The Option Investor Newsletter Sunday 8-1-99 1 of 7 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment ******************************************************************* MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ******************************************************************* WE 7-30 WE 7-23 WE 7-16 WE 7-9 DOW 10655.15 - 255.81 10910.96 - 298.88 11209.84 + 16.14 +54.46 Nasdaq 2638.49 - 53.91 2692.40 - 172.08 2864.48 + 71.41 +52.05 S&P-100 683.29 - 15.59 698.88 - 34.91 733.79 + 10.91 + 6.66 S&P-500 1328.72 - 28.22 1356.94 - 61.84 1418.78 + 15.50 +12.06 RUT 444.77 - 3.61 448.38 - 16.88 465.26 + 7.28 + 1.47 TRAN 3333.24 - 48.25 3381.49 - 20.38 3401.87 - 25.45 -88.67 VIX 25.83 + 2.07 23.76 18.13 19.09 Put/Call .72 .58 .46 .46 ******************************************************************* Inflation, inflation, inflation... The Dow has dropped -600 points (-5.3%) since I called the exact top on Sunday, two weeks ago. The Nasdaq dropped -237 points (-8.2%). I wish I could point to some support level and say the carnage is over but I don't think it is over yet. The Nasdaq has shown some strength in holding above 2620 for several days now. After all, an -8% in two weeks is significant and we should be resting as the battle between sellers and bargain hunters is played out. Eventually I think we will see 2550 as the next support level and then 2400 below that. The Dow has strong support at 10,500 and I think we will test that this week. Both indexes closed at almost the lows of the day on Friday which does not bode well for next week. I do feel we have a good possibility of a short relief rally again Mon/Tue. This relief rally could be squashed early if the sellers decide to exit promptly and grab some 6.1% bonds to avoid the rush later in the week. The Fed does not have to hunt for signs of inflation to appear. They are popping up almost daily and the fear now is the Fed will not wait until the August 24th meeting to raise rates. Many fear a rate hike this week. This would be very bad this far in advance of the meeting. Analysts would then worry about a third hike at the meeting just to snuff the inflation fires for good. No one expects more than three hikes at present. The theory is the Fed will take back the three cuts from last fall to put the economy back on a slower pace. Greenspan is not a fast mover. He prefers to do things in small increments to avoid sudden shocks to the market and economy. While my market view is bearish over the next several weeks there are some pockets of resistance forming in the Nasdaq. This resistance could help keep the Nasdaq from a total washout in the next several days. Intel for instance, only closed down -.50 after trading over recent resistance of $71 during the day. Dell closed down only -.38 and looks like it will hold over $40 unless the market really craters. Qualcom closed down only -.38 and has successfully held $152 support several times recently. Cisco closed up +.38 and actually looks like it is gaining ground on its support at $61. Yahoo looks like it is resting on support at $135 and possibly building a base here. Microsoft however is tanking, -1.13, but it is news related. The Justice Dept breakup news is weighing heavily on the stock price. Actually I think a breakup of MSFT would free even more value for stock holders but that is another topic. Although these stocks held the line on Friday, nothing is sacred if the sellers start running for the exits. When the selling is over these are the stocks to play. The Friday sell off was accentuated by light volume again and this is another reason we could see a bump Mon/Tue. The summer volume is always light and the NYSE only traded 725 mln compared to the Nasdaq 873 mln. Stock funds are still reporting negative cash flows as traders move money out of stocks and into money markets. Huge bond offerings continue to drain cash as well. New IPOs are becoming a daily occurrence which also add to the cash drain. As prudent investors we need to continue to be cautious for another couple weeks. There is really still no reason to open new positions on other than story stocks that can buck the market trends. The market trend of flat to down could continue until the August 24th Fed meeting. That meeting should be the catalyst for the market. Normal market cycles show August to be flat to down and the next signs of life to be after Labor Day in September. This is not exciting news for call buyers but good news for put buyers and call sellers. Cash is still king and gives you many options.(pun) Yes, there are still calls on the recommendations page but that does not mean you should rush out and play them. Please, wait for the market to turn around before opening new call positions. It is entirely possible that NO CALL BUYING opportunities will present themselves this week! The big economic report for the week will be the Non-Farm Payrolls for July on Friday. This is the next sign post for the inflation guru. I would still be an OEX put buyer on any strong market spike. 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 are provide a much more visual image on the website than is possible in an email format. *********** JIM'S PLAYS *********** The market did exactly what we expected last week but I was not able to capitalilze on it totally. I was moving last week and was not able to trade with no PC and only a cell phone. QCOM - Qualcom is still holding above support at $152 and well above my $150 strike price. The AUG-150 puts closed at $5.00 on Friday and have three weeks until expiration. EXDS - Exodus rolled over this week and is showing no signs of life. I closed the AUG-130 puts @ 12.00 on Tuesday for a loss of $2.75. I was closed the AUG-110 calls on Monday for $26.25 and a profit of $3.50. VOD - Vodaphone was all over the map. This should be in our rolling stock section. VOD is a buy everytime it breaks $206 on the downside and a sell over $210 on the up side. The 4:1 split was approved but the press has been very quiet. I was stopped out on the drop on Monday at $11.38 on the AUG-110 calls for a loss of -1.50. I did not play them again due to lack of PC access. OEX - I did not play the OEX on Monday when it started up. I was not able to watch the market closely during the week and missed getting an order filled at the close Wednesday. The price was moving between $12 and $13. I was trying to buy the AUG-700 put at $12.00 but missed the boat. It gapped open Thursday to $18.50 and closed the week at $23. I obviously should not have been greedy and placed a market order instead. Play recap: Sold EXDS Puts AUG-130 EXF-TF @ $12.00 cost $ 9.25 loss $ 2.75 Sold EXDS Calls AUG-110 EXF-HB @ $26.25 cost $22.75 profit $ 3.50 Sold VOD Calls AUG-100 VOD-HT @ $11.38 cost $12.88 loss $ 1.50 Current position: Short QCOM Puts AUG-150 AAW-TJ @ $9.25 (current 5.00) The plan for this week will be to buy OEX puts again on any relief rally. I have no faith in any rally so I do not plan to open any new long positions this week on stocks. This is the week I usually sell puts on Friday (two weeks until expiration) but I think this could be hazardous. Instead I am hoping for a late week rally to pump up call premiums. I would sell calls on Friday and expect the market to go down the following week. Good Luck Jim ************* COMING EVENTS ************* Monday: NAPM Index July Forecast: 56.0 Previous: 57.0 Construction Spend June Forecast: 0.5% Previous: -0.9% Tuesday: Leading Econ Indic. June Forecast: 0.3% Previous: 0.3% BTM Schroders 7/31 Forecast: -- Previous: 0.2% LJR Redbook 7/31 Forecast: -- Previous: -0.1% API Oil Stocks 7/29 Forecast: -- Previous: -1.68M Wednesday: NAPM Non-manuf July Forecast: -- Previous: 61.0 Factory Orders June Forecast: 0.7% Previous: 1.1% Thursday: Jobless Claims 7/31 Forecast: 314k Previous: 275K Money Supply (M2) 7/26 Forecast: -- Previous: $4.4B Non-Farm Prod Q2-rev Forecast: 2.5% Previous: 3.5% Unit Labor Cost Q2-rev Forecast: -- Previous: 0.7% Help Wanted Index June Forecast: -- Previous: 89 Friday: Non-Farm Payrolls July Forecast: 195K Previous: 268K Unemployment Rate July Forecast: 4.3% Previous: 4.3% Avg Hour Earns July Forecast: 0.3% Previous: 0.4% Avg Work Week July Forecast: 34.5 Previous: 34.5 Consumer Credit June Forecast: $6.0B Previous: $12.1B ************** MARKET POSTURE ************** As of Market Close - Friday, July 30, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,655 Neutral 7.20 SPX S&P 500 1,330 1,420 1,329 BEARISH 7.30 * OEX S&P 100 675 735 683 Neutral 7.20 RUT Russell 2000 430 465 445 Neutral 7.20 NDX NASD 100 2,200 2,468 2,271 Neutral 7.20 MSH High Tech 1,080 1,250 1,131 Neutral 7.20 XCI Hardware 920 1,090 997 Neutral 7.20 CWX Software 700 844 740 Neutral 7.20 SOX Semiconductor 450 535 494 Neutral 7.20 NWX Networking 550 625 568 Neutral 7.20 INX Internet 500 580 435 BEARISH 7.20 BIX Banking 690 710 653 BEARISH 7.23 XBD Brokerage 410 440 390 BEARISH 7.23 IUX Insurance 645 660 623 BEARISH 7.23 RLX Retail 915 960 873 BEARISH 7.23 DRG Drug 370 400 349 BEARISH 7.20 HCX Healthcare 750 800 719 BEARISH 7.22 XAL Airline 180 190 163 BEARISH 5.21 OIX Oil & Gas 285 310 300 Neutral 5.13 Posture Alert As the long bond creeps up, our market slithers down. July ended on a sour note as most equity sectors added on to loses. With the increase of a rate hike in August, or a change in bias, continued weakness should be expected. With Friday's action, we have turned BEARISH on the S&P 500. Several other sectors on our Posture-Watch list include: the Dow, S&P100, and the Russell 2000. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture **************** MARKET SENTIMENT **************** Sunday, August 1, 1999 Necklines & Margins Calls Don't look now, but you can begin to see some head and shoulder patterns begin to form. Among technical analysts, a head and should pattern is created by a failed rally (lower high) following a new high. A neckline is the base of this pattern and creates selling pressure if this benchmark is VIOLATED. What's more, many investors using leverage, will receive margin calls, creating even more selling pressure. As a side note, last years biggest (margin call) week also happened to occur at the absolute bottom of the market. So if you see the Wall Street Journal touting the high amount of margin calls in the future, it may a strong signal to buy hand over fist. As we move into the month of August, we thought it would be helpful to highlight some of the necklines across the major indices and technology sectors. Remember, last year's precipitous selloff occurred in August. Market Index Friday's Percent Above (+) Close Neckline / Below (-) Dow Jones 30 DOW 10,655 10,500 +1.5% S&P 500 SPX 1,329 1,300 +2.2% S&P 100 OEX 683 640 +6.7% Russell 2000 RUT 445 430 +3.5% Hardware XCI 997 850 +17.3% Software CWX 740 600 +23.3% Semiconductors SOX 494 360 +37.2% Networking NWX 568 510 +11.3% Internet INX 435 450 -3.3% We already know that the interest rate sensitive indices have broken down and violated their respective 50/100-day moving averages. Pinnacle Capital Advisors has been correctly Bearish on these sectors. But now the technology sectors are beginning to show some weakness as evidenced by the deteriorating Internet issues. Keep an eye out on the software (CWX) and networking (NWX) indices this week. Both of these key technology sectors are trading at their respective 50-day moving average. If they trade and close BELOW 740 and 560, get defensive. BULLISH Signs: None Mixed Signs: None BEARISH Signs: Technicals: Many indexes are below key supports, including Healthcare, Drug, Retail, Brokerage, Banking and Insurance. 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% Friday, July 30 74,895 +131.9% Market Sentiment at a Glance Friday Indicator (7/30) Alert Pinnacle Index (OEX): Overhead Resistance (720-750) 4.9 Overhead Resistance (685-715) 0.9 Underlying Support (645-680) 4.7 Put/Call Ratios: CBOE Total P/C Ratio .7 CBOE Equity P/C Ratio .5 OEX P/C Ratio 1.5 Peak Open Interest (OEX): Puts 620 Calls 740 P/C Ratio 1.11 Market Volatility Index (VIX): CBOE VIX 25.83 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 Benchmark (7/30) Overhead Resistance (720-750) 4.87 Overhead Resistance (685-715) 0.94 OEX Close 683.29 Underlying Support (645-680) 4.74 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 720/750 level while the underlying support is holding at the OEX 645/680 level. Put/Call Ratio Friday Strike/Contracts (7/30) CBOE Total P/C Ratio .74 CBOE Equity P/C Ratio .50 OEX P/C Ratio 1.49 (OEX) Peak Open Interest Friday Strike/Contracts (7/30) Puts 620 / 9,874 Calls 740 / 8,862 Put/Call Ratio 1.11 (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 30, 1999 25.83 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 * *********** 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 8-1-99 Sunday 2 of 7 BROKERS CORNER *************** USE Y2K OPTIONS TO PROFIT OR TO PROTECT YOUR PORTFOLIO? Is the countdown to the year 2000 hype or simply a great opportunity to profit? Nobody knows to what extent the year 2000 computer glitch will effect the economy or for that matter everyday life. Experts have been on record saying extreme events will occur regardless of the outcome. One thing is for certain; uncertainty provides opportunity for profit. Y2K problems may lead to problems with food and energy shortages even if only in perception. Interest rates and currencies may be affected by fear. Futures options on physical commodities offer a great leveraged vehicle to profit from uncertainty with completely limited risk. Options on GOLD, SILVER, CRUDE OIL, SOYBEANS, etc. control are large quantity of the underlying commodity without the problem of physical storage. The Feb 2000 $290 Gold Call is 10% out of the money and costs about $160. This is very inexpensive Y2K protection. Each option controls 100 ounces of gold at $290 an ounce. If Gold moves up 20% by the year 2000, each option will be worth at least $2000. We have developed virtual safety packs that will put our clients in a good position to profit if any Y2K problems materialize, with completely limited risk. Many investors have large paper profits with their stock portfolios and need to make some decisions regarding the seriousness of Y2K. The million-dollar question is whether to take profits in anticipation of a market correction or not. Another possibility is to hedge your stock positions with options or index options. We will look at a few choices to use in order to lower or hedge your exposure. BUY PUTS - This strategy is similar to fire insurance. Most people sleep better at night knowing your house is covered in the event of the unexpected, in this case a fire. The premium paid is small compared to the potential downside. A full-service live option broker can help tailor a strategy to protect your portfolio using options. COLLAR STRATEGY - The classic collar strategy gives investors a cost free hedge to protect profitable stock positions. The basic strategy consists of buying the protective puts as above but paying the costs by selling calls on the upside. This accomplishes the need for protection on the downside but also allows for continued profit up to the strike price of the call sold. The only negative of a collar strategy is the profits are limited if the stock continues up. Again a full service option broker can assist you with selecting the best strike prices and option duration for the protection desired. Example: 200 shares of Lucent have climbed from $30 to $75 since October 1998 Option 1- Take profits and sell the stock. It is never bad to take profits. No money is lost if the stock continues up; only potential profits are not made. Option 2 - Portfolio Insurance, Buy puts as protection Jan 2000 65 put @ 5.5 =$550 Therefore $1100(2x$550) locks in profit at $65 and protects the position until January 21st, 2000 Option3 - Collar Strategy Free Hedge Sell Calls to pay for the protective puts as a cost free hedge. Sell the Jan 2000 80 calls @ 5.5 to buy the Jan 65 puts @5.5. Cost free protection (minus commissions) at $65 a share with upside to $80 until Jan 21st, 2000. For no