The Option Investor Newsletter Sunday 7-25-99 1 of 6 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment ******************************************************************* MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ******************************************************************* WE 7-23 WE 7-16 WE 7-9 WE 7-2 DOW 10910.96 - 298.88 11209.84 + 16.14 11193.70 +54.46 +586.68 Nasdaq 2692.40 - 172.08 2864.48 + 71.41 2793.07 +52.05 +188.37 S&P-100 698.88 - 34.91 733.79 + 10.91 722.88 + 6.66 + 44.99 S&P-500 1356.94 - 61.84 1418.78 + 15.50 1403.28 +12.06 + 75.91 RUT 448.38 - 16.88 465.26 + 7.28 457.98 + 1.47 + 13.40 TRAN 3381.49 - 20.38 3401.87 - 25.45 3427.32 -88.67 +199.88 VIX 23.76 18.13 19.09 18.85 Put/Call .58 .46 .46 .47 ******************************************************************* Why buy? The market finished up the week leaning over the cliff. The worry I spoke about last weekend came to pass and things are not looking up for the near future. It is hard to visualize by looking at these charts but the Dow, Nasdaq, OEX and SPX were all setting new highs just last Monday. What a difference a week makes. Note also the advance/decline line which has accelerated downward and is looking very grim. The tech stocks took it the hardest but you know the rules. Tech is always first up and first down. They are most impacted by higher interest rates because of their high PE values. The Dow finished the week down about -2.8% but the Nasdaq suffered the worst, down -6.1%. I wish I could say the troubles are over but I think they are just beginning. The market spike upward on Monday was textbook and many readers have emailed us with thank you letters and profit examples. You subscribe to this newsletter not just for the wit and humor and not just for the prescreened stocks. You should be more focused on the actual market commentary and forecasts. These alone should stand above the picks. The picks are the ammunition you use when the time is right. The market commentary is to tell you when to pull the trigger. Granted, nobody can forecast the future 100% but more often than not we are very close. We received many emails this week claiming we were the first newsletter to call the peak and drop last week, in advance. If you were acting on the recommendations in the commentary the last two weeks you profited well. The point. I am not writing this just to pat ourselves on the back but to get your attention about the next several weeks. The market has a very good chance of a significant decline ahead and I will explain that shortly. However, we are still recommending calls. Why? Because 90% of our readers are call only players. Would I go out and blindly buy calls next week? Not hardly. However, there will be stocks that go up and they may be good call plays. If our market outlook was totally negative and we did not list any call plays this week, we would lose half our subscribers. Really! We have found that most readers are in denial of market trends and want to play calls even in the worst conditions. Can you make money doing this? Sure but only if you do it correctly. Nothing goes down in a straight line. Everything cycles. Two, Three, Four days down and one, two days up. (reverse the cycle for an advancing stock) If you must play calls then focus on buying the dips and focus even harder on getting out early. Enough preaching but you really need to focus on the next segment. Why Buy? What causes stocks (markets) to go up? News. News about earnings to be exact. Positive earnings growth causes stock in IBM for instance to have more value. As the company creates more assets the value of the stock goes up. What causes markets to go down? News. Lack of earnings news, economic news, interest rate news, global news. During an earnings cycle the "positive expectation" causes investors to ignore the negative news and buy stock hoping for news of more value. (positive earnings growth) The second quarters earnings, which are now almost over, is normally a strong quarter and investors reap profits from buying stocks over the previous 90-120 days. The third quarter, which reports in October, is not normally an outstanding quarter. The economy is largely seasonal and results from summer months are normally mediocre at best. If you are a professional money manager and you get paid for results then you are aware of these trends. Tech stocks for instance were up about +28% last week since the January lows. We all know that profit is not profit until you sell the stock. Astute money managers who can read historical charts know that they can buy these same stocks back later in the year for less money and start the cycle all over again. So here is the question. Why buy now? Earnings expectations are over. The Fed is on inflation alert and almost surely will raise rates again in August. The Y2K exodus is slowly starting to be seen. The economic news has been so strong recently that traders are beginning to think it can't get any better and the Fed is ready to raise rates to keep it that way. There is just no reason to buy stocks NOW. Psychologists claim we are destined to relive the past if we do not learn from it. Fortunately as traders we have a wealth of historical information available at our finger tips. Take these two charts. The top one is from Nov 1997 to July 20th 1998. The bottom chart is from Nov 1998 to July 23rd. Do you see any patterns? 1. You have the December bump, the Jan bump, and the long Feb-May seasonal market run. 2. You have the pull back in June as traders take profits from the long rise BEFORE the actual July earnings. 3. In July you have a market top culminating around the second week of earnings. The expectation is over and profit taking begins. 4. The last week on each chart is the week Greenspan gave his House Banking Committee testimony each year. Coincidence? I don't have a chart YET to show you for the next 60 days so lets just guess for a second what it might look like by analyzing last years chart. After July earnings expectations were over, the reduced October expectations became the focus. The world economic issues moved to the forefront and every "crisis" became exaggerated and only hastened the downward spiral. This year we have China and Taiwan. We have increased worry over a China devaluation. We have the Argentina elections. And most of all we have Y2K only 150+ days away. We already know the market does not like uncertainty and Y2K could be the most uncertain unknown in recent memory. Our near term future could be very cloudy. Last year we dropped almost -2000 points between the July highs and October lows. This week represented only -300. Care to guess where the bottom might be? That guess and $3 will buy you a cup of coffee at your nearest Starbucks. I will bet however that the number of readers tonight that guessed the market to go higher from here would fit into a Starbucks. Scary! Multiply that percent of pessimism by the estimated 44 million brokerage account holders with stock investments today. Numerous, previously bullish, analysts have started coming out of the woodwork this week with dire predictions. Ed Kerschner of Paine-Webber, who has been a leading bull, said Friday that stocks were currently over valued at 108% of actual. He advised cutting stock holdings to only 50% of your total portfolio. Another analyst called tech stocks 19% over valued. About this time last year Ralph Acompora did his famous one day about face and changed from Dow 10,000 to Dow 7,500. I would bet he is not sleeping well this week with his Dow 12,500 prediction looking farther away every passing day. Now that I have painted this bleak picture I have to put in the caveat of "past performance does not indicate future results". Just because the market has done this in the past does not mean sell the farm and buy puts. If it was that easy then every July 20th the market would drop -2000 points and flat line until October. Everyone would wait for July 20th each year and become millionaires over night. There is always a battle between the optimists and pessimists for control of the market direction. There are still a herd of analysts calling for new highs in the next week or two. I would like to think this herd is not headed for slaughter but the facts appear to be different. I would like to think that the place for us to be is on neither side. We should be firmly planted on the sidelines with the realists. We do not care whether the market goes up or down. We only care that we recognize the trend and capture the profits. By showing you the possibilities I am hoping to prevent you from buying the dip blindly and then getting slammed the next day by another dip. There is a time and a place for everything. On any given week you could make money in either calls OR puts in any stock. Granted one direction will be favored each week but you could make money either way. The trick is in determining your entry point. Remember the cycles. Up some, down some. In a neutral market the number of down days for a stock trending up is about half the number of the recent up days. If the stock went up four days in a row then you could expect it to go down two days. The same thing works in reverse for a down trending stock or market. Four days down, two days up. Now before you start firing off those emails I want to stress that this is just a rule of thumb. The market makes its own rules. Another trend is the "harder they fall the higher they bounce" rule. Obviously if the market drops -500 points in one week the odds of a +200 point technical bounce are very good. This may seem very boring to you but it is reality and failure to observe the laws of reality will make you broke. You can't hope a stock or the market up or down. As we all know nothing "has" to go up or down and holding on to losing plays will only make you a loser eventually. I will quit on this point. Nobody can tell you what to play or how to play or when to play. We can only give you suggestions and try to help you understand what MAY happen in the future. It is your decision how to invest. Need I remind you that Greenspan gets to take another shot at the markets this week with his testimony to congress. Another Fed head spoke out Friday and hinted that a rate hike was coming. Richmond Fed President, J. Alfred Broaddus, said "the Fed sees few signs of the economy slowing" and echoing Greenspans "promptly and forcefully" speech on Thursday. The Fed will have more economic reports than they can read this week with ECI, New & Existing Home Sales, APICS Survey, Real GDP, Help Wanted Index, Personal Income and Spending and Chicago PMI. Looks like a minefield and the markets are sure to react to ANY negative info, no matter how slight. We could possibly have a technical bump Monday morning from the -300 drop last week and if it happens I plan to buy puts again. Good Luck, Sell too soon. Jim Brown Editor PS: If you are only reading the email version and not viewing these sections on the website you are missing out. The imbedded charts and links are provide a much more visual image on the website than is possible in an email format. *********** JIM'S PLAYS *********** This week was much better for me than the previous. By being in cash at the start of the week I was not locked into any direction and could focus on the actual market and look for the right play. When you are nursing open positions you will tend to focus on those positions and try to wish them in the direction you want them to go. This takes your focus off the big picture and causes poor trading decisions. OEX - The market spiked up to a new intraday high on Monday and gave us a textbook failed rally just like we were expecting. When the drop began I bought Aug-730 Put OEZ-TF for $13.75 and rode it until the bump up on Wednesday morning. I sold them for $24.00 and then suffered sellers remorse as they wen on to trade as high as $36.00 on Friday. Now I am hoping for another spike on Monday to repeat this highly profitable play. Yahoo - I was short the August $170 calls @ $19.38 and I closed the position early @ $2.00 when it appeared YHOO might have found a bottom at $145. What a great play! $17.38 profit in three weeks. EXDS - Exodus continues to mystify me. After making a great run to earnings and dutifully selling off a couple days early, they announced earnings inline with estimates on Wednesday and promptly exploded the next day. No whisper number beating performance but they did announce a split. I bought the AUG-110 calls @ 16.75 after the bounce off $110 on Tuesday. Purely a dead cat bounce play after the -$35 point drop. I sold them at the close on Wednesday, before earnings, @ $24.25. When the stocked dropped at the open on Thursday I bought them back for $22.75 when it appeared they were going to bounce again. I came close to selling at the close on Friday but with the Nasdaq showing signs of life I decided to hold for the opening bounce (I hope) on Monday. Closing price = $27.88. After seeing the strength EXDS was showing I decided to sell puts as well. With a split coming and strong buying volume I sold the AUG-130 Puts for $9.25. QCOM - Qualcom came back from its long overdue profit taking on the announcement of its inclusion to the S&P-500. When it bounced on Thursday I sold the AUG-150 PUTS AAW-TJ for $9.25. The odds of QCOM continuing on up inspite of a down market are very good. They posted record profits, severely beating the street and the S&P-500 buying should continue for several weeks. Closing price = $8.00. VOD - Vodaphone tanked on profit taking and market unrest on Tuesday. When it started recovering on Wednesday I bought the AUG-100 calls VOD-HT @ $15.63 and sold them at $16.75 before the close. I felt the weak market could translate into problems for the overseas markets as well. On Friday VOD again tanked to almost $205 and gave me another entry point. I bought the same calls @ $12.00. The drop at the close almost had me pulling the trigger to get out but again I felt the possiblity of a technical bounce by the markets on Monday was a possibility. Closing price = $12.88 Play recap: Sold YHOO Calls AUG-170 YHV-HN @ $19.38 cost $ 2.00 profit $17.38 Sold OEX Puts AUG-730 OEZ-TF @ $24.00 cost $13.75 profit $10.25 Sold EXDS Calls AUG-110 EXF-HB @ $24.25 cost $16.75 profit $ 7.50 Sold VOD Calls AUG-100 VOD-HT @ $16.75 cost $15.63 profit $ 1.12 Current position: Short EXDS Puts AUG-130 EXF-TF @ $9.25 (current 9.00) Short QCOM Puts AUG-150 AAW-TJ @ $9.25 (current 8.00) Long EXDS Calls AUG-110 EXF-HB @ 22.75 (current 27.88) Long VOD Calls AUG-110 VOD-HT @ 12.00 (current 12.88) The game plan for last week was to only trade momentum movers and stocks that had bounced off strong support. The plan for this week will be to sell the calls at the opening bounce Monday (hopefully) and buy OEX puts again. Good Luck Jim ************* COMING EVENTS ************* Monday: Existing Home Sales July Forecast: 5.06M Previous: 5.04M Tuesday: Consumer Confidence July Forecast: 138.2 Previous: 138.4 BTM Schroders 7/24 Forecast: -- Previous: -0.7% LJR Redbook 7/24 Forecast: -- Previous: -0.2% API Oil Stocks 7/23 Forecast: -- Previous: 5.534M Wednesday: Durable Goods Orders June Forecast: 0.7% Previous: 1.2% Thursday: Greenspan testimony before House Banking Committee Jobless Claims 7/24 Forecast: 314k Previous: 313K Money Supply (M2) 7/19 Forecast: -- Previous: $27.8B APICS Survey July Forecast: -- Previous: 48.8 Employment Cost Idx Q2 Forecast: 0.7% Previous: 0.4% Real GDP Q2-Adv Forecast: 3.3% Previous: 4.3% Help Wanted Index June Forecast: -- Previous: 89 Friday: Persoanl Income June Forecast: 0.5% Previous: 0.4% Personal Spending June Forecast: 0.4% Previous: 0.6% New Home Sales June Forecast: 896K Previous: 888K Chicago PMI July Forecast: -- Previous: 60.0 Univ Michigan Sent. July-F Forecast: -- Previous: 106.8 ************** MARKET POSTURE ************** Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,500 11,320 10,910 Neutral 7.20 SPX S&P 500 1,330 1,420 1,357 Neutral 7.20 OEX S&P 100 675 735 699 Neutral 7.20 RUT Russell 2000 430 465 448 Neutral 7.20 NDX NASD 100 2,200 2,468 2,302 Neutral 7.20 MSH High Tech 1,080 1,250 1,143 Neutral 7.20 XCI Hardware 920 1,090 1,003 Neutral 7.20 CWX Software 700 844 750 Neutral 7.20 SOX Semiconductor 450 535 483 Neutral 7.20 NWX Networking 550 625 568 Neutral 7.20 INX Internet 500 580 484 BEARISH 7.20 BIX Banking 690 710 677 BEARISH 7.23 * XBD Brokerage 410 440 403 BEARISH 7.23 * IUX Insurance 645 660 636 BEARISH 7.23 * RLX Retail 900 960 895 BEARISH 7.23 * DRG Drug 370 400 355 BEARISH 7.20 HCX Healthcare 750 800 740 BEARISH 7.22 XAL Airline 180 190 169 BEARISH 5.21 OIX Oil & Gas 285 310 301 Neutral 5.13 Posture Alert With Friday's action, we have turned BEARISH on Retail, Insurance, Brokerage, and Banking. Technology stocks had a minor rebound on Friday, with the Internet and Semiconductor secotors closing up 1.6%, and the Morgan Stanley High Tech Index closing up 1.8%. The loser board was lead by Brokerage (-2.9%), Banking (-1.2%), and the Drug sector (-1.0%). A detailed description of our Market Posture and its applications can be found at: /members/marketposture.asp **************** MARKET SENTIMENT **************** Great Expectations! Below is an updated list of equities (that should be reporting their earnings this next week) and our Pinnacle Index for those particular stocks. We have now also included their expected earnings, the infamous whisper number (if available), and their estimated earnings release date. 