The Option Investor Newsletter Thursday 7-1-99 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. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 7-01-99 High Low Volume Advances Decline DOW 11066.42 + 95.62 11080.30 10903.70 833,748k 1,696 1,374 Nasdaq 2706.18 + 20.06 2711.76 2658.26 1088,000k 2,002 1,968 S&P-100 709.49 + 5.07 711.01 697.69 Totals 3,698 3,342 S&P-500 1380.96 + 8.30 1382.80 1360.76 52.5% 47.5% $RUT 454.42 - 3.26 457.71 451.78 $TRAN 3466.60 + 62.24 3474.35 3398.27 VIX 19.80 - 3.19 22.15 19.68 Put/Call Ratio .48 ************************************************************* A flood of previously sidelined cash pushes markets to new highs. The flood of money pouring in from the sidelines overwhelmed the sellers at the open and the market quickly overcame a -65 point loss to close with big gains. The Dow closed over 11,000 for the first time since May-13th and the Nasdaq and S&P-500 both set new record highs. The National Assoc. of Purchasing Managers Report came in stronger than expected at 57.0 instead of the 54.4 estimates. This stronger than expected report immediately brought into question the rate increase from Wednesday and brought up the specter of another rate increase sooner than was expected just yesterday. This shows you how quickly soaring positive sentiment can be brought back to reality by an economic report. While the Fed did return to a neutral bias there is nothing to prevent them from raising rates at any time if the situation warrants. The bond market which rallied strongly yesterday and saw yields pushed below 6% for the first time in several days, immediately sold off again and closed the day with the yield at 6.01%. The quick reversal on the NAPM report caught many analysts by surprise. The top had been called in interest rates and only a day later the top blew off. Fortunately the stock market did not hear the alarm and the buying binge continued. The transports finally confirmed the rally today as the airlines caught the buying contagion. The Internets continued to gain ground and the tech sector in general did well. There was a few pockets of profit taking but by and large the euphoria snuffed out the normal down day after a Fed meeting. However the advance decline line only barely made it into positive territory with only 356 more stocks advancing than declining. Some of the stocks giving in to profit taking included Dell -.38, VRSN -3.69, QCOM -3.75, GTE -1.38, SUNW -.69, BRCM -6.88, NVLS -1.22, TXN -2.50, GE -1.50. After beating earnings yesterday NKE dropped -3.81 today. Starbucks coffee was burned for -10.63 after warning about slowing earnings. Amazon missed a sale today as Books A Million (BAMM) won a sole source contract with Walmart to supply books for Walmart's online customers. BAMM broke a seven month slide with a gain of +6.34. AMZN lost -2.75 on the news. The oil companies all tacked on decent gains as oil traded over $19 per bbl. The big news was the Nasdaq closing over 2700 (2706) and near the high of the day, and the S&P-500 also closing at a record 1381, only 2 points from the high of the day. Volume was good and investors appeared to be putting off their holiday vacations to make last minute purchases. The Nasdaq is clearly in breakout mode and the Dow is not far behind. The only major index not taking part in the rally was the newly reshuffled Russell-2000. Now a small cap index again, it posted a -3.26 loss. Without the big Internets to hold it up the Russell was again struggling to tread water. Horror stories of huge swings in stock prices on individual stocks were common. One stock, ABRX, soared from $35 to $100 yesterday and then opened back at $35 this morning as one fund manager mistakenly bought ABRX when he should have been selling. Another nightmare was Pit-Des Moines, which trades on the AMEX, it rose +$30 yesterday only to drop -$30 today. The fly in the soup will be the Jobs report Friday morning. If the dreaded inflation monster shows up strongly again tomorrow like it did in early May then the euphoria may be short lived. If there is no sign of inflation then the rush to earnings will continue and next week could be a banner week. Whether the averages will benefit from a good report tomorrow remains to be seen. With the Dow tacking on +531 points in the last five days we could see some profit taking but I sure would not bet on it. The positive sentiment is very strong. There were many stocks that dropped in the last five minutes of the day today either in anticipation of the jobs report or early profit taking by traders leaving early for the weekend. Some examples would be TXN, QCOM, INKT, AMTD, DCLK. This could be nothing or a prelude to a broader profit taking in the morning. Either way I would still be a bargain hunter midday Friday. S&P futures are down about -1.50 and the open tomorrow could swing either way but midday should be level. We could see a bounce again at the close as non-vacationing traders try to start positions in front of a continued rally next week. Expect weak volume conditions and associated volatility. Remember, July options expire in two weeks so don't get married to them. Time to move into another month before the time premium evaporates. Only play July on new positions if you expect to be out of them within the week. Friday would be an excellent chance to sell naked July puts on some of the fast gainers to make some free cash. Simply remember to enter a buy to close order with a stop if you don't want to accidentally own the stock on a pullback. Have a great weekend, and watch those eyes and fingers! Jim Brown Editor *********************** SEMINAR UPDATE FROM LA *********************** Dear Jim and all OI readers: Second OI seminar - update from 30,000 feet - Fontanills on his way back to Boston The Los Angeles seminar ROCKED!! - We had a great time!! The OptionInvestor/OPTIONETICS Los Angeles seminar was a great success. The sell-out crowd appeared to really enjoy the compliment of my partner, Tom Gentile and my own different trading styles. The audience commented that we offered an exciting mix with your own style, Jim, on OIN. Everyone is thrilled at the new relationship and are excited by our plans for the future. In particular I wanted to thank the two OIN investors that flew in from Hong Kong and the United Kingdom. I asked them after the seminar "Was it worth flying over for the 2 day event?" I was informed that they were delighted with the seminar and would come back for a FREE repeat some time in the near future. They also added that the next time they would bring their friends with them. Great stuff!! Due to the success last week's at Boston seminar we did a similar presentation and also added some new material. We spent more time on when to get in and out of a trade. Also, did an in-depth review of straddles and spread trading. Tom spent a lot of time on his straddle presentation which the traders really liked. At the LA seminar the comment sheets were again full of kind words for our efforts, such as: "I have been telling friends and family about OPTIONETICS as it works for me. Over the last 14 months I have a $150,000 return ..." Continues " I put on a trade went on a 3 week vacation and sold it for a total return of 250%. Trade paid for several more vacations" F White "Actual traders teaching techniques that they use" Paul S "I wish I would have known about this seminar before I took other people's seminars WC" Mike M "A must for all options traders" W E Wunder "Systematic way to make $$$ with less risk" Robert G. Delavictoria "OPTIONETICS is the most honest and realistic picture of making money in the markets. Anyone serious about learning option strategies greatly improves their chances of success .." Ted Ehr "This is the only course that is comprehensive and non-directional .. the most risk free. I doubled my money in 3 days" Harold McCall Thank you one and all that attended the LA seminar. It was an amazing experience to meet so many people that are grateful that we take the time to travel from our homes and families to teach a 2 day course. It is hard work but worth it to meet such great people. I am happy to spend my time showing others how to make money in the markets and learn to avoid the mistakes that I have made over the years. I hope to see you all in one of the future events that you can re-attend for FREE as our OIN/OPTIONETICS alumni. My staff have asked me to warn all the OIN readers that we have only a limited number of seats available for the two remaining July seminars in San Francisco and Dallas. The seminars will sell out so I encourage any last minute OIN traders to grab the last seats to avoid being disappointed. Until I meet you at a seminar - when we can trade together live. Happy trading to one and all Kind regards George Fontanills President OPTIONETICS ********************* Remaining seminars: ********************* July 18 & 