The Option Investor Newsletter Thursday 7-8-99 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 11126.89 - 60.47 11211.11 11092.07 824,088k 1,299 1,657 Nasdaq 2771.86 + 28.82 2775.52 2731.12 1047,000k 2,016 1,929 S&P-100 718.31 - 1.44 723.45 713.56 Totals 3,315 3,586 S&P-500 1394.42 - 1.44 1403.13 1386.67 48.0% 52.0% $RUT 454.75 + 2.06 454.80 450.65 $TRAN 3451.39 - 23.51 3474.35 3415.15 VIX 19.87 - 0.34 21.81 19.68 Put/Call Ratio .54 ************************************************************* A day late but here at last. The profit taking I expected on Wednesday finally appeared in earnest today. Wednesday was a non-day as far as trading went. The markets failed to fall but also failed to sustain any rally attempts. Today looked more like a profit day. After dropping -90 shortly after the open it looked like we had an instant reversal but after trying to hit +25 in two separate attempts the Dow finally gave in to the slow bleed as sellers outnumbered buyers. The good news in my mind is the repeated bounce off 11,100. Look at this chart. After passing 11,100 Friday morning the threshold became surprising support. We tested it Friday at the close, Tuesday morning, three times Wednesday and again this morning. I was very glad to see us hold slightly above it at the close today. The Nasdaq is setting up for a continued breakout on the back of the Yahoo earnings. Even though Yahoo went down, (more later), the Internet sector was positive. After setting a new high on Tuesday the Nasdaq only took one day off to rest and moved up again today in spite of the Dow problems. The Nasdaq finished only four points off it's high for the day and had positive momentum at the close. We did not match Tuesday's intraday high but did set a new record close. I was watching the very short term gainers on my live quote program at the close. It provides a list of the top 100 gainers for the last five minutes every 30 seconds. It is constantly updating as new stocks appear and old ones drop off. At the close almost all the major Internet stocks appeared as buyers jumped onboard. I think this is a good omen for Friday. The Dow and NYSE ticks both went positive at the close as well. There were many upgrades today, positive earnings surprises and minor gains in the bond market. Sounds like a recipe for success but we had to pay the profit piper. We will not know if the toll paid today is enough until the close tomorrow but I am betting on it. I bought the close today. Big winners included Hewlett-Packard, (HWP), who received an upgrade and a new price target of $125, gained +6.50. Apple Computer (AAPL) gained +4.13 after Robertson Stephens made bullish comments and raised it's price target to $75. General Electric, who manages earnings with the best of companies, announced earnings that BEAT the street by $.01. This is no minor feat when you consider they have over 3 bln shares outstanding. GE dropped -.94 after announcing the record earnings. Biogen announced earnings after the close that beat street estimates by +$.02 and should impact the sagging drug sector tomorrow. The big winner (loser) today was of course Yahoo. Yahoo beat the street's estimates of $.08 last night with $.11 and hit the official whisper number. OOPS! By hitting the whisper number and having a very positive conference call it avoided the big sell off syndrome of late AND injected a hope vaccine into the entire Internet sector. HOWEVER, by only hitting the whisper number and failing to blow away estimates it suffered investor flight. The amateurs bought into the news at the open and ran the stock up to almost $175, a +7 gain from yesterdays close but the euphoria was short lived. After dropping back to $168 within minutes there was a midday rally prompted by the Nasdaq strength but the sellers finally took control and YHOO hit a low of $162 before the close. If you follow my plays and my recent commentary on Yahoo you know this was a picture perfect execution of the plan. I wrote calls at the high of the day and shorted YHOO at $172 after it rolled over. Don't get me wrong. I am not negative on Yahoo. I am just playing the trend it has established the last two earnings cycles. We got lots of hate mail when we switched from call recommendations to puts in the Tuesday newsletter but for the life of me I can't imagine why. We always recommend getting out of calls before the earnings on any stock. We have been warning of the expected drop in YHOO for at least a week. I strongly urge some readers to actually read the play descriptions and not just the options listed. This play was as good as it gets. We recommended it at $135, got an entry point on profit taking at $120 and it went to $189. It has already dropped over $10 since we changed to puts. If you did not make money on this play you need to re-evaluate your trading profile or be in mutual funds. I met with a good friend today that just started trading options recently. He has made all the rookie mistakes AND admitted it. I think he is finally ready to start trading profitably. Down several thousand dollars of hard earned money, he finally stopped and faced the facts. I wish I could impart the facts to every new reader we get BEFORE they spend thousands of dollars getting educated. Ignorance, stupidity and impatience are very costly. Once you recognize the facts of life you can be a good trader. Some facts never change. The law of gravity for instance. You can refuse to accept it but it still exists. You can have twenty people tell you that buying July options $20 out of the money with a week to go is stupid but may disagree until you have a bunch expire worthless on you. Suddenly the light bulb goes on and you realize those $.50 options are cheap for a reason. We are here to try and educate new readers as painlessly as possible. Please reread the Top Ten Rules for Option Trading and try not to break more than two a day. All experienced traders will break them routinely. It is like driving 65 in a 55. We know the risk and are willing to take the responsibility for the eventual ticket but we push the envelope. We are still humbled routinely by bad decisions but we place the blame squarely on ourselves. Knowingly breaking the rules is one thing, ignoring the rules is another. Summer Fridays are notorious for low volume and yawner afternoons but if 11,100 was really the bottom today we could see a good bounce as traders take positions in front of the next round of earnings next week. I can't of course guarantee the market will move up but I do not see a very big risk of it moving down tomorrow. Pick your plays carefully and sell too soon. Have a great weekend! Jim Brown Editor ********************************* TOP TEN RULES FOR OPTION TRADING ********************************* 1. Never put all your money into one play. As soon as you do Murphy's Law will take control and you will be broke. With a $2000 account put $1000 into two plays. $5000 should divide into 2-3 plays, $10,000 = 3 to 5 plays maximum. I strongly recommend NEVER playing more than 3 to 5 positions at one time. You cannot watch more than three and act decisively when the situation demands action. 2. Never hold a position over an earnings report. Historically the number of stocks that rise substantially after an earnings report is less than one in ten. Sure there are a rare few that gap open on great earnings but far more gap down. To gap open they must beat the whisper number by a LARGE margin AND have a good conference call. To go down they only need to meet the whisper, meet the estimates, miss the estimates, prewarn any problems or just plain not be positive enough in the conference call. Traders leaving after playing the earnings exert enough pressure on the price as it is without bad news. 3. Never play deep OUT OF THE MONEY call options. Sure they are cheap but they are cheap for a reason. They are like playing roulette and betting on any one number. If you hit the payoff is 35 to 1 but the odds of being hit are 38 to 1. 4. Never put in a MARKET BUY before the open. You will more than likely get filled at the high of the day. Enthusiasm is rampant at the open and everything costs more (as a rule) than it will an hour later. 5. Never place a market order for a thinly traded option. You may take out the current ask and be very shocked at how high the next ask was. Several times I have seen fills more than $2 over the current ask quote. 6. Always pick a sell price you would be happy to get BEFORE you buy an option. Immediately after purchase place a limit sell for that price. You will be surprised how many times you will sell on an intraday spike that you did not expect. See #5 for why. Decide how much you are willing to risk on the trade BEFORE you make it. Sell when that limit is reached. Ask anybody who ever had an option expire worthless. They will all tell you now "they wish they had sold". At the time emotion will always convince you tomorrow is turnaround day. Hundreds of thousands of contracts expire worthless EVERY month. Turnaround never came for them. 7. Never bet against the market/sector. The trend is your friend. It does not matter why the market/sector is going down you will still lose your money. 