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. What a difference one week can make. Last Sunday, we highlighted our Great Expectation list with many companies showing Pinnacle Index's off the charts. This upcoming week is leftovers of the earnings season with a couple of big names. As you can see below, the Pinnacle Index is extremely lower in comparison to last week. Company Symbol Pinnacle Expected Whisper#: Estimated Index: Earnings: Date*: AT & T T 1.61 +.48 +.50 7/29 BMC Software BMCS 1.59 +.40 +.42 7/29 Compaq Computer CPQ 1.67 -.10 -.09 7/28 Cybercash CYCH 4.98 -.37 -.35 7/27 E-Bay EBAY 0.46 +.03 +.04 7/26 Egghead EGGS 3.81 -.38 -.34 7/27 GTE GTE 0.64 +.80 +.80 7/26 Ingram Micro IM 2.46 +.34 +.36 7/29 InfoSpace INSP 5.59 -.04 +.00 7/27 KLA-Tencor KLAC 2.01 +.26 +.28 7/28 Lam Research LRCX 1.69 +.12 +.16 7/29 Mindspring MSPG 1.26 +.09 +.09 7/27 Nortel Networks NT 2.64 +.50 +.51 7/27 Storage Tech STK 3.02 +.27 +.27 7/29 MCI-Worldcom WCOM 0.69 +.44 +.45 7/29 Low expectation stocks this week include AT&T, EBAY, GTE, Mindspring, and MCI-Worldcom. GTE would be the best example this week of a low expectation stock (low Pinnacle Index, whisper number in-line with expected earnings). However, GTE does not have the volatility that most people want, so we will look elsewhere. EBAY and Mindspring both look poised for a bounce (with such low expectations), however, as poorly as internet stocks have been trending, their bounce may be short-lived. AT&T and Worldcom both have a low Pinnacle Index, however, their whisper numbers are 2 and 1 cents above expectations. AT&T and Worldcom haven't made runs into earnings (which is a positive), so potential upside is significant for both, given all that has been said. The most optimistic stocks this week are Cybercash and InfoSpace. Their Pinnacle Index is the highest on the list, and they both have whisper numbers several cents higher than expected. This only gives greater chance of an earnings letdown after they report. However, these two examples are not as good as the last couple of weeks examples (MSFT, TXN,etc) due to the fact they are both small float stocks with less following on Wall Street. This can lead to a greater degree of risk as well as a tougher gauge on the true underlying sentiment. 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 averages, and also above key 450 benchmark. BEARISH Signs: Interest Rates: The 30-yr Treasury is beginning to bump back over the key 6% level. Peak Open Interest: The contraian put-call ratio clocking in at 1.0 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: The A/D line is has been rolling over, and could prove Bearish if decliners continue to 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 +183.5% August Expiration Cycle OEX OTM Call Analysis (Open Interest August 710-780) Date Open Interest Change % Alert Friday, July 16 32,285 Friday, July 23 62,455 +93.4% Market Sentiment at a Glance Friday Indicator (7/23) Pinnacle Index (OEX): Overhead Resistance (720-750) 3.2 Underlying Support (685-710) 1.2 Put/Call Ratios: CBOE Total P/C Ratio .7 CBOE Equity P/C Ratio .5 OEX P/C Ratio 1.0 Peak Open Interest (OEX): Puts 700 Calls 740 P/C Ratio 1.01 Market Volatility Index (VIX): CBOE VIX 23.76 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 Benchmark (7/23) Overhead Resistance (720-750) 3.2 OEX Close 698.88 Underlying Support (685-710) 1.2 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 725/750 level while the underlying support is holding at the OEX 685/710 level. Put/Call Ratio Friday Strike/Contracts (7/23) CBOE Total P/C Ratio .68 CBOE Equity P/C Ratio .49 OEX P/C Ratio 1.04 OEX Peak Open Interest Friday Strike/Contracts (7/23) Puts 700 / 8,032 Calls 740 / 7,933 Put/Call Ratio 1.01 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 23, 1999 23.76 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 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 * *********** 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 7-25-99 Sunday 2 of 6 BROKERS CORNER ************** STOP THE LOSERS! We cannot stress enough ...not to stress-out over trading. Emotion is one of the three biggest reasons people lose money-trading options. The other two of not buying enough time or choosing the wrong strike price can be corrected with experience and with speaking with an option specialist. It seems in every "market correction" customers need to be calmed and reminded to trade logically instead of overreacting. As we have stated before, any trade is worth doing as long as you have a plan. Choose the best value of time and expiration date based on your research and brokers assistance. Then make it as simple as possible by placing a profit order AND a stop loss for protection. The only thing you can attempt to control is the RISK. With proper money management and asset allocation no one single trade should be catastrophic. Being wrong is part of the game, but risking the whole option premium and letting options expire worthless is a rookie mistake that we all have made. Have a plan and take a reasonable loss if you are wrong. Mathematically when an option losses half of its' premium it will probably lose all of it. Anything can happen but more times than not you are better off to salvage some money than taking the risk of getting nothing. Live for another day and preserve capital for the unlimited number of opportunities ahead. We at LaSalle St. Securities do not place stop losses with the floor because most floor traders will not accept them or the option may be traded on many exchanges. That can cause situations where the primary exchange for that option may not have traded to the high or low which could trigger a stop. We program our computers and enter the trades manually as marked orders to exit when the market trades at or below the sell stop-loss order. A highly traded option market will have tighter spreads on the bid/offer and result in better executions. Again when you reach the point of being stopped-out; it is not a bad situation: only a time to regroup and conserve trading capital. GET OUT AND REGROUP! Call us toll free at 888-281-9569 to discuss our option brokerage services and help plan your success with a live option broker that will make your trading less stressful. Learn the right way to trade and how to make money not save money on commissions. Alan Knuckman & Andrew Aronson LaSalle St Securities Chicago, IL 888-281-9569 (312) 341-7462 FAX READERS WRITE ************* Still 100% cash I am paper trading for the rest of the week, but recovering and chilling outafter a long 4 or 5 weeks of watching everything with my plays very, very closely. I am finding that the emotional aspects of developing as a traderare at least as demanding as the financial/ information aspects. My plan for the week called for exiting my August/ Oct call plays on Mon, Tues, or Wed; and, if we got the failed rally formation, entering OEX putplays on the downside. The murky side of my plan was the exit strategy on the OEX puts. I have been nailed by big moves down followed by big moves up in the past, so I have an itchy trigger finger on taking OEX put profits, despite my rational evaluation that we are at a turning point and headed down into August. At any rate, we got the failed rally in the first half hour of trading monday morning. I took 6 call plays off the table... I had at least 10-12k in profits on option positions worth about 30k, mostly on some Nok Oct 85s, HWP Aug 105s, and MSFT Aug 100s. I "hoped" that the techs would continue to trend up through Wed with all the tech earnings announcements. Recognizing that that was not to be, I sold in a snap decision on Monday morning. But without studying the OIN newsletter closely, I would not have recognized the situation and made the fast decision accordingly. At the same time, I initiated a OEX 730 Put position with 15k. My own guideline was to use no more capital in my OEX put positions than I had from my Aug/Oct call positions. Last week at this time, I had 80k in July, August, and Oct call positions riding a rising wave into the peak of earnings season. But this is very trying emotionally. So I had to ramp my risk downward. 80k in positions last week... 30k in positions monday... 15k in OEX puts. Anyway, confirming the downward trend on Tues AM, I pulled the trigger on another OEX 720 Put position. I had set limit sells for 5 of 10 contracts in each case... at between 33% and 50% profits, which I estimated I could expect in a big sell off. My positions traded through my limit sell prices in both cases and I got fills. Since I was gun shy of the OEX put game, and because I needed an emotional break, I made a gut call on Tuesday to take the remaining 10 contracts (5 OEX 730 puts, and 5 OEX 720 puts) off the table with about an hour left on Tuesday. I went to lunch with my girlfriend with a 13k profit, and 100% in cash. Now, I am beginning to decompress. I have some seller's remorse for not holding my OEX 730 and 720 puts.. especially with the OEX down below 700 today. But I have kicked ass in A) A boatload of July Plays (52k), B) A smaller amount of Aug/Oct plays (13k?), C) a quick profit in a OEX put play (13k). Now is a good time to chill out and move some cash around to optimize my trading set up (I was previously trading my preferred trade account, a fidelity account, and a fidelity Roth IRA count, AKA "the kitchen sink"... I am moving everything over to preferred). My paper trades for the week include: 1. Holding OEX Aug 730 and 720 Puts. This would probably be a good entry point to hold a small amount of these contracts for the next few weeks. 2. Yesterday, I considered initiating a new OEX Aug 710 Put, but did not pull the trigger, though I was tempted. Would have been a nice profit today. 3. TXN Puts. For all the reasons described in the Market Sentiment Section of the Newsletter. I paid close attention to this section on Sunday night, and TXN seemed like a no-brainer Put play. I have tracked this one from a Monday open of 154 to 137 today. If the OIN newsletter highlights more such opportunities at a similar juncture in the future (ie, height of earnings season, with probable reversal coming, earnings for specific stock coming out, Put/Call balance far out of whack for that stock), I will be a more confident buyer of put plays on such a stock. The nice thing about paper trading is that it develops your recognitional decision skills, which is very much like how they train officers in the military (Marines is my background). You study, study, study old battles, new weapons, changing political situations so that when you are in the thick of it, you can recognize what is going on, formulate a plan and execute it quickly. And as they say in the Marines, a good plan executed violently is better than a perfect plan executed later. Sure, NOW I know that I should have bought 80k worth of OEX 730 puts on Monday and more than doubled my money. But i DID buy 15k worth of those on Monday and have an 8k gain on those alone to show for doing my homework on Sunday night. Anyway, the newsletter is key because it gives the right information and analysis to help make those decisions at critical junctures. Of course, I will continue to feel seller's remorse for the rest of the week as I see the market tank and I see profitable plays go up in value. But I will be a lot happier knowing I made some good money thanks to the newsletter. Right now, it feels good and getting better to be in 100% cash... kind of like coming back to a nice warm fire after running around in the rain and wind... One of the local organizers of the OIN investors clubs, Vera Roth, who apparently made over $1 million, said one of her biggest lessons was to take a week off after making a lot of money... since she had a tendency to lose at least part of it if she just kept trading. I have done that too both in February with the Dell Debacle, and in April/May. I had over 100k profit in Dell which I ploughed back into calls because I "knew" that the stock would announce great numbers and shoot up. It didn't, and tanked. And in the April earnings season, the end of the earnings period was characterized by enormous volatility. I won and lost... then in May and June got clobbered on the wrong side of some OEX put plays where I didn't take profits quickly enough. Well, Feb, April, May are experience. Now I am a more savvy player. Now, it is good to be in cash. I was good to be lucky, now I need to recover my perspective, enjoy my gains, and re adjust my game plan to a new battlefield. Thanks for your emails. I really value the feedback. Janar CHARITY SOCIAL TO FIGHT AUTISM ****************************** Once in a Lifetime Opportunity Combining America’s Three Greatest Pastimes, Making Money, Paying Less Taxes & Baseball. This Event is Limited to up to Ten Fortunate Individuals. On a First Come, First Serve Basis. "Investing to Fight Autism" Your hosts will be Chris Verhaegh, author of Options 101, and his technical analysis guru friend Steve (June 27,1999 Options 101). Chris, the parent of a son with Autism, travels the country teaching basic courses on option trading, and raises money for Autism research has put together a unique opportunity. A Luxury Box and catered meal at Miami’s Pro Player Stadium for the Monday August 9th game between the Colorado Rockies and the Florida Marlins. The Box seats 12 people, giving an opportunity for up to 10 traders to share an evening of baseball and investing. We will make arrangements to insure plenty of non-baseball time to "learn to earn." To make it a truly unbelievable event, Chris has invited a number of his personal friends and colleagues to attend (forgive the initials, their privacy makes meeting them that much more valuable, their business cards may be priceless). If you are among the lucky attendees, you may request and sponsor any of the following to attend: Chris’ personal full service stock broker, JM. If you ever wanted to know about IPO’s, this is the opportunity. JM is a syndicate manager, he helps takes companies public and helps distribute the shares. WS, a professional Day Trader. Learn everything you possibly could ever want to know about Level II quotes and order execution. WS has made the greatest commitment to come so far. BZ, a former options market maker and floor trader. Recently traded Japanese Yen Futures in Singapore. RA, a Futures trader. Learn about commodities and indices. RA is also an expert on technical analysis. SF, a full time Mutual Fund trader. Option traders should detest Mutual Funds, but investors should know everything about them. It’s possible there will be six experts and six lucky attendees. The seats are offered to those donating a minimum of $ 1,000 to help fight Autism. A receipt will be given by a bona fide 501c Charity offering a tax deduction for the fullest amount allowed by law. All proceeds will go to charity, all costs are being underwritten. We do have one corporate sponsor so far, and are looking for more. Contact Chrisv@OptionInvestor.com for more info. OPTION CLUB UPDATE ****************** The Excitement Continues to Grow Our Raleigh, NC club had our second meeting last night. We had 6 people attend out of 12 on my email list. Most were local, but we had one attendee drive about 75 miles. I think everyone had a good time and learned some too!! We went over some past trades ( success & failures) and also discussed some of OIN recent plays. Hopefully, we will be able to spend even more time next month !! Tommy Sims - firstname.lastname@example.org ********** At long last we got our St. Louis group started. We met on Tuesday evening at Roxanne Bode's home from 7:30 pm until about 10:00. 