The Option Investor Newsletter Thursday 7-29-99 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) ************************************************************ 7-29-99 High Low Volume Advances Decline DOW 10791.29 -180.78 10971.36 10714.03 766,699k 805 2,227 Nasdaq 2640.01 - 65.83 2672.51 2627.80 913,879k 1,349 2,591 S&P-100 690.40 - 12.64 703.04 685.76 Totals 2,154 4,818 S&P-500 1341.03 - 24.37 1365.40 1332.82 30.9% 69.1% $RUT 441.58 - 5.03 446.61 439.80 $TRAN 3348.95 - 69.44 3417.32 3342.21 VIX 25.08 + 1.88 26.98 24.62 Put/Call Ratio .74 ************************************************************* When in doubt, sit out! Just when you think the doom and gloom at OIN is simply bull the market does another swan dive on economic news. The Employment Cost Index rose +1.1% for the biggest jump in eight years. The signs of inflation were flashing red today as the bond market tanked on the strong inflation news. Bond yields closed off the highs but still a hefty 6.08%. The Dow went into panic mode at the open and promptly dropped -130 points within several minutes. The worst was not over and after resting at 10800 for awhile it fell to the afternoon low of 10714. Bargain hunters in denial of the market pull back jumped in to buy the dip again. The Dow closed +76 points off its lows but the ticks were still not showing any signs of life. The advance/decline line was severely negative with decliners beating advancers 7:3. The Nasdaq was looking worse, down -65, but dropping again at the close. These charts do not paint a pretty picture. Just Monday of last week we were setting new highs but how quickly the economic picture can change. Just a week after Greenspan warned the Fed would act "promptly and forcefully" and a day after he repeated his warning, the signs of strong inflation appeared as if to say "oh yeah? I dare you!" The challenge has been made and the bond market analysts say it is now better than an 80% chance that the Fed will raise rates again in August. While the actual raising of rates another +.25% is hardly a big deal, the worry that the hike could be higher or more than one, put the old fear of uncertainty back into the markets. The GDP numbers released today were non-inflammatory at +2.3% but the ECI blowout completely overshadowed the news. With the ECI showing the biggest increase in eight years there was no doubt at all that the results of the tight labor market had finally made itself felt. Wage prices make up 66% of the cost of most goods. If wages continue to climb, inflation cannot be ignored. The few reasons for continuing to buy stocks just got smaller. Bulls who had been using the weakness from the last week as buying opportunities may be rethinking their positions. Bonds are starting to look very attractive at 6.1%, the high of the day, especially with Y2K uncertainty growing. Did you hear Y2K mentioned today? I did several times by analysts claiming part of the sell off to be Y2K related as well. Whatever your feeling about Y2K it is only 108 trading days away. Funds are bleeding cash as cautious investors are moving money out of stock funds and while there is not a lot of selling by funds there is a lack of buying. If you remember my "Why Buy" article last week there is just no compelling reason to buy stocks right now. Earnings expectations are over. 83% of the S&P-500 have reported and the remaining 17% are spread out over the next several weeks. Of the companies reported, 66% beat estimates, 22% were on target and only 12% reported less than estimates. A very good season, but it is over. No reason there. Interest rates are more than likely to go up which impacts future earnings. No reason here. Third quarter earnings are not normally great so expectations are not high. August is not normally a banner month so no reason to jump in now. There is just no reason to expect the market to move up from here. I know this is heresy but as traders we need to face facts even if we don't like the facts. The best scenario I can picture for the next two weeks would be a range bound market. Definitely not a positive for traders. The most likely scenario is a continued downtrending market. Bulls are pointing to the last ECI report of .4% as abnormally low and today's ECI of 1.1% as abnormally high. Averaged together at .75% you get a normal reading. I can see their point but remember Greenspan is looking for any reason to justify the next rate increase. They try to anticipate future inflation and be pre-emptive NOT chase after inflation with a leaky hose. Another bullish sign today was the lack of volume. At 766 mln on the NYSE there was no panic driven rush to the exits. Either the bulls are still in denial or most investors think the reaction was overblown. Another bullish sign was the spike in the put/call ratio to .74. Normal is .50 and market bottoms are formed when large numbers of traders buy puts to protect positions. This is sometimes a last ditch effort which slows market declines and is viewed positively. These bullish signs may contribute to the next bounce but in the end I think the direction is down. The technical bounce after the last –400 points on Tuesday, came true only to become another rally for investors to sell into. I expect the next bounce to be the same. The next major economic report is the July jobs report next Friday. If we can make it to then without a surprise rate increase then our fate will hinge on the unemployment rate. With employment in some states as low as 2.4% and employers offering large cash signing bonuses it is not likely that the U.S. rate went up. This will be another wall of worry that the market and Fed will have to climb. In stock news today the 800lb software gorilla. MSFT, may end up being several smaller ones. A Justice Dept spokeswoman said the agency had "made preliminary inquires to experts that might assist us in evaluating an array of remedy options" if the U.S. wins the antitrust case. Bankers at two investment banks, which declined to take on the project, said the government wanted to know how a breakup would be done and how the market would react. While I don't think this will happen I can believe this was a trial balloon to create anxiety on the part of MSFT and make them more reasonable at the negotiating table. Time will tell. If you are not in the market today, and I hope you are not stuck trying to "hope" up some positions tonight, I would suggest that cash is king and sleeping is much easier on pillow of cash in your account. Waking up to markets gapping down is not good for your health. Our motto is "when in doubt sit out" and this would be our directive for tomorrow. 