85% of stock movement is due to market/sector movement and not stock fundamentals. 8. Always sell when you pass 100% profit. If you still like the play take half the money and buy back in at a higher strike. Once you sell they can't take the profit away from you. Don't play 100% of the money again. Double or nothing will eventually get you nothing. Our recommendation is really to sell at 35% profit but we know how the greed factor works. 9. Emotion is your enemy, logic is your friend. Never trade on emotion. There is no such thing as "it has to go up", "it can't go down". The market does not care what you think or hope. It is ruthless and makes its own rules. You should say this 50 times a day, "past performance is not a guarantee of future results". 10 Never buy on impulse. If you just heard the news, it is already to late. Plan your buys during non-market hours. Once the bell rings your mind is clouded, emotion takes over. Plan your strategy, execute your plan. When in doubt, stay out. PS Cashflow is king. It is very easy to make 25% every two weeks but very hard to make 100% routinely. 25% on $10,000 every two weeks for a year is $65,000. (without benefit of compounding) Take a profit over and over and over. Market Posture *************** As of Market Close - Thursday, July 8, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,000 11,126 BULLISH 7.01 SPX S&P 500 1,315 1,355 1,394 BULLISH 7.01 OEX S&P 100 660 690 718 BULLISH 6.29 RUT Russell 2000 390 450 455 BULLISH 6.29 NDX NASD 100 2,110 2,220 2,375 BULLISH 6.29 MSH High Tech 1,010 1,080 1,202 BULLISH 6.19 XCI Hardware 900 950 1,035 BULLISH 6.17 CWX Software 675 700 800 BULLSIH 6.17 SOX Semiconductor 410 425 510 BULLISH 6.10 NWX Networking 525 545 595 BULLISH 6.25 INX Internet 500 510 565 BULLISH 7.01 BIX Banking 680 720 714 Neutral 6.29 XBD Brokerage 410 425 436 BULLISH 7.01 IUX Insurance 645 660 654 Neutral 6.29 RLX Retail 900 910 940 BULLISH 6.29 DRG Drug 375 400 373 Neutral 7.01 HCX Healthcare 750 800 764 Neutral 7.01 XAL Airline 180 190 171 BEARISH 5.21 OIX Oil & Gas 285 310 307 Neutral 5.13 Posture Alert Strong earnings from Yahoo, and Broadcast.com helped out the Nasdaq even though these two issues closed down on the day. General Electric also pleased the street with a penny surprise, which could be a preview to more positive earnings from other international conglomerates. With plenty of earnings due out next week and the 30-yr Treasury below 6%, the posture board remains dominated by bulls. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture Market Sentiment **************** Thursday, July 08, 1999 Yahoo + GE = ? Earnings season has just begun, and things are looking bright as General Electric and Yahoo both beat analyst expectations. Even though both stocks sold off (buy on rumor, sell on news), they both had great runs going into earnings. This should be a preview of things to come. General Electric is KNOWN for COMING IN AT expectations, not surpassing. They manage their earnings about as good as anyone, but are always in-line with expectations. For a company with 3.3 BILLION shares outstanding, beating by a penny is a phenomenal feat. What you can expect from these solid earnings, is a potential run-up in some of the other big names going into their quarterly reports (AOL, IBM, MOT etc.). As evidenced by the strength in broad technology Thursday, many investors missed the huge run-up in Yahoo, and will try to make it up on others. Here at Pinnacle Capital, we always weigh in on sentiment indicators to help shape the way we believe the market will be trending. The latest Investors Intelligence Survey showed that Bullishness decreased and Bearishness increased. From a contrarian standpoint, this is good for the market. We also looked at the amount of OEX calls and puts, and what we see is building support in the 700-715 range. From a technical standpoint combined with the recent run-up in the indexes, we would expect the market to start consolidating/and or selloff. However, with the buildup in support (OEX 700-715), the lack of any significant selloff (assuming no disaster on Friday), interest rates remaining close to 6% or below, and major corporate earnings due out the next two weeks, we could be getting poised for another takeoff. Do you Yahoo? Bullish Signs: OEX Put Buying: From a contrarian standpoint, the amount of puts in the 700-715 range is giving good support for this market and could help fuel additional upside potential. Market Posture: Several indexes breaking into new highs, including networking, software, and semiconductors. Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased by over 3% and the percent of Bearish investors increased by 2%. Russell 2000: Trending above both moving average, and also above key 450 benchmark. Mixed Signs: Interest Rates: With the help of the FED, the 30-yr Treasury is beginning to retrace back under the key 6% level. Advance/Decline Line: After checking up last week, the A/D line is beginning to roll over and could prove Bearish if decliners out pace advancers in the week ahead. BEARISH Signs: Peak Open Interest: The contraian put-call ratio clocking in at 1.09 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. July Expiration Cycle OEX OTM Call Analysis (Open Interest July 680-750) Date Open Interest Change % Alert Friday, June 19 35,225 - Friday, June 25 63,342 +79.8% Friday, July 02 87,833 +149.3% Market Sentiment at a Glance Friday Tues Thurs Indicator (7/02) (7/06) (7/08) Alert Pinnacle Index (OEX): (680-750) 3.5 3.6 1.6 Overhead Resistance (680-700) 1.2 1.4 .7 Underlying Support (645-660) 2.5 2.4 2.8 (580-660) 6.6 6.5 6.9 Put/Call Ratios: CBOE Total P/C Ratio .5 .5 .5 CBOE Equity P/C Ratio .3 .3 .4 OEX P/C Ratio 1.1 1.0 1.4 Peak Open Interest (OEX): Puts 670 600 600 Calls 680 680 730 P/C Ratio 1.10 1.18 1.1 Market Volatility Index (VIX): CBOE VIX 19.19 20.27 19.87 Investors Intelligence: Bullish 52.60% Bearish 27.20% 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 (7/02) (7/06) (7/08) (680-750) 3.5 3.6 1.6 Overhead Resistance (680-700) 1.2 1.4 .68 OEX Close 716.28 714.28 718.31 Underlying Support (645-660) 2.5 2.4 2.8 (580-660) 6.6 6.5 6.9 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 (7/02) (7/06) (7/08) CBOE Total P/C Ratio .48 .48 .53 CBOE Equity P/C Ratio .33 .33 .44 OEX P/C Ratio 1.13 .97 1.42 Peak Open Interest Friday Tues Thurs Strike/Contracts (7/02) (7/06) (7/08) Puts 600 / 10,820 600 / 12,345 600 / 12,344 Calls 670 / 10,017 680 / 11,046 730 / 11,364 Put/Call Ratio 1.10 .92 1.09 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 May 14, 1999 Top 25.01 July 8, 1999 19.87 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Tue Wed Thu Week Dow 11126.89 -4.12 52.24 -60.47 -12.35 Nasdaq 2771.86 -4.42 6.26 28.82 30.66 $OEX 718.31 -2.00 5.47 -1.44 2.03 $SPX 1394.42 -3.10 7.74 -1.44 3.20 $RUT 454.75 0.04 -3.86 2.06 -1.76 $TRAN 3451.39 -38.04 -3.05 -23.51 -64.60 $VIX 19.87 1.34 1.36 -0.34 2.36 Calls Tue Wed Thu Week AOL 127.69 5.69 4.06 2.69 12.44 New, earnings run VISX 93.00 2.81 0.06 5.00 7.87 Another new high TXN 147.50 0.31 3.38 2.13 5.82 $175 price target VRIO 72.00 -1.06 3.31 2.94 5.19 On the move VRSN 89.63 3.13 -2.19 3.75 4.69 Poised to go higher MSPG 53.31 -0.44 -2.94 8.06 4.68 Still more rumors BBY 77.50 4.25 1.75 -1.50 4.50 Entry point? SLR 71.25 0.69 0.69 2.75 4.13 Breaking out HWP 105.81 -1.38 -1.06 6.50 4.06 Big jump today INKT 139.88 2.38 -3.25 4.38 3.50 New, Internet play VOD 208.81 3.75 2.19 -2.63 3.31 Analysts ratings INTC 65.75 0.38 0.50 1.38 2.26 Earnings on Tues. BRCM 138.81 1.85 -3.00 2.94 1.79 Strong chip sector IBM 134.00 -1.25 1.81 1.19 1.75 Earnings surprise?? SUNW 71.75 -1.75 1.56 1.88 1.69 Nearing new high JDSU 170.88 6.00 -5.25 2.25 3.00 2-for-1 split! DRIV 35.00 -0.13 -0.19 1.75 1.43 New online product CTXS 60.75 1.06 -1.31 1.13 0.88 Wait for a bounce LU 71.56 -0.63 1.75 -0.25 0.87 Earnings run time SNE 113.56 -1.63 0.19 2.25 0.81 Closed at highs SONE 48.00 1.19 -0.63 0.25 0.81 Strong sector MSFT 92.56 -2.44 2.75 0.25 0.56 Holding $92 NXTL 49.63 0.38 -0.19 0.25 0.44 Light volume TOM 76.63 0.13 1.44 -1.31 0.26 Splits on Monday MOT 97.94 -1.38 -2.19 3.19 -0.37 Big volume today NOK 94.13 0.69 1.19 -2.31 -0.43 Entry point?? CSCO 66.44 -0.38 -0.44 0.19 -0.63 Taking a breather COF 56.00 -0.06 0.81 -1.44 -0.69 Use caution CAH 68.63 -0.44 0.19 -0.81 -1.06 Flat drug sector MMCN 48.19 -0.56 -1.06 0.31 -1.31 Re-grouping PFE 37.19 -0.69 -0.19 -0.56 -1.44 Range bound NT 89.00 1.13 -0.19 -2.50 -1.56 Support at 10-dma ICIX 30.00 -0.25 -1.13 -0.25 -1.63 Lacking volume EFII 54.38 1.69 -3.38 0.00 -1.69 Set stops close QCOM 142.25 -2.00 -2.81 2.81 -2.00 Added to S&P 500 SGP 51.75 -0.19 -2.06 -0.50 -2.75 Consolidating NSOL 78.38 -1.75 -3.69 0.31 -5.13 Dropped, nose-dive Puts YHOO 164.44 -3.00 -8.06 -2.63 -13.69 Good but not great AET 88.13 -1.63 -1.69 2.19 -1.13 Dropped, reversal GBLX 40.03 2.13 -0.88 -1.22 0.03 Under the 50-dma MCK 32.56 0.69 -0.44 0.06 0.31 $33.50 resistance AT 70.00 -0.69 0.81 0.56 0.68 Couldn't go higher FON 51.00 0.13 -0.13 0.88 0.88 Consolidating?? WLP 85.00 -0.44 1.50 1.38 2.44 Dropped, bottoming 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: ****** NSOL $78.38 +0.31 (-5.12) NSOL never recovered from its last-minute nose-dive on Tuesday (just