The Option Investor Newsletter Thursday 7-22-99 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) ************************************************************ 7-22-99 High Low Volume Advances Decline DOW 10969.22 - 33.56 11044.26 10880.25 775,748k 1,073 1,811 Nasdaq 2684.44 - 77.33 2749.05 2679.35 1036,000k 1,538 2,373 S&P-100 700.91 - 9.36 710.27 696.51 Totals 2,611 4,184 S&P-500 1360.97 - 18.32 1379.29 1354.02 38.4% 61.6% $RUT 451.49 - 3.14 454.63 448.43 $TRAN 3404.50 - 34.09 3455.14 3404.50 VIX 23.66 + 2.05 25.52 22.45 Put/Call Ratio .68 ************************************************************* "Fed must be especially alert to react promptly and forcefully..." Greenspan greenspamed the markets again today with hawkish comments about suspected inflation. Greenspan warned that the strong demand and shrinking pool of workers would eventually produce traces of inflation and the Fed would look under every rock for these traces. Should these signs appear, or even signs of signs, the Fed would not hesitate to slap us with another rate increase to prevent an inflationary slide. Gee whiz, thanks Al. Within minutes the markets reacted strongly and dropped to triple digit lows. The bond market quickly priced in another +.25 increase in August. Instead of a kinder, gentler Greenspan, we saw the balanced, hawkish Fed chief appear. Yes he was balanced if you can call "The business model is not dead, inflation will eventually reappear", balanced. He said the economy was currently perfectly balanced, too perfectly balanced and teetering on the brink of a rapid movement in either direction. Kind of like our current market! Greenspan was more hawkish than most expected and the markets reacted negatively. However, by mid-afternoon the Dow drop had been completely erased, much to the amazement of many analysts. We all know from repeated experiences that if you want logic you should look some place besides Wall Street. The buy the rumor, sell the news axiom is still alive and well. The sell off early in the week was claimed to be on worry about what Greenspan might say. He said it, it was bad but it was already priced into the market. The Nasdaq closed near the low of the day on interest rate worries and Internet earnings. Now the market is free to focus on the remainder of second quarter earnings. OOPS! After the Nasdaq focused on yesterdays earnings I don't think the outlook here is good. Amazon posted earnings showing a bigger loss than analysts had hoped for and some fear the Internet model for Amazon is breaking down. Amazon is pouring money into conventional brick and mortar warehouses and preparing to inventory more and more items. The first Amazon model was to order only when sold and keep a minimum on hand. This just in time concept kept space and inventory dollars to a minimum. Now they are starting to look more like a Barnes and Noble, Best Buy and Toys-R-Us combination. Even though they tried to pacify stockholders with a 2:1 split the stock got hammered to the tune of -$18 or a -14% loss. If the Amazon earnings were not bad enough for the market to digest, AOL turned in spectacular earnings but a weak growth. Analysts had expected better numbers for new subscribers and the news of a new free subscription model in Europe sent shivers through investors. AOL closed down -4.56 on heavy volume. Is the Internet suffering from ticker shock? Are the valuations for companies that continue to lose money at accelerated rates being reviewed? You bet! Look at the recent slide of almost any Internet stock and this is the middle of the earnings cycle. Things could be changing in the Internet investor psychology. So if the market has failed to rally on earnings with more than 50% of the S&P already reported, then why should it rally on the stragglers that start thinning out next week? One analyst said the market would now start focusing on the third quarter earnings. That is really scary. The third quarter is not normally a robust quarter and suffers from the result of the summer doldrums. If the third quarter is the focus, and the reporting is in October, only 75 days from Y2K, then we are going to need some rose colored glasses to see anything exciting. We are watching the futures tonight and at +1.30 and the entire office is amazed. The rationality of why they would be positive going into a summer Friday, an August rate increase and slowing earnings is beyond us. Of course the best reason is probably the most obvious. It is a technical bounce. The futures have been in a vertical drop since their high of 1430 on July 19th. A -62 point drop with almost no relief. Since nothing goes up or down in a straight line you can build a case for s short term technical rally. I stress short term and depending on Asia and Europe tonight it might not materialize at all. I would be cautious of any strong move upward Friday or Monday. If volume is high and the previous leaders fail to recover major ground then the road signs are obvious. With the recovery under way in Asia and the U.S. market very close to recent highs many funds are taking money out of the U.S. market and looking for cheaper stocks overseas. The feeling that the U.S. market may be near a top for the year has many fund managers locking in profits and looking for safe havens. We will not know for at least a week if the recent downdraft is just a pothole on the rally road or the beginnings of a washout. Either way there will be profits to be made. We just need to be more conservative in guarding profits and limiting losses. When you start thinking about buying the dips, pause for a moment and remember last August. Good Luck, Sell too soon! Jim Brown Editor *************** Market Posture *************** As of Market Close - Thursday, July 22, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,969 Neutral 7.20 SPX S&P 500 1,315 1,420 1,361 Neutral 7.20 OEX S&P 100 660 735 701 Neutral 7.20 RUT Russell 2000 390 465 451 Neutral 7.20 NDX NASD 100 2,110 2,468 2,282 Neutral 7.20 MSH High Tech 1,010 1,250 1,122 Neutral 7.20 XCI Hardware 900 1,090 994 Neutral 7.20 CWX Software 675 844 746 Neutral 7.20 SOX Semiconductor 410 535 476 Neutral 7.20 NWX Networking 525 625 566 Neutral 7.20 INX Internet 500 580 477 BEARISH 7.20 BIX Banking 680 710 685 Neutral 6.29 XBD Brokerage 410 440 415 Neutral 7.20 IUX Insurance 640 660 641 Neutral 6.29 RLX Retail 900 960 895 Neutral 7.22 * DRG Drug 370 400 359 BEARISH 7.20 HCX Healthcare 750 800 744 BEARISH 7.22 * XAL Airline 180 190 170 BEARISH 5.21 OIX Oil & Gas 285 310 300 Neutral 5.13 Posture Alert Technology continues its recent slide, with Software once again the leader (5.67%), followed by Internet (-4.7%), Semiconductors (-4.12%) and Hardware (-3.85%). With Thursday's action, we have turned BEARISH on Retail and Healthcare. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** Throw in the Towel! Let's look at the stats for this great week of July. Software is down -10%, Hardware -7%, Semiconductors -11%, Networking -9%, and Internet -10%. Pretty humbling numbers. However, these were the sectors that lead the market up the preceding 6 weeks. Stocks can't go straight up. Therewas bound to be profit taking, and profit taking there was. If you take a look at the below chart of the software index, what you see is a huge run-up, which was due for a breather. The breather just happened to come during the busiest earnings week of the month (where most companies beat expectations handily). The same can be said for the other indexes that have gotten hammered. We highlighted many individual equities this past Sunday that had high expectations, and as you can imagine, the respective indexes that these stocks fall under also had lofty expectations. Seeing such extreme bullish sentiment was writing-on-the-wall of a strong selloff. Many of you have sent positive feedback on the sentiment analysis (great expectations) for individual stocks. The same can be said for using negative sentiment. If you go back to our newsletter from Sunday, June 6, 1999, what you would see is that we highlighted the extreme bearish sentiment on the Internet, Software, NDX, and Russell 2000. Looking at the chart below, if you would have bought Software Index calls when we highlighted this bearishness, you would have done extremely well, and this last selloff would not have been a big deal. Vice versa, if you sold you stocks at the beginning of this week (based on the extreme bullish sentiment that we highlighted), then you have done extremely well. If you took advantage of both, Pinnacle Capital better be in your will. For the rest of you, don't throw in the towel, this is just another blip on the radar. Bullish Signs: Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased 1.1% and Bearish investors increased 1.2%. Mixed Signs: Russell 2000: Trending above both moving average, and also above key 450 benchmark. Interest Rates: The 30-yr Treasury is beginning to retrace back under the key 6% level. BEARISH Signs: Peak Open Interest: The contraian put-call ratio clocking in at 1.1 suggesting bullish sentiment picking up steam. Market Posture: Several indexes have just rolled over, 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. OTM Call Analysis As we move through the August expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 710-780 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% August Expiration Cycle OEX OTM Call Analysis (Open Interest August 710-780) Date Open Interest Change % Alert Friday, July 16 32,285 - Market Sentiment at a Glance Friday Tues Thurs Indicator (7/16) (7/20) (7/22) Alert Pinnacle Index (OEX): Overhead Resistance (720-750) 3.6 2.0 2.6 Underlying Support (685-710) 1.7 1.1 1.3 Put/Call Ratios: CBOE Total P/C Ratio .6 .5 .6 CBOE Equity P/C Ratio .5 .4 .5 OEX P/C Ratio 1.3 1.7 1.9 Peak Open Interest (OEX): Puts 600 700 700 Calls 730 700 740 P/C Ratio .95 1.1 1.1 Market Volatility Index (VIX): CBOE VIX 23.59 Investors Intelligence: Bullish 54.10% * Bearish 27.90% * 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 (7/09) (7/13) (7/15) Overhead Resistance (720-750) 3.6 1.9 2.6 OEX Close 733.79 710.03 700.91 Underlying Support (685-710) 1.7 1.1 1.3 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 725/750 level while the underlying support is holding at the OEX 685/710 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (7/16) (7/20) (7/22) CBOE Total P/C Ratio .60 .52 .65 CBOE Equity P/C Ratio .45 .42 .49 OEX P/C Ratio 1.26 1.74 1.89 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (7/16) (7/20) (7/22) Puts 600 / 12,196 700 / 7,286 700 / 8,105 Calls 730 / 12,844 700 / 6,724 740 / 7,245 Put/Call Ratio .95 1.08 1.09 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 16, 1999 Top? 18.13 * July 22, 1999 23.59 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 July 14, 1999 55.2 26.7 July 21, 1999 54.1 27.9 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10969.22 -22.16 -191.55 6.65 -33.56 -240.62 Nasdaq 2684.44 -34.19 -98.11 29.59 -77.33 -180.04 $OEX 700.91 -5.75 -18.01 0.24 -9.36 -32.88 $SPX 1360.97 -11.13 -30.55 2.19 -18.32 -57.81 $RUT 451.49 -3.89 -7.82 1.08 -3.14 -13.77 $TRAN 3404.50 61.97 -28.90 3.65 -34.09 2.63 $VIX 23.66 1.34 2.94 -0.80 2.05 5.53 Calls Mon Tue Wed Thu Week WHR 76.81 2.13 0.06 1.19 1.81 5.19 New NXLK 98.44 -1.88 -3.13 1.25 6.25 2.50 Dropped VISX 96.50 3.38 -0.63 -1.44 0.94 2.25 Looks good BGEN 72.63 0.56 1.75 2.38 -3.69 1.00 Rough day CMB 83.31 0.31 -2.25 0.44 2.00 0.50 New VOD 211.50 -0.81 -3.81 4.06 -2.19 -2.75 Breakout? VRIO 79.00 0.88 -3.25 0.13 -1.13 -3.38 Mild dip DELL 39.63 -0.81 -1.31 0.13 -1.63 -3.63 Is it time? GE 115.00 1.13 -2.44 -0.63 -1.94 -3.87 Below 10-dma UIS 41.75 -1.88 -0.13 -0.19 -1.94 -4.13 Dropped EL 51.44 -0.69 -1.81 -1.25 -0.81 -4.56 Dropped CSCO 61.13 -1.06 -2.69 0.81 -1.94 -4.88 Use caution EXDS 132.63 -18.81 3.31 5.63 4.50 -5.37 New CMVT 76.00 -3.75 -1.75 3.00 -2.88 -5.38 NASDAQ play HD 64.00 0.19 -4.31 0.31 -1.81 -5.62 Be careful EDS 61.44 -2.31 -0.81 -1.25 -1.31 -5.69 Bounce?? HWP 105.25 2.25 -5.63 1.94 -7.31 -8.75 Dropped SUNW 67.19 -2.31 -3.81 0.56 -3.50 -9.06 Dropped SEPR 83.19 -4.44 -1.25 1.00 -5.06 -9.75 Dropped SNE 115.56 -1.38 -2.50 -2.31 -3.81 -10.00 Dropped AMAT 68.25 -1.00 -5.25 0.38 -4.44 -10.32 Dropped Puts DCLK 85.00 -5.31 -7.19 2.38 -5.00 -15.13 Excellent EBAY 108.69 -5.28 -4.75 2.38 -6.63 -14.28 Close at low CMGI 96.63 -7.81 -3.94 4.25 -5.19 -12.69 Late drop AOL 110.50 -1.00 -5.81 1.88 -4.56 -9.50 New GTW 62.88 -0.56 -2.63 -1.63 -2.88 -7.69 New SANM 69.44 -2.75 -4.19 2.69 -1.56 -5.81 On support NDB 42.75 -4.19 -2.75 2.94 -1.69 -5.69 Looks weak SCH 48.19 -2.94 -2.25 0.00 0.94 -4.25 Bad outlook U 39.00 1.06 -0.75 -0.50 -1.00 -1.19 Close at low AHP 52.19 -0.50 -1.94 1.69 -0.44 -1.19 Basing WPI 36.00 0.06 -0.75 0.63 2.00 1.94 Dropped DE 37.81 0.25 -0.13 0.00 2.00 2.13 Dropped **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** SUNW $67.19 -3.50 (-9.06) And now for the earnings! Which means we are dropping SUNW as a call play (as you all know by know, we never hold over earnings). It wasn't difficult to decide to drop this play either. It has obviously broken its uptrend with the collapse of the market but overall it was still a very good play. We've played it for over a month by buying the dips and selling the highs. It has provided a string of multiple profits. The earnings were good as they beat the street by .02 cents but there was no split announcement (granted that didn't help Amazon much either as they still went down big time today). If somehow you haven't been stopped out, it would be a good time to re-evaluate your position and look for an exit point. SEPR $83.19 -5.06 (-9.75) SEPR has fluctuated between $84 and $88 for the past three days. However today it slipped way below its 10 dma ($87) and stayed there. Recall, SEPR had broken its near resistance just last week at $88.75 and on Monday peaked at $94.25. Now with earnings just around the corner and due on August 6th, it's possible SEPR could run up again. However, the total losses the stock has suffered warrant us to drop it from the call list. When the Nasdaq tanks, tech stocks tend to follow. NXLK $98.44 +6.25 (+2.50) Nextlink surprised us this afternoon with an earnings' report. They came in strong at a loss of -2.24 versus First Call's estimate of -2.43. 