cost, we have locked in 92 percent of the value of the stock, and have still given ourselves the opportunity to make an additional 12 percent on our stock through the rest of the year. We can tailor a strategy that will help you hedge your portfolio. Please call Andrew Aronson and Alan Knuckman for more information on how we can help lower your downside exposure through the Y2K. LaSalle St Securities Toll Free 888-281-9569 OPTION CLUB UPDATE ****************** Trading Clubs are having a HOT summer!!! We have a new organizer in Mississippi. He is anxious to get his club off the ground, so please feel free to contact him at firstname.lastname@example.org. We held our second Trading Group Meeting in St. Louis on Monday night (7/26)with 12 people attending. We spent time just getting acquainted and discussed trading histories and interests. We also discussed some buy-write scenarios with a presentation by Tom Lovett and I presented a Dell spread I recently did. We have a mailing list of about 20 and I've had several more people contact me about joining since the meeting. Our next meeting is on 9 August at the office of Wellness Therapies on Manchester Road in Ballwin that has been offered to us by OIN members Lyle and Nancy Jeffers. I will be sending a memo to everyone by 7/30 with information. Anyone interested please contact me and I will be happy to include you on our mailing list. Spouses are also welcome. We plan to have group members discussing topics or trades of interest to them at our meeting in order to illustrate trading concepts and provide beneficial critique. Many of our group have been to other programs and have done trading for awhile so it should be very beneficial for traders of all levels. We can learn from each others mistakes. Maris Eshleman email@example.com The Fresno Area Trading Club had its first meeting on Saturday June 26th. There were 7 attendees. Several drove 1 to 2 hours to attend the meeting. Every one expressed much enthusiasm for the club. The main focus was on sharing information. Every attendee had a stock or option transaction to discuss. The next meeting is Wednesday July 21. Each of us is going to present their particular stately and go over several examples of what to do and what not to do. We should have 7 or 8 people attend. Terry - firstname.lastname@example.org If you are interested in joining a Club, please send email to Visit@OptionInvestor.com or Organize@OptionInvestor.com. LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Index Last Week Dow 10655.15 -255.81 Nasdaq 2638.49 -53.91 $OEX 683.29 -15.59 $SPX 1328.72 -28.22 $RUT 444.77 -3.61 $TRAN 3333.24 -48.25 $VIX 25.83 2.07 Calls Week JDSU 90.38 12.38 Earnings and a split = rocket fuel SNE 125.19 8.19 New, It's back and ready for more INTC 69.00 4.81 New, semiconductors are strong VOD 210.50 2.56 Looking for an upside breakout soon AMGN 76.88 1.50 New, done consolidating and ready QCOM 156.00 1.31 Showing great strength against Nasdaq DELL 40.88 -0.13 Earnings are August 17th. be patient VISX 101.25 -0.50 Amazing strength compared to technology CSCO 62.13 -0.81 Only 1.5 weeks left before earnings GDT 58.56 -1.69 Dropped, falling Dow was too much GE 109.00 -6.00 Dropped, Too sensitive to Dow's fall VRIO 71.31 -10.31 Finally gave in to the market pressure Puts AOL 97.13 -12.81 Two weeks of bad news is too much GNET 58.75 -11.94 Internet sector still weak MSPG 33.56 -10.56 Earnings not good enough for investors EBAY 97.69 -10.13 High PE + new competitors = bad news SEPR 73.50 -8.56 New, breaking down below support ELNK 48.31 -7.69 Interest rates not good for high PEs NITE 42.13 -6.59 Financial Internet stocks are weak LVLT 53.00 -5.06 Beautiful failed rally and collapse CMGI 92.19 -5.00 How many times can we say it? GM 61.13 -4.50 New, auto sales cycle has peaked TBH 76.38 -4.44 New, not just interest rate fears MER 68.00 -3.69 Dow's weakness pulling them down MWD 90.25 -3.25 Interest rate worries don't help DCLK 81.00 -2.69 One more: the internets are unloved SCH 44.06 -2.69 Brokers are weak and broke support TERN 39.13 -2.63 Technical play that looks strong U 35.63 -2.56 Higher oil prices is bad for business CA 45.88 -1.69 Losing its footing in a weak sector XRX 48.88 -0.38 Earnings were not good enough QLGC 166.88 9.44 New, quick play on split pullback PICK SUMMARY ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. STOCKS ADDED TO THE PICK LIST ***************************** CALLS: AMGN - Amgen INTC - Intel Corp. SNE - Sony Corp. PUTS: Please confirm downward motion before playing. With the market in rally mode any beat up stock starts looking like a value play. GM - General Motors Corp. QLGC - Qlogic Corp. SEPR - Sepracor Inc. TBH - Telecomunicacoes Fbrasileiras PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS: GE $109.00 (-6.19) GE continues to fall through support, dropping with the Dow. It is now resting on its 50 dma, from which it may bounce. However, with current interest rate worries sending the market lower, many stocks are falling through possible support levels. Given different market conditions, GE options would make a good call, but in the current market, they could easily keep falling. We are dropping GE. GDT $58.56 (-1.69) The bears had the upper hand this last week and unfortunately it was strong enough to effect our call play on Guidant. Despite the recent upgrades and general upward trend of the stock the prior week, it just wasn’t enough to convince investors not to sell when the waters got a little rough. We can thank the employment-cost index report that was released on Thursday for these new fears that have entered the market. When the index numbers came in higher than expected, this caused fears this would give the Fed. just one more reason to justify an interest rate hike during their next meeting. For these reasons we have decided to drop Guidant as a current play. PUTS: none today STOCK SPLIT CANDIDATES *********************** QCOM - Qualcomm VISX - VISX Inc. HWP - Hewlett-Packard (not a current play) STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. The number of splits has slowed down considerably but we are sure to get another flood with the earnings announcements. Symbol - Stock Splits/Date AIG - American Intl 5:4 07-30-99 ex-date 08-02 CREE - Cree Research 2:1 07-30-99 ex-date 08-02 QLGC - QLogic Corp 2:1 07-30-99 ex-date 08-02 current play JDSU - JDSUniphase 2:1 08-03-99 ex-date 08-04 current play TD - Toronto Dominion2:1 08-03-99 ex-date 08-04 JMED - Jones Pharma 3:2 08-06-99 ex-date 08-09 LVCI - Laser Vision 2:1 08-09-99 ex-date 08-10 ENE - Enron 2:1 08-13-99 ex-date 08-16 XETA - Xeta Corp 2:1 08-13-99 ex-date 08-16 ADVS - Advent Software 3:2 08-16-99 ex-date 08-17 TXN - Texas Instrument2:1 08-16-99 ex-date 08-17 NXLK - Nextlink Comm 2:1 08-27-99 ex-date 08-30 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. SPECIAL SHORT TERM SPLIT PLAYS ******************************* We always recommend selling the day of the actual split or earlier. Profit taking will drive down the price on an average of 7 of 10 splitters immediately after the split. They may come back in a week or two but why risk it ! JDSU - JDS Uniphase $90.38 (+11.85) Splits 2:1 on 08/04 See details in sector list Chart = http://quote.yahoo.com/q?s=JDSU&d=3m ***** VRIO - Verio Inc $71.31 (-10.32)(-0.75)(+7.63)(P4W +19.87) Splits 2:1 on 08/20 See details in sector list Chart = http://quote.yahoo.com/q?s=VRIO&d=3m THE PLAYS OF THE DAY -CALLS- ONLY PLAY IN RISING MARKET ******************************************************* With all the great plays each week we can never decide on just one so take your pick. AMGN - Amgen $76.88 (+1.50) Looks like a breakout of its recent trading range. See details in sector list Chart = http://quote.yahoo.com/q?s=AMGN&d=3m ****** JDSU - JDS Uniphase $90.38 (+11.85) Earnings and a split last week and it never looked back. See details in sector list Chart = http://quote.yahoo.com/q?s=JDSU&d=3m ****** Put play of the day: EBAY - eBay Inc $97.69 (-10.12)(-15.16) Continues to fall as more and more competitors stake their claim. See details in sector list Chart = http://quote.yahoo.com/q?s=EBAY&d=3m ****** Put play of the day: ELNK - Earthlink $48.31 (-7.69)(-3.06) Weak sector, weak stock. Not much support at this level. See details in sector list Chart = http://quote.yahoo.com/q?s=ELNK&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 8-1-99 Sunday Part 3 of 7 CALL PLAYS ********** Hardware ********* DELL - Dell Computer $40.88 (-0.12)(-2.25)(+0.44)(+5.68)(+0.19) The one, the only, the amazing. . . Dell! Dell is the direct sales model leader and pioneer of the on-line retail business. They sell PC's notebooks, servers and work stations built to order direct from their factories worldwide. Eager buyers pony-up 18 million e-$$$ daily for their products. Total annual sales for the trailing 12 months were $18.2 bln., excluding their recent foray into direct selling of other manufacturers' software and support products from their gigabuys.com web site. For 1999, Dell expects total revenues of $26 bln. For perspective, that greater than Microsoft's anticipated 1999 revenue. Despite their recent fall from grace, they are growing at an annual rate of 41% with margins that are the envy of the industry. Return on equity is a whopping 79%. Like a phoenix in the desert, Dell has kept on performing no matter how many feathers the analysts try to pluck from it. Investors were concerned that the sub-$1000 category was going to eat Dell alive. Not so. As early as June 9, International Data Corporation announced that they expected worldwide PC shipments to grow by over 21% this year instead of the previously forecast 16.5%. Then analysts squealed about the falling ASP's, or average selling prices. That Dell's least expensive model is $899 compared to competitors in the $300-$500 range doesn't hold water since over 90% of Dell's customers are businesses. A comment from Michael Dell stating "the company earned 55 percent of the PC industry's total profit in the first quarter and that its profit share may increase in the second quarter" points to the direction of the future. Not many noticed that either. The market didn't cooperate for those of us trying to play DELL last week. It remained range-bound between $40-$43 on less than average volume for most of the week. A run into earnings scheduled August 17 after the close is the basis for the play. If the market rolls over, DELL's next support level is $37-$38, where the more conservative may want to wait to nibble. DELL has been basing well in the lower $40's range during the last 2 weeks and may have enough strength to hold, even if the market heads decidedly south. Technically, DELL is flat. You'll have to make your own evaluation, but we are comfortable buying if DELL dips to $40. Just keep in mind that a market hurricane could easily blow DELL into the $30's, wiping out what would otherwise be a good entry. In short, let the market be your guide. Note too that AUG-45 strike appears to be the upper resistance level based on open interests. Just like other positive price moves, DELL's move will come only with increased volume. Let that be another clue to entry. We still have plenty of time, so don't rush in. Wait for DELL to come to you. If you don't get a fill, there is always tomorrow. Be patient. Not to be outdone by upstarts who have recently bundled cheap PC's with "free Internet service", DELL introduced a Celeron- based model with 1 year of free Internet access on dellnet.com (it's own ISP and portal), which includes a personalized homepage and links to Dell's business partners in the "Dellzone". Price: $959. Once again, the old news is worth of repeating. At Dell's shareholders meeting 3 weeks ago, Michael Dell predicted that 1 of the current top 5 computer makers would be forced out of business. Dell further commented, "There are NOT (emphasis, ours), we believe, dramatic, fundamental changes going on in the industry. Prices have declined at fairly predictable levels similar to trends in other industries, and in this kind of environment the superior business model thrives and those without it flounder." On a chart, Dell showed Compaq's cost structure as "about double" that of Dell's. Can you guess which of the 5 might have been referring to? BUY CALL AUG-35 DLQ-HG OI=12414 at $6.50 SL=4.75 BUY CALL AUG-40*DLQ-HH OI=57221 at $2.56 SL=1.25 BUY CALL AUG-45 DLQ-HI OI=73212 at $0.69 SL=0.00 riskier BUY CALL SEP-40 DLQ-IH OI= 2904 at $3.63 SL=2.00 BUY CALL SEP-45 DLQ-II OI= 6197 at $1.56 SL=0.75 Picked on July 22 at $39.63 PE = 72 Change since picked +1.37 52 week low =$20.38 Analysts Ratings 10-9-12-0-0 52 week high=$55.00 Last earnings 05/99 est 0.16 actual 0.16 Next earnings 08-18 est 0.17 versus 0.13 Average daily volume = 23.93 mln. Chart = http://quote.yahoo.com/q?s=DELL&d=3m Internet ******** VRIO - Verio Inc $71.31 (-10.32)(-0.75)(+7.63)(P4W +19.87) Verio is a national provider of Internet services to primarily small and medium sized business. With a huge wad of cash from a host of venture-capital firms and an IPO, Verio is buying regional and local Internet service providers (ISPs) across the US. It owns or has majority stakes in more than 35 business-oriented providers across the US. The firm's customers include General Electric, Microsoft, Princeton University, and Ziff-Davis. Brooks Fiber Properties, a unit of MCI WorldCom, has a 17% stake in Verio. We've been carrying VRIO as a play since the end of June when the stock went into upswing mode. Investors were reacting to the powerful alliances Verio made with MSFT and AOL. These deals (along with a key acquisition of Hiway) securely positioned the company as leading-edge in this hot Web hosting business. Additionally, Verio announced on June 23rd that they had surpassed the 250,000 Web site milestone. Needless to say, this generated even more enthusiasm among investors. By July 19th, VRIO had pinnacled at $85, its newest 52-week high. At that point, Jack Grubman, analyst for Soloman Smith Barney, stepped in and started coverage with a "buy". He cited Verio as "the leading Web hosting company on the Internet, with more than 240 mln. sites, four times the size of its nearest competitor" and sees "growth of e-commerce, business-to- business, and business-to-consumer" rising. He set a target price for VRIO is $105. Also that week on Thursday, July 22nd, the company announced its first ever stock split. Verio is expected to split 2:1 on or about August 20th. After the pay out, they will have 75.4 mln. shares outstanding. It is very important that you confirm direction before initiating any new plays. Now in reaction to the bearish market, VRIO started showing signs of weakness mid-week. It has dipped down to its 30 dma at $72. You have to remember that we recommend calls that will do good when the market is positive. When the Nasdaq falls close to 10% in two weeks, it is almost impossible for a volatile stock like VRIO to hold on to all of its recent gains. You need to wait for the broader market to turn positive and for a bounce on strong volume before considering a new position on VRIO. The earnings date has been confirmed for Friday, August 6th before the bell (the conference call will be held at 9am EST for those interested). Remember play smart. Don't ever hold over earnings. You can always pick it back up ahead of the split. BUY CALL AUG-65*RLQ-HM OI=591 at $8.50 SL=6.50 BUY CALL AUG-70 RLG-HN OI=644 at $5.25 SL=3.50 BUY CALL AUG-75 RLQ-HO OI=466 at $2.69 SL=1.50 BUY CALL SEP-70 RLQ-IN OI=132 at $7.88 SL=6.25 BUY CALL SEP-75 RLQ-IO OI= 61 at $5.50 SL=3.75 Picked on June 27 at $62.68 PE = N/A Change since picked +8.63 52 week high=$85.00 Analysts Ratings 7-2-1-0-0 52 week low =$13.00 Last earnings 03/99 est= -1.31 actual= -1.24 surprise=5.34% Next earnings 08-06 est= -1.30 versus= -1.33 Average daily volume = 618 K Chart = http://quote.yahoo.com/q?s=VRIO&d=3m Semiconductors ************** INTC - Intel Corp $69.00 (+4.81) Its best customers are Compaq, Dell, and IBM. Intel is the world's #1 chip maker. The powerful Pentium and low-end Celeron are Intel's claim to