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 - Thursday, July 29, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,791 Neutral 7.20 SPX S&P 500 1,330 1,420 1,339 Neutral 7.20 OEX S&P 100 675 735 689 Neutral 7.20 RUT Russell 2000 430 465 442 Neutral 7.20 NDX NASD 100 2,200 2,468 2,263 Neutral 7.20 MSH High Tech 1,080 1,250 1,136 Neutral 7.20 XCI Hardware 920 1,090 1,003 Neutral 7.20 CWX Software 700 844 736 Neutral 7.20 SOX Semiconductor 450 535 493 Neutral 7.20 NWX Networking 550 625 565 Neutral 7.20 INX Internet 500 580 445 BEARISH 7.20 BIX Banking 690 710 667 BEARISH 7.23 XBD Brokerage 410 440 398 BEARISH 7.23 IUX Insurance 645 660 629 BEARISH 7.23 RLX Retail 915 960 883 BEARISH 7.23 DRG Drug 370 400 350 BEARISH 7.20 HCX Healthcare 750 800 723 BEARISH 7.22 XAL Airline 180 190 163 BEARISH 5.21 OIX Oil & Gas 285 310 296 Neutral 5.13 Posture Alert GDP and the Employment Cost Index were the main contributors to today's selloff, with the Internet sector leading the way down (-4.35%). There was no where to hide as all sectors got beat up including Semiconductors (-3.35%), Drug (-2.84%), Healthcare (-2.30%), and Software (-3.1%). A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture **************** Market Sentiment **************** Not Many Positive Signs. In doing our latest update, we at Pinnacle Capital noticed that there is currently not a lot of positive things going for this market, with the exception of another solid earnings season in the books. Advance/Decline looks poor, stocks/indexes are breaking below key supports, money flows in the market is slowing down, the bond market is hinting at (inflation) higher rates, rumors of more currency devaluation around the globe, and Y2K looms just around the corner. When all stacked up, not a pretty picture. However, there isn't a state of panic either. It's very mediocre, as was this selloff today. Volume on the NYSE was lame; the 30-yr bond sold off this morning on very light volume, and rebounded well off of its lows by day's end; and overall, investors and traders we spoke to seemed very complacent. This complacency can be witnessed by the weekly Investors Intelligence Survey. Bullishness decreased by .5%, yet bearishness decreased by 3.3%. For this market to break new highs, we need bearishness to increase, not decrease. When evaluating all of the above, we would most likely expect more downside potential in all segments of this market, so be prepared. However, the key will be interest rates. As long as the yield on the long bond doesn't break new highs, this market could be trading range bound, with wild fluctuations like this last week. Even though this market has taken it on the chin (especially technology) several sectors have held up nicely during these last seven days. This would include: the Morgan Stanley High Tech (MSH +14), Semiconductor (SOX +17), Hardware (XCI +9), and Networking (NWX -1). Below are charts of the 4 above-mentioned sectors, and as you can see, they have been very volatile yet locked in a narrow range. If interest rates (for whatever reason), start to rally and sparks this market, these sectors would be where I would put my money. If the bond continues on its higher course, look for red across all sectors. BULLISH Signs: None Mixed Signs: None BEARISH Signs: Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased 0.5% but Bearish sentiment decreased 3.3%. Russell 2000: Trending below both moving averages, and also below key 450 benchmark. 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 .97 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 Thurs Indicator (7/23) (7/27) (7/29) Pinnacle Index (OEX): Overhead Resistance (720-750) 3.2 3.9 4.1 Underlying Support (685-710) 1.2 1.2 1.2 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 .7 CBOE Equity P/C Ratio .5 .5 .5 OEX P/C Ratio 1.0 1.0 1.3 Peak Open Interest (OEX): Puts 700 700 Calls 740 740 P/C Ratio 1.02 1.55 Market Volatility Index (VIX): CBOE VIX 25.44 Investors Intelligence: Bullish 53.60% * Bearish 24.60% * 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 Thurs Benchmark (7/23) (7/27) (7/29) Overhead Resistance (720-750) 3.2 3.86 4.14 OEX Close 698.88 701.51 690.40 Underlying Support (685-710) 1.2 1.18 1.21 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 725/750 level while the underlying support is holding at the OEX 685/710 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (7/23) (7/27) (7/29) CBOE Total P/C Ratio .68 .70 .68 CBOE Equity P/C Ratio .49 .50 .52 OEX P/C Ratio 1.04 1.55 1.32 (OEX) Peak Open Interest Friday Tues Thurs Strike/Contracts (7/23) (7/27) (7/29) Puts 700 / 8,032 700 / 8,427 700 / 8,629 Calls 740 / 7,933 740 / 8,230 740 / 8,971 Put/Call Ratio 1.01 1.02 .97 (VIX) Market Volatility 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 29, 1999 25.44 Investors Intelligence Survey 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 July 28, 1999 53.6 24.6 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10791.29 -47.80 115.88 -6.97 -180.78 -119.67 Nasdaq 2640.01 -73.21 60.14 26.51 -65.83 -52.39 $OEX 690.40 -5.97 8.60 1.53 -12.64 -8.48 $SPX 1341.03 -9.18 15.08 2.56 -24.37 -15.91 $RUT 441.58 -5.51 3.61 0.13 -5.03 -6.80 $TRAN 3348.95 1.83 33.94 1.13 -69.44 -32.54 $VIX 25.08 2.15 -1.98 -0.73 1.88 1.32 Calls Mon Tue Wed Thu Week JDSU 87.00 1.06 3.56 5.38 -1.00 9.00 Excellent QCOM 156.38 -2.06 1.75 5.38 -3.38 1.69 Looks good DELL 41.25 -1.00 2.13 0.63 -1.50 0.25 Held up GDT 60.50 1.19 0.44 0.88 -2.25 0.25 Entry?? VOD 207.00 -1.56 4.19 -2.25 -1.31 -0.94 Bounce CSCO 61.75 -1.88 1.88 0.38 -1.56 -1.19 Waiting VISX 100.56 -3.19 1.69 3.50 -3.19 -1.19 Low volume CMB 80.25 1.31 0.88 -0.81 -2.69 -1.31 Dropped EDS 62.13 -2.13 0.50 -0.31 -0.44 -2.38 Dropped GE 112.00 -1.19 2.25 -2.25 -1.81 -3.00 Dow mover BGEN 66.88 -2.19 1.75 0.31 -3.13 -3.25 Dropped WHR 71.69 -0.56 -0.44 -0.63 -2.19 -3.81 Dropped LGTO 