2Q revenues increased 25% over the 1Q's and a whopping 89% from the 2Q of 1998! During the last hour of trading NXLK spiked up and tacked on the $6.25 (otherwise the stock would have likely closed around $92-93). Because of the change in circumstances (the earnings' report) we're dropping NXLK as a call play. If the stock follows the characteristic pattern after earnings, it will begin to decline. Keep this in mind though, NXLK shareholders' will meet on August 25th to vote to increase the number of authorized shares for a 2:1 split on August 27th. This could cause some excitement and we may pick it back up then. HWP $105.25 -7.31 (-8.75) On Wednesday, the hardware sector tried to recover from Tuesday's carnage. Computer related stocks, EMC and LSI even reported positive earnings, but nonetheless HWP only made a gain of $1.96. Today was much worse. Greenspan has once again revived the interest rate concerns and spooked investors. The market languished in the fears. HWP was the steepest decliner among the Dow components. The stock closed only a fraction from its daily low. These are not good signs for a call play and we're dropping HWP for now. Earnings are expected in a couple weeks on August 16th and remember, there is the growing possibility of a stock split so keep this one on your watch list. EL $56.00 -.81 (-5.75) Did we pick this as a call? One we definitely missed. EL actually mirrored the Dow index every day this week. The majority of stock movement is due to the broader market. When the markets are down, most stock go down. Unfortunately, no one appears to consider expensive makeup a defensive stock play. Maybe another time, but for now EL is officially dropped. SNE $115.56 -$3.81 (-10.00) Well its coming down just about the same way it went up. GAPS and more gaps. We said Tuesday that we were glad to finally see some profit taking begin with Sony. You should have taken any profits you had in SNE by now. Technically we are about $5.00 away from the next major support area at about $110.00. We would need to see SNE turn around and head back up accompanied by better than average volume, before we would consider jumping on the Sony bandwagon again. It's been a great ride, but it's time to move on. AMAT $68.25 -4.44 (-10.31) Ok, that towel we spoke of Tuesday, we just threw it in. AMAT never gave us a chance. Since 9:45a.m Monday morning it's been downhill. What happened early Monday was basically a head fake, or a blow off top, and we went south. If you did get in at the end of the first hour Monday morning, you should have long since been stopped out. We did get a bit of a bounce yesterday morning at the $70 area we mentioned on Tuesday but it was missing one thing, VOLUME! With no strength to support the advance AMAT turned down and lost an additional $8 since its midday high Wednesday. In all, AMAT is down $10.31 for the week and we will look elsewhere for our opportunities. UIS $41.75 -1.94 (-4.13) This is another one that never gave us a chance. If we follow "Jim's TOP TEN RULES of TRADING" you would have never entered UIS. It did make a new high at $46.19, however it made that high in the 1st thirty minutes of the trading day on Monday. UIS has traded lower everyday since. We still believe the $40 are could prove to support UIS. The decline the past four days has been on lighter than average volume, but its is a decline none the less. We would let the market prove to us where the support for UIS is at. Regardless of where support is we will leave UIS for another time. PUTS: ****** DE $37.81 +2.00 (+2.13) Deere is not participating in the major declines since it is considered a defensive play. We added the stock over the weekend while the market was still hot. It was good candidate to go lower during a booming market since everyone wanted to buy technology issues. So now that we are in a (is it time to use the word) correction, DE is looked at as a defensive play and is now trending higher. So we are removing it from our put list and we don't recommend opening any new positions. WPI $36.00 +2.00 (+1.94) This is the end of our play on WPI thanks to the spike above the 10-dma today. The stock was up right at the open today and climbed higher all day. In fact the more it climbs the faster it goes. This is the ol' short squeeze play and believe me WPI has enough short stock to pull it off. This was the one concern we addressed on Sunday. Any rally can cause a change of momentum in a hurry. The stock may be ready to run ahead of earnings which are the second week in August so we are exiting the play instead of being caught in a short-covering rally that could take us back near $40. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 7-22-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** GE $115.00 -1.94 (-3.88) With a $1.94 loss today, GE fell below its 10 dma. There is little in the news specifically on GE that would provide a reason for the drop in GE's price this week after just setting a new high on Monday. One possible negative for the company is that certain airlines may not like the fact that Boeing has chosen GE to provide ALL the engines for its 777s. Some airlines like to use the same engines on their entire fleet of planes in order to gain greater economy of scale in maintenance. Airlines that use Rolls-Royce engines are not happy that they must buy planes with GE engines. Rolls-Royce, a competing supplier, even rose a bit on hopes that Boeing would recant its exclusive contract with GE. We attribute GE's decline mainly to the weakness in the Dow, however. Therefore, look for both the Dow and GE to head higher before starting new options in the stock. In other news, GE Capital Corp will be offering 80 billion yen worth of bonds in Japan next week. And its NBCi (for NBC Internet) unit may become an Internet tracking stock for GE, which has already filed papers with the SEC. BGEN $72.63 -3.69 (+1.00) Yesterday, BGEN rose $2.37, helped by news of the J&J buyout of Centocor. The market's positive reception of the "new" Genentech stock probably helped as well. Today, however, BGEN gave back yesterday's gains plus a little more as it sank $3.69 in a volatile and generally down market. Some of the other biotechs also saw some profit-taking today. One good sign: although BGEN's volume was a little above average today, it was considerably less than the strong volume of the last 5 days in a row, when BGEN was moving up. A negative sign: the stock closed near the low of the day, so BGEN could be in for a little more selling. Confirm upward movement before initiating new positions. CMVT $76.00 -2.88 (-5.38) The Nasdaq came back strong yesterday. CMVT followed the sentiment and advanced $3 pushing it up towards its near-term resistance. Today the tables turned and the market plummeted. However, CMVT faired rather well in the heavy trading that ensued; not giving up all of yesterday's gains. 