after reaching a new 52-week high of $87.50!). The following day the stock proceeded to shed another 3.69 points after an early morning attempt to keep its head above the $80 mark. Today offered no sliver of hope as NSOL closed in the proximity of its daily low. The apparent reversal of NSOL within this positive market is good enough reason for us to drop it. Plus in this earnings' season, better plays abound. PUTS: ****** AET $88.13 +2.19 (-1.13) Aetna had a strong bounce after a weak past couple of days. We got a good downside move from AET after it broke through solid support at $88. We saw it move down to under $84 a share. That is more than $4 move in two days. But after today's bounce on no news, it is back above the $88 level again. This is an example of a reversal in the trend and momentum is looking strong so we are no longer recommending opening new plays on AET. Hopefully your stops pulled you out early today and you were able to lock in your profits from Tuesday and Wednesday. WLP $85.00 +1.38 (2.44) WLP has been a successful put for us the past couple weeks but it has been showing signs of a bottom this week. Today's release of a few positive news articles has sparked some buying interest and effectively ended our play. Wellpoint released news of a new deal with Providence Health plan where WLP will provide coverage for 360,000 new participants. Also Wellpoint's subsidiary, Blue Cross of California announced a new marketing and advertising program with the potential to attract lots of new customers. So if you stops haven't already gotten you out of the play, it is time to look for an exit point. ***** 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 Thursday 7-8-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ****************** PICK NEWS - CALLS ****************** VRSN $89.63 +3.75 (+4.69) We mentioned in our last update that we thought Wednesday would be a down day and, sure enough, it was. Hopefully those of you interested in getting into VRSN options were able to get a nice fill yesterday. VRSN dropped as low $81.25 on Wednesday and then closed at $85.55. Thursday brought another strong day and the stock is now over $8 above yesterdays low. VRSN still is trading below its April high of $94.13, but seems poised to break through this resistance. MACD is very strong and with Yahoo! announcing strong earnings, this should help keep other Internet related companies in the spotlight until their earnings. VRSN has earnings in two weeks and has a history of beating estimates. VOD $208.81 -2.63 (+3.31) VOD gave back some of its recent profits today, but is still positive for the week. The stock was kept on the "recommend list" at Goldman Sachs today, and was reiterated "outperform" by Lehman Brothers. VOD announced yesterday that the company added 2.3 million customers in the 2nd quarter. Tressan MacCarthy, an analyst at Credit Lyonnais Securities Europe stated: "Based on this quarter, they're adding nearly 10 million customers a year, and the Christmas season will add much more, name me any business in the world that's adding customers at that rate." (Bloomberg.com) We are playing this as mainly a split announcement play. We see a 4-1 split being announced at VOD's annual meeting on July 21. LU $71.38 -.25 (+.89) LU acted today very much like it did on Wednesday. The stock traded positive for most the day, but couldn't hold on and lost just a fraction at the close. LU was on the receiving end of good and bad news. The bad news was a downgrade by AG Edwards from "accumulate" to "maintain". The good news came from being added to Salomon Smith Barney's list of "10+ Exceptional Names". Though LU's stock closed lower, it did reach another all time high today when it hit the $73.13 mark. Earnings are in two weeks and we expect to see an earnings rally. SONE $48.00 +.25 (+.81) SONE finished positive today, though not by much. The stock has gained less than a dollar so far this week, but is still trading well above its 50-dma and should start to see an earnings run soon. With Yahoo! announcing such strong earnings, the sector should benefit. There is a little support at $47, but wait for verification of a bounce off this level before buying the dip. For those that didn't know, SONE is also one of 11 stocks in TheStreet.com E-Finance Index and options started trading on this index on July 7th. DRIV $35.00 +1.75 (+1.44) DRIV had a nice gain today and closed just off of the intraday high. The company added Day-Timer Digital to its online retail channel yesterday. This partner- ship will help add another strong product to DRIV's already large database of digital products. MACD is positive and moving up and we feel as the companies earnings date draws closer, the stock will continue to benefit. Earnings are scheduled for July 21st. IBM $134.00 +1.19 (+1.75) Another new high today! IBM hit $135.50 as the boxmakers and hardware companies enjoyed gains today after analysts made positive comments on the group. Fred Cohen, at Daiwa Securities, said that in this Internet oriented world, it is the infrastructure companies that will really benefit. He expects upside order surprises from IBM. Steve McClellan, of Merrill Lynch, said that the computer services industry will grow at a double digit rate for years. Now at $250 billion per year, it is expected to reach $318 billion in 2002. In a continuing effort to shift its focus to this more profitable area of its business, IBM has announced that Toshiba will buy out IBM's stake in Dominion Semiconductor. IBM continues to team up with companies interested in making use of IBM's growing presence and expertise in the e-commerce world. Two noteworthy mentions are a deal with Maars Software, Ltd., of India, and an agreement with French retailer Galleries Lafayette worth 1.1 billion Euros over 15 years. Also, IBM already has customers lined up for its "Pizzazz" server, which it will roll out in the fall. NOK $94.13 -2.31 (-.43) Nokia gained $1.19 on Wednesday, but lost $2.31 today after rival Ericsson continued its slide following the unexpected resignation of its chief executive on Wednesday. This may be good news for option investors, who now have another chance to buy NOK options. The stock is down in a sympathy move rather than a fundamental one. Watch for the stock to start back up again before buying. Meanwhile, NOK continues to push its WAP standard and to announce new contracts daily. Yesterday, a 100,000 block trade, suggested institutional buying. Earnings for NOK will be announced July 22nd, before the open. BBY $77.50 -1.50 (+4.50) This has to be some kind of record. BBY has now set a new all time high for 7 days in a row. Where is the profit taking? After the huge long run it has enjoyed, it only gave up $1.50 on the day, its first negative close in 7 days. It did lose $3.00 after hitting that new high, and closed near its low of the day--maybe it is in for a little more profit taking. If you are looking for an entry, watch it tomorrow. News today that the founder and chief executive has filed to sell 456,000 shares may have given investors pause. However, to put the sale in perspective, the shares he is selling were acquired through stock options, and only represent a small fraction of his 37 million shares. Although we don't have June sales numbers for Best Buy, Circuit City released same store sales that increased 8% last month. BBY is better managed, and should show strong June sales as well. VISX $93.00 +5.00 (+7.87) VISX hit another new high today of $93.25 and closed right near that high. Yesterday the stock dipped $2.16 midday, but came right back to close up $.06. This stock is really giving us a good earnings run. VISX has been moving steadily higher, making our volatility warnings look unwarranted. Don't let it fool you. Although VISX looks very strong and it may continue up until it releases earnings, it has been known to move in big swings at times in the past. Also, some stocks are seeing profit taking a little ahead of earnings. Use stops as earnings approach, just in case. Earnings will be released Wednesday, July 14th after the close. VISX's 700% rise in earnings over the last 8 months had Motley Fool eyeing the stock. In an Internet article out tonight, the Fool says that laser vision correction procedures are expected to grow from 200,000 in 1997 to 1.2 million next year, and competition notwithstanding, VISX, the dominant leader in the field, will benefit from that increase in procedures. BRCM $138.81 +2.94 (+1.78) After huge new high of $148.50 that BRCM set on Tuesday, we warned you that more correction was possible. It did pull back further on Wednesday, and dropped a bit at the open today before climbing to close just about where it closed on Tuesday. (Tuesday's close, however was $10 lower than the high it set the same day.) The last time we covered BRCM in OI, it had just bought Epigram, a company that delivers high speed technology for networking PCs over home telephone lines. As Epigram's technology gets closer becoming the standard for the industry, BRCM stands to benefit big time, analysts were quoted as saying in an CNET article today. Semiconductor companies are expected to report strong earnings for the second quarter, and