The Option Investor Newsletter Tuesday 7-27-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 7-27-99 High Low Volume Advances Decline DOW 10979.04 +115.88 11031.28 10862.84 719,214k 1,618 1,368 Nasdaq 2679.33 + 60.14 2685.04 2650.18 994,959k 2,168 1,827 S&P-100 701.51 + 8.60 704.72 692.91 Totals 3,786 3,195 S&P-500 1362.84 + 15.08 1368.77 1347.75 54.2% 45.8A% $RUT 446.48 + 3.61 446.49 442.88 $TRAN 3417.26 + 33.94 3424.00 3384.02 VIX 23.93 - 1.98 25.35 23.11 Put/Call Ratio .58 ************************************************************* New life or just a bump in the road? After dropping from last Monday's high of 11252 to yesterday's intraday lows under 11850 the -400 point decline was stopped dead in its tracks with the drop in consumer confidence reported this morning. The index dropped to 135.6 from a revised 139.0 in June. This was the first drop since last October and suggests that maybe the economy is not growing as fast as the Fed thinks. The bounce today could have been just that. Nothing moves in a straight line, up or down. With the Dow dropping -400 points and the Nasdaq dropping a whopping -275 (over -1000 in Dow points) the possibility of a technical bounce was approaching 100%. The true test will be in holding at this level or higher. The Dow bounced twice yesterday off 10,850 which appeared to be good support. Today however, it failed to hold over 11000 which could become resistance at this level. The Dow suffered from fear of darkness again and lost -50 points from its high in the last hour of trading. The fear of darkness was probably brought on by the horror show scheduled to play at the Senate Banking Committee meeting room tomorrow morning. It is the sequel to the Nightmare on Wall Street part 1 that played to packed crowds in the House last week. The star is chainsaw Al Greenspan. Al uses his chainsaw wit to trim markets at will and attendance at Wednesday's event is sure to be a sell out. All seriousness aside, we all know the market will take its cue from the cross examination after the prepared speech. The Senate is probably more concerned with Mr. Greenspan's opinion about the tax cut proposal but there will be several senators waiting to spend their minute in the spotlight trying to elicit some market moving comment. He is sure to be asked his "feeling" on the economy and we all know that Al thinks the market is over valued, etc, etc. The real question is whether he caught enough flack from his hawkish appearance last week to decide to tone down his remarks tomorrow. The bounce today in the markets were also helped by upgrades by several market moving stocks. American Express jumped +6.38 after being rated a strong buy at Morgan Stanley. Profits were up +12% and the forecast was strong. Hewlett-Packard was up +$4.00 after Salomon Smith Barney raised their price target to $130 from $105. Over +50 points of the Dow gains came from these two stocks. Intel was upgraded to a buy from Neutral by SG Cowen Securities. They feel the free PC movement can only help Intel and fuel a new cycle of PC sales. Dell, another Nasdaq leader, powered forward for a +2.13 after announcing their new sub $1000 PC that comes with one year of Internet service and a personal web page. The free PC movement is taking hold and it makes you wonder what the PC vendors are going to do next year to bolster slipping sales. What is cheaper than free? The other Nasdaq horsemen rallied slightly. MSFT +1.19, CSCO +1.88, QCOM +1.75 and WCOM +1.50. The performances did not impress me. The supposedly oversold market did not have any breadth. The advancers only narrowly beat decliners and the closing sell off shows a lack of confidence or commitment. I am sure we could move up from here but the market is still top heavy. Sellers were only barely beaten by bargain hunters buying the dip. One analyst said he saw evidence of short covering as short sellers locked in profit from the recent gains. The impact of Greenspan on TV tomorrow is a wildcard and it is better to take some profit off the table than risk it all on a possible kinder gentler Greenspan appearance. AOL may be under pressure tomorrow as rumors surface that AT&T will start discounting its Internet access. A strong discount program would easily cut into AOL profits. Using a smaller independent ISP is a risk many surfers would rather not take and they stay in the comfort of AOL's security blanket. AT&T is a recognized name and would not have the stigma of the unknown. Any AOL weakness could pressure the Internet sector again. The bounce, in my opinion, was simply technical and was powered by bottom fishing bargain hunters. With the Nasdaq down almost -9% from its highs there were many perceived bargains. If the market continues downward into August the red apples picked today could be thrown out with the rest just as quickly. One positive sign was the spike in put buying yesterday. The put/call ratio bounced to .70 at the close yesterday. This is a level not seen since last Feb and Oct before that. This represents a possible short term bottom and could give us a resting place if Greenspan does not torpedo the plan. If you want to trade this bounce I would suggest waiting to confirm market direction AFTER Greenspan speaks tomorrow. Please, pick your entry points carefully. Good Luck, Sell too soon. Jim Brown Editor AOL Warning: If you are an AOL user you cannot depend on getting all of our email routinely. AOL admits that they have email outages and it is not unusual for readers to get only half the Sunday newsletter. The entire newsletter is always available on the website IN EMAIL FORMAT as well. Should you fail to receive any portion of the emailed newsletter please visit the website and click on "email format" in the left margin. 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 provide a much more visual image on the website than is possible in an email format. *************** Market Posture *************** As of Market Close - Tuesday, July 27, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,979 Neutral 7.20 SPX S&P 500 1,330 1,420 1,363 Neutral 7.20 OEX S&P 100 675 735 702 Neutral 7.20 RUT Russell 2000 430 465 446 Neutral 7.20 NDX NASD 100 2,200 2,468 2,309 Neutral 7.20 MSH High Tech 1,080 1,250 1,142 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 500 580 457 BEARISH 7.20 BIX Banking 690 710 687 BEARISH 7.23 XBD Brokerage 410 440 405 BEARISH 7.23 IUX Insurance 645 660 640 BEARISH 7.23 RLX Retail 915 960 900 BEARISH 7.23 DRG Drug 370 400 359 BEARISH 7.20 HCX Healthcare 750 800 741 BEARISH 7.22 XAL Airline 180 190 168 BEARISH 5.21 OIX Oil & Gas 285 310 296 Neutral 5.13 Posture Alert Tuesday's market action was positive in all sectors, especially high tech. The leaders include: NDX (+3.37%), Software (+3.08%), and Networking (+2.6%). There are currently no changes in market posture. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture **************** Market Sentiment **************** Re: Great Expectations! During the last 2 weeks, we have received many positive emails from subscribers who have made a lot of money using our sentiment analysis. Congrats to all of you who took advantage of the analysis, and thanks for your support. We received so many, that we will try to answer a few of your questions for the benefit of everyone. From Gary D: I made some decent money on Tuesday from the Pinnacle sentiment numbers on individual stocks going into earnings that appeared last week and on Sunday in "Market Sentiment". (Such as: Microsoft MSFT 9.8 +.36 +.38 7/19) I think this chart is a VERY valuable resource. I hope this is something you will include on a REGULAR basis. Re:Gary: We will try to highlight individual stocks or groups as often as we can. In the past, we have highlighted sectors that have appeared too bullish or bearish in sentiment and have given a Pinnacle Index on those respective indexes. We will continue to point our stocks/sectors as often as we can. However, the most consistent strategy of using sentiment analysis on individual stocks is when there is a news event pending (ie earnings announcement, court ruling, special conference calls, new product introduction etc). Obviously, the most widely followed event (and most easily tracked) is the earnings reports. The vast majority of companies report in January, April, July, and October. We will consistently do our "Great Expectations" letter during these respective months for the benefit of our subscribers. Thanks for your support Gary. I want to congratulate you for the three last Market Sentiment notes, where Pinnacle listed the equities that should report earnings during the week. They where very clear, short and very very very helpful making me lots of $$. A happy trader. From MAK: >To OptionInvestor.com, First I would like to say Great Job!! I really enjoy reading the columns. Now to my questions, I am a new subscriber to your site and had 3 questions mainly on the 'The Pinnacle Index' columns: 1. Is the 'The Pinnacle Index' of any stock can be found on your web site? 2. Do you have these articles only during earnings or is this a test run? 3. If you recommend to follow The Pinnacle Index with your columns why was their not more stocks from this list in the call recommendations? Keep up the good work! Re: MAK Thanks for your questions. First of all, we try to highlight companies that are coming out with earnings in a short period of time. This article will always come out during earnings season. However, we do highlight our Pinnacle Index for the S&P 100 (OEX) during every newsletter. The OEX is the most liquid Index Option and is widely used for broad market sentiment by the investment community. It is one of the more consistent sentiment indicators that we use. To answer your third question, we try to highlight companies that are expected to report their earnings within the next several days. We also try to show stocks that have excessive optimism (yes's) or pessimism (no's), and to avoid stocks in the middle (maybe's). We do this so our subsribers can take advantage of the volatility, either up or down. We filter out MANY companies due to the fact that their indicators are giving absolutely no indication of prevailing bullish or bearish sentiment. Other factors of companies being omitted would be because there is no whisper number, no options traded on the underlying equity, companies that have already prereleased their earnings, or companies that have not given a set earnings date. As always, we will try to expand our list for your benefit. Thanks for your question and your support. 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, which could prove disastrous for high tech and small caps. Peak Open Interest: The contraian put-call ratio clocking in at 1.02 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 has been rolling over, and could prove Bearish if decliners continue to out-pace advancers in the weeks 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 Tues Indicator (7/23) (7/27) Pinnacle Index (OEX): Overhead Resistance (720-750) 3.2 3.9 Underlying Support (685-710) 1.2 1.2 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 CBOE Equity P/C Ratio .5 .5 OEX P/C Ratio 1.0 1.0 Peak Open Interest (OEX): Puts 700 700 Calls 740 740 P/C Ratio 1.02 1.55 Market Volatility Index (VIX): CBOE VIX 23.77 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. Pinnacle Index OEX Friday Tues Benchmark (7/23) (7/27) Overhead Resistance (720-750) 3.2 3.86 OEX Close 698.88 701.51 Underlying Support (685-710) 1.2 1.18 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 725/750 level while the underlying support is holding at the OEX 685/710 level. Put/Call Ratio Friday Tues Strike/Contracts (7/23) (7/27) CBOE Total P/C Ratio .68 .70 CBOE Equity P/C Ratio .49 .50 OEX P/C Ratio 1.04 1.55 Peak Open Interest (OEX) Friday Tues Strike/Contracts (7/23) (7/27) Puts 700 / 8,032 700 / 8,427 Calls 740 / 7,933 740 / 8,230 Put/Call Ratio 1.01 1.02 (VIX) Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top? 18.13 * July 27, 1999 23.77 Investors Intelligence Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 07, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 07, 1999 52.6 27.2 July 14, 1999 55.2 26.7 July 21, 1999 54.1 27.9 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Week Dow 10979.04 -47.80 115.88 68.08 Nasdaq 2679.33 -73.21 60.14-13.07 $OEX 701.51 -5.97 8.60 2.63 $SPX 1362.84 -9.18 15.08 5.90 $RUT 446.48 -5.51 3.61 -1.90 $TRAN 3417.26 1.83 33.94 35.77 $VIX 23.93 2.15 -1.98 0.17 Calls Mon Tue Week JDSU 82.63 1.06 3.56 4.62 Surprise Stock split today CMVT 75.44 -0.50 3.56 3.06 Dropped, too much risk VOD 210.56 -1.56 4.19 2.63 Five for One stock split CMB 83.75 1.31 0.88 2.19 Greenspan speaks! watch it GDT 61.88 1.19 0.44 1.63 New, momentum play DELL 42.13 -1.00 2.13 1.13 Nice rally today GE 116.25 -1.19 2.25 1.06 Moving with market CSCO 62.94 -1.88 1.88 0.00 Even-steven this week QCOM 154.38 -2.06 1.75 -0.31 Hope for continued recovery BGEN 69.69 -2.19 1.75 -0.44 Earnings estimate raised WHR 74.50 -0.56 -0.44 -1.00 Looking for an entry VISX 100.25 -3.19 1.69 -1.50 Nice rebound today VRIO 80.13 -1.25 -0.25 -1.50 Earnings & split coming EDS 62.88 -2.13 0.50 -1.63 Earnings are Thursday HD 62.44 -0.81 -1.38 -2.19 Dropped, no love here LGTO 77.00 -3.56 -0.19 -3.75 Bounced off support VRTS 54.63 -3.75 -2.63 -6.38 Dropped, stock dilution EXDS 128.00 -10.94 0.44-10.50 Dropped, weak sector Puts AOL 98.19 -7.81 -1.94 -9.75 No support at $100 EBAY 99.56 -3.44 -4.81 -8.25 Losing its luster CMGI 90.25 -8.44 1.50 -6.94 Internets are sinking GNET 65.00 -8.06 2.38 -5.68 New, turned away at 50 dma NITE 44.38 -4.53 0.19 -4.34 New, no support til $40 DCLK 80.75 -5.13 2.19 -2.94 Failed rally today LVLT 55.44 -4.06 1.44 -2.62 Watch out below! SCH 45.56 -1.13 -0.06 -1.19 Sector woes continue XRX 48.44 0.56 -1.38 -0.82 Plagued by bad earnings TERN 41.31 -2.00 1.56 -0.44 New, great trend down U 38.00 -1.00 0.81 -0.19 Slow but steady AHP 52.06 -0.44 0.94 0.50 Dropped, FDA approval CA 48.75 -0.94 2.13 1.19 Keep your eye on CA GTW 74.88 -2.31 4.19 1.88 Dropped, another upgrade MER 73.56 0.25 1.63 1.88 Use caution tomorrow SBH 59.69 0.88 1.81 2.69 Dropped, found a bottom MWD 96.38 -0.88 3.75 2.87 Interest rate play **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** EXDS $128.00 +.44 (-10.50) We have decided to drop EXDS after the stock crashed for almost a $11 loss on Monday, and then showed little strength today as the Internet sector had a technical bounce. Shares of EXDS reached as high as $132.75 today, but could not hold. In general, we feel the Internet sector is in for a hard time for the next