19 DALLAS / Airport Marriott July 25 & 26 SAN FRANCISCO / Crown Planza If you are tired fighting the market and are ready to step up to the next level then we strongly suggest you attend. There is a full money back guarantee and we will allow you to retake the seminar for free as many times as you feel necessary to grasp and implement all the techniques taught. People fly from around the world to hear George speak and you can have two full days of personal attention at the OIN/Optionetics seminars. Go here for details: http://www.OptionInvestor.com/seminar/index.asp We guarantee you will not be disappointed! *************** Market Posture *************** As of Market Close - Thursday, July 1, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,500 11,000 11,066 BULLISH 7.1 * SPX S&P 500 1,315 1,355 1,381 BULLISH 7.1 * OEX S&P 100 660 690 709 BULLISH 6.29 RUT Russell 2000 390 450 454 BULLISH 6.29 NDX NASD 100 2,110 2,220 2,322 BULLISH 6.29 MSH High Tech 1,010 1,080 1,169 BULLISH 6.19 XCI Hardware 900 950 1,002 BEARISH 6.17 CWX Software 675 700 784 BULLISH 6.17 SOX Semiconductor 410 425 492 BULLISH 6.10 NWX Networking 525 545 587 BULLISH 6.25 INX Internet 500 510 536 BULLISH 7.1 * BIX Banking 680 720 712 Neutral 6.29 XBD Brokerage 410 425 435 BULLISH 7.1 * IUX Insurance 645 660 647 Neutral 6.29 RLX Retail 900 910 931 BULLISH 6.29 DRG Drug 375 400 378 Neutral 7.1 * HCX Healthcare 750 800 769 Neutral 7.1 * XAL Airline 180 190 167 BEARISH 5.21 OIX Oil & Gas 285 310 301 Neutral 5.13 Posture Alert After closing in record territory, we have turned Bullish across select industry sectors including Internet and Brokerage. We have also turned Neutral across Drug and Healthcare. A detailed description of our Market Posture and its applications can be found at: /members/marketposture ***************** Market Sentiment ***************** Thursday, July 1, 1999 Airborne! After favorable FED action on Wednesday, many of the broad market indices and key industry sectors are airborne. Upon quick review of the key industry sector charts, the market is on all clyndirs. Fundamentally the story is good. Strong economy, low inflation. Technically, many of the key sectors are breaking out after several months of consolidation. And from a sentiment point of view, investor sentiment appears to be in check for the momnet. Now that we are airborne, Pinnacle will be evaluating closely the level of investor sentiment to make sure our trusted indicators are not reaching extreme levels. Bullish Signs: -------------- Market Posture: Several indexes breaking into new highs, including hardware, networking, software, and semiconductors. Russell 2000: Trending above both moving average, and also above key 450 benchmark. Market Volatility (VIX): The VIX is firmly below its 50-day moving average (19.80). Pinnacle Index: The Pinnacle Index decreased in the amount of overhead resistance (OEX 680-750), and increased in the amount of support (OEX 645- 660). Mixed Signs: ------------ Advance/Decline Line: Following the favorable FED action, the advance/decline line is finding support and is beginning to turn up. Interest Rates: With the help of the FED action, the 30-yr treasury yield is beginning to retrace back under the key 6% level. BEARISH Signs: -------------- Investor Intelligence: As a contrarian indicator, the percent of Bullish investors is over 55.0%. Peak Open Interest: The contraian put-call ratio clocking in at .95 suggesting bullish sentiment picking up steam. OTM Call Analysis ----------------- As we move through July'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% Friday, May 21 115,336 +275.0% July Expiration Cycle OEX OTM Call Analysis (Open Interest July 680-750) Date Open Interest Change % Alert Friday, June 19 35,225 - Tuesday, June 22 41,724 +18.4% Thursday, June 24 58,502 +66.1% Friday, June 25 63,342 +79.8% Tuesday, June 29 69,044 +96.0% Thursday, July 1 77,336 +119.5% Market Sentiment at a Glance Friday Tues Thurs Indicator (6/27) (6/29) (7/01) Alert Pinnacle Index (OEX): (680-750) 5.3 5.6 3.6 Overhead Resistance (680-700) 2.3 2.6 1.5 Underlying Support (645-660) 2.0 2.0 2.3 (580-660) 5.1 6.1 6.3 Put/Call Ratios: CBOE Total P/C Ratio .7 .4 .4 CBOE Equity P/C Ratio .5 .4 .3 OEX P/C Ratio 1.4 1.0 1.0 Peak Open Interest (OEX): Puts 670 670 670 Calls 680 680 680 P/C Ratio 1.08 .92 .95 Market Volatility Index (VIX): CBOE VIX 22.61 22.99 19.80 Investors Intelligence: Bullish 57.5% 55.8% Bearish 26.5% 25.7% 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. OEX - Pinnacle Index Friday Tues Thurs Benchmark (6/25) (6/29) (7/01) (680-750) 5.3 5.6 3.6 Overhead Resistance (680-700) 2.3 2.6 1.5 OEX Close 671.29 691.51 709.49 Underlying Support (645-660) 2.0 2.0 2.3 (580-660) 5.1 6.1 6.3 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 690/720 level while the underlying support is holding at the OEX 645/660 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (6/25) (6/29) (7/01) CBOE Total P/C Ratio .65 .42 .42 CBOE Equity P/C Ratio .45 .36 .31 OEX P/C Ratio 1.42 1.02 .99 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (6/25) (6/29) (7/01) Puts 670 / 10,820 670 / 10,979 670 / 11,891 Calls 680 / 10,017 680 / 11,993 680 / 12,506 Put/Call Ratio 1.08 .92 .95 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 May 14, 1999 Tops 25.01 June 29, 1999 22.99 July 1, 1999 19.80 * Investors Intelligence 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 07, 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 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10815.35 102.59 160.20 155.45 95.62 513.86 Nasdaq 2642.11 49.79 39.67 44.01 20.06 153.53 $OEX 691.51 8.47 11.75 12.91 5.07 38.20 $SPX 1351.45 16.04 20.10 21.21 8.30 65.65 $RUT 454.08 5.50 5.47 3.60 -3.26 11.31 $TRAN 3409.62 81.06 12.45 -5.26 62.24 150.49 $VIX 22.95 -0.05 0.39 -0.02 -0.79 -0.47 Stock Mon Tue Wed Thu Week YHOO 177.38 9.62 3.50 12.25 2.13 27.50 Earnings run UNPH 168.00 2.38 8.25 4.00 2.00 16.63 Caution VRSN 82.56 5.50 3.88 8.38 -3.69 14.07 Entry Point? QCOM 139.75 7.75 2.50 6.50 -3.75 13.00 Set stops MMCN 50.00 -0.50 1.13 4.13 5.25 10.01 More gains HWP 102.00 4.75 0.00 3.12 1.50 9.38 New NOK 94.50 0.06 3.06 3.19 2.94 9.25 52-week high MOT 98.31 1.88 2.50 0.38 3.56 8.32 Another high IBM 131.00 -0.56 2.06 4.63 1.75 7.88 Solid gainer SNE 112.06 0.88 3.13 2.19 1.69 7.88 Bullish signs NT 90.25 0.81 1.44 1.13 3.44 6.82 Consistent VRIO 69.13 1.88 1.50 3.75 -0.38 6.76 Good advances MSFT 91.19 1.81 1.25 2.19 1.00 6.25 Strong volume TXN 141.50 3.38 0.94 4.19 -2.50 6.01 More news BBY 68.81 -0.75 2.40 2.41 1.31 5.37 New LU 68.06 2.00 1.00 0.75 0.63 4.38 Break out GTE 74.13 0.38 0.75 4.50 -1.38 4.26 Looking good NXTL 50.00 1.25 0.81 1.69 -0.19 3.57 Intraday high SLR 66.19 1.63 2.25 0.00 -0.50 3.38 Entry point? SUNW 68.19 0.94 0.69 2.38 -0.69 3.32 Go NASDAQ! CSCO 64.38 0.63 0.56 2.00 -0.06 3.12 Pullback EFII 54.25 2.19 0.56 -3.38 2.88 2.25 Strong buy? PSIX 46.50 -0.25 0.88 -3.63 2.75 -0.26 Dropped VOD 201.63 0.13 -7.88 0.00 4.63 -3.12 Strong day Puts GBLX 40.00 -1.25 -2.06 0.13 -2.63 -5.81 More problems FON 51.00 1.25 -0.44 -2.06 -2.00 -3.25 New WLP 83.75 -3.88 2.38 1.00 -1.13 -1.63 Still falling AET 88.63 -0.56 1.06 0.00 -0.81 -0.31 Looking weak CI 88.88 1.69 -0.69 0.69 -0.13 1.57 Bad sector WCII 50.75 -0.13 -0.94 0.94 2.00 1.87 Dropped MCK 33.13 -0.13 0.63 0.69 0.94 2.12 Bounce? TMX 82.38 1.63 1.50 3.19 1.56 7.88 Dropped MWD 101.75 2.75 0.25 7.88 -0.88 10.01 Dropped NDB 55.50 0.50 9.25 12.50 -2.25 20.00 Dropped ***************** 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: ****** PSIX $46.50 +2.75 (-0.25) PSIX was beaten down on Wednesday, as the stock got caught up in rumors about the equivalent of a civil subpoena. PSIX is part of a consortium of companies that are combining resources to lay cable under the Pacific Ocean. Two of the big names, AT&T and Sprint, acknowledged they have received such documents. The premise is that these companies are possibly muscling out upstart company Global Crossing. PSIX lost $3.63 yesterday. Though the stock bounced back on Thursday, we have concerns with PSIX in that it is having problems breaking through and holding above its 50-dma. As the market has rallied, PSIX has struggled. We are going to drop PSIX until we can see a meaningful break upward. PUTS: ****** TMX $82.38 +1.56 (+7.88) Telmex is trading higher after the surprise decision by the Federal Reserve on Wednesday. With all the uncertainty ahead of the decision, we were recommending TMX as a potential put if the Fed had made a negative announcement. That is why we recommended on Tuesday not to open new positions until after the FOMC meeting. But, as I'm sure you've all heard, the surprise was to the positive side. TMX had a lot of traders on the sideline waiting for a decision and they obviously liked what they heard. The stock has traded up solidly both Wednesday and Thursday. Therefore we are dropping TMX from the put