BRCM is in an especially hot niche within the chip sector. It is expected to reported $.16 on July 21st (a date still not verified by the company), but BRCM has handily beat analysts' estimates in past quarters. PFE $37.19 -.56 (-1.44) Pfizer, along with a few of the other drug stocks, has seen a decline in price this week. Analysts keep mentioning the recovery that has started in the pharmaceuticals, and PFE is a name that is recommended repeatedly. However, it is stuck in a range since it hit a split-adjusted near term high of $39.25 on Monday. (The 52 week high is 50.) There was no news to account for the slight decline. Another call to PFE resulted in a somewhat clarified earnings date. PFE said that although it never announces an exact date, it expects to release earnings the at the end of the week of July 12th or the beginning of the next week. That means about one to one and a half weeks from now. There is still time for an earnings run. HWP $105.81 +6.50 (+4.06) Today Richard Chu, analyst at SG Cowen, reiterated his "strong buy" rating on HWP and upgraded the target price to $125. He cited expectations of double-digit revenue growth for the company after several quarters of reporting zero growth. His comments on the stock also aided the hardware sector in general. The excitement pumped up HWP and amid the enthusiasm it set a new 52-week high when it peaked at $106.38 during intraday trading. Volume was exceptional at 5.63 mln. shares exchanging hands. This split candidate is expected to announce earnings August 16th. HWP's last split was a 2:1 in July of 1996 when it was around $80-85. The stock is well above that level now and has enough shares authorized. In the news, HWP will continue its business relationship with Yokogawa even though their joint Japan venture will end. Yokogawa is selling its 25% stake and HP Japan will become the sole subsidiary of HWP. Hewlett-Packard supplied the computers and Yokogawa supplied the power units for the printers. INTC $65.75 +1.38 (+2.25) Intel held its own in the mixed market yesterday and kept a fractional gain. Again on average volume today, this leader of the semi-conductors forged ahead to tack on more points. INTC faces overhead resistance at its 52-week high of $71.87. This earnings play will end soon. They are to report next Tuesday on July 13th. Remember we never recommend holding over an earnings' announcement. Please consider having any open positions closed prior to that time. Its too risky even if the prognosis is for a positive report. Yesterday, Intel announced a definitive agreement to acquire Softcom Microsystems, a privately held company, in an all cash transaction. No further details were available. Softcom develops and markets semi-conductor products used to transfer voice and data across the Internet and within traditional networks. CTXS $60.75 +1.13 (+0.87) At its recent new highs, CTXS suffered mild profit-taking yesterday and lost $1.31 at the close. The good news is that it occurred only on about 50% of its normal trading volume. Considering the stock has made about 10% in gains since last week its quite natural for a stock to consolidate at some point. Today the volume wasn't any better, yet CTXS recouped for a positive finish. It may be wise to wait for a bounce on stronger volume before beginning a new position. Earnings are expected July 20th. VRIO $72.00 +2.94 (+5.19) It appeared support was forming around $67-69 since last week, but all bets are off now. VRIO spiked up the last two days advancing $6.25! The stock is heading for its overhead resistance at $78. As has been the case during this stock's run-up the past couple weeks, the volume has been low to average. Yet buyers are interested. Investors seem to be responding to the software alliances Verio made with MSFT and AOL in June. Plus, on June 23rd, Verio surpassed the 250,000 Web- site milestone - just another notch in their belt as they prescribe themselves as the leader in this hot Web-hosting business. Earnings are weeks away on August 20th. NXTL $49.63 +0.25 (+0.44) NXTL has been relatively flat all week and volume has tapered off too. It's formed a comfortable support level at $48-$50. The stock hasn't been able to break its latest resistance at $50.75, the 52- week high set a week ago last Wednesday. You should wait for upward confirmation on strong volume before starting a new position on this momentum play. Nextel and Sprint Corp (PCS) are getting unwanted publicity. They are two of the wireless companies that begin charging airtime the moment a caller presses the send key whether or not the call actually makes a connection. It's perfectly legal, but consumer advocates are up in arms. MMCN $48.19 +.31 (-1.31) The profit taking began late Tuesday kicked in the last two days. MMCN dropped $3.56 in the last two sessions. Hitting a low of $45.38 early in today's trading, MMCM started to regroup an shake off the drop. What is encouraging is how MMCN recovered late the day. After bouncing off support in the $45.00 area it and trading in the range near $47.00 for most of the day, MMCN jumped over $1.00 in the last hour of the session. As we mention Tuesday, MMCN was due for a pullback, and this may have been it, especially considering the late day advance. Volume today was over 671K, which is a little stronger than normal, and the earnings run may now resume, as the are due to be released on July 15th. We still suggest keeping you stops tight. MOT $97.94 +3.19 (-.37) MOT also got the pullback we mentioned in Tuesdays update. Wednesday MOT fell $3.38 to $93.56 and recovered to close at $94.75 at days end. Today was a whole different story. Motorola came out of the gate strong, with a steady advance through out the day hitting $98.38 at its high, erasing all of Wednesdays loss. Volume today was better at 3.1 mln. shares. Earnings come out on July 13th, we've had a pullback, and it would appear that the earnings run is back on track. As always, assess your own risk profile, and keep you stops where you are comfortable. NT $89.00 -$2.50 (-1.56) NT jumped up early Wednesday morning making a new 52 week high at $93.50. At that time the profit began. NT continued its fall today making a low of $88.75 and closing down $2.50 for the day. The 10dma should provide support for Nortel. What is a bit concerning is today's volume. Today's fall was done on over 3.9 mln. shares. Another upgrade from a hold to a buy from Warburg Dillon Read Inc., and the announcement Nortell is launching a new Internet Services strategy may help to bolster NT. Earnings come out July 27th, but we would suggest you keep your stops tight on this one. SLR $71.25 +2.75 (+4.12) SLR broke through the $67.25 mark we told you about last week and it just kept going. It seems to have regained its momentum making a new 52 week high today at $71.38. Volume on today's move came on just under the norm with slightly over 1.0 mln shares exchanging hands. The support level at $68.00 has held, and there is no new news to report at this time. Technically MACD is strong and the latest move has been solid as well. We would suggest that you keep moving your stops up and let the market do the rest. JDSU $170.88 +2.25 (+3.00) JDSU has had an erratic few days. Profit taking started on Tuesday and continued into early today, dropping to $167.75 on Wednesday. JDSU was fairly flat for most of the day, until it was announced that they would have a 2:1 effective July 23rd. Trading was halted and when it resumed, JDSU jumped almost $7.00 then fell back to $170.88 to close up $2.25 for the day. Now can we expect an earnings run? Probably so, but keep your stops tight to protect your current profits. We would also suggest that you check with your broker and make sure you have the correct option symbols since the merger of Uniphase and JDS Fitel was completed earlier this week. SNE $113.56 +2.25 (+.81) Profit taking began Tuesday and continued into Wednesday. $110.00 seemed to provide support for Sony. This morning started out strong, consolidated and got stronger at the close, making a new 52 week high at $113.69, closing almost at its high of the day. Again what impressive here is that volume today was 344K, compared to an average of 196K. The Japanese electronic stocks have been strong lately, and appear to be just getting warmed up for further moves upward. No new news, just a nice move up on good volume. Adjust your stops accordingly. COF $56.00 -1.44 (-.69) We like the movement we saw in COF in the week. It seems to have run into some resistance at the $57.75 area and has fallen back the last two sessions. Friday could be crucial for COF as we would like to see the earnings run resume. Earnings are due out July 16th, and we still have time for this play to develop, but we would need to have $54 - $55 to hold as support. Volume was a little stronger than average today at 992K compared to the average of 766K as well. Keep your stops in place, just in case the market doesn't cooperate with what we want. TOM 76.63 -1.31 (+.25) TOM SPLITS MONDAY. TOM started the week out strong. It has fallen back to support at $76.00 and just stayed there. Again the retail industry is strong right now, the sales are up and the earnings have been