few months. EXDS had been performing contrary to the industry, but seems to have now succumbed to the pressure. For those day traders out there... EXDS is bound to provide more opportunities with a split on the horizon. CMVT $75.44 +3.56 (+3.06) Following the Nasdaq's rally today, CMVT bounced off its 50 dma advancing 5% on good volume. It's now back at the 30 dma mark. More good news came from Dain Rauscher Wessels as they started coverage with a "buy aggressive" rating and set a 12-month target price at $80. This is all great and good, but with Greenspan meeting tomorrow with the Senate, we believe the markets could get hit hard (unless we are blessed with a miracle and he actually says something positive). Since the big tech stocks will, of course, be the first to go headfirst into the trenches; we'd rather not be caught without a paddle so we're dropping CMVT. Now just because we're dropping the stock doesn't mean it may not continue to run-up, but beware, the environment has changed. Why drop CMVT and not one of our other tech plays? Because CMVT has already shown a lot of weakness lately and we want to see what the market conditions are closer to its earnings date before playing it again. Today, Investor Relations at Comverse confirmed 2Q earnings will be released on August 31st, after the bell. VRTS $54.63 -2.63 (-6.37) This stock did a sharp about- face the last two days. Yesterday it's losses were linked to the big Nasdaq sell-off, but today company news was the likely culprit. Veritas announced they had filed a secondary offering of 12 mln. shares for two of their largest shareholders, Seagate and Warburg. Seagate's offering is 10.6 mln. shares and represents about 15% of its 35% stake it originally received through the May 1999 acquisition of its Network and Storage Management Group. Plus Veritas also filed with the SEC in regard to $575 mln. in convertible subordinate notes. The notes' proceeds will be used for general corporate purposes. No other details were available. At this point, we can no longer keep VRTS on our call list and are dropping it. HD $62.44 -1.38 (-2.19) Ouch. Sometimes a play just doesn't work out. On a day when the rest of the market is moving up, HD went the opposite direction in a big way on good volume. That doesn't inspire confidence. The chart is headed south and looks similar to a put play chart (though we are NOT adding it to that section). It reports earnings on August 17 (company confirmed)and should ultimately have an earnings run, just not now that it broke $64 support. Thus we are dropping it tonight. PUTS: ****** AHP $52.06 +0.94 (+.50) Although AHP was still trending down yesterday, it moved up $.94 on strong volume today based on 2 positive events. First of all, the FDA approved AHP's transplant drug, Rapamune, for use in preventing organ rejection in kidney transplants. About 12,000 kidney transplants are performed each year. Second, Immunex(IMNX), a biotechnology company, announced a 2:1 stock split, and its stock shot up today. Since AHP owns a majority interest in IMNX, it benefits from a rise in IMNX share price. This good news for the company is bad news for our put play. We believe that it is time to drop AHP. GTW $74.88 +4.19 (+1.88) Just after 11am EST Monday morning the profit taking we told you about Sunday began. After hitting a high of $73.94 GTW began to slip. GTW dropped $3.38 to a low of $70.56, closing near its lows of the day at $70.69 down $2.31 for the session. We believed there might be more profit taking in store today. Investors had a different idea, driving the price higher for most of the session. GTW closed up $4.19 for the day after receiving and upgrade to a strong buy from analyst Arthur Russell at Edward Jones yesterday. A report from Bloomberg also indicated Worldwide PC shipments rose 27% in the 2nd Quarter, adding further strength to the PC sector. We will say so long for now to GTW. SBH $59.69 +1.81 (+2.69) We said Sunday that SBH may be due for a bounce. Well, it is bouncing. SBH fell over $7.81 last week and need to do a little stock cycling upward or consolidating sideways to prepare it for the next leg down. We just didn't expect such a sharp bounce (at least for SBH) back upward. The strength in SBH's volume during the bounce was a little unnerving as well. We would rather wait to see if overhead resistance near $60 to $61 holds before playing it again. The low near $56 on Friday is its only support. We're going to put SBH back on the shelf and let it ripen for a few more days before playing it again. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 7-27-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** VOD $210.56 +4.19 (+3.38) After a small drop on Monday, VOD jumped back up today with a gain over $4. We got word back from VOD's investor relations about their proposed stock split. The information confirms our belief that a split will occur, but the record date isn't even until September 30th. Here is the exact information sent: "the Company(VOD) will effect a bonus share issue on the basis of four new ordinary shares for every one held, for every holder of ordinary shares appearing on the register of members of the Company at 9.30 p.m. on 30 September 1999." Do you know what that means?! That means VOD is in effect offering a 5:1 stock split. A capitalization bonus of 4 shares means they are giving you 4 shares in addition to the 1 share you have, not swapping you 4 new ones for your 1 old one. That is a 5:1 stock split. Too bad we don't know the ex-date yet. GE $116.25 +2.25 (+1.06) An upturn at the end of the day Friday on strong volume signaled that things would brighten for GE this week. It tried to mount a gain yesterday, but the weight of the sinking Dow was too much. Today, under better market conditions, GE managed a nice gain of $2.25. Sitting on its 10 dma, it is ready for continued gains if only Greenspan smiles on the market tomorrow. In the news, NBC, still showing its growing interest in the Internet, will spend $25 million to increase its stake in Telescan, which provides support to its CNBC Website. In another area of business, ONEOK, inc. plans to purchase 4 natural gas turbine generators from GE for about $70 million. Also, GE Capital has entered an alliance with Hitachi Credit Corp in issuing credit cards for employees' business expenses. CMB $83.75 +0.88 (+2.19) CMB rose $1.32 yesterday and tacked on $.88 more today. Please remember that financial stocks are interest rate sensitive and Mr. Greenspan speaks again tomorrow. Anything he says that is strongly negative could affect this stock. However, unlike some of the high growth tech stocks, CMB trades at a reasonable PE. Therefore, the downside risk is possibly not as great as it is for many stocks with recent dramatic run-ups. CMB did drop from around $75/share a year ago to below $40/share last September during the financial debacle, but this year, CMB has surprised with strong earnings growth. CMB will encounter resistance at $86 and $91.13 and has some support around $80. In the news, Chase has introduced the LensCard, a credit card with a built-in magnifying glass, designed to appeal to the aging baby boomers, whose vision isn't quite what it used to be when trying to read the bill's total. Also, Chase's Small Business Financial Services, a