list. NDB $55.50 -2.25 (+20.00) You may remember in Tuesday's write up on NDB the following statement...The FOMC hasn't yet cleared the market for take off. We now think it's safe to say the Fed did clear the market for take off yesterday and NDB did hesitate for a moment. The stock carried the momentum that it had built up earlier this week to push even higher. We wanted to play NDB based on its big run on Monday and Tuesday as potentially having a let down by the Fed. But a let down was not in the cards and we didn't get an entry point so we are no longer playing the NDB as a put. WCII $50.75 +2.00 (1.88) We've mentioned this for the past two updates but it has become a reality today. CEOs love to promote their stock at annual meetings. William Rouhana, CEO of Winstar, proved our point today. His apparently inspiring words caused WCII to jump today and pushed it above the key resistance of $50. WCII held their annual meeting today which gave WCII's top brass the spotlight to share their optimism on the outlook for the company. This was expected and your stops should have you out of the play but we are no longer recommending new plays on WCII. But for those looking to continue, it is common for the stock to reverse after the excitement wears off. So watch the $50 mark to see if it is now support. If not and WCII falls back through, then we should back right back into the $46 to $50 pattern. MWD $101.75 -0.88 (+10.00) The bullish results of the FOMC meeting have ultimately killed this put play. The rate increase was expected, but the return to a "neutral" bias gave the bulls the clearance they were waiting for. Yesterday, the stock spiked up $7.88 on almost double its average volume and this is most definitely NOT a "bearish" sign! With the financial sector basking in Greenspan's words, we must drop MWD. Unfortunately, this is one of those "thank God for stop losses" plays. ***** Play updates continued in section two ***** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 *********** DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. 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The Option Investor Newsletter Thursday 7-01-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ****************** PICK NEWS - CALLS ****************** TXN $141.50 -2.50 (+6.50) Let's get to the news first. From PRNewswire: TXN, Liquid Audio and SanDisk announced they have teamed to offer the first complete solution for the secure downloading of music off the Internet onto portable audio players. The programmable DSP-based solution is available today to enable manufacturers to develop secure players in time for Christmas 1999. Also, TXN now offers a new software-writing suite that cuts DSP code writing time by 50%. Remember TXN is a leader in DSP technology. This new suite will help others develop applications in much the same way that J.D. Rockefeller helped inventors develop petroleum-using devices. Trend-wise, after 5 days up, TXN was due for a break, which we got today. With a $4.19 gain yesterday on great volume, today's give back of $2.50 on less than average volume appears to be just profit taking - probably nothing major. The technical chart is still in strong positive territory. We could see a continued move down tomorrow simply because investors may not want to jeopardize their profitable position over a long weekend. That said, set your stops for some flexibility if your risk profile permits. Otherwise, set stops tight to protect profits with the idea that you can target shoot back into a new position. Of course, if employment figures scare the bond market, all bets are off. Confirm market direction before playing. (Just a reminder that TXN reports earnings on July 20 and is also a split candidate. It last split 2:1 in November, 1997, and will require shareholder approval to do it again, since TXN doesn't currently have enough shares to pull it off. MSFT $90.19 +1.00 (+6.25) Finally, volume kicks in and the price goes up. Yesterday on heavy volume, MSFT handily broke through resistance of $89. Volume today, while still strong, but not as strong as yesterday, helped move MSFT up another $1. As we noted last night in the Market Wrap, MSFT spin meisters said they would be revising previously stated quarterly revenues upward to correct accounting "irregularities". Not even reverse- spun news of an SEC investigation into MSFT's alleged sandbagging of revenues could hurt it today. Talk about Teflon coating! Technically, MSFT couldn't look stronger - it's been up 6 days in a row, closing at or near its highs for in the last 4 days. The chart looks like a diagonal rocket-launcher. You know what that means - yep, due for profit taking. Keep stops set to get you out with profits intact, and use the dips as buying opportunities. Earnings are July 21. Confirm direction before playing. QCOM $139.75 -3.75 (+13.00) Uh oh. Don't look now, but in the last 10 minutes of trading today, QCOM fell off the cliff for a $3.75 loss on a substantial volume trade. If it's any consolation, there appeared to be a 15,000-share sale back up at $143.15 in after hours trading. But that was only 1 sale of many that otherwise transacted in the $139 range. It may be "Shorty" showing up to play a few hands. Following yesterday's $6.50 gain on big volume, today's volume, looking merely average in flat trading may have enticed "Shorty " to the table. While there is no guaranty that this is what actually happened, be on guard for further weakness and get out if the trade goes against you, especially since traders may not want to take QCOM home over a long weekend. There is a lot of profit in QCOM and you don't want it to slip away either. That said, QCOM is still technically strong. Remember S&P's comments from Tuesday in upping QCOM's rating: "CDMA patent royalties are substantial, based on equipment manufacturers' revenues. Royalties will also apply to equipment built for the next generation of the European wireless network, starting in about three years. Qualcomm is the dominant supplier of profitable CDMA semiconductors to the industry". Volatility = risk. Keep an itchy trigger finger and confirm direction before playing. EFII $54.25 +2.88 (+2.25) Here's another one where you'll want to keep the trigger finger itchy. Despite the strength of the market, EFII has shown weakness at the close for the last 2 days, especially yesterday where it fell $7 in the last hour; it fell $2 today. Evaluate your position and risk profile and act accordingly. Technically, it's looking a bit tired too. Conversely, at least someone is bullish. Check this out from Bloomberg: Prudential Securities analyst B. Alex Henderson reiterated his "strong buy" rating on the maker of color desktop- publishing computer systems. "The outlook and the competitive position of the company has not looked stronger," Henderson wrote in a note to investors. The shares are "considerably undervalued," he wrote. You decide. Of course, confirm market direction before opening a new play. Earnings are July 15. CSCO $64.38 -0.06 (+3.07) As we noted Tuesday, profit taking could set into CSCO following 4 days of gains. Fortunately, CSCO sprang ahead $1.94 yesterday on strong volume and gave up only $0.06 today, again on strong volume. Were it not for the last hour of trading, today CSCO would have actually closed up about $0.75. Perhaps this is the profit taking we'd referred to. However, while technically strong, with 5 up days (almost a 6th) and a long weekend ahead, CSCO may unwind a bit more. With 3.2 bln. shares outstanding, it's a slow mover to the downside too. We still consider dips to be buying opportunities (market willing) since the Internet equipment sector is strong. Near term support looks to be about $63.75. Target shooting may work well here. Nonetheless, we need to use stops to protect profits if the trade moves against us. Earnings are not until August 10 (company confirmed), and won't likely affect the price yet. Confirm market direction before playing. SUNW $68.19 -0.69 (+3.31) Sun paused for a breather after 4 straight up days. The stock traded as low as $67.19 today before rebounding with the market to close down less than a dollar. That has really been the story this week as SUNW has generally moved with the market but at a slower pace. We like Sun's position here because it is only $4.50 from a new high. The FOMC's decision has prompted a wide spread rally but high- growth stocks are one of the groups that have the most to benefit. That is because lower borrowing rates translate into more money to spend on growth and increase the speed of expansion. The news was also fairly quiet Thursday on SUNW. There was nothing to move the stock either direction. So we expect more of the same with respect to the recent uptrend in SUNW. But confirm market direction and look out for a pullback as the market has made huge gains this week. VRSN $82.56 -3.69 (+14.06) Though VRSN gave back some of its large profits on Thursday, the stock is still up over $14 on the week. VRSN actually traded as low as $79 today, but fought its way back to lose just $3.69. The company announced an agreement with Diversinet(DVNT) yesterday that will allow for extended authorization capabilities for any enterprise using digital certificates. DVNT is a leading provider of security solutions for e-commerce. VRSN continues to profit from the masses converging on the Internet, as it helps provide secure transactions. VRSN has mild support at $79 and is trading just $12 from its 52 week high. VOD $201.63 +4.63 (-3.13) VOD's week has been a wild one, but we are glad to see that its 50-dma has held and the stock seems to be coming under control. The stock had been all over the place as the company finalized its merger with AirTouch. Now this is over, we see the stock making a run and announcing a split in the near future. After bouncing off its 50-dma at about $195 yesterday, the stock has since gained $6.69. Today's rise was helped along by higher than anticipated subscriber numbers from many of Britain's wireless phone companies. Though the market could take a dip tomorrow to consolidate its gains, we like VOD going forward and feel that it has plenty of upside potential still to achieve. LU $68.06 +.63 (+4.38) LU has had a nice week after breaking out recently, and is now trading at new high levels. On Wednesday, LU reached an intraday high of $68.69, also a new 52 week high. Though LU rose slightly in today's trading, it couldn't quite eclipse yesterdays high. LU announced today the purchase of CCOM Information Systems. CCOM is a telephony integration software maker which LU feels will help "unify the databases that underlie the voice and data networks of businesses, thus simplifying their network management and helping to reduce costs." (Reuters) Watch for profit taking and consider pull backs as possible buying opportunities. LU will announce earnings in four weeks and an earnings run could start in the near term. NOK $94.50 +2.94 (+9.25) Following the Fed announcement yesterday, Nokia set a new high of $92.00. It closed very near that high at $91.56, paving the way for a continued rally today, when it eclipsed Wednesday's record high by reaching $95.75 and closing at $94.50. Volume was strong on Wednesday, but today's was even stronger at more than double the normal volume. This stock is on a great run, but please realize that it has now been up 5 straight days in a row and will be due for a pullback any day. Take a cue from the way it trades overnight in Europe, watch the jobs report, and plan on much lighter volume tomorrow. An up or down day can be magnified when volume is light. If NOK peaks, this could be a profit-taking opportunity for option owners, who could then re-enter on a dip. If the dip comes tomorrow, it may be a chance to add to positions or initiate new ones. In the news, NOK has signed an agreement with Polkomtel of Poland to provide general packet radio service equipment. Mobile customers will have fast, continuous connection to the Internet while on the move, through packet transmission technology. Yesterday, Nokia agreed to acquire 40% of U.K.-based AIRCOME International, a company that develops planning, information management, and software for networking. Also, in an effort to further the adoption of the WAP standard in the mobile communication industry, NOK has introduced the Nokia WAP Browser, which can be ported to mobile phones. IBM $131.00 +1.75 (+7.50) Yesterday, the neutral stance adoption by the Fed helped IBM set a new high of $132.00, before it closed at $129.25, a gain of $4.62. Volume was huge at 8.26 million shares. Today Big Blue added another $1.75 on average volume. The move over the last few days turned all technical indicators on IBM solidly positive. IBM has gained a big $8.44 in the last three days. Trading may be light tomorrow ahead of the holiday, and if there is any profit taking (especially if the jobs report is bad), there may not be enough buyers to prevent a drop in price. If a dip occurs, it would be a good opportunity to open positions. In the news, IBM announced that its RS/6000 S80 Enterprise server, due out in October, set a new world record for speed and performance. According to IBM, in early tests it was 66% better than the current server standard, set by a Hewlett Packard product. GTE $74.13 -1.38 (+4.25) Yesterday, GTE set a new all time high of $76.13 before closing at $75.50. Volume was very high yesterday at 4.49 million shares, but unfortunately, volume was still above average today when GTE gave back $1.38. Yesterday's $5.50 was an especially big one day move for this stock, and profit takers were quick to capitalize on it. In the news, GTE announced another sale of phone lines as part of its plan to generate investment revenue. It will sell its Iowa local telephone access lines to Iowa Network service for an after tax proceed of $3 billion. Also, the senate has approved a bill that would limit the time the FCC can spend on the telecommunications merger process. (The GTE/BEL merger review has been ongoing for nearly a year.) Finally, according to Mealy Publications, GTE is suing five insurers for $400 million in Y2K costs. YHOO $177.25 +5.00 (+30.37) Four fun-filled days of trading and $30 in gains makes for a nice holiday week-end. The encouraging report by Greenspan of a return to a "neutral" bias prompted another resurgence of the Internets. YHOO led the pack as it advanced into the double-digits with a $12.25 increase. Pacific Crest also started coverage on YHOO with a new "buy" rating. Today, the extended marketing agreement between Yahoo and Proctor & Gamble (PG) was well received by investors and certainly aided YHOO in tacking on more gains. YHOO almost broke the $180 mark when it peaked at $179.88 during intraday trading. And the volume was very strong the past few days which is definitely a "bullish" indicator. However, even though this earnings' play has been quite profitable and the near future looks bright, it is coming to an end. Time is taking us closer to its report date of July 7th. Remember no matter how promising 2Q results may be, it's too risky to hold over the announcement. Take your profits and consider having all your positions closed out soon. NXTL $50.00 -0.19 (+3.56) NXTL is again testing new waters as it hit another 52-week high when it rallied with the market yesterday. The record now stands at $50.75. Today the stock came close to breaking that record again only missing it by a fraction. Earlier in the morning, NXTL had dipped to $48.69 which was most likely a result of profit- taking. Recall NXTL left the $38 mark on June 15th and has consistently risen to these new levels on sheer momentum. Who can blame investors for wanting to cash in on some shares. Steep gains are always a factor to consider when planning your future plays. Please consider using stops to protect your positions. The stock's last support level was established last week at $44-46 and NXTL may very well need to consolidate again soon. Plus, Davenport & Co cut NXTL to a "hold" from an "accumulate" today and set the 12-month target price at only $50. VRIO $69.13 -0.38 (+6.45) Volume picked up to normal ranges on Wednesday and VRIO advanced $3.75. However, this surge was short-lived and trading volume fell back to about 35% today. Volume or no volume, VRIO has been making consistent advances. Take a look at a 1-month and 10-day chart for visual confirmation. The recent marketing alliances with AOL and MSFT securely established Verio's leading-edge position in this very hot Web hosting business. Presently, the stock is moving even closer to its overhead resistance at the 52-week high of $78. VRIO surpassed its 10 dma at $61 last week, but because of the recent advances there's no support level determinant. Keep a close watch for consolidation at this point! Today VRIO traded relatively flat between $68 and $70 losing a fraction overall. UNPH $168.00 +2.00 (+16.62) OK, so the merger with JDS Fitel is complete, and the final approval has been received from Ontario Superior Court of Justice. So what's the problem? There is none if you got in on the latest run, however, UNPH made a new 52-week igh today at $174.00 and settled at $168.00, up $2.00 on the day, which is at the lower end of its range for the session. We are pretty amazed at UNPH's strength. The rally ignited by the Fed yesterday pushed UNPH through what we thought had been a top. The momentum today was just a continuation of yesterday's excitement. We are really looking for a sizeable pullback now with UNPH above its upper channel. The profit taking may have already begun, the market is getting ready for the 4th of July weekend, and volume could be very thin Friday. We are not dropping UNPH however we are going to be looking for