good. As we stated earlier this is strictly as split play, so what ever TOM does on Friday we are either going take our profits or lick our wounds and move on. Of course they don't split until after the close on Monday, so you could hold on if you want to. We are planning on dropping TOM over the weekend. There is no news to pass along at this time, so let the market dictate your next move. TXN $147.50 +2.13 (+5.81) TXN will report earnings on July 20 (company confirmed) and is also a split candidate. Their last split (2:1) was in November 1997 at about $100. They do not currently have enough shares to make it happen and have yet to issue a proxy statement to shareholders for approval. Just when we thought TXN might be flattening out, they deliver another new high. The dips we keep waiting for haven't materialized, as TXN advanced both days since our last update. TXN successfully pierced resistance of $145 on its way to new intra-day and closing highs of 147.69 and $147.50 (new resistance), respectively. The close near its high is a good sign. It probably helped that Morgan Stanley Dean Witter increased its price target to $175, citing their belief that a 20% premium to the S&P fairly values the company. Lots of profit for the taking and tomorrow is Friday, so keep your stops set. Target shoot on weakness and enjoy the ride. MSFT $92.56 +0.25 (+0.56) Though we expected MSFT to take a day or 2 off in the wake of 6 straight daily gains, we're pleased with its ability to hold $92. Even so, we're now checking our watch to see when MSFT will start its earnings run. There are only 7 trading days left (July 19) to get the lead out. If the market cooperates, we should continue up to between 95-100 by earnings, as indicated by the huge OI at these strikes. In the news, MSFT will supply Bank of America, American Express, Citigroup and Schwab with content from MSN. There's really nothing to get in the way of another $3-$8 increase tomorrow and next week, but keep your stops set in case of bad news. Also watch out for eroding time value on July strikes. As always, confirm market direction before starting a new play. QCOM $142.25 +2.81 (-2.00) Yes, dreams can come true, as long as you analyze the market correctly. Last night we noted in the Market Wrap that QCOM was buyable on yesterday's dip. We cited CNBC early morning comments (missed by most other news services) that QCOM had gained 600 K new customers in Korea during the month of May and they are expected to announce a major equipment sale to Sprint in the next 2 weeks. Not only that, but Lehman Bros. was "pounding the table" on QCOM while they raised earnings estimates by another $0.02. Today's $2.81 gain is nice to see, but QCOM investors may have hit the mother lode in after hours trading, as QCOM traded up $9 at $151. The news release states that QCOM will be replacing TransAmerica on the S&P 500. As one exuberant message poster wrote, "!#$% &*#@, I AM ROLLING IN MONEY!!!!!!!!". Earnings are July 20, 1999 at approx. 1:30 p.m. (company confirmed). Remember too that since they announced their last split at $157, we may get another 2:1 split announcement at that time, though shareholders will need to vote on the issue (anyone object?). We can pretty much confirm the direction of this stock tomorrow. Just don't buy with a market order at the open and wait for any mid-day weakness. Try not to chase the stock price. EFII $54.38 +0.00 (-1.69) Yesterday's selling on increased volume didn't look so great. After reaching as high as $60 on Tuesday, and failing to hold its high today (see the chart), EFII could be headed south. If there is a positive spin, it's that EFII showed only average volume today and was in need of a breather anyway after setting new highs. EFII has earnings scheduled July 14 at 1:10 p.m., Pacific (company confirmed) Though we may see more gains on the way to earnings, exercise caution and don't get lulled into a false sense of security. As we noted in prior write-ups, insiders have sold sizable positions in May and June. You certainly do not want to be a holder over earnings, especially with that knowledge. Keep stops set to protect profits and start a new play only after you confirm market direction. CSCO $66.44 +0.19 (-0.63) While CSCO seems to have been taking a breather for the last three days following 13 days of strong up- trend, the technical chart is still well in the positive. Sellers, as hard as they try, have been met with willing buyers every time they step up pressure. As we've said, individual investors can't possibly provide that kind of support and that mutual funds are putting $$$ to work in CSCO. Continued strong volume supports that supposition. NASDAQ has been working hard to build its record gains and may be subject to a day or 2 of selling pressure. CSCO may yet succumb if its volume falls off. If you are going to buy the dip, just make sure you see the bounce off support of $65.50 (or anything less if you are more comfortable with a higher risk entry). Earnings are scheduled for August 10 (company confirmed). As always, confirm direction before starting a new play. MSPG $53.31 +8.06 (+4.50) Rumors, rumors, rumors. MSPG has been a buyout candidate since we stared coverage this week. Yesterday looked pretty weak as excess volume flooded MSPG to a $2.94 loss. Today, word hit the Street that MSPG cancelled an analyst meeting, citing continuing merger discussions. Companies do this only when the talks are getting serious. That's all it took for investors to launch MSPG for a gain of over $8 today. Volume was 5 times normal - over 10 mln. shares. As we've said before, dips are buyable until any announcement is made. Earnings are scheduled July 28. The downside is that no merger/acquisition announcement takes place and the price, thus the option premium, evaporates. Confirm market direction and keep your stops in place to protect your profits. ICIX $30.00 -0.25 (-1.63) Though technical indicators are still strong, we cautioned Tuesday that without volume, "expect further decline". ICIX is sitting right at $30 support and could be ready to take off again, but it needs volume. The price will likely fall without it. Focus your attention there. If it breaks south of $30, the next stop is $27. There is no news; thus ICIX should be treated with caution. The buy signal will be when ICIX convincingly moves back above $31.75. Use stops to get out if the trade moves against you. Otherwise confirm market direction before starting a new play. Earnings are tentatively scheduled on July 28. SUNW $71.75 +1.88 (+1.69) Sun Micro climbed higher on Thursday and is now in striking distance to an all-time high, which is less than a point away. The NASDAQ continues to be the driver in this bullish market and SUNW is reaping the benefits. The news on SUNW is still made up of smaller articles that don't carry a lot of trading weight. But that is fine though as our play revolves around the up coming earnings. The earnings date is Thursday, July 22nd. We still expect the 52-week high to fall in the short-term if the NASDAQ sustains its current momentum. So trail your stops to lock in recent gains and look for volume on both the stock and options to start picking up now that we are inside of two weeks before the earnings date. SGP $51.75 -0.50 (-2.75) Schering suffered the pullback we all knew it would on Wednesday. Ever since they announced that earnings would grow around 20% in 1999 the stock had been on a tear. The stock jumped more than 20% in three weeks. So it's understandable to have a day or two of profit taking. But SGP was able to curb the slide today and begin consolidating at the 200-dma. This could be indicative of a new rally ahead. But we do need to make sure it holds support around $51.50 before opening new plays. If it does decide to bounce and trend higher, we could be looking at two week rally ahead of earnings on July 21. CAH $68.63 -0.81 (-1.06) Cardinal continued its sideways trading this week. It traded lower most of the day on Thursday but did rally near the close to end at the day high. This is to be expected as the drug and healthcare sector have been consolidating also. We are continuing to see signs of buyers like this afternoon when the market was dropping, CAH was rebounding. Also, like most of the drug stocks, CAH is finding support at $68 from its 200-dma. We expect Cardinal to move with the group so keep your eye on other major players as well. Any move above $70 would be considered a bullish signal. ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter Thursday 7-8-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ******************************************************* PICK NEWS - PUTS ******************************************************* MCK $32.56 +.06 (+.31) MCK has gained a fraction this week, but still sits under resistance at $33.50. The stock lost ground yesterday and traded in a range from $32 to $32.75 today. No sign yet that the stock will be able to gather any momentum to break out of this slump. With the consolidation recently, the stock is in a position to move and we think that move will be down. We see the stock dropping to at least $30, the spot of support. Doesn't seem like much of a drop, but this would be a drop of about 8 percent from current levels. If the stock rises intraday and bounces back down from the $33.25 to $33.50 level, this would be another put buying opportunity. MCK had another class action suit brought against it today. This one is going after the company financial advisors and accountants who allegedly pursued the HBOC merger in a fraudulent manner. YHOO $164.44 -2.63 (-13.69) YHOO did get the Internets off to a roaring start when it came in at .11 versus the official estimate of .08, but it was no blowout. The rumors were higher than that; but all in all, YHOO still beat the estimates. Plus, the conference call was very positive, daily page views rose by 32%, registered users increased 38% to 65 mln. and revenues exceeded the consensus at $115 mln. versus $105 mln., motivated by strong advertising income. Nonetheless, there was no split announcement and if history does repeat itself, then YHOO should continue to fall in the coming days. Of course you're all waiting for the "but wait there's a catch". In typical analyst exuberance, many came out with reiterations of previous ratings. Thomas Weisel Partners, Banc of America Securities, Hambrecht & Quist, and CSFB all restated their "buy" rating on YHOO. CSFB took it a step farther and raised its 1999 p/s estimates to .41 from .38 and its 2000 p/s estimates to .67 from .58 in the same breath. Needham & Co also put in their two-cents and reiterated their "hold" rating (oh boy!). With all this positive press, you should wait to confirm direction even in light of the recent losses YHOO has undergone in the past 3 days. This HIGH RISK PLAY is NOT for everyone! GBLX $40.03 -1.21 (+0.03) On Tuesday, GBLX added on a little over $2 likely due to positive news events unrelated to the Qwest battle over Frontier and US West. In the two days that followed, GBLX gave up those gains on low to average trading volume. It's back where it started sitting between its 50 dma of $50 and its 200 dma of $32. A bearish indication would be for GBLX to break through this apparent bottom resistance of $40 and continue its descent. A conservative player will wait for further evidence of downward movement before opening a new play. For the new readers, this put play is based on the competition between Global Crossing and its rival, Qwest, to acquire Frontier and US West. Please view the detailed write-up of the events surrounding this contention in Sunday's newsletter. Since Tuesday, US West has signed no confidentiality pact with Qwest and emphatically stated it wants a merger of "equals" not a takeover bid. The talks are continuing. Some analysts are predicting it may be a draw with Qwest ending up with US West and Global Crossing acquiring Frontier. Time will tell as the battle unfolds and news leaks to the press. Consider using stops - news events can turn a play in an instant. FON $51.00 +0.88 (+0.88) Sprint had a lot in the way of news the past few days. On Wednesday, Goldman started coverage of FON with a market-outperform but that was lower than both AT&T and MCI Worldcom which made the recommended list. Also on Wednesday, People's Choice T.V. shareholders approved the pending merger with Sprint. But this wasn't a major deal as PCTV's shareholders will receive only $10 a share. Then today was an article about sketchy billing practices among wireless carriers. Sprint PCS was cited as one example of rounding up minutes when billing customers and other such practices. This helped bring FON down from the highs for the day. So we had a lot to digest recently. The stock has moved higher though and we are watching closely to see if a new trend is emerging. For now we still think there is more downside left but keep your stops tight just in case. AT $70.00 +0.56 (+0.69) Alltel climbed slightly on Wednesday and Thursday before being pushed back by resistance. The stock jumped a dollar in early trading on Thursday. This was sparked by an article about some lesser known survey of top 500 businesses for value added resellers. Alltel ranked 28 in the survey but that only sounds impressive because that is where it ranked last year. This pushed the stock up to resistance at the 50-dma and then promptly came back down. This is the kind of pattern we like to see on the put plays. When positive news fails to spark a sustainable rally. So we now expect AT to challenge the short-term lows around $67.50. Market willing, that mark will soon be replaced by another short-term low. One final note, on Wednesday Goldman started all telecom stocks with ratings. AT received the middle of the three possible ratings which is market- outperform. ******************************************************* NEW CALL PLAYS ******************************************************* AOL - America Online $127.69 +2.69 (+12.44 this wk) America Online is the world's leading provider of Internet and online services. It currently has over 17 million subscribers between its two divisions, America Online and CompuServe. AOL Interactive Services product group operates the company's America Online service & manages the AOL Instant Messenger service, the AOL.COM Web site, and AOL NetFind. In 1999 it purchased Netscape Communications which brought the popular Navigator Web browser and the Netcenter Internet portal to AOL. That's not the only purchase this year either. In May they bought MovieFone Incorporated to add to an already commanding list of services. We are adding AOL to the call list as the stock is off and running ahead of earnings. They are scheduled to report their results on July 22 with expectations of 0.11 cents a share. You can see by the chart that interest in the stock has come alive this week. Volume is coming in well above what is average, pushing the stock up over 10% on the week. Yahoo kicked off the earnings season for Internet stocks this week and proved that profits are increasing as are ad revenue and page viewing growth. This will help fuel other stocks, like AOL, as they head into their respective earning dates. And now that Yahoo's numbers are past you almost get the sense that the money pulling out of Yahoo is shifting to the other major Internet blue-chip, AOL, for their earnings run. Plus we are still seeing strength in the NASDAQ and Internet issues in general. From a technical standpoint, AOL moved above the 50-dma on Tuesday at $120. This will be support if we get a pullback but don't expect too much. AOL is looking very strong so you may want to consider finding an entry point in one of the intraday dips. [editor's note: believe it or not, AOL qualifies as a split candidate again over $120. However, they only have 1.8 bln shares authorized and already have over 1 bln outstanding. At the moment there are no share holder meetings scheduled until October. So the best we can hope for is a 3:2 unless they call for a special vote. Best chance of an announcement is at earnings. -Kimo] News this week has been mostly general and sector related but on Tuesday they did announce a deal with the recent IPO Dr.Koop.com. They signed a four year contract in which Koop agrees to pay AOL $89 million dollars. The deal will link Dr.Koop to the millions of AOL users to potentially build their advertising and electronic sales. ***there are no July options listed because there is only 1 week left before expiration. However if you can handle the risk, they are much cheaper but you will have to be out of them before AOL completes its earnings run. BUY CALL AUG-120*AOO-HD OI=4981 at $16.13 SL=12.50 higher delta BUY CALL AUG-125 AOO-HE OI=4443 at $13.50 SL=11.00 BUY CALL AUG-130 AOO-HF OI=4611 at $11.00 SL= 8.75 BUY CALL AUG-135*AOO-HG OI=2952 at $ 8.88 SL= 6.75 more brave BUY CALL OCT-135 AOO-JG OI=5427 at $15.25 SL=11.75 Picked on July 08th at $127.69 P/E = 155 Change since picked +0.00 52-week high=$175.50 Analysts Ratings 24-12-1-0-0 52-week low =$ 17.25 Last earnings 04/99 est= .09 actual= .11 Next earnings 07/22 est= .11 versus= .06 Average Daily Volume = 12.75 mln Chart = http://quote.yahoo.com/q?s=AOL&d=3m **** INKT - Inktomi Corp $139.88 +4.38 (+3.50 for the week) Inktomi develops and markets scalable software applications to intensify and strengthen larger networks. Their Internet search engine, which provides a fast and customizable Web search, is used by Yahoo! Other products include a large-scale network caching application for ISPs (like AOL) and corporations that need help addressing capacity constraints in high-traffic network routes and also an Internet shopping engine for price comparison. Inktomi has operations in the US and UK. INKT got serious on June 30th and tacked on a double-digit gain of $12.37 for a $131.50 finish. The new "buy" rating that day by Pacific Crest Securities surely had its influence. INKT has so far not returned to its old support of about $112-116 as it rides upward. The earnings' report from YHOO spread optimism and encouragement throughout the Internet sector today. INKT advanced over $4 on moderate volume. The stock faces near resistance of $145.13 (an intraday high hit on Monday) as its earnings' date approaches us next week on July 15th. Beyond that point, the 52-week high is at $159.12 - a height reached back in April around 1Q earnings. You may have to