sunday? The first step is "talk" the market down, the second is change the bias to warn the market. Then the Fed tries to "talk" the market down again. Third is the actual rate hike and it is normally anticlimactic. Now the noise is like a big clap of thunder that shocked the markets for a few minutes and now can only barely be heard in the distance. Now we will go through another period of reporters beating the dead horse into hamburger until the story loses its attraction. The real news today was the stunning difference between the Hewlett Packard earnings announcement yesterday and Dell's announcement today. HWP, with 1 bln shares outstanding and an average daily volume of 3.5 mln, traded 14 mln shares today and gained over 7 points after beating estimates by $.08. Dell however, with 2.4 bln shares outstanding and a daily volume of 25 mln shares, only met expectations and missed the whisper number by a mile. Dell dropped -2.69 in after hours trading. The CFO said on the conference call that their revenue increase for next quarter would drop to single digits and then pick up again in the last qtr. With Dell posting record earnings and profits what part of the conference call do you think analysts remember? "Single digits" This is a clear lesson in why not to hold over earnings. Dell, which is far more profitable and has a stronger business model got beaten badly for only meeting estimates. With 2.4 bln shares Dell needs to sell $343 mln in product in one qtr to add .01 cent in per share profit. To hit the whisper number of $.18 Dell would have to have sold $700 mln more than analysts have expected or +13% more. With Dell producing $5.5 bln in sales last qtr, adding another $700 mln would have been quite a feat. The problem is in the expectation. Because of its past history of rapid growth the standard and expectations for Dell have exceeded Dell's reach. HWP however has disappointed analysts so many times that nobody expected them to beat estimates so badly. This cold, hard analysis of the facts is what has had the fund managers moving out of Dell since last quarter. Here is a comparison you will not hear on the news and have not heard for several years. Dell, at the high of today, was still selling for less than it sold for on the same day in the February earnings period. Yes, Dell actually went down in the last 90 days. Heresy but true. And you can bet it will go down more tomorrow. For the rest of the week we recommend a watchful stance. I think the market showed remarkable strength today but after sleeping on the bias change traders could come back to the market tomorrow with a little less bullish attitude. Interest sensitive stocks like financials are sure to be soft. Oil stocks are going to be hit again tomorrow after the API report showed much more oil in inventory than expected. Big drugs have been hit hard recently and don't show any life. Techs may drift on the weak Dell numbers after being up on the HWP numbers today. Internets took the interest rate news hard with YHOO -5. CMGI -8.94, EBAY -8.88, AMZN -5.00. I would have to see a real nice uptrend in ANY stock after today before I would start any new plays this week. The market looks strong but it could be the calm before the storm. Remember we are up +1200 points without any significant profit taking. With earnings now over we have no news to drive the market. Advances are declining again at a rapid rate. Buyer beware! Do you see the new downward tilt on this chart? Definitely, pick your entry points carefully and sell too soon until a new direction is established. Jim Brown Editor *************** Market Posture *************** As of Market Close - Tuesday, May 18, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,000 10,837 Neutral 5.14 SPX S&P 500 1,325 1,360 1,360 Neutral 5.14 OEX S&P 100 660 690 673 Neutral 4.29 RUT Russell 2000 435 450 442 Neutral 5.14 NDX NASD 100 2,100 2,250 2,159 Neutral 5.7 MSH High Tech 1,000 1,100 1,052 Neutral 5.11 XCI Hardware 900 920 912 Neutral 5.18 * CWX Software 625 650 646 Neutral 4.22 SOX Semiconductor 390 420 413 Neutral 5.11 NWX Networking 450 490 533 BULLISH 4.22 INX Internet 550 650 561 Neutral 5.18 * BIX Banking 700 720 693 BEARISH 5.18 * XBD Brokerage 425 475 453 Neutral 5.14 IUX Insurance 630 660 646 Neutral 5.14 RLX Retail 900 970 881 BEARISH 4.29 DRG Drug 390 425 365 BEARISH 4.29 HCX Healthcare 780 850 746 BEARISH 4.29 XAL Airline 170 210 183 Neutral 5.14 OIX Oil & Gas 285 310 289 Neutral 5.13 Posture Alert Adopting a bias towards tightening, the FED announcement prompted broad markets to retreat from early morning gains. We have turned Bearish on the Banking sector while changing our posture on Hardware and Internet to Neutral.. **************** Market Sentiment Pinnacle Capital Advisors Bunker Down After the FED adopted a bias towards interest rates tightening, the broad market could very well come under pressure over the near term. What's more several of our trusted sentiment indicators are telling us that option speculators are ignoring deteriorating technicals and buying OTM calls. As shown below, the key benchmark for the DJIA is 10,800. The mark has been tested several times over the past two weeks should serve as an early warning sign should the DJIA close below this mark. 