10 option investors attended. Several other people replied that they were unavailable. We generally discussed investment backgrounds and strategies. We have our next meeting is planned for July 26 tentatively at a location off Manchester Road in Ballwin. All investor readers in Eastern Missouri and Southwestern Illinois are invited. Any interested folks may contact Maris Eshleman at email@example.com or Roxanne Bode at firstname.lastname@example.org. Maris Eshleman ********** We had several of our members gone to the seminar in Los Angeles. As of today we have 17 members, and the ideas just keep coming. It is fun to listen to stories, from some other seminars. Our next meeting is going to be on the 21st. We are in Ventura County, Simi Valley,Thousand Oaks, Westlake, Aquora, Somis, Fillmore, Santa Paula ETC.The best thing is, the tips you get to make $. Otto Laszlo - Olaszlo@aol.com Won't you join the fun! Organize@OptionInvestor.com or Visit@OptionInvestor.com LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Index Last Week Dow 10910.96 -298.88 Nasdaq 2692.40 -172.08 $OEX 698.88 -34.91 $SPX 1356.94 -61.84 $RUT 448.38 -16.88 $TRAN 3381.49 -20.38 $VIX 23.76 5.63 Calls Week VISX 101.75 7.50 More good news, more new highs WHR 75.50 3.88 Hit new highs again this week EXDS 138.50 0.50 Stock split on August 12th LGTO 80.75 -0.13 New, good earnings and a 2:1 split VRTS 61.00 -0.19 New, bounced off support VRIO 81.63 -0.75 First-ever stock split on Aug 20th CMB 81.56 -1.25 Another terrific quarter for CMB BGEN 70.13 -1.50 Earnings driving the stock higher DELL 41.00 -2.25 Is the wait finally over? EDS 64.50 -2.63 Earnings to be released Thursday CSCO 62.94 -3.06 Almost time for an earnings run QCOM 154.69 -3.56 New, too many positive signs GE 115.19 -3.69 Holding up relative to the Dow HD 64.63 -5.00 Be patient, wait for direction VOD 207.94 -6.31 Another buying opportunity CMVT 72.38 -9.00 Use caution and wait for a bounce JDSU 157.06 -15.19 New, nice entry for split run Puts DCLK 83.69 -16.44 Investors are becoming impatient EBAY 107.81 -15.16 And now for the earnings!!! CMGI 97.19 -12.13 Internet sector is still weak AOL 107.94 -12.06 NASDAQ woes hurting AOL's stock XRX 49.25 -9.81 New, weak earnings and revenues LVLT 58.06 -8.94 New, broke through support at $60 CA 47.56 -8.44 New, currently in a tailspin SBH 57.00 -7.81 New, post-earnings depression NDB 41.88 -6.56 Dropped, successful play MWD 93.50 -6.44 New, rate fears lurking again SCH 46.75 -5.69 No relief for the online brokers MER 71.69 -4.94 New, weakening financial sector SANM 70.38 -4.87 Dropped, basing at the 100-dma U 38.19 -2.00 Oil is rising so USAIR is dropping AHP 51.56 -1.81 Drugs and healthcare still hurting GTW 73.00 2.44 Gapped higher but should retreat PICK SUMMARY ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. STOCKS ADDED TO THE PICK LIST ***************************** CALLS: JDSU - JDS Uniphase Corp. LGTO - Legato Systems Inc. QCOM - Qualcomm Inc. VRTS - Veritas Software Corp. PUTS: Please confirm downward motion before playing. With the market in rally mode any beat up stock starts looking like a value play. CA - Computer Associates International Inc. LVLT - Level 3 Communications Inc. MER - Merrill Lynch & Company Inc. MWD - Morgan Stanley Dean Witter/Discover SBH - SmithKline Beecham PLC XRX - Xerox Corp. PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. ***** CALLS: none today PUTS: SANM $70.38 (-4.63) The weakness in the computer sector appeared to be short-lived as GTW kicked off the rally with more than $10 move. This was an obvious spike and it is unlikely to be sustained but it brought hope to component makers like SANM. This happened at the wrong time for our play as the stock was flirting with a breakdown below the 100-dma. It added support and we are now looking at possibly a short-term bottom. You can see this in a one-week chart of SANM. So we are letting it go as a play to pursue some stocks with a more clear direction. NDB $41.88 (-6.56) It is time to take our profits in NDB. We were able to play it for a nice gain this week as the online brokers led the way down for the markets. We saw nice entry and exit points during the week and are now resting on the support that we mentioned Thursday at the 100-dma. It looks like some buying interest has been generated and the stock held up well on Friday. This buying is probably spurred by the analyst report a few weeks ago that had the price target of $100 a share. Investors don’t quickly forget numbers that optimistic. It is better for us to take our profits and put them to work somewhere else. STOCK SPLIT CANDIDATES *********************** HD - Home Depot QCOM - Qualcomm VISX - VISX Inc. VOD - Vodafone AirTouch STOCKS WITH UPCOMING SPLITS *************************** We don't list all splits available, only those we feel may have play possibilities. The number of splits has slowed down considerably but we are sure to get another flood with the earnings announcements. Symbol - Stock Splits/Date LCOS - Lycos 2:1 07-26-99 ex-date 07-27 AIG - American Intl 5:4 07-30-99 ex-date 08-02 CREE - Cree Research 2:1 07-30-99 ex-date 08-02 QLGC - QLogic Corp 2:1 07-30-99 ex-date 08-02 JDSU - JDSUniphase 2:1 08-03-99 ex-date 08-04 TD - Toronto Dominion2:1 08-03-99 ex-date 08-04 JMED - Jones Pharma 3:2 08-06-99 ex-date 08-09 LVCI - Laser Vision 2:1 08-09-99 ex-date 08-10 ADIC - Adv Digital 2:1 08-11-99 ex-date 08-12 EXDS - Exodus Comms 2:1 08-12-99 ex-date 08-13 ENE - Enron 2:1 08-13-99 ex-date 08-16 XETA - Xeta Corp 2:1 08-13-99 ex-date 08-16 ADVS - Advent Software 3:2 08-16-99 ex-date 08-17 LGTO - Legato 2:1 08-16-99 ex-date 08-17 PMA - PMI Group 3:2 08-16-99 ex-date 08-17 TXN - Texas Instrument2:1 08-16-99 ex-date 08-17 RFMD - RF Micro 2:1 08-19-99 ex-date 08-20 VRIO - Verio 2:1 08-20-99 ex-date 08-23 VERT - Vertical Net 2:1 08-20-99 ex-date 08-23 CLX - Clorox 2:1 08-23-99 ex-date 08-24 NXLK - Nextlink Comm 2:1 08-27-99 ex-date 08-30 AMZN - Amazon.com 2:1 09-01-99 ex-date 09-02 TYC - Tyco 2:1 10-21-99 ex-date 10-22 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. SPECIAL SHORT TERM SPLIT PLAYS ******************************* We always recommend selling the day of the actual split or earlier. Profit taking will drive down the price on an average of 7 of 10 splitters immediately after the split. They may come back in a week or two but why risk it ! **** JDSU - JDS Uniphase Corp. $157.06 (-15.19) Splits 2:1 on 08/04 See details in sector list Chart = http://quote.yahoo.com/q?s=jdsu&d=3m ***** EXDS - Exodus Communications $138.50 (+0.50) Splits 2:1 on 08/12 See details in sector list Chart = http://quote.yahoo.com/q?s=EXDS&d=3m ***** LGTO - Legato Systems $80.75 (-0.13) Splits 2:1 on 08/16 See details in sector list Chart = http://quote.yahoo.com/q?s=LGTO&d=3m ***** VRIO - Verio Inc $81.63 (-0.75)(+7.63)(+7.94) Splits 2:1 on 08/20 See details in sector list Chart = http://quote.yahoo.com/q?s=VRIO&d=3m THE PLAYS OF THE DAY - *********************** With all the great plays each week we can never decide on just one so take your pick. **** Call play of the day: JDSU - JDS Uniphase Corp. $157.06 (-15.19) Offering us a great entry point to catch the split run See details in sector list Chart = http://quote.yahoo.com/q?s=jdsu&d=3m ****** Put play of the day: MWD - Morgan Stanley Dean Witter $93.50 (-6.44) Broken through major support and heading south See details in sector list Chart = http://quote.yahoo.com/q?s=mwd&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 7-25-99 Sunday Part 3 of 6 CALL PLAYS ********** Hardware ********* DELL - Dell Computer $41.00 (-2.25)(+0.44)(+5.68)(+0.19) The one, the only, the amazing. . . Dell! Dell is the direct sales model leader and pioneer of the on-line retail business. They sell PC's notebooks, servers and work stations built to order direct from their factories worldwide. Eager buyers pony-up 18 million e-$$$ daily for their products. Total annual sales for the trailing 12 months were $18.2 bln., excluding their recent foray into direct selling of other manufacturers' software and support products from their gigabuys.com web site. For 1999, Dell expects total revenues of $26 bln. Like a phoenix on the desert, Dell has kept on performing no matter how many feathers the analysts try to pluck from it. Investors were concerned that that the sub-$1000 category was going to eat Dell alive. Not so. As early as June 9, International Data Corporation announced that they expected worldwide PC shipments to grow by over 21% this year instead of the previously forecast 16.5%. Then analysts squealed about the falling ASP's, or average selling prices. That Dell's least expensive model is $899 compared to competitors in the $300-$500 range doesn't hold water since over 90% of Dell's customers are businesses. A comment from Michael Dell stating "the company earned 55 percent of the PC industry's total profit in the first quarter and that its profit share may increase in the second quarter" points to the direction of the future. Not many noticed that either. Those following the play know that we have been waiting for an entry point on DELL. We added some options to play in Thursday's letter and noted that it was probably safe for the bigger risk takers to nibble. Some of us around here did, while others of us are still waiting for that dip into the technical support range of $37-$38. DELL's next earnings report isn't until August 17 (they moved it up 1 day), leaving us time to wait for a better entry. Though DELL was up Friday, volume was only two thirds of normal, indicating no mad rush to get on the train. It was more likely a coattail ride on Gateway's favorable earnings report. There is some resistance at $40 and $45 thanks to open interest of 54,500 contracts and 62,000, respectively, suggesting that investors believe DELL is going to close in that range by option expiration date, August 20 (3 days after earnings). We think $45 is more likely since investors are not about to let the DELL specialist walk home with 62,000 contracts worth of premiums in his front pocket. Veteran readers, please forgive the repeat, but Dell held their shareholders meeting 2 weeks ago, wherein Michael Dell predicted that 1 of the current top 5 computer makers would be forced out of business, according to a Reuter's report. That's a bold reference, even for Michael Dell. In the same report, Dell further commented, "There are NOT (emphasis, ours), we believe, dramatic, fundamental changes going on in the industry. Prices have declined at fairly predictable levels similar to trends in other industries, and in this kind of environment the superior business model thrives and those without it flounder." On a chart, Dell showed Compaq's cost structure as "about double" that of Dell's. Can you guess which of the 5 might have been referring to? Sure, we knew you could. But that doesn't mean load up the truck on DELL, or short CPQ. That's a long-term trend and not conducive to options trading. BUY CALL AUG-35*DLQ-HG OI=12615 at $6.75 SL=5.00 recommended BUY CALL AUG-40 DLQ-HH OI=54500 at $2.88 SL=1.50 BUY CALL AUG-45 DLQ-HI OI=62081 at $0.88 SL=0.00 faithful only! BUY CALL SEP-40 DLQ-IH OI= 1122 at $4.00 SL=2.50 BUY CALL SEP-45 DLQ-II OI= 2320 at $1.75 SL=0.75 Picked on July 22 at $39.63 PE = 72 Change since picked +1.37 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 NETWORKING ********** EDS - Electronic Data Systems Corp $64.50 (-2.50) EDS specializes in systems consulting. They offer corporate outsourcing, data center management, online consulting, and reengineering for businesses. They were founded by Ross Perot who is head of rival Perot Systems. EDS provides management consulting services through a subsidiary, A. T. Kearney, which General Motors spun off in 1996. Approximately 25% of its sales still come from contracts with GM and affiliates EDS had been consolidating, however, it appears to be on the move again. Profit taking set in on July 16th, after EDS hit a new 52 week high at $67.38. EDS fell to a low of $61.00 on Thursday. Volume on the decline has been low, averaging just over 1.4 mln. shares per day. The computer software index regained a bit strength during Friday's session. EDS regained a bunch, closing $3.06 higher for the day. The volume supporting Friday's advance was an impressive 2.46 mln. shares. EDS is schedule to release earnings July 29th. It appears as though EDS will continue higher into its earnings announcement, as investors didn't seem to be bothered by the action in the broader markets on Friday. If you are in this play keep your stops close. If you are considering entering a new play on EDS, remember earnings are due out this Thursday. Confirm stock and market direction before initiating a new position in EDS. As was mentioned earlier EDS signed a contract with Telecom New Zealand last week to supply all of Telecom's IT services. It was a 10 year $800 million deal. Wednesday EDS and Microsoft launched an alliance aimed at offering a more comprehensive computer network services to businesses and organizations. BUY CALL AUG-60*EDS-HL OI=490 at $5.75 SL=3.75 ITM 4.50, low prem BUY CALL AUG-65 EDS-HM OI=355 at $2.44 SL=1.50 BUY CALL SEP-60 EDS-IL OI=841 at $6.50 SL=4.75 BUY CALL SEP-65 EDS-IM OI=727 at $3.38 SL=1.75 Picked on July 20th at $64.00 PE = 59 Change since picked +.50 52 week high=$67.38 Analysts’ ratings 6-7-8-0-0 52 week low =$30.44 Last earnings 3/99 est 0.36 actual 0.36 surprise=0% Next earnings 7-29 est 0.43 versus 0.49 Average daily volume 1.62 mln. Chart = http://quote.yahoo.com/q?s=eds&d=3m SOFTWARE ******** LGTO - Legato Systems $80.75 (-0.13) Legato Systems is in the business of developing, marketing and supporting network storage management software products. The company's NetWorker software centralizes storage management services for a wide variety of clients, including servers and desktop computers. Legato's Global Enterprise Management of Storage, which works with NetWorker, controls storage management across a company's multisite network. Legato provides training and consulting services while earning revenue from initial license fees and ongoing royalties. We are adding LGTO as a play after the company announced a 2:1 stock split with their earnings on Wednesday. The split will be effective on Aug 16. This event should add even more the LGTO’s already booming stock price. If you were to look only at a chart of Legato you wouldn’t realize we are having such a broad market sell-off. The stock hasn’t missed a beat in its upward journey since the April. This of course should be a concern since we don’t want to open new plays near the top but there are other dynamics which should keep LGTO rolling. First they beat estimates by a healthy .04 cents with their earnings report on Wednesday. It appeared that all signs were good with their business model and growth prospects. Next the stock has a relatively low float for being a well-known, up-and-coming company at only 31 million shares. For investors that want to be bullish in this market there aren’t a lot of choices. LGTO’s stock split will draw a lot of attention and supply and demand should take over from there. We do want to emphasize that no company can stay immune forever to the recent selling we’ve seen in the NASDAQ so use your stops if you are going to open a play. On Thursday BancBoston Robertson Stephens analyst Mark Fernandes reiterated his strong buy rating on the stock. He cited revenue growth of 20% over last quarter (not last year) and earnings which exceeded estimates. In his opinion LGTO is still valued lower than its competitors and has better growth prospects over the next 4 to 6 quarters. This was probably more gloating than anything by this analyst for having a strong buy rating on a stock that has doubled in 3 months but it should keep investors buying so we’ll take it. BUY CALL AUG-75*EQN-HO OI=1087 at $8.63 SL=6.50 ITM BUY CALL AUG-80 EQN-HP OI= 258 at $5.75 SL=4.00 BUY CALL SEP-80 EQN-IP OI= 129 at $8.38 SL=6.25 BUY CALL SEP-85 EQN-IQ OI= 172 at $6.25 SL=4.50 Picked on July 25 at $80.75 PE = 92 Change since picked +0.00 52 week high=$82.81 Analysts Ratings 12-4-1-0-0 52 week low =$27.50 Last earnings 7/99 est 0.25 actual 0.29 Next earnings 10-14 est 0.31 versus 0.15 Average daily volume 881 K Chart = http://quote.yahoo.com/q?s=LGTO&d=3m ***** VRTS - VERITAS Software Corp $61.00 (-0.19) VERITAS Software is the industry's leading enterprise-class application storage management software provider. They furnish storage management software for protection against data loss and file corruption, efficient file processing and networks back-up. VERITAS (Latin for "truth") has made its name by partnering with such technological heavyweights as Hewlett-Packard, Microsoft, and Sun Microsystems, all of which have licensed and embedded VERITAS products in their operating systems. Its purchase of the network and storage management software group of disk drive maker, Seagate Technology, doubled VERITAS's size and gave Seagate a 35% stake in the company. This month has been an active one for VRTS. After the bell on July 8th, the stock split 2:1 (VRTS had closed at $104.25 and opened the next day at $52). Then they announced better-than-expected earnings of .16 p/s versus First Call's estimate of .13 on July 15th. The following day (last Friday), VRTS jumped up 13% to close at $61.19. A new 52-week high was also set when it spiked to $63.44 during the last minutes of trading. In this past week's market, the stock established new support in the $58-60 range. VRTS did initially suffer a drop to $57.50 on Monday, but since has made consecutive advances. Volume has been very strong all week, at times double and triple its ADV. Analyst correspondingly had their hand in the cookie jar the day after earnings (July 16th). Goldman Sachs started coverage with a "market outperform" and commented on the strong results; and especially the 70% jump in revenues. Deutsche Banc Alex Brown analyst, Chris Mortenson, also noted the company "has cemented its leadership position in the storage management software market and we believe strong growth in earnings per share and revenue is achievable going forward". CE Unterberg Towlin reiterated a "buy" rating and set a target price at $65 for VRTS; and SoundView also put in their two-cents and reiterated a "strong buy" rating. One dissenting vote came from SunTrust Equitable on July 20th. They cut the stock down from a "long-term buy" to "attractive", but offered no comments. BUY CALL AUG-55*VUQ-HK OI=402 at $7.63 SL=6.00 ITM $6, low prem BUY CALL AUG-60 VUQ-HL OI=455 at $4.50 SL=2.75 BUY CALL AUG-65 VUQ-HM OI=370 at $2.31 SL=1.25 BUY CALL SEP-60 VUQ-IL OI= 25 at $6.50 SL=4.75 BUY CALL SEP-65 VUQ-IM OI= 75 at $4.38 SL=2.75 Picked on July 25th at $61.00 PE = N/A Change since picked +0.00 52 week high=$63.44 Analysts Ratings 8-7-2-0-0 52 week low =$11.87 Last earnings 06/99 est= .13 actual= .16 Next earnings 10-16 est= .16 versus= .10 Average daily volume = 1.16 mln. Chart = http://quote.yahoo.com/q?s=VRTS&d=3m Internet ******** EXDS - Exodus Communications $138.50 (+0.50) 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. Wow, what a comeback. After starting the week with a drop of $19, the stock battled all the way back to actually finish slightly positive for the week. The stock is quickly approaching its 52 week high of $148, which when reached could be a site of resistance. We like the fact that the stock has made strong gains in the wake of a weak Internet sector last week. EXDS recently announced earnings and had revenues that increased fourfold. Along with earnings, the company announced a 2:1 split effective August 12. The short time frame of this split bodes well for the next few weeks. With such strong gains the last four days, the stock could see some mild profit taking, but we would view this as a buying opportunity. On Thursday, along with a reiteration of "buy" from Banc Boston, Goldman Sachs raised their price target on the stock by 41% to $190 and its sales estimate by 26% to $214.5 million. Like we mentioned in Thursday's write up, EXDS achieved 40% sequential growth for the 11th straight quarter. The stock has reacted to the growth though, as it is up 725 percent this year. BUY CALL AUG-135*EXF-HG OI=273 at $15.88 SL=12.25 ITM $3.50 BUY CALL AUG-140 EXF-HH OI=371 at $13.63 SL=10.50 BUY CALL AUG-145 EXF-HI OI=284 at $11.25 SL= 8.75 BUY CALL SEP-150 EXF-IJ OI= 73 at $16.63 SL=13.00 Picked on July 22nd at $132.63 PE = n/a Change since picked +5.88 52 week low =$ 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 = 2.04 mln Chart = http://quote.yahoo.com/q?s=EXDS&d=3m ***** VRIO - Verio Inc $81.63 (-0.75)(+7.63)(+7.94)(P4W +10.06) Verio is a national provider of Internet services to primarily small and medium sized business. With a huge wad of cash from a host of venture-capital firms and an IPO, Verio is buying regional and local Internet service providers (ISPs) across the US. It owns or has majority stakes in more than 35 business-oriented providers across the US. Verio is buying ISPs with a large number of dedicated accounts (business accounts with direct lines to the provider). The firm's customers include General Electric, Microsoft, Princeton University, and Ziff-Davis. Brooks Fiber Properties, a unit of MCI WorldCom, owns approximately 17% of Verio. VRIO kicked off the week with yet another new 52-week high when it peaked at $85 during intraday trading. Saloman Smith Barney also started coverage with a new "buy" rating. Analyst, Jack B Grubman cited Verio as "the leading Web hosting company on the Internet, with more than 240 mln. sites, four times the size of its nearest competitor" and sees "growth of e-commerce, business-to-business, and business-to-consumer" specifying key deals with AOL and Hiway (acquisition) as "two major coups". Their target price for VRIO is $105. Mild consolidation followed for the next few days. VRIO traded in the close proximity of its 10 dma ($79) in a tight range primarily between $79 and $80. Then Bang! Late Thursday evening the Board of Directors announced a 2:1 stock split to be paid on or about August 20th. This is the first time VRIO has ever split. After the pay out, they will have 75.4 mln. shares outstanding. VRIO gained another $2.63 and traded as high as $82 on the news. Volume was only about 60% of the norm. This may cause VRIO to pick up its momentum once again; however, play smart. Look for entry points and confirm direction. **Please be careful. Zack's has Monday, 7/26 as earnings while First Call has Friday 7/30 as VRIO's earnings date. This definitely increases the RISK factor here. Don't hold over earnings. You can always pick it back up ahead of the split. BUY CALL AUG-75*RLQ-HO OI=496 at $9.50 SL=7.25 ITM $6.63 BUY CALL AUG-80 RLQ-HP OI=716 at $6.25 SL=4.50 BUY CALL AUG-85*RLQ-HQ OI=287 at $3.75 SL=2.25 aggressive BUY CALL SEP-80 RLQ-IP OI= 0 at $9.25 SL=7.00 wait for OI BUY CALL SEP-85 RLQ-IQ OI= 21 at $6.75 SL=5.00 Picked on June 27 at $62.68 PE = N/A Change since picked +18.95 52 week high=$83.50 Analysts Ratings 6-2-1-0-0 52 week low =$13.00 Last earnings 03/99 est= -1.31 actual= -1.24 surprise=5.34% Next earnings 07-30 est= -1.30 versus= -1.33 Average daily volume = 658 K Chart = http://quote.yahoo.com/q?s=VRIO&d=3m Semiconductors ************** JDSU - JDS Uniphase Corp. $157.06 (-15.19) Uniphase is most widely known for their fiber-optic telecommunications equipment, which accounts for about 60% of their sales. They also make laser subsystems, and laser-based semiconductor wafer inspection and analysis equipment. You will find their products in a number of different fields from bar code scanning to biotech to the printing industry. The new name of the company "JDS Uniphase" came out a merger in early July between JDS Fitel and Uniphase. On July 18th the board of directors approved a 2:1 stock split for early August. We are looking for JDSU to make a split run into that time. The analysts seem to approve of the recent merger as well with four different brokers reiterating or upgrading JDSU. 10 days ago JDSU released "pro forma" earnings for the 4th quarter of $0.40 to $0.41 per share. For those chart grinders out there, go back and look at the old UNPH chart. Notice how it bounces off its 50 dma almost like clockwork. Now the symbol has changed but the pattern should still work. Guess where the 50 dma should be? Pretty darn close to where JDSU closed on Friday. We look at it this way. With a 2:1 split occurring on August 4th, the bounce off this support level should almost be guaranteed. Which of course makes us skeptical. Don't jump in until you confirm the bounce up first. According to Reuters, JDSU is "rumored to be eyeing the acquisition of the fiber-optic division of Nortel Networks Inc." ! Caution. There is some mix up over JDSU's earnings date. We were unable to confirm with the company but First Call has Monday, July 26th. Zack's has August 5th. Conservative players should wait until Tuesday before starting any new plays to avoid any risk of an announcement Monday. BUY CALL AUG-155 UNQ-HK OI= 84 at $11.25 SL=$ 9.25 BUY CALL AUG-160 UNQ-HL OI= 95 at $ 8.63 SL=$ 7.00 BUY CALL AUG-165*UNQ-HM OI= 162 at $ 6.88 SL=$ 5.25 we're brave! BUY CALL SEP-160 UNQ-IL OI=1077 at $13.25 SL=$11.00 (the 150s would be a good play too, just a lot of money) Picked on July 24th at $157.06 PE = 160 Change since picked $ 0.00 52 week high=$177.44 Analysts’ ratings 8-9-1-0-0 52 week low =$ 31.25 Last earnings 3/99 est 0.32 actual 0.36 surprise=+12.5% Next earnings 8-05 est 0.41 versus 0.26 Average daily volume = 880k. Chart = http://quote.yahoo.com/q?s=jdsu&d=3m FINANCIAL ********* CMB - Chase Manhattan Corp $81.56 (-0.25) 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 bln. 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. Friday turned our signal lights to yellow on CMB. The stock still has good intrinsic value with a target of $107.00, based on the recent earnings as described; however, the Fed chairman's comments, and the bond markets continue to impede our direction. We experienced a downward trend all day Friday, until the last hour, when buyers stepped in anticipating a Monday bounce. We now have support at our 50 dma at $79.45. A look at the charts show GE has dropped below its 10 and 20 dma. This, coupled with so many market indicators hinting that our top may be at hand, forces us to use extreme caution before making any new play. We are keeping CMB on our recommendation list because a good bounce could occur with a positive market, and the built in value that the company is ready to show. BUY CALL AUG-75 CMB-HO OI= 430 at $7.88 SL=6.25 BUY CALL AUG-80*CMB-HP OI=6727 at $4.25 SL=2.50 BUY CALL AUG-85 CMB-HQ OI=1946 at $1.69 SL= .75 BUY CALL SEP-80 CMB-IP OI=3279 at $6.00 SL=4.25 BUY CALL SEP-85 CMB-IQ OI=3665 at $3.25 SL=1.50 Picked on July 22nd at $83.31 PE = 16 Change since picked -$ 1.75 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 1.32 versus .82 Average daily volume = 3.07 mln. Chart = http://quote.yahoo.com/q?s=CMB&d=3m Biotechnology/Medical ********************* BGEN - Biogen, Inc $70.13 (-1.50)(+6.75) This biopharmaceutical company develops, manufactures, and markets drugs for humans. Biogen's main drug is Avonex, an interferon beta used to slow the progression of multiple sclerosis. The biotech sector is one of the few sectors where positive earnings surprises are actually driving stock prices higher. BGEN was one of the earlier stocks in this group to report, and on July 8th it beat analysts' estimates of $.32 by $.02/share (before charges). Sales of its multiple sclerosis drug, Avonex, rose 67% over last year's Q2 sales. The company also said that it is "proceeding aggressively with phase III trials of its psoriasis drug, Amevive, and human trials have begun on Antove, which is primarily for the treatment of Lupus. Additional upside earnings surprises came from Amgen and Genentech, and investors have responded by sending the biotechs to new highs. BGEN has given us the opportunity to ride the biotech wave. The momentum has been quite strong, up until the last two days. We attribute a majority of the profit taking to the market. Cautious investors have chosen to guard their profits, and get out with the announcement of Mr. Greenspan's caution signals. One of the analysts also downgraded BGEN to outperform. Despite this BGEN still held above its support at the 10 dma, reinforcing the opportunity of a strong rebound. Friday, BGEN did close a bit higher than the days low, and the stock is resting nicely on its 10 dma. BGEN has used this 10 dma several times before, and the more BGEN uses this benchmark, the stronger it becomes. We expect a bounce from here sometime Monday. This should provide us with a nice profit on the way up. Use caution however, if we don't get a bounce, and head lower, it will be time to look to something else. BUY CALL AUG-65*BGQ-HM OI=359 at $6.88 SL=5.25 ITM $5 BUY CALL AUG-70 BGQ-HN OI=484 at $4.00 SL=2.50 ATM BUY CALL AUG-75 BGQ-HO OI=446 at $1.94 SL=1.00 BUY CALL SEP-75 BGQ-IO OI=124 at $3.50 SL=1.75 Picked on July 20th at $73.94 PE = 67 Change since picked -$3.82 52 week low =$20.88 Analysts Ratings 11-11-5-0-0 52 week high=$76.63 Last earnings 06/99 est .32 actual .34 surprise=6% Next earnings 10-04 est .36 versus .25 Average daily volume = 1.59 mln. Chart = http://quote.yahoo.com/q?s=BGEN&d=3m ***** VISX - VISX Inc. $101.75 (+7.50) Their Technology is distributed and installed in 45 countries. VISX designs and develops technology to recontour the surface of the cornea of the eye. VISX markets the FDA-approved system through 20 distributors worldwide. VISX technology enables ophthalmologists to treat conditions from nearsightedness and astigmatism to pathological vision disorders. VISX has had another good week. Probably one of the most encouraging things we saw this week for VISX, was that the overall weakness displayed in the broader markets didn't really seem to have an effect on the price of VISX stock. Yes it did fall to a low of $92.13 on Thursday. It came roaring back with strong volume on Friday making a new 52 week high of $102.31. VISX closed at $101.75 up $7.50 for the week. This is a breakout of a recent $6 range. We would be prepared for a slight pullback, however overall the direction and trend is up. If you are in this play we remind you to keep your stops close. If you are considering a new play on VISX, confirm market direction and stock volume. As we said before, we believe VISX will continue higher, but remember it has climbed over $22.68 since the first of July. Pick your entry points carefully. Nothing new in the news. BUY CALL AUG- 95*VFS-HS OI=1817 at $ 9.88 SL=7.50 BUY CALL AUG-100 VFS-HT OI=1003 at $ 7.00 SL=5.25 BUY CALL AUG-105 VFS-HA OI= 472 at $ 4.50 SL=2.75 BUY CALL SEP-105 VFS-IT OI= 242 at $11.13 SL=8.75 Picked on July 20th at $97.00 PE = 192 Change since picked +4.75 52 week high=$102.31 Analysts’ ratings 4-3-2-0-0 52 week low =$ 10.50 Last earnings 7-14 est 0.29 actual 0.32 surprise=10% Next earnings 10-14 est 0.32 versus 0.16 Average daily volume 1.64 mln. Chart = http://quote.yahoo.com/q?s=visx&d=3m Telecom/Communications/Networking ********************************* CMVT - Comverse Technology Inc $72.38 (-9.00)(+4.25) Comverse is the world's leading supplier of enhanced services platforms to wireless and wireline network operators. For instance, their AudioDisk and Ultra lines are communication monitoring systems used by police, emergency 911, and even financial institutions. They are also the 3rd largest firm in the voice-mail market, only behind Lucent and Northern Telecom. We know it looks ugly. Considering that the Nasdaq fell almost 200 points this week, CMVT was bound to hit some profit taking. After setting its latest 52-week high the previous Friday at $82.38, CMVT fell back to its first lines of defenses - the 10 dma ($78) and the 30 dma ($76); that is until this Friday. On that day, the stock slipped down to its 50 dma ($73). Now this may not be all bad. CMVT has a history of not only bouncing off its 30 dma and but an even better history of bouncing off its 50 dma. Take a look a 6-month or 1-year chart for visual confirmation. This mark may serve as an excellent entry point. But we CAUTION. This is a RISKY play - there are no guarantees. If the broader market continues to crumble, the stock will suffer. Specifically, CMVT will follow the Nasdaq. Overall, trading volume has been heavy for CMVT this week. So you'll want to look for upward direction with continued strength in the volume before you start a new position. Besides the recent positive remarks from analysts, we originally added CMVT to our call list when it jumped out of its relative support of $77 and $79 on company news. On July 15th, Comverse announced their subsidiary, Comverse Network Systems, licensed advanced voice technology for their Unified Messaging Service from the Belgian Speech Technology firm, Lernout & Hauspie Speech Products. The Text-to-Speech system allows callers to hear e-mails over the phone. Earnings are expected on August 25th. BUY CALL AUG-70 CQV-HN OI= 0 at $5.50 SL=3.75 wait for OI BUY CALL AUG-75*CQV-HO OI=136 at $2.94 SL=1.50 BUY CALL AUG-80 CQV-HP OI=401 at $1.31 SL=0.75 BUY CALL SEP-75 CQV-IO OI= 0 at $4.88 SL=3.25 wait for OI BUY CALL SEP-80 CQV-IP OI= 18 at $3.25 SL=1.75 Picked on July 18th at $81.38 PE = 40 Change since picked -9.00 52 week high=$82.38 Analysts Ratings 9-1-0-0-0 52 week low =$19.62 Last earnings 04/99 est= .44 actual= .49 surprise=9.09% Next earnings 08-25 est= .49 versus= .37 Average daily volume = 1 mln. Chart = http://quote.yahoo.com/q?s=CMVT&d=3m PLAYS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 7-25-99 Sunday 4 of 6 Telecom/Communications/Networking Continued ******************************************* CSCO - Cisco Systems $62.94 (-3.06)(-1.06)(+5.75)(+2.81 SA) Cisco builds 85% of the routers and switches that make the Internet work. They are the leading supplier of products that link local and wide area networks. The company's other products include dial-up access servers and network management software. Cisco has been on an acquisition binge (about 35 since 1993) to broaden its product line. It also derives revenue by licensing products as it seeks to widen the influence of its Cisco Internetwork Operating System (Cisco IOS) software, in hopes of making it an industry standard. Strategic relationships with the industry's biggest players (including Alcatel, Microsoft, Qwest, and U S WEST) are boosting Cisco's influence on the networking industry. At first glance, the immediate timeframe technical chart is looking pretty sad. CSCO yo-yo'd a bit, but drifted down for the week, still consolidating earlier gains and unable to escape general market weakness. As we've noted in past write-ups, earnings runs typically begin 1-2 weeks prior to earnings announcement, which in CSCO's case is August 10. We're about there. Couple this with a chart pattern that shows good reversals following dips below its 30-DMA, and we have the makings of a nice up-trend into earnings, market willing. The only real resistance is up at $69. Just for good measure, CSCO moved up $1.81 Friday on volume that was about 5% over average. On a typically slow Friday where the market finished down, that was a good sign. Confirm market direction before starting a new play. For the assumption of a bit more risk, you can get a better price buying intra-day dips. News was sparse this week. BUY CALL AUG-60*CYQ-HL OI= 8275 at $5.00 SL=3.25 ITM BUY CALL AUG-65 CYQ-HM OI=22067 at $2.06 SL=1.00 BUY CALL AUG-70 CYQ-HN OI=29706 at $0.88 SL=0.00 BUY CALL SEP-65 CYQ-IM OI= 1570 at $3.63 SL=2.00 new BUY CALL SEP-70 CYQ-IN OI= 931 at $1.81 SL=0.75 new Picked on June 29th at $62.50 PE = 105 Change since picked +0.44 52 week low =$20.56 Analysts Ratings 19-12-0-0-1 52 week high=$69.25 Last earnings 05/99 est 0.37 actual 0.38 surprise = 2.7% Next earnings 08-10 est 0.40 versus 0.32 Average daily volume =15.15 mln. Chart = http://quote.yahoo.com/q?s=CSCO&d=3m ***** QCOM - Qualcomm $154.69 (-3.56)(+9.50)(+6.50)(P3W +35.50) Qualcomm is the inventor of CDMA technology, the new industry standard for mobile communications used in cellular phones, wireless telephone system equipment, and satellite ground stations. Its OmniTRACS global positioning system is used by the trucking industry to monitor traveling truckers. In a joint venture with several companies, including Loral, QUALCOMM is developing the Globalstar system of low-orbiting satellites, which will offer telecommunications services around the world (and should smoke Iridium like a pork chop, we might add). QUALCOMM also publishes the popular Eudora e-mail software. We couldn't resist bringing it back. QCOM announced earnings of $0.75 last Monday to spank Street estimates of $0.58 by $0.17. In our book, that qualifies as a blowout. That a tech company with such high expectations only lost $3.56 after the announcement is testimony to its strength. But the real catalyst for its return to our list is four-fold. First, on a typically slow Friday when the rest of the market floundered, QCOM showed us the money (+$4.19) and the volume with 37% more than average shares traded. They bounced firmly north off their 30-DMA in the process. Second, last Tuesday, they were awarded a $400 mln contract by Sprint PCS for a new generation of Internet capable CDMA phones. Third, last Wednesday, they were formally added to the S&P 500. Fourth, from an SEC filing not un-coincidentally filed Wednesday (this one's a bit tricky), "the underwriters have agreed to purchase from QUALCOMM the common stock offered by this prospectus (6.9 mln. shares) for a purchase price of $156.50 per share, resulting in aggregate proceeds of $1,079,850,000 to QUALCOMM. . . Shares offered by this prospectus will be offered primarily to index funds whose portfolios are primarily based on stocks included in the S&P 500 Index. . .to be completed on or about July 27." Get it? Goldman Sachs and Lehman Bros. just did a de facto block trade of their own with QCOM for 6.9 mln. shares at $156.50, and they are not about to sell it for a loss to index funds who will purchase it from these 2 for their S&P 500 index funds. Can you say SUPPORT? Not only that, but QCOM may still