look intraday for an entry point. Remember this is an Internet and experiences volatility and wide intraday swings. This play is HIGH RISK and requires the utmost attention. Be careful. On Tuesday, Henry Blodget of Merrill Lynch resumed coverage of INKT as an "accumulate" and also reiterated his "long- term buy" rating. His 12-month target price is set at $160. He cited their "most important product, network caching software, is expected to grow from 1.6 bln. in 2000 to more than 4 bln. in 2003" as his primary factor. ***there are no July options listed because there is only 1 week left before expiration (which means more RISK). However if you can handle the risk, they are much cheaper. NOTE: you should be out on or before the 15th of July anyway. BUY CALL AUG-135*KYQ-HG OI= 237 at $20.38 SL=15.50 ITM 4.88 BUY CALL AUG-140 KYQ-HH OI= 556 at $18.00 SL=14.00 BUY CALL AUG-150*KYQ-HJ OI= 160 at $13.88 SL=11.25 Aggressive Picked on July 8th at $139.88 PE = N/A Change since picked +0.00 52 week high=$159.12 Analysts Ratings 5-5-3-0-0 52 week low =$ 19.50 Last earnings 03/99 est= -.10 actual= -.09 surprise=10% Next earnings 07-15 est= -.11 versus= -.13 Average daily volume = 2.24 mln. Chart = http://quote.yahoo.com/q?s=INKT&=3m ************** NEW PUT PLAYS ************** NONE ****************** COMBINATION PLAYS ****************** Dow Falls As Investors Move Back Into Technology Issues U.S. stocks ended mixed on Thursday with blue chips falling as investors moved funds into technology stocks, pushing the Nasdaq further into record territory. Wednesday, July 7 U.S. markets set new records again on Wednesday with key indices climbing to new highs. Despite the records, NYSE declining issues outpaced gainers leading analysts to speculate that the overall market is showing signs of fatigue. The Dow closed at 11,187, up 52 points while the Nasdaq composite rose 6 points and broader issues in the S&P 500 moved that index up 7 points to 1,395. The long Treasury bond fell 5/32, pushing the yield higher to 6.05%. Tuesday's new plays (positions/prices): AOL AUG105C/A110C $3.38 debit (probably as low as $3.25) INTC OCT65C/JUL65C $4.00 debit (easy entry at target price) GM *JAN75C/JUL75C $11.12 debit (fell almost $1 at the open) GM *JAN75C/JUL70C $10.00 debit (new play on Tuesday prices) *January 2001 LEAP American Online (AOL) made a nice dip on Tuesday morning, filling the target order at $3.38. It appeared that some positions could have traded as low as $3.25. Intel Corp., (INTC) was up and down during the first few hours of trading allowing an easy entry at the suggested net debit. The General Motors (GM) play opened much lower than expected. The stock price fell in the first few minutes of trading and never really recovered. The target was adjusted down to $11.12 but it actually traded lower than that during the afternoon and the short position dissolved to almost nothing. In light of the short-term weakness, we also opened a position at the $70 strike (the highest time value premium). Both plays are very long-term and we expect them to be profitable regardless of the poor starting position. Portfolio plays: The Dow's move into record territory got a boost from General Electric (GE), which rose $4 on anticipation of favorable second quarter earnings. The move brought our bullish diagonal spread to the upper edge of the profit envelope and without closing the short term position early, we are at the mercy of the underlying stock, hoping for a small consolidation after the report. Silicon Graphics (SGI) finally gave back some recent gains, falling to $16 near midday, allowing us to exit the short position at $1.75 debit (in favor of the new bullish trend). The play was already profitable as a spread but we think there is new upside potential to this issue and the risk is very small compared to the upside profit potential. Compaq Computers (CPQ) also made a big recovery today, moving closer to the sold position, a favorable change as we approach the monthly roll-out to August positions. Thursday, July 8 U.S. stocks ended mixed on Thursday with blue chips falling as investors moved funds into technology stocks, pushing the Nasdaq further into record territory. The Dow closed down 60 points at 11,126 while the Nasdaq Composite rose 28 points to another high at 2,771. Losing issues outpaced advances 1,657 to 1,299 on the New York Stock Exchange on volume of 820,023,100 shares. The 30 year U.S. Treasury bond jumped 23/32 lowering the yield to 5.99%. Portfolio Plays: Apria Healthcare (AHG) made a big move today, climbing to a high of $20 and bringing new hope that our long-term diagonal spread may yet recover to profitability. Hopefully, it can remain near the current price until next week when we sell August positions. Long term plays on oil stocks including Halliburton (HAL), Ensco (ESV) and Global Marine (GLM) continue to perform well and even Sepracor (SEPR) is showing signs of life as it tries to rebound from a recent slump. Our bullish debit spreads led the combos portfolio as Micron (MU) gapped up $4, Earthlink (ELNK) moved up $5, Sequent (SQNT) came back to the $16 range and even American Online (AOL) continued to climb, gaining $2.56 to $127. Other long-term issues that also performed well today include Worldcom (WCOM), up almost $5 and Motorola (MOT), up $3.18. Our new (2001) LEAP/Covered Call play on Tuesday received some favorable interest, so today we are going to offer a few more of these (very) long-term positions. These are all issues that are commonly listed in the main section of the OIN and they have excellent institutional coverage. The fundamental outlook for each of these companies is positive and the long-term technical histories are favorable. Please review the current news on each play individually and make your own decision about the future direction of the stock price. Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** SUNW - Sun Microsystems $71.75 LEAPS/Covered-Calls Sun Microsystems is a leading supplier of enterprise network computing products including workstations, servers, software, microprocessors, and a full range of services and support. The company's products command a significant share of a rapidly growing segment of the computer industry: networked computing environments. Their products are also used for many demanding commercial and technical applications in various industries. Server manufacturers and other specialists in back-room hardware are likely to beat earnings expectations for the second quarter based on strong Internet infrastructure sales. SUNW is just one of the companies likely to exceed consensus estimates because hardware companies are currently benefiting from investments in Internet infrastructure by companies that are putting more operations online. Concerns over the Y2K technology glitch have also helped and even as that starts to wind down, new E-commerce revenues will offset the potential fourth-quarter downside. The profitable trend for SUNW should continue well into the next decade as their leading edge technology fuels profits in other segments of the growing enterprise network industry. PLAY (conservative/long-term): BUY CALL JAN-2001-75 ZSU-AO OI=444 A=$20.50 SELL CALL JUL-1999-75 SUQ-GO OI=5042 B=$0.62 INITIAL NET DEBIT TARGET=$19.50 TARGET ROI=120% (18 months) Chart = http://quote.yahoo.com/q?s=SUNW&d=3m ***** SLR - Solectron Corp. $71.25 LEAPS/Covered-Calls Solectron is an independent provider of customized manufacturing services to electronics original equipment manufacturers (OEMs). The company provides a wide variety of manufacturing services to the industry. The company provides integrated solutions that span the entire product life cycle; from pre-production planning and design, to manufacturing, distribution and end-of-life product service and support, for the world's leading electronics OEMs. Solectron offers its customers competitive outsourcing advantages such as access to advanced manufacturing technologies, shortened product time-to-market, reduced cost of production and effective asset utilization. The company has received hundreds of quality and service awards from its customers in addition to the Malcolm Baldrige National Quality Award. Solectron is the first company to win the Baldrige Award for Manufacturing twice in the 11-year history of the national program. In mid-June, Solectron announced record sales for the 3rd quarter of fiscal 1999. Revenues increased 68% from the third quarter of fiscal 1998 to $2.2 billion for fiscal 1999. Net income for the quarter was up 53% from the third quarter of fiscal 1998 to $75.7 million for fiscal 1999. Earnings per share were also higher for this quarter; $0.29 compared to $0.20 for the third quarter of last year. This record-breaking quarter is based in part on the new shift toward outsourcing by customers requiring fully-integrated and optimized supply-chain solutions and the company is continuing to invest in initiatives intended to globally integrate their design, product development, manufacturing, distribution and support services offerings. Deutsche Banc Alex Brown agrees with the positive outlook and recently it initiated coverage of Solectron with a Buy rating. PLAY (conservative/long-term): BUY