fame. These microprocessors have provided the brains for IBM-compatibles since 1981. Recently INTC has began a major push into communications products such as servers and networking devices. Their microcontrollers and flash memories are used in products for communications, industrial equipment, and military markets. INTC is fast approaching its 52 week high. As with the rest of the semi-conductor industry INTC, has recently paused to catch its breath. As the broader markets continued to drift lower this week, Intel did just the opposite. It did start the week off $1.31 lower. Since Tuesday INTC has been climbing, fast approaching it 52 week high of $71.84 set back in mid January. The fact they missed their earnings estimates in the middle of July didn't seem to bother investors as it opened over $2 higher the following day at $68.00. Since July, 14th INTC has traded in a $5 range. Wednesday INTC climbed out of its rut hitting $70.81 a level that hadn't been reached since the January 11th. Volume on the advance the past three days has been strong, averaging 34.7 mln shares the past four days. We believe INTC will continue higher if the major market indices don't rain on its parade. The majority of the earnings are out and INTC will be left to move on its own merits. The semiconductor industry was one of the bright spots this week in the broader markets. INTC did close near its bottom on Friday which is normally not a good sign. However, $69 might provide some small support. What we really want to see is INTC break its old resistance near the $72 level. Intel has tried several times to move higher both in January and on Friday. So far, $72 has been too much. For the more conservative player, don't even think about starting a play in INTC until we see it close above its old high. Tuesday SG Cowen analyst Drew Peck raised his rating on INTC from a neutral to a buy. Peck forecast prices for Intel to reach $75-$80, citing a "positive outlook for the second half of the year. BUY CALL AUG-65*INQ-HM OI=26269 at $5.50 SL=$3.75 confirm move up BUY CALL AUG-70 INQ-HN OI=39341 at $2.31 SL=$1.00 BUY CALL AUG-75 INQ-HO OI=13556 at $0.69 SL=$0.00 BUY CALL SEP-70 INQ-IN OI= 3298 at $3.88 SL=$2.25 BUY CALL SEP-75 INQ-IO OI= 5598 at $1.88 SL=$1.00 Picked on July 31st at $69.00 PE = 33 Change since picked $ 0.00 52 week high=$71.84 Analysts’ ratings 17-12-7-0-0 52 week low =$34.88 Last earnings 6/99 est 0.54 actual 0.51 surprise=-5.56% Next earnings 10-13 est 0.56 versus 0.44 Average daily volume = 20.5 mln. Chart = http://quote.yahoo.com/q?s=intc&d=3m ***** JDSU - JDS Uniphase $90.38 (+11.85) Uniphase is most widely known for their fiber-optic telecommunications equipment, which accounts for about 60% of their sales. They also make laser subsystems, and laser-based semiconductor wafer inspection and analysis equipment. You will find their products in a number of different fields from bar code scanning to biotech to the printing industry. The new name of the company "JDS Uniphase" came out a merger in early July between JDS Fitel and Uniphase What a week! Here's how it went. JDSU announced earnings Monday after the close of business. Not only did they beat the street by 16%, they topped their own estimates by about 10%. Since they were announcing earnings they went ahead announced the 2:1 split that had been previously scheduled to take place on August 3rd, would take place Tuesday morning at the beginning of trading. After closing about $1 higher Monday, we decided to stick with JDSU and let the market tell us what to do. Tell us it did! JDSU opened $3.57 higher the next morning. It did pullback to an intra-day low of $79.50, turned higher and hasn't looked back. JDSU made a new 52 week high during the last 15 minutes of trading Friday at $90.50, closing at $90.38, an advance of $11.85 for the week. Volume has been extremely strong this week with over 17 mln. shares exchanging hands (of course the 2:1 split helped boost the volume by about 5 mln), considering 5.0 mln. is about average. JDSU has been on its own this week not paying any attention to the rest of the semi-conductor industry. We would expect JDSU to continue higher, however as we have said many times nothing goes straight up or straight down. With a move from $78 to $90 we want to urge caution. JDSU tends to move in 5 to 10 day runs both up and down. We are nearing the top of its latest run. While we think it can still move up for a few more days it is getting closer to the top of its channel. Be extra careful and scrutinize every move down. If you are already in JDSU, assess your risk profile and move your stops up accordingly. Other than their earnings announcement and stock split JDSU received five upgrades or reiterations from analysts coming in as buy or strong buys. Their additional 10 mln. shares of common stock came out $82.63. BUY CALL AUG-85*UNQ-HQ OI= 613 at $7.88 SL=$6.25 confirm direction BUY CALL AUG-90 UNQ-HR OI=1255 at $4.63 SL=$3.00 BUY CALL AUG-95 UNQ-HS OI= 352 at $2.50 SL=$1.25 BUY CALL SEP-95 UNQ-IS OI=3103 at $5.50 SL=$3.75 Picked on July 24th at $78.53 PE = N/A Change since picked +$11.85 52 week high=$90.50 Analysts’ ratings 8-9-1-0-0 52 week low =$15.63 Last earnings 6/99 est 0.41 actual 0.48 surprise=+17.07% Next earnings 10/99 est 0.24 versus 0.12 Average daily volume = 1.05 mln. Chart = http://quote.yahoo.com/q?s=jdsu&d=3m Medical/Biotechnology ********************* AMGN - Amgen $76.88 (+1.50) Located in Thousand Oaks, CA, Amgen, is one of the biggest in Healthcare and Drug industry. They spend approximately one fourth of their sales on research and development. Epogen an anti-anemia drug and Neupogen an immune system stimulator make up about 90% of Amgen's sales. Infergen, a treatment for hepatitus C has been commercialized as well. They are involved in several marketing alliances with Johnson & Johnson and Hoffmann-La Roche. AMGN released earnings on July 12th. They beat analysts estimates by over 8%. Amazingly investors rewarded them for their efforts. Shares of AMGN stock jumped $6 the following day. Over the next four days AMGN climbed another $7 hitting $79.13 on July 16th. Since that time we've seen a predictable pullback in the drug maker's stock. This week AMGN made a low of $72.25 and then bounced off its 10 dma which is now setting at $74.58. AMGEN has showed strength this past week as the rest of its co-horts in the industry have followed the broader markets down. For the last eight days AMGN has been stuck in a narrow $4 range, which it came out of on Friday closing near its high of the day at $76.88 on volume of 4.23 mln. shares. We are looking for Amgen to continue higher. If we get any bounce in the major indices this week, Amgen could continue with a solid move higher. If the rest of the market continues to drift lower in may be a little tougher for AMGN to continues its winning ways. If we do get a pullback its 10 dma should provide support. Before entering a play in AMGN confirm market direction and volume. Thursday AMGN was reiterated a strong buy at Basler Kantonalbank analyst Christian Dreyer. It was also announced Monday that Amgen's patent lawsuit against Hoechst Marion Roussel will begin in Boston in April 2000. BUY CALL AUG-70 AMQ-HN OI=2529 at $8.00 SL=$6.25 BUY CALL AUG-75*AMQ-HO OI=2970 at $4.25 SL=$2.75 BUY CALL AUG-80 AMQ-HP OI=1954 at $1.75 SL=$0.75 BUY CALL SEP-75 AMQ-IO OI= 381 at $5.88 SL=$4.25 Picked on July 31st at $76.88 PE = 42 Change since picked $ 0.00 52 week high=$81.38 Analysts’ ratings 15-9-6-0-0 52 week low =$28.97 Last earnings 6/99 est 0.46 actual 0.50 surprise=+8.70% Next earnings 10-12 est 0.48 versus 0.41 Average daily volume = 5.13 mln. Chart = http://quote.yahoo.com/q?s=amgn&d=3m ***** VISX - VISX INC $101.25 (-.50)(+7.50) Their technology is distributed and installed in 45 countries. VISX designs and develops technology to re-contour the surface of the cornea of the eye. VISX markets the FDA-approved system through 20 distributors worldwide. VISX technology enables ophthalmologists to treat conditions from nearsightedness and astigmatism to pathological vision disorders. Since making its new 52 week high late in the day Wednesday VISX has been trying to decide which way to go. Since we picked VISX, it has had a pattern of moving $2 higher, consolidating, and repeating the act again. Given the weakness in NASDAQ this week, it's amazing that VISX has not been hit by major selling pressure. This is encouraging, yet we would like to see better volume behind the recent advances in VISX. Honestly, we aren't sure if the steam is starting to run out of VISX. Its 10 dma is at $98.65 and its 30 dma is back at $88.67. VISX has been able to bounce off its 10 dma every time for the last two months (or from the first full week of July). If we break this pattern for more than a couple of days, it might be a signal that the momentum has stopped. Again we would suggest moving your stops up to fit your risk profile. If the NASDAQ can find some strength and recover this week, then we will most likely see VISX continue higher with the same pattern it has displayed in the past. If we get further weakness in the broader markets, the bears may decide to have their way with VISX so keep your stops tight. Pick your entry point carefully and watch that 10 dma. Citing the VISX had placed 61 new lasers worldwide in the last quarter, BancBoston Robertson Stephens senior medical device and medical technology analyst Wade H. King M.D., reiterated his buy rating on VISX on Friday. BUY CALL AUG- 95*VFS-HS OI=1809 at $9.25 SL=$7.00 higher delta BUY CALL AUG-100 VFS-HT OI=1282 at $6.00 SL=$4.25 BUY CALL AUG-105 VFS-HA OI= 887 at $3.75 SL=$2.25 BUY CALL SEP-100 VFS-IT OI= 391 at $9.88 SL=$7.50 Picked on July 20th at $97.00 PE = 92 Change since picked +$ 4.25 52 week high=$103.88 Analysts’ ratings 5-3-2-0-0 52 week low =$ 10.50 Last earnings 6/99 est 0.29 actual 0.32 surprise=+10.34% Next earnings 10-14 est 0.33 versus 0.16 Average daily volume 1.69 mln. Chart = http://quote.yahoo.com/q?s=visx&d=3m Telecom/Communications/Networking ********************************* CSCO - Cisco Systems $62.13 (-0.81)(-3.06)(-1.06)(P2W +8.56 SA) Cisco builds 85% of the routers and switches that make the Internet work. They are the leading supplier of products that link local and wide area networks. The company's other products include dial-up access servers and network management software. Cisco has been on an acquisition binge (about 35 since 1993) to broaden its product line. It also derives revenue by licensing products as it seeks to widen the influence of its Cisco Internetwork Operating System (Cisco IOS) software, in hopes of making it an industry standard. Strategic relationships with the industry's biggest players (including Alcatel, Microsoft, Qwest, and U S WEST) are boosting Cisco's influence on the networking industry. Marking time - that's all we could do with CSCO as it traded in a narrow range of $61-$64 all week long. Technically, CSCO is basing and gathering support in this range. Strong market headwinds are partially to blame for its lack of advance. Nonetheless, CSCO has withstood the pressure pretty well. 1.5 weeks remain until CSCO reports earnings on August 10 after the close. Technically CSCO's chart has indicators in the negative. Then again, everyone else's look generally the same. As we've noted in previous write-ups, our intent is to capture a move that should result from a strong technical basing and an earnings run. Unfortunately, volume was only average all week. Volume increases are what CSCO needs to break out of its range. Investors are already telegraphing (based on open interests) that they expect the price to be at $70 by August 20 (expiration day). Get ready. CSCO is not likely to disappoint with its earnings. When the run begins (anytime, now!), volume will be the key. More speculative types may want to target shoot the entry. Just make sure the market is headed in the right direction. From a PRNewswire release, "Whether the (telecommunications) industry likes it or not, voice is absolutely going to be carried by IP (Internet telephony), 'to the tune of a 30-50% growth rate', predicts Gordon Astles, vice president for Cisco Systems. Commenting in a StockHouse.com interview on future industry trends and Cisco's role, Astles added that, 'IP being Cisco's focus means that the voice market is coming to Cisco, not the other way around. We have to learn voice, and everybody else has to learn IP." This makes it all the more likely that LU and CSCO will be even bigger competitors in the future. Watch for "Battle of the Titans", coming to a phone company near you. BUY CALL AUG-60*CYQ-HL OI=10679 at $4.00 SL=2.50 BUY CALL AUG-65 CYQ-HM OI=26640 at $1.56 SL=0.75 BUY CALL AUG-70 CYQ-HN OI=31076 at $0.44 SL=0.00 BUY CALL SEP-65 CYQ-IM OI= 2410 at $2.88 SL=1.50 BUY CALL SEP-70 CYQ-IN OI= 2013 at $1.31 SL=0.75 Picked on June 29th at $62.50 PE = 106 Change since picked -0.37 52 week low =$20.56 Analysts Ratings 19-12-0-0-1 52 week high=$69.25 Last earnings 05/99 est 0.37 actual 0.38 surprise = 2.7% Next earnings 08-10 est 0.40 versus 0.32 Average daily volume = 15.34 mln. Chart = http://quote.yahoo.com/q?s=CSCO&d=3m ***** QCOM - Qualcomm $156.00 (+1.31)(-3.56)(+9.50)(P4W +42.00) Qualcomm is the inventor of CDMA technology, the new industry standard for mobile communications used in cellular phones, wireless telephone system equipment, and satellite ground stations. Its OmniTRACS global positioning system is used by the trucking industry to monitor traveling truckers. In a joint venture with several companies, including Loral, QUALCOMM is developing the Globalstar system of low-orbiting satellites, which will offer telecommunications services around the world (and should smoke Iridium like a pork chop, we might add). QUALCOMM also publishes the popular Eudora e-mail software. Given some of the carnage on the NASDAQ last week, QCOM held up pretty well. Thanks to Goldman Sachs and Lehman Bros. previous week purchase of 6.9 mln. shares (the intent is to re-sell them to index funds since QCOM became a part of the S&P 500), there is strong support at $156.50. Following blowout earnings for the second quarter in a row, QCOM is still regaining its composure and may need to consolidate a bit more before moving up again. Volume has been pretty light lately too. My, how the landscape changes quickly. Though we think QCOM is a great company with long-term prospects, the luster may be off the play. Earnings season is coming to an end and QCOM may remain flat or drop with the rest of the market if there is no news to prop it up. What news might we look for? Perhaps a split, which when last announced in April, QCOM traded at $157. Here we are again. While a split is plausible, QCOM needs shareholder approval to make it happen. There is no SEC filing yet either. So don't hang your hat on this if you enter the play. Wait for the market and the volume to show you the direction. Not much in the news this week, except that Hambrecht & Quist initiated coverage of Qualcomm with a market perform rating. Pretty tough to get enthusiastic about that, but we'll take it! Oh yes, almost forgot to mention that 4 more Globalstar satellites were launched last Sunday. Globalstar is a satellite- based CDMA communications system that should start operations by the end of the year. It carries greater call quality and data capacity than Iridium and should be better priced for the average user. Qualcomm is one of the largest of 15 Globalstar partners. BUY CALL AUG-150*AAW-HJ OI=2269 at $11.13 SL= 8.75 BUY CALL AUG-155 AAW-HK OI=1665 at $ 8.00 SL= 6.25 BUY CALL AUG-160 AAW-HL OI=3624 at $ 6.25 SL= 4.50 BUY CALL SEP-155 AAW-IK OI= 317 at $14.75 SL=11.75 BUY CALL SEP-160 AAW-IL OI= 277 at $12.50 SL=10.00 Picked on July 22 at $154.69 PE = 230 Change since picked + 1.31 52 week low =$ 18.88 Analysts Ratings 7-7-3-0-0 52 week high=$167.25 Last earnings 07/99 est 0.58 actual 0.75 surprise = 29.31% Next earnings 11-03 est 0.68 versus 0.27 Average daily volume = 3.57 mln. Chart = http://quote.yahoo.com/q?s=QCOM&d=3m ***** VOD - Vodafone AirTouch $210.50 (+2.56)(-6.31)(+7.13)(+1.63) Vodafone is the number one mobile communications company in the UK and recently doubled its size by purchasing AirTouch Communications. The new Vodafone AirTouch operates analog and digital cellular networks, along with paging and mobile data services. The company serves 29 million customers in 23 countries. VOD's major competitors are British Telecom, AT&T and Cable & Wireless. This is almost too easy. VOD continues to bounce off its 50 dma. Twice this week, VOD gave us opportunities to play calls and get out the next day with nice profits. Granted playing an ADR presents its own risks, this has been pretty consistent. The two major risks are there is no guarantee it will continue to bounce off its 50 dma, and VOD's habit of gapping up or down. If you're right, you did good, if you're wrong, your play could be dead. Nothing has really changed since last week. VOD continues to hit resistance near $214 but as we said above, it continues to find support at its 50 dma. This is an ascending bullish triangle that has been building for almost two months. We are getting closer and closer to the point of this triangle. That means that the breakout it coming soon. Again, there is no guarantee that it will be upward, but the clues are pointing that direction. So far, VOD has shown amazing strength given the performance of the Dow this week. VOD is near the top of its channel and needs to come back down to $205 or $206 for a possible entry point again. Watch for an intraday bounce off these levels for a play. Here is a repeat of our news on the VOD 4:1 stock bonus: 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. 