73.44 -3.56 -0.19 0.88 -4.44 -7.31 Dropped VRIO 72.00 -1.25 -0.25 -2.38 -5.75 -9.63 Ouch! Puts MSPG 34.38 -3.94 0.06 -4.75 -1.13 -9.75 New AOL 98.75 -7.81 -1.94 4.56 -4.00 -9.19 Looks good GNET 63.88 -8.06 2.38 1.75 -2.88 -6.81 Rough week ELNK 49.50 -4.44 3.31 -2.38 -3.00 -6.50 New EBAY 102.25 -3.44 -4.81 5.38 -2.69 -5.56 Down again NITE 44.00 -4.53 0.19 2.88 -3.25 -4.72 Weak group LVLT 53.75 -4.06 1.44 2.38 -4.06 -4.31 Falling CMGI 93.50 -8.44 1.50 7.88 -4.63 -3.69 Net play TERN 38.38 -2.00 1.56 -1.63 -1.31 -3.38 On target U 36.06 -1.00 0.81 -0.31 -1.63 -2.13 Keep going DCLK 81.88 -5.13 2.19 5.25 -4.13 -1.81 Dropping SCH 45.86 -1.13 -0.06 2.50 -2.20 -0.88 $45 is key MER 70.88 0.25 1.63 0.13 -2.81 -0.81 Weakening MWD 93.00 -0.88 3.75 -0.31 -3.06 -0.50 Rate fears CA 47.25 -0.94 2.13 -0.19 -1.31 -0.31 Rangebound XRX 49.56 0.56 -1.38 0.69 0.44 0.31 Caution **************** 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: ****** LGTO $73.44 -4.44 (-7.31) LGTO is dying with the market as the employment cost index triggered a selloff on Thursday. The stock is now under the important 10-dma that we mentioned on Tuesday. This should have been the signal to stop out your plays. There is no specific news to have caused the recent profit-taking but, believe it or not, Legato's employees are jumping for joy with this decline in their stock price. This is because their stock option program for next year is locked in to purchase shares at whatever price the stock is on August 1. So the lower it goes, the better the price they can exercise at. We do still have a split coming on August 16 but now that we have broken the uptrend the risk outweighs the reward so we are dropping it as a play. EDS $62.13 -0.44 (-2.37) EDS earnings came in better than expected on Thursday. EDS beat the street by about 10% with earnings at $0.48. The street was expecting $0.43. However you should have exited any positions in EDS by the close of business today. EDS traded down to $60.37 for the low before coming back strong the last hour of trading to regain just under $2.00, closing at $62.13. Whether investors will pat the company on the back or slap them in the face remains to be seen. We will step aside and wait for another opportunity with EDS. CMB $80.25 -2.69 (-1.31) Banks and other financial stocks went south today, following a reported increase in the cost of labor and fears that a tight labor market will send wages even higher. That means inflation may still be a problem and interest rates are more likely to go higher. CMB couldn't buck the trend and dropped with the rest of the financial sector, as well as the overall market. CMB has a little support at this level but it has dropped below its 10-dma and if market forces send it lower, the next support level isn't until the $70 level. Therefore we are dropping CMB. BGEN $66.88 -3.13 (-3.25) BGEN was up fractionally yesterday on a newly issued "buy" rating from Gruntal and Co. They believe the market does not fully appreciate the potential of 2 drugs currently in development by the company, saying that Amevive and Antova could eventually become blockbusters that generate $1 billion. They gave the stock an $83, 12-month price target. In spite of these positive comments, BGEN sank with its sector and the rest of the market today. The technicals look fairly negative and we don't want to keep BGEN in case it decides to test that lower levels of support so we are dropping from our call plays. WHR $71.69 -2.19 (-3.81) So where is all the support? We hope for sake of those in the play it's at $71-$71.50. But on a day when the market is taking out its aggressions (and profits) in tech stocks, WHR should have given us a better performance given its typically defensive nature. Instead the stock fell with no buyers coming in to support it. Investors are telegraphing that this is no safe haven. Even on an up day yesterday, WHR lost ground. That's our cue to exit the trade. Bye bye, Whirpool. You are all washed up for now. PUTS: ****** none today ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Thursday 7-29-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** VRIO $72.00 -5.75 (-9.63) Verio had been consolidating at its firm support level of $79-80 (also its 10-dma) for the past few days. But yesterday it started showing signs of weakness as it dipped to $76.88 and proceeded to close near its day low. Today VRIO followed the bearish market and spiraled down almost 9 points during intraday trading, only managing to recover to $72 by the finish. If you decide to open a new play, you need to wait until the broader markets turn positive - VRIO will likely follow, but always confirm stock direction. Remember, earnings are tentatively scheduled for next week and the 2:1 stock split is expected on or about August 20th. GDT $60.50 -2.25 (+0.25) Following the trend of the market, Guidant was also on the downside today. The decline was because of a higher-than-forecasted report on the employment- cost index that stirred fears that inflationary pressures will spur higher interest rates. Despite the unfortunate news brought on by today's economic numbers, this may be the entry point we are looking for. With last week's upgrades and a support level around $60, GDT has more upside potential. As always, we recommend using stop loss orders to end the play if needed. We would confirm upward direction on the stock first before jumping in. VISX $100.56 -3.19 (-1.19) When looking at the volume the last two days on VISX, it has been coming in a bit light. This has been common for most major stocks as the summer doldrums set in. Wednesday VISX picked up $3.50 on volume of just under 965K. Today it gave back $3.19 on similar volume. Remember normal volume is about 1.64 mln shares per day. It is encouraging to see VISX not get hit with major selling pressure but at the same time we would like to see stronger volume on the rallies. Today, with the major indices set to open lower, VISX opened $1.69 lower and traded down to $100.38 in the 15 minutes of trading. But buyers quickly jumped in and drove VISX higher to $103.63, which given the weakness we saw today is pretty amazing. Still, the weakness in the Nasdaq was too much and VISX traded lower by the end of the day. As