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% Tuesday, May 18 109,613 +66.2% 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 a technical 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 (5.887%). Market Volatility (VIX): Trading ABOVE its 50-day moving average (25.60) indicating the end of the recent bullish trend which began on March 5th. Pinnacle Index: After evaporating some late last week, the Index has surged to 5.5 suggesting that option speculators are expecting the market to advance higher. Peak Open Interest: The lowest in some time, the contraian put-call ratio clocking in at .67 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% Tuesday, May 18 109,613 +257.0% 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 2.7 * Underlying Support (645-660) 3.2 3.2 Put/Call Ratios: CBOE Total P/C Ratio .6 .6 CBOE Equity P/C Ratio .4 .4 OEX P/C Ratio 1.7 1.2 Peak Open Interest (OEX): Puts 650 600 Calls 700 700 P/C Ratio .81 .67 * Market Volatility Index (VIX): CBOE VIX 29.66 28.15 Investors Intelligence: Bullish 56.9% 56.9% * Bearish 31.0% 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 2.7 OEX Close 673.57 673.00 Underlying Support (645-660) 3.2 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 .60 CBOE Equity P/C Ratio .43 .41 OEX P/C Ratio 2.44 1.18 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (5/14) (5/18) (5/20) ----------------------------------------------------------------- Puts 650 / 14,250 600 / 13,853 Calls 700 / 17,593 700 / 20,820 Put/Call Ratio .80 .67 VIX Volatility Index 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 14, 1999 29.66 May 18, 1999 28.15 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 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Index Last Mon Tue Week Dow 10836.95 -59.85 -16.52 -76.37 Nasdaq 2558.36 33.98 -3.48 30.50 $OEX 673.01 1.49 -2.05 -0.56 $SPX 1333.32 1.69 -6.17 -4.48 $RUT 442.45 -1.78 1.10 -0.68 $TRAN 3650.16 -15.22 -0.96 -16.18 $VIX 28.21 -1.42 -0.03 -1.45 Stock Mon Tue Week RMBS 79.75 0.63 4.25 4.88 Looking strong BRCM 98.38 -2.81 7.63 4.82 Roaring back SWS 69.31 -0.94 4.56 3.62 New 52 week hi LVLT 86.00 3.94 -2.50 1.44 Tricky play DLJ 74.00 1.38 -0.13 1.25 Resilient Financial SUNW 63.81 2.13 -0.94 1.19 Strong support at $61 DRMD 14.69 0.38 0.56 0.94 New, Estrogen drug hot! ASND 94.56 2.56 -1.81 0.75 A bang for your buck BA 43.69 -0.50 1.19 0.69 Showing strength VRSN 128.75 1.09 -0.41 0.68 Resisting profit-taking LU 59.06 1.00 -0.44 0.56 Dropped for ASND instead ROK 63.13 -0.56 0.81 0.25 Great technical chart EMC 105.38 -2.50 2.63 0.13 Strong Bounce off $100 MCHP 43.38 -0.44 0.31 -0.13 Dropped, not really moving PEP 37.75 -0.56 0.13 -0.43 Waiting for the breakout! NXTL 37.81 0.25 -0.75 -0.50 Dropped, weak volume SQNT 13.13 -0.81 0.25 -0.56 Dropped, announced alliance IBM 238.50 -1.75 1.00 -0.75 Thanks HWP! TV 45.50 -1.50 0.31 -1.19 Dropped, not moving KEA 27.63 -0.56 -0.81 -1.37 Resting before next run CB 72.31 -1.00 -0.81 -1.81 Wait for a bounce ETH 52.38 -0.75 -1.25 -2.00 Dropped, technical weakness CTXS 45.44 -0.63 -1.81 -2.44 Dropped momentum play TBH 99.50 -2.69 0.19 -2.50 Dropped,looking weak COF 166.69 1.69 -4.56 -2.87 Splits 3:1 June 2nd NEON 45.88 -1.19 -1.94 -3.13 Off to a rough start Puts TBFC 83.75 -6.75 -1.75 -8.50 Analyst with sell rating FNM 67.69 -0.75 -2.06 -2.81 Continuing its descent GM 81.00 -2.81 0.69 -2.12 Dropped, turning over CHV 92.63 1.44 -3.25 -1.81 New, What OPEC cutbacks? MOB 96.31 0.00 -1.69 -1.69 New, Crude prices heading south VO 52.69 0.31 -1.63 -1.32 Bearish behavior BVSN 46.13 -1.50 1.13 -0.37 Possible resistance at $46 SEEK 48.25 1.56 -1.25 0.31 Dropped, teeter-tottering AXP 124.38 0.88 2.75 3.63 Dropped, no change in rates MSPG 87.13 4.75 -0.63 4.12 Dropped, successful play ***************** PICKS WE DROPPED ***************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** MCHP $43.38 +.31 (-.12) Going nowhere fast it seems. Microchip has not been the performer we expected. Sure, we are virtually even on the week, but the consolidation should be over by now. We not saying you should sell, but we don't want to recommend it for new readers. Look for a break over $44 on strong volume as a positive sign. Short interest is still high and could be a factor if the market rallies. NXTL $37.81 -.75 (-.50) The numbers don't show the whole story. Yes, we only lost a fraction of a dollar on weak volume...but the intraday action looks bad. There are strong tops in the daily trading that do not bode well for the short term performance of NXTL. Sometimes, a new play just doesn't work out. ETH $52.38 -1.25 (-2.00) The Fed now leans toward raising rates, but did not actually raise them today. For the short term anyway, it will not cost furniture buyers any more to finance their purchases. However, industries like this one which are affected by the new stance toward higher rates may suffer further losses. The fact that housing starts were down 10% in April helped counter Friday's CPI report, but lower housing starts are not good for furniture makers. In addition, ETH is now trading below its 10 dma and beginning to show technical weakness. With only a few days left before it splits, we are dropping ETH. If you threw caution to the wind and bought ahead of the FOMC meeting, be sure to set your stops and remember that we never recommend holding over the split, which will occur May 24th. CTXS $45.44 -1.81 (-2.44) There was no burst of volume or positive direction this week to suggest another rewarding bounce. The stock has provided lucrative cycles over the weeks, but now is a good time to end this momentum play. CTXS seems to have lost its steam. TBH $99.50 +0.19 (-2.50) TBH's run for the gold has come to a halt. After breaking through the $100 hurdle and holding its own above its new support of $101-102, TBH is slipping. Yesterday, it