any signs of a bottom if UNPH pulls back tomorrow. SLR $66.19 -$0.50 (+3.38) We suggested Tuesday, that SLR may be due for a pullback. At that time it was approaching its all time high of $67.25 set on June 21st. In the last three days SLR has made three attempts to break through that mark only to fall back. With the action in the overall market this past two sessions, and the strength in the tech industry today, we would again strongly suggest you examine your stops. SLR may be simply catching its breath before its next step upward or it may be waiting for an excuse to pullback. Volume has been just under its average this past three days at 1.1 mln. shares per day. If SLR shows any strength tomorrow, its bottom should be $65.50 otherwise, if we get a strong sell-off SLR could hit as low as $62. MOT $98.31 +3.56 (+8.31) Motorola reports earnings July 13th. Could this be the beginning? of the earnings run we mentioned on Tuesday. MOT has had a nice run up $8.31 for the week. MOT posted a new 52-week high of $98.56 on average volume of 3.47 mln. shares. Analyst Gregory S. Geiling of J.P. Morgan Securities reiterated a "buy" rating today, raising his 12 month target to $115.00 per share. As we've previously mentioned MOT is getting into possible split territory, and is probably experiencing an earnings run, however don't forget MOT is up just under 12% in the last six sessions and a holiday weekend is coming. Volume tomorrow could be light and as always profit taking could set in at any time. Set your stop losses appropiately. MMCN $50.00 +$5.25 (+$10.00) With a chart that looks like MMCN's we are somewhat hesitant to suggest new plays at this point. Caution would be wiser. MMCN is up $10.00 in one week, that's a 25% gain in marketcap. Volume was well over the average today at 817 K. MMCN hit a new 52-week high at $50.50 today and we would expect this current should continue. However remember profit taking can happen at any time, we are heading into a long holiday weekend, and a 25% return is not bad for one week and makes a very tempting target for investors to lock in some profits. Keep your stops tight, and look for a dip with a strong intraday bottom before entering any new plays. NT $90.25 +3.44 (+$6.81) Nortel Networks has advanced 8% this week marking a new 52-week high at $91.00 today. Volume was strong at 2.74 mln. shares. With the recent move NT, received a strong buy recommendation by analyst Tru Do at SoundView Technology Group. In reiterating their recommendation a new 12 month price target of $120.00 was also set. Wednesday NT won a contract from who else? "Qwest" It's a three year deal worth 600 mln. for fiber-optic equipment. This is the biggest contract ever awarded NT for optical-networking equipment. We are excited about the breakout in price today but with the market up so much this week and traders heading into a long holiday weekend, we would expect some pullback. Hopefully it will only be in the morning and the buying can resume late afternoon as investors try to get a head start for next week. SNE $112.06 +1.68 (+3.87) Sony is off to a good start, having jumped up $3.87 in the past two sessions. It basically has just followed the broader market. There is really no news that has triggered any move here just, jumping on the bandwagon. Speaking of jumping, that is kind of how SNE trades. If you look at the chart for Sony, you'll see GAPS! Gaps up, Gaps Down. Tomorrow the latest unemployment report comes out, depending on how it's received, you may see another Gap. If you didn't take this trade on Wednesday, you may want to see how the indexes react to the news in the morning, and remember we are going into a holiday weekend and volume could be thin especially on Sony. ***************** PICK NEWS - PUTS ***************** WLP $83.75 -1.13 (-1.63) WLP traded lower all day despite an upgrade from JP Morgan. The stock had been down more than 3 points before a press release showed that an analyst at JP Morgan had reiterated a long-term buy rating on WLP with a $97 price target. This helped the stock recover some of the days losses but it didn't have the feel of a strong upgrade. It's appearance was more along the lines of trying to help a falling stock. We think the entire industry is still struggling with the government payment system and shrinking profits. As a whole, the group has lagged behind the strong market this week. WLP is just one example as it is still lower on the week. Maybe the upside from the JP Morgan rating is the potential entry point, market willing of course. CI $88.88 -0.12 (+1.56) Cigna is still in the consolidation phase after breaking through support last week. It has traded in a tight range all week. Today was the final day for HMO plans had to let the government know of any changes to their service. Also industry analysts say that the situation is growing worse. We expect stocks in this group to sink until the outlook begins to clear up. Recent legislation introduced by President Clinton will make more changes but will be locked up in Congress for awhile. For further information on this subject, check the news wire today on any popular healthcare stock. There were lots of articles out today. As far as our play, $88 is near term support. Cautious investors may want to see a break below that level before opening new plays. Please trail your stops to lock in profits. AET $88.63 -0.81 (-0.31) Trading in AET continues to be light despite some recent news. Today, a JP Morgan analyst started coverage of AET with a market-perform rating. This was the lowest rating given by this analyst who also started coverage on two other healthcare stocks. So it is a less than impressive rating. Aetna also released an article about how they have restructured some of their HMO business to withdraw from unprofitable locations. This is the big reoccurring theme lately in the sector. Every company is saying the same thing. The government's new payment program has tightened profits especially in the low margin communities. This caused AET to trade lower but again volume was light. We expect the stock to continue to drift lower as the sector has shown no signs of recovery. MCK $33.13 +.94 (+2.13) Though MCK has risen this week, we feel the gains have been market related. In other words, we feel MCK has been the beneficiary of a very strong market and that its gains are temporary. After the large drop MCK took, a little bounce is not uncommon. After a stock has dropped, it will often retrace about 50% of its drop. If we look at a chart of MCK, we see the stock consolidated at the $36 range for quite some time. From there the stock dropped to $30 and since has retraced about 50% of those losses. From here we see the stock running into further selling pressure and moving down to its previous lows. MCK has news every day about law suits from shareholders. Though these lawsuits rarely pan out, they still put a dark cloud over the stock. Our educated guess would be that MCK hits resistance at about $33.50 and then trends downward to at least $30. GBLX $40.00 -2.63 (-2.50) The battle continues between rivals GBLX and QWST! On Wednesday, Global Crossing issued a statement regarding their bid for Frontier. Putting aside the obvious lack in numbers, GBLX believes their bid is superior "based on strategic, financial, regulatory, and timing considerations". However, by the following day it was all over the press that Frontier had agreed to talks with Qwest. They are presently discussing a procedural confidentiality pact. This pact is ultimately a protection feature for Frontier. For instance, there will be features that would forbid Qwest from proceeding with a hostile takeover bid or lowering their offer once they actually view Frontier's Financial information. It's expected a deal could be reached as earlier as next Thursday. If Frontier finds favor with Qwest, US West is likely to follow suit because its merger agreement with Global Crossing is contingent on Frontier being part of the deal. Again bottom line is this - the acquisitions are pivotal regarding the future success of these two global rivals. If it appears GBLX will lose the bid, the stock price will suffer and if investors think GBLX is going to sweeten the deal to rival Qwest and put out more of its cash that would also put a strain on the stock price. It's almost a win/win situation. However there is one important snag that you want to keep in mind (besides that nothing is guaranteed!). If Global Crossing does ultimately lose the bid, the stock may rally short-term because they will not have to swallow such large fish in USW and Frontier. The trading volume heated up with over 2 mln. shares exchanging hands the past two days. With the broad market rally after Greenspan spoke on Wednesday, GBLX held steady right around $43 and gained a fractional. Today was a different story as it shed $2.63 moving it closer to