The Option Investor Newsletter Tuesday 7-13-99 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) ************************************************************ 7-13-99 High Low Volume Advances Decline DOW 11175.02 - 25.96 11211.11 11085.10 737,913k 1,278 1,715 Nasdaq 2778.23 - 12.21 2782.25 2755.84 992,634k 1,771 2,184 S&P-100 719.79 - 2.07 721.86 715.73 Totals 3,049 3,899 S&P-500 1393.56 - 5.54 1399.10 1386.84 43.9% 56.1% $RUT 458.11 - 1.19 459.30 455.46 $TRAN 3405.60 - 26.29 3433.82 3401.87 VIX 20.23 + .39 21.14 20.04 Put/Call Ratio .58 ************************************************************* Argentina up +4.5%, Dow/Nasdaq down! One day after the leading presidential candidate in Argentina made a remark about asking the pope to help Argentina get a one year debt repayment moratorium, the Dow opened down -115 points but the Argentine Merval Index was up +4.5%. Yes, I know he recanted his remarks and downplayed the statements but the damage had already been done. The comment rippled markets around the world bringing back memories of last years Brazil debacle. The reason the result was so dramatic was the current state of the Argentine economy. They are in a deep recession and the current president has failed to enact need reforms. The country has been rumored to be on the devaluation trail for some time. Currently their currency is pegged to the U.S. dollar but could be changed after the election. Analysts and investors worldwide were afraid that a post election Argentina could hold some surprises after the flippant comment by the front runner. Latin American experts do not think Argentina can afford to devalue since they need outside investment and loans to keep the country afloat. Taking their currency off the peg or devaluing would keep them from getting outside loans for a long time. In reality the reaction was much ado about nothing but the impact was still the same. The Dow opened down about -115 points after seeing the S&P futures close down about -8.00. The banks and brokerages were hardest hit but techs suffered also. The tech stocks were first to recover but were still very tentative all day in front of Intel's earnings tonight. With the market still resting (or struggling) from the strong gains two weeks ago, we did not need another straw on our backs. Sectors and stocks were spotty and recent market leaders failed to pull out of the dumps. Only story stocks like Amazon, who announced two new online stores for toys and electronics, were able to gain back lost ground. As you can see from these charts we remain locked into a solid range on both the Dow and Nasdaq. In reality we should have been moving upward in advance of better than expected earnings. Several factors are influencing the markets lethargy. One was the Argentina thing. The next big worry was the Intel earnings tonight and the PPI/CPI/Retail Sales Wednesday and Thursday. No one wanted to make big bets in front of these possibly dangerous events. Maybe Andy Grove, the CFO for Intel, should have gotten the pope to bless the earnings for Intel. Intel announced weaker than expected earnings after the bell with a +.51 cent actual instead of the $.53 the street was expecting. The analysts were immediately faced with a problem. Lower than expected earnings but sales were almost $1 bln higher than expected. The Intel conference call was very positive with Intel pounding the table about second half expectations. Their product mix was strong with higher margin chips offsetting the lower end of the product line. In total contradiction to normal trends Intel dropped over -$2 after hours but quickly bounced and recovered to finish only -.13 down. This would make you believe that the faithful were more focused on the $1.7 bln in profits from $6.7 bln in sales than the actual earnings per share. Intel had already warned they would have a revenue shortfall from last year and analysts were expecting only $5.93 bln. The jump in sales and positive call indicate that maybe there will be no punishment tomorrow. Motorola however posted $.44 vs $.41, beating the street by $.03 but traded down -$1.50 after hours. Paine Webber beat the street by +.08 and lost -.38. Phelps Dodge beat by +.02 and lost -1.25, International Paper beat by +.01 and lost -1.38. Merrill Lynch beat the street by +.11 and closed up +1.19 on good comments made by several analysts after the announcement. It just goes to prove, "it's all in the call". The market breaker tomorrow will be the PPI in the morning. It has been trending down recently so a slightly larger number than the expected +.1% could still be seen as a positive. A smaller number could re-ignite the rally on lessening Fed rate fears but a much larger number could be a killer. As if we did not have enough to worry about this week the CPI numbers are due out Thursday morning. Just replace PPI with CPI in the above paragraph to get the market outlook for Thursday. The silver lining in the Argentina, Latin American problem is the result on the Fed. With instability in Latin America the Fed would be hard pressed to raise rates again. Raising our rates impacts their loan costs necessary for economic recovery and would be politically incorrect. Because of the lagging market several market timers are calling for a near term market top as early as Thursday and as late as next week. The lack of earnings momentum is seen as investors selling into every rally and lightening up their portfolios. Several mentions of Y2K were heard today and it seems like they are becoming more frequent. I would also caution our readers that a down trend is possible as earnings wane and not to be married to your positions. Did anybody say to themselves today "If only I had sold when..."? The market action at the open today should be a wakeup call for taking a profit when one is available. I have vivid memories of October 1997 and a market opening similar to this one. Futures were lock limit down and options did not trade on most stocks for 30-45 minutes. Well after they had dropped huge numbers. Unlike today the market did not rebound on a false alarm. Had this been a real problem the gap down at the open would have only been a prelude for the rest of the day. Any profits would be changed into large losses before you even had the chance to sell. Stop loss orders would be useless. Profits can be lost far faster than gained and investors should always be aware of pending market/global/economic problems and step aside until the clouds blow over. Good Luck, sell too soon. Jim Brown Editor ************** SEMINAR UPDATE - Almost gone! ************** The Dallas and San Francisco seminars are almost full. We were able to shift the room setup and add several more seats. We currently have about five seats available for each location. 