traded as low as $98.06 losing -2.69 by the finish. Today TBH managed slightly better holding a fractional gain and peaking at $101. However, this is not the best environment to begin a new play so we're dropping it. SQNT $13.13 +0.25 (-0.56) Well, that was quick. Whaddaya know? An announcement of an alliance with IBM came yesterday and not much happened. Technical chart looks good, but the volume has tapered off. Since this is only a rumor play (with added positive technical twist), we think the play is over. It appears to us that there's nothing to be gained by staying with this play, so we're dropping it tonight. TV $45.50 +0.31 (-1.19) The instability of the US markets has impacted TV in recent trading. The company is fighting to stay above its 15 dma at the $45 level. TV is no longer moving fast enough for us to keep it as a play. Even though we believe it has the potential to rebound, we feel there are better money makers out there to play at this time. PUTS: ****** SEEK $48.25 -1.25 (+.31) Infoseek has traded back and forth this week with the Internets. The stock hasn't had much news so is left to trade on technicals. The announcement by the Fed that they have adopted a tightening bias triggered a sell-off around 12:30 Tuesday. It quickly pushed the stock down to its 200-dma at $46 before finding support. Higher borrowing rates will hurt smaller firms. We expect to see SEEK to challenge the 200-dma and possibly push through it. Unfortunately, LCOS turned in some good numbers and announced a 2:1 stock split. This might spur the net sector forward (especially those that have recently felt unloved, like SEEK). AXP $124.38 +2.75 (+3.62) Today's move by Alan Greenspan not to raise interest rates signals an end to our play of AXP. When we initially recommended it last Thursday we mentioned it would be a short play to capitalize on a quick move. We got the move we wanted thanks to the CPI report and new inflation fears. The stock traded lower before showing support around $120. That is where we tighten the stops and exited the play. At this point, the short-term down move appears to be over. GM $81.00 +0.69 (-2.13) GM was the 2nd biggest decliner in the DJIA on Monday falling 3.4% (-2.82) at the close. Early on, MSDW piped right up and downgraded GM (Ford and DaimlerChrysler too) to a "neutral" from an "outperform". The prospect of lower sales pressuring corporate profits certainly dowsed any sizzle left in the Auto Sector. GM fell as low as $77.69 yesterday. The move down on Monday probably happened too fast for most traders to take advantage of it. What is worse is the late day turn around (as evidenced in their chart). Sigh, yet another play that moved too quick for us to jump into. MSPG $87.13 -0.63 (+4.13) It is now time to say goodbye to MSPG. The company has performed extremely well as a put play. It has slumped over -$25 in the past three weeks of trading. On Monday it dropped all the way to $81.38 and then bounced off this support level with some force. The bounce actually pushed it to finish the day of trading up +$4.75. Today's lack of profit taking may give MSPG strength in the shadow of LCOS's strong earnings report and 2:1 split announcement. ****************** PICK NEWS - CALLS ****************** EMC $105.38 +2.63 (+1.63) EMC lost a dollar on Monday, but had a strong day on Tuesday. The stock continues to be mentioned by different fund managers as one of their top picks. EMC bounced strongly off of the $100 mark on Monday, and stayed positive all day today. Definite support is at $95, but the $100 level has also showed some support. On Monday, Motorola announced they will be using EMC's Network Attached Enterprise Storage to speed process development. This is not a big surprise, being that EMC is the market leader. Target shooting an entry point may be the best way to play this stock. Split coming up soon. SUNW $63.81 -.94 (-.82) SUNW didn't do much on Monday and lost just under a dollar on Tuesday. SUNW traded in a very narrow range on Tuesday and has strong support at the site of its 10 and 20-dma ($61). SUNW did announce today that they are providing a comprehensive warranty on their products dealing with the Y2K problem. This will help customers feel confident in buying products during 1999, instead of waiting to see what happens with Y2K. Since SUNW has consolidated its gains, we could be in for a nice move. Remember, always plan your move into a play. Don't buy on impulse. NEON $45.88 -1.94 (-3.12) NEON has had a bad week so far. Losing over $3 on the week. The stock is still above its 10-dma ($45) and we did see a bounce off this level on Tuesday. Make sure the stock starts a new up trend before buying in. If we see a bounce off $45 on nice volume, it could signal a buy. NEON is in a strong industry, and if you have been following this stock you know that business has been growing. The recent 10Q showed that revenues had tripled from $9.6 mln in March of 1998 to $29.6 mln by March of 1999. Watch the sector in addition to the Nasdaq when timing your play. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 5-18-99 PICK NEWS - CALLS - Continued ****************** BRCM $98.38 +7.63 (+4.82) BRCM lost a bit in yesterday's down market, but it came roaring back today with a gain of $7.63 on triple its average volume, after Morgan Stanley Dean Witter's Mark Edelstone raised his price target to $120 from $95. He also reiterated his "outperform" rating. Edelstone said that AT&T's buyout of MediaOne and Microsoft's $5 bln investment in AT&T will result in increased use of BRCM's new integrated circuits for cable set top boxes to be released in the second half of the year. He also said he expects BRCM to maintain its dominant position in the cable modem market, which will more than double in each of the next 3 years. Other big pluses he sees for BRCM: its new LAN products and its purchase of Epigram. Broadcom needs to clear the $100.63 high it set next week. Watch out for Internet like swings in the price of BRCM. VRSN $128.75 -.41 (+.69) After an early $8.00 drop in price yesterday, VRSN clawed its way back to gain $1.16 by the close. This is a great show of strength. Today it traded in a $5.00 range, and closed down $.41. Volume was strong on Monday when it ended the day higher, but somewhat light today when it dropped. Following a $21.06 gain last week, the stock has done well to resist profit taking and it actually shows a small gain on the week so far. In the news, a week after signing a deal with Visa U.S.A., VRSN has made another deal to use its Internet security solutions, this time with Critical Path, inc. VRSN is an Internet related stock, so it has additional risk, but the risk is somewhat offset by the 2:1 stock split scheduled for May 31st. CB $72.31 -.81 (-1.81) Chubb lost $1.00 yesterday on light volume and another $.81 today on even lighter volume--about half the average. Given the inflation uncertainties, that's not too bad for an insurance stock, especially one that had run up $10.00 in the previous 2 weeks. In the news today: Friedman Billings initiated coverage of CB with a "buy" rating. Yesterday, Hiscox Plc (of Lloyd's of London) reported a 36% increase in pre-tax profits for 1998. Hiscox is 28% owned by Chubb. Watch for CB to bounce off its 10 dma at about $72 in the next day or two. To drop significantly below it would be a negative sign. SWS $69.31 +4.56 (+3.62) The market pressure and some mild consolidation continued on Monday resulting in a fractional loss for the stock. But today SWS rose to the occasion. With no overhead resistance, SWS peaked at $69.75 and set another new 52-week high. Certainly the new "buy" rating by L. Russell Keene of Putnam Lovell helped. The analyst also set a $100 12-month target price. This stock is presently in uncharted territory and no support level has been establish as of yet. Keep your stop losses in place. IBM $238.50 +1.00 (-0.75) Thank you Hewlett Packard! Having lost -$1.75 yesterday, IBM came back today, trading over $240 (up $3 from yesterday's close, most likely on HP's positive surprise earnings) until the Fed meeting gave us a "bias tightening" announcement. We'll just have to settle for a +$1 gain today on volume that was uncharacteristically low. With an e-commerce focused strategy, great earnings, dividend increase, stock repurchase and $260-$280 price targets, we still have a 2:1 split due on May 26. Market willing, we could still get a nice run up to the split. The long-term chart looks strong but the 10-dma shows resistance at $240. Wait for a clean break over $240 with strong overall market volume. Target shooting is OK too, but be on the lookout for profit taking. Confirm market direction before playing. ROK $63.13 +0.81 (+0.25) What a great looking technical chart. This pure technical play was unmoved by the Fed's bias tightening announcement and again closed at a new high on stronger than average volume. Nothing but technicals and momentum are driving this play. Based on the chart and the relative volume, we'd expect the trend to continue, market willing. No price-moving news to be found. As always, watch out for profit taking by keeping stops in place, and confirm market direction first before making a new play. RMBS $79.75 +4.25 (+4.87) Though squeaking out less than +$1 yesterday, RMBS jumped today on only average volume. There is no press-generated news available, but we suspect Intel will adopt RMBS technology for its newest chipset, which should spark OEM memory order bookings. See Sunday's write-up for details. Technically, RMBS is looking strong. However, keep your eyes open for signs of profit taking and keep your stops in place. Rambus is volatile and can swing either direction quickly. Of course confirm the direction of the market if you start a new play. COF $166.69 -4.56 (-2.87) On Tuesday, though there was no change in the existing rates, but the Fed did tightened its bias. That was enough to send COF spiraling downward. Fear of an interest rate hike down the road caused a major reversal in the majority of financials. Before the news, COF had traded to as high as $175. After the information was out, COF dove to its 30 dma. The picture could get even worse in the next few days of trading if the sell off continues. However, we are keeping COF as a play. The company splits 3:1 on June 2nd. We still have faith that our battered financial will make a split run. But, be careful not to jump in too early. Let the cheaper option prices come to you. Keep in mind that the day after a Fed meeting is usually down. Wait for the investors to fully digest the Fed reports. Be on the lookout for the markets and a COF rebound before jumping in. Again, pick your entry point carefully! BA $43.69 +1.19 (+0.69) On Tuesday, BA was one of the few bright spots in the market. The company's chairman announced that "the drop in demand in Asia for jet airliners was unlikely to go further." (-Reuters) BA could benefit as orders from Asian carriers rebound. However, he pointed out that the renewed Asian demands may only minimally affect BA profits in the next