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. BUY CALL AUG-200 VOD-HT OI= 491 at $13.13 SL=10.50 wait for dip BUY CALL AUG-210*VOD-HB OI=3951 at $ 6.38 SL= 4.25 BUY CALL SEP-210 VOD-IB OI= 241 at $11.75 SL= 9.00 BUY CALL SEP-220 VOD-ID OI= 334 at $ 7.00 SL= 5.25 Picked on June 26th at $204.75 PE = 80 Change since picked +5.75 52 week low =$ 94.00 Analysts Ratings 3-4-1-0-0 52 week high=$216.44 Last earnings 04/99 est ? actual ? Next earnings ? est 1.56 versus ? Average daily volume = 1.20 mln Chart = http://quote.yahoo.com/q?s=VOD&d=3m PLAYS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 8-1-99 Sunday 4 of 7 CALLS CONTINUED *************** Retail ******* SNE - Sony Corp $125.19 (+8.19) Sony is a consumer electronics and multimedia entertainment company. It sells products like TVs, VCRs, MiniDisc systems, stereos, digital camcorders, DVD video players, and the Playstation home video game system. It is also in the process of strengthening its position in the music and image-based software markets. Some of Sony’s entertainment assets include Columbia TriStar Motion Picture, Columbia TriStar Television, Sony Pictures Studio, and Columbia and Epic record labels. Other high-tech products include flat-screen TVs, digital TVs, CD-ROMs, and digital cellular telephones. Sony has been such a solid performer that we just had to bring it back for another play. We let the stock go a couple weeks ago since it was retracing after a great run and it is always difficult to pick a bottom. SNE went down to around $116 where it found support and traded sideways for a couple days. This gave the stock the bottom it needed to begin back up again to where it currently sits only $1.69 from a new high. The strength comes from a variety of reasons. First, consumer electronics have been selling well recently with help from new technology like DVD players. Second, the Japan economy is showing strong signs of recovery and Sony is a bell-whether stock in their economy. Third, the stock is still relatively cheap. Its P.E. is less than the industry average and it has a very low float which makes it difficult for money managers to accumulate as many shares as they want. This in turn drives up the price, not to mention making it more volatile for greater option movement. SNE looks to be ready to hit new highs shortly but you should still plan an entry point to buy on the dips. On Friday SNE announced that its Station at Sony.com site has registered its 4 millionth user. The pace has been increasing every month too. This is the fastest of any entertainment site on the Web. The speed at which The Station continues to increase membership reflects the demand among consumers for quality online entertainment. Sony is definitely ahead of the curve in this industry. BUY CALL AUG-120*SNE-HD OI=97 at $ 7.88 SL=6.25 BUY CALL AUG-125 SNE-HE OI=31 at $ 4.88 SL=3.25 BUY CALL SEP-120 SNE-ID OI=15 at $10.50 SL=8.00 BUY CALL SEP-125 SNE-IE OI=28 at $ 7.63 SL=5.75 Picked on July 2nd at $125.19 PE = 48 Change since picked +0.00 52-week high=$126.88 Analysts Ratings 0-0-0-0-0 52-week low =$ 60.25 Last earnings 07/29 est= N/A actual= N/A Next earnings 10/99 est= N/A versus= N/A Average Daily Volume = 190 K Chart = http://quote.yahoo.com/q?s=SNE&d=3m PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. Recommended Puts **************** AOL - America Online $95.13 (-12.81)(-12.06) America Online is the world’s leading provider of Internet and online services. It currently has over 17 million subscribers between its two divisions, America Online and CompuServe. AOL Interactive Services product group operates the company's America Online service & manages the AOL Instant Messenger service, the AOL.COM Web site, and AOL NetFind. In 1999 it purchased Netscape Communications which brought the popular Navigator Web browser and the Netcenter Internet portal to AOL. That’s not the only purchase this year either. In May they bought MovieFone Incorporated to add to an already commanding list of services. It just keeps getting worse for AOL. The stock sold off yet again on Friday as old news and new news had a negative impact on the share price. The old news that we talked about last week was the increase in insider selling. The company confirmed today that CEO Steve Case plus other high level executives did sell large chunks of stock. This would have been when the stock was up in the $105 to $115 range. The disturbing part is the reason for the sale. A company press release stated that they sold to diversify their portfolios, which is just the wrong thing to tell shareholders. In translation, that means the CEO and his chums feel there are other investments that will do better than AOL. If that is the case, why would I want to own AOL? And this was no small sale either. It was 7 guys selling almost 4 mln shares for over $425 mln dollars. Astounding numbers to say the least. The catalyst this week was rumors that Baron’s magazine would be printing a negative article about AOL in their weekend edition. You should be able to check any online news service this weekend for an update. Now with all that said, we are not far from the 200-dma. AOL has not broken that support level in years so we are expecting an initial bounce at that price. The question is whether it will hold or eventually break. Keep watching the overall Internet sentiment for any change and use caution on your new entry points. BUY PUT AUG-100*AOO-TT OI=18031 at $8.50 SL=6.50 watch the 200 dma BUY PUT AUG- 95 AOO-TS OI= 8727 at $5.63 SL=2.75 BUY PUT AUG- 90 AOO-TR OI=11322 at $3.50 SL=1.50 Average Daily Volume = 12.75 mln Chart = http://quote.yahoo.com/q?s=AOL&d=3m **** CA - Computer Associates Intl $45.88 (-1.68)(-7.44) CA markets over 500 software products. Their products are used with a variety desktop, midrange, and mainframe computers. Ca is #3 in the world behind Microsoft and Oracle. CA offers various information management systems and business applications solutions. Their mainstay Unicenter program gives customers centralized control over their software, hardware and networks. Computer Associates finally began to slip Friday. For most of the week CA traded in a $3 range. As with the broader markets the volume has been very light. Just after 11 a.m. ET, CA began to lose its footing, falling through the $46.50 area that had provided support for most of the week. The software industry had a tough month. It peaked in the middle of the month and started a 12%-13% slide, lead by industry giant Microsoft. CA hit a new 52 week high on July 8th and has been retreating since. Its pullback has been more than the industry average. CA has fallen about 21% from its early July high. Technically the chart looks like there is more room to the downside. MACD went negative early this week. The 200 dma is at $43.78 which should provide support for CA. The fact is CA seems to have been fighting going south all week long, and given the weakness in the broader markets this does make us somewhat suspect. The other fact which can't be denied however is the trend for CA is still down. Until the market tells us different we will stick with our view of Computer Associates. Move your stops down and let the market do the rest. Not much news this week for CA. They did receive an upgrade from analyst Monish Bahl at Parker Hunter Inc., from an accumulate to a buy. The 12 month price target for CA was set at $60.00. Obviously, it didn't help much. Be careful. MSFT makes up a large portion of the software index. The software giant is sitting on its 50 dma. If MSFT rallies strongly from here, it may spark a rebound in CA. Just keep your eyes open. BUY PUT AUG-45 CA-TI OI=1615 at $1.63 SL=$0.75 BUY PUT AUG-50*CA-TJ OI=1884 at $5.00 SL=$3.75 Average daily volume 1.79 mln. Chart = http://quote.yahoo.com/q?s=ca&d=3m **** CMGI - CMG Information Services $92.19 (-5.00)(-12.13) Formerly a marketing data base conglomerator, CMGI now has the appearance of an Internet incubator/venture fund. They own a big chunk of Lycos, Yahoo! (thanks to YHOO's purchase of GeoCities), a 10% stake in Hollywood Video from HLYW's purchase of Reel.com, and the recently acquired Alta-Vista search engine. Recently, they IPO'd another company, Engage Technology (ENGA), in which they still own 82%. CMGI now trades below its 30, 50, and 100-dma. Current support is around $88. With earnings season darn near over, there isn't much to keep the price supported. The key lies with the sector and the NASDAQ. The NASDAQ now sits at it's 50-dma. A break at this technical level will likely pull most everything down with it and CMGI would likely break its support in the NASDAQ's wake. Then, the next stop is $77. Sensing that the "light my fire" days of Internet high-flyers are waning, investors are beginning to require earnings with those revenues streams. Add to that an onslaught or Internet IPO's, and you have the formula for a long run and even current period shakeout - an oversaturation of issues. The high multiples are getting harder to come by. That does not mean that we should enter the play blindly. CMGI, like the rest of 'em is still volatile and can rise $10 easily if the market ignites a rally, wiping out an otherwise good entry. Translation: Internet = Volatility = Risk. Wait for the market to give us the direction before taking a new position. BUY PUT AUG-95*GCB-TS OI=1779 at $7.63 SL=5.75 BUY PUT-AUG-90 GCB-TR OI=2548 at $4.88 SL=3.25 BUY PUT AUG-85 GCB-TQ OI=1922 at $2.88 SL=1.25 Average daily volume = 5.79 mln. Chart = http://quote.yahoo.com/q?s=CMGI&d=3m **** DCLK - Doubleclick $81.00 (-2.69)(-16.44)(-2.81) Doubleclick is an Internet banner advertising agency. They provide Internet advertising services for advertisers and Web publishers worldwide. The DoubleClick Network provides fully- outsourced ad sales, delivery, and Related services to publishers of highly trafficked web sites, including AltaVista, The Dilbert Zone, Macromedia, and U.S. News Online. The DoubleClick Network focuses on meeting the advertising needs of Internet advertisers who target users on a national, international, or local basis. The company's DART Service enables Web publishers, advertisers, and ad agencies to control the targeting, delivery, measurement, and analysis of their online marketing campaigns on a real-time basis. They recently, they announced the purchase of NetGravity (NETG). DCLK is stuck in the Internet downdraft. You know the news. DCLK failed to deliver any upside surprise earnings. Internets including AMZN and AOL have even disappointed. Technically, DCLK has no support until it gets down to $70. It already trades under its 50-dma and 100-dma. Its 200-dma is in the low $60 range. Now that earnings are winding down as we enter August, there isn't anything to prop up the prices. Nonetheless, don't count DCLK out. In the last 2 months, they have agreed to buy Abacus Direct, a database of catalogue buying habits, and Netgravity, a former competitor. Total cost: $1.5 bln. To DCLK, it's all about ad placement on the Internet, and the Internet isn't going away. Even so, we expect the trend to continue down for the foreseeable future. We probably don't need to remind you (but we will) that DCLK is volatile and not for those with weak stomachs. Stops will be difficult use with the Internet's wild gyrations. Confirm market direction downward by watching to see if the NASDAQ's 50-dma is violated. If it is violated and remains there, that's probably the safest entry (if there is such a thing). Next support is in the low $70's. The dreaded upgrade is a pothole in the road for puts. After the close on Friday, Brokerage firm Thomas Weisel issued a buy rating, which may affect trading on Monday. July 19, DCLK reported an earnings loss of $0.13, in line with estimates. Some were looking for the loss to be as small as -$0.10. BUY PUT AUG-85*QWE-TQ OI=1387 at $8.25 SL=6.25 confirm direction BUY PUT AUG-80 QWE-TP OI=1231 at $5.25 SL=3.50 BUY PUT AUG-75 QWE-TO OI=1116 at $3.00 SL=1.50 Average daily volume = 3.07 mln. Chart = http://quote.yahoo.com/q?s=DCLK&d=3m **** EBAY - eBay Inc $97.69 (-10.12)(-15.16) eBay is an Internet auction service in which users buy and sell personal property. The sellers pay a fee to have their items placed on the company's Web site and the buyers get to browse and make bids on the merchandise. If an item sells, eBay charges the seller a percentage of the closing price. The company's newest rival in the auctioning arena is Amazon.com. This month the internets took their worst beating since August 1998. EBAY is down 35% from $151.38 on June 30th. The interest rate fears have hung over this sector and now with the high Employment Cost Index numbers (reported on Thursday) Greenspan has a greenlight for a rate hike. The lofty internets become prime targets for profit-taking as they are very susceptible to anything that involves the possibility of higher borrowing costs. Plus on Friday, Priceline.com (PCLN) announced they may enter the auction market. Yet another new competitor for eBay. In March of this year, Amazon.com has added auctions to their web site stepping into eBay's turf. A week ago Thursday, EBAY broke through its 200 dma and hasn't looked back. This week, trading volume continues to be strong and EBAY shed more than $10. But please remember, this is a HIGH RISK INTERNET play and not for everyone. BUY PUT AUG-100*QXB-TT OI=2181 at $7.75 SL=6.00 BUY PUT AUG- 95 QXB-TS OI= 587 at $5.00 SL=3.25 BUY PUT AUG- 90 QXB-TR OI=2649 at $3.25 SL=1.75 Average daily volume = 3.70 mln. Chart = http://quote.yahoo.com/q?s=EBAY&d=3m **** ELNK - Earthlink $48.31 (-7.69)(-3.06) 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. Last week, because of the higher than expected numbers released on the employment-cost index report, investors feared that interest rate hikes may be in the near horizon. Bearish sentiment in the overall markets caused investors to unload those positions that were the most overvalued, many of which were Internet stocks. Earthlink, with the help of a weak internet sector, continued to lose ground falling further from its 50 dma and 200 dma making this play look even better. The next support level is around $40 so we have a few points to ride. Just a word of caution however, because this sector has been known to turn around on a dime, continue to adjust your stop losses if needed and make full use of this feature to end the play. BUY PUT AUG-45 QKL-TI OI=1007 at $2.50 SL=1.25 BUY PUT AUG-50*QKL-TJ OI= 995 