1.43 mln. shares exchanged hands today versus the average daily volume of about 973 K. As it is, CMVT is sitting on its 30 dma. If historical patterns continue, the stock should bounce off this mark. This is an entry point only IF the market rebounds. Earnings are expected next month on August 25th. VRIO $79.00 -1.13 (-3.38) The mild consolidation that began on Tuesday has continued over the past two days. In all relativity to the negative broad markets and the stellar advances VRIO has made over the previous weeks, this pullback is natural. VRIO is consolidating right in the proximity of its 10 dma ($79); trading in a tight range primarily between $79 and $80. The only exception was an early morning spike down today - the stock bottomed at $76.88 but quickly recovered. Wait for a positive market environment and upward confirmation before initiating a new play. Earnings are expected on August 20th. VOD $214.25 -2.19 (-2.75) VOD struggled today with the rest of the market, but did have a gain of over $4.00 on Wednesday. The stock has strong resistance at about $214, but the more VOD hits this mark and retreats, the bigger the breakout will be. We have looked high and low for information on VOD's annual general meeting yesterday, but with no luck. At this meeting, VOD was scheduled to approve what they call a 4 for 1 capitalization bonus. This in effect is a 4:1 split. We will check with VOD's investor relations department and update the status of this announcement ASAP. In other news, VOD's Australian unit announced it made profits of $19.2 million with sales increasing 71 percent. VOD now reaches 92 percent of Australia's population. This unit of VOD plans on taking 20 percent of its shares public next year. EDS $61.44 -1.31 (-5.56) The profit taking on EDS has continued the last two days. It has come on very light volume. If the profit taking continues in the broader markets, we will probably see EDS go along with it. We do want to see if the previously mentioned $59 area holds. If it does, we would expect a possible bounce and a quick run into earnings, which are due out July 30th. It is important that a move up from these levels have good volume and or news backing it before considering a play on EDS. VISX $96.50 +0.94 (+2.25) Since adding VISX on Tuesday, it dropped to a low of $92.13 today, which is a drop of $4.87. We are, however, encouraged by the bounce back at midday to close +0.94 for the day. Given the trading in the broader markets it could have been much worse. After shaking off Mr. Greenspan's comments this morning, VISX won the backing of an expert government panel for its LASIK procedure, already used in 90% of laser eye surgery. Volume was very solid on the advance which began just after 3:30. Again as always wait for a move up on with good support before entering a play on VISX. We would like to see a positive move in the broad market as well before initiating a play. CSCO $61.13 -1.93 (-4.87) From Tuesday night, "the worst may not over. Don't try to catch a falling knife. Wait for a recovery. There is still plenty of time to ride the earnings release wave." Sometimes, the best decision is to wait and do nothing. Earnings are not until August 10, about 2.5 weeks away, giving us plenty of time to enter this play. Generally speaking (not always), earnings runs begin 1-2 weeks before the release date. In addition, when CSCO drops below its 30-DMA, it generally springs back within a few days (check out the chart to see what we mean). Market willing, these 2 timely factors could dovetail into a nice upturn prior to August 10. The chart isn't pretty, but view this in a contrarian light with the idea that a turnaround is nearing. THAT DOESN'T MEAN GET IN NOW! It means wait for some stability and market-wide reversal. Market volume and stock volume in the positive direction are the keys. DELL $39.63 -1.63 (-3.62) Farmer in the DELL? This field is getting ploughed. We noted Tuesday, "support is OK at $40, but could be quickly wiped out with the next stop at $37, should the market continue its sell-off." The market continued its sell-off and DELL fell through $40 to close near its low of the day at $39.50. This is not a good sign. Though DELL hasn't shown any company-specific flaws lately, like a vibrant planet, it cannot escape a market-wide black hole that swallows everything in its path. We also noted that brave souls might want to nibble at $40, but not to do so if the market heads south. Hopefully, you are still waiting for an entry. Tomorrow, we could get a technical bounce that might take DELL back over $40. Even so, we're still inclined to wait for positive volume in the market and in the stock, something we aren't likely to see on a Friday. Reserve this entry for the risk taking side of your brain. Or if your risk tolerance leans a bit to the conservative side, consider waiting for a strong bounce off $37-$38, with volume, but it may never get there. (Yes, confirm market direction.) In either case, it looks like we are nearing a bottom, so tonight we begin offering some strikes for you to consider. BUY CALL AUG-35 DLQ-HG OI=12722 at $5.63 SL=4.00 BUY CALL AUG-40*DLQ-HH OI=54440 at $2.13 SL=1.00 be patient BUY CALL AUG-45 DLQ-HI OI=65497 at $0.69 SL=0.00 BUY CALL SEP-40 DLQ-IH OI= 564 at $3.25 SL=1.50 BUY CALL SEP-45 DLQ-II OI= 1455 at $1.44 SL=0.75 Picked on July 22 at $39.63 PE = 72 Change since picked +0.00 52 week low =$20.38 Analysts Ratings 10-9-12-0-0 52 week high=$55.00 Last earnings 05/99 est 0.16 actual 0.16 Next earnings 08-18 est 0.17 versus 0.13 Average daily volume = 26.13 mln. Chart = http://quote.yahoo.com/q?s=DELL&d=3m HD $64.00 -1.81 (-5.63) More hammering took place on this home improvement giant today. Well, the market wasn't willing; the bounce off $65 was weak and not indicative of a good entry. Hopefully, you stayed out of the play. Technically, HD is sitting at $64, its 30-DMA and the indicators are headed south. There is nothing wrong with the company, just traders realizing some big-cap profits from the run-up following June's FOMC meeting. The only saving grace for HD is that it reports earnings August 17, before the open (company confirmed) and is a split candidate around $70. It's a bit early for a run to earnings, but risk tolerant souls can target shoot in anticipation. Risk adverse types still should consider this as trying to catch the falling knife. If HD can't pop off this level convincingly, the next step down looks to be $60. Enter this play according to your tolerance for risk. As always, confirm market direction. **************** PICK NEWS - PUTS **************** SCH $48.19 +0.94 (-4.25) Schwab took advantage of the strength in the financials today to mount a small comeback. This isn't a lot compared to recent losses but in does provide a good entry point for new plays. The rally could have been sparked by many different news articles out the past two days. SCH has teamed with DLJ and Fidelity to form a new market maker of sorts to match orders on NASDAQ stocks. The also announced a joint venture with Tokio Marine to try and infiltrate the Japan market, which has shown signs of recovery lately. These