offer up another 2:1 split like they did on April 14. Their last split was announced when the stock traded at $157. Don't hang your hat on this though, they still need shareholder approval and have yet to file a proxy with the SEC. All that said, the negative tone of the market might extract a pound of flesh anyway. Don't give up the discipline of your own research and confirm market direction before entering a play. BUY CALL AUG-150*AAW-HJ OI=2213 at $13.00 SL= 9.50 ITM $4.69 BUY CALL AUG-155 AAW-HK OI=1170 at $10.13 SL= 8.00 BUY CALL AUG-160*AAW-HL OI=3288 at $ 7.50 SL= 5.75 BUY CALL SEP-155 AAW-IK OI= 83 at $16.13 SL=12.50 BUY CALL SEP-160 AAW-IL OI= 202 at $14.00 SL=11.25 Picked on July 22 at $154.69 PE = 221 Change since picked + 0.00 52 week low =$ 18.88 Analysts Ratings 7-7-3-0-0 52 week high=$167.25 Last earnings 07/99 est 0.58 actual 0.75 surprise = 29.31% Next earnings 11-03 est 0.68 versus 0.27 Average daily volume = 3.54 mln. Chart = http://quote.yahoo.com/q?s=QCOM&d=3m **** VOD - Vodafone AirTouch $207.94 (-6.31)(+7.13)(+1.63)(P2W-7.31) Vodafone is the number one mobile communications company in the UK and recently doubled its size by purchasing AirTouch Communications. The new Vodafone AirTouch operates analog and digital cellular networks, along with paging and mobile data services. The company serves 29 million customers in 23 countries. VOD's major competitors are British Telecom, AT&T and Cable & Wireless. Good news and bad news on VOD this week. Bad news is that the stock still hasn't been able to break resistance at $214. Good news is that the stock has given us another entry point. The stock is forming a perfect ascending triangle. This is when the highs remain around the same level and the lows keep getting higher and higher. This usually precedes a strong breakout to the upside. We are waiting to hear from VOD about its annual meeting and whether the 4:1 split was approved. When we hear back from VOD's investor relations, we will pass on the news. We see any intraday dip as a buying opportunity, with the stock likely bouncing off the $205 level. VOD's Airtouch division announced its first US satellite distributors. These companies will supply Globalstar service to a wide variety of customers across the US. The Globalstar system provides high quality, affordable mobile satellite voice and short message services via a small hand-held phone. BUY CALL AUG-200 VOD-HT OI= 436 at $12.88 SL=10.00 ITM $7.94 BUY CALL AUG-210*VOD-HB OI=3612 at $ 7.00 SL= 5.50 BUY CALL SEP-210 VOD-IB OI= 222 at $11.63 SL= 9.00 BUY CALL SEP-220 VOD-ID OI= 299 at $ 7.25 SL= 5.50 Picked on June 26th at $204.75 PE = 80 Change since picked +3.19 52 week low =$ 94.00 Analysts Ratings 3-4-1-0-0 52 week high=$216.44 Last earnings 04/99 est ? actual ? Next earnings ? est 1.56 versus ? Average daily volume = 1.20 mln Chart = http://quote.yahoo.com/q?s=VOD&d=3m Retail ******* HD - Home Depot $64.63 (-5.18)(+3.81) Toys R Us for Men. Every new Home Depot contains over 130,000 square feet of tool, hardware, construction material and gardening heaven in a discount warehouse environment. With over 800 stores across the U.S. and Canada, HD is the largest home improvement chain in the country offering discount prices with a helpful, generally knowledgeable staff that prides itself on good service. What the chart giveth, the chart taketh away. The market really beat up HD last week, and Friday's gain of $0.63 eked out on about half its normal volume isn't a big confidence builder, though it's normal for a Friday. Technically, the indicators are still pointing south. So here it sits just above support at $64. If it can hold this level and show us the volume, we could begin to see a run into earnings, scheduled on August 17 (company confirmed). If HD can get back up to $70, they could also announce a split then too. If not, $60 is the next support. We think it's better to play this more conservatively and wait for the market and HD volume to rise before getting back in. It's just a tad early to begin a strong earnings run. However risk tolerant souls can target shoot in anticipation. Risk adverse types still should consider this as trying to catch the falling knife. Be patient, there is still time in this market that hasn't given us a direction yet. BUY CALL AUG-60*HD-HL OI=7510 at $5.75 SL=4.00 confirm direction BUY CALL AUG-65 HD-HM OI=6815 at $2.44 SL=1.25 BUY CALL AUG-70 HD-HN OI=7716 at $0.69 SL=0.00 BUY CALL SEP-65 HD-IM OI= 234 at $3.25 SL=1.75 BUY CALL SEP-70 HD-IN OI=2754 at $1.44 SL=0.75 Picked on July 18 at $69.63 PE = 55 Change since picked -5.00 52 week low =$31.62 Analysts Ratings 6-14-6-0-0 52 week high=$69.94 Last earnings 5/99 est 0.28 actual 0.32 surprise = 14.29% Next earnings 8-17 est 0.39 versus 0.31 Average daily volume = 3.51 mln. Chart = http://quote.yahoo.com/q?s=HD&d=3m ***** WHR - Whirlpool Corp. $75.50 (+1.75)(-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. Sear/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. Not much has changed since Thursday when we picked WHR, except the price dropped $1.31 and volume slumped - typical Friday. So why make the play? 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 had been rising 4 days in a row until Friday. As we noted Thursday, "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." Yep. This is a pretty conservative play, but don't let your guard down. Confirm market direction before starting a new play. For the record, WHR's Hungarian subsidiary, in which they own 25%, reported earnings growth of 31% for the first 6 months this year compared to the same period last year. BUY CALL AUG-70*WHR-HN OI=652 at $7.00 SL=5.25 ITM and low prem BUY CALL AUG-75 WHR-HO OI= 53 at $4.13 SL=2.50 BUY CALL AUG-80 WHR-HP OI= 33 at $1.50 SL=0.75 BUY CALL SEP-75 WHR-IO OI=892 at $5.00 SL=3.25 BUY CALL SEP-80 WHR-IP OI= 2 at $2.81 SL=1.50 Picked on July 22 at $76.81 PE = 20 Change since picked -1.31 52 week low =$40.94 Analysts Ratings 10-9-12-0-0 52 week high=$76.88 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 MISCELLANEOUS ************* GE - General Electric $115.19 (-3.69) GE might not call itself a conglomerate, but it is. Its 14 divisions make airplane engines, appliances, lighting, medical systems, plastics, power systems, and also include NBC, financial services, and electrical distribution and control. It is one of the largest and most diversified industrial corporations in the world. As a major conglomerate, many traders see GE as a proxy for the market in general. However, looking at how the Dow and the S&P 500 both reacted to Greenspan's comments, GE faired pretty well. The stock has dipped below the 10 dma but appears to be holding at $115 where it has found mild support. The current trend does look down, but late day buying action on Friday makes us suspect that the profit taking may be over. With over 3.2 bln shares outstanding, to come in $0.01 over estimates is a significant feat. With the world economy in recovery mode GE is primed to reap the benefits with its hands in some many industries. Watch the market on Monday morning for clues to GE's direction for next week. Not a lot of news on GE, just a great stock waiting for market direction. Friday provided us with a strong end of the day bounce on good volume. Mild support of GE is now set at $115. We are holding GE because it appears to be consolidating for another run, market permitting. Be very cautious however. If the trend turns south, below $115, we will want to find a new ride. BUY CALL AUG-110*GE-HB OI=2430 at $6.88 SL=5.25 BUY CALL AUG-115 GE-HC OI=4799 at $3.50 SL=1.75 BUY CALL AUG-120 GE-HD OI=3975 at $1.25 SL=0.00 BUY CALL SEP-115 GE-IC OI=4239 at $5.25 SL=3.25 BUY CALL SEP-120 GE-ID OI=3934 at $2.63 SL=1.25 Picked on July 1st at $118.88 PE = 38 Change since picked $ -3.69 52 week low =$ 69.00 Analysts Ratings 7-11-2-0-0 52 week high=$120.00 Last earnings 06/99 est .84 actual .85 surprise=01% Next earnings 10-04 est .79 versus .69 Average daily volume = 5.00 mln. Chart = http://quote.yahoo.com/q?s=GE&d=3m PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. Recommended Puts **************** AHP - American Home Products $51.56 (-1.81) One of the major pharmaceutical and health care companies, American Home Products develops, manufactures, and markets prescription and over-the-counter drugs, vaccines, and consumer products. They include such familiar names as Advil, Centrum vitamins, Chapstick, and Robitussin. AHP also makes agricultural and animal care products When J&J and SmithKline Beecham reported good earnings for the quarter, AHP reported only $.30/ versus $.39/share in the year ago period, a 30% drop in earnings, or 23% drop in diluted earnings/share. Estimates had been $.41/share, but they were lowered when the company issued an earnings warning June 1st, due to poor sales of agricultural products. Then the bad news got worse. Rotashield, a rotavirus vaccine given to infants, was causing serious intestinal problems. A big $.04 per share went toward the cost of suspending sales of Rotashield. The vaccine had been expected to produce revenues of $102 mln., not a huge amount for such a large company. But the worst part of the vaccine news is that it is only the latest in a series of drugs that the company has been forced to withdraw from the market in the last couple of years. These include: obesity drugs Pondimin and Redux, hypertension drug Verdia, and pain killer Duract. It raises safety questions about the drugs in AHP's pipeline. Also in the quarter, although drug sales rose 8%, and consumer sales climbed 10%, agricultural products fell 29%. Furthermore, the company said it was hurt by an unfavorable foreign exchange. On July 16th, AG Edwards downgraded AHP from "buy" to "maintain position". Indicators continue to point towards a down trend with AHP. This stock is quite fundamentally overvalued. Based on earnings and growth, the company has an intrinsic value of $31.50. Based on the fact that stock price and value will eventually converge, we have a good reason to continue down. We received another confirmation of a put play as we bounced off our resistance of $52.80 on Wednesday. The stock was generally down on Friday, which was greatly helped by the negative market. There was a slight rebound late in the day, although it was anything but convincing. A candlestick chart reveals topside trails, indicating that the bulls couldn't hold their own, and pressure still points to the downside. News for AHP isn't rosy either. Wyeth-Ayerst Labs ordered shipments of RotaShield stopped until further research can be done. Confirming a real problem with the product. This continues to be an attractive put play, especially as market conditions continue to confirm we may be at the top. The late day pop on Friday may carry over into Monday, so confirm a negative stock before starting any new plays. BUY PUT AUG-50*AHP-TJ OI=2878 at $1.25 SL= .75 BUY PUT AUG-55 AHP-TK OI= 741 at $4.63 SL=3.25 Average daily volume = 2.72 mln. Chart = http://quote.yahoo.com/q?s=AHP&d=3m **** AOL - America Online $107.94 (-12.06) 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. Another day, another drop. That normally wouldn’t sound right for AOL but after 4 down days this week, it seems to fit. It all stems from this new dynamic where beating estimates are no longer good enough. In fact, hitting the whisper number is apparently not even good enough since AOL hit their whisper by earning 0.13 cents per share and still dropped. The overall bearish sentiment appears to be the catalyst right now and Internets have become the enemy. The NASDAQ suffered its greatest one-week loss this past week. So whether you like AOL as a company is irrelevant, this is a game of momentum. That is one reason why we are playing AOL as put. Plus with their earnings report they mentioned softness in Europe as a potential problem. It's this kind of cloudy future outlook that will bring down a P.E. of 147 in a hurry. The technical picture also looks bad but after the losses incurred this week we are getting closer to support at $100. AOL should bounce from there but the question is will it hold? It may be a temporary bounce before heading lower. We offer this to help you in planning and executing your trades. Keep in tune to the market sentiment as any change will signal a quick end to our play. BUY PUT AUG-115*AOO-TC OI= 8207 at $10.88 SL=8.75 higher delta BUY PUT AUG-110 AOO-TB OI=13154 at $ 7.63 SL=5.75 BUY PUT AUG-105 AOO-TA OI= 8569 at $ 4.88 SL=3.25 Average Daily Volume = 12.75 mln Chart = http://quote.yahoo.com/q?s=AOL&d=3m **** CMGI - CMG Information Services $97.19 (-12.13) Formerly a marketing data base conglomerator, CMGI now has the appearance of an Internet incubator/venture fund. They own a big chunk of Lycos, Yahoo! (thanks to YHOO's purchase of GeoCities), a 10% stake in Hollywood Video from HLYW's purchase of Reel.com, and the recently acquired Alta-Vista search engine. Recently they IPO'd another company, Engage Technology (ENGA), in which they still own 82%. Not much good news to find around this previous high-flyer. Current support is around $88, earnings season (which typically props up a market) is winding down, and CMGI won't report again until September. Last week CMGI found a bit of support at its current price, perhaps thanks to Tuesday's IPO debut of Engage Technology (ENGA), a DCLK competitor in which they own 82%, but even ENGA has fallen substantially back from its opening price. Again, too much supply, not enough demand. As of Friday, CMGI has filed to take another of their upstarts public. This one, NaviSite is engaged in Web-hosting services. This may provide a bit more support in the short-term, but isn't likely to hold too long, given the sentiment in the industry. Suffice it to say the bloom is still off the rose. Nonetheless, since last week's move down came without much conviction (except Monday), you will want to carefully plan your entry by confirming downward movement, perhaps even waiting until Tuesday following EBAY's earnings on Monday. More bad news, which we will likely see from EBAY, could rub off on all the sector players, much like a skunk rubs off on the rest of a meadow. Internet = high risk! BUY PUT AUG-100*GCB-TT OI=2516 at $8.50 SL=6.50 BUY PUT AUG- 95 GCB-TS OI=1404 at $5.88 SL=4.00 Average daily volume = 5.77 mln. Chart = http://quote.yahoo.com/q?s=CMGI&d=3m **** DCLK - Doubleclick $83.69 (-16.44)(-2.81) Doubleclick is an Internet banner advertising agency. They provide Internet advertising services for advertisers and Web publishers worldwide. The DoubleClick Network provides fully- outsourced ad sales, delivery, and Related services to publishers of highly trafficked web sites, including AltaVista, The Dilbert Zone, Macromedia, and U.S. News Online. The DoubleClick Network focuses on meeting the advertising needs of Internet advertisers who target users on a national, international, or local basis. The company's DART Service enables Web publishers, advertisers, and ad agencies to control the targeting, delivery, measurement, and analysis of their online marketing campaigns on a real-time basis. They recently announced the stock purchase of NetGravity (NETG). Well, you know the news. . .DCLK failed to deliver any upside surprise earnings. Internets including AMZN and AOL have even disappointed. Investors are beginning to demand earnings. Technically, DCLK has no support until it gets down to $70. It already trades under its 50-dma. Its 200-dma is in the low $60 range. CMGI's IPO of Engage technology last week will also offer tough competition for DCLK (that doesn't mean to buy CMGI; see below). In short, along with DCLK's own woes, the sector is suffering too from oversupply of new issues and lack of earnings performance. With earnings season coming to an end, there just isn't anything to support the lofty multiples going forward. Greenspan fear going into August won't help. Enjoy the ride, but remember that Murphy (and his law) will act against your best interest unless you protect your downside. Even then, it's sometimes hard. Keep your stops in place. Internet = risk, even when playing a downward trend Last Monday, DCLK reported an earnings loss of $0.13, in line with estimates. Some were looking for the loss to be as small as -$0.10. BUY PUT AUG-90 QWE-TR OI= 596 at $11.25 SL=9.00 BUY PUT AUG-85 QWE-TQ OI=1090 at $ 8.13 SL=6.25 BUY PUT AUG-80*QWE-TP OI= 723 at $ 5.38 SL=3.50 Average daily volume = 3.33 mln. Chart = http://quote.yahoo.com/q?s=DCLK&d=3m **** EBAY - eBay Inc $107.81 (-15.16) 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. Previously, EBAY had peaked on June 30th at $151.38 and then began a steady spiral downwards (-43.57 to date). As the week progressed, EBAY moved closer to its 200 dma (a mark we wanted to see broken through for better confirmation) and on Thursday, we got it. That day, the Internet sector got eaten alive (Greenspan spoke!) and EBAY shed -$6.63 to close only a fraction away from its daily low. Friday the stock offered entry points as it traded as high as $112, but the more conservative Internet player may have chosen to wait and see. As we cautioned in the mid-week updates EBAY is reporting earnings on Monday July 26th, after the bell (the Internet conference call is scheduled for 5pm EDT); and this event could cause a sudden and sharp rally. First Call's estimates are for an EPS of .03 while other estimates range from .01 to .04 (some whispers are as high as .06). SO BEWARE! Remember, Internets have wider daily swings than most stocks and this makes it difficult to use stops. If you decide to begin a play please give it your undivided attention. Admist a sluggish Internet sector, site outages have plagued eBay since its 22-hour outage on June 10th and 11th. Just on Monday, eBay executives sent a long and detailed letter to its subscribers making the