at $5.00 SL=3.75 Average daily Volume = 2.05 mln Chart = http://quote.yahoo.com/q?s=ELNK&d=3m **** GNET - Go2Net,Inc. $58.75 (-5.13)(-11.94) 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. Last Wednesday & Thursday, GNET was acting a little to tall, and kept hitting it's head on that resistance of $67.00. Remember we said that the more bumping it got, the stronger it would be? On Friday, those previous bumps took their toll, and down we went. The significant moves appeared to be in conjunction with the broader markets. The bearish trend and momentum on GNET continue to build, and will be helped with any negatives from the market. Re-adjust short term resistance to $62.50 based on the last two days charts. Be ready for some buyers coming in on the dip if the Nasdaq shows any signs of a significant turn around. There hasn't been any significant news to report since our last update; however, no news can be very good news in a put play. Remember that the main things that really effect stock price are news, earnings, inflation, and interest rates. We're putting together a good mix for GNET with no news, inflation fears, and a possible rate hike in August. Confirm market direction before starting a new play. BUY PUT AUG-65 GQI-TM OI=268 at $8.88 SL=6.75 higher delta BUY PUT AUG-60*GQI-TL OI=242 at $5.50 SL=3.75 BUY PUT AUG-55 GQI-TK OI= 62 at $3.13 SL=1.50 Average daily volume = 928k Chart = http://quote.yahoo.com/q?s=GNET&d=3m **** LVLT - Level 3 Communications $53.00 (-5.06)(-8.94) Level 3 Communications is a communications and information services company that is building an international advanced Internet Protocol network. Level 3 offers local and long- distance plus Internet service over leased network capacity in the US and Europe. The network will be the first international communications network to use IP technology end-to-end. It also offers computer operations outsourcing and owns stakes in telecom companies such as RCN and Commonwealth Telephone. Every time this stock tries to stand up and mount a rally the sellers come back in and pull the rug out from under LVLT. It has been unable to mount any lasting rally and it doesn’t appear to be over yet as Level 3 ended Friday right near the day low. We mentioned on Thursday that $54 is still the critical level and it would confirm direction for our play if LVLT stayed under that price, well we got our wish. It rallied early Friday and looked like it may hold $54 but around 3:00 EST the support gave may and we plunged lower. The market didn’t help LVLT any either as the DOW sunk to end the day near the lows but then again, the tech-heavy NASDAQ was down less than 2 points. We see more downside ahead for LVLT even though some indicators are suggesting the stock may be oversold here. Its always good to use caution but LVLT is lacking any real support at this level. The market is also still looking weak and until the broad sentiment changes, Level 3 is likely to follow it down. It's very important that you confirm LVLT's direction on Monday if you are starting a new play. Now that it has broken through $54, that level should become overhead resistance. BUY PUT AUG-55*QHN-TK OI=610 at $4.63 SL=2.75 BUY PUT SEP-50 QHN-UJ OI=342 at $2.06 SL=1.00 Average Daily Volume = 977 K Chart = http://quote.yahoo.com/q?s=LVLT&d=3m **** MER - Merrill Lynch & Co Inc $68.00 (-3.69)(-4.94) Merrill Lynch provides a variety of financial and investment services to individuals and institutions on a global basis (about 25% of its sales comes from overseas). Under pressure from industry consolidation, Merrill Lynch, once the undisputed leader in the financial world, now finds itself in a close fight for dominance with fellow retail/wholesale financial supermarket Morgan Stanley Dean Witter. Merrill Lynch has been a laggard in online services and only added Internet trading services in 1999 with its Unlimited Advantage product. We added MER to our put play list a couple of weeks ago amidst the turmoil of the financial sector. Just the mention of "Greenspan" sends shivers down investors' spines! At the beginning of July, MER was comfortable at a support level of $77 and $79. Then it began to descend lower, slipping below the formidable 200 dma (about $75). This week the stock has traded consistently at or below this level. The resurgence of its descent picked back up on Thursday after the ECI report came in shockingly higher than anticipated. MER followed the DOW into the trenches breaking near-term bottom resistance of $71. A longer-term resistance is only a few more points down the ladder at about $65-66 (achieved in June and then again only hit as far back as February). Take a look at a 6-month chart for visual confirmation. If you choose to start a new play, pick your entry point carefully and consider stops in case the sentiment reverses. BUY PUT AUG-70*MER-TN OI=5315 at $4.00 SL=2.50 BUY PUT AUG-65 MER-TM OI=2104 at $1.63 SL=1.00 Average daily volume = 3.45 mln. Chart = http://quote.yahoo.com/q?s=MER&d=3m **** MSPG - MindSpring Enterprises $33.56 (-0.81)(-10.57) 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. A bearish signal is forming technically for MSPG. A descending right triangle. These are fun to play, because when we get a true breakout from the triangle, the move down is usually quite profitable. The last four days have developed this signal, so any continued downward movement in the market could give us our breakout. We have had several very negative overall days this last week, so you can expect some bounce next week from the bargain hunters. It should be just that, a bounce, as the indicators for this stock say we have more downward potential in store. The gap is widening on our MACD, a good sign of continued momentum. Keep in mind that there is market support at $28, so numbers close to this could show a turn forming. The last few hours of trading on Friday showed continued weakness which confirms our play. Confirm another negative trend here before entering. News on MSPG is really dependant on the NASDAQ. Not a lot from inside the company. Friday's trading on the NASDAQ provided some interesting moves, giving us some bearish tails on the charts. If the Nasdaq drops below its own 50 dma, the Internet sector will probably be dragged down even further. If we get significant strength in the index, be careful as MSPG will move with it. BUY PUT AUG-30 MQD-TF OI= 336 at $1.25 SL=0.50 BUY PUT AUG-35*MQD-TG OI= 808 at $3.63 SL=1.50 BUY PUT AUG-40 MQD-TH OI=1461 at $7.38 SL=5.25 higher delta Average daily volume = 2.08 mln Chart = http://quote.yahoo.com/q?s=MSPG&d=3m **** MWD - Morgan Stanley Dean Witter $90.25 (-3.25)(-6.44) MWD is the #2 retail broker in the US only after Merrill Lynch. The 1997 merger of Morgan Stanley and Dean Witter created an investment banking and retail brokerage powerhouse. The company is now global financial service firm with three primary business segments: securities, asset management, and credit services. Its Discover unit has been one of the leading credit card issuers. MWD has more than 430 branches in the US and some 30 more abroad. Its clients include both individuals and institutions. The broad market decline and the negative sentiment of the financial sector have been effecting MWD for a couple of weeks. This week, the DOW's rally on Tuesday and Greenspan's relatively flat speech on Wednesday gave a temporary reprieve to its decline. However after the higher than expected Wage Cost numbers on Thursday, the stock's descent was once again in full throttle. MWD shed another $5.81 by Friday's close. Presently, it's well below the 50 dma of $95 and merely points away from breaking through the 200 dma of about $87. If MWD can slip below this level, it would give us further evidence of its demise. Volume did pick up towards the end of the week reaching around 85% of its norm. 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. MWD rejects the employees claim of discrimination. The EEOC and MWD have two weeks to decide if data relating to this issue should be released. If they cannot come to an agreement, a U.S. District Judge will make the decision. This may cause additional jitters amongst investors in the near-term. BUY PUT AUG-95*MWD-TS OI=1856 at $6.50 SL=4.75 higher delta BUY PUT AUG-90 MWD-TR OI= 658 at $3.63 SL=1.75 BUY PUT AUG-85 MWD-TQ OI=1406 at $1.75 SL=1.00 Average daily volume = 2.23 mln. Chart = http://quote.yahoo.com/q?s=MWD&d=3m **** NITE - Knight/Trimark Group Inc $42.13 (-6.59) 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. NITE started losing ground after 2Q blowout earnings on July 21st (.43 p/s versus same quarter 1998 of .14) followed by a much disfavored interview with the CEO Ken Pasternack. Mr. Pasternack stated that he calculates the company's future growth rate would come in at a more reasonable 5-10% a quarter. On Monday, NITE plunged 9% (-$4.53) during the Nasdaq sell-off driving it even farther away from its 50 dma (now at $54) - the stock had been trading below this indicator since July 9th. We picked up NITE as a put play on Tuesday when it didn't respond to the market's rally. This gave us the bearish confirmation we wanted. The internets in general have been getting hammered with interest rate concerns looming overhead. Wednesday was the only day NITE advanced due to the broad market relief experienced after Greenspan's speech (remember he offered no negative comments on the rates and buyers tip-toed back in to buy at bargain prices). Then the tables turned once again on Thursday as the U.S. Wage and Labor numbers jumped up significantly since last quarter; giving the Feds a green light to raise the interest rates a bit more in August. NITE lost another -$3.38 on that day and then shed another -$1.88 on Friday as the internets continued to struggle. The intraday swings haven't been so wide that you may consider using stops to protect your position if the play doesn't go your way. 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 high- technology companies. BUY PUT AUG-45*QTN-TI OI=1897 at $4.88 SL=3.25 BUY PUT AUG-40 QTN-TH OI= 711 at $2.13 SL=1.00 Average daily volume = 4.47 mln. Chart = http://quote.yahoo.com/q?s=NITE&d=3m ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 8-1-99 Sunday 5 of 7 PUTS CONTINUED ************** SCH - Charles Schwab & Co. $44.06 (-2.69)(-5.69) Charles Schwab is a holding company with subsidiaries that provide financial services which include discount brokerage, trade execution, investment, advisory services, and administrative services. One subsidiary performs clearing and account maintenance and another is a market maker in Nasdaq securities. Schwab is the largest discount brokerage in the U.S., and operates 235 branch offices in 46 states, Puerto Rico, and the U.K. On Feb.8th, it also entered the Canadian market through an acquisition. On Friday, SCH dropped below its support at $45, which had been holding all week. This should help to propel the stock down another $4 to the next support at $40. The online brokers continue to be the weak sector. On Wednesday they tried to rally but it was only the matter of a few hours before investors jumped back in to sell. The news has been quiet this week for Schwab. The lack of positive news to hold up the stock is helping our play. If you listen to the money managers and analysts on CNBC and other financial programs, they are all mostly bearish on the sector in the short-term. This is evident by the massive selling which probably includes many institutions. All in all, we see more downside ahead as long as the market continues its bearish pattern. Until the sentiment for this group changes, there will be opportunities to make money on this play. BUY PUT AUG-50 SCH-TJ OI=1980 at $6.63 SL=4.75 BUY PUT AUG-45*SCH-TI OI=3031 at $2.94 SL=1.50 Average Daily Volume = 3.51 mln Chart = http://quote.yahoo.com/q?s=SCH&d=3m ***** TERN - Terayon $39.13 (-2.62)(-6.75) 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? Blind squirrel finds acorn? Just kidding, but even TERN deserves an up day since its chart shows steady descent from $56 over the last 19 trading days. Volume was pretty low, so we can't read too much into it. The gist of the play here is that TERN announced earnings and can't keep its head above water. It violated support of $40 last week, a level it hadn't seen since June 9. Next stop is $33. Don't get us wrong, long-term this company has great prospects and will likely make the "longs" lots of money, but right now there is nothing until next earnings season to support the price. If NASDAQ falls, TERN will follow, barring any big contract announcements, which are certainly possible. News is sparse, so any good news will likely bounce TERN to the north. If you play TERN, protect yourself from a profit-vaporizing reversal with stop orders. Even then, it could trade right through, so you'll want to keep your eye it. This is not one to buy and forget. It's a short-term technical play only. Market willing, enjoy the ride. In the news, Preferred Capital Management downgraded the company to accumulate from buy, but that was July 14 when they announced earnings. To be fair, 2 other companies reiterated their buy ratings on July 15, with price targets of $60-$65 per share. BUY PUT AUG-45*TUN-TI OI=238 at $6.63 SL=4.75 lowest premium BUY PUT AUG-40 TUN-TH OI=386 at $3.38 SL=1.75 BUY PUT AUG-35 TUN-TG OI= 12 at $1.25 SL=0.50, feel lucky? Average daily volume = 659 K Chart = http://quote.yahoo.com/q?s=TERN&d=3m **** U - USAir Group Inc. $35.63 (-2.56)(-2.00)(-4.81) As one of the top 10 airlines in the U.S., US Airways Group is the holding company for US Airways, Inc., Shuttle, Inc., Allegheny Airlines, Inc., Piedmont Airlines, Inc., and PSA Airlines, Inc. As a certified air carrier, they are engaged primarily in the business of transporting passengers, mail, and property. USAir is still trying to emerge from a rough decade which has included low-fare competition, labor disputes, and early retirement by more than 300 pilots. Currently one of their more popular routes comes from Shuttle, Inc. which operates the US Airways Shuttle between New York and Washington. We have seen USAir drop for the third straight week and since the outlook and momentum haven’t changed, it should drop again next week. There is no love for the airlines right now as oil prices continue to rise. The inventory reports for oil this week came in lower than expected which gave prices a boost. This is bad news for the airlines who have to pay more for fuel, that in turn hurts earnings. It doesn’t take much prodding for investors to sell USAir since they were struggling with earnings estimates when oil at 20-year lows back in February. On the bright side, they did announce a settlement with their flight dispatchers. It was a 7-year deal with 197 employees but their 7000 mechanics are still far from a deal and may strike. After trying to hold on at $38, USAir came down sharply Thursday and Friday to end the week less than a point from its 52-week low. If oil stays strong, it is likely we will see new lows this week. Lock in your profits with stops and use the bounces for a new entry point. BUY PUT AUG-40*U-TH OI=691 at $4.63 SL=2.75 BUY PUT AUG-35 U-TG OI= 69 at $1.25 SL=0.50 Average Daily Volume = 859 K Chart = http://quote.yahoo.com/q?s=U&d=3m **** XRX - Xerox $48.88 (-0.38)(-9.81) Xerox is a global company dedicated to providing solutions that simplify your work and make you more productive. Whether you're a small business or a global enterprise, Xerox offers products and services that can help your company improve its business processes, lower costs, increase clock speed and share crucial knowledge. These products and services make it easy for you to turn paper information into digital information, and vice-versa; to view, organize and share information in the form of digital documents; to send documents on networks throughout the office or around the world; and to print, publish, and copy them onto paper. Since the $4.50 point loss on the 22nd of the month when XRX earnings came in below expectations, the stock has continued to slowly inch its way lower. The lower earnings were associated with a weakness in its overseas operations in Japan and Brazil and the strength of the U.S. dollar. Even though the stock has tried to establish some support lately around the $48 level, it still continues to trade well below both its 200 dma and 50 dma. and is likely to continue along this path until it reaches its next support at $45. Watch for a breakthrough of $48, and remember to place the stop loss orders for protection just in case the market decides to reverse. BUY PUT AUG-50 XRX-TJ OI=2665 at $2.63 SL=1.00 BUY PUT AUG-55*XRX-TK OI=2319 at $6.75 SL=4.75 ITM Average daily volume = 2.16 mln Chart = http://quote.yahoo.com/q?s=XRX&d=3m NEW PUTS ******** GM - General Motors Corp. $61.13 (-4.50)(-3.43) General Motors is the world's largest industrial corporation. It has manufacturing or assembly capacity in more than 50 countries, and has a presence in over 190 countries. In addition to making and marketing cars and trucks and related parts, the company also makes locomotives and heavy transmissions. Other business interests include financial services(GMAC), insurance, electronics, telecommunications, aerospace, and defense. Even without car and truck sales, GM would rank in the top 30 in the Fortune 500. GM recently reported outstanding record sales and earnings, which looked especially strong compared to the strike-affected earnings of last year. But the stock barely reacted in price. GM stock has lost more than one third of its value since hitting an all-time high of $94.88 on May 4th. Now at $61.13, GM is about as low as it has traded since October. Near the end of June, the stock bounced off the $61-plus level a few times, once hitting $61.06. However, Friday it traded as low as $60.38. 