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. We guarantee you will not be disappointed! July 18 & 19 DALLAS / Airport Marriott July 25 & 26 SAN FRANCISCO / Crown Plaza Click here for details: http://www.OptionInvestor.com/seminar/index.asp *************** Traders Corner *************** On-line Brokerage Firms -- Part II By Tom Gentile "If your not on line, than your business is off-line" seems to be the topic of conversation at most brokerage firms these days. "Even the Johnny-come-lately's", such as Merrill Lynch and Smith Barney are plunging into Web World with their own brand of on line trading. But what about options traders? Can the savvy option spread trader find a home in this growing on line infrastructure? At first glance, you may think so, but look again. Spread trading is growing in population, thanks in part to an ever-increasing trader base and volatility expansion in the markets. Day traders who have had enough, as well as short-term options traders are taking a second look to spread trading, as it becomes a more favorable avenue for investing or hedging equity portfolios. Spread trading involves spreading or crossing options with one another in hopes to reduce cost and risk of the options position, as well as slow down the day to day equity fluctuations in portfolios. Trading to most people is a high or an emotion. Take the emotion out of trading, and generally you will replace it with profits. Lets look at an example of how a simple options spread can both reduce your cost exposure and risk exposure in the market. Yahoo has options that trade on the CBOE, in various strike prices and expiration dates. On any particular day, the at-the-money calls for Yahoo with 30 days to expiration can run as high as 35 points to buy. Assuming that you are buying a Yahoo August 150-call option, Yahoo stock must be at 185 or higher at expiration before you can realize a profit. Sometimes this can be far fetched for some stocks in terms of options premiums. By simply buying a spread, this trade can be drastically reduced in terms of cost, risk, and break-even. Let's assume that taking the trade above, you also decide to sell the Yahoo August 180 call, receiving 25 points for the sale. By entering this order as a spread, you no longer have a cost of 35 points, but a spread cost of 10 points. Your risk is reduced by 2/3 and you still have profit potential of 20 points, up to 180. Profit potential is limited, which is the only problem with this spread. Although profits are limited, the limited risk in most cases clearly outweighs the limited rewards. This is due to the hedge that the option spreader has which cuts the directional risk of the position. Placing online options spreads hasn't been easy for the typical options spreader. Until recently, the only way to place a spread order online was to leg into the position. Legging into a position, is accomplished by entering option buy and sell orders outright on separate tickets. The big problem with this is that if you want to get fills by legging into spreads, you normally have to enter market orders on both sides of the spread. Option spreaders know that legging into positions opens up a window of risk, especially in a fast market. There is also the element of slippage, due to entering market orders on each side of the spread. Online firms that offer true option spread entries allow the option spread trader the ability to get the entire order done on one ticket, eliminating the directional risk of legging, as well as the slippage that comes with market orders. While there are hundreds of online brokerage firms in existence, as of this writing there are currently four that offer true spread trading. Wall Street Access, Ameritrade, WallStreet Electronica, and AccuTrade. Each of these online firms has an order screen that specifies the spread options strategies that are available. These firms truly offer more than just cheap commissions. Although cheap commissions lure traders to brokerage houses in droves, the firms with a vision for the future realize that flexibility of order placement and speed of execution will become the most important thing to an online trader. Tom Gentile is a full time trader and Chief Options Strategiest to Optionetics and George Fontanills. *************** Market Posture *************** As of Market Close - Tuesday, July 13, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,000 11,175 BULLISH 7.01 SPX S&P 500 1,315 1,355 1,394 BULLISH 7.01 OEX S&P 100 660 690 720 BULLISH 6.29 RUT Russell 2000 390 450 458 BULLISH 6.29 NDX NASD 100 2,110 2,220 2,374 BULLISH 6.29 MSH High Tech 1,010 1,080 1,208 BULLISH 6.19 XCI Hardware 900 950 1,046 BULLISH 6.17 CWX Software 675 700 795 BULLSIH 6.17 SOX Semiconductor 410 425 504 BULLISH 6.10 NWX Networking 525 545 593 BULLISH 6.25 INX Internet 500 510 529 BULLISH 7.01 BIX Banking 680 720 698 Neutral 6.29 XBD Brokerage 410 425 431 BULLISH 7.01 IUX Insurance 645 660 650 Neutral 6.29 RLX Retail 900 910 935 BULLISH 6.29 DRG Drug 370 400 374 Neutral 7.01 HCX Healthcare 750 800 768 Neutral 7.01 XAL Airline 180 190 168 BEARISH 5.21 OIX Oil & Gas 285 310 308 Neutral 5.13 Posture Alert The broad market made a late-day rally attempt but came short of closing at any new highs. The 30-yr Treasury continued its rally thanks to Argentina, but it was not enough to spark an equity rally. Even with the equity markets taking a breather these last couple of days, the posture board remains predominately bullish. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** Tuesday, July 13, 1999 The Pinnacle Index! Below is a list of equities and our Pinnacle Index for those particular stocks. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. For example, below you can see that Motorolla has a Pinnacle Index of 7.0 and 14.7 at the 100 and 105 level, respectively. This is extremely bullish, and would indicate that Motorolla would have a tough time breaking 100, let alone getting up to 105 and holding above this mark. It does start to show support at 95, with strong support at 90, however. Intel is bearish at 62.5 and 65 (1.4/1.8), but extremely bullish at 70, clocking in at 14.22. This would suggest strong overhead resistance at 70 and good support in the 62.5 and 65 area. close tonight so we will be interested in how this numbers hold up. Stock Symbol Strike Price Pinnacle Index Motorolla MOT 95 / 100 / 105 2.8 / 7.0 / 14.7 * Intel INTC 62.5 / 65 / 70 1.4 / 1.8 / 14.2 * Pairgain PAIR 10 / 12.5 / 15 2.1 / 9.2 / 14.8 * Apple Comp. AAPL 47.5 / 50 / 55 1.3 / 5.3 / 1.3 Altera ALTR 35 / 40 / 45 1.6 / 1.1 / 1.3 Gillette G 40 / 45 / 50 .7 / 2.0 / .3 Rambus RMBS 85 / 90 / 95 .4 / .7 / 1.2 E-Trade EGRP 35 / 37.5 / 40 .9 / .9 / 3.0 Amazon AMZN 125 / 130 / 135 1.5 / 3.4 / 12.8 * IBM IBM 130 / 135 / 140 1.9 / 2.1 / 1.4 Gateway GTW 65 / 70 / 75 2.0 / 2.2 / 1.0 Lucent Tech LU 70 / 75 / 80 3.5 / 13.7/ 37.0 * Microsoft MSFT 90 / 95 / 100 3.4 / 9.9 / 51.0 * Sun Micro SUNW 70 / 75 / 80 4.7 / 13.0/ 99.0 * Tellabs TLAB 65 / 70 / 75 1.4 / 2.1 / 19.0 * Schwab SCH 50 / 55 / 60 1.3 / 6.5 / 14.5 * This list will be expanded on Thursday. Bullish Signs: Interest Rates: The 30-yr Treasury is beginning to retrace back under the key 6% level. 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: Market Posture: Several indexes are showing signs of a potential rollover, including the Dow, OEX, networking, software, and semiconductors. 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 .5 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% Friday, July 09 99,855 +283.5% Market Sentiment at a Glance Friday Tues Indicator (7/09) (7/13) ************************************************ Pinnacle Index (OEX): Overhead Resistance (720-750) 7.9 6.1 Underlying Support (685-710) 1.3 1.9 (650-710) 2.1 2.7 Put/Call Ratios: CBOE Total P/C Ratio .5 .5 CBOE Equity P/C Ratio .4 .4 OEX P/C Ratio 1.5 1.2 Peak Open Interest (OEX): Puts 600 680 Calls 730 725 P/C Ratio 1.01 1.08 Market Volatility Index (VIX): CBOE VIX 19.09 20.46 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. Pinnacle Index OEX Friday Tues Benchmark (7/09) (7/13) Overhead Resistance (720-750) 7.9 6.1 OEX Close 722.68 719.79 Underlying Support (685-710) 1.3 (650-710) 2.1 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 725/750 level while the underlying support is holding at the OEX 685/710 level. Put/Call Ratio Friday Tues Strike/Contracts (7/09) (7/13) CBOE Total P/C Ratio .54 .55 CBOE Equity P/C Ratio .40 .42 OEX P/C Ratio 1.48 1.15 Peak Open Interest Friday Tues Thurs Strike/Contracts (7/09) (7/13) (7/15) Puts 600 / 12,089 680 / 12,503 Calls 730 / 11,917 725 / 11,571 Put/Call Ratio 1.01 1.08 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 13, 1999 20.46 * 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 July 07, 1999 52.6 27.2 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Week Dow 11175.02 7.28 -25.96 -18.68 Nasdaq 2778.23 -2.63 -12.21 -14.84 $OEX 719.79 -1.02 -2.07 -3.09 $SPX 1393.56 -4.18 -5.54 -9.72 $RUT 458.11 4.55 -1.19 3.36 $TRAN 3405.60 4.57 -26.29 -21.72 $VIX 20.23 0.75 0.39 1.14 Calls Mon Tue Week SNE 118.06 3.13 0.56 3.69 It keeps going and going NXTL 52.81 1.44 1.38 2.82 Earnings on Thursday HWP 109.31 0.44 2.19 2.63 CSFB raised estimates VRIO 77.00 0.09 2.16 2.25 Monday breakout LU 72.69 1.63 -0.88 0.75 Time for an earnings run GTW 68.31 2.13 -1.44 0.69 New, entry point! SUNW 73.50 2.25 -1.69 0.56 New highs on Monday IBM 137.88 0.44 0.06 0.50 Still hitting new highs MSFT 93.63 0.94 -0.56 0.38 Confirm upward movement TMCS 35.25 1.38 -1.00 0.38 New deal to drive sales VISX 89.69 1.06 -0.88 0.18 Dropped, reports tomorrow TXN 146.31 1.19 -1.44 -0.25 Split candidate ABOV 43.38 0.25 -0.63 -0.38 July 23 is earnings NT 89.69 1.75 -2.13 -0.38 Dropped, profit-taking DELL 42.25 0.81 -1.38 -0.57 SG Cowan raises target EXDS 135.50 3.44 -4.31 -0.87 Extremely volatile! INTC 65.38 -0.81 -0.06 -0.87 Dropped, earnings today BBY 74.88 -0.31 -0.81 -1.12 Wait for a bounce NXLK 91.75 4.72 -5.97 -1.25 Possible takeover target NOK 92.63 -1.50 -0.31 -1.81 Strong Motorola earnings CSCO 65.25 -1.44 -0.38 -1.82 More consolidation COST 83.88 -1.38 -0.69 -2.07 Waiting for direction SONE 46.06 -0.38 -1.81 -2.19 Bounce off 50-dma? SLR 69.56 -1.44 -0.94 -2.38 Support at $68 ITVU 49.00 1.63 -4.13 -2.50 Dropped, wait for bounce DRIV 32.56 -2.06 -0.63 -2.69 Earnings on the 21st MSPG 48.25 -2.25 -0.63 -2.88 Waiting for news AOL 125.13 -5.94 2.81 -3.13 Big swing on Tuesday BRCM 140.50 0.63 -3.88 -3.25 Look for any Intel effect QCOM 144.38 -1.31 -3.06 -4.37 Outlook is still good VOD 202.25 -0.38 -4.50 -4.88 Is a bounce coming? RNWK 86.75 -4.88 -0.75 -5.63 Strong technical picture DCLK 96.50 -8.94 2.50 -6.44 Buyout of Netgravity CMGI 113.88 -8.19 1.06 -7.13 Short-term bottom? INKT 125.56 -8.00 -6.44 -14.44 Dropped, earnings time Puts IMNX 115.75 -6.75 3.50 -3.25 Bounced off 100-dma today YHOO 156.94 -9.75 6.69 -3.06 Dropped, successful play WPI 35.25 -0.75 0.06 -0.69 Volume is increasing FDX 47.88 0.19 -0.81 -0.63 Oil prices remain high JCP 45.00 0.25 -0.69 -0.44 Resting on support SAPE 50.25 2.50 0.00 2.50 Wait for break of $50 **************** 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: ****** INTC $65.38 -0.06 (-0.87) Intel reported earnings after the bell today. Your positions should've been closed out prior to the announcement since stocks generally decline after an earnings' report no matter what the perspective. Intel came in with lower than expected results of .51 versus .53 p/s (First Call's consensus). On the flip side, their conference call was quite positive and INTC is up in after-hours trading (so was YHOO and they still fell $30), nevertheless, INTC must be dropped from our call list now that earnings have come. ***** 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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All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Tuesday 7-13-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Drops Continued: INKT $125.56 -6.44 (-14.44) This play was cut short, very short. Earnings are due tomorrow so that in itself is reason to be out of any positions. But the kicker came yesterday when Inktomi announced they were filing registration statements with the SEC for a public offering of 3.3 mln. shares of common stock which will bring shares outstanding to 51.57 mln. INKT fell $8 on the news and the descent continued into today's trading. INKT is a "Thank goodness for stop losses" example. INKT made #1 on the drop list. ITVU $49.00 -4.13 (-2.50) We are dropping ITVU after it fell substantially today. Though the stock gained on Monday, we feel further profit taking might take place after the severity of the drop on Tuesday. The fall was on lower than average volume, but was pretty substantial considering there isn't any news to account for the drop. Sometimes plays just don't workout and this, unfortunately, is one of them. NT $89.68 -2.12 (-0.37) It's time to let NT go for now. Profit taking set in yesterday late in the day. NT hit $92.81 and promptly began to fall, making a low of $90.50 for the session before recovering. The pulled back continued today. While we believe NT will probably get back on track, even prior to earnings, which are scheduled to be released July 27th, it looks like NT may have some more consolidating to do. NT has been a good play since we picked it at $79.94. Look for it again when it begins a new trend. VISX $89.69 -.88 (+.19) We are dropping VISX because it reports earnings after the close tomorrow, and we never recommend holding over earnings. We had expected a nice rise in the stock's price today, but news from Argentina got in the way (overseas weakness makes investors worry over high P/E stocks). That cloud of worry may hang over the stock tomorrow as well. Even though that news doused our hopes for a final few points today, VISX has still risen $4.56 in the 6 trading days since we added it. Plan to be out of VISX options by the close tomorrow. ****** PUTS: ****** YHOO $156.94 +6.69 (-3.06) We're dropping YHOO today and ending this play on a good note. First we had picked up YHOO as a call play back in June. It had a very successful earnings' run with over $40 in profits! Then on July 7th (the day before earnings), when YHOO was at $175.13, we switched to a put play to take advantage of YHOO's historical after-earnings' decline. This morning, we believe YHOO hit its relative bottom when it dipped to $145. After an overall $30 decline and two analysts starting new "buy" ratings on YHOO today it's time to cut our ties and move on. ***************** PICK NEWS - CALLS ***************** NXTL $52.81 +1.38 (+2.81) NXTL advanced almost another $3 as it approaches its earnings' date this Thursday. On Monday, Gerald Klauer Mattison reiterated their "buy" rating on NXTL and set a 12-month target price at $65. New highs were reached during intraday trading on both days. The 52-week high is now at $53.94. The gains on strong volume is a bullish indicator. Nevertheless, we never recommend holding any call positions over the announcement. HWP $109.31 +2.19 (+2.62) HWP is packing some power as it climbs even higher this week. For the 4th consecutive trading day, this stock has reached new heights. The latest new high was hit during an afternoon rally today and now stands at $109.75. However, the volume has been slightly less than average. Yesterday, HWP was awarded a $100 mln., 3-year computer deal with Rockwell, a world leader in electronic controls and communications. Rockwell is primarily buying higher-end Vectra desktops ($1000-1700 each) from HP. Considering the sluggish PC market, this is a big catch for the company. Today, CSFB announced they raised their 1999 fiscal numbers for HWP to $3.55 from 3.45 and but kept their "buy" rating. HWP is definitely a split candidate. It last split 2:1 in July of 1996 when it was in the $80-85 range. There are plenty of shares authorized for another split. With earnings expected on August 16th, the possibility of a split announcement around that time just keeps getting more promising. VRIO $77.00 +2.16 (+2.25) VRIO broke its overhead resistance on Monday! The stock broke through the $78 opposition (now its former 52-week high) during a big run- up mid-morning and peaked at $78.75. Of course, profit- takers didn't stay on the sidelines for very long and VRIO only managed to hang onto a fractional gain by the close. The trading volume was strong again today and the stock tacked on a couple more points but couldn't pop over $78 again. There's more good news for Verio stockholders. Today the company announced they acquired privately held, digitalNATION for $100 mln. in cash. This acquisition further strengthens their leading position in this red hot Web hosting