appropriate assurances and outlining the steps they have taken to avoid a future outage. Lo and behold, Thursday morning the site went down again; this time for an hour's worth of emergency maintenance. Yet some analysts still put out a good word for EBAY. On Tuesday, DLJ reiterated a "buy" rating and set a $300 target price. Still EBAY kept dropping and shed -$4.75. Then on Friday, Goldman Sachs reiterated a "recommend list" rating and set its 12-month target price at $200. Consider all the factors. This play does break our earnings' rule. It is EXTREMELY HIGH RISK and certainly not for everyone. BUY PUT AUG-100*QXB-TT OI=1687 at $ 5.75 SL=4.00 very aggressive BUY PUT AUG-105 QXB-TA OI= 411 at $ 7.75 SL=6.00 BUY PUT AUG-110 QXB-TB OI=1050 at $10.63 SL=8.25 Average daily volume = 3.79 mln. Chart = http://quote.yahoo.com/q?s=EBAY&d=3m **** GTW - Gateway $73.00 (+2.44) 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 are not dropping GTW just yet. You might wonder why not? One Thursday does not a trend make! We picked GTW as a "PUT" play on Thursday. Friday morning Gateway gapped up $6.13 at the open. That’s right gapped higher. Throughout the day it was +10.63 higher, closing $73.00 up $10.13 for the session. GTW announced earnings Thursday. Earnings were $0.56 compared to $0.38 for the same period a year ago. Revenues jumped 18%. Even so, beating earnings by a penny doesn't cut it these days. Technically GTW didn't look good and with the "Good News-Bad News", "Buy the rumor-Sell the News" that has been taking place this past few weeks, we felt GTW would continue its downward trend. It STILL MAY! What we are suggesting is a pullback in GTW. Remember it gapped up over $6.00. Yes the trend may change to up over the coming weeks, but a $63 stock that jumps up to $73 in one day like GTW Friday is going to get a pullback, and that's what we are looking for. If you consider a play on GTW remember, we are planning for it to be a quick in and out play. Plan you entry points carefully and keep your stops tight on this one. Other than earnings and the fact it jumped over 16% in one day, there is nothing new to report on Gateway. Fortunately, the gap up on Friday prevented anyone from getting hammered by the surprise reaction. Remember, just grab a couple of points and get out. We'll probably close this play quickly. BUY PUT AUG-70 GTW-TN OI= 518 at $3.00 SL=$1.50 BUY PUT AUG-75*GTW-TO OI= 294 at $5.25 SL=$3.25 Average daily volume 1.31 mln. Chart = http://quote.yahoo.com/q?s=gtw&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 7-25-99 Sunday 5 of 6 PUTS CONTINUED ************** SCH - Charles Schwab & Co. $46.75 (-5.69) Charles Schwab is a holding company with subsidiaries that provide financial services which include discount brokerage, trade execution, investment, advisory services, and administrative services. One subsidiary performs clearing and account maintenance and another is a market maker in Nasdaq securities. Schwab is the largest discount brokerage in the U.S., and operates 235 branch offices in 46 states, Puerto Rico, and the U.K. On Feb.8th, it also entered the Canadian market through an acquisition. Schwab is cooperating nicely as a put play in a market and sector that continues to get battered. We added SCH as a play on Tuesday and got good entry points on both Wednesday and Thursday. The stock began to dip again on Friday as the online brokers were the worst sector for the day. This is an honor they have received quite often during the past two weeks. The reason for the rise on Thursday was a press release about Schwab partnering with long time rival Fidelity Investments and DLJ to form a new ECN. An ECN is an electronic market maker to match orders from the firms which some analysts speculate is 20% of the overall markets. Although it is interesting to see Schwab and Fidelity team up after years of direct competition, it is not enough to generate sustained buying interest in the stock. Technically, we still see SCH testing support at $40. This is dependent on the market continuing it’s bearish tone so choose your entry points with that in mind. Any reversal in sentiment should be a signal not to open new plays. BUY PUT AUG-50*SCH-TJ OI=1840 at $4.88 SL=3.25 BUY PUT AUG-45 SCH-TI OI=2297 at $2.00 SL=1.00 Average Daily Volume = 3.51 mln Chart = http://quote.yahoo.com/q?s=SCH&d=3m **** U - USAir Group Inc. $38.19 (-2.00)(-4.81) As one of the top 10 airlines in the U.S., US Airways Group is the holding company for US Airways, Inc., Shuttle, Inc., Allegheny Airlines, Inc., Piedmont Airlines, Inc., and PSA Airlines, Inc. As a certified air carrier, they are engaged primarily in the business of transporting passengers, mail, and property. USAir is still trying to emerge from a rough decade which has included low-fare competition, labor disputes, and early retirement by more than 300 pilots. Currently one of their more popular routes comes from Shuttle, Inc. which operates the US Airways Shuttle between New York and Washington. It looks like there is no end in site to the troubles that plague the nation’s sixth largest airline. The stock dropped again this week as earnings were announced with no big surprises. They earned $1.38 a share, which is right in line with what they pre-announced a month ago. Their bad fortune comes at a time when most other airlines are prospering. Many of the other major airlines reported stronger than expected earnings this week and saw there stock prices rise. To make matters worse, oil prices continue to rise. Has any one else noticed the price for a gallon of gas this week? This relatively new development is the last thing USAir needs right now as they are already struggling to right the ship (or plane as it were). From labor problems to lower revenue, U’s forecast is bleak. Some analysts expect to see the stock in the upper $20s before too long. While that seems a little overdone, we do expect the stock to drift lower for awhile. The beauty of this play is the low premiums which put more of the profits in your pocket instead of eroding into space. On U’s behalf, there is an end in site to this decline but if you have your stops in place, you will be taken out of the play and preserve your profits. BUY PUT AUG-45*U-TI OI=820 at $7.38 SL=5.75 higher delta BUY PUT AUG-40 U-TH OI=647 at $2.94 SL=1.50 Average Daily Volume = 859 K Chart = http://quote.yahoo.com/q?s=U&d=3m *** CA - Computer Associates Int. $47.56 (-8.44) CA markets over 500 software products. Their products are used with a variety desktop, midrange, and mainframe computers. Ca is #3 in the world behind Microsoft and Oracle. CA offers various information management systems and business applications solutions. Their mainstay Unicenter program gives customers centralized control over their software, hardware and networks. Four upgrades and an earnings announcement in line with the estimates, is all it took to knock the legs out from underneath CA. Monday, CA came down to touch and close right at its 30dma at $55.31. Tuesday earnings came out in line with the street at $0.34 per share. Revenues rose 17% compared to the same period the previous year. For the rest of the week CA fell like a rock, making an intraday low on Friday at $46.38. CA managed to come back to close at $47.56, down over $8.00 for the week. As has been the case so far for most of the earnings season, investors have been punishing companies for meeting or beating the street. Technically CA looks weak. MACD is coming off the ceiling and heading south. There is mild support in the $45-$46 area and we may even see a small bounce from this level. Until CA can form a base and regroup we would look for the weakness to continue. The next level of support is around its 200 dma. Volume on the recent decline has been about average at 1.8 mln. Before entering a new play on CA, as always confirm direction and volume. Not much else in the news at this time. With all the good news that came out this week for CA with the earnings and upgrades, and the drop in price, who needs more "news." BUY PUT AUG-45*CA-TI OI=1023 at $1.63 SL=$0.75 BUY PUT AUG-50 CA-TJ OI= 916 at $4.13 SL=$2.50 Average daily volume 1.85 mln. Chart = http://quote.yahoo.com/q?s=ca&d=3m **** LVLT - Level 3 Communications $58.06 (-8.94) Level 3 Communications is a communications and information services company that is building an international advanced Internet Protocol network. Level 3 offers local and long- distance plus Internet service over leased network capacity in the US and Europe. The network will be the first international communications network to use IP technology end-to-end. It also offers computer operations outsourcing and owns stakes in telecom companies such as RCN and Commonwealth Telephone. LVLT is another tech stock that has bore the brunt of the selling during this most recent correction. The stock has actually looked weak for some time as it has been setting lower-lows since the beginning of April. The market down turn has just accelerated the process. We have been waiting to see LVLT break support at $60 before adding it as a play. We finally got that result this week but now the stock has just hit its 200-dma. This might produce a bounce and give us the entry point we are looking for. The market should continue to remain weak over the near-term and we expect support at 200-dma to fail. LVLT reported 2Q results that were slightly better than expectations. They had a net loss of 0.37 cents compared to an estimate of 0.42 cents. But there were some concerns about telecom revenue. They had a court ruling go against them in Massachusetts which will end certain revenue payments from other telephone carriers. In fact, half of the total revenue for LVLT still comes from coal mining operations. That’s an odd business for a future telecom and communications giant to be involved with! But the stock looks to be in a very negative trend. It is still up 35% on the year so there is plenty of room for more profit- taking. Remember we expect a bounce before opening new plays. Conservative players should wait for it to close below its 200 dma. BUY PUT AUG-60*QHN-TL OI=1395 at $5.38 SL=3.75 BUY PUT SEP-55 QHN-UK OI-1322 at $4.50 SL=2.75 Average Daily Volume = 977 K Chart = http://quote.yahoo.com/q?s=LVLT&d=3m **** MER - Merrill Lynch & Co Inc $71.69 (-4.94) Merrill Lynch provides a variety of financial and investment services to individuals and institutions on a global basis (about 25% of its sales comes from overseas). Under pressure from industry consolidation, Merrill Lynch, once the undisputed leader in the financial world, now finds itself in a close fight for dominance with fellow retail/wholesale financial supermarket Morgan Stanley Dean Witter. Merrill Lynch has been a laggard in online services and only added Internet trading services in 1999 with its Unlimited Advantage product. The anticipation and actuality of Greenspan's formidable commentary effected the financial sector this week. Previously at the beginning of the month, MER had found comfortable support in the $77-79 range. On Monday, it slipped $2 to perched itself smack on its 200 dma near $74. As the days progressed, MER fluctuated within this range trading between $73 and $74 - the volume was only fair at 60-80% of its norm. After the much awaited remarks from Greenspan on Thursday, MER fell yet another $2.31 on Friday to close at $71.69. If the descent continues into next week, the long-term bottom resistance from May/June and even as far back as February is around $66. So there's some room for profit. Pick your entry point carefully and consider stops for protection. In the news this week, it hit the press that Merrill Lynch may be put on notice regarding a 1998 harassment case (filed by about 900 female brokers) alleging office managers reassigned departing brokers' accounts to mostly male employees. Part of the settlement was that Merrill Lynch would disclose how it distributed the above mentioned accounts by hardcopy or computer by July 1st (a date agreed upon by both parties). As of yet, the company has failed to fully comply, but states it has plans to complete the process by August 1st. BUY PUT AUG-65 MER-TM OI=2007 at $0.88 SL=0.00 Aggressive BUY PUT AUG-70*MER-TN OI=4810 at $2.25 SL=1.25 BUY PUT AUG-75 MER-TO OI=3383 at $5.13 SL=3.50 Average daily volume = 3.43 mln. Chart = http://quote.yahoo.com/q?s=MER&d=3m **** MWD - Morgan Stanley Dean Witter $93.50 (-6.44) MWD is the #2 retail broker in the US only after Merrill Lynch. The 1997 merger of Morgan Stanley and Dean Witter created an investment banking and retail brokerage powerhouse. The company is now global financial service firm with three primary business segments: securities, asset management, and credit services. Its Discover unit has been one of the leading credit card issuers. MWD has more than 430 branches in the US and some 30 more abroad. Its clients include both individuals and institutions. MWD had been maintaining a firm support of $100 and $104 since the end of June. Then at the beginning of the week, the stock started pushing through its bottom resistance of $99 (also its 10 dma). On Tuesday it broke this barrier and closed at $97.31. For the next two days, MWD closed at $96.81 [right between its 30 dma ($97) and its 50 dma ($96)]. We saw a bearish signal on Friday as MWD slipped another -$3.31 giving us further evidence of its direction. If MWD slips under its 200 dma at $86 this would be even better. Except for Thursday's trading, volume has been rather low at only 60-70% of it normal levels. The broad market decline and the negative sentiment of the brokerage sector has certainly aided in this stock's decline. With 2Q earnings in the past (June 24th), and once again rate fears lurking in the shadows on WallStreet, there's not much to hold up MWD. Now let's realize that this is by no means a guarantee! So please don't just go out and buy up all those put options. Be patient, look for an entry point, and by all means consider stops to protect your capital and profits. BUY PUT AUG-85 MWD-TQ OI= 755 at $1.50 SL=0.75 BUY PUT AUG-90 MWD-TR OI= 630 at $3.13 SL=1.50 BUY PUT AUG-95*MWD-TS OI=1531 at $5.13 SL=3.50 Average daily volume = 2.22 mln. Chart = http://quote.yahoo.com/q?s=MWD&d=3m **** SBH - SmithKline Beecham $57.00 (-7.81) They refer to themselves as "one of the world's leading healthcare companies." SmithKline Beechman develops, manufactures, and markets pharmaceuticals, vaccines, over-the-counter medicines and health-related consumer products. Some of their more notable products include Geritol vitamins, NicoDerm CQ anti- smoking patches and Aquafresh toothpaste. They manufacture prescription drugs including antidepressant Seroxat/Paxil and vaccines for diphtheria, tetanus, whooping cough, and hepatitis. SBH, another "Good News-Bad News" story. Tuesday, SmithKline Beecham announced second quarter earnings. We know you can already see it coming. Earnings were up 13% to $0.40 per share compared to $0.35 in the same period a year ago. Let the selling begin. Tuesday SBH dropped $1.62 to close at $61.38. It got worse from there. Friday closed at $57.00 down $7.81 for the week. The Drug sector has been weak lately, seemingly trying to find a bottom. Is it here? Honestly we don't know. Technically SBH looks terrible. The $60 area could have provided support for SBH. It didn't. We have a couple different scenarios setting up. SBH has fallen so far so fast, it could be due for a bounce, and consolidation. The next is that it could just keep falling as there is no real support until it hits about $48.00. We will have to let the market tell us which it will be. We would be prepared on further weakness accompanied by better than average volume to jump in. As we always suggest pick you point, and your stops prior to entering a position. Yesterday SmithKline won U.S. clearance to bring to market a Cuban vaccine designed to treat the most common form of meningitis, after more than a year of negotiations. BUY PUT AUG-55 SBU-TK OI= 180 at $1.81 SL=$1.00 BUY PUT AUG-60*SBU-TL OI=1061 at $4.88 SL=$3.25 Average daily volume = 606k. Chart = http://quote.yahoo.com/q?s=sbh&d=3m **** XRX - Xerox $49.25 (-9.81) Xerox is a global company dedicated to providing solutions that simplify your work and make you more productive. Whether you're a small business or a global enterprise, Xerox offers products and services that can help your company improve its business processes, lower costs, increase clock speed and share crucial knowledge. These products and services make it easy for you to turn paper information into digital information, and vice-versa; to view, organize and share information in the form of digital documents; to send documents on networks throughout the office or around the world; and to print, publish, and copy them onto paper. XRX recently announced earnings that came in 13 percent above last years numbers, but the company just met analyst's estimates and fell short of revenue expectations. The stock plummeted from $55 to $50 on the news and continued to drop in Friday's trading. No dead cat bounce here as the company keeps getting downgraded by analyst's along with revised earnings estimates. The company also downplayed the next few quarters earnings. We see further downgrades in the future with the result being a drop to at least the $45 level. Of course, this is all just an educated guess, but the news and chart point us in this direction. The stock closed right on its low of the day Friday, but watch for a small technical bounce intraday to get the best entry point. BUY PUT AUG-50 XRX-TJ OI=1565 at $2.13 SL=1.00 ITM $0.75 BUY PUT AUG-55*XRX-TK OI=2341 at $6.00 SL=4.50 ITM $5.75 ITM Average daily volume = 2.16 mln Chart = http://quote.yahoo.com/q?s=XRX&d=3m Combos ********** Greenspeak Dominates The Week.. Friday, July 23 Stocks fell again Friday and investors went on