we suggested Tuesday, VISX has gained over 28% since the first of July. The bears may become serious at any time in this kind of market. We are not trying to scare you out of VISX, but want to make you aware how crucial it is that you protect your hard earned profits with stops. JDSU $87.00 -1.00 (+9.00) With all the hoopla over earnings anda stock split, JDSU has had a great week so far. There hascertainly been no post-split or earnings depression this week. To the contrary JDSU gained $5.38 Wednesday on huge volume of 8.68 mln shares. Today with the broader markets getting hammered, JDSU fell $3.75 to a low of $84.25 and started its comeback just before 2:00 ET to close at $87.00 down only $1 for the day. JDSU hit a new 52-week high on Wednesday at $88.88 (split-adjusted), surpassing the old high set on July 6th at $88.72. Given the weakness in the major indices today and the strength JDSU managed to show, we believe there is more room to move up. We would suggest you assess you risk profile and move your stops up accordingly. CSCO $61.75 -1.56 (-1.19) More yo-yo and consolidation, and still waiting for earnings to be announced after the bell on August 10. This is a classic "hurry up and wait" scenario. Volume is the key and it continues to hover around the average of 15.5 mln shares. Until we see heavier volume in CSCO, guided by clear market direction, we simply have to wait for the play to come to us. Working against us is a market pre- disposed to the downside and CSCO continues its consolidation in the $61-$63 range. One thing is for sure, CSCO will break out; its just that the direction depends on the market. If the market stays flat or goes up, CSCO should rise into earnings. If the market goes south like today, all bets are off. We can't stress it enough - wait for the entry based on volume and confirm market direction before getting in. DELL $41.25 -1.50 (+0.25) Nobody seemed too rattled by CPQ's earnings release that showed earnings in line with expectations, and revenue on the light side thanks to a PC turf war that CPQ is losing. We expected some fallout in the rest of the sector, but after gapping down this morning, DELL traded in an $0.81 range on typically low volume of 15.8 mln shares. Recall earlier this week, DELL announced a sub-$1000 PC with free Internet service and free user homepage with links to other DELL sites. As the de facto inventor of it, they really know how to exploit the direct sales model. Dell seems to be holding up well, but the week isn't over yet. Mild support is in the $40 range, with stronger support at $37-$38. Resistance based on technical indicators and open interests seems to be at $45. Still, pick your entry according to your risk profile. You have plenty of time before earnings are announced on August 17. As always, confirm market direction before playing. QCOM $156.38 -3.38 (+1.69) Even in strong market headwinds, QCOM continues to progress upward. Don't let today's drop of $3.38 scare you. Were it not for a $2 spike up at the close last night, QCOM would have only lost $1.38 today - pretty mild trading on 10% less volume than normal. That's a number we can live with on a day like this. A look at the chart is pretty impressive too, compared to the rest of the market. It remains technically positive, perhaps thanks to support over $156 from index funds (see Sunday's write-up for details). The bogeyman in the closet is the NASDAQ closing at its 50-dma. If it doesn't find support soon, QCOM will fall in sympathy since it is a part of that index. It gets tougher to pull the trigger on entering this play too since QCOM can be more volatile than other plays. It is definitely not for the weak stomached. Heck, even risk takers may want to sit out until the market picks a direction. There has been no news to move QCOM in the last 2 days. Remember, there is also the possibility of a split, just don't hang your hat on that as the basis for the play. GE $112.00 -2.00 (-3.19) GE simply can't fight the downdraft in the market. It lost $2.25 yesterday and gave up another $2.00 today. There is nothing in the news to suggest any problem with the stock. Rather, it is moving in step with the rest of the Dow. In the last 2 days, GE has dropped through its 10-dma, and technical indicators are dimming. Today it bottomed around 1:30 PM at $110.06 and did move higher over the next 2 1/2 hours. Look for a continued move up before entering new positions and preferably, watch for a positive move in the Dow as well. It is imperative that you use caution in this market. VOD $207.00 -1.31 (-0.94) Still no word on VOD's ex-date for its, in essence, 5:1 stock split. The stock has gone down the last few days and is now at the lower end of its recent range. The stock is also sitting right on its 30-dma. But it's the 50 dma you should be looking at. Notice the last three bounces off of this support. VOD actually came right down to this support (at $205) and bounced up today. This seems to be a good entry point as the stock has lost ground for the last couple of days and tends to go through this type of movement. AirTouch announced a new all-digital mobile Internet service today called Net Access. This will allow users of certain AirTouch wireless services to use their wireless phone to access the Internet. The service will initially be launched in Salt Lake, Seattle and Michigan. VOD is not immune from a sell-off in the markets. If the Dow or Nasdaq decide to plummet, then VOD will eventually follow suit. **************** PICK NEWS - PUTS **************** LVLT $53.75 -4.06 (-4.31) LVLT made a technical bounce on Tuesday but was unable to push above the 200-dma so back down it goes. The bounce was a purely technical move and that is why it made our Play-of-the-Day last night. Most stocks will get a relief after suffering losses for many days. Typically the stock will bounce back to the old level of support. On Wednesday afternoon you may have noticed LVLT rally to $60 and turn down again. This shows that some investors aren't done selling and therefore driving the stock back down. Late in the day Thursday, LVLT broke below key support at $54. This is extremely negative but you should still use caution and wait for confirmation of the selloff tomorrow