growing part of the bank, just introduced its first TV ad campaign. BGEN $69.69 +1.75 (-0.44) We were glad to see BGEN move up with the market today. Last Friday, we became cautious as the stock slipped and ABN AMRO downgraded it from "buy" to "outperform", based on valuation and its 33% price rise since early June. At the same time, however, ABN AMRO raised its price target to $87. Yesterday, Prudential started coverage with an "accumulate" rating. Then today, Raymond James and Assoc. raised its estimates for 1999 by $.03 to $1.34 and for 2000 by $.10 to $1.59. James and Assoc. also raised its price target by $7 based on the belief that sales of Avonex will continue to show strong growth. Fellow biotech stock Immunex just announced a split today, and that may help fuel the rally in this sector. We feel that BGEN still has potential for further gains after its $1.75 gain on strong volume today. We know what we said on Sunday, but with this sudden rash of good news, we want to watch it for another day or two. This does not mean jump in. This means watch it for a day or two. VRIO $80.13 -0.25 (-1.50) Last Thursday after announcing a 2:1 stock split (a first time event for Verio), the stock shot up $2.63 and traded as high as $82. However since then, it has returned to comfortable support at $79 and $80 and continues to consolidate at its 10 dma. Wait for momentum to pick up once again before initiating a new position. According to Verio's Investor Relations, the earnings date is tentatively scheduled for the week of August 2nd and the stock split should be paid out on or about August 20th. Remember, OIN never recommends holding over an earnings' or split announcement. EDS $62.88 +$0.50 (-1.62) Electronic Data Systems made an attempt to go higher first thing Monday morning and turned lower. It traded as though there was just not much interest in buying, as opposed to sellers jumping in and really trying to punish the stock. EDS traded down to $61.63 late Monday. It bounced off the $62.00 area for most of the morning Tuesday and found a bit off strength in the early afternoon, as investors returned from lunch ready to do some buying. The strength in the broader markets didn't seem to help EDS today. Volume was light at 887,800 mln. shares which is slightly better than half the norm. Earnings are scheduled to be released Thursday. Estimates are for $0.43 per share. Regardless of market direction, you will want to be out prior to their announcement. We'll be dropping them on Thursday's letter. VISX $100.25 +1.69 (-1.50) The first two days of the week VISX has tried to go lower. We've seen the profit takers come in and take VISX lower to $96.88, only to rebound in the afternoon. This is a similar pattern we saw last week. After being down $1.68 early in the day, volume picked up and the price advanced to close up $1.69 for the session. Volume was a little light at 1.09 mln. shares today. Technically the chart still looks strong. If you are considering a new position in VISX, we will remind you again that this play is not for everyone. VISX has climbed over 28% since the 1st of July. Look at further dips as a buying opportunity once they have been confirmed as dips. Keep your stops close as investors could decided to take their money off the table at any time. JDSU $82.63 +3.56 (+4.10) In case you didn't notice JDSU split this morning. The split was scheduled to take place on August 3rd. This move caught us off guard as we were recommending JDSU for a split run. Fortunately the stock is up $4.10 for the week. If you entered a play on JDSU late yesterday morning you are probably in good shape. OIN called JDSU investor relations and was told their attorneys suggested moving up the split date up. In a JDSU conference call last evening company official indicated that they had been advised by the NASDAQ that their shares would begin trading today at post split levels Tuesday morning. Regardless, the stock has split which eliminated our pre-split run. Hold on there's more. In the same conference call JDSU announced Q4 earnings. Not only did JDSU beat the street by 16%, they also beat their own previous estimates by $.03 per share. JDSU had earnings of $41.7 mln or $0.48 per share, double that of the same period last year at $20.8 mln or $0.26 per share. So where do we go from here? As you know we almost never suggest holding over earnings or splits. We are now faced with both. We are going to watch JDSU for the next two days. Why are we not going to drop it? We feel that the surprise split prevented much of a split run and the 6% correction in the Nasdaq last week prevented any kind of earnings run for the stock either. Now that the good news with the stock is out and investors can buy it at half the price, JDSU might just rally for a few days because it didn't get a chance to before these key events. However, if have a current play in JDSU keep you stops extremely tight. Just remember that your number of contracts probably doubled and your strike price has been cut in half. Be sure to double check with your broker to confirm. Fortunately, investors didn't slap JDSU for achieving their grand earnings, nor did post split depression start today with the stock gaining $3.56 on 1.4 mln shares, which is positive as well. If you do not have a current play on JDSU we would suggest keeping your eye on JDSU and only entering on further advances supported by strong volume. CSCO $62.94 +1.88 (+0.00) The yo-yo effect continues. As we wait for earnings to be announced after the bell on August 10, CSCO is on our pick list for an earnings run. We simply have to wait for an entry. It isn't here yet, thanks in part to market weakness over the last week and a half, from which CSCO hasn't been immune. Until we see volume come back into the stock, it will continue to consolidate in this range, that is if Greenspan or international events don't create any market surprises. Keep in mind too that earnings season is in its final stretch. With no other news to spark a rally (one can only hope with Greenspan, but don't count on it), we've noted in the Market Wraps that the overall future is foreseeably weak rather than strong, despite today's nice pop to the upside. A better buying opportunity may be just around the corner on intra-day dips or even more pervasive market corrections before CSCO starts its earnings run. Resistance is still up at $69. Play this commensurate with your risk profile, be patient, and wait for your entry. Though CSCO continues to announce new products in its press releases, ultimately it's the market that moves CSCO with it. DELL $42.13 +2.13 (+1.13) Bet on management. Though down intra- day to $39.75 in yesterday's trading, Dell staged a nice recovery today as they finally turned both barrels loose on the sub-$1000 PC market. They are now offering an Intel Celeron-based PC with monitor and 1 year of free Internet service on dellnet.com for a $959 to capitalize on the recent success of upstarts' similar PC merchandising plans. In addition, Dell will quickly link eager shoppers to the DellZone in search of goods and services provided by Dell's strategic partners, like Snap.com or Amazon.com. In any case, all the fanfare worked some magic on the stock, as the price sprang up $2.13 from its close yesterday. Dell doesn't announce