business. VRIO has made gains for 5 straight days so please watch out for consolidation! Remember stocks move in cycles. Use stops for protection. NXLK $91.75 -5.99 (-1.25) After gaining $11 on Thursday and Friday, NXLK surged again on Monday. It added on another $4.75 and set its newest 52-week high at $98.44 by mid-afternoon. The gains have been great since NXLK left its old support ($75-78) last Tuesday; so of course some consolidation is expected. Today was a case in point. The stock opened at $96.13, but then settled into a narrower trading range around $92-94 for most of the day. This may be a good entry point, but a conservative player will wait for upward confirmation before beginning a new play. Earnings are due in a couple of weeks on July 30th. DCLK $96.50 +2.50 (-6.44) DCLK, along with the rest of the Internets, tanked on Monday thanks to Infoseek. You might have trouble seeing the connection at first glance but it has to do with the premium paid by Disney for Infoseek. The reason that most Internet issues trade for such high values is they have potential to either make money in the future or may be bought out for a premium tomorrow. Well, the premium paid by Disney was lower than expected and may be an indication of future premiums paid for Internet stocks. But on Tuesday DCLK was the acquirer as they announced the purchase of Netgravity. This is an attempt to strength their hold as one of the top advertising firms on the Web. DCLK rebounded today and looks poised to move back above $100, market willing. This pullback may be the entry point you were looking for. AOL $125.13 +2.81 (-3.13) AOL suffered a serious bout of profit-taking at the open on Tuesday. The stock dropped to $117 within minutes of the opening. But if you blinked, you missed a great entry point because the stock instantly turned around and ended higher on the day. In fact, the last hour produced a strong rally in the stock. The volume has picked up again today and we should expect an active play right up earnings next week. AOL also has a stake in today’s hot IPO of China.com, which is supposedly the AOL of China (Well not really, but China.com would like to think so). This will help add a few dollars to AOL’s balance sheet as the China.com IPO surged over 200%. The rest of the week will depend on the two key reports due out starting tomorrow. We have the PPI announced Wednesday and the more important CPI out on Thursday. Look for quick plays and expect lots of volatility. SUNW $73.50 -1.69 (+0.56) With just over one week left until earnings, Sun is off and running. On Monday, they announced that their SPARC Ultra engine boards are 33% faster than the competition. This helped SUNW continue their breakout and move to a new high of $76.44. The China.com IPO was released today to an incredible reception. This should also please shareholders in SUNW since the company has a stake in the new company. We did see the stock move lower with the market today but it also rebounded late in the day as well. Look for the PPI and CPI to move the market and SUNW will probably move with the market but remember earnings are just over a week away. This should keep the momentum leaning to the upside. TMCS $35.25 -1.00 (+.38) After gaining $1.38 on Monday, TMCS gave back some profits on Tuesday after six straight days of gains. The stock has been trending up since late June and has shown strong volume on up days and light volume on down days. On today's drop, volume was about 2/3's of normal. TMCS announced Monday the company has hired E-Dialog to develop a series of customized digital direct marketing campaigns. This will enable TMCS to build sophisticated customer profiles and establish target messaging to help drive sales. CMGI $113.88 +1.06 (-7.12) CMGI took a serious hit on Monday with most of the Internet sector, but bounced back a bit on Tuesday. The Internet sector dropped substantially on Monday as investors took profits and didn't approve of the Disney/ Infoseek partnership. On Tuesday, CMGI came right down to its 50-dma and bounced up, closing over $5 off of its low of the day. We are keeping CMGI as a call play for the simple fact that we think it has bottomed for the short term. The 50-dma provided nice support today and unless some negative news surfaces, we feel CMGI is positioned to rise in the coming weeks. DRIV $32.56 -.63 (-2.69) DRIV was another Internet stock to lose substantial ground on Monday, as the stock lost over $2.00. Tuesday saw DRIV lose further ground, but close about a dollar above its intraday low. DRIV has solid support at $29, though it doesn't seem this will come into play. DRIV has resistance at $35 and we would like to see the stock break this level on strong volume. The last three days have been below average volume for DRIV. Digital River announced on Monday that they are buying Tech Squared, a seller of mid- to high-end microcomputer hardware and software. On Tuesday, DRIV inked an online delivery agreement with Traveling Software, the company that develops LapLink. We like DRIV going forward with earnings on the 21st, but watch for an intraday drop to get in. VOD $202.25 -4.50 (-4.88) VOD has lost ground this week on decreasing volume. The stock is now just $3 above its 50-dma which has been support. A bounce off this mark intraday would be a good buying opportunity. We continue to like VOD because of a 4-1 split announcement we expect at its annual meeting on July 21. VOD was dropped by many investors this week as many UK investors sold Telecom's in search of cyclicals. VOD has a tendency to channel up and down and with four straight down days, seems poised to start back up. LU $72.69 -.88 (+.75) LU traded down slightly on Tuesday, but gained a $1.63 on Monday. LU has earnings coming up on the 22nd of July, and a run is likely. LU set another 52 week high on Monday as the stock reached a price of $73.94. LU showed very little activity today as volume was low and the trading range was from just $71.94 to $72.75. LU announced today that its elemedia software venture arm, will be the first software vendor to offer its H.323 Version 2 gatekeeper platform to industry developers and OEM vendors free of charge. The $72 level is the strongest near term support, but we feel LU will trade higher from here as its earnings date approaches. SONE $46.06 -1.81 (-2.19) SONE has had problems getting anything positive going this week. After dropping slightly on Monday, SONE proceeded to fall another $1.81 on Tuesday. The stock is still above its 50-dma of $42.50, and it has earnings in a few weeks. Watch for a bounce off of its 50-dma as a buying opportunity. If PPI and CPI numbers are non-inflationary, we feel we will see SONE make a run into earnings. SNE $118.06 +.56 (+3.68) Sony is like that little rabbit, it just keeps going and going and going. We mentioned earlier this month that SNE has a habit of jumping up and either working higher for the rest of the day or moving sideways for the balance of the session. SNE is up $3.68 for the week already. It appears as though the economic recovery may be for real, as most of the Japanese electronic stocks have been moving high recently. SNE and Time Warner will team up to buy online and video retailer CDNow Inc. and combine it with their Columbia House music club. Move your stops up on SNE and enjoy the ride. SLR $69.56 -0.94 (-2.38) SLR popped up first thing Monday morning and then went south. SLR opened $1.00 higher, and moved to an intraday and 52 week high of $73.25. That's when the bears decided that was enough for now. SLR fell $3.00 to a low of $70.25 closing down $1.44 for the day. The selling continued throughout the session today although with not so much momentum behind it. Support is in the $68.00 range for now and volume on the decline has been about average. If this support level holds we