year or two. In any case, BA showed strength by trading in a narrow trading range even though the greater markets were all over the place. BA even managed to close trading at $43.69, just off its high of the day of $43.94. This could prove to be the confirmation we were looking for. But, keep in mind that the day after the Fed meets is usually down. BA looks to have some support at the $42 level. PEP $37.75 +0.13 (-0.44) PEP was caught in a tight trading range on Monday and Tuesday. It would reach as high as $38 and then drop back to about $37. We are looking for a breakout. What could cause PEP to bust out? Possibly the opening of Star Wars this week. Pepsi owns the exclusive rights to use Star Wars characters to help promote its products. If excitement for the new release picks up, there is a strong possibility that Pepsi's revenues could also increase. This is a slower play but target shooting may help boost your returns. KEA $27.63 -0.81 (-1.37) After heading higher everyday in trading last week, KEA decided to take a rest on Monday and Tuesday of this week. It slipped -$1.37 and could possibly dip further due to simple stock cycling. A stock that has been up for 5 straight days tends to pullback for at least 2. Market pressures could also add to the profit taking since the day after the Fed meets is usually down. Even though DLJ downgraded KEA to a market perform on Tuesday, KEA was named Company of the Year by The Boston Globe in its annual "Best of Massachusetts Business Globe 100." Keane was the "best-performing company among Massachusetts-based public corporations due to its consistent growth and revenue increases."(-PRNewswire) We feel that KEA could head higher but it is imperative to confirm market and stock direction before opening any new positions. Don't try to guess the bottom. DLJ $74.00 -0.13 (+1.25) DLJ showed its resiliency by only sloughing off thirteen cents as the Fed announced that it was tightening its bias towards increasing interest rates. Many of the other financials faired much worse. Even though DLJ showed strength, we would still like to see it break through its overhead resistance of $77. DLJ does have the potential to head higher if the markets can settle down. On Monday, DLJ was named the top web-based discount broker by a supplement of Time magazine, Time Digital. DLJ lead the pack and was recommended for "Fundamentalist, Long Viewer, and All-In One types of individual investors." (-Business Wire) LVLT $86.00 -2.50 (+1.44) Like we said Sunday, "a tricky play". Volume has been exceptionally low, not unlike the rest of the market. Buying opportunities under $86 were short lived as were prices over $89. In short, a narrow trading range. Nonetheless, today's drop may give the agile trader a buying opportunity before LVLT attempts another ascent to $94. Remember, this is a channeling stock on its way back up, market willing. Technically, it's looking a bit long of tooth. It isn't helpful that LVLT's President is selling 1 mln. shares, about 9% of his total holdings (to repay personal debt and take some off the table). The good news is that his trustee must sell 4 K shares daily for the next 250 trading days, no more, no less, no matter what. It's irrevocable, which may have only a psychological affect on investors, but won't affect the performance of the company. Wait for a good entry by target shooting and use stops to protect your profits if it falls back further. LU $59.06 -.44 (+.56) LU still has a lot of potential as a play, but we've decided to switch out focus to ASND instead. If you are familiar with either company, you know that LU decided to purchase/merge with ASND last January. Essentially, the play is still LU, but with ASND we are gaining more leverage in our options. See the details below with ASND. ASND $94.56 -1.81 (+0.75) This stock may be Lucent's little shadow, but it packs quite a bang. That is - a bang for your buck! If you remember, last January 13th Lucent announced they'd be taking over Ascend Communications by the end of June in a $18.7 bln. stock deal. For every 1 share of ASND, the stockholder would receive .825 of a share of LU. Now because LU split 2:1 last month that ratio has doubled. So let's look at it this way. For every 1 point LU moves, ASND will now move 1.65 resulting in greater $$ profits (assuming the play goes our way). So it's easy to understand why we've decided to replace LU with ASND. Remember, the essence is the same - it's a momentum play. Over the past couple of days, ASND has been forming support in the $94-96 range. This may be a good entry point. The stock's recent resistance was tested last week and is around $99-100. Today ASND managed to close slightly off its lows on pretty strong volume. We want to say thanks to Ken (a reader) for helping us improve the LU play. This time you are going to need to watch both LU's and ASND's news and stock performance. As always, confirm direction before you initiate a new play and keep those stops in place for protection. BUY CALL JUN- 90 QQA-FR OI=5530 at $9.25 SL=7.00 BUY CALL JUN- 95*QQA-FS OI=2502 at $6.25 SL=4.50 BUY CALL JUN-100 QQA-FT OI= 627 at $4.25 SL=2.75 PICK NEWS - PUTS ***************** BVSN $46.12 +1.12 (-.38) BVSN has struggled this week as the Internet group continues to come under fire. Any move up in interest rates has a major impact on a start-up company's ability to borrow money. Most Internet companies fall into this category as they are still building the business. The stock ran into resistance at the $46 level for most of the day