before opening new plays. If we don't rebound above $54, look out below. U $36.06 -1.63 (-2.13) USAir is unable to catch a break lately but that is just fine with us. We are dropping into territory that this stock hasn't visited in a year. The stock was looking poised to drop on Thursday. This is because oil prices rose on Wednesday but USAir held even so when oil rose again on Thursday, U's stock had some catching up to do on the downside. There is still potential for more losses despite the current dips but it will depend on your entry points. With the recent trend you would be successful entering plays on the day the stock rallies and selling on the dips. AOL $98.75 -4.00 (-9.19) As always AOL has been in the news frequently this week but the real catalyst is still a very bearish sentiment towards Internet companies. On Wednesday, the San Francisco battle over open-access came to a short- term conclusion as AT&T will not have to open their lines for competitors such as AOL. But the war is far from over as the door was left open to revisit the issue again in the future. This is one of many problems currently plaguing AOL. Another is the Instant Messaging debate with Microsoft. The debate stems from AOL not wanting Microsoft to share in its new technology. No agreement has been reached but odds are it will eventually be opened up to everyone. The $98 range has offered some support but we are watching technology stocks and the NASDAQ carefully for signs of breaking support. Then we may get AOL to dip down to the 200-dma at $92. SCH $45.86 -2.20 (-0.89) SCH is dropping again but we still haven't broken through $45. SCH has recently found support at this level. For example, mid-afternoon today SCH bounced at $45 and started moving back up. Granted, the stock hasn't rallied strongly after hitting support but we want to see Schwab move down past this mark to re-ignite our play. The online brokers sector did get a nice bounce on Wednesday. There was a press release announcing a new CFO, which is another reason for the buying interest, but the sentiment is still too negative for any meaningful rally and the stock quickly gave back Wednesday's gains. Keep watch on the sector for any change of sentiment. XRX $49.56 +0.44 (+0.31) Xerox has been trading between the range of $48.50 and $50.00 for the past few sessions since its $4.50 point decline last Thursday. That loss was attributed to the recent downgrades by Deutsche Banc Alex., strong dollar, and weakness from its overseas operations in Japan and Brazil. XRX continues to trade well below its 50-dma and 200-dma, and doesn't see any real support until around $45. Once we get through this slight stall, we look for the stock to continue its downward trend to its next support level. But keep your stops set tight at this point as XRX is struggling to put in a short-term bottom. CA $47.25 -1.31 (-0.31) Computer Associates traded sideways for most of the day Wednesday although volume and buying did pick up in the last hour. But it didn't last as CA fell today with the broad markets. CA opened $1 lower today and made an intraday low of $46.50. If you entered CA on today's drop we want you to use caution as CA is trying to halt the slide and we are seeing signs of buying around $46.50. Technically we would look at yesterdays high of $49.38 as an area of resistance for CA. Today's report of the employment cost index was what spooked the market and took the major indices down at the opening bell. If CA is going to remain a viable put play we will need to see further movement to the downside on strong volume regardless of the action in the broader markets. The 200-dma is just under $44.00 and could provide support. Keep your stops tight on CA. MWD $93.00 -3.06 (-0.50) MWD rallied for a few hours yesterday after all the weary listeners were assured that Greenspan wasn't adding in anything new or unusual. The rally offered some solid entry points. And by late Wednesday, MWD had returned to where it began and closed down a fraction. Today, the negative market sentiment help slam MWD and it shook off 3%. MWD, and the market, were reacting to the U.S. Wage Cost numbers that came in much higher than anticipated. Thus volume levels today were also slightly stronger at 1.77 mln. In the news, the EEOC is launching and investigation at the firm for alleged gender discrimination in reference to an earlier case regarding MWD's pay and promotion policies. This may cause jitters among investors in the future. MER $70.88 -2.81 (-0.81) On Wednesday, MER traded higher for the majority day, reveling in the lack of negative news from Greenspan's comments. However, by the end of the day some profits were snatched and the stock only kept a fractional gain. The Greenspan limelight was short-lived as the Employment Cost Index numbers were surprisingly higher than expected. The DOW plunged and so did MER. MER once again slipped below its 200-dma (about $74) to close only a fraction from its daily low of $70.06. Couple these bearish indicators with a negative broad market and you have the makings of a successful play. Pick your entry carefully and always sell too soon. NITE $44.00 -3.25 (-3.38) Yesterday, after all was said and done, the market sentiment turned away from the fearful anticipation of 'oh my gosh what will Greenspan say now' to a more relaxed attitude. Some buyers came off the sidelines and began loading up at the seemingly bargain prices. NITE was pushed up $2.87 on moderate volume. If we had a crystal ball of what today was to bring, that run up would have been a great entry point. Once again, today brought interest rate uncertainty (good news for Internet put players) as the U.S. Wage and Labor numbers jumped up significantly since last quarter giving the Fed a reason to raise rates some more. Trading volume was fair during NITE's decline of -$3.25. In the news, NITE became the leading shareholder of Easdaq, the Brussels-based pan-European stock exchange, when they bought a 18.92% stake for $8.2 mln. This foreign exchange was created primarily for trading in high-technology companies. EBAY $102.25 -2.69 (-5.56) The Internets surged upwards on Wednesday after Greenspan gave no signals of a prompt rate increase nor pulled any surprises out of