CALL JAN-2001-70 ZSR-AN OI=0 A=$19.37 SELL CALL JUL-1999-75 SLR-GO OI=40 B=$0.56 INITIAL NET DEBIT TARGET=$18.50 TARGET ROI=120% (18 months) Chart = http://quote.yahoo.com/q?s=SLR&d=3m ***** MDT - Medtronic Inc. $78.81 LEAPS/Covered-Calls Medtronic is the world's leading medical technology company specializing in implantable and interventional therapies. Their primary products include implantable pacemaker systems used for the treatment of bradycardia, implantable tachyarrhythmia management devices, ablation systems, mechanical and tissue heart valves, balloon and guiding catheters used in angioplasty, coronary and peripheral stents and stented grafts, neurosurgical devices, and urological and digestive diagnostic systems. Medtronic has been on a roll lately with new product launches and five acquisitions completed in fiscal 1999. They are ahead of schedule in integrating all five companies and the next decade in the best strategic position in their 50-year history. Growing product lines are building new momentum on expanded and strengthened sales and technical support organizations serving all the world's major medical markets. The key to success for companies like MDT is new developments in the field of medical technology. MDT continues to be a leader in this filed and recently the Food and Drug Administration backed two of their newest devices, a prosthetic heart valve and a defibrillator for certain heart patients. The panel endorsed the Jewel AF defibrillator system for treating patients with ventricular and atrial arrhythmias, two types of irregular heartbeats. Medtronic calls the device the most advanced implantable medical device in the world because it is designed to treat heartbeat disturbances in both the lower and upper chambers. The panel also backed Medtronic's Hancock 2 heart valve, the next generation of its original Hancock valve, declaring it safe and effective for replacing diseased natural valves or other prosthetic valves that had deteriorated. The company, which has fortified its heart and artery business through recent mergers, makes two other heart valves besides the Hancock series. PLAY (conservative/long-term): BUY CALL JAN-2001-75 ZKD-AO OI=704 A=$18.50 SELL CALL JUL-1999-80 MDT-GP OI=1575 B=$0.68 INITIAL NET DEBIT TARGET=$17.50 TARGET ROI=120% (18 months) Chart = http://quote.yahoo.com/q?s=MDT&d=3m ***** JNJ - Johnson & Johnson $95.68 LEAPS/Covered-Calls Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field. J&J's business is divided into three segments: Consumer, Pharmaceutical and Professional. The Consumer segment's principal products are personal care and hygienic products while the Pharmaceutical segment's are in the allergy, antibacterial, antifungal, contraceptive, dermatology, gastrointestinal, and pain management fields. The Professional segment's products are used by doctors, nurses, therapists, hospitals, diagnostic laboratories & clinics. Lots of news and product developments for J&J but we like this play strictly as a market hedge in the area of conglomerates and safety stocks. The long-term technical outlook is very favorable and the option prices are fair with excellent (monthly) open interest. This issue provides an excellent low risk candidate for even the most conservative investor. PLAY (conservative/long-term): BUY CALL JAN-2001-100 ZJN-AT OI=685 A=$14.12 SELL CALL AUG-1999-100 JNJ-HT OI=267 B=$1.75 INITIAL NET DEBIT TARGET=$12.00 TARGET ROI=120% (18 months) Chart = http://quote.yahoo.com/q?s=JNJ&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. 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 ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Thursday 7-8-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. **************** Play of the Day **************** QCOM - Qualcomm Inc. $142.25 +2.81 (-2.00 this week) Sunday's Write up Qualcomm is the inventor of CDMA technology, the new industry standard for mobile communications used in cellular phones, wireless telephone system equipment, and satellite ground stations. Its OmniTRACS global positioning system is used by the trucking industry to monitor traveling truckers. In a joint venture with several companies, including Loral, QUALCOMM is developing the Globalstar system of low-orbiting satellites, which will offer telecommunications services around the world (and should smoke Iridium like a pork chop, we might add). QUALCOMM also publishes the popular Eudora e-mail software. Fortunately, profit taking last week turned out to be pretty mild. The price just keeps marching, with all technical indicators in positive territory. QCOM had only 1 down day last week (Thursday) and sprang back on Friday to close at yet another new high of $144.25. Near-term support is at $141, where it bounced Thursday and again Friday morning. If volume can stay up, so can the price. Resistance is at $147, its highest intra- day high. Earnings are tentatively scheduled for July 21. How about the possibility of another split then too? Perhaps, but no guarantee. QCOM last announced a 2:1 split on April 14, when it traded at $157. Trading gods willing, QCOM could be there again by earnings and announce another 2:1 split. There are 300 mln. shares authorized. There are 150.646 mln. shares issued - slightly too many to pull off a split without a shareholder vote. No special proxy has been issued yet. We'll keep an eye out. QCOM may exhibit a bit of weakness in conjunction with any market weakness. Let this be a buying opportunity, but exercise caution since QCOM's volatility makes it a bit riskier play. Confirm market direction before jumping in. No news since last Thursday. Just a reminder from the previous week, Deutsche Banc Alex Brown analyst Brian Modoff anticipates QCOM's CDMA royalties alone will garner about $1.50 a share in 1999. That works out to roughly $112.50 per share at a multiple of 75 time earnings. This looks good to analysts. Tuesday's Write up Nothing in the news to report today - just good old-fashioned profit taking on slightly higher than average volume. QCOM held pretty well at $149 until the last hour and a half of trading, then the bottom fell out, causing QCOM to fall $7 to $142. Its trading range today was from $141.50 to $150.25. A small spurt of buying at the closing bell propped it off its low - a bit too late to confirm $141 support. Tomorrow may be a down day on a market wide basis, and QCOM will likely follow suit. If not, consider today's bounce off $141 a gift/buying opportunity. Earnings are July 20, 1999 at approx. 1:30 p.m. (company confirmed). Also, since they announced their last split at $157, we may get another 2:1 split announcement at that time, though shareholders will need to vote on the issue (anyone object?). Just a reminder VOLATILITY = HIGH RISK! Confirm market direction first. Thursday's Write up Yes, dreams can come true, as long as you analyze the market correctly. Last night we noted in the Market Wrap that QCOM was buyable on yesterday's dip. We cited CNBC early morning comments (missed by most other news services) that QCOM had gained 600 K new customers in Korea during the month of May and they are expected to announce a major equipment sale to Sprint in the next 2 weeks. Not only that, but Lehman Bros. was "pounding the table" on QCOM while they raised earnings estimates by another $0.02. Today's $2.81 gain is nice to see, but QCOM investors may have hit the mother lode in after hours trading, as QCOM traded up $9 at $151. The news release states that QCOM will be replacing TransAmerica on the S&P 500. As one exuberant message poster wrote, "!#$% &*#@, I AM ROLLING IN MONEY!!!!!!!!". Earnings are July 20, 1999 at approx. 1:30 p.m. (company confirmed). Remember too that since they announced their last split at $157, we may get another 2:1 split announcement at that time, though shareholders will need to vote on the issue (anyone object?). We can pretty much confirm the direction of this stock tomorrow. Just don't buy with a market order at the open and wait for any mid-day weakness. Try not to chase the stock price. Comments We are making QCOM the play of the day due to the announcement of their addition to the S&P 500. This will make for an exciting and volatile day tomorrow. Keep in mind that the prices listed below will have changed dramatically and there is bound to be many more strikes created as it is hitting new highs after-hours. We are looking for QCOM to climb for the next few days on this news. Remember to buy the dips and enjoy the ride! BUY CALL JUL-140 AAW-GH OI=1684 at $ 7.50 SL= 5.75 BUY CALL JUL-145 AAW-GI OI=1645 at $ 4.75 SL= 3.00 BUY CALL JUL-150*AAW-GJ OI=3081 at $ 3.00 SL= 1.50 BUY CALL AUG-145 AAW-HI OI= 702 at $13.75 SL=11.00 BUY CALL AUG-150 AAW-HJ OI=1015 at $12.00 SL= 9.50 Picked on June 22 at $130.63 PE = 384 Change since picked +11.63 52 week low =$ 18.88 Analysts Ratings 7-7-3-0-0 52 week high=$150.25 Last earnings 04/99 est 0.49 actual 0.21 surprise = 41.38% Next earnings 07-21 est 0.55 versus 0.17 Average daily volume = 3.58 mln. Chart = http://quote.yahoo.com/q?s=QCOM&=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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. 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