its 200 dma at $32! Remember, there isn't any bottom resistance to speak of since GBLX hasn't been below $45 since last April. *************** NEW CALL PLAYS *************** BBY - Best Buy $68.81 +1.31(+5.37 this week)(+3.44) Best Buy Company sells personal computers and other home office products, consumer electronics, entertainment software, major appliances and related accessories nationwide through its retail stores. It is one of the fastest growing retail specialty companies in the country. Best Buy has been on a tear for some time and has moved up fairly steadily over the last 2 weeks, following a record first quarter. Like its competition, Circuit City, BBY has managed to thrive in the cut-throat competition in the discount electronics business, even as others have fallen by the wayside. The company is capitalizing on the digital revolution, as consumers spend big bucks on everything digital. It operates 314 "superstores" in 36 states with plans to open 45 to 50 new stores each year. In fact, BBY plans to double its size and sales in the next 5 years. (Sales were just over $10 bln. last year.) In addition to more stores, the company will add new products and services and further develop its Internet strategy, where it currently offers music and movies online. BBY beats earnings estimates quarter after quarter. It has even surpassed its own sales projections for digital products, and while PC prices are declining, high volume is making up for lower per unit revenue. Technically, the stock looks great as well. Last, but by no means least, BBY was added to the S&P 500 on June 29th, replacing Airtouch, which was bought out by Vodaphone, another OI pick. That means that every S&P 500 index fund MUST BUY shares of BBY. Shares of BBY surged $2.40 on Tuesday this week when it took its place in the S&P 500. A whopping 13.97 mln. BBY shares traded that day. (Average is only 1.75 mln.) On Wednesday, the move toward a neutral stance by the Fed sent the stock up another $2.41, with investors relieved that consumers will still be able to finance those digital products at a reasonable rate. Today, the stock gained yet another $1.31. BBY has now set a new all-time high for three days in a row. As always, we caution you to watch out for profit taking and try to buy on a dip, if there is one. In the news today, BBY has entered a deal with Prodigy in which BBY will offer a $400 rebate on the purchase of a computer with the purchase of a three year Prodigy Internet Service contract. **We want to re-emphasize that we are expecting this stock to dip. Look for your entry point. BUY CALL JUL-65*BBY-GM OI=1221 at $5.13 SL=3.50 wait for dip BUY CALL JUL-70 BBY-GN OI= 442 at $2.25 SL=1.25 BUY CALL AUG-70 BBY-HN OI= 248 at $5.63 SL=4.00 Picked on July 1st at $68.81 PE = 43 Change since picked +$ 0.00 52 week low =$15.97 Analysts Ratings 8-5-0-0-0 52 week high=$66.38 Last earnings 05/99 est .20 actual .22 surprise=10% Next earnings 09-15 est .23 versus .21 Average daily volume = 1.75 mln. Chart = http://quote.yahoo.com/q?s=BBY&d=3m ****************************** New Calls continued in section three ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter Thursday 7-01-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. *************************** NEW CALL PLAYS - continued *************************** HWP - Hewlett Packard $102.00 +1.50 (+9.36) Hewlett Packard is best known as the #2 worldwide provider of computers, peripherals, and computer related services standing only behind the "Big Blue". Almost 85% of sales revenue is derived from this aspect of the business. But HWP also makes testing and measurement equipment and medical equipment products which it plans on developing and combining into a separate company. HWP rallied with its sector this week. On Monday it advanced $4.75 to move it beyond its comfortable support of $94-95 and pop it right over its 10 dma. This was the first real sign of a positive uptrend. The confirmation came on Wednesday when HWP reacted in a positive manner to the results of the FOMC meeting. Big cap tech stock always have responded well to good interest rate news and HWP was no exception. The stock tacked on another $3.12 to close smack on its daily high of $100.50! HWP climbed even higher today setting yet another 52-week high as it hit $103.19 during intraday trading. OIN expects a pull-back tomorrow and this may be your opportunity for a solid entry point to get into the play for next week. The goal of course would be to find the intraday bottom; however, if you can't watch it all day, try target shooting a better position. Industry news from INTC and KLAC certainly had its influence on the tech sector today as they were named to the "uncommon value" list by Lehman Brothers. BUY CALL JUL- 95 HWP-GS OI=2232 at $8.13 SL=6.25 BUY CALL JUL-100*HWP-GT OI=2537 at $4.38 SL=2.75 BUY CALL JUL-105 HWP-GA OI= 0 at $2.00 SL=1.00 new strike BUY CALL AUG-100 HWP-HT OI=1662 at $7.50 SL=5.75 BUY CALL AUG-105 HWP-HA OI= 983 at $4.88 SL=3.00 Picked on July 1st at $102.00 PE = 27 Change since picked +0.00 52 week high=$103.19 Analysts Ratings 7-10-8-0-0 52 week low =$ 47.06 Last earnings 04/99 est= .80 actual= .88 surprise=10% Next earnings 08-16 est= .79 versus= .58 Average daily volume = 3.32 mln. Chart = http://quote.yahoo.com/q?s=HWP&d=3m ************** NEW PUT PLAYS ************** FON - Sprint Corporation $51.00 -2.00 (-3.25 this wk) Sprint is the nation's third largest provider of long-distance behind AT&T and Worldcom. It is also the second non-baby bell local phone service company behind GTE with more than 7.6 million phone lines. Besides that, Sprint is involved with telecom equipment distribution, directory publishing and the Internet. They also offer the ION project (Integrated On-Demand Network) which is a broad-band service to meet future demands. So it is a formidable foe in the telecom market. Sector warnings from two analysts on Wednesday cast a shadow over FON, causing it to miss out on the market rally. On Wednesday, Morgan Stanley and Paine Webber analysts said that they see competition putting pressure on prices. FON was cited as one company that would suffer. Although they did not specifically have an earnings revision like WCOM. It was generally assumed by investors that the sector was entering a tough period. Also it was reported Wednesday that the Justice Department had contacted some of the major firms involved with building the $1.2 billion undersea cable from the U.S. to Japan. FON did acknowledge that they had received the 18-page civil investigative demand. If the consortium has been found to have violated antitrust concerns, it would mean changes in the way voice and data services are transmitted. Global Crossing is one of the original companies to have complained to the Justice Department. We are adding FON due to its relative performance against a very bullish market. The stock has dropped below the support of the 50-dma at $54. This has been on heavy volume too. We see potential for further declines as the stock closed right near the day low and volume has let up yet. But use caution as FON's next support could be at $50 (basically its 100 dma). Conservative put players might want to wait for the stock to close below this price. Look for an entry point and watch for more analysts comments to drive the sector. BUY PUT JUL-55 FON-SK OI=854 at $4.38 SL=2.75 BUY PUT JUL-50*FON-SJ OI=891 at $1.06 SL=0.00 Average Daily Volume = 1.83 mln Chart = http://quote.yahoo.com/q?s=FON&d=3m ***************************************************** COMBINATION PLAYS ***************************************************** Markets Rally As Inflation Fears Subside... Stocks moved higher for the second straight day as investors grew comfortable with the idea that the Fed's small rate increase might be enough to slow the economy's growth. ************ MARKET RECAP ************ Thursday, June 24 Stocks tumbled on Thursday as investors were rattled by a jump in bond interest rates; the yield on the benchmark 30-year U.S. Treasury issue climbed to 6.17%, the highest since November 1997. The Dow was down 132 points to 10,534. The Nasdaq index fell 44 points to 2,554. In the broader market, declining issues beat advances 2-to-1 on moderate volume of 690 million shares on the New York Stock Exchange. Portfolio plays: Some of our streaking calendar spreads; Baan Company (BAANF) and 3COM Corp (COMS), came back to earth with today's market-wide sell-off. Brokerage firms, including Merrill Lynch (MER) and Lehman Brothers (LEH) were also less than impressive. Oil issues like Halliburton (HAL) and Ensco (ESV) continue to suffer from the recent slump in crude prices. Even the safety stocks like Proctor & Gamble (PG) and the giant telecoms like Motorola (MOT) were not immune to the beating. Williams Company (WMB) has been one of our biggest concerns and it is still showing no sign of