26th, 1998. Not only that, but on Friday, GM also fell below both its 50 and 200 dma’s. Other technical indicators are looking weak as well. Last week, same-sector Daimler-Chrysler (DCX) reported poor second quarter earnings that were well below expectations. It received a slew of downgrades and dropped 15% in 2 days. Both Ford and GM, already trending down, fell sharply in sympathy. The threat of interest rate hikes has investors worried that the auto makers will see declining car sales. Some analysts think that the auto sales cycle may already have peaked in the last few months. During that time, unemployment and interest rates have been low, while wages and consumer confidence have been high. It can't get much better than that, and rate hikes will only change the picture for the worse. If auto makers are forced to offer more incentives to maintain selling volume, profitability will suffer. July new car sales numbers, scheduled to be released approximately August third, could affect this play, if they are significantly more or less than expectations. Also, any sign that there will not be an interest rate hike would hurt this put. Otherwise, as long as interest rate worries remain at the forefront, the auto stocks will suffer. BUY PUT AUG-60 GM-TM OI=1279 at $1.75 SL=0.75 BUY PUT AUG-65*GM-TL OI=1537 at $5.00 SL=3.25 Average Daily Volume = 2.55 mln. Chart = http://quote.yahoo.com/q?s=GM&d=3m **** QLGC - QLogic Corp. $166.87 (+9.44)(+15.75) If time is money, then QLogic is providing eight of the ten top server manufacturers with better speed and performance than their competition. Companies like IBM, Dell, Fujitsu, Quantum, Hitachi, and others, all view QLogic as the innovator and the place to be when it comes to providing SCSI, enclosure management products, storage subsystems, and data storage peripherals. Qlogic is so innovative, that they were the ones who provided the industry with the first standard SCSI processor. Labeled as one of the "most booming young companies" of 1998 by Fortune Magazine, they are responsible for the new growth market of Fibre Channel. This is allowing them to be ranked a true leader in the electronic components and semiconductor industry. What an incredible few weeks it has been for QLGC. On July 14, the company announced a 2:1 stock split. A very bullish move considering the news was made public a day before their earnings announcement. Then they gave us the earnings surprise investors were waiting for. A $0.60/share earnings vs. the $0.49 estimate. Investors have been rewarded handsomely with this news, and have also been provided opportunities for entry due to the volatility of the stock. The price run into the stock split has been exceptionally strong, considering our market conditions; however, it is time for QLGC to rest. We believe that the post split depression will cause the stock to retreat substantially. This due mostly profit taking and catch-up to our current market. Also, the close Friday put us above the top Bollinger band on our charts. If we see a gap down Monday, the slide should be quite strong due to this formation. It can an extremely bearish signal when market conditions are negative also. This play is not for everyone. You'll have to watch the stock for an entry point Monday morning. Plus you'll need to call your broker for the correct put option symbols. Their 2:1 split is effective Monday and is bound to cause some confusion with most online quote services. The correction we are looking for could be as short as 1 or 2 days or it could last a couple of weeks. You'll need to watch it closely. Only good news to report on this stock. They are being added to the S&P MidCap 400 index, along with several brokerages upgrading the stock, in addition to what has already been mentioned. When all the good news comes at once, as it has with QLGC, it doesn't leave any excitement for after the party. We think the party is over for the short term, and puts should be our play. Due to the volatility of this stock, the fact that the trends have been strong to the upside, and there may be some Johnny come lately to the party, use extreme caution before entering. Remember, 7 out of 10 stocks go down after a split. There is a 30% chance we'll get hit on this play, but the odds are in our favor after such a strong ramp up the last two weeks. NO OPTIONS are listed. Call your broker for the new put option symbols. Average Daily Volume =424k Chart = http://quote.yahoo.com/q?s=QLGC&d=3m **** SEPR - Sepracor Inc. $73.50 (-8.56) Specialty pharmaceutical company Sepracor Inc. develops improved versions of widely prescribed pharmaceuticals. Sepracor seeks to offer drugs with advantages over existing compounds such as reduced side effects, improved therapeutic efficacy, effectiveness for new applications, and improved dosage forms. Sepracor has developed single-isomer or active -metabolite forms of several well-known drugs used by other pharmaceutical companies including Norastemizole, an antihistamine, (R) fluoxetine, an anti-depressant drug, Xopenex, an asthma medication and (S)-oxybutynin, a treatment of urinary incontinence. Like most of the drug sector this month, Sepracor too has taken a fairly good beating. The difference between SEPR and some of its competition is that SEPR shows greater signs of weakness. On July 23, SEPR announced its 2nd quarter earnings which resulted in a loss of $1.11 a share vs. $0.63 from the previous quarter. Those losses were mainly associated with costs incurred for research and development of new drugs. Investors, taking in consideration both the weak sector and the bad earnings reported by the stock have continued to sell and is reflected in its current price. These past few weeks SEPR has broken through both its 50 dma and 200 dma and doesn’t show any real support until $64. For these reasons we feel this is a play definitely worth mentioning. Even though we have a few points to ride on this play, remember to be safe, place a stop loss orders for protection encase the sector makes a U-turn. BUY PUT AUG-70 ERQ-TN OI= 96 AT $2.56 SL=1.25 BUY PUT AUG-75*ERQ-TO AI=161 at $5.00 SL=3.25 Average Daily Volume = 448K Chart = http://quote.yahoo.com/q?s=SEPR&d=3m **** TBH - Telecomunicacoes Brazileiras $76.38 (-4.43)(-4.69) Telecomunicacoes Brazileiras, or Telebras SA, as it is often known, was Brazil's state-owned telecommunications sector holding company until July 29th of last year, when it was privatized. On September 21st, 1998, the company spun off 12 new telecommunications companies. Telebras is now the benchmark for the industry and its ADRs are traded on the New York Stock Exchange. Some of the spun-off Brazilian telecommunications companies, particular the cellular ones, have performed very well in the last year. Others have struggled, with the difficulties of going private and the state of the economy in Brazil. Brazil's currency devaluation hit hard. In recent days, newly introduced competition in the long distance business has resulted in near chaos, with most calls in some areas failing to be connected at all. TBH has been up and down during its year of public trading. It hit its 1999 low (so far) of $50 in mid-January, and it topped out in May at $105. As the ADR headed down, its 50 dma became a cap on its price. In the last few weeks, its 10 dma has become the new ceiling. In the last few days of trading, TBH fell through support at $81. Meanwhile, fiscal imbalances and an ongoing trucking strike continue to cause problems in Brazil, and the Brazilian stock index is reflecting investor worries. Brazil's Central Bank cut local rates and shifted its bias from neutral to down last week. That should have helped Brazilian stocks, but fears of rising interest rates in the U.S. overshadowed the positive rate news in Brazil. With the stock markets here showing big losses, ADRs such as Telebras will continue to fall as well. BUY PUT AUG-70 TBH-TN OI=6805 at $1.44 SL=0.75 BUY PUT AUG-75 TBH-TO OI=7028 at $3.00 SL=1.50 BUY PUT AUG-80*TBH-TP OI=5091 at $5.75 SL=4.00 Average Daily Volume = N/A Chart = http://quote.yahoo.com/q?s=TBH&d=3m 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 8-1-99 Sunday 6 of 7 ********** Combos ********** Are Higher Interest Rates Looming On The Horizon? Friday, July 30 Blue-chip stocks were down again on Friday as Wall Street was hit by another round of unfavorable reports concerning inflation. The Dow slid 136 points to 10,655 after falling 180 points Thursday. For the week, the world’s most-watched index was down 255 points. The technology-heavy Nasdaq managed to hold ground at 2,638 but the S&P 500 index fell 12 more points to 1,328. Strangely enough, advancing issues led declines 1,492 to 1,441 on moderate volume of 721 million shares on the NYSE. In the inflation-sensitive bond market, the 30-year Treasury issue was off 14/32 with the yield up to 6.11%. Thursday’s plays (new positions/opening prices/strategy): Noble Drilling NE SEP17C/SEP20C $1.87 debit bull-call Entremed ENMD AUG17C/AUG22C $3.37 debit bull-call Cambridge Tech. CATP MAR20C/AUG20C $3.00 debit calendar The Noble Drilling (NE) spread was offered at $2.00 debit near 10 AM; and the target entry should have been achieved. Entremed (ENMD) was down most of the day but the recommended price also remained slightly below the trading range. Cambridge Tech (CATP) was easily opened at the suggested debit of $3.00. Portfolio plays: Friday's trading offered a mixed bag of results and it was truly a stock picker's market. There were few moves of any significance in the spreads portfolio and most were too unguided to discuss or focus upon. From an overall perspective, as General Motors (GM) goes (down $3), so goes the Dow and those two instruments provide a fairly accurate indication of the market's condition; weak but trying to stabilize. Another of the big safety issues, General Electric (GE), dropped $3 with the increased possibility of higher interest rates. Our conservative approach to the bullish diagonal position may yet pay off. Sepracor (SEPR) appears possessed at times, refusing to cooperate with any of our attempts to resurrect the (long-term) calendar spread. American Online (AOL) may also be past the point of no return as new investor interest falls to an all-time low. One of the few favorable positions today was Barr Laboratories (BRL); a long-term debit straddle. The stock price gapped down to $32 in morning trading and the NOV-40 Put traded as high as $7.25, almost a break-even price for the entire position. Emulex (EMLX) and RF Micro Devices (RFMD) now appear to be safely above the sold options and Proctor & Gamble (PG) rambled up through a recent resistance area near $90 after their earnings beat Wall Street's expectations. Questions & comments on spreads/combos to ray@OptionInvestor.com - NEW PLAYS - ****************************************************************** LTD - The Limited Inc. $45.68 *** Leaps/Covered-Calls *** The Limited is principally engaged in the purchase, distribution and sale of women's apparel, lingerie, men's apparel, personal care products and children's apparel. LTD operates an integrated distribution system which supports retail activities conducted under various trade names through department stores and catalogue divisions. Merchandise is targeted to appeal to customers in many specialty markets who have distinctive consumer characteristics. In addition, the company offers branded lingerie and accessories, men's apparel and personal care products. The Limited is a great company with a positive future but the big news is the spin-off of Too, Inc., which operates 331 stores under the name Limited Too. Limited Too is the specialty retailer of apparel, underwear, sleepwear, swimwear, lifestyle and personal care products for fashion-aware, trend-setting young girls. It is estimated that approximately 30 million shares of common stock in Too, Inc. will be distributed to The Limited's shareholders. The Limited intends to distribute one share of Too, Inc. common stock for every 7 shares of The Limited's common stock held at the close of business on August 11, 1999, the record date for the spin-off. The Limited expects that the spin-off will occur on August 23, and that regular trading of Too, Inc. (TOO) common stock on the NYSE will begin on August 24, 1999. There will be two sets of options for the underlying issue after the spin-off. Donaldson Lufkin & Jenrette analyst Dana Eisman Cohen is bullish on the company and upgraded Limited Inc to a ‘buy’ on Friday. PLAY (conservative - bullish/long-term): BUY CALL JAN01-50C ZLT-AJ OI=2 A=$7.00 SELL CALL AUG99-50C LTD-HJ OI=564 B=$0.38 INITIAL NET DEBIT TARGET=$6.38 TARGET ROI=100% (18 months) Chart = http://quote.yahoo.com/q?s=LTD&d=3m ********************** GD - General Dynamics Corp. $67.31 *** Bigger Is Better *** The primary business of General Dynamics is supplying weapons systems and services to the U.S. government and its allies. The company currently operates in the following business segments: Marine, Combat Systems, and Information Systems & Technology. Marine includes the Electric Boat Corporation, Bath Iron Works Corporation, and American Overseas Marine Corporation. Last month, General Dynamics and other defense firms reported quarterly profits that were above Wall Street's forecasts. GD, the nation's No. 4 defense firm, said its profits rose 14% to $105 million, or $0.81 versus $0.72 last year. The outlook is for profits to continue upward as the company consolidates to increase efficiency. In terms of consolidation, General Dynamics and Gulfstream just announced that they have completed their merger, creating a company with 38,000 employees and estimated 1999 sales of $8.2 billion. They will have leading market positions in business aviation, land and amphibious combat systems, shipbuilding and marine systems, and information systems. The transaction is a one-for-one stock swap valued at $4.8 billion and GD expects to issue approximately 72.2 million shares of stock to Gulfstream shareholders. Beginning in the third quarter, Gulfstream will record financial results as General Dynamics' fourth major business group, to be called Aerospace and the merger will be a positive adjustment to GD’s earnings and cash flow. Together, they expect to leverage their complementary manufacturing and marketing expertise to deliver outstanding financial