his hat. The fears faded and buyers were on the front lines. EBAY traded as high as $106.75, but settled in with a $5.38 advance to close at $104.94. Well today was a different market to play. The internets got hammered. The interest rate fears that were just beginning to fade yesterday were refueled by the release of the Employment Cost Index numbers. The numbers jumped up at the quickest pace since 1991. In other words, this piece of data gives Greenspan a green light for a rate hike and makes the lofty internets very susceptible to profit-taking as they don't react well to anything that involves the possibility of higher borrowing costs. Remember, this is an Internet stock and that equals a HIGH RISK PLAY. Just look back over the past two days and it's easy to see the wide intraday swings so be careful. DCLK $81.88 -4.13 (-1.81) DCLK is trading just below its 50-dma. The NASDAQ index is trading right at its 50-dma. If the NASDAQ can spring back, DCLK goes with it in the Internet sector. If NASDAQ breaks down, DCLK goes south with it too. The point is, wait for the market to give us direction. If it breaks down, DCLK has no support until it reaches $70. A word of warning if you are reading about this play for the first time, exercise extreme caution. DCLK shoots up like a rocket or sinks like a stone, depending on the market. Wait for direction, evaluate the risk, and trade your plan. Tums or Rolaids may also prove useful. CMGI $93.50 -4.63 (-3.69) Know the breed, know the dog. Here's another Internet stock just waiting for NASDAQ to give it a direction. Like DCLK, CMGI is also trading under its 50-dma. Should the NASDAQ falter, the Internet sector and CMGI will go with it. There is short-term support at $88, but if the action gets really bad, the next support level is at $77. On the other hand, a strong NASDAQ bounce off its 50-dma will put a big flea on this put play. Confirm market direction before starting a new position. (Use flea powder responsibly) TERN $38.38 -1.31 (-3.38) So far this play is working according to plan. TERN has fallen through support, with its next level of support around $33. Earnings were announced 2 weeks ago and TERN has been headed south since. Though we think the long-term future is good for this company, the current chart tells a different story. The descent is steady and should continue whether or not the NASDAQ breaks down from its 50-dma. As we noted when we picked TERN on Tuesday, this company's news is sparse but when they release news it's usually good. So watch the newswire for anything that may trigger a rally and keep your stops set in case the outlook changes. GNET $63.88 -2.87 (-6.81) Home on the range. That's how we felt with GNET today as we were stuck between $63-65. After a nice gap down this morning due to the news of higher labor costs and interest rate fears, we didn't get the follow through we would have expected in this market. This is a sign to use caution! We did get a nice test of our resistance at $67.00 yesterday though and it held up very well. The more we test it, the stronger it becomes. As the market weakness continues to build, we feel this will give us a good trend down. Look for an entry point during a market rally and confirm the stock is bouncing off resistance before opening new plays. In the news, GNET announced today that they have hired Eric Zocher to head up their Broadband division. Eric Zocher has 15 years of experience and should be a good asset to the company. GNET also signed an exclusive deal with Deerbrook to market Artup.com on their search engines. ************** NEW CALL PLAYS ************** none today ************* NEW PUT PLAYS ************* ELNK - Earthlink Network Inc. $49.50 -3.00 (-6.50) Internet service provider EarthLink Network, Inc. provides Internet access and related services to some one million subscribers nationwide. EarthLink provides Internet access through a network of leased high- speed dedicated data lines and over 1,700 dial-up access sites. EarthLink also provides Internet connections by cable, ADSL, ISDN, frame relay, and other high-speed access technologies. Earthlink along with most of the Internet stocks has had a dramatic decline the last few weeks. ELNK topped earlier in the month when it got as high as 70.50 on the July 8th. Since this recent high however, the stock has broken through both its 50-dma and 200-dma and continues to fall, closing just above today's intraday low. With the recent interest rate worries that are coming into play, not only will it affect the general markets but it will have even a greater strain on those sectors that analysts feel are overvalued. ELNK is in one of those sectors and we feel they will continue along this downward trend. Watch for any change in momentum that may spark a rally. There are always lots of buyers waiting in the shadows to rush into this sector. BUY PUT AUG-45 QKL-TI OI=963 at $2.25 SL=1.00 BUY PUT AUG-50 QKL-TJ OI=975 at $4.63 SL=2.75 Average daily Volume = 2.05 mln Chart = http://quote.yahoo.com/q?s=ELNK&d=3m ***** MSPG - MindSpring Enterprises $34.38 (-1.13)(-9.74) A dream that we, the Internet community have, is to find an Internet service provider that has no down time, immediate customer service, and the ease to enjoy our Internet experience without thinking about procedures. MindSpring seeks to offer this type of service to us. As a national ISP company, they focus on individuals and small businesses. Providing Internet connection, easy to use software, Web hosting services, and reliability to 45 states. They have increased their customer base 275% since 1995 as a result of the superior reliability and service. MSPG has seen better days. On Tuesday the company announced a loss of 0.11. Ouch! Analysts were only expecting a profit of .09 according to First Call. Shareholders are accustomed to enjoying positive earnings last year, so the stock is taking it on the chin. The company attributes the negative numbers to the recent acquisitions of NETCOM and Spry customer bases. Since earnings are out of the way, there's not much news to push the stock. The sector is also extremely weak, so any company with a high P/E is very susceptible to drops in price. If the market continues down and breaks it's 50-dma, look