events won't have a long-term impact on the stock and will be forgotten by tomorrow. The next support looks to be at $40 and that is still $8.00 lower. If we only get half way there, we will have a very profitable play. SANM $69.44 -1.56 (-5.81) SANM is holding on tightly to the 100-dma as it is trying to end the slide and create a bottom. Whether or not it will be able to is up to the markets. If the NASDAQ can put a halt to the brutal fall then SANM may be able to walk away without further damage. But we don't expect that to happen. The NASDAQ is still far from support and SANM looks vulnerable to more profit-taking. Even the sector looks weak as component makers will move with the computer sector, which is showing signs of further weakness. Conservative players may want to see a close under $68 before opening new plays and all plays should be complimented with stop losses. NDB $44.75 -1.69 (-5.69) Just like clockwork NDB bounced with the relief rally on Wednesday opening the door to start some new plays. The stock bounced almost $3.00 but gave most of it back in light of Alan's comments before the Senate. This is encouraging to see NDB behaving like it should. We want to continue to see modest gains on low volume followed by a renewal in selling. This will give us entry and exit points in the volatile market. We are near support at $42.50 from the 100-dma so plan your trades accordingly and keep your stops set tight to lock in profits. Any new push down should send NDB to the $40 level. U $39.00 -1.00 (-1.19) The earnings are in for USAir and at $1.38 per share they have met expectations. Does any care? No, not really since the stock continued to drop and end the day right at the low. This is really no surprise since they announced in June that that would be right in line with estimates due to lower revenues and higher costs. Plus with last week's warning of the worse-than-expected second half of the year, this quarter was already a non factor. The stock is being sold off again as the bigger picture is still clouded with concerns over the future. This bodes well for our play as the stock is now clearly underneath support. Without a clear bottom in sight we will continue to let it drift lower and tighten our stops as we go. AHP $52.19 -.44 (-1.19) When the market stumbles, Pharmaceuticals are sometimes still seen as a safer haven than other stocks are. Yesterday, many drug companies rose a bit as investors moved into the sector ahead of Greenspan's testimony today. AHP added $1.69, but gave back $.44 today. The bad vaccine and poor earnings performance should conspire to take the stock lower. In dissecting AHP's recent earnings report, Alex Zisson, of Hambrecht & Quist, said, "AHP's agricultural unit is an albatross that is destroying any chance of the company having meaningful earnings growth." He thinks AHP will spin off or sell the under-performing unit this year. Meanwhile, AHP reached a $3 mln. plus settlement in its twelfth lawsuit brought by a user of Fen-phen, the diet drug it withdrew in 1997. EBAY $108.69 -6.63 (-14.29) The Internet sector got sliced and diced today. This morning AOL and AMZN led the pack down as the investors continued the typical pattern of selling off right after encouraging earnings' news. Then the imposing Mr. Greenspan words hit the market hard. Interest rate fears and inflation worries are again looming over WallStreet. This is good news for the EBAY play. The stock finally fell through its 200 dma of $110 giving us a better signal. However, you need to be aware that eBay will report its earnings on Monday. This is a threat as EBAY could suddenly rally. Internets, in general, can move sharply up or down. This play is EXTREMELY HIGH RISK and does break our earnings' rule - BE CAREFUL. DCLK $85.00 -5.00 (-15.13 this wk.) After failing to deliver better than expected earnings and trading in a currently under- loved sector (Internets), DCLK is on the skids and has no support until it hits $70, where it bounced twice in June. After that its 200 dma should offer support in the low 60s. It now trades below its 50-DMA, with other technicals pointed south. The granddaddy of Internet retailing, AMZN, reported on the low end of revenues last night, putting further pressure on the sector. With earnings winding down, and a sour taste for Internets in investors' mouths, look for a continued trend down. This doesn't mean we won't see a technical bounce or an up day every now and then. But until the market and especially the sector improves, the future is not bright. Keep your stops set - this is still a risky Internet play. CMGI $96.63 -5.19 (-12.69 this wk) "When morale improves, the beatings will stop!" With AMZN leading the sector down the path of despair, the rest of the sector will follow. CMGI, a representative cross section of the sector, with ownership stakes in LCOS, YHOO, HLYW, newly IPO'd Engage (ENGA), and 36 other Internet companies in various stages of incubation has it rough too. The technical chart is moving to the negative quickly. There is simply nothing after earnings season to hold up the price, and CMGI doesn't report again until September. Next support is at $88. We caution you though, be careful, as CMGI did show mild intra-day support at $98 until the very end of today's trading, when it tumbled to its low of the day. That may portend a technical bounce for tomorrow, even though Friday's are typically slow. Still the overall trend is down. A reminder: Internet = Risk (in both directions). Confirm downward movement before starting a play, and try to use stops to help protect from a surprise rally (with an Internet, stops can be hard to play). ************** NEW CALL PLAYS ************** CMB - Chase Manhattan Corp $83.31 +2.00 (+1.50 this week)(-3.38) The number three bank in the U.S., Chase Manhattan offers banking and financial services around the world. This large money center bank employs over 72,000 people and has assets of about $114 billion. As recently as July 7th, an analyst said of banks during the upcoming earnings season: "When we look at all the numbers, the second quarter looks fine but basically boring. Results will not be as good as they were in the first quarter, when trading was phenomenal. The banks don't have that this quarter." And another said, "The mortgage business is not going to be a terrific business this quarter." Wrong! Chase announced very strong earnings on July 21st of $1.55 per share, shattering estimates of $1.36/share. (With one-time items, the company earned $1.60/share.) Operating earnings rose 25% for the second quarter on revenues that rose 13%. Home loans and investment banking were especially strong for CMB. Following the blow-out earnings, Judah Kraushaar of Merrill Lynch raised his 1999 earnings estimate for the bank to $5.40/share from $5.25, and his 2000 estimate to $5.80 from $5.65. As OI keeps saying, expectations often determine what a stock will do following its earnings report as much as the earnings numbers do. A stock can announce tremendous earnings, but if expectations were for even