performance in the future. Hmmm.. We like the long-term chart but some consolidation is expected after the news fades. The generous time frame and small initial cost offer us a favorable position with low risk. PLAY (conservative - bullish/calendar spread): BUY CALL FEB-70 GD-BN OI=5 A=$6.12 SELL CALL AUG-70 GD-HN OI=3170 B=$1.12 INITIAL NET DEBIT TARGET=$4.87 TARGET ROI=50% (6 months) Chart = http://quote.yahoo.com/q?s=GD&d=3m ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock price. ********************** GMST - Gemstar $66.25 *** An Old Friend *** Gemstar develops, markets and licenses proprietary technologies and systems that make technology user-friendly for consumers. The technology and intellectual properties are licensed to most major companies in the consumer electronics, satellite, cable and personal computer industries. Gemstar is a leading provider of electronic program guide services, which allow a user to view a television program guide on screen, obtain details about shows, sort shows by themes or categories, and select shows for tuning or recording, all through the remote control. The electronic program guide has been built into a number of models of new televisions, VCRs and TV/VCR combination units. Gemstar's electronic program guide is also licensed to cable, telco and MMDS service providers, and has been integrated into direct broadcast satellite receivers, digital & advanced analog cable set-top boxes, PCTV & other Internet devices and computer operating systems. If you read this section, you know that we participate in GMST on a regular basis. Friday’s gap-up has given us another unique opportunity to open a favorable position on this issue. This month we are going to sell excess premium in the OTM options. Earnings are expected early next month so this will be a very aggressive play. PLAY (aggressive - neutral/credit strangle): SELL CALL AUG-80.00 QLF-HP OI=147 B=$1.00 SELL PUT AUG-52.50 QLF-TX OI=94 B=$0.93 INITIAL NET CREDIT TARGET=$2.00 ROI=16% UPSIDE B/E=$82.00 DOWNSIDE B/E=$50.50 Chart = http://quote.yahoo.com/q?s=GMST&d=3m ********************** BTY - British Telecom (PLC) $176.00 *** Back For More! *** British Telecommunications (PLC) is an international provider of telecommunications services. The company provides local and long distance telephone call products and services in the U.K., phone exchange lines to homes and businesses, international telephone calls to and from the United Kingdom and telecommunications equipment for customers' premises. Last week, BTY gapped-up on a positive earnings announcement but Friday, the stock was right back in the middle of a three month trading range. It continues to be a unique technical formation (slightly bullish/ascending triangle) and favorable option prices exist once again on this high priced ADR. The probability of a profitable outcome is difficult to forecast because of the recent change in volatility. This play (a pair of OTM credit spreads, sometimes called a Long Iron Butterfly) is very aggressive but offers an excellent reward. Note: BTY options are thinly traded and this play must be ordered as net-credit position. PLAY (aggressive - neutral and opposing/credit spreads): BUY PUT AUG-165 BTY-TM OI=36 A=$2.00 SELL PUT AUG-170 BTY-TN OI=0 B=$3.12 BUY CALL AUG-185 BTY-HQ OI=5 A=$2.50 SELL CALL AUG-180 BTY-HP OI=1 B=$3.87 OVERALL INITIAL NET CREDIT TARGET=$2.75 ROI(max)=122% UPSIDE B/E=$182.75 DOWNSIDE B/E=$167.25 A stock price finish inside the sold strikes on the expiration date would be the most favorable outcome. Chart = http://quote.yahoo.com/q?s=BTY&d=3m ********************** ESPI - E.Spire Communications $10.00 *** Cheap Speculation *** E.Spire, formerly known as American Communications Services, is a leading provider of integrated communications solutions and dedicated access, local dial tone, long distance, advanced data, Internet and networking solutions, in markets throughout the southern United States. The company has lots of news and new contract agreements but the play is based solely on historical volatility and favorable option pricing. Implied volatility in the long-term options has fallen to extreme lows and this issue has the demonstrated ability to make the required move for a profitable outcome. This play should easily achieve the break-even point (and the profit target) long before the March expiration. PLAY (conservative - neutral/debit straddle): BUY CALL MAR-10 AQ-CB OI=10 A=$2.68 BUY PUT MAR-10 AQ-OB OI=0 B=$2.37 INITIAL NET DEBIT TARGET=$4.81 TARGET ROI=50% (8 months) Chart = http://quote.yahoo.com/q?s=ESPI&d=3m INDEX OPTION SPREADS... *********************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. ******************************************************************* OEX - S&P 100 Index $683.29 OTM Credit-Spreads The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Remember however, that you can always be exercised early so monitor your positions daily. TECHNICALS: The market continues to weaken and become much more selective as the major averages move toward their 30 week (150 dma) moving averages. A trading bottom is expected to occur as the DOW and S&P 500 approach their May and June lows - around 10400 and 1280 respectively. Short term, plan for a few more days of selling, leading into another oversold rally. If the last one gave us any clue, ‘smart money’ will be selling into any strength except in the most bullish of sectors: Oil Service, Semiconductor, and some secondary issues. Review the Pinnacle ‘Market Sentiment’ section for more specific technical information on the OEX. Very Conservative... PLAY (bearish - disparity/low ROI): BUY CALL AUG-725 OEZ-HE OI=8427 A=$1.31 SELL CALL AUG-720 OEZ-HD OI=7973 B=$1.87 INITIAL NET CREDIT TARGET=$0.56 ROI=12% PLAY (bullish - disparity/low ROI): BUY PUT AUG-640 OEY-TH OI=5159 A=$3.50 SELL PUT AUG-645 OEY-TI OI=3458 B=$4.00 INITIAL NET CREDIT TARGET=$0.50 ROI=11% CHART= http://quote.yahoo.com/q?s=^oex&d=b 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 8-1-99 Sunday 7 of 7 ************* COVERED CALLS ************* Investing Goals And Expectations.. A well-known stock market expert once said "There may be as many different investment goals as there are investors". In fact, that is one of the most difficult obstacles for inexperienced traders to overcome when they begin to invest. Most experts say that a combination of investments will provide the best balance of risk and reward in a long-term portfolio. A diverse group of 'buy and hold' issues is a good foundation for any novice investor and a qualifying retirement account can help defer taxes. Those who need current income can choose from a vast number of dividend paying securities, many of which also have an excellent record of share price growth. Investors who choose to avoid certain types of business activity (based on ethical or financial principles) can still find numerous value-based stocks that meet their investment objectives. Those who wish to achieve the same performance as an industry or sector can purchase mutual funds and diamonds that mirror a specific group of stocks. More aggressive traders can apply value investing principles to blue chip issues; buying stocks that are undervalued and selling those that are overvalued. As a portfolio matures, investors can also diversify into bonds or treasury instruments to benefit from market and interest rates fluctuations. While strategy is important, it is also imperative to approach investment activities with the right attitude and expectations. Trying to achieve too much from a portfolio can put the account in the red quickly (greed can lead to terrible decisions), and accepting returns that barely surpass current inflation rates will prevent a portfolio from growing. While most investors who make the effort to learn about the stock market are not satisfied to achieve the same return as the Dow or the S&P 500, others will actively seek mediocrity. Just look at the number of index funds that are sold to investors who then are relegated to losing what the market loses and gaining no more than what the market gains. So how do you determine a reasonable expectation? Most investors who participate in historically profitable strategies will easily average 15%-20% return on an annual basis. In the long-term, 10% a year is the typical return for broad market stocks in general. In comparison to a rigid investing plan, the Dow's performance is just what it's described as; average, and yet Warren Buffett made his fortune (Berkshire Hathaway is worth over a billion dollars), by focusing on a mere 15% annual return on assets. His primary goal however, was to maintain a substantial margin of safety in all of the portfolio's holdings. Charles Dow may have said it best, "The man who is prudent and careful in carrying on a store, factory or real estate business seems to think that totally different methods should be employed in dealing with stocks. Nothing could be further from the truth." Good Luck! ************************* SUMMARY OF PREVIOUS PICKS ************************* Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI FRTE 11.63 13.19 Aug 10.00 2.75 *$ 1.12 12.6% 7.8% SQNT 17.50 17.13 Aug 15.00 3.88 *$ 1.38 10.1% 7.3% FUSE 5.69 6.34 Aug 5.00 1.00 *$ 0.31 6.6% 7.2% NEWZ 8.13 7.75 Aug 7.50 1.06 *$ 0.43 6.1% 6.6% RRRR 11.81 10.31 Aug 10.00 2.50 *$ 0.69 7.4% 6.4% BNBN 19.25 18.06 Aug 17.50 3.13 *$ 1.38 8.6% 6.2% PAMC 33.69 24.94 Aug 25.00 10.63 $ 1.88 8.2% 5.9% MESG 19.75 17.19 Aug 15.00 5.88 *$ 1.13 8.1% 5.9% LIPO 20.88 26.81 Aug 20.00 2.38 *$ 1.50 8.1% 5.9% FRTE 13.69 13.19 Aug 12.50 1.81 *$ 0.62 5.2% 5.7% WSTL 8.97 8.88 Aug 7.50 2.00 *$ 0.53 7.6% 5.5% IRF 13.19 14.50 Aug 12.50 1.63 *$ 0.94 8.1% 5.0% NTPA 27.19 24.88 Aug 22.50 5.63 *$ 0.94 4.4% 4.7% IDTC 22.50 19.75 Aug 17.50 5.88 *$ 0.88 5.3% 4.6% COOL 12.63 10.75 Aug 10.00 3.13 *$ 0.50 5.3% 4.6% CATP 18.13 17.13 Aug 17.50 1.69 $ 0.69 4.2% 4.6% LIPO 22.00 26.81 Aug 20.00 2.75 *$ 0.75 3.9% 4.2% NOVT 22.75 23.06 Aug 20.00 3.50 *$ 0.75 3.9% 4.2% NPIX 19.13 19.94 Aug 15.00 4.75 *$ 0.62 4.3% 3.7% MESG 22.38 17.19 Aug 17.50 5.88 $ 0.69 4.2% 3.6% CIEN 37.13 33.75 Aug 35.00 4.38 $ 1.00 3.1% 2.7% CS 14.81 12.06 Aug 12.50 3.00 $ 0.25 2.1% 1.8% DGN 17.81 13.94 Aug 15.00 3.50 $ -0.37 -2.6% 0.0% CCCG 12.88 11.19 Aug 12.50 1.19 $ -0.50 -4.3% 0.0% UBET 12.38 8.13 Aug 10.00 3.00 $ -1.25 -13.3% 0.0% ARM 11.88 5.00 Aug 10.00 2.38 $ -4.50 -47.4% 0.0% Note: With current market conditions you may consider closing the following plays: DGN: Broke long term support, market not helping CCCG: weakening further, market not helping UBET: no news, but heading lower ARM: down on Friday's news Previously closed: SNRS, ATVI -ROI is equal to the profit (or loss) divided by the cost-basis. Monthly ROI represents the return on a monthly basis. Example: a 10% return in 20 days equals 15.2% ROI for a month). -Margin is not used in any calculations. -Profit/Loss Column: Asterisk indicates stock price above strike price and should be called. Stock that will not be called is assumed sold at current price (for tracking purposes). *** LOSING PLAYS *** Determining when to exit a play is a matter of personal preference but we strongly recommended closing any play that falls more than 20% below the initial cost-basis. Some positions may eventually become profitable but it is generally more productive to exit a losing play and move your capital into another prospective trade. ********* NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) ******************** Sequenced by Company ******************** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis ANET 15.56 Aug 12.50 QTE HV 3.50 313 12.06 3.6% 3.6% AVL 16.75 Aug 15.00 AVL HC 2.19 1022 14.56 3.0% 3.0% CYLK 5.06 Aug 5.00 YQB HA 0.56 736 4.50 11.1% 11.1% GLFD 16.44 Aug 15.00 GQF HC 2.06 430 14.38 4.3% 4.3% NFLD 13.25 Aug 12.50 DHQ HV 1.25 307 12.00 4.2% 4.2% SYNM 9.44 Aug 10.00 QSH HB 0.50 18 8.94 11.9% 5.6% ------------- NETA 17.56 Sep 15.00 CQM IC 3.50 1755 14.06 6.7% 6.7% RNBO 13.88 Sep 12.50 BQO IV 2.19 0 11.69 6.9% 6.9% ************************** Sequenced by Return Called ************************** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis SYNM 9.44 Aug 10.00 QSH HB 0.50 18 8.94 11.9% 5.6% CYLK 5.06 Aug 5.00 YQB HA 0.56 736 4.50 11.1% 11.1% GLFD 16.44 Aug 15.00 GQF HC 2.06 430 14.38 4.3% 4.3% NFLD 13.25 Aug 12.50 DHQ HV 1.25 307 12.00 4.2% 4.2% ANET 15.56 Aug 12.50 QTE HV 3.50 313 12.06 3.6% 3.6% AVL 16.75 Aug 15.00 AVL HC 2.19 1022 14.56 3.0% 3.0% ------------- RNBO 13.88 Sep 12.50 BQO IV 2.19 0 11.69 6.9% 6.9% NETA 17.56 Sep 15.00 CQM IC 3.50 1755 14.06 6.7% 6.7% ****************************** Sequenced by Return Not Called ****************************** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis CYLK 5.06 Aug 5.00 YQB HA 0.56 736 4.50 11.1% 11.1% SYNM 9.44 Aug 10.00 QSH HB 0.50 18 8.94 11.9% 5.6% GLFD 16.44 Aug 15.00 GQF HC 2.06 430 14.38 4.3% 4.3% NFLD 13.25 Aug 12.50 DHQ HV 1.25 307 12.00 4.2% 4.2% ANET 15.56 Aug 12.50 QTE HV 3.50 313 12.06 3.6% 3.6% AVL 16.75 Aug 15.00 AVL HC 2.19 1022 14.56 3.0% 3.0% ------------- RNBO 13.88 Sep 12.50 BQO IV 2.19 0 11.69 6.9% 6.9% NETA 17.56 Sep 15.00 CQM IC 3.50 1755 14.06 6.7% 6.7% ******************** Company Descriptions ******************** ANET - ACT Networks, Inc. $15.56 *** Buy-out Rumor *** ACT Networks, Inc. develops, manufactures and markets wide area network access products which support a broad range of integrated voice and data network applications. ANET's recent downtrend stalled with rumors of a buy-out or merger. Several technical indicators are showing bullish divergence's. This 21-day ITM speculation play has some technical support at the strike price. Aug 12.50 QTE HV Bid=3.50 OI=313 CB=12.06 RC=3.6% RNC=3.6% Chart = http://quote.yahoo.com/q?s=anet&d=3m ************* AVL - Aviall, Incorporated $16.75 *** Another Buy-out *** Aviall, Inc is an independent global distributor of new aviation parts and supplies. AVL also provides on-line parts information services to the aviation and marine industries. Aviall may be up for sale or aligned for a joint venture as it has been actively seeking a method to raise shareholder value. Now the delay in its earnings has increased the suspense. If you must speculate, we like the technical support near the ITM strike price. Aug 15.00 AVL HC Bid=2.19 OI=1022 CB=14.56 RC=3.0% RNC=3.0% Chart = http://quote.yahoo.com/q?s=avl&d=3m ************* CYLK - Cylink Corporation $5.06 *** Break Out *** Cylink Corp. supplies network information security products that enable the secure transmission of data over private local area networks (LANs) and wide area networks (WANs) and public packet switched networks, such as the Internet. The stock broke-out of a long term stage I base after announcing enhancements to its encryption solution for ATM networks and acquiring Security Design International. Cylink beat street estimates by $0.04, reporting a 2Q EPS loss of $0.10, though they are cautious about the third and fourth quarter (Y2K). This offers a potentially favorable return at the risk of owning Cylink for $4.50. Aug 5.00 YQB HA Bid=0.56 OI=736 CB=4.50 RC=11.1% RNC=11.1% Chart = http://quote.yahoo.com/q?s=cylk&d=3m ************* GLFD - Guilford Pharmaceuticals $16.44 GLFD is a biopharmaceutical company engaged in the development and commercialization of products in two principal areas: targeted and controlled drug delivery systems for the treatment of cancer, and therapeutic and diagnostic products for neurological diseases. On June 24, Guilford successfully passed the first registration procedure used to obtain marketing authorization in Europe for its GLIADEL(R) Wafer. On Monday, Prudential initiated coverage with a 'strong buy' rating. Aug 15.00 GQF HC Bid=2.06 OI=430 CB=14.38 RC=4.3% RNC=4.3% ************* NFLD - Northfield Laboratories $13.25 Northfield Laboratories Inc. is a leader in the development of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. Northfield's PolyHeme blood substitute is the only blood substitute undergoing clinical trials that has been tested at large enough dosages to be considered a substitute for acute blood loss in