earnings until after the bell on August 17 (company confirmed), so it's a bit early for the earnings run. In fact, if today's action was just a head fake, there is still support in the $37-$38 range, should the market resume downward movement. If not, near-term support, based on yesterday's bounce can be found at $40. Pick your entry and wait, we still have plenty of time. WHR $74.50 -0.44 (-1.00) Yes, the market was up today, but losing $0.44 on only 2/3 normal volume is acceptable, especially since it fell only $0.56 on a fairly negative day yesterday. After falling a bit this morning to $73.50, WHR steadily clawed its way back to $74.50 by the close. Technically, the chart is still positive, as WHR rests right at its 10-dma and remains comfortably above its 30-dma. Even though this is a more conservative play, we still need to be careful given that the whole market won't have earnings to prop it up in the coming weeks and appears headed lower, despite today's action. We still need to wait for volume to kick WHR back up to its all-time high of $76.50, set last Friday. If you think the market is headed south, defensive plays like WHR should turn popular again. Although it probably won't withstand a complete market meltdown. QCOM $154.38 +1.75 (-0.31) Despite trading as low as $148.75 yesterday morning in an otherwise bad day for the NASDAQ, QCOM steadily ascended yesterday and today to get back close to even. We just don't see QCOM staying at this level for long, since they reported blowout earnings last week. QCOM was also added to the S&P 500 index then. More importantly, 6.9 mln. shares currently owned by Goldman Sachs and Lehman Bros. are ear-marked to be sold to S&P index funds for something in excess of $156.50 per share (see Sunday's write-up for details). That's a tremendous level of support. Even so, if the whole market gets a bad case of hiccups, QCOM will suffer too. This is still a volatile play. Perhaps, if investors feel better after Greenspan leaves the microphone tomorrow, we could see a bit more tech. recovery, which would be good for QCOM. We still think they could announce a split, market willing, but will need shareholder approval to do so. Keep a close eye on the overall market and pick your entry carefully. You don't want to be an owner of these expensive calls just before the market craters. LGTO $77.00 -0.19 (-3.75) It was a rough start to the week for LGTO. The weakness in the NASDAQ pushed the stock back down to its 10-dma just under $76. Fortunately the stock had a nice double bottom there and started moving higher. This has the look of a short-term bottom and you may want to consider using it for an entry point. Tomorrow's action will be a result of Alan Greenspan's testimony before Congress so use caution. We still expect LGTO to begin making a split run anytime but any move below the 10-dma should be taken as a signal to start looking for an exit point. This is because the stock has held that support for basically the past two months. **************** PICK NEWS - PUTS **************** EBAY $99.56 -4.81 (-8.25) EBAY may have come in ahead of estimates at .04 p/s versus .03 and dominate 70% of the online auction arena, but the decline in earnings of $816K from $2.73 mln. (resulting from outages and infrastructure investments) put quite a damper on the excitement. It demonstrates EBAY is starting to feel the heat from two fierce competitors, Yahoo! and Amazon. The investor reaction - EBAY shut down $3.43 yesterday in heavy trading. This is good news for the put players! Even today, the losses extended amid the markets' technical bounce upward and analysts' remarks. Thomas Weisal reiterated a "watch list" recommendation and BBRS reiterated a "buy" rating. MER $73.56 +1.63 (+1.87) With interest rate concerns still paramount, the small gains MER made this week may simply be a cyclical reaction to its slippage below the 200 dma ($74) on Friday. The good news is the trading activity was low to moderate in volume and MER is still below its recent support of $77-79. If the decline renews itself in the next couple of days, the long-term bottom resistance from the previous months is around $66. This leaves lots of room for profit. Pick your entry point carefully and remember to confirm stock direction first. MWD $96.38 +3.75 (+2.88) MWD traded higher today as the DOW rallied +115 points; however, the stock's trading volume was very low at only 55-60% of its average levels. MWD is now back on its 50 dma. Recall that Greenspan speaks tomorrow and generally, investors get real jittery usually resulting in a market downturn. If you had the guts, you may have used the highs today as an entry point. However, a conservative player will always wait for directional confirmation before beginning a new play. CA $48.75 +2.13 (+1.19) Computer Associates is one that we suggest you keep your eye on if you are already in. Monday morning opened down $0.68, and then turned higher. We suggested on Sunday that we may see a bounce in CA. It was down over $8.00 last week and a bounce back to the $50 area wouldn't be a big surprise. The 50 dma is right at $50.00 as well. The short term trend is still down. If volume and buying don't pick up CA will probably go south after running into resistance. Keep your stops tight and only initiate a new play in on further weakness. XRX $48.44 -1.38 (+0.81) Xerox continued its downward trend today as investors continued to sell the stock. Under heavier than normal volume, the stock continues to sink ever since their earnings announcement. XRX is now well out of its normal range and is showing signs of being oversold. This should encourage investors with open plays to tighten up their stops. There has been no new news to move the stock but we are well under support and XRX should continue to drop on its own. With the volatile market continue to use caution with this trade but today's action in light of a 115 point Dow rally bodes well for the future of our play. DCLK $80.75 +2.19 (-2.94) Yesterday's cliff drop looked pretty impressive for this play. Today, there was a bit of recovery, but the future looks bleak. DCLK traded as high as $85.69 today, but couldn't hold the gain. A sell-off ensued mid-afternoon, knocking it down almost $5 from its high. Earnings season is over soon and there won't be anything to hold Internets or this stock up in the coming weeks. Still today's Internet action was scary. You either have to accept the volatility of this sector with nerves of steel to hold a position through these spikes (something we don't recommend) or be prepared to get stopped out. That's why we continue to remind readers that DCLK is not for the timid. In the long run the trend is down. If you are going to play in a volatile environment, just do your homework and plan your entry accordingly. Support is at $70. CMGI $90.25 +1.50 (-6.94) Yesterday, CMGI showed us a steady descent toward $88 support. Today, though it bounced off, the recovery didn't stick and CMGI sold off again. It's trying to dig out, but the Internets are just showing old-fashioned weakness. Though it sits near support, when earnings season ends, investors will get tired of "hoping" for recovery and throw in the towel. If investors won't prop it up at $88, the next stop is around $77. At least that's how the textbook