recovery. Yesterday's collapse back through the 30 dma was disappointing, and with the newly confirmed bearish trend, we decided to close our long position near break-even ($3.50). Ocular Sciences (OCLR) is one of our short-term speculation plays that just hasn't performed as expected. With time running out, we are going to try to use the daily movement of the stock to help exit the play. The total credit for both positions is currently $3.00. Two stocks from our past, Atlantic Coast Airlines (ACAI) and Xilinx (XLNX) were in play today. We sold JUL-20 calls on ACAI to reduce the cost basis on that long-term position. When the chip sector tumbled, we bought-back the XNLX JUL-55 calls for $2.50, a $1.00 recovery in one week. We now expect to resell the options on the market rally after the FOMC meeting. Friday, June 25 U.S. blue chips closed modestly higher on Friday and technology stocks held their ground even as many investors remained on the sidelines ahead of next week's meeting of the Federal Reserve policy-makers. Boosted by the financial sector, the Dow rose 17 points to 10,552. The Nasdaq was almost unchanged at 2552. The long bond rose 4/32 with the yield at 6.15% after a protracted slide this week. Advancing issues narrowly led declining issues with 1504 stocks on the upside compared to 1421 stocks on the downside in the lightest volume session of the year. Portfolio plays: Polaroid (PRD) finally came back to us today, finishing down $0.75 at $27.00. Even though we didn't officially enter this play (the pricing disparity disappeared on the first morning as the stock rallied), it is still a worthwhile study because of the recent technical history and high implied volatility. Quantum (QNTM) is another play that has traded against us (to the upside), reducing the profitability of our neutral spread. In that play, we were successful in significantly reducing the overall cost basis during the first month. Cisco (CSCO) and EMC Corp. (EMC) continue to be two of our best (and most unlikely) performers in the growing list of calendar spreads. In the beginning, we were quite worried that both would be difficult to contain but they proved to be very stable issues; and their option pricing remains at the upper extreme. Current losers in long-term category include Merrill Lynch (MER), Ensco (ESV), and Apria Healthcare (AHG). None of these issues are performing well and only ESV appears to have a chance of recovery in the next few weeks. Oil industry stocks continue to suffer and Halliburton (HAL) is experiencing a much-needed correction. Our bullish LEAP position is muddling through it (in the short-term) but we hope the group will rebound by the end of summer. The other long-term play that has plagued that section for months is Sepracor (SEPR). Our loss in that position is about $7 and the stock refuses to cooperate with any kind of sustained rally. Revlon (REV) and Earthlink (ELNK) are leading the bullish-debit portfolio but Micron (MU) continues to under-perform. We expect it to find support near $37-$38 and hope the rebound is in time to save the (July) play. Most of our debit straddles are experiencing the unfavorable effects of a range-bound market. Three of the current plays; Amcol (ACO) - $1.00 profit, Coherent (COHR) - $0.75 profit and Sandisk (SNDK) - $2.50 profit, can be closed for positive short term returns but the rest are slowly withering away. Luckily, none of them are anywhere near our stop-loss limit of 50% and except for the speculation play on OCLR, the closest expiration is in September. We expect to wait at least until the end of summer before considering a losing exit. Time decay increases sharply during the last month, and that makes it important to use a mental loss limit near 50% - 60% of the initial straddle price. This means if you're sitting on a three month straddle, you will be able to hold it for slightly over two months before it loses half of its value, even if the underlying stock remains exactly where it was when the play was opened. On the bright side, our two credit strangles, Maztec (MTC) and Spacelabs Medical (SLMD) and the butterfly spread on Torchmark (TMK) are performing exactly as expected; small profits are currently available in each of the positions. Monday, June 28 U.S. stocks rallied on Monday as investor's fears of the Federal Reserve meeting subsided. The central bank's Federal Open Market Committee meets this week and the market is now comfortable with the expected increase of 25 basis points. The Dow average was up 102 points to 10,655. The technology-heavy Nasdaq index was also higher, finishing up 49 points at 2,602. In the broader market, advancing issues beat declines 1,859 to 1,127 on moderate trading of 641 million shares on the New York Stock Exchange. Portfolio plays: Two of our straddle plays, Rental Service (RSV) and Coherent (COHR) made big moves today. RSV gapped-up $4 on news that it has entered into a definitive merger agreement with Atlas Copco North America, in which all of the outstanding shares of the company's stock will be aquired for $29.00/share. The position was closed for a $6.00 credit. There was no news on COHR but the $2.00 move took the straddle to a $1.00 profit (on $4.50 invested) and that is a favorable return for a 1 month play. Gemstar (GMST) caught our interest again today as BancBoston Robertson Stephens Internet analyst Michael Graham and managing director/senior Internet analyst Keith E. Benjamin reiterated their 'Strong Buy' rating on the company. They made some very bullish remarks such as, "We like the risk/reward profile of the stock with advertising revenue creating the potential for 5 - 10 times upside to our estimates, while the company's licensing business provides some downside protection - we believe there is potential for more good news ahead". This recommendation is likely to bolster the upward momentum of the stock and today's close at $59.50 (the 25 dma and a very recent price resistance area), has certainly placed this issue at a key moment. We will watch this one closely for signs of a continued rally and a possible roll-out. Tuesday, June 29 U.S. stocks closed higher on Tuesday after the report on 'new home sales' indicated that future inflation may not be as high as expected. The Dow was up 160 points at 10,815 while the technology-laced Nasdaq index gained 39 points to 2,642. In the broader market, advancing issues beat declines 1824 to 1113 on active volume of 780 million shares on the NYSE. On Tuesday, the central bank's FOMC started a two day meeting. Analysts are expecting a small rise of 25 basis points in the short-term interest rate and if that occurs, the market should rally further given the end-of-quarter dynamics and historic patterns approaching the long 4th of July weekend. Portfolio plays: The straddle portfolio continues to be the highlight of the combos section and today's mover was Sandisk (SNDK). The stock climbed almost $5, moving the straddle credit to an incredible $18. Needless to say, we closed the play for the available profit rather than hold the position for future returns. Kennametal (KMT) was another big play in the straddle section. The stock price opened $2 lower on news that the company would miss earnings expectations due to soft sales. The put options traded as high as $5.50 during the morning session (the entire position was worth about $6.25 credit) but the stock rebounded in the afternoon as traders realized the forecasts would be positively affected by a favorable FOMC meeting. By the end of the day, the stock was trading over $1 higher than the previous close. Almost any exit on the downside move would have been profitable and the sum of the positions should currently yield at least a $1.00 profit. Spacelabs Medical was up $1.25 on 'no news' in a completely uncharacteristic move. On average, the stock trades in a $0.25 range throughout the day but there has been some new merger speculation and this could be an indication of the upcoming announcement. With the late afternoon price well above the recent resistance area near $17, we decided to close the long position for a small profit and reduce the possibility of a future loss. Gemstar continued to rally today as investors abandoned their concerns of inflation and future rate hikes. With a high near $63 and the close above last week's resistance at $60, this one is poised to run. We will plan to buy-back the short position in the expected sell-off prior to the FOMC announcement. With any luck, the news will be favorable and will be able to close the play for a small profit. Wednesday, June 30 U.S. markets rallied Wednesday after the Federal Reserve agreed to increase interest rates by 25 basis points. The also lowered their future outlook for rate hikes and plan to refrain from any further moves at this time. The Dow average rose 155 points to 10,970; less than 140 points from its all time