would view any bounce as another potential buying opportunity. Before initiating any new play however, as always confirm the market direction and volume. COST $83.88 -0.68 (-2.06) As we said Sunday pick your entry point on positive confirmation. So far this week there hasn't been any positive direction. We also said support is in the $83.00-$84.00 area. Watch and see if COST holds in this area. If it holds and we get a bounce, THEN could be the time to consider a play. Volume on this decline has been very light, about half the norm. This leads us to believe that this pullback is just that. The industry is still strong and nothing has changed as far as the company in the last two days. No real news on the company at this time, so keep your eye on COST and wait for a bounce, with good volume supporting it. ABOV $43.38 -0.62 (-0.37) ABOV moved higher Monday on average volume of 1.4 mln. shares. Today it really seemed like there was just not much interest in the stock. Since June 30th ABOV has moved from its low of $34.00 to its high yesterday of $45.25. Today’s move down appears to be profit taking. We would like to see the $42.00 area hold as support and then a move back up with good volume before considering a new play on ABOV. Earnings are scheduled to be announced July 23, which leaves us plenty of time for the earnings run. We will be patient and allow the market to dictate our next move on AboveNet. RNWK $86.75 -.75 (-5.63) RNWK suffered a loss of $4.88 yesterday in profit-taking, and dropped an additional $.75 today. It has corrected back to its 10 dma, from which we expect to see a bounce. Technically it still looks strong, but the deal with Disney and SEEK helped clip the wings of some of the high-flying stocks, such as RNWK. RNWK had risen sharply in recent days on new products and a deal with Microsoft. With a little correction under its belt, this stock is ready to head higher in a run toward its earnings announcement, which will be July 20th, after the close. Remember that Internet stocks carry extra risk, especially with a couple of financial reports due out this week and with foreign market concerns. IBM $137.00 -.81 (-.38) Although IBM is off $.38 on the week so far, it set a new all-time high yesterday and followed that up with ANOTHER all-time high today of $139.19. A new high in 6 of the last 7 trading sessions ain't bad! In the news: Germany's NSE Software AG has entered an agreement with IBM to develop software for the financial services industry. Yesterday, IBM finally agreed to buy Sequent Computer Systems Inc for $18/share. The deal had been much discussed in the news, and will help IBM strengthen its server offerings. Also, yesterday, Deutsche Banc Alex. Brown reiterated a "strong buy" rating on the stock. With earnings due out in 6 days, IBM is looking strong. Big Blue reports earnings Monday, July 19th. NOK $92.63 -.31 (-1.81) Nokia has been slipping over the last few sessions. The last time it corrected was nearly three weeks ago, and it spent a few days consolidating before it headed up again. It has now moved below its 10 dma, but it did that during its last correction, too, just before it resumed climbing. If it behaves in a similar manner this time, it may be ready to head up soon. Last week, a sympathy move on Ericcson's sudden CEO loss helped send NOK lower. However, news tonight from Motorola may send it higher. Motorola just reported earnings of $.44, $.03 ahead of estimates. Its earnings growth resulted from increasing chip sales and strong growth in the wireless phone market. Nokia has made sympathy moves down on news from Ericsson in the past. Only after the initial knee-jerk reaction did investors realize that fierce competition from Nokia was at least in part responsible for Ericsson's troubles. Nokia still has 6 trading sessions in this country before it reports earnings. It will report Thursday, June 22nd, before the opening bell. If you are looking to enter options on NOK, wait for it to start up again. BBY $74.88 -.81 (-1.12) In Sunday's letter, we suggested that profit taking may not be completely over, and sure enough, the stock has lost a bit more this week. It had run up about $15.00 after it was added to the S&P 500 on June 28th, without pausing to catch its breath along the way, so it was due for some consolidation. The fact that volume was average to strong on 2 of the 4 down days is a bit concerning, but the profit takers need to be shaken out before the stock can move higher. Wait for an entry. A negative CPI report could hurt this high growth retail stock. Meanwhile, BBY Internet division just got some competition, as Amazon.com Electronics was launched. BRCM $140.50 -3.88 (-3.25) BRCM set a big new high just after the open yesterday of $149.50, but couldn't hold onto it. It ended a volatile day with a gain of only $.38. Today it lost $3.88, but traded as high as $146.75. Technically the stock still looks good and it continues to ride along its 10 dma. We were a bit concerned when Intel's earnings came in somewhat low, though. They put a good spin on things in the conference call, however, so the chip sector could escape unscathed. BRCM is in a different niche within the chip sector, anyway. Its products are associated more with communications, the Internet, and networking than they are with computers. BRCM reports earnings on July 21st, after the close. BRCM is a volatile stock that may suffer if investors fret about inflation and overseas markets. TXN $146.31 -1.44 (-0.25) 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. As we noted Sunday, TXN has come a long way in a hurry and may take a week off on the way to earnings. The chart is confirming a flattening out, as is the price change yesterday and today. We also noted that there were probably a few more points to squeeze out, but keep your stops set to protect profits from market disaster (you know, alarming PPI/CPI, poor reaction to INTC earnings, etc.). Otherwise target shoot into a position, or confirm that volume is coming into the stock again before you start a new play. (Also, Efficient Networks, in which TXN owns 13%, launches its IPO on Thursday - tail won't wag dog here. Even so, nothing wrong with vitamin supplements even if you are healthy.) MSFT $93.63 -0.56 (+0.38) Tap, tap, tap, tap. . .we're still waiting for that earnings run. INTC's weak earnings report today won't help things much tomorrow. Earnings are July 19 (company confirmed), 1 trading day following expiration of July contracts. Support of $92 is holding nicely, but MSFT needs to get the lead out (with volume) if it's going to get through $95 (its previous all-time high and current resistance). OI is still heavy at $95- $100 level, telling us that there is still some money to be earned on this. However, if you get in, try to be out sometime before Monday morning so you don't commit the eighth deadly sin of holding over earnings. We'll be dropping this play in Sunday's upcoming letter. 4 trading day left, but don't get in until you know your exit and confirm upward movement. QCOM $144.38 -3.06 (-4.37) Related to the announcement that QCOM would join the S&P 500, QCOM announced they would sell 4 mln. shares of stock. Investors didn't check the facts and ran QCOM in the wrong direction in what we think is a knee-jerk reaction. First of all, with 130 mln. shares in float 4 mln. shares amounts to a 3% dilution - no big deal on this growth stock. Second and most importantly, those shares are 100% subscribed by index funds who would otherwise have to go to the open market get them, thus driving up the price in a hurry from sellers demanding a premium -yes, that means we miss out on price spike. Even so, we can't get our hands on these shares anyway, so it won't dilute the trading float since index funds are not in the business of selling. Actually, this is pretty smart of QCOM, as it limits day-trader-induced volatility and keeps all of us focused squarely on earnings and the possibility of a split. Besides, its highly unlikely these shares would have been issued if management felt there would be any kind of an earnings shortfall (by default, that would force funds into the open market, thus supporting the price). It really telegraphs management's faith in the future. Clearing the smoke away, this looks like a buying opportunity if your risk profile allows it. Remember, this play carries a lot of risk. Keep your eyes open. Earnings are Tuesday, July 20, at approx. 