reads. So if Greenspan or another event doesn't trash the market and we get a small recovery, you might consider it a buying opportunity for a shorter term play. Otherwise, confirm market direction before getting in. After today's surprise rally, nobody really has a clear idea of tomorrow's direction. Sit this one out if the word "risk" is not in your vocabulary. . Bring the Pepto-Bismol. It can move up as fast as it goes down. Perhaps the EBAY skunk will rub off on the rest of the meadow. LVLT $55.44 +1.44 (-2.63) Investors are beginning to panic and sell their shares of LVLT. The fact that the stock price is dropping shouldn't be that much of a surprise. Remember this is a company that went from $35 to $100 earlier this year but doesn't actually have prospects for real earnings for 3 years. We saw the stock bounce off of $54, which has some significance. LVLT sold some 25 million shares to institutions in March at $54 so we could see some short-term support there. Overall the trend will continue lower. LVLT is now under the 200-dma and looking very bad from a technical standpoint. U $38.00 +0.81 (-0.19) There isn't much to report on our play of USAir. The stock is down on the week thanks to a weak market and higher oil prices. There wasn't any company specific news to carry the stock one way or the other. Like we have said before, USAir should continue to drift lower until they iron out some other ongoing problems with labor disputes and slowing revenues. Pick your entry points on the jumps and take your profits on the dips. AOL $98.19 -1.94 (-9.75) And the losses continue. AOL has given back almost another 10% so far this week. This drop has been prompted by more than just a weak market. In fact, AOL didn't even get to participate in today's NASDAQ rally as it closed down on the day (yes, we know AOL is on the NYSE). The big news on Monday was that upper level management at AOL has been selling stock big time. The company has confirmed that Steve Case and Robert Pittman have sold substantial portions of their shares recently. This is just another weight on the ailing stock price. The Internet sector had some issues doing very well Tuesday morning but by the end of the day most had given back their gains. We would have expected to see more support from the $100 price which it has held in the past. At this point the next stop could be at the 200-dma at $92. Remember to secure your profits with stops. SCH $45.56 -0.06 (-1.19) Schwab has been moving with the sector for the most part this week. It dropped with the weak online brokers group during a rough session for the NASDAQ on Monday. It tried to recover on Tuesday and did spend most of the day in positive territory before closing down fractionally. That is not a very positive sign for how strong the markets were on Tuesday. This is a further sign that the sector will stay in the dog house over the short-term. Use the rallies for entry points and continue to monitor market sentiment for any signs of a meaningful recovery. ************** NEW CALL PLAYS ************** GDT - Guidant Corp $61.88 +0.44 (+1.63) Guidant Corp. designs, develops, manufactures and markets a wide range of medical products used in cardiology & vascular intervention and surgery. Guidant makes automatic implantable cardioverter defibrillator systems used in the detection & treatment of abnormally fast heart rhythms. It also makes a full line of implantable pacemaker systems used for slow or irregular arrhythmias. The company also makes minimally invasive products used in surgery to open blocked coronary arteries, including stent systems, coronary dilatation catheters, guide wires, atherectomy catheters, guiding catheters and related accessories. Guidant was up fractionally today along with the general market. We are adding Guidant as one of our call plays because of good news this past week and the general momentum of the stock. The stock is currently trading above both the 50dma and 200dma of $53. We expect this upward trend to continue with recent upgrades by Adams Harkness from accumulate to trading buy. Also, Leaman Brother initiated coverage of the stock at outperform, and Prudential initiated it at accumulate. Even with this good, news be careful with the recent volatility in the market and Greenspans speech tomorrow. There was no other news about Guidant besides what was stated in the above paragraph. BUY CALL AUG-60 GDT-HL OI=500 at $4.75 SL=3.00 BUY CALL AUG-65*GDT-HM OI=471 at $2.13 SL=1.13 BUY CALL SEP-60 GDT-IL OI= 64 at $6.38 SL=4.25 Picked on Jul. 27th at $61.88 PE = 49 Change since picked 0.00 52 week low =$29.75 Analysts Ratings 14-13-10-0-0 52 week high =$69.88 Last earnings 6/99 est= .33 actual= .34 Next earnings 9/99 est= .33 versus= .27 Average Daily Volume = 1.744 mln Chart = http://quote.yahoo.com/q?s=GDT&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 7-27-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************* NEW PUT PLAYS ************* NITE - Knight/Trimark Group Inc $44.38 +0.19 (-4.34 for wk) Knight/Trimark is a market maker in 4,200 Nasdaq securities and other over-the-counter (OTC) equity securities. They also sell NYSE and American Stock Exchange listed securities in the Third Market. The Third Market is a group of non-exchange-member broker-dealers who trade exchange-listed securities OTC. They make their money on the difference (the spread) from what they pay for a stock to what they sell if for. The company has some well-known clients such as Paine-Webber, Merrill Lynch, E*Trade, and AmeriTrade. Company earnings came out last week (July 21st) and they were great at .43 p/s versus the consensus estimate of .35; and certainly a blowout compared to 1998's 2Q of .14 p/s. However, in an interview the following day, CEO Ken Pasternak's stated that he expects a much slower future growth rate (a reasonable 5-10% a quarter). Well, investors didn't like that too much; especially since this stock has had such unbelievable returns in the last 9 months. Now, the stock has been trading below its 50 dma since July 9th (it's at about $56 now), but on Monday NITE plunged 9% (-$4.53) driving it even farther south amidst the Nasdaq sell-off. Today the Nasdaq rallied strong and NITE didn't respond. This is definitely a bearish sign. With Greenspan again on center stage tomorrow, its likely to have a negative impact on the markets. If you decide to open a play, confirm the stock direction and overall sentiment first, then look for an entry point intraday. BUY PUT AUG-45*QTN-TI OI=1824 at $3.88 SL=2.50 BUY PUT AUG-40 QTN-TH OI= 401 at $1.69 SL=1.00 Average daily volume = 4.46 mln. Chart = http://quote.yahoo.com/q?s=NITE&d=3m **** GNET - Go2Net,Inc. $65.00 +2.38 (-5.69) Because we are online investors, chances are most of us have had the opportunity to use the services of Go2Net. This company provides us with Web sites, search engines, and software for finance and the investment community. Their focus is to be able to allow their customers access to vast amounts of resources by linking together the virtual community. Products such as Siliconinvestor.com, Metacrawler, stocksite.com, and playsite.com are but a few of the sites this company offers. GNET has been the unfortunate recipient of the markets attack on the Internet sector. The stock weakened with a break below