high. The Nasdaq index jumped 43 points to a record high of 2,685 while the S&P 500 index rose 21 points to 1,372. In the broader market, advancing issues outnumbered declines 1,921 to 1,147 on active volume of 1.114 billion shares on the New York Stock Exchange. Portfolio plays: It was clearly a broad market rally as investors turned their attention to earnings and forecasts on the announcement of the FOMC's revised (neutral) bias. Many of our down-and-out issues rebounded and this may be just the boost we need for the long summer months ahead. Merrill Lynch (MER) was one of our slumping volatility plays; opened during the merger speculation last month. Today, the stock recovered another $2.50 to close at $80 and we opted out of our remaining long position; JUL80C @ $1.50. The falling oil sector rallied, bringing our plays on Ensco (ESV), Halliburton (HAL) and Global Marine (GLM) back into favorable positions. Micron (MU) is now in positive territory and 'takeover' plays on Revlon (REV) and Earthlink (ELNK) are well in-the-money with small profits currently available. If you didn't exit the Kennametal (KMT) straddle on yesterday's move, today was even better. The stock climbed another $3.25 to close near a 10 month high at $31.00. Gemstar (GMST) cooperated to some degree, and although there was no pre-announcement sell-off, it still offered a fairly easy roll out (good practice for the novice trader). The stock opened $1.50 higher and that was obviously the last straw (we probably should have closed the short yesterday). The JUL-65 call was available near the open (and for a long period during the morning session) for $3.50. By the end of the day, the stock was up another $4 and the long position (JUL-70C) traded as high as $2.87. The entire roll-out transaction; even poorly executed, should have produced at least a $0.25 credit, and that is based on a one-day trade. Thursday, July 1 - Portfolio plays: Most of the issues in the spreads/combos portfolio continued to rally with the blue-chips today. Motorola (MOT) was the leader in the LEAPS/Covered-calls section and Schering Plough (SGP) is also participating in the recovery. Sepracor (SEPR) is finally showing some new signs of strength and we may eventually profit in that long-term position. The rebounds were widespread as EMC Corp. (EMC) and Dupont (DD) both made positive moves while lower priced stocks like National Semiconductor (NSM) and Silicon Graphics (SGI) move towards new short-term highs. Another one of our oil issues; Unocal (UCL), is back in a profitable position and Micron (MU) climbed comfortably into the low 40's on a $2.62 move. Our current nemesis Gemstar (GMST) again fell to the $62 range in midday trading and the short position (JUL-65C) retraced its move to $3.50 during the consolidation. At the close, the long position was just short of break-even on the bid side but we still expect further upside testing in the last buying spree before the long holiday weekend. From the bearish point of view, the $65 resistance level is proving tough to overcome and now it becomes apparent why these types of charts (with well defined areas of support or resistance) can give you an advantage when opening an aggressive credit spread position. The eventual move above or below the $65 strike price should be very significant in either direction, allowing a skillful trader to profit from a correct (initial) assumption or limit losses in the event of an overall change in character such as this one. Questions & comments on Spreads/Combos to ray@OptionInvestor.com ********** NEW PLAYS ********** SPD - Standard Products Co. $26.37 *** Volatility Play *** Standard Products is engaged in the manufacture of rubber and plastic parts requiring a substantial degree of product engineering and high-volume production processes for automotive original equipment manufacturers in the United States, Canada, Europe and Brazil (the "Transportation Equipment Segment"). This segment also produces rubber and plastic parts for the appliance, construction and marine industries. The Company also manufactures pre-cure & mold cure tread rubber for the truck tire re-treading industry. Merger speculation is high and the rumor is that there are two companies competing for SPD. An American company, possibly Dana Corp. and an offshore concern, Laird Group PLC, a leader in the worldwide plastics business. With the stock up almost $5 in just five days, implied volatility has moved higher in the call options, well above the historical average for the issue. Options volume earlier this week also increased, rising to more than 500 contracts on Wednesday. The overpriced front-month options offer us a favorable speculation opportunity and depending on your opinion of the outcome, there are two positions available. PLAY (conservative - bullish/calendar spread): BUY CALL AUG-30 SPD-HF OI=130 A=$1.75 SELL CALL JUL-30 SPD-GF OI=408 B=$0.93 INITIAL NET DEBIT TARGET=$0.75 TARGET ROI=20% PLAY (conservative - bearish/calendar spread): BUY CALL AUG-25 SPD-HE OI=49 A=$3.87 SELL CALL JUL-25 SPD-GE OI=449 B=$2.62 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=20% Chart = http://quote.yahoo.com/q?s=SPD&d=3m ******************************************* SQNT - Sequent Computer Systems $16.75 *** IBM Take-Over *** Sequent Computer Systems the leader in Intel-based solutions for the data center, is committed to the success of its end-user and system integrator customers. Sequent's platform architectures and services are optimized for the scalability, availability and manageability requirements of corporate and institutional data center environments leveraging industry-standard technologies and best-in-class partnerships. Sequent supports more than 10,000 installations worldwide, including many of the world's largest and most sophisticated OLTP, DSS and RDBMS applications. IBM is in advanced talks to acquire the small computer and a deal could be announced in the next few days. Although the terms have not been finalized, The Wall Street Journal, quoting a person familiar with the deal, said IBM was in the "advanced" stage of discussions. A Sequent acquisition would bolster IBM's line of computer servers and enhance its strategy for Unix servers. IBM and Sequent declined to comment. Nasdaq officials also said Sequent declined their request to comment publicly on its stock activity. The outcome seems obvious based on the stock and option movement. Implied volatility and volume swelled this week in the call options as takeover rumors that surfaced earlier this month circulated more broadly. The recent bullish technicals and a small disparity in the August ITM call options make this a favorable, low risk position. PLAY (conservative/debit spread): BUY CALL AUG-12.50 SQQ-HV OI=171 A=$5.12 SELL CALL AUG-15.00 SQQ-HC OI=144 B=$3.37 INITIAL NET DEBIT TARGET=$1.50 ROI(max)=66% B/E=$14.00 Chart = http://quote.yahoo.com/q?s=SQNT&d=3m ******************************************* TIE - Titanium Metals $11.12 *** New trend? *** TIMET is a leading worldwide integrated producer of integrated titanium sponge and mill products. Not much news on this company but stocks in the metal mining sector were among the most actively traded convertible issues recently on the heels of the group's strong performance this year. After a two-year decline, the sector as a whole has been on a steady upward trajectory since last October and is currently one of the strongest groups in the convertible bond universe. We like the bullish technical trend and the renewed option interest makes this a unique (if somewhat speculative) hedge position for the remainder of 1999. PLAY (conservative - long-term/calendar spread): BUY CALL OCT-12.50 TIE-JV OI=94 A=$1.75 SELL CALL JUL-12.50 TIE-GV OI=1692 B=$0.38 INITIAL NET DEBIT TARGET=$1.25 TARGET ROI=50% Time spreads (horizontal spreads) involve the sale of one option and the purchase of a more distant option, both with the same strike price. The philosophy for using calendar spreads is that time will erode the value of the near-term option at a faster rate than it will the far-term option. The calendar spread that is established when the underlying stock is at or near the strike price of the options used is a neutral spread. If the stock price remains relatively unchanged until the near-term option expires, the neutral spread will make a profit. It is generally best to establish such a spread at least 2 - 3 months before the near term option expires, capitalizing on the ability to sell another call against the longer-term option (if necessary). Ideally, the spreader would like to have the stock be just below the strike price when the near-term call expires. If the sold options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. Chart = http://quote.yahoo.com/q?s=TIE&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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