greater results, the stock will fall. (Hence we never hold over earnings.) This is a case of reduced expectations for earnings that beat the street by a whopping $.18! It is a recipe for rising stock price. Today CMB rose $2.00 on strong volume. Usually, a stock spikes right after this kind of earnings surprise and we can't recommend it in the newsletter until it has pulled back. In this case, a weak market has kept the spike in check, so we took the opportunity to include CMB. We must caution you, however, that those same weak market conditions may also keep a lid on prices in general, so please confirm market direction before initiating new plays. In other news: Chase has plans to launch an Internet shopping site by Christmas with ShopNow.com, inc. (An investment in a Latin American Internet company provided big gains in the quarter just ended.) Overseas, Chase opened an office in Beijing on July 5th, its third office in China. BUY CALL AUG-80 CMB-HP OI=1876 at $5.75 SL=4.00 BUY CALL AUG-85 CMB-HQ OI=1793 at $2.56 SL=1.25 BUY CALL SEP-80 CMB-IP OI=3277 at $7.25 SL=5.50 BUY CALL SEP-85 CMB-IQ OI=3241 at $4.38 SL=2.75 BUY CALL SEP-90 CMB-IR OI=2833 at $2.31 SL=1.25 Picked on July 22nd at $83.31 PE = 15 Change since picked +$ 0.00 52 week low =$35.56 Analysts Ratings 10-7-3-0-1 52 week high=$92.13 Last earnings 06/99 est 1.36 actual 1.55 Next earnings 10-20 est 1.31 versus .82 Average daily volume = 3.07 mln. Chart = http://quote.yahoo.com/q?s=CMB&d=3m **** WHR - Whirlpool Corp. $76.81 +1.81 (+5.18 this wk.)(-0.50) Can you separate lights from darks? WHR is the #1 producer of major home appliances in the U.S., and #2 in the world behind Electrolux. By the names under which they sell, we bet you already know them: Sears, Kenmore, KitchenAid, Roper, Speed Queen, and of course, Whirlpool. Sears/Kenmore already accounts for 20% of sales. WHR's product lineup includes washers, dryers, dishwashers, dehumidifiers, microwave ovens, ranges, refrigerators, freezers, and air conditioners. Whirlpool manufactures its products in 13 countries and sells them in 170. About 25% of its sales come from Europe, but they currently concentrate on emerging markets in Latin America and Asia. It's back! Tonight WHR returns to our lineup. With 1 look at the chart, you'll understand why. First, they set a new all-time high of $76.81 today on twice the normal volume. Until today's price eclipse, WHR had not traded at this level since April 1998. Don't you just love a breakout with volume? Wait, there's more. That it has risen in last 2 days when the rest of the market has had some rough sledding shows good relative strength. There are only 46 mln. shares in float. Fidelity Funds own 6% of the business. On July 13, they reported earnings of $1.30, handily beating street estimates of $1.24. From there, coverage/upgrades from Goldman Sachs (to its "recommended" list), McDonald Investment, and Midwest Research ensued. Midwest's new price target is $95. Volume and price have been rising 4 days in a row. All that is a double-edged sword. Friday, volume typically suffers, which could put the brakes on until next week. Not only that, after 4 days of strong performance, WHR may take a breather. Also, if the market backfires, WHR would not be immune. This is a pretty conservative play, but don't let your guard down. Wait for an entry commensurate with your risk tolerance. News is contained above. BUY CALL AUG-70*WHR-HN OI=652 at $7.88 SL=6.00 ITM 6.81, low prem BUY CALL AUG-75 WHR-HO OI= 53 at $4.38 SL=2.75 BUY CALL AUG-80 WHR-HP OI= 29 at $2.13 SL=1.00 BUY CALL SEP-75 WHR-IO OI=888 at $5.88 SL=4.00 BUY CALL SEP-80 WHR-IP OI= 2 at $3.25 SL=1.50 Picked on July 22 at $76.81 PE = 20 Change since picked +0.00 52 week low =$40.94 Analysts Ratings 10-9-12-0-0 52 week high=$76.81 Last earnings 7/99 est 1.24 actual 1.30 surprise = 4.8% Next earnings 10-13 est 1.21 versus 1.02 Average daily volume = 386 K Chart = http://quote.yahoo.com/q?s=WHR&d=3m **** EXDS - Exodus Communications $132.63 +4.50 (-5.37 this week) Founded in 1994, Exodus pioneered the Internet Data Center market and now ranks in Silicon Valley's top ten fastest-growing companies for the second year in a row! How did they do it? By offering outsourcing solutions for Internet operations. Exodus is a leading provider of Internet systems and network management solutions for enterprises with mission-critical Internet operations. Exodus manages Internet Web sites and its network infrastructure from 13 Internet Data Centers located in the United States and Europe. Well now, here is an Internet company that has actually gained for the last three days. It's nice to see a company with the name of Exodus hasn't participated in the exodus from Internet stocks. The catch is that EXDS dropped substantially on Monday before it started heading up on Tuesday. The company announced an agreement with Nordstrom's that got it moving and then the company announced earnings on Wednesday. Earnings, needless to say, were very strong. The company announced its 11th straight quarter of sequential 40 percent plus growth. That isn't year over year, but quarter after quarter. Very impressive. Along with earnings though, EXDS announced a 2-1 stock split effective August 12. Volume today was almost twice normal and could be a result of some short covering. The stock is still $16 from its yearly high. We like the move the stock has made on the news and see it performing well with its stock split so close. EXDS was reiterated a "buy" at Banc Boston Robertson Stephens today because of strong revenue numbers. They also raised their 1999 revenue estimates from $165.1 million to $215.9 million. Watch for an intraday drop for best fill. The stock actually jumped early today and then fell off a bit. BUY CALL AUG-130*EXF-HF OI=291 at $15.63 SL=12.00 ITM $2.63 BUY CALL AUG-135 EXF-HG OI=224 at $13.38 SL=10.25 BUY CALL AUG-140 EXF-HH OI=313 at $11.25 SL= 8.75 BUY CALL SEP-150 EXF-IJ OI= 54 at $14.63 SL=11.25 Picked on July 22nd at $132.63 PE = n/a Change since picked +0.00 52 week low =$ 7.75 Analysts Ratings 11-3-1-0-0 52 week high=$148.19 Last earnings 07/99 est -0.52 actual -0.51 Next earnings 10-22 est -0.47 versus -0.45 Average daily volume = 2.03 mln Chart = http://quote.yahoo.com/q?s=EXDS&d=3m ************* NEW PUT PLAYS ************* AOL - America Online $110.50 -4.56 (-9.50 this week) 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. Well you probably heard the news. AOL beat the street and hit the whisper number by reporting 0.13 cents per share after the close on Wednesday but it just wasn't good enough. In all fairness, it almost doesn't matter how good your numbers are with the underlying sentiment of the market. When the market is selling, you go with the flow. That is the one of the reasons AOL will come under fire in the short- term. Also the results for the latest quarter left a lot to be desired. They noted softness in Europe as a potential problem. This is considered somewhat seasonal but the real reason for slowing growth is the all the free Internet services available to customers. Why