the 10 dma on 7/16. Since then it has continued to drop below it's 50dma and 100 dma, a significant resistance level at $67.00. Like a balloon losing helium against the ceiling, we think the stock will continue fall to lower levels due to market conditions and overvaluation. The technical indicators are showing us that this may be a good entry point to enjoy this balloons ride to the floor. Despite GNET's positive report of .07/share earnings on 7/21, and increased traffic to it's sites, the stock was unable to maintain any upward momentum. The company's CEO expressed some dismay at Wall Street's outlook; however, it appears to be a sector issue, and not so much a personal one. AT&T also announced they are lowering their ISP rates, which is causing the whole Internet sector to be affected adversely. With all indicators pointing toward a continued correction, we feel this is a good point to play the downside on GNET. Keeping the resistant levels in mind, pick your entry, and confirm market direction before jumping in. BUY PUT AUG-65 GQI-TM OI=154 at $5.50 SL=3.75 BUY PUT AUG-70 GQI-TN OI=169 at $8.75 SL=6.50 Average daily volume = 904K Chart = http://quote.yahoo.com/q?s=GNET&d=3m **** TERN - Terayon Comm. $41.31 +$1.56 (-0.44 this wk.) A George Gilder favorite, TERN makes CDMA cable modems. Their products enable much faster and cleaner transmission of voice and data/Internet over cable TV mediums. Its biggest customers are in Israel, Japan, and Brazil. In the U.S., they are used by Cablevision, and in Canada, by Shaw communications. They could become particularly instrumental in helping AT&T to provide services over their newly acquired cable assets, while spending a smaller fortune in the process of upgrading the system. Are you listening, Michael Armstrong? Gilder readers will frown at us for putting this on the PUT list, but the chart is just too compelling. Take a look. TERN has been in descent from $56 to $41 over the last 16 trading days. Not only that, but they announced great earnings 2 weeks ago and suffered a downgrade that day too. To be fair, there were a couple of "buy" recommendations reiterated too. However, there is no support until it reaches $33. If the market remains in an overall sour mood (and with earnings season on the wane, we expect that), TERN has nowhere to go but down. Having said that, news releases from this company are sparse. We haven't seen one since July 14. However, since they are on the cutting edge of delivering bandwidth through cable, an announcement of adoption of TERN technology from one of the big cable companies would rocket this play to the sky (wrong direction). We know that will eventually happen, we don't know when. The play is based on short-term technicals and will be most influenced by the market, not the stock itself. Confirm market direction before playing. BUY PUT AUG-45 TUN-TI OI=276 at $5.63 SL=3.75 BUY PUT AUG-40*TUN-TH OI=352 at $2.63 SL=1.25 Average daily volume = 675 K Chart = http://quote.yahoo.com/q?s=TERN&d=3m *************** PLAY OF THE DAY *************** Play of the Day. Due to the Fed chairman's address to the Senate tomorrow, there is no play of the day. Market direction will hinge on his speech. ***************** COMBINATION PLAYS ***************** Relief Rally Comes Just In Time.. U.S stocks rebounded Tuesday as investors scoured the market for bargains after the recent slump on interest rate worries. U.S. stocks fell Monday on prevailing worries about increasing interest rates as the Federal Reserve chief prepares to address the Senate Banking Committee Wednesday. The Dow ended 47 points lower at 10,863 while the technology-heavy Nasdaq index plunged 73 points to 2,619. In the broader market, declining issues led advances by a 2-to-1 margin on moderate volume of 611 million shares on the New York Stock Exchange. The 30-year Treasury bond was down 3/32 with the yield at 6.04%. Sunday's new plays (positions/prices): RPC Roberts Pharm. OCT30C/AUG30C $0.00 debit RPC Roberts Pharm. OCT25C/AUG25C $0.00 debit TNB Thomas & Betts AUG50P/AUG45P $3.00 debit MACR Macromedia SEP35P/AUG30P $4.12 debit EQ Equitable Co. AUG75C/AUG70C $0.87 credit HMC Honda Motor Co. AUG95C/AUG90C $1.00 credit There was great difficulty in the spreads portfolio on Monday as Interquote was painfully slow in producing updated quotes. All of the new positions were based on CBOE (delayed) prices. Our volatility play was quickly subdued on an early morning announcement that Britain's Shire Pharmaceuticals Group Plc and Roberts Pharmaceutical planned to merge. Roberts will exchange each of its shares for 1.1374 American Depository Receipts of Shire in a transaction valuing each Roberts share at $30.71. The British company expects to complete the transaction in the 4th quarter. It will be interesting to watch the price of RPC and how the merger would have affected each of our positions. Thomas & Betts (TNB) traded in a small range for most of the day and a $3.00 debit on the August bear-put spread was easily achieved. The Macromedia (MACR) calendar position was quoted at $4.25 debit near 9:46 AM and the target price ($4.12) should have been available. The Equitable Co. (EQ) gapped lower at the open and took most of the day to recover; the suggested entry price was available in the afternoon. Honda (HMC) was virtually unaffected by the broad market sell-off but we were unable to achieve the target credit. Portfolio plays: The big loser today was America Online (AOL). The stock fell over $8 to just below $100 as the Nasdaq market took a drubbing because valuations, particularly in the Internet sector, are now seen as unreasonably high. Most of our large-cap technology stocks were affected by the sell-off. Cisco (CSCO), Intel (INTC) and Sun Micro (SUNW) were all down. Many secondary issues also moved lower in sympathy; Network Associates (NETA) and Novell (NOVL) were down significantly. One positive mover was Emulex (EMLX), up almost $3 to $107 after announcing that Data General's (DGN) CLARiiON division selected its high-performance Fibre Channel host adapter, the LightPulse LP8000, for use in future storage solutions. Another bullish issue was Apria Healthcare (AHG), as traders speculated on the upcoming earnings report. Watch for the post announcement drop. Tuesday, July 27 U.S stocks rebounded Tuesday as investors scoured the market for bargains after the recent slump on worries of higher interest rates. The Dow ended up 115 points at 10,979 regaining some of last week's 300 point loss. The technology-laced Nasdaq index jumped 60 points to 2,679. In the broader market, advancing issues led declines 1,618 to 1,368 on moderate volume of 717 million shares on the NYSE. The benchmark 30-year Treasury bond rose 7/32 and the yield fell to 6.01%. Portfolio plays: A nice broad market recovery and many of our positions moved back into recent trading ranges. RF Micro (RFMD) rallied today, up over $7 on huge 'pre-split' speculation. Intel (INTC) also climbed back into respectability after a sector upgrade boosted hardware stocks. New expectations for strong personal computer and chip sales later this year helped the group rebound. Most of the other big guns (including CSCO, DELL, MSFT, SLR, & SUNW) in the technology group were higher. Western Wireless (WWCA) gapped-up after ING Barings upgraded the company and set a new year-2000 share target price of $38. WWCA reported better-than-expected second quarter earnings on Monday. Two of our small-cap issues rebounded significantly today; Novell (NOVL) and Polaroid (PRD) were both up over $2. Looking back at the Roberts pharmaceutical (RPC) calendar spread (from Monday), it appears that the long-term time frame of the announced merger is going to keep some speculators active in the options. Today's prices were relatively unchanged through 500,000 shares traded, leading us to believe that either of the positions could be profitable. Those of you holding August positions on Standard Products (SPD) were happily surprised by the announcement that Cooper Tire & Rubber plans to acquire the company for $584 million. Cooper said the purchase price values Standard Products at $36.50 a share. Depending on which spread you participated in, that represents a $6-$11 gain. (Our position was previously closed.) Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - I had some new requests for conservative, low priced calendar spreads this week. These positions offer favorable risk/reward ratios and the (long-term) time frames will allow for a greater range in stock price movement. We are establishing these spreads 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this type of horizontal spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the investor would like to have the stock price finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. ****************************************************************** IGL - IMC Global $18.55 *** Awesome Earnings *** IMC Global Inc. is one of the world's leading producers of crop nutrients for the international agricultural community and is one of the foremost distributors in the United States of crop nutrients and related products through its retail and wholesale distribution networks. IGL mines, processes and distributes potash in the United States and Canada and is a joint venture partner in IMC-Agrico Company, a leading producer and marketer of phosphate crop nutrients and animal feed ingredients. Today IMC Global reported earnings that exceeded Wall Street estimates even though revenues were hurt by price pressures and lower sales of phosphate fertilizer. IMC's profit was down 21% from last year and the results reflect the full impact of one of the worst domestic spring application seasons for phosphate and potash in several years. The company says the current condition is temporary and this years seasonal harvest will improve based on extensive fertilizer applications. On the positive side, two subsidiary groups, IMC Salt and IMC-Agrico Feed Ingredients, posted double-digit increases for sales, margins and operating earnings. Another reason for today's rally may be the announcement that the company is in discussions with several potential buyers for its IMC Chemicals unit. But they also commented "Despite a high degree of interest and generally improving market conditions, the timing of any sale remained uncertain". We like the long-term technical outlook for the stock and the possibility of a divestiture of the company's losing division. This type of issue may also participate in rallies with the large-cap safety stocks when the market outlook becomes bearish. PLAY (conservative - bullish/calendar spread): BUY CALL JAN-20 IGL-AD OI=69 A=$2.25 SELL CALL AUG-20 IGL-HD OI=101 B=$0.43 INITIAL NET DEBIT TARGET=$1.62 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=IGL&d=3m ****************************************************************** RNBO - Rainbow Technologies $13.38 *** Cheap Speculation *** Rainbow Technologies provides security related technology for the Information Age. RNBO is a leading developer, manufacturer and supplier of software protection solutions, and a leading provider of network license management and information security. The company applies its core technology to a variety of Internet applications; from securing software, to the acceleration of communication for e-commerce and Virtual Private Networks. Their products include secure Web server and VPN acceleration boards, anti-piracy & Internet software distribution solutions, software metering & management tools, voice, data and satellite security systems, USB-based authentication tokens and smart card readers. Last week, Rainbow Technologies reported quarterly revenues that increased 10% primarily because of substantial growth in their Internet Products & Services segment. The company's strategy to invest in that market segment appears to be paying off. For the past six months, net income increased 30% percent to $3 million after they added a new major OEM customer, and they are pleased with an increased end-user acceptance of their new products; NetSwift and CryptoSwift. The company is a market leader in accelerator products for the Internet, specifically in the fast-growing on-line trading and financial services area. Internet business transactions will continue to grow and any company that excels in that area should profit significantly in the future. The recent run to earnings has left a small void to fill in the technical outlook but once the consolidation is complete, this stock should continue higher. PLAY (aggressive - bullish/calendar spread): BUY CALL OCT-15 BQO-JC OI=43 A=$1.62 SELL CALL AUG-15 BQO-HC OI=80 B=$0.50 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=RNBO&d=3m ****************************************************************** UCL - Unocal Corp. $40.06 *** Oil Industry Hedge? *** Unocal is a fully integrated oil and gas resources company whose worldwide operations comprise many aspects of energy production. The company has reorganized its business into these segments in order to remain focused on its most critical business activities: exploration and production, refining, marketing, transportation and diversified businesses. Unocal just reported that second quarter earnings fell 70%, due mostly to the cost of drilling unsuccessful wells. Their earnings fell to $19 million, or $0.08 a share, but analysts had expected the company to post earnings of only $0.05 a share. Unocal also said it took an $11 million after-tax charge for restructuring costs. One positive note, the company commented that earnings reflected continued strong performance by Spirit Energy 76's mature assets. Despite the relatively poor earnings, UCL has a positive outlook for the future based on optimism that there will be no change in production quotas at the September meeting of OPEC. Shares of independent oil and gas producers should do well if the broad market consolidates while oil prices remain near current levels. We are going to offer this play as a portfolio hedge against the high priced technology and blue-chip issues that many of us trade regularly. The current bearish outlook for UCL is expected to diminish after a few weeks and a small disparity in the front month options will allow us to open this conservative position at a discount. PLAY (conservative - neutral/calendar spread): BUY CALL JAN-40 UCL-AH OI=330 A=$4.37 SELL CALL AUG-40 UCL-HH OI=67 B=$1.68 INITIAL NET DEBIT TARGET=$2.50 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=UCL&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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