1:30 p.m. PST (company confirmed). There is a strong likelihood of a 2:1 split, if history is any indication. CSCO $65.25 -0.38 (-1.81) "CSCO doesn't report earnings until August 10 (company confirmed), so it may take another week of consolidation before it finds its legs." Remember that from Sunday? $66.50 support proved to be short-lived too, as CSCO got caught in the market downdraft yesterday and today. If there's any good news, it's that CSCO dug itself out of the sub-$65 hole in last 2 hours of today's trading, though volume was average at about 14.8 mln. shares. Nothing in the news, just a good old- fashioned consolidation, which will most likely affect CSCO until volume returns, which then will be our signal to take a position. Of course, confirm market direction before starting a new play. MSPG $48.25 -0.63 (-2.88) Last week, MSPG cancelled an analyst meeting scheduled for this week, citing ongoing talks of a new relationship (read that, "merger/acquisition"). At least that was the rumor. Our words form Sunday, "The Euphoria may have further worn off by Monday. . . If the rumor loses speed, the stock may suffer. If there's a buzz around the issue, volume will be the key to taking a position." The rumor lost speed... .no buzz. . .no volume. We hope you waited to take a position. Earnings are 2 weeks away, tentatively set for July 22 (per Zack's). The company's own Web site says that a date has yet to be published. We'll let you know when we find out. Anyway, this has nonetheless turned into an earnings play (with any merger viewed as gravy), but we need to see the volume come back into MSPG before taking a new position. If ELNK (reports earnings tomorrow) is an indicator for MSPG, MSPG could move in sympathy. Since MSPG has been down during the last 3 days, we could see a reversal tomorrow anyway (despite ELNK), market willing. This is a tricky play. It may not start its own earnings run until next week. Needless to say, it carries a higher degree of risk. Confirm market direction first. DELL $42.25 -1.38 (-0.56) First thing Monday morning, SG Cowan gets on the Dell bandwagon by upgrading from buy to strong buy and sets a new price target of $55. Dell reached as high as $44 with strong volume on the news yesterday, but pulled back to $43.63 at the close. Today, it gave back $1.38. If you check the chart, you will see strong resistance over the last 6 mos. at $45. So many people got "stuck" with this stuff at $45, that just to break even makes them happy. Thus, when the price nears $45, the weary sell into strength knocking the price back down. A reminder from Sunday, "plan your entry and wait to get it. You won't be missing any earnings run, since earnings won't be announced until August 18 (company confirmed). The closest support is $40, after that, $37. Plan your entry based on your own risk profile. The point is to wait for it, not chase it. EXDS $135.50 -4.31 (-0.88) If you had to leave your screen every day, not much happened. But if you were watching, wow! What a ride! Yesterday, EXDS touched $146, a $10 gain from its Friday close. Unfortunately, it didn't hold, but still closed up almost $4 for the day. Today? Different story. . .down $4.31. Fortunately, it was probably just profit taking since volume was only 60% of normal. Support is still at $134, where it bounced today on 2 occasions. If tomorrow is a good day market-wide, EXDS could resume its upward trend. Earnings are scheduled July 21 after the close (company confirmed). Despite the yo-yo effect, the technical chart is still quite strong, and EXDS still has a good story in a strong sector (see Sunday's write-up). Note that this play carries lots of risk, thanks to high volatility. It's not for the conservative investor types. Target shoot your entry for intra-day dips and know your exit before you start a new play. Looking good, market willing. **************** PICK NEWS - PUTS **************** SAPE $50.25 +0.00 (+2.50) Sapient hasn’t generated much excitement this week as the stock is searching for a bottom. This is understandable after the losses experienced the past couple of weeks. The stock had a big spike down after rumors they would miss their 2Q earning estimates. We continue to like the downside potential for SAPE based on the lack of support but we need to confirm the trend first. Right now the stock appears to be basing at $50. Any signs of a break down from here would be a signal to open new plays. JCP $45.00 -0.69 (-0.44) We are at a critical point in our play of JCP. The stock has moved below all moving averages since the announcement of lousy same-store sales for June except for the 200-dma. It is sitting right on that level and is trading sideways. We want to see a break of support before opening any new plays. Any signs of a bottoming will encourage institutions and investors to invest so the sooner the break the better. If you are involved with the play, tighten up your stops to trigger on any positive bounce. There has been no news to report this week either. WPI $35.25 +0.06 (-0.69) Concerns for WPI has been hurting the company’s stock again this week. The bigger concern for WPI may be that volume is picking up as the decline increases. That is one of the more bearish signals when you get a down move on strong volume. There hasn’t been any new news but it appears investors are not willing to wait until the Aug. 08 earnings to hear the real news. This recent crisis started last week when rumors of missing the estimate surfaced. Keep your stops set in case of a reversal. IMNX $115.75 +3.50 (-3.25) Sometimes the weekend does a lot to alleviate selling pressure in a stock and then there are the other times. This is one of the other times. Investors picked up right where they left off in beating the stock lower on Monday. The stock did rebound on Tuesday thanks to a strong earnings report from Amgen but it was only able to recoup half of Monday’s loss. So we see more downside ahead before any sustained rally. On Tuesday, IMNX bounced off the 100-dma at $105 but nothing moves in a straight line. IMNX could retest that low again soon. FDX $47.88 -.81 (-.12) FDX made a slight gain yesterday, but resumed its descent today, as crude oil moved back above $20/barrel, sending the Dow Transport index moved lower. As long as oil prices remain higher than they have been in the last year and a half, airlines may continue to struggle. FDX has mild support around $45 with stronger support around $40. No new news specific to FDX ********** SEE DISCLAIMER IN SECTION ONE **********