out below! The current down trend with MSPG started on 7/10 and has taken the stock below all short-term moving averages. If the market conditions continuing as they are, MSPG should continue to be a good put play. Along with earnings, the news announcements from MSPG have not been accepted well by the market. The company has presented a new $45 million marketing plan that is very aggressive. It seems they want to give AOL a run for the money. Some sources indicate that this plan will affect earnings for a full three quarters in the future. Keep in mind that nothing goes down every day so pick your entry and confirm the market direction. BUY PUT AUG-35 MQD-TG OI= 720 at $3.12 SL=1.50 BUY PUT AUG-40 MQD-TH OI=1501 at $6.75 SL=4.75 Average daily volume = 2.08 mln Chart = http://quote.yahoo.com/q?s=MSPG&d=3m *************** PLAY OF THE DAY *************** MWD - Morgan Stanley Dean Witter $93.00 -3.06 (-0.50 this week) Sunday Write up 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. Tuesday's Update 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. Thursday's Update MWD $93.00 -3.06 (-0.50) MWD rallied for a few hours yesterday after all the weary listeners were assured that Greenspan wasn't adding in anything new or unusual. The rally offered some solid entry points. And by late Wednesday, MWD had returned to where it began and closed down a fraction. Today, the negative market sentiment help slam MWD and it shook off 3%. MWD, and the market, were reacting to the U.S. Wage Cost numbers that came in much higher than anticipated. Thus volume levels today were also slightly stronger at 1.77 mln. In the news, the EEOC is launching and investigation at the firm for alleged gender discrimination in reference to an earlier case regarding MWD's pay and promotion policies. This may cause jitters among investors in the near-term. BUY PUT AUG-85 MWD-TQ OI=1387 at $1.25 SL=0.50 BUY PUT AUG-90 MWD-TR OI= 649 at $2.81 SL=1.25 BUY PUT AUG-95*MWD-TS OI=2064 at $4.75 SL=2.50 Average daily volume = 2.22 mln. Chart = http://quote.yahoo.com/q?s=MWD&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 7-29-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** COMBINATION PLAYS ***************** Markets Fall As Labor Costs Raise Rate Hike Fears.. U.S stocks plummeted Thursday as rising wage costs created new fears that the Fed may be ready to increase interest rates again. Most stocks made modest gains on Wednesday after Federal Reserve chief Alan Greenspan ended his remarks to the Senate Banking Committee without uttering any discouraging remarks. The Commerce Department also helped, reporting favorable (lower-than-expected) demand for June durable goods. The Dow ended relatively unchanged at 10,972 but the Nasdaq index was up 26 points at 2,706. The 30 year long bond's yield stood at 6.03%, off 6/32, and above the psychologically important 6% level. Tuesday's new plays (positions/prices): IGL IMC Global JAN20C/AUG20C $1.87 debit RNBO Rainbow Tech. OCT15C/AUG15C $1.06 debit UCL Unocal JAN40C/AUG40C $2.50 debit IGL and RNBO were unavailable at the target entry prices. UCL traded near the recommended entry point throughout the day. Portfolio plays: Intel (INTC) continued it's bullish run after announcing it will introduce two new PC processors and release a mobile version of the Pentium III later this year. The stock moved to the recent resistance level near $70 and this is where we will plan our roll-up if the rally continues. Chemical giant DuPont (DD) was up over $1 after it reported a 6% rise in quarterly earnings. The neutral calendar spread is trading near the maximum profit point. Western Wireless (WWCA) continued its meteoric climb, moving another $5 higher to the low 40's. The bullish debit spread is now $15 ITM and also at maximum profit. Qualcomm (QCOM) has also surpassed all expectations and the bullish position can be closed for a $2.50 profit. Halliburton (HAL) moved back to the $45 range today and both of the long-term plays are performing very well. Paxson (PAX) Communications traded as high as $12.25, up almost $1 and the long (SEP-15C) position should be monitored for an early exit. The debit straddle on Vulcan Materials (VMC) is also an early exit candidate; now trading at a $1.00 credit, three weeks into the play. One the downside, Macromedia (MACR) moved up $4 on pre-earnings speculation with rumors flying about 'blowout' numbers and a new equity partner - merger/buyout from Adobe or Microsoft. If the stock fails to sell-off significantly after the announcement, we will roll-up to a neutral calendar position; SEP35P/AUG35P. Apria Healthcare (AHG) fell over $1 even though they announced a $25 million increase in net profit for the quarter. EPS was $0.33, compared to a loss of $0.17 last year. Lets hope that investors regain their senses before the (bullish) long position expires in September. Thursday, July 29 U.S stocks plummeted Thursday as rising wage costs created new fears that the Fed may be ready to increase interest rates again. The Dow ended down 180 points at 10,791, its second biggest loss this month. The Internet sector was hammered, driving the Nasdaq composite down another 65 points to 2,640. In the broader market, declining issues outnumbered advances 2,227 to 805 on subdued volume of 762 million shares on the New York Stock Exchange. In the bond market, the yield on the U.S. 30 year treasury climbed to 6.08% percent, highest in a month, and the price fell 27/32. Portfolio plays: Not much favorable activity today as investors continued to flee as if from a burning building. Almost all of the market leaders were down and many of those appear poised for even lower numbers. One of the positive movers was Proctor & Gamble (PG); up almost $2 after the chairman of the company said PG could expect 13%-15% EPS growth in the year 2000. Other bullish issues were found in the Oil sector. Both Ensco (ESV) and Halliburton (HAL) moved up after crude prices rose on favorable weekly U.S. oil statistics. Macromedia (MACR) had a positive earnings report and the stock managed to avoid serious post-announcement selling until late in the day. The buy-to-close price for the AUG-30P was $0.87 and the AUG-35P was sold at $2.62 for a new debit of $2.37 on our neutral