Tuesday. Watch the sector for any indication of a rally and use your stops to exit the play. But we see more downside ahead due to the lack of support for the stock itself. TBFC $83.75 -1.75 (-8.50) Telebanc bore the brunt of a rare move on Monday as an analyst started the company with a sell rating. This sent the stock plummeting in an already shaky market. The seldom-used sell rating is questionable since it was from Jeff Runnfeldt of First Security Bank. You have wonder if the fact that First Security's stock is down 20% on the year while TBFC is up 170% has any bearing. But we got what we wanted as the stock traded down to the 50-dma before rebounding. Tuesday caused more losses as the Fed's tightening bias hurts financial institutions. Lock in your profits and choose your entry points carefully for all new plays. TBFC is at a crucial point. Today it actually closed below its 50-dma. While losing 8.5 points could prompt a technical bounce, be sure it is not a recovery from this support line. If it continues to fall through the 50-dma then its standing as a put is stable. VO $52.69 -1.63 (-1.31) Yesterday Jessica Cohen of Merrill Lynch reiterated a near-term and long-term "buy" on Seagram. Ms. Cohen also set a 12-month target price of $70 for VO. The coverage resulted in a mere +0.31 gain, but on strong volume. Remember, this increase could also be a slight technical bounce considering the sharp 8% drop on Friday (due to the announcement for the company's motion for a $2.5 bln. secondary offering). Today the stock declined steadily on moderate volume. VO then closed a fraction shy of its daily low but more importantly confirmed yesterday's close under its 50 dma. This is definitely a bearish indicator. VO could fall to $50 (100 dma is $49.30) or $45 if the market cooperates. FNM $67.75 -2.00 (-2.75) FNM continues to fall within mission parameters, as the stock makes its way toward the bottom of its channel. FNM dropped $.75 on Monday and continued its drop on Tuesday. Remember, the range is currently from $66 to $72. Don't be greedy. The stock might only hit $67 and then turn. We just want to get the middle of the channel. If the stock hits its bottom channel, wait for a confirmation of a turn up before buying calls because this time it may not turn back up. The FOMC decision to tighten is bad news for FNM and it might dig a lower end to its recent channel. This may be one time to let profits run a little bit futher. Keep an eye on it! NEW CALL PLAYS *************** DRMD - Duramed Pharm. $14.69 +0.56 (+0.94 this wk.) DRMD manufactures and sells prescription generic drugs to customers mostly throughout the United States. They are distributed through wholesalers, private label distributors, drug store chains, HMO's, nursing homes, retiree organizations, mail order distributors, mass merchandisers, governmental agencies, and other drug manufacturers. Their focus is on women's health and hormone replacement therapy. DRMD received approval from the FDA in March to begin marketing a plant-derived form of estrogen to help with menopausal side effects, hot flashes and night sweats. Through a distribution agreement with Cardinal Health, they hope to achieve initial revenue rates of $100 mln. over the next 15-18 months. That may prove overly optimistic for a company with current revenues of just $50 mln. Nonetheless, barriers to entry are tough and the market is growing as baby-boomer women enter menopause. Technically, this company is zipping up the chart at an incredible pace. All indicators are maxxed-out including RSI. One look is all you'll need to recognize its beauty. There are some warts too. It's a very small company with a market cap of about $275 mln. and relies on individual investors for market support. There's not much ownership or trading volume from institutions, making this a bit more risky if investor sentiment moves elsewhere (not uncommon in the pharmaceutical business). There is also a rumor is that the estrogen drug will actually be on sale June 1st. Rumor has it that they will also be approved for a new birth control drug sometime in the next two weeks. ***Trading Note: to comply with disclosure rules, We would like to report that Jim, our editor, does own stock in Duramed (but does not own options on DRMD). Guess he thought the played looked good too. BUY CALL JUN-12.5 DUQ-FV OI= 715 at $3.13 SL=1.50 BUY CALL JUN-15 DUQ-FC OI=1082 at $1.56 SL=0.75 BUY CALL SEP-12.5 DUQ-IV OI=1358 at $4.50 SL=2.75 BUY CALL SEP-15 DUQ-IC OI=1914 at $3.13 SL=1.50 Picked on May 18 at $14.69 PE = N/A Change since picked +$0.00 52 week high=$17.00 Analysts Ratings 0-0-0-0 52 week low =$2.62 Last earnings 03/99 est N/A actual N/A Next earnings 06-24 est N/A versus N/A Average daily volume = 807 K Chart = http://quote.yahoo.com/q?s=DRMD&d=3m NEW PUT PLAYS ************** MOB - Mobil Corporation $96.31 -1.69 (-1.69 this wk)(-5.50) Mobil is ranked as the #2 oil company in the United States and #4 in the world. The company has operations in more than 140 countries and exploration and production projects in approximately 25. MOB is also involved in the chemical business focused on the production of petrochemicals, wood and polymer building materials plastics, and other products. Mobil will be bought by Exxon in a pending $73.7 billion linkup which will create Exxon Mobil, the world's biggest oil company. We are adding MOB as a put play thanks to the countries that have cheated in cutting back their oil production. Analysts had expected a possible rise of 2 million barrels of crude oil in