pay for what you can get for free? The technical picture also looks bad for AOL. We don't see support until the $100 level. Choose your entry points carefully as we are bound to see more volatility but until the overall sentiment changes we are likely to head lower. BUY PUT AUG-115*AOO-TC OI=10087 at $9.38 SL=7.00 ITM $5 BUY PUT AUG-110 AOO-TB OI= 9213 at $6.50 SL=4.75 BUY PUT AUG-105 AOO-TA OI= 7399 at $4.25 SL=2.75 Average Daily Volume = 12.75 mln Chart = http://quote.yahoo.com/q?s=AOL&d=3m *** GTW - Gateway $62.88 -2.88 (-7.68) 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 desktop and portable PC's PCTV's and servers. We said Tuesday we would keep our eye on Gateway for another opportunity. That opportunity is here. It is based on the "Buy the Rumor/Sell the News" trading that's been so prevalent this earnings season. GTW announced earnings this afternoon. Revenue for the second quarter jumped 18%, their net income was $0.56 compared to $0.38 for the same period last year. Good News, right? Well maybe, GTW only beat estimates by a penny. Investors have been pounding companies this season for meeting or beating the analyst's estimates. Technically GTW looks very weak. It has dropped about $13.00 in the last week. It is resting right on its 200dma. Support is between $57-59. We could possibly see a small bounce from these levels, but would look for further weakness in Gateway. If we get further weakness, accompanied by volume pushing GTW lower we would consider that an opportunity to jump on board. The earnings released today is the only news of any significance at this time for Gateway. BUY PUT AUG-60 GTW-TL OI=1164 at $2.63 SL=$1.25 BUY PUT AUG-65*GTW-TM OI=1396 at $4.88 SL=$3.25 Picked on July 22 at $62.88 PE = 28 Change since picked $ 0.00 52 week high=$84.50 Analysts' ratings 8-8-5-1-0 52 week low =$36.13 Last earnings 6/99 est 0.55 actual 0.56 surprise=+2% Next earnings 9/99 est 0.68 versus 0.51 Average daily volume 1.30 mln. Chart = http://quote.yahoo.com/q?s=gtw&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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The Option Investor Newsletter Thursday 7-22-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. *************** PLAY OF THE DAY *************** EBAY - eBay Inc $108.69 -6.63 (-14.28 this week) eBay is an Internet auction service in which users buy and sell personal property. The sellers pay a fee to have their items placed on the company's Web site and the buyers get to browse and make bids on the merchandise. If an item sells, eBay charges the seller a percentage of the closing price. The company's newest rival in the auctioning arena is Amazon.com. Tuesday's Write Up EBAY peaked on the last trading day of June at $151.38 and from there on in began a steady spiral downwards (-38.44 to date). Plagued by its Website outages eBay is shuddering at the loss of revenues and the confidence of its users. Last Monday, the stock presented further evidence of its demise as it fell through its 10 dma of $130 and hit $127.88. As the week progressed, EBAY moved closer to its 200 dma at $110 - still we're cautious about adding this stock to our put list. We'd prefer to see EBAY break through this mark; thereby giving us a better signal of its true condition. A conservative player (if there are any out there that play Internets) will look for this confirmation before beginning a new play. Plus, earnings are due this Monday on July 26th. This play is EXTREMELY HIGH RISK. It's well known Internets can reverse direction very quickly and stop losses will, of course, be hard to use since wide intraday swings are common. A news warning - an analyst from DLJ reiterated a "buy" rating on EBAY and set a target price of $300 today. Nonetheless, the stock still shed $4.75 and never traded above $116.50. Thursday's Write Up EBAY $108.69 -6.63 (-14.29) The Internet sector got sliced and diced today. This morning AOL and AMZN led the pack down as the investors continued the typical pattern of selling off right after encouraging earnings' news. Then the imposing Mr. Greenspan words hit the market hard. Interest rate fears and inflation worries are again looming over WallStreet. This is good news for the EBAY play. The stock finally fell through its 200 dma of $110 giving us a better signal. However, you need to be aware that eBay will report its earnings on Monday. This is a threat as EBAY could suddenly rally. Internets, in general, can move sharply up or down. This play is EXTREMELY HIGH RISK and does break our earnings' rule - BE CAREFUL. BUY PUT AUG-105 QXB-TA OI= 362 at $ 7.88 SL=6.25 BUY PUT AUG-110*QXB-TB OI=1002 at $10.63 SL=8.00 BUY PUT AUG-115 QXB-TC OI= 489 at $13.75 SL=11.25 ITM Average daily volume = 3.86 mln Chart = http://quote.yahoo.com/q?s=EBAY&d=3m ***************** COMBINATION PLAYS ***************** Greenspan Testimony Can't Save The Day.. U.S. stocks ended lower Thursday as investor's hopes for another summer rally faded with the Federal Reserve Chairman's comments about the economy and the market. U.S. equity markets ended slightly higher Wednesday as the Nasdaq led a technical rebound from the sharp decline during the previous day. The Dow average rose 6 points to end at 11,002 after an early morning rally failed to convince investors the correction was over. The Nasdaq composite index, which suffered a bigger loss Tuesday, recovered 29 points to end at 2,761. In the broad market, advances led declines by 1,487 to 1,403 on volume of 782 million shares in trading on the New York Stock Exchange. The 30-year Treasury bond fell 9/32, pushing the yield to 5.91%. Tuesday's new plays (positions/prices): Costco COST AUG70P/AUG75P $1.00 credit Emulex EMLX AUG80P/AUG85P $1.12 credit RF Micro RFMD AUG55P/AUG60P $1.00 credit All of Tuesday's plays were available at-or-below the target entry prices. Portfolio plays: Another day of cautious optimism for the technology sector as the market awaits Greenspan's testimony on Thursday. Most of our long-term issues held their ground and even some of the bullish positions rebounded. One stock that looks troubling is Solectron (SLR). The chart has turned bearish in the short-term with no signs of a bottom. Traders in the bullish diagonal spread may consider re-purchasing the sold position when the stock price firms and selling a new call on the next rally. On the positive side, EMC Corp. (EMC) was up over $3 after reporting an all-time record in revenues and net income. There was other positive news in the portfolio as Aegon USA (AEG) announced it has completed the acquisition of Transamerica (TA). TA shareholders will receive a cash payment of $23.40 and 71 AEG shares in exchange for each Transamerica share. Based on the new trading value, the aggregate value (cash and stock) received per Transamerica share is $77.94. That should lock-in a small profit on the bullish debit spread. One of the big losers today was Progressive (PGR) Insurance. The company did the unthinkable; reporting earnings that missed most estimates by $0.23 a share (on 20% growth). Trading was actually