the defense a day after Federal Reserve Chairman Alan Greenspan vowed to act upon any signs of inflation. The Dow ended down 58 points at 10,910, a loss of almost 300 points for the week. The S&P 500 index fell 4 points to 1,356. The Nasdaq composite managed a mediocre rally of 8 points as Internet stocks rebounded. In the broader market, declining issues beat advances 1,938 to 968 on moderate volume of 628 million shares on the New York Stock Exchange. The Treasury's 30-year bond fell 22/32 and the yield jumped to 6.03%. Thursday’s new plays (positions/prices): Novell NOVL NOV30C/AUG30C $1.75 debit Zoran ZRAN DEC17C/SEP22C $0.00 debit Zoran ZRAN SEP20C/SEP22C $0.00 debit Zoran (ZRAN) jumped at the open and our option pricing disparity went with it. There may have been a favorable position available (from a technical viewpoint) but the premium discount was gone. On the positive side, Novell (NOVL) was actually priced lower than we expected and the adjusted target price (easily achieved) was a much better entry position. Portfolio plays: The was very little positive movement in the portfolio today. A few of the long-term positions rebounded after recent sell-offs. These issues included Sun Microsystems (SUNW), Cisco (CSCO), EMC Corp (EMC) and Solectron (SLR). Many secondary Internet stocks also made nice moves today and one of those positive issues was Barnesandnoble.com (BNBN). The stock moved back above the recent trading range near $19 (closed at new high) and it appears that the trend should continue. Our original Progressive Insurance (PGR) position was adjusted to a (bearish) break-even play. We closed the AUG-135 calls at $4.25 debit and sold AUG-145 calls at a credit of $1.25 to end with a small positive return ($0.75). PGR must now finish below $145 for the overall position to retain a profit. Questions & comments on spreads/combos to ray@OptionInvestor.com - NEW PLAYS - **************************************************************** RPC - Roberts Pharmaceutical $25.00 *** Volatility Play *** RPC focuses on value-added specialty pharmaceuticals in the therapeutic categories of gastroenterology, oncology/hematology, urology, and cardiology/neurology. The company actively pursues a strategy of Search & Develop to identify & acquire novel post- discovery drug candidates to advance through late-stage clinical development. The Company also pursues opportunities to acquire and enhance the potential of commercially available specialty medicines. The company recently reported better-than-expected quarterly earnings and they were due in part to its recent purchase of the rights to the anti-platelet drug Agrylin. Roberts had previously purchased the rights to Agrylin from Bristol-Myers Squibb (BMY) and agreed to pay a 15% royalty on sales of the drug. Last month, they re-negotiated the deal, paying BMY an estimated $30 million to end its obligation to pay any royalties on future sales. The second quarter 1999 sales of Agrylin were much higher than in previous quarters and the company retained all the profits. Option volatility and volume were at an extreme just before the earnings report and then they faded as the stock retreated in a post-announcement sell-off. Now the stock has started to rebound and a new interest in call options has created more disparity in the front month positions. Two favorable volatility plays are available, depending on your short-term outlook for the stock. PLAY (conservative - neutral/calendar spread): BUY CALL OCT-25 RPC-JE OI=344 A=$3.50 SELL CALL AUG-25 RPC-HE OI=1122 B=$1.81 INITIAL NET DEBIT TARGET=$1.50 TARGET ROI=50% PLAY (aggressive - bullish/calendar spread): BUY CALL OCT-30 RPC-JF OI=480 A=$1.56 SELL CALL AUG-30 RPC-HF OI=208 B=$0.38 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=RPC&d=3m **** MACR - Macromedia Inc. $31.00 *** A Long Way Down! *** Macromedia's mission is to add life to the Web. By providing its award-winning Web Publishing, Web Entertainment, and Web Learning solutions to Web designers, consumers, and the enterprise, MACR is delivering a completely new generation of Internet tools and technologies designed to transform the Web experience. The recent rally ended somewhere in early June, probably when the company announced its new Shockwave.com operations is expected to lose $15 million over the next two years. MACR plans to run the site as a separate operation under a separate CEO and in separate quarters but the losses will affect the overall bottom line. Another costly pre-earnings announcement came two weeks ago when MACR agreed to buy Silicon Valley startup Elemental Software to expand its software toolkit for e-commerce and personalized Web site publishing. Macromedia will exchange 625,000 shares of its stock for all of the outstanding equity of Elemental, for a total purchase price of about $24 million. The company will also take a one-time charge of $3 million for expenses related to the acquisition in the current quarter. The fiscal first quarter results are due out Wednesday and the software maker’s 7-cent-per-share profit in the first quarter of 1999 needs to increase dramatically for a positive impact. The consensus estimate is for a profit of $0.13 a share but investors are obviously not that optimistic. Just look at a recent chart. PLAY (conservative - bearish/diagonal spread): BUY PUT SEP-35 MRQ-UG OI=20 A=$6.87 SELL PUT AUG-30 MRQ-TF OI=456 B=$2.56 INITIAL NET DEBIT TARGET=$4.12 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=MACR&d=3m **** TNB - Thomas & Betts $45.00 *** To Merge Or Not To Merge *** Thomas & Betts Corporation is a leading producer of connectors and components for worldwide electrical and electronics markets, with 70 manufacturing and distribution facilities, including 16 located outside the United States. The current focus of the company is a long awaited merger with AFC Cable Systems. (AFC Cable Systems is a leading manufacturer of cost and labor-saving electrical and communications products and systems for commercial and industrial construction and renovation). When TNB first agreed to the deal, the SEC raised certain questions concerning the availability of pooling of interests method; a condition for completing their merger. Now it appears that the merger may indeed go through as the SEC has approved the agreement and AFC Cable Systems announced that it has granted an extension of the merger termination date to August 30, 1999. The company announced simultaneously that it had received a second unsolicited written proposal from a third party to acquire AFC Cable Systems. AFC Cable Systems also said its board of directors had engaged a financial advisor and is evaluating both proposals. If AFC Cable attempts to terminate the merger agreement, Thomas & Betts has said they will consider all legal remedies available, including commencement of litigation seeking specific performance in order to require AFC Cable to comply with their obligations under the merger agreement. It sounds like this may be tied up for another month and in the interim, most investors will grow weary of the chase. Earnings are expected next week for the company and the recent technical history reflects some resistance near $47. A very reasonable risk/reward ratio and the small premium disparity in the sold option provides an extra bonus. PLAY (aggressive - bearish/debit spread): BUY PUT AUG-50 TNB-TJ OI=0 A=$5.87 SELL PUT AUG-45 TNB-TI OI=1500 B=$2.62 INITIAL NET DEBIT TARGET=$3.00 ROI(max)=66% B/E=$47.00 Chart = http://quote.yahoo.com/q?s=TNB&d=3m **** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock price. **** EQ - The Equitable Companies $65 *** Trading Range? *** The Equitable Companies is one of the world's premier insurance and investment management organizations through its primary businesses: Equitable Life Assurance Society; Alliance Capital Management and Donaldson Lufkin & Jenrette. The Equitable is also a key member of the global AXA Group, one of the world's largest and most diversified insurance and financial services companies, with assets under management of $655 billion. Not much news other than a positive earnings report by their brokerage firm, Donaldson Lufkin & Jenrette (DLJ). That may not be enough to lift this slumbering giant from the throes of a recent consolidation at $65. The new trading range has produced a three month top at $70 and with the poor performances in the insurance and financial sectors, a reasonable expectation would be for the sideways trend to continue. PLAY (aggressive - bearish/credit spread): BUY CALL AUG-75 EQ-HO OI=0 A=$0.25 SELL CALL AUG-70 EQ-HN OI=230 B=$1.00 INITIAL NET CREDIT TARGET=$0.87 ROI=21% Chart = http://quote.yahoo.com/q?s=EQ&d=3m **** HMC - Honda Motor Company (ADR) $85.19 *** World Markets *** Honda Motor Co. develops, manufactures, distributes and finances motor-cycles, automobiles and other power products. Manufacturing operations are principally conducted in 19 separate factories, six of which are located in Japan. Major overseas manufacturing are located in the U.S., Canada, U.K. France, Italy, Spain, Brazil, Mexico, New Zealand and Thailand. Just about any news source will tell you its been a losing week for U.S. stocks, led by weaker blue chips and new concerns over interest rates. World markets also finished the week in the red, with one major index in Asia seeing its biggest percentage drop ever. With Greenspan's Fed on alert to act against inflation, most Asian stocks fell on worries that another hike in U.S. interest rates may not be far away. The stronger yen has also hurt shares of Japan's big blue-chip multinationals by reducing the positive outlook for future earnings. In Tokyo, the Finance Minister hinted Friday that Japanese financial authorities are still prepared to intervene by attempting to stem the yen's rapid appreciation against the dollar, but recent efforts have failed, and many investors are just not convinced. Automobile stocks have weakened further on the higher yen and the current technical outlook for HMC reflects a failed rally area at $90 and a neutral to bearish trend with TSV and money- stream leading the way lower. PLAY (aggressive - bearish/credit spread): BUY CALL AUG-95 HMC-HS OI=6 A=$0.75 SELL CALL AUG-90 HMC-HR OI=7 B=$1.68 INITIAL NET CREDIT TARGET=$1.12 ROI=29% Chart = http://quote.yahoo.com/q?s=HMC&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 7-25-99 Sunday 6 of 6 ************** COVERED CALLS ************** Program Trading... An OIN subscriber recently asked for an explanation of 'Program Trading'. That generic title can describe many different types of computerized systems or methods but most of them are directed at 'portfolio hedging' or 'index arbitrage'. A lesser used technique is called 'speculative' program trading. None of these should be confused with 'package trading'; institutions buying quantities of stock on a regular basis as they receive infusions of capital. Computerized trading systems originated in the early 1980s, when personal computers began to offer access to trading information in 'real' time. Clearly, this technology has made the market more efficient; portfolio managers, institutional traders and retail investors are able utilize the very latest information. Hedgers, arbitrageurs, and speculators can trade with the most up-to-date prices and forecasts. The reaction time to market-influencing news and events has been reduced to minutes and seconds. The problem is, without computers to evaluate all this data instantly, brokers and institutional traders would be unable to manage their portfolios effectively. Portfolio hedging or 'insurance' is not really insurance. It is a form of money management that makes use of stock index futures to protect the value of a portfolio. In theory, when the market value of the stock declines, managers offset most of the losses through short sales in the futures contract obligation. In reality, not all the losses are offset because index futures prices can't track the actual portfolio stocks exactly. Index arbitrage is based on small differences between futures and stock prices. Using sophisticated programs, arbitrageurs exploit these discrepancies by simultaneously purchasing lower-priced (near-term) instruments and selling higher-priced (deferred) ones. They finance these futures contract positions by borrowing at favorable interest rates. When the percentage difference between the long position's purchase price and the short position's sale price is greater than the financing rate, a profit is guaranteed without assuming any risk. Arbitrageurs regularly account for 20% of all stock market trades. Speculative program traders generally trade against the direction of the market. They represent buying pressure in bearish markets and selling pressure in bullish ones. These speculators provide a much needed component in the marketplace because they enter outright long or short positions in heavily traded equities. Next week, we will discuss the mechanics of index arbitrage using an intra-market S&P 500 spread. Good Luck! ************************* SUMMARY OF PREVIOUS PICKS ************************* Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI FRTE 11.63 13.69 Aug 10.00 2.75 *$ 1.12 12.6% 7.8% SQNT 17.50 17.19 Aug 15.00 3.88 *$ 1.38 10.1% 7.3% RRRR 11.81 10.31 Aug 10.00 2.50 *$ 0.69 7.4% 6.4% BNBN 19.25 19.81 Aug 17.50 3.13 *$ 1.38 8.6% 6.2% PAMC 33.69 27.50 Aug 25.00 10.63 *$ 1.94 8.4% 6.1% MESG 19.75 17.50 Aug 15.00 5.88 *$ 1.13 8.1% 5.9% LIPO 20.88 22.00 Aug 20.00 2.38 *$ 1.50 8.1% 5.9% WSTL 8.97 7.63 Aug 7.50 2.00 *$ 0.53 7.6% 5.5% MESG 22.38 17.50 Aug 17.50 5.88 $ 1.00 6.1% 5.3% CS 14.81 12.94 Aug 12.50 3.00 *$ 0.69 5.8% 5.1% IRF 13.19 13.38 Aug 12.50 1.63 *$ 0.94 8.1% 5.0% UBET 12.38 9.88 Aug 10.00 3.00 $ 0.50 5.3% 4.6% IDTC 22.50 24.13 Aug 17.50 5.88 *$ 0.88 5.3% 4.6% COOL 12.63 11.44 Aug 10.00 3.13 *$ 0.50 5.3% 4.6% NPIX 19.13 17.88 Aug 15.00 4.75 *$ 0.62 4.3% 3.7% CIEN 37.13 33.88 Aug 35.00 4.38 $ 1.13 3.5% 3.0% ATVI 15.50 13.94 Aug 15.00 1.44 $ -0.12 -0.9% 0.0% DGN 17.81 14.00 Aug 15.00 3.50 $ -0.31 -2.2% 0.0% CCCG 12.88 11.00 Aug 12.50 1.19 $ -0.69 -5.9% 0.0% SNRS 13.06 3.72 Aug 10.00 4.38 $ -4.96 -57.1% 0.0% Notes: (The overall market trend may effect these stocks) ACTV: Dropped to 50 dma, several indicators still positive, consider closing breaking* $13.00 DGN: Dropped into a support area, indicators still positive, consider closing breaking* $13.00 CCCG: Dropped out of the trend to April low, consider closing breaking* $10.00 * below that price on a closing basis. Closed: SNRS: FDA advisors recommended against approving its laser system treatment. Should have been closed near the open for a smaller loss. -ROI is equal to the profit (or loss) divided by the cost-basis. Monthly ROI represents the return on a monthly basis. Example: a 10% return in 20 days equals 15.2% ROI for a month). -Margin is not used in any calculations. -Profit/Loss Column: Asterisk indicates stock price above strike price and should be called. Stock that will not be called is assumed sold at current price (for tracking purposes). *** LOSING PLAYS *** Determining when to exit a play is a matter of personal preference but we strongly recommended closing any play that falls more than 20% below the initial cost-basis. Some positions may eventually become profitable but it is generally more productive to exit a losing play and move your capital into another prospective trade. ****************** NEW PICKS ****************** Definitions: OI - Open Interest CB - Cost Basis (Prc pd - Prm rec'd = CB, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) ******************** Sequenced by Company ******************** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis ARM 11.88 Aug 10.00 ARM HB 2.38 821 9.50 5.3% 5.3% CATP 18.13 Aug 17.50 TQP HW 1.69 845 16.44 6.4% 6.4% FRTE 13.69 Aug 12.50 RQF HV 1.81 592 11.88 5.2% 5.2% FUSE 5.69 Aug 5.00 QML HA 1.00 283 4.69 6.6% 6.6% LIPO 22.00 Aug 20.00 LPQ HD 2.75 526 19.25 3.9% 3.9% NEWZ 8.13 Aug 7.50 QBE HU 1.06 37 7.07 6.1% 6.1% NOVT 22.75 Aug 20.00 QOH HD 3.50 46 19.25 3.9% 3.9% NTPA 27.19 Aug 22.50 NQD HX 5.63 78 21.56 4.4% 4.4% ************************** Sequenced by Return Called ************************** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis FUSE 5.69 Aug 5.00 QML HA 1.00 283 4.69 6.6% 6.6% CATP 18.13 Aug 17.50 TQP HW 1.69 845 16.44 6.4% 6.4% NEWZ 8.13 Aug 7.50 QBE HU 1.06 37 7.07 6.1% 6.1% ARM 11.88 Aug 10.00 ARM HB 2.38 821 9.50 5.3% 5.3% FRTE 13.69 Aug 12.50 RQF HV 1.81 592 11.88 5.2% 5.2% NTPA 27.19 Aug 22.50 NQD HX 5.63 78 21.56 4.4% 4.4% LIPO 22.00 Aug 20.00 LPQ HD 2.75 526 19.25 3.9% 3.9% NOVT 22.75 Aug 20.00 QOH HD 3.50 46 19.25 3.9% 3.9% ******************** Company Descriptions ******************** ARM - ARM Financial Group, Inc. $11.88 *** No News? *** ARM specializes in the asset accumulation business, providing retail and institutional customers with products and services designed to serve the long-term savings and retirement markets. ARM started trading with increased volume in mid-June which led to a bullish up-trend and a recent increase in call volume. No news from the company since June 16 when ARM issued a statement reiterating the strength of its business operations. Earnings are due the first week of August. Aug 10.00 ARM HB Bid=2.38 OI=821 CB=9.50 RC=5.3% RNC=5.3% Chart = http://quote.yahoo.com/q?s=arm&d=3m ****************** CATP - Cambridge Technology Ptnr $18.13 *** For Sale? *** Cambridge Technology Partners provides management consulting and systems integration services to transform its clients into e-businesses, pioneering fixed-priced contracts with guarantees. Cambridge appears back on track as it again reported sequential revenue growth and there is some speculation that CATP is a take- over target. CEO/Pres. Jim Sims (who has opposed a sale) has stepped down, replace by long-time board member Jack Messman. Technicals