the weekly API report but instead the report showed an increase of almost 4 million barrels in the crude oil stockpiles. Oil stocks have already been weak of late and MOB has already dipped -$1.69 in trading this week. Something to watch out for was the unexpected drop in gasoline stockpiles which fell about 4 million barrels this week. Gosh with numbers this big, you wonder how they could miss a couple of million from last week? The wildcard here is how will the market react to such a mixed report between the oil and gas numbers. BUY PUT JUN-100 MOB-RT OI=194 at $5.88 SL=4.25 BUY PUT JUN- 95*MOB-RS OI=254 at $3.00 SL=1.50 Average Daily Volume = 1.93 mln Chart = http://quote.yahoo.com/q?s=MOB&d=3m **** CHV - Chevron Corporation $92.63 -3.25 (-1.81 this wk)(-0.44) Although Chevron is an giant in the oil sector, it also engages in chemical and coal mining. The company provides administrative, financial, and management support for its US and foreign affiliates. We are adding CHV as a put for the same reasons that we are adding Mobil- somebody cheated. OPEC had called for cutbacks in oil production. All countries agreed to the terms. Analysts had expected a possible rise of 2 million barrels of crude oil in the weekly API report but instead the report showed an increase of almost 4 million barrels in the crude oil stockpiles. Oil stocks have already been weak of late and MOB has already dipped -$1.69 in trading this week. Something to watch out for was the unexpected drop in gasoline stockpiles which fell about 4 million barrels this week. Gosh with numbers this big, you wonder how they could miss a couple of million from last week? The wildcard here is how will the market react to such a mixed report between the oil and gas numbers. BUY PUT JUN-95 CHV-RS OI= 858 at $4.88 SL=3.25 BUY PUT JUN-90*CHV-RR OI=1238 at $2.31 SL=1.25 Average Daily Volume = 1.50 mln Chart = http://quote.yahoo.com/q?s=CHV&d=3m COMBINATION PLAYS ****************** Federal Reserve Stirs Inflation Fears... Monday, May 17 Blue-chip stocks fell Monday as Wall Street awaited the Federal Reserve meeting with speculation that a bias will be issued on future interest rates. Last week's news of a jump in consumer prices for April may be the final stake in the coffin. The Dow was off 59 points at 10,853. Internet stocks lifted the Nasdaq 33 points higher to 2,561 but in the broader market, declining issues still swamped advances 2-to-1 on moderate volume of 668 million shares on the New York Stock Exchange. Sunday's new plays (positions/prices): PCS MAY55C/MAY50C $0.38 credit (slightly less than our target) SKYT SEP22C/MAY22C $2.50 debit (disparity faded at the open) LHSP MAY40C/MAY30P $1.25 credit (call side options much lower) USW JUN60C/MAY60C $0.00 debit (merger announced on Sunday) The big news on USW came just one day too early as they reached an agreement Sunday night to merge with Global Crossing. There was no play available on Monday but it was interesting to see the stock price perform exactly as expected on the announcement. USW fell $5 to just under the sold strike price, which left our volatility spread at a small credit with no potential in the May positions; an easy buy-back for a short-term profit. SKYT fared about as well, also opening lower and with far less premium in the short position than Friday afternoon. A favorable play was available but the debit was slightly higher than expected. Portfolio plays: The other takeover announcement was much more exciting as New Holland NV agreed to acquire Case Corp for about $4 billion in cash. CSE gapped up to $50 on the news, providing an excellent profit our bullish debit spread. Tuesday, May 18 U.S. markets closed lower Tuesday as Wall Street was numbed by the Fed's warning that it will raise rates when necessary to slow inflation. The Dow was off 16 points at 10,836 and the Nasdaq index of technology stocks was slightly lower at 2,558. In the broader market, declining issues led advances by a small margin on moderate volume of 737 million shares on the NYSE. Portfolio plays: EGRP continued its rebound today, pushing our short-term debit spread to a $1.75 profit. You may consider closing the position now for a small gain rather than risk a potential loss. TXN was higher on the news of HWP favorable outlook. As we said before, this week was expected to be volatile for the computer industry techs with the big companies reporting earnings. PCS fell into the mid-$40 range, moving our credit spread comfortably OTM. CS and MOT both made nice moves, finishing at the sold strike price near the maximum profit point; we hope they remain in that area for the next few days. This week, many of the OIN research staff will be attending the Omega World Options Seminar in Las Vegas, Nevada. I will be one of the unfortunate traders unable to attend (the newsletter is still our number #1 duty) as I've been tasked with other duties for this week's Thursday & Sunday edition. The 'Spreads/Combos' section will not be published again until this weekend. It is expiration week and you are on your own for Friday's "roll-out" to June positions. If you have long-term calendar spreads, plan to close any short (May) options that are in-the-money to prevent being exercised. We will post the current summary of this month's plays in the Sunday edition. Good Luck! NEW PLAYS ********** AMZN - Amazon.com $132.62 *** Ready To Rebound? *** Amazon.com is the Internet's #1 music, #1 video, and #1 book retailer. Amazon.com has expanded to offer free electronic greeting cards, online auctions, and