halted as sellers lined up to unload and the first trade after the announcement was $10 lower. There was no time to exit on the way down so we had to wait for the post sell-off bargain hunting to unload the long position. Our credit on the AUG-$125 call was only $12 so we now have a significant loss in the play and still need to re-purchase the short options (or buy $140 calls and let the remaining position exist as a call credit spread). Our new plan is to buy-back the AUG-135 calls and sell enough $145 calls (above the old support/new resistance level) to bring the play back to break-even. Robert Half (RHI) moved almost $2 higher a day after reporting positive revenues and earnings for the second quarter of 1999. One of our long positions, the NOV-25 call option, was bid as high as $3.12. Those of you considering an early exit on this straddle could use the rally to unload the bullish portion of the play. Thursday, July 22 U.S. stocks ended lower Thursday as investor's hopes for another summer rally faded with the Federal Reserve Chairman's comments about the economy and the market. The Dow industrials fell 33 points to 10,969 and the Nasdaq index slumped 77 points to 2,684 on a big drop in Internet stocks. The treasury market was also pressured, with the benchmark 30-year bond off 25/32, driving the yield up to 5.97%. In the broader market, declining issues beat advances 18 to 10 on active volume of more than 773 million shares on the NYSE. Some of our recent volatility positions traded higher today. Riggs (RIGS) was a standout, climbing almost $2 to a high near $21 on news the company has decided to postpone the issuance of new variable rate Trust Preferred Securities. Network Associates (NETA) rebounded after NAI Labs, its security research division, announced it has been awarded two Government-funded contracts to develop next generation intrusion detection technology. Rite-Aid (RAD) was up at midday on the excitement surrounding the pricing of the drugstore.com IPO (DSCM). Rite-Aid has an alliance with the company; they will be handling their online prescriptions. American Online (AOL) continued to fade today as Amazon (AMZN) led a group of large Internet issues lower. Qualcomm (QCOM) also dropped another $6, a day after announcing that it placed 6.9 million shares of its common stock in a public offering at $156. Sepracor (SEPR) pulled back below the sold strike (at $185) in our long-term position. On the positive side, Cyberian Outpost (COOL) had a nice rally, closing above $12 on a day when most Internet stocks were less than outstanding. Most other issues were lower after Greenspan's testimony failed to bolster investor confidence. Most analysts now think we will have a short consolidation period at this level and only select stocks will continue to advance. Based on that assessment, we will try to focus on volatility spreads and long-term positions. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - ****************************************************************** NOVL - Novell $27.25 *** An Old Favorite *** Novell is the leading provider of network software-enabled by directory services. Novell Internet solutions make networks more manageable and secure and reduce the total cost of ownership for organizations of every kind and size. Novell's worldwide channel, developer, education and technical support programs are the most extensive in the network computing industry. The newest development from Novell includes a product that will help reduce the problems associated with having a variety of passwords for access to networks and applications. A new software tool, Single Sign-on, will allow users to log on to a computer network only once and access a number of applications across multiple operating systems. Network administrators need a single sign-on system, but security experts are worried about listing a user's passwords all in one place. With Novell's new software, each user's security profile is centrally located in NDS; the user is the only person with authorized to access to password information. Single Sign-on is the latest move by the network company to join applications from its core Novell Directory Services technology, a central repository for network-based information that functions like a sophisticated address book. Management even hinted that Novell may include support for applications from Microsoft (MSFT) in the future. In early July, Gruntal & Co. reiterated their 'strong buy' rating with a target of $32. Earnings are due in mid-August and that may be just enough to bring the stock price back to recent highs near $30 at the expiration date. PLAY (conservative - bullish/calendar spread): BUY CALL NOV-30 NKQ-KF OI=4784 A=$3.50 SELL CALL AUG-30 NKQ-HF OI=9604 B=$0.81 INITIAL NET DEBIT TARGET=$2.50 TARGET ROI=50% It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. Chart = http://quote.yahoo.com/q?s=NOVL&d=3m ****************************************************************** ZRAN - Zoran Corporation $23.88 *** On The Move! *** Zoran Corporation develops and markets integrated circuits (ICs), IC Intellectual Property (IP) cores, and embedded and PC software for digital audio and video applications enabled by compression. Zoran also provides complete reference designs based on Zoran's technology. Zoran's product lines and IP include JPEG codecs, MPEG and DVD decoders, digital still camera system on a chip and digital audio. All these standard-based products benefit from Zoran's Standard Plus(TM) technology. Zoran's ICs are used in numerous digital audio and video products. Leading applications incorporating Zoran's products and IP include professional and other consumer video editing systems, filmless digital cameras, standalone consumer DVD players, SuperVCD players, speakers and audio systems. On Monday, SoundView Technology analyst Scott Randall started coverage of Zoran with a 'buy' rating and a price target of $30. He expects earnings of $0.40 a share for fiscal 1999 and $0.95 a share for fiscal 2000. Today, Zoran did not disappoint, reporting significantly increased revenue and earnings in the 2nd quarter. Revenues increased to $13.6 million from $7.1 million and net income increased to $1.2 million, or $0.10 per share, from a net loss of $976,000. The positive earnings and favorable outlook for the DVD market bode well for this small technology company but we expect a short consolidation before the stock price can move on. A unique disparity exists in the September call options and there are two ways to benefit from the pricing; depending on your outlook. PLAY (conservative - bullish/diagonal spread): BUY CALL DEC-17.50 ZUO-LW OI=202 A=$8.75 SELL CALL SEP-22.50 ZUO-IX OI=358 B=$4.00 INITIAL NET DEBIT TARGET=$4.50 TARGET ROI=50% PLAY (conservative - bullish/debit spread): BUY CALL SEP-20.00 ZUO-ID OI=176 A=$5.50 SELL CALL SEP-22.50 ZUO-IX OI=358 B=$4.00 INITIAL NET DEBIT TARGET=$1.38 ROI(max)=81% B/E=$21.28 Chart = http://quote.yahoo.com/q?s=ZRAN&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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