are bullish though we would expect some consolidation near $20 (the 150 dma). Aug 17.50 TQP HW Bid=1.69 OI=845 CB=16.44 RC=6.4% RNC=6.4% Chart = http://quote.yahoo.com/q?s=CATP&d=3m ****************** FRTE - Forte Software, Inc. $13.69 *** Break-out! *** FRTE develops, designs, markets and supports Forte, a software application development that enables businesses to create, integrate, customize, manage, and deploy applications across multi-platform networks for thousands of users simultaneously. In recent news; added Nu Skin Enterprises to a list of users who use FORTE in their web applications. FRTE has broken above the neckline of a long term (2 year chart) head-n-shoulders bottom (the longer the formation - the stronger the meaning!). Friday's positive earnings surprise; 48% revenue growth, resulted in two broker upgrades and should spur Forte upward...market permitting. Aug 12.50 RQF HV Bid=1.81 OI=592 CB=11.88 RC=5.2% RNC=5.2% Chart = http://quote.yahoo.com/q?s=frte&d=3m ****************** FUSE - Fuisz Technologies Ltd. $5.69 *** Speculative *** Fuisz Technologies is engaged in the development, manufacture, and commercialization of a wide variety of pharmaceutical and consumer healthcare products which utilize its proprietary CEFORM(TM), Shearform(TM), and other drug delivery technologies. FUSE dropped back in May when the CEO stepped down and warned it would post a 2Q loss because of restructuring costs. With earnings due shortly, the stock has recently started climbing on increased volume, "suggesting" the negative impact has already been factored into the current price. Aug 5.00 QML HA Bid=1.00 OI=283 CB=4.69 RC=6.6% RNC=6.6% Chart = http://quote.yahoo.com/q?s=fuse&d=3m ****************** LIPO - Liposome Company, Inc. $22.00 *** Stage II *** Liposome is a biopharmaceutical company engaged in the discovery, development, manufacturing and marketing of proprietary lipid and liposome-based pharmaceuticals, primarily for the treatment of cancer and other life-threatening illnesses. LIPO's current stage II climb started after reporting 1Q earnings in April (its second consecutive quarterly profit). Liposome recently announced it has filed a New Drug Submission for marketing approval of Evacet in Canada (they already have filed with the USF&DA and Europe). Breaking resistance near $26.00 would move Liposome into blue sky territory. Earnings are expected this week. Aug 20.00 LPQ HD Bid=2.75 OI=526 CB=19.25 RC=3.9% RNC=3.9% Chart = http://quote.yahoo.com/q?s=lipo&d=3m ****************** NEWZ - NewsEDGE Corporation $8.13 *** STAGE I Base *** NewsEdge Corporation is the leader in providing global news and current awareness solutions for business and is the world's largest independent news integrator. Products offered range from filtered, real-time scrolling news to editorially enhanced news briefings presented by topic, industry or company. 2Q revenue increased 7% as NEWZ put in a new management team, launched NewsPage.com to deliver personalized news/information to business people over the Web, and had its registered users grow by 40%. NewsEDGE has been consolidating for several months and the bottom of the trading range is at the $7.50 strike. Aug 7.50 QBE HU Bid=1.06 OI=37 CB=7.07 RC=6.1% RNC=6.1% Chart = http://quote.yahoo.com/q?s=newz&d=3m ****************** NOVT - Novoste Corporation $22.75 *** Take-over? *** NOVT is a development stage enterprise engaged in developing the Beta-Cath System, an intraluminal beta radiation catheter delivery system designed to reduce restenosis. This system has already been approved in Europe with increasing sales and market penetration. There is some speculation on future earnings surprises and take- over possibilities. We like the support above the $20 strike and the signs of accumulation over the last 5 months. Aug 20.00 QOH HD Bid=3.50 OI=46 CB=19.25 RC=3.9% RNC=3.9% Chart = http://quote.yahoo.com/q?s=novt&d=3m ****************** NTPA - Netopia, Inc. $27.19 *** 2nd Tier Internet *** Netopia develops, markets and supports complete, easy-to-use, plug-and-play Internet connectivity products and real-time collaboration software for all platforms. Netopia reported an 81% increase in 3Q revenues and beat street estimates by a penny. Even with the recent market downturn, Netopia's technicals remain bullish. The up-trend is intact and the recent consolidation created a new support level near the $22.50 strike. Aug 22.50 NQD HX Bid=5.63 OI=78 CB=21.56 RC=4.4% RNC=4.4% Chart = http://quote.yahoo.com/q?s=ntpa&d=3m ****************************** CALLS STRICTLY PERCENTAGE LIST ****************************** The Strictly Percentage List has been dropped due to size and space limitations. However, if enough readers are interested we will reinstate it next Sunday. If you would like to see this feature reinstated in future newsletters please email us your comments before next weekend. precentage@OptionInvestor.com Thanks OIN Staff ***************** NAKED PUT SECTION ***************** More On Technical Indicators...Trin and Tick An OIN subscriber recently requested an explanation of these two terms; The 'Tick' is a computerized calculation of the net difference on the NYSE between all last sales on upticks (or 'zero plus' ticks) versus all last sales on downticks (or 'zero minus' ticks). As an example, if all the last sales showed 400 on upticks and 200 on downticks, the Tick would be +200. Some technicians use it as a trend-trading snapshot of advances and declines by monitoring the minute-by-minute fluctuations. A Tick reading under 200 in either direction is relatively insignificant but when it exceeds 300, a good indication is given as to the next important near term move. When Tick moves to an upside extreme (+700 to +900), a bearish signal is given; the rally generating the upticks is approaching overbought conditions and is ready for a consolidation. On the downside, a negative Tick in the -700 to -900 range indicates the selling trend is approaching a climax. Tick can also be used for short to mid-term trading signals by charting a 10-day closing Tick against the major market averages. When Tick moves above the zero line, a favorable indication is given. When it remains in step with the advancing index, that's also a bullish signal. When the Dow (or other leading average) continues to achieve new highs while the Tick diverges, that's a bearish warning; a short term top is indicated. The reverse is also true; if the averages move lower while Tick diverges higher, that's a favorable near term indication. Tick can also be used as a short term overbought/oversold oscillator. When Tick nears a reading of +250 (on a 10 day basis), that signals an overbought market, while a reading near -300 indicates an oversold market. 'Trin' is an indicator that combines the component of volume to advance/decline statistics. The formula is very simple; divide advancing issues by declining issues to generate the numerator of the equation (A). Then divide upside volume by downside volume for the denominator of the equation (B). Trin is equal to A divided by B. When TRIN is below 1.00, this indicates that declining stocks are attracting more volume than advancing stocks; a negative reading. On a daily basis, a TRIN below 1.00 is favorable and a reading in the range of 0.70-0.80 is very favorable. Trin is also tracked on a 10 day basis to determine the overall market trend. If the 10 day moving average drops below 0.80, that's an important overbought signal. In contrast, when the indicator moves above 1.20 (on a 10 day basis), that's an oversold signal. Next week, more on trading strategies... ----------------------------------------- Selling naked-puts offers an attractive method of generating small profits on portfolio collateral. A premium is received for the obligation to buy the underlying security at a specific price. A successful outcome is achieved if the stock remains above the sold strike at expiration. It is also one of the best ways to achieve a technically correct entry position for owning a stock. *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. ************************* SUMMARY OF PREVIOUS PICKS ************************* Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI MGCX 28.00 23.00 Aug 20.00 1.13 *$ 1.13 16.8% 12.2% PSSI 12.00 10.38 Aug 10.00 0.44 *$ 0.44 13.6% 11.8% NETS 19.56 27.56 Aug 15.00 0.75 *$ 0.75 16.1% 11.7% RMII 13.13 12.00 Aug 10.00 0.38 *$ 0.38 12.6% 11.0% PTVL 23.63 19.63 Aug 17.50 0.81 *$ 0.81 14.6% 10.6% QNTM 24.56 24.75 Aug 17.50 1.00 *$ 1.00 16.9% 10.5% PRIA 38.63 29.94 Aug 30.00 1.00 $ 0.94 10.8% 9.4% GISX 21.13 20.00 Aug 17.50 0.56 *$ 0.56 10.4% 9.0% CDNW 19.94 20.81 Aug 15.00 0.56 *$ 0.56 12.3% 8.9% BYND 29.50 20.81 Aug 20.00 0.75 *$ 0.75 11.3% 8.2% LIPO 20.88 22.00 Aug 17.50 0.63 *$ 0.63 11.3% 8.1% DRIV 35.31 26.56 Aug 25.00 0.88 *$ 0.88 11.1% 8.0% MIPS 43.94 41.31 Aug 30.00 0.75 *$ 0.75 7.9% 6.8% CIEN 37.13 33.88 Aug 30.00 0.63 *$ 0.63 7.5% 6.6% AMTD 38.19 28.94 Aug 25.00 0.75 *$ 0.75 8.9% 6.5% ADAP 23.19 19.00 Aug 17.50 0.44 *$ 0.44 8.7% 6.3% DRIV 32.44 26.56 Aug 22.50 0.50 *$ 0.50 7.2% 6.2% PAMC 33.69 27.50 Aug 20.00 0.56 *$ 0.56 7.7% 5.6% MCOM 35.38 32.88 Aug 20.00 0.44 *$ 0.44 5.9% 5.1% SNRS 16.63 3.72 Aug 7.50 0.31 $ -3.47 -95.3% 0.0% Closed: SNRS: FDA advisors recommended against approving its laser system treatment. Hope you closed at the open for a much smaller loss. (I did!) -ROI is equal to the profit (or loss) divided by the original investment requirement (varies broker to broker). -Monthly ROI represents the return on a monthly basis. Example: a 10% return in 20 days equals 15.2% ROI for a month). -Profit/Loss Column: Asterisk indicates stock price above strike price and put option should expire - not be exercised. Stock to be exercised assumed sold at current price.(for tracking) ****************** NEW PICKS ****************** Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment - formula: premium received divided by the collateral required by the broker (the greater of 40% of the current price of the stock plus the premium, minus the difference between the cost of the stock and the strike price; or 20% of the current price of the stock plus the premium.) As you move further from the stock price, the 20% requirement will take precedence. ROI may vary based on equity required by each individual broker. ******************** Sequenced by Company ******************** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CLEC 27.00 Aug 22.50 QFU TX 0.56 0 21.94 8.2% GISX 20.25 Aug 17.50 GQC TW 0.56 75 16.94 9.5% HNCS 37.44 Aug 30.00 NSQ TF 0.56 19 29.44 6.9% IDTC 24.13 Aug 20.00 IQJ TD 0.69 463 19.31 11.1% PCYC 27.75 Aug 22.50 QPY TX 0.69 0 21.81 10.6% PERI 21.50 Aug 17.50 HQS TW 0.38 80 17.12 7.6% PZX 10.94 Aug 10.00 PZX TB 0.69 89 9.31 16.7% RSLC 22.50 Aug 17.50 QRL TW 0.38 173 17.12 7.8% VSTR 38.13 Aug 30.00 UVT TF 0.50 350 29.50 6.2% ********************************* Sequenced by Return on Investment ********************************* Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired PZX 10.94 Aug 10.00 PZX TB 0.69 89 9.31 16.7% IDTC 24.13 Aug 20.00 IQJ TD 0.69 463 19.31 11.1% PCYC 27.75 Aug 22.50 QPY TX 0.69 0 21.81 10.6% GISX 20.25 Aug 17.50 GQC TW 0.56 75 16.94 9.5% CLEC 27.00 Aug 22.50 QFU TX 0.56 0 21.94 8.2% RSLC 22.50 Aug 17.50 QRL TW 0.38 173 17.12 7.8% PERI 21.50 Aug 17.50 HQS TW 0.38 80 17.12 7.6% HNCS 37.44 Aug 30.00 NSQ TF 0.56 19 29.44 6.9% VSTR 38.13 Aug 30.00 UVT TF 0.50 350 29.50 6.2% ******************** Company Descriptions ******************** CLEC - US LEC Corp. $27.00 *** Telecom Network *** US LEC is a switch-based competitive local exchange carrier that provides local, long-distance and enhanced services to customers in the Eastern U.S. CLEC serves telecom-intensive businesses, universities, financial institutions, hospitals, internet service providers, hotels, and government agencies. CLEC has over 300,000 Equivalent Access Lines in service on the US LEC network, many of them which earn reciprocal compensation from other telephone companies. Expected to increase revenue in core businesses on rapid customer growth from their expanded geographic reach. Aug 22.50 QFU TX Bid=0.56 OI=0 CB=21.94 ROI=8.2% Chart = http://quote.yahoo.com/q?s=CLEC&d=3m ****************** GISX - Global Imaging Systems $20.25 *** Back For More *** Global Imaging Systems is becoming a one-stop shop for office imaging solutions. The company provides a broad line of products including the sale and service of automated office equipment, network integration services, electronic presentation systems, and document imaging management systems. The company is a rapidly growing consolidator (most recently Daniel Communications) in the industry and was just added to the Russell 2000 index. Aug 17.50 GQC TW Bid=0.56 OI=75 CB=16.94 ROI=9.5% Chart = http://quote.yahoo.com/q?s=GISX&d=3m ****************** HNCS - HNC Software Inc. $37.44 *** Friendly Software *** HNC Software is a provider of Predictive Customer Relationship Management solutions for service industries. Their divisions include Financial Solutions, Retek Retail Solutions, Insurance Solutions, eHNC and Telecommunications Solutions. eHNC develops predictive software that increases profits and improves customer satisfaction by enhancing and automating e-commerce interactions. HNC products provide companies with targeted online advertising, personalized content, one-to-one marketing promotions and email response solutions. Aug 30.00 NSQ TF Bid=0.56 OI=19 CB=29.44 ROI=6.9% Chart = http://quote.yahoo.com/q?s=HNCS&d=3m ****************** IDTC - IDTC Corp. $24.13 *** Net2Phone IPO *** IDT Corporation is a telecommunications company which offers a broad range of integrated long-distance telephone and Internet access services. IDT's Net2Phone (telephone calls through the Internet) raised the expected price range of its IPO to $12-$14 and raised the offer to 5.4 mil shares. IDT will own about 57 percent of Net2Phone. IDT already has distribution deals with Compaq and Snap and looks to integrate Net2Phone throughout the PC world. Sprint is also rumored to be eyeing IDT for a take-over bid. Aug 20.00 IQJ TD Bid=0.69 OI=463 CB=19.31 ROI=11.1% Chart = http://quote.yahoo.com/q?s=IDTC&d=3m ****************** PCYC - Pharmacyclics Inc. $27.75 *** Biopharmaceutical *** Pharmacyclics is a company developing energy-potentiating drugs to improve radiation therapy and chemotherapy of cancer, and to enable or improve the photodynamic therapy of certain cancers, atherosclerotic cardiovascular disease and diseases of the eye. The company's products are ring-shaped small molecules, called 'texaphyrins', which localize in cancer cells, atherosclerotic plaque and neovasculature, where they can be activated by forms of energy, including X-rays, light and chemotherapeutics, to eliminate diseased tissue. Aug 22.50 QPY TX Bid=0.69 OI=0 CB=21.81 ROI=10.6% Chart = http://quote.yahoo.com/q?s=PCYC&d=3m ****************** PERI - Periphonics $21.50 *** InterPhone Technology *** Periphonics Corporation is a global leader in the development, marketing and support of products and professional services for Computer Telephony Integration and Telecom Enhanced Network Services. Their products and services utilize technologies such as interactive voice response (IVR), advanced speech processing with large vocabulary recognition, natural language processing and text-to-speech, as well as interactive processing via Web browsers, messaging, and fax. Reported record earnings in early July. An upgrade followed, based on higher revenues and better gross margins. Aug 17.50 HQS TW Bid=0.38 OI=80 CB=17.12 ROI=7.6% Chart = http://quote.yahoo.com/q?s=PERI&d=3m ****************** PZX - Pittston BAX $10.94 *** A Unique Issue *** Pittston BAX Group Common Stock is a class of common stock of the Pittston Company which is intended to reflect the performance of the global freight & logistics management services businesses of BAX Global. BAX Global is a $1.8 billion transportation and supply chain management company offering multi-modal freight forwarding to business-to-business shippers through a global network of over 500 offices in 121 countries. In North America, BAX Global offers freight delivery to every major community in addition to international airfreight, ocean forwarding and customs brokerage worldwide. Aug 10.00 PZX TB Bid=0.69 OI=89 CB=9.31 ROI=16.7% Chart = http://quote.yahoo.com/q?s=PZX&d=3m ****************** RSLC - RSL Communications $22.50 *** Favorable Earnings? *** RSL Communications is a multinational telecom with operations in 20 countries on four continents that account for more than 70% of the world's telecommunications traffic. RSL provides an array of telecommunications applications both fixed and wireless, calling card, fax, data, Internet, and private line services. The company has an emphasis on international long distance voice services and its target customers are primarily small/medium-sized businesses in key markets. Earnings are on Monday; a post announcement dip may allow a better entry point. Aug 17.50 QRL TW Bid=0.38 OI=173 CB=17.12 ROI=7.8% Chart = http://quote.yahoo.com/q?s=RSLC&d=3m ****************** VSTR - VoiceStream $38.13 *** Telecom Giant? *** VoiceStream provides wireless communications services in cities across the U.S.. With the recent addition of Omnipoint, the new company becomes the largest independent player using GSM (Global System for Mobile Communications) technology. The company has a near-nationwide wireless footprint with licenses covering 175 million people in 17 of the top 25 markets. With only about 70 million people signed up currently, analysts say there's plenty of room for growth and the upgrades are numerous. Aug 30.00 UVT TF Bid=0.50 OI=350 CB=29.50 ROI=6.2% Chart = http://quote.yahoo.com/q?s=VSTR&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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