more than 4.7 million book, music-CD, video, DVD, computer-game, and other titles, with secure credit-card payment, personalized recommendations, streamlined ordering and hassle-free auction bidding. AMZN also has two international web sites and PlanetAll.com, a Web-based address book, calendar, and reminder service. It also operates the Internet Movie Database with comprehensive information on more than 150,000 movies and entertainment programs and 500,000 cast and crew members dating from the birth of film in 1892 to the present. Amazon recently created a frenzy in the online bookselling business, increasing its discount on bestsellers to 50% below suggested retail price. The company has reduced prices on all hardcover and paperback books in three categories: fiction, nonfiction, and advice/how-to/miscellaneous. Some people are worried that the price cuts will affect AMZN's bottom-line but the success of their future business will come from being the Internet's dominant retailer. AMZN has also started up an auction site and purchased stakes in drugstore.com and pets.com, which benefit from exposure to Amazon's growing customer base. Amazon.com is also entering the business of selling groceries online with its purchase of a stake in HomeGrocer.com, an Internet grocery shopping and home delivery service. The investment is cheap speculation in what could possibly be another successful online business. We like the short-term technical consolidation at the current price and this deep in-the-money position provides an excellent opportunity to play a conservative spread on a volatile stock. Note: Please open this position as a spread only - no "legging". PLAY (conservative/debit): BUY CALL JUN-100 YZZ-FT OI=187 A=$35.75 SELL CALL JUN-110 YZZ-FB OI=14 B=$27.25 INITIAL NET DEBIT TARGET=$8.00 ROI(max)=25% B/E=$108.00 Chart = http://quote.yahoo.com/q?s=AMZN&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. ***** WLP - Wellpoint Health Networks $75.69 ** Multiple Upgrades ** WellPoint Health Networks is one of the nation's largest publicly traded managed care companies. The company serves the health care needs of millions of members nationally. WellPoint offers a broad spectrum of quality network-based health products, including HMO, PPO, POS, hybrid and specialty managed care products that include pharmacy benefit management, dental, vision, mental health, life and disability insurance, flexible spending accounts and Medicare supplements. This week, WLP was in the news with upgrades from two well-known brokerages. Morgan Stanley initiated coverage of Wellpoint with a 'strong buy' rating and a 12-month price target of $89. Another analyst from PaineWebber raised his rating on shares of WellPoint to a 'buy' and increased earnings estimates to reflect higher assumptions on the synergies and cost savings from the Blue Cross of Georgia aquisition and continued pricing momentum. WLP is definitely in a short-term upward trend but we like the three recent failures at $80 and the solid support near $69 as a basis for this favorable credit position. PLAY (aggressive/credit strangle): SELL CALL JUN-80 WLP-FP OI=4 B=$2.18 SELL PUT JUN-70 WLP-RN OI=70 B=$1.43 INITIAL NET CREDIT TARGET=$3.75 ROI=24% UPSIDE B/E=$83.75 DOWNSIDE B/E=$66.25 Chart = http://quote.yahoo.com/q?s=WLP&d=3m ***** WCOM - MCI Worldcom $88.88 *** Telecom Merger-Mania *** MCI WorldCom is a global leader in communications services with 1998 revenue of more than $30 billion and established operations in over 65 countries encompassing the Americas, Europe and the Asia-Pacific regions. WCOM is a premier provider of local, long distance, international and Internet services. MCI WorldCom's global networks, including its state-of-the-art European network and transoceanic cable systems, provide end-to-end high-capacity connectivity to more than 40,000 buildings worldwide. The last few weeks have been very exciting in the telecom industry as smaller companies continue to struggle for future market share with mergers and alliances. Last year, MCI WorldCom completed the merger of WorldCom and MCI Communications to create the #2 long distance company and strengthen its hold on the fastest growing segments of the telecommunications industry: international, data and Internet services. The company has reaped the benefits and savings of last year's merger and remains far ahead of many rivals but they still need a wireless phone business and a high-speed Internet access service. This year, they walked away from two opportunities to buy wireless companies; AirTouch Communications and Nextel Communications at a time when an increasing amount of phone calls are being made on wireless phones. The company has focused primarily on high-spending business customers and has become less aggressive in targeting consumers. That may be their downfall in the short-term because many customers are adding more communications services like high-speed Internet access to their homes. The company will hold its annual meeting on Thursday and that's probably the driving force in the recent rally. Regardless of the outcome of the meeting, the well-established trading range between $80 and $95 makes this a favorable speculation play. PLAY (aggressive/credit strangle): SELL CALL JUN-100 LDQ-FT OI=6650 B=$1.06 SELL PUT JUN-80 LDQ-RP OI=5325 B=$1.31 INITIAL NET CREDIT TARGET=$2.62 ROI=17% UPSIDE B/E=$102.62 DOWNSIDE B/E=$77.38 Chart = http://quote.yahoo.com/q?s=WCOM&d=3m ***** SEE DISCLAIMER IN SECTION ONE *****
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