The Option Investor Newsletter Tuesday 7-13-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************** NEW CALL PLAYS ************** GTW Gateway $68.31 -1.44 (+.68) Gateway is #2 in the direct marketing of PCs in the U.S. second only to Dell, Gateway is unique in their marketing approach. Computer users may order by phone, or on the Web. GTW makes desktops, portable PC's, PCTV's, and servers. GTW hit a 52 week high of $84.50 in late February. Since that time it has been trending lower, however it has been forming a base since late May, bottoming around $57.00. Since the 1st part of July GTW has began to find some strength. Volume has been picking up, and the industry has been picking up as well. Earnings for GTW are scheduled to be released July 22 and its appears GTW could be setting up for a nice earnings run. Gateway looks as though they will at least meet or beat their earnings estimates of $0.55 per share. Technically, MACD turned positive within the last four days, and stochastics are coming out of the hole as well. The 100 dma is just below today's low of 66.37, which we believe should provide good support for GTW. With PC prices tumbling, PC makers are calculating ways of getting and keeping new customers. Gateway has reportedly been talking with Earthlink Network Inc., among other Internet Service Providers. A new management team at Gateway recently introduced personal computer leases for consumers that incorporate its Gateway.net Internet access. In the last three months subscribers more than doubled to over 400,000. BUY CALL AUG-65 GTW-HM OI=1037 at $6.88 SL=5.25 BUY CALL AUG-70*GTW-HN OI=1086 at $4.25 SL=2.50 BUY CALL AUG-75 GTW-HO OI= 369 at $2.50 SL=1.25 BUY CALL SEP-70 GTW-IN OI=1796 at $6.00 SL=4.25 Picked on July 13, at $68.31 PE 30 Change since picked +$ 0.00 52 week high=$84.50 Analysts’ ratings 7-8-6-1-0 52 week low =$36.13 Last earnings 3/99 est 0.60 actual 0.62 surprise=+3% Next earnings 07-22 est 0.55 versus 0.38 Average daily volume 1.35 mln. Chart = http://quote.yahoo.com/q?s=gtw&d=3m ************* NEW PUT PLAYS ************* none today *************** PLAY OF THE DAY *************** AOL - America Online $125.13 +2.81 (-3.13 this week) Sunday's Write up 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. After a brief pullback Friday morning AOL rallied back with the market to close higher once again. Internets in general were relatively flat on Friday but investors were anxious to jump in near the close. This is because the earnings run is now in full swing. AOL is set to report after the close on July 22, with and expectation of 0.11 cents. They are also a possible stock split candidate. We mentioned on Thursday that there are not enough shares currently authorized to do a 2-for-1 split but they may consider either a shareholder meeting to authorize more shares or do a 3-for-2. Either way we are including them as a split candidate due to past history of such announcements in this price range. Look for momentum to continue this week as most investors still consider the stock cheap relative to its 52-week high which is still over $45 away at $175.50. Plus entry points are becoming extremely important now that premiums are inflating due to recent enthusiasm. Refer to Thursday’s write up if you would like more information on our play of AOL. There was an article out after the close Friday indicating which Web sites were the most popular for Internet users for the week ending June 28. Once again AOL was on the top for users and advertisers. We bring this up because it was after the close in case you missed it and also it should be an indication that all is well heading into earnings. Tuesday’s Write up AOL suffered a serious bout of profit-taking at the open on Tuesday. The stock dropped to $117 within minutes of the opening. But if you blinked, you missed a great entry point because the stock instantly turned around and ended higher on the day. In fact, the last hour produced a strong rally in the stock. The volume has picked up again today and we should expect an active play right up earnings next week. AOL also has a stake in today’s hot IPO of China.com, which is supposedly the AOL of China (Well not really, but China.com would like to think so). This will help add a few dollars to AOL’s balance sheet as the China.com IPO surged over 200%. The rest of the week will depend on the two key reports due out starting tomorrow. We have the PPI announced Wednesday and the more important CPI out on Thursday. Look for quick plays and expect lots of volatility. Comments We are making AOL our play of the day due to its strong rally to end the day. It sharply outperformed most other stocks in the final hour. Most of the excitement stems from the upcoming earnings announcement which is only a week away. BUY CALL AUG-120 AOO-HD OI= 7090 at $13.88 SL=11.25 BUY CALL AUG-125*AOO-HE OI=11992 at $11.38 SL= 9.00 BUY CALL AUG-130 AOO-HF OI= 7714 at $ 9.00 SL= 6.75 BUY CALL AUG-135 AOO-HG OI= 5289 at $ 7.38 SL= 5.75 BUY CALL OCT-135 AOO-JG OI= 5548 at $13.50 SL=11.00 Picked on July 08th at $127.69 P/E = 153 Change since picked -2.56 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 ***************** COMBINATION PLAYS ***************** Markets Fall On Latin American Woes... U.S. stocks closed lower on Tuesday as earnings optimism failed to overshadow the growing uncertainty from Argentina's economic problems. Monday, July 12 U.S. markets ended mixed Monday as investors cashed in profits while waiting for the flood of corporate results later this week. The Dow managed a small gain of 7 points, finishing at a new high of 11,200 after a late-day rally. The Nasdaq index was off just slightly at 2,790. The S&P 500 index was down 4 points at 1,399. In the broader market, decliners led advances 1,631 to 1,371 on active volume of 664 million shares on the NYSE. The 30-year U.S. Treasury bond's price rose 1-1/4 points, with the yield slumping to 5.91%. Sunday's new plays (positions/prices): Corporate Express CEXP OCT10C/AUG10C $0.38 debit Orion Capital OC AUG40C/JUL40C $0.00 debit Western Wireless WWCA AUG22C/AUG25C $2.00 debit World Color Press WRC AUG22C/AUG30C $0.00 debit Diamond Tech DTPI AUG22C/AUG25C $0.00 debit It seems like all of our plays were in the news. Among the big movers, Orion Capital (OC) rose almost $7 at the open when Royal & Sun Alliance Insurance Group of the U.K. agreed to buy OC for $50 per share. The volatility play was unavailable. World Color Press (WRC) was up $5 in early morning trading after the company agreed to be acquired by Quebecor Printing of Canada. Once again, the play was unavailable due to the change in stock price. The calendar spread on Corporate Express traded at or below the suggested entry price and after the market closed, there was a rumor about a possible merger announcement. Western Wireless (WWCA) was hovering around $30 during the morning session and the quote on the August debit position moved to a low of $2.12 with a fairly wide bid/ask spread. No trades were made in the position but it appears that a price of $2.00 would have been a reasonable expectation to open the play. Diamond Tech (DITP) was a unique position because the quotes held up all day and yet there were no trades. Without the time to investigate, we will just assume that the quotes were in error; no play was opened. Portfolio plays: Continuing with stocks/plays that were 'in-the-news'. Sequent Computer (SQNT) agreed to be acquired by International Business Machines in an $810 million transaction in which Sequent holders are being offered $18 per share in cash. The August play can now be closed at $2.25 credit, a $0.75 profit for one week. General Motors (GM) managed a small gain despite news that a California jury ordered the auto maker to pay $4.9 billion to six people who were burned when their car exploded in an accident. One of our long-term issues, Tommy Hilfinger (TOM) split 2-for-1 today. The new position is based on $37.50 strike prices. General Electric (GE) continued to fall after the recent earnings announcement. A successful roll-out to the August $110 strike (short position) in our bullish diagonal spread is a current priority. Halliburton (HAL) made a nice move today, climbing over $1, probably on news that Oilfield services giant Schlumberger was spinning off its marine drilling business, and merging it with Transocean Offshore (RIG) to create the world's biggest offshore driller. In the big downers category; American Online (AOL) dropped $6 and Earthlink (ELNK) fell $7 as profit taking consumed many of the larger Internet issues. We have started to roll forward some of the calendar spreads to August. Today's adjustments and the new positions/prices; Ensco (ESV) SEP22C/AUG22C $0.38 debit HealthSouth (HRC) SEP15C/AUG15C $0.19 credit Unocal (UCL) OCT45C/AUG45C $0.38 credit Tuesday, July 13 U.S. stocks closed lower on Tuesday as earnings optimism failed to overshadow the growing uncertainty from Argentina's economic problems. Analysts are worried that another crisis could occur in Latin America and investors promptly sold stocks of financial services companies whose profits could be hurt by problems in that region. The Dow was down 25 points to 11,175 and the Nasdaq composite index finished 12 points lower at 2,778. In the broader market, declining issues led advances 1,715 to 1,278 on active volume of 733 million shares on the NYSE. Portfolio plays: Merger news continues to dominate our portfolio. Buhrmann NV just announced the acquisition of Corporate Express (CEXP), creating the world's largest distributor of office supplies. The Dutch company will pay $9.70 for each share of Corporate Express. Most stockholders believe that is less than the company's true value but for now, it appears the merger will be approved. C-Cube made another nice move today, rallying $1.62 on earnings speculation. The neutral time-spread was closed last Friday for a $1 profit. Intel (INTC) reported second quarter earnings that were just below expectations, but said it expected a strong second-half of the year. We will watch our short-term calendar spread closely in tomorrow's trading and make the necessary changes as we move into next month's positions. Merrill Lynch (MER) posted a record $673 million in the second quarter, up 22% from a year-ago. The results soundly beat analysts' expectations and maybe that will boost our slumping LEAPS/covered-calls play. General Electric was one of our adjustments today. We bought the July $110 call and sold the August $110 call for a credit of $2.12. The new position is SEP105C/AUG110C at a debit of $4.38. The spread might perform better if the $115 call was sold, to allow further upside movement, but we have locked in a profit at $110 or higher. Implied volatility and volume stayed firm in options on Titanium Metals (TIE) as the stock price rose $0.50 to just above $11. The debit on the October position should be reduced by at least $1.12 as we move into the August options on Wednesday or Thursday. Other plays (new positions/prices) that we rolled-forward include; 3 Com Corp (COMS) OCT25C/AUG25C $0.12 credit Ralston Purina (RAL) SEP30C/AUG30C $0.62 credit Dupont (DD) JAN70C/AUG70C $3.38 debit EMC Corp (EMC) OCT65C/AUG65C $0.50 debit Proctor & Gamble (PG) JAN100/AUG90C $0.25 credit I am often asked to suggest brokers that are familiar with combos/spreads. Here are two highly recommended OIN affiliates that I know personally: Robert J Ogilvie, ROP Baxter, Banks, & Smith, Ltd. firstname.lastname@example.org Andrew Aronson LaSalle St. Securities email@example.com Good Luck! ****************************************************************** - NEW PLAYS - ****************************************************************** CSCO - Cisco Systems $65.25 *** On The Move *** Cisco Systems is the worldwide leader in networking for the Internet. Cisco products include routers, LAN and ATM switches, dial-up access servers and network management software. These products, integrated by IOS software, link geographically dispersed LANs, WANs and IBM networks. In recent news, Cisco Systems and Microsoft announced they have extended their joint development agreement for the Microsoft® Active Directory(TM) directory service in Windows® 2000 Server. In its collaboration with Microsoft, Cisco is developing the Networking Services for Active Directory (CNS/AD), built on the Microsoft Active Directory platform. CNS/AD, the world's first truly directory-enabled networking solution, enables Cisco's service provider and enterprise customers to offer personalized intelligent network services. That is the type of leading edge product development that will propel CSCO revenues upward into the year 2000. Analysts seem to agree with the positive outlook. Last month, CSCO had these brokerages in their corner: 6/18/99 First Boston reiterates 'Strong Buy', 6/18/99 SG Cowen reiterates 'Strong Buy'; target $70, 6/17/99 Morgan Stanley Dean Witter reiterates 'Strong buy'; target $67.50, 6/15/99 Josepthal & Co. reiterates 'Buy' based on a meeting with the IR director, and comments that the quarter is on track. This slew of upgrades and revised forecasts has driven the stock price above resistance at $60 and it should use that area as support for an earnings run into mid-August. There may be a better 'bullish' position at the $60 - $70 spread but we will choose the maximum downside protection while still preserving a small profit in the event of an upside break-out. PLAY (conservative - bullish/diagonal spread): BUY CALL OCT-55 CYQ-JK OI=10067 A=$13.25 SELL CALL AUG-65 CYQ-HM OI=15783 B=$4.12 INITIAL NET DEBIT TARGET=$8.87 TARGET ROI=40% Note: In this type of diagonal spread, we are reducing the net cost of the long-term option with the credit from the sale of the nearer-term option. If the near term call expires worthless, we may decide to hold the long-term position for future profits or sell a September call to further reduce our debit. There are many other ways to exit this type of position and you should review those techniques with your broker prior to entering the play. Chart = http://quote.yahoo.com/q?s=CSCO&d=3m ****************************************************************** SLR - Solectron Corp. $69.56 *** Another Try *** 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. We just like the bullish technical trend and this week's small consolidation may allow us another favorable entry point. PLAY (conservative - bullish/diagonal spread): BUY CALL OCT-60 SLR-JL OI=70 A=$12.75 SELL CALL AUG-70 SLR-HH OI=225 B=$4.37 INITIAL NET DEBIT TARGET=$8.12 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=SLR&d=3m ****************************************************************** NETA - Network Associates $19.50 *** Volatility Play *** Network Associates is dedicated to providing leading enterprise network security and management software. AVERT (Anti-Virus Emergency Response Team), the anti-virus research division of NAI Labs, currently employs more than 85 virus researchers and maintains labs on five continents worldwide. In addition to studying new and existing security threats, AVERT serves as a global resource for virus information and provides rapid support for emergencies worldwide. Current virus alerts are also issued to customers from Network Associates, the leader in anti-virus detection and cleaning technology. The stock price has moved up $3 in two days causing volume and implied volatility to increase in the short-term call options. The new interest may be based on the quarterly earnings report expected next week or today's after-hours announcement that NETA and ISS Group have resolved their patent litigation and no material adverse effect on either parties' business or financial condition will result from the proceedings. In either case, some excellent disparities exist for conservative or aggressive positions. PLAY (conservative - bullish/debit spread): BUY CALL AUG-15.00 CQM-HC OI=1668 A=$5.12 SELL CALL AUG-17.50 CQM-HW OI=2524 B=$3.12 INITIAL NET DEBIT TARGET=$1.87 ROI(max)=33% B/E=16.87 PLAY (aggressive - neutral/time spread): BUY CALL SEP-20 CQM-ID OI=4361 A=$2.93 SELL CALL JUL-20 CQM-GD OI=110 B=$0.50 INITIAL NET DEBIT TARGET=$2.31 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=NETA&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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