position; SEP35P/AUG35P. The Roberts Pharmaceutical (RPC) play is also an interesting study. With a future buyout offer (originally calculated at $30), the stock price remains near $26 and the options are relatively unchanged from the day the play was offered. Hmmm.. Questions & comments on spreads/combos to ray@OptionInvestor.com **************************************************************** - NEW PLAYS - **************************************************************** ENMD - Entremed $22.75 *** Silver Bullet For Cancer? *** EntreMed is a leader in the field of antiangiogenesis research, which involves the inhibition of abnormal blood vessel growth recently associated with a broad range of diseases such as cancer and atherosclerosis. Their strategy is to accelerate development of core technologies through collaborations & sponsored research programs with university medical departments, research companies and government laboratories. EntreMed recently announced the U.S. Food and Drug Administration has given it clearance to begin clinical trials of Endostatin, a protein the company is trying to use as a weapon against cancer. Endostatin is one of two proteins EntreMed is pursuing known as angiogenesis inhibitors. The proteins have shown the power to inhibit lung tumor growth in mice by starving the tumors' blood supplies. ENMD has been waiting a long time for this opportunity. They have already manufactured sufficient Endostatin protein for the tests and are now completing the final requirements which include receipt of protocol approvals from the Institutional Review Boards (IRBs) at each of the clinical trial sites, and quality assurance of the vialed GMP material. The first Phase I clinical trial is human safety testing and evaluation. An established trading range near $20 (with a few slightly bullish divergences) and a fair disparity at the August ITM call options offers us a favorable, low risk position. PLAY (conservative - bullish/debit spread): BUY CALL AUG-17.50 QMA-HW OI=50 A=$5.37 SELL CALL AUG-22.50 QMA-HX OI=250 B=$1.81 INITIAL NET DEBIT TARGET=$3.37 ROI(max)=48% B/E=$20.87 Chart = http://quote.yahoo.com/q?s=ENMD&d=3m ******************************************************* NE - Noble Drilling $22.00 *** Break-out On The Horizon? *** Noble Drilling Corporation is a leading provider of diversified services for the oil and gas industry. Contract drilling services are performed with a fleet of 47 offshore drilling units located in key markets worldwide. Their fleet of floating deepwater units consists of semi-submersibles and drill-ships, some of which are designed to operate in water depths greater than 5,000 feet. The fleet of independent leg, cantilever jackup rigs includes premium units that operate in water depths of 300 feet and greater. Some are capable of operating in harsh environments. They also provide engineering & production management services and turnkey drilling services. Noble Drilling Corporation earned $27.3 million in net income this quarter, about half of last year's numbers. However, they managed to satisfy the analysts and some of the revenues were used to pay off a long term debt instrument. Earnings of diversified oilfield service firms were expected to hit a low this quarter but improve near the end of the year. Drilling contractors are also expected to report lower quarterly earnings, because the rising oil prices will take longer to affect their bottom line. Improved commodity prices (oil) are expected to support an increase in exploration and production budgets, which will eventually flow to the service companies and drillers. Geoff Kieburtz of Salomon Smith Barney said that after clearing the hurdle of a weak second quarter, the oil services industry is poised for recovery. That must be part of the reason this chart has become so bullish. The small disparity in the September ITM call options will allow us to participate in this low-risk play at a discount. PLAY (very conservative - bullish/debit spread): BUY CALL SEP-17.50 NE-IW OI=903 A=$5.00 SELL CALL SEP-20.00 NE-ID OI=1176 B=$3.00 INITIAL NET TARGET=$1.81 ROI(max)=37% B/E=$19.31 Chart = http://quote.yahoo.com/q?s=NE&d=3m ******************************************************* CATP - Cambridge Tech. Partners $17.00 *** On The Rebound! *** Cambridge Technology provides management consulting and systems integration services to transform its clients into e-businesses. Working in collaboration with Global 2000 and high-velocity mid- market companies, Cambridge combines a deep understanding of new economy issues with integrated, end-to-end services and a proven track record of shared risk and rapid, guaranteed delivery. The consulting firm has struggled over the past year but appears to be on the move again after reporting first-quarter earnings that met Wall Street's revised estimates. The company also had a one-time charge of $7 to $9 million to cover a "repositioning and retention" program intended to help the firm keep, retrain, and move employees. The program stems from decreased demand for enterprise resource planning services and growing demand for interactive and Web-based offerings. They also appointed a new CEO, a previous board member, Jack Messman. Implied volatilities and volume are up on front month options because industry observers have said that Cambridge has widely been looked at as a takeover target. Rumors of a buy-out have persisted in recent months, but the previous CEO, along with his replacement continue to affirm that Cambridge is not up for sale. The new CEO says that major reorganization is well under way and nearing completion. This may be a good opportunity to get in on the ground floor of a long-term recovery and the over-valued option prices offer us a favorable entry point. PLAY (conservative - bullish/calendar spread): BUY CALL MAR-20 TQP-CD OI=1 A=$3.50 SELL CALL AUG-20 TQP-HD OI=1584 B=$0.37 INITIAL NET DEBIT TARGET=$3.00 TARGET ROI=50% It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. Chart = http://quote.yahoo.com/q?s=CATP&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* 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.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
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