trauma and surgical settings. On Monday, Prudential started coverage on Northfield with a rating of 'accumulate'. Aug 12.50 DHQ HV Bid=1.25 OI=307 CB=12.00 RC=4.2% RNC=4.2% Chart = http://quote.yahoo.com/q?s=nfld&d=3m ************* SYNM - Syntroleum Corporation $9.44 *** OTM Speculation *** Syntroleum Corporation is the developer and owner of a proprietary process designed to catalytically convert natural gas into synthetic liquid hydrocarbons. On Wednesday, Syntroleum and ARCO completed the successful start-up of their natural gas-to-liquids (GTL) pilot plant. ARCO and BP, who are merging, have significant natural gas reserves on Alaska's north slope. In addition to ARCO, its current licensees include Enron, Kerr-McGee, Marathon, Texaco, and YPF SA of Argentina. The chart is bullish as SYNM offers a potentially favorable short term return. We like the long term outlook (if you don't mind owning Syntroleum at $8.94). Aug 10.00 QSH HB Bid=0.50 OI=18 CB=8.94 RC=11.9% RNC=5.6% Chart = http://quote.yahoo.com/q?s=synm&d=3m ****************************************************************** SEPTEMBER PLAYS ****************************************************************** NETA - Network Associates $17.56 *** A New Beginning *** Network Associates is dedicated to providing leading enterprise network security and management software. They are the leader in anti-virus detection and cleaning technology. AVERT (Anti-Virus Emergency Response Team), the anti-virus research division of NAI Labs, serves as a global resource for virus information and also provides rapid support for emergencies worldwide. NETA and ISS Group resolved their patent litigation with no adverse effect and now there is speculation that NETA is going to get taken over by either Cisco or Computer Associates for a price in the high 20s. Sep 15.00 CQM IC Bid=3.50 OI=1755 CB=14.06 RC=6.7% RNC=6.7% Chart = http://quote.yahoo.com/q?s=neta&d=3m ************* RNBO - Rainbow Technologies $13.88 *** A Bright Future *** Rainbow Technologies provides security related technology for the Information Age. Rainbow is a leading developer, manufacturer and supplier of software protection solutions, and a leading provider of network license management and information security. Products include secure Web server & VPN acceleration boards, anti-piracy & Internet software distribution solutions, software metering & management tools, voice, data and satellite security systems, USB authentication tokens and smart card readers. Recently reported a 10% increase in quarterly revenues along with a 30% increase in net income over the past six months and they are becoming a market leader in accelerator products for the Internet, specifically in the fast-growing on-line trading and financial services area. Sep 12.50 BQO IV Bid=2.19 OI=0 CB=11.69 RC=6.9% RNC=6.9% Chart = http://quote.yahoo.com/q?s=rnbo&d=3m ***************** NAKED PUT SECTION ***************** Undeclared Short Selling... The recent catastrophic failure of Sunrise Medical Systems (SNRS) and the incredible amount of 'short' interest in that issue has presented us with an excellent opportunity to discuss this subject. Most of you already understand the basic characteristics of 'short selling' and the account requirements for participating in that strategy. The technique is often maligned but it also occupies a necessary place in equity markets. You will recall that short selling is an attempt to profit from a decline in the price of stock. An investor sells stock that is borrowed. If the stock falls below the original sale price, it is repurchased and returned to the broker as a replacement for the stock that was borrowed. The difference between the sale price and the purchase price is profit. Short selling can be divided into two categories, declared and undeclared. Declared short selling is a common trading strategy that is used in the market regularly by institutional investors, fund managers and professional speculators. Because the basis for short selling is borrowed stock, declared short positions risk being squeezed. Recall that a short seller generally provides 50% of the value of the stock in a margin account. If the share price increases, the short seller will be forced to increase his margin collateral in order to maintain the short position. If the issue continues higher, the seller may elect to repurchase the stock instead of adding to his margin requirement. This contributes to the natural movement of the stock by increasing demand and thus driving the price higher. Undeclared short selling is a destructive and unwelcome practice that leverages enormous negative pressure on a stock. The method consists of creating stock that doesn't exist to sell many times over. The stock isn't borrowed, it is actually fictitious stock that is sold short. This nonexistent stock increases a company's float and makes it very difficult for the stock price to increase in value. The short sellers make a profit at great cost to the companies involved. It adds massive costs to maintaining a market in a stock and it reduces a company's business options. It will also drive the price of a stock to artificial lows where eventual shareholder lawsuits can ruin the company's future. Complaints to regulatory agencies haven't stopped the practice of undeclared short selling but one way a company can protect their stock is to recommend that shareholders take physical delivery of the stock certificates. When delivery of an issue is demanded by a significant number of investors, the originators of non-existent stock can be 'squeezed'. The short sellers won't have the stock to deliver and thus they will be forced to buy it in the open market. When this type of protective activity becomes public knowledge, unscrupulous traders will ply their ruinous techniques elsewhere. Good Luck! ------- Selling naked-puts offers an attractive method of generating small profits on portfolio collateral. A premium is received for the obligation to buy the underlying security at a specific price. A successful outcome is achieved if the stock remains above the sold strike at expiration. It is also one of the best ways to achieve a technically correct entry position for owning a stock. *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. ************************* SUMMARY OF PREVIOUS PICKS ************************* Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI PZX 10.94 10.00 Aug 10.00 0.69 $ 0.69 16.7% 18.1% MGCX 28.00 23.25 Aug 20.00 1.13 *$ 1.13 16.8% 12.2% PSSI 12.00 10.31 Aug 10.00 0.44 *$ 0.44 13.6% 11.8% NETS 19.56 25.25 Aug 15.00 0.75 *$ 0.75 16.1% 11.7% PCYC 27.75 28.19 Aug 22.50 0.69 *$ 0.69 10.6% 11.5% RMII 13.13 10.56 Aug 10.00 0.38 *$ 0.38 12.6% 11.0% PTVL 23.63 23.38 Aug 17.50 0.81 *$ 0.81 14.6% 10.6% QNTM 24.56 22.31 Aug 17.50 1.00 *$ 1.00 16.9% 10.5% GISX 20.25 18.25 Aug 17.50 0.56 *$ 0.56 9.5% 10.3% PRIA 38.63 30.94 Aug 30.00 1.00 *$ 1.00 11.5% 10.0% GISX 21.13 18.25 Aug 17.50 0.56 *$ 0.56 10.4% 9.0% CDNW 19.94 19.75 Aug 15.00 0.56 *$ 0.56 12.3% 8.9% CLEC 27.00 25.75 Aug 22.50 0.56 *$ 0.56 8.2% 8.9% PERI 21.50 21.38 Aug 17.50 0.38 *$ 0.38 7.6% 8.3% BYND 29.50 23.63 Aug 20.00 0.75 *$ 0.75 11.3% 8.2% LIPO 20.88 26.81 Aug 17.50 0.63 *$ 0.63 11.3% 8.1% IDTC 24.13 19.75 Aug 20.00 0.69 $ 0.44 7.1% 7.7% HNCS 37.44 36.38 Aug 30.00 0.56 *$ 0.56 6.9% 7.5% MIPS 43.94 37.00 Aug 30.00 0.75 *$ 0.75 7.9% 6.8% VSTR 38.13 45.13 Aug 30.00 0.50 *$ 0.50 6.2% 6.7% CIEN 37.13 33.75 Aug 30.00 0.63 *$ 0.63 7.5% 6.6% ADAP 23.19 22.56 Aug 17.50 0.44 *$ 0.44 8.7% 6.3% DRIV 32.44 22.75 Aug 22.50 0.50 *$ 0.50 7.2% 6.2% AMTD 38.19 24.94 Aug 25.00 0.75 $ 0.69 8.2% 6.0% PAMC 33.69 24.94 Aug 20.00 0.56 *$ 0.56 7.7% 5.6% MCOM 35.38 25.44 Aug 20.00 0.44 *$ 0.44 5.9% 5.1% RSLC 22.50 17.13 Aug 17.50 0.38 $ 0.01 0.2% 0.2% DRIV 35.31 22.75 Aug 25.00 0.88 $ -1.37 -17.3% 0.0% Note: With current market conditions you may consider closing the following plays: DRIV: The $25 strike may be too optimistic in the current market. Previously Closed: SNRS -ROI is equal to the profit (or loss) divided by the original investment requirement (varies broker to broker). -Monthly ROI represents the return on a monthly basis. Example: a 10% return in 20 days equals 15.2% ROI for a month). -Profit/Loss Column: Asterisk indicates stock price above strike price and put option should expire - not be exercised. Stock to be exercised assumed sold at current price.(for tracking) ********* NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment - formula: premium received divided by the collateral required by the broker (the greater of 40% of the current price of the stock plus the premium, minus the difference between the cost of the stock and the strike price; or 20% of the current price of the stock plus the premium.) As you move further from the stock price, the 20% requirement will take precedence. ROI may vary based on equity required by each individual broker. ******************** Sequenced by Company ******************** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired ADAP 22.63 Aug 17.50 CQI TW 0.44 232 17.06 8.9% CDNW 19.75 Aug 17.50 NWQ TW 0.50 766 17.00 8.1% LYNX 14.63 Aug 12.50 ULX TV 0.31 17 12.19 7.7% NETA 17.56 Aug 15.00 CQM TC 0.31 1330 14.69 6.5% PMRY 14.50 Aug 12.50 PBQ TV 0.25 25 12.25 6.2% PTVL 23.38 Aug 15.00 QUT TC 0.25 260 14.75 5.1% RNBO 13.88 Aug 12.50 BQO TV 0.25 10 12.25 5.7% ZRAN 24.50 Aug 20.00 ZUO TD 0.38 48 19.62 6.7% ********************************* Sequenced by Return on Investment ********************************* Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired ADAP 22.63 Aug 17.50 CQI TW 0.44 232 17.06 8.9% CDNW 19.75 Aug 17.50 NWQ TW 0.50 766 17.00 8.1% LYNX 14.63 Aug 12.50 ULX TV 0.31 17 12.19 7.7% ZRAN 24.50 Aug 20.00 ZUO TD 0.38 48 19.62 6.7% NETA 17.56 Aug 15.00 CQM TC 0.31 1330 14.69 6.5% PMRY 14.50 Aug 12.50 PBQ TV 0.25 25 12.25 6.2% RNBO 13.88 Aug 12.50 BQO TV 0.25 10 12.25 5.7% PTVL 23.38 Aug 15.00 QUT TC 0.25 260 14.75 5.1% ******************** Company Descriptions ******************** ADAP - Adaptive Broadband $22.63 *** On The Move! *** Adaptive Broadband, formerly known as California Microwave (CMIC), designs, manufactures and markets sophisticated systems and products used worldwide in satellite and wireless communications for the transmission of voice, data, facsimile and video. ADAP also provides industry-leading solutions for satellite-based data communications and terrestrial wireless telemetry networks. New orders booked in the quarter were up 20% over last year, to a record $53.8 million. Recently signed a $100-million contract to sell AB-Access(TM) broadband wireless service and equipment to I3S Inc. Aug 17.50 CQI TW Bid=0.44 OI=232 CB=17.06 ROI=8.9% Chart = http://quote.yahoo.com/q?s=ADAP&d=3m ************* CDNW - CdNow $19.75 *** Merger Announced *** CdNow is one of the most popular e-commerce sites, especially among teens, and is the largest retailer of custom music tracks on the Internet. CDNW offers over 500,000 music-related items; album recommendations, custom CDs, music samples, and a vast library of interviews & news from top music writers. CDNow has agreed to merge with Columbia House, the retail music arm of Sony and Time Warner, melding CDNow's powerful online brand with Columbia's 16 million mail customers. Under the pact, each share of CDNow is to be exchanged for one share in a new publicly traded company. Sony and Time Warner will each own 37% of the new entity and CDNow shareholders 26%. Aug 17.50 NWQ TW Bid=0.50 OI=766 CB=17.00 ROI=8.1% Chart = http://quote.yahoo.com/q?s=CDNW&d=3m ************* LYNX - Lynx Therapeutics, Inc. $14.63 *** Genetics *** Lynx is engaged in the development of unique, proprietary technologies designed to enable the simultaneous identification and analysis of all the DNA molecules or fragments in a single biological sample. Lynx climbed $5 on heavy volume shortly after naming a new president and CEO on June 30. The post earnings dip appears to be stalling as the chart remains bullish with support at the strike price. Aug 12.50 ULX TV Bid=0.31 OI=17 CB=12.19 ROI=7.7% Chart = http://quote.yahoo.com/q?s=LYNX&d=3m ************* NETA - Network Associates $17.56 *** A New Beginning *** Network Associates is dedicated to providing leading enterprise network security and management software. They are the leader in anti-virus detection and cleaning technology. AVERT (Anti-Virus Emergency Response Team), the anti-virus research division of NAI Labs, serves as a global resource for virus information and also provides rapid support for emergencies worldwide. NETA and ISS Group resolved their patent litigation with no adverse effect and now there is speculation that NETA is going to get taken over by either Cisco or Computer Associates for a price in the high 20s. Aug 15.00 CQM TC Bid=0.31 OI=1330 CB=14.69 ROI=6.5% Chart = http://quote.yahoo.com/q?s=NETA&d=3m ************* PMRY - Pomeroy Computer Resources $14.50 Pomeroy Computer Resources/Pomeroy Select is one of the country's five largest network integrators and a significant franchisee of ComputerLand Corp. They sell, install and service microcomputers and software products for business, professional, educational and governmental customers. They also derive revenue from customer support services, including network analysis and design, systems configuration, custom installation, training, maintenance and repair. New contracts, a new sales and service facility and good support at the cost basis. Aug 12.50 PBQ TV Bid=0.25 OI=25 CB=12.25 ROI=6.2% Chart = http://quote.yahoo.com/q?s=PMRY&d=3m ************* PTVL - Preview Travel $23.38 *** An Old Favorite *** Preview Travel is a leading provider of online travel services for leisure & small business travelers & a producer of travel related programming for broadcast & cable TV. Preview provides its customers with real-time access to schedules, pricing & all other available information for over 500 airlines. With access to rooms at 13,000 hotels worldwide, rental cars from all the major agencies and complete vacation packages, their services are designed to enable customers to make informed choices about their travel purchases. And now there are rumors of a takeover by Microsoft. Aug 15.00 QUT TC Bid=0.25 OI=260 CB=14.75 ROI=5.1% Chart = http://quote.yahoo.com/q?s=PTVL&d=3m ************* RNBO - Rainbow Technologies $13.88 *** A Bright Future *** Rainbow Technologies provides security related technology for the Information Age. Rainbow is a leading developer, manufacturer and supplier of software protection solutions, and a leading provider of network license management and information security. Products include secure Web server & VPN acceleration boards, anti-piracy & Internet software distribution solutions, software metering & management tools, voice, data and satellite security systems, USB authentication tokens and smart card readers. Recently reported a 10% increase in quarterly revenues along with a 30% increase in net income over the past six months and they are becoming a market leader in accelerator products for the Internet, specifically in the fast-growing on-line trading and financial services area. Aug 12.50 BQO TV Bid=0.25 OI=10 CB=12.25 ROI=5.7% Chart = http://quote.yahoo.com/q?s=RNBO&d=3m ************* ZRAN - Zoran Corp. $24.50 *** Up, Up And Away *** Zoran Corporation develops and markets integrated circuits (ICs), IC Intellectual Property (IP) cores, and embedded and PC software for digital audio and video applications enabled by compression. Zoran also provides complete reference designs based on Zoran's technology. Zoran's product lines and IP include JPEG codecs, MPEG and DVD decoders, digital still camera system on a chip and digital audio. All these standard-based products benefit from Zoran's Standard Plus(TM) technology. Zoran's ICs are used in numerous digital audio and video products. A SoundView analyst recently started coverage of Zoran with a 'buy' rating and a price target of $30 based on significantly increased earnings. Aug 20.00 ZUO TD Bid=0.38 OI=48 CB=19.62 ROI=6.7% Chart = http://quote.yahoo.com/q?s=ZRAN&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc