The Option Investor Newsletter Tuesday 8-3-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 8-3-99 High Low Volume Advances Decline DOW 10677.31 + 31.35 10727.97 10613.99 735,004k 1,091 1,882 Nasdaq 2587.99 - 35.64 2649.21 2564.25 1012,000k 1,296 2,689 S&P-100 681.54 - 0.79 687.44 677.20 Totals 2,387 4,571 S&P-500 1322.18 - 5.87 1336.06 1314.94 34.3% 65.7% $RUT 436.28 - 6.35 443.75 434.27 $TRAN 3325.80 - 44.47 3387.52 3316.82 VIX 26.68 + 0.56 27.62 25.72 Put/Call Ratio .71 ************************************************************* Are we there yet? Parents dread long car trips with young children because of the repeated impatient questions. Trying to be creative with answers to this question contributes to vacation stress. Vacation stress is what some analysts are calling the slippage in the markets. Citing low volume as evidence of lack of traders and lack of interest in the market in general, they are not worried about the recent drops. I am not worried. I am in cash. Amazing how that impacts your view of the carnage. If you are long stocks or options this week then you probably need another Rolaids. If you are long Internet stocks you need a Prilosec. The Dow struggled back from a midday loss to finish up +31. The Dow appears to have found a temporary bottom at 10615 after testing it four times in the last two days. This could be only temporary but any relief is welcome. Hopefully this brief stop ends up better than the Nasdaq stop last week. After bouncing off 2630 several times last week, the Internet sell off today knocked the bottom out of the Nasdaq. Closing down -35 today, the Nasdaq was only 15 points off the bottom and not looking healthy. Internet stocks were being pounded into dust and previous high flyers were the down draft leaders today. Qualcom took a nose dive on no news to the tune of -12.50. Yahoo dropped -6.94 after denying any takeover rumors of Excite At Home. Other Internet losers were VRSN -6.75, INKT -7.81. Nextlink dropped -16.56, GNET -5.56, RNWK -7.09. On the NYSE AOL dropped -4.06. AOL has lost $94 billion in market cap since July 12th. Next support for AOL is in the $78-80 range. AOL broke thru its 200 day moving average which it has not touched since October 12th last year. Many of the Internets have now lost -50% from their recent highs. The bloodbath may not yet be over. The flood of Internet IPOs is increasing and it appears if you can spell .com you can do an IPO. The end may be in sight after the 1800flowers.com IPO today. FLWS was offered at $21 but dropped to $18.19 at the close. The supply vs demand acquisition formula has simply shifted heavily to more supply than demand. This and no real earnings has investors thinking twice before paying high premiums for new issues and old. The Dow's tenuous bottom at 10615 could be in trouble with the July jobs report on two days away. The chances of more inflation signs showing up in the critical report are keeping investors from making any bets on future market direction. The bond yields closed at 6.16%, a 21 month high. The higher yields are luring away cash from the weak stock market. The real news today was the deteriorating advance/decline line. This indicator has taken a strong turn for the worse and decliners beat advancers by over 2:1 today even though the Dow struggled back to positive ground. There is still no reason to buy and most now think the market will go lower. Still there is no real fear in the markets. Just slow orderly selling with no panic. There is a camp that says "don't worry be happy, all will return" and the other camp that says "sell now and avoid the Y2K rush". Even the most bullish analysts are saying things like Dow 12500 but expect a -15%-20% correction at any time. A contradiction of terms? Yes. How else could you stay a noted bull and still be right? Predict both ways and claim victory when each eventually happen. Another factor dragging on the market is the curse of margin calls. The margin balances of brokers are dropping because of the sell off in Internet stocks. As each stock drops more and more each day, investors who bought on margin are being forced to sell at a loss to relieve the pressure on their accounts. This forced selling is actually good for the market, unless of course you are selling. This takes stocks out of weaker hands and puts them into stronger portfolios more able to withstand the market cycles. This creates a stronger base at each level. Speaking of online brokers, CS First Boston issued a warning this morning that trading volume is expected to go down in the third quarter (now) and not pick up again until next year after Y2K. What? A major bank warning about Y2K and the impact on the markets? Yes..and the stock of the online brokers tumbled as a result. EGRP -4.31 to $24.69 WOW! AMTD -2.75 to $21.25, NDB -4.96 to $32.12, SCH -4.56 to $37.88, NITE -4.21 to $37.03. Most of these stocks are down -50% from their recent highs. So lets see...Internets -50% from highs, brokers -50% from highs, how many more sectors have to take a serious hit to qualify as a bear market instead of a "bullish correction"? Basically as long as the Dow and S&P stay above the -10% range, this correction never happened. They are both at the -7% stage right now. Internally there is a serious sector rotation taking place and until the Dow 30 stocks are impacted the real damage is invisible. (tell that to your accountant when he looks at your trades for last month) Seriously, I don't think we are there yet boys and girls but I can't tell you how much farther we have to go. I would like to think Dow 10,500 would be a floor and Nasdaq 2550 but the mood has not turned ugly yet. Until we get a serious drop and capitulation by the last weak holders then we have to keep suffering. I would like to think the big drops today on no news by companies like Qualcom -12.50 and Nextlink -16.56 would be the start of the healing but there are still some high flyers left and until everybody gets a turn in the woodshed the pain is not over. Look for more of the same through Friday. Choppy markets with morning rallies meeting heavy selling. Until we see the next chapter in the Fed inflation play book on Friday (non-farm payrolls), nothing good is going to happen. We have a new section starting tonight that highlights straddles. That is buying a call and a put on the same stock. It only requires the stock to make a big move in either direction to make a profit. This will be a new Sunday section with updates on Tue/Thr. It will be written by our new staff writer and trader Tom Gentile. Tom will be on CNBC Wednesday between 12:00 and 2:PM during the Power Lunch in Atlanta segment. Tom is also an instructor at the OIN/Optionetics seminar series. Check it out! Please, if you must play, pick your entry points carefully. Good Luck, Sell too soon. Jim Brown Editor *************** Market Posture *************** As of Market Close - Tuesday, August 3, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,677 Neutral 7.20 SPX S&P 500 1,330 1,420 1,322 BEARISH 7.30 OEX S&P 100 675 735 682 Neutral 7.20 RUT Russell 2000 430 465 436 Neutral 7.20 NDX NASD 100 2,200 2,468 2,239 Neutral 7.20 MSH High Tech 1,080 1,250 1,116 Neutral 7.20 XCI Hardware 920 1,090 992 Neutral 7.20 CWX Software 700 844 725 Neutral 7.20 SOX Semiconductor 450 535 492 Neutral 7.20 NWX Networking 550 625 562 Neutral 7.20 INX Internet 500 580 394 BEARISH 7.20 BIX Banking 690 710 651 BEARISH 7.23 XBD Brokerage 410 440 370 BEARISH 7.23 IUX Insurance 645 660 613 BEARISH 7.23 RLX Retail 915 960 856 BEARISH 7.23 DRG Drug 370 400 350 BEARISH 7.20 HCX Healthcare 750 800 720 BEARISH 7.22 XAL Airline 180 190 162 BEARISH 5.21 OIX Oil & Gas 285 310 301 Neutral 5.13 Posture Alert Still bleeding? Technology stocks continue to take it on the chin with the internet sector being the leader to the downside. Many sectors that we have been bearish on continue to add to their losses. Losers on the day include Internet (-5.34%), Brokerage (-4.17%), and Airlines (-2.51%). The few marginal gainers today include Oil & Gas (+1.11), Semiconductors (+.35%), and the Dow (+.29%). A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture **************** Market Sentiment **************** Flight to Quality? Another day, another dollar lost (unless you've been short). The bleeding on the Nasdaq continues with wide sweeping losses from Internet to Brokerage. The drops that have occurred in some of these sectors have been staggering, especially when you consider the short period of time that they occurred in. Here at Pinnacle Capital, we've been bearish on many key sectors during this time span. Two sectors that we highlighted during this last Sunday's letter was networking and software. Both sectors are breaking down as we speak. They both closed down -1.4% and -1.5% just today. If they don't bounce here, there could be plenty of more bloodshed. In the software index, Microsoft comprises a large percent of the weighting by itself. Gates & Company is currently breaking below key moving averages, as shown below. However, the stock does have significant support in the 77 range. If this stock continues to break down and below key support levels, the software index will get crushed. We'd continue to keep a close eye on the king of software. Playing the index (CWX) can make you some serious money, especially when a general such as Microsoft starts to break down. However, Microsoft is Microsoft, so extreme caution should be made. Should a broad rally occur in technology, you can bet that Microsoft will be one of the leaders. BULLISH Signs: None Pinnacle Index: The Pinnacle Index for the OEX (645-680) is now reaching levels of extreme pessimism. From a contrarian standpoint, support is building in this area, and may indicate a short term base. Mixed Signs: None BEARISH Signs: Technicals: Many indexes are below key supports, including Healthcare, Drug, Retail, Brokerage, Banking, Internet, and Insurance sectors. 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 .91 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 will continue to 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 Tues Indicator (7/30) (8/03) Alert Pinnacle Index (OEX): Overhead Resistance (720-750) 4.9 6.0 Overhead Resistance (685-715) 0.9 1.1 Underlying Support (645-680) 4.7 5.7 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 CBOE Equity P/C Ratio .5 .5 OEX P/C Ratio 1.5 1.1 Peak Open Interest (OEX): Puts 620 620 Calls 740 700 P/C Ratio 1.11 .91 Market Volatility Index (VIX): CBOE VIX 25.83 27.07 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. OEX Pinnacle Index Friday Tues Benchmark (7/30) (8/03) Overhead Resistance (720-750) 4.87 6.02 Overhead Resistance (685-715) 0.94 1.13 OEX Close 683.29 681.54 Underlying Support (645-680) 4.74 5.66 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 Tues Thurs Strike/Contracts (7/30) (8/03) (8/05) CBOE Total P/C Ratio .74 .68 CBOE Equity P/C Ratio .50 .53 OEX P/C Ratio 1.49 1.14 (OEX) Peak Open Interest Friday Tues Thurs Strike/Contracts (7/30) (8/03) (8/05) Puts 620 / 9,874 620 / 10,475 Calls 740 / 8,862 700 / 11,468 Put/Call Ratio 1.11 .91 (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 * August 3, 1999 27.07 Investors Intelligence Survey Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 07, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 07, 1999 52.6 27.2 July 14, 1999 55.2 26.7 July 21, 1999 54.1 27.9 July 28, 1999 53.6 24.6 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Week Dow 10677.31 -9.19 31.35 22.16 Nasdaq 2587.99 -14.86 -35.64-50.50 $OEX 681.54 -0.96 -0.79 -1.75 $SPX 1322.18 -0.67 -5.87 -6.54 $RUT 436.28 -2.14 -6.35 -8.49 $TRAN 3325.80 37.03 -44.47 -7.44 $VIX 26.68 2.90 0.56 3.46 Calls Mon Tue Week INTC 72.94 2.31 1.63 3.94 New 52-week high CHKP 72.00 1.44 2.13 3.56 New, strong vs. markets JDSU 90.44 3.63 -3.56 0.06 Confirm direction first! AMGN 76.63 1.88 -2.13 -0.25 Hindered by market woes CSCO 61.13 -0.31 -0.69 -1.00 Treading water still DELL 39.44 -0.94 -0.50 -1.44 Buying opportunity?? VRIO 69.88 -0.69 -0.75 -1.44 Dropped, not recovering VOD 208.94 -0.63 -0.94 -1.56 Just like clock-work SNE 123.38 -0.19 -1.63 -1.81 Holding above the 10-dma VISX 92.63 -0.50 -8.13 -8.63 Dropped, fell apart QCOM 140.00 -3.50 -12.50-16.00 Dropped, look out below Puts EBAY 84.38 -6.44 -6.88-13.31 Leading the charge lower CMGI 81.88 -3.88 -6.44-10.31 Continuing to sink GNET 49.13 -4.06 -5.56 -9.63 Riding the Internet wave AOL 88.81 -4.25 -4.06 -8.31 Broke key support level ELNK 41.44 -3.44 -3.44 -6.88 Lawsuits announced Mon. QLGC 76.63 -1.06 -5.75 -6.81 Right on schedule DCLK 74.50 -2.88 -3.63 -6.50 Nearing support at $70 SCH 37.75 -1.63 -4.69 -6.31 Negative sector comments AXP 126.69 -1.69 -3.38 -5.06 New, weak sector NITE 37.03 -0.75 -4.22 -4.97 Down on big volume VRSN 65.25 2.13 -6.75 -4.63 New, stuck in a downtrend MSPG 29.56 -2.56 -1.44 -4.00 Another Internet victim TERN 35.19 -2.75 -1.19 -3.94 Approaching support SEPR 69.63 -0.75 -3.13 -3.88 No signs of a rally MWD 87.44 -1.69 -1.13 -2.81 More economic data ahead LVLT 51.69 0.19 -1.50 -1.31 Now underneath support MER 67.25 0.63 -1.38 -0.75 Interest rate play TBH 75.88 -1.75 1.25 -0.50 Indicators are negative XRX 48.50 0.25 -0.63 -0.38 Dropped, going nowhere CA 46.44 1.69 -1.13 0.56 Dropped, underperforming U 36.81 2.88 -1.69 1.19 Not convinced of recovery GM 63.06 0.75 1.19 1.94 Dropped, no direction **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** QCOM $140.00 -12.50 (-16.00) YYEEEOOOOWWWWW!! Look out below!! "We are seeing the wind being let out of the sails of the overpriced technology stocks," said Chris Dickerson, an analyst at Global Market Strategists Inc. in Gainesville, Fla. "There is just absolute fear of higher interest rates." This comes from a Reuters report. Despite Lehman Bros. and Goldman Sachs purchase of 6.9 mln. shares of QCOM at $156.50 for intended resale to index funds, QCOM frankly has come a long way in a hurry. Apparently, the market, having chewed up and spit out QCOM on 2.5 times its normal volume today, doesn't care what L.B and G.S. paid. There is no company specific news today that would precipitate that kind of sell-off. Today's action has the appearance of professional money managers taking a profit, thus the price may bounce a bit tomorrow. If you didn't have a stop order in (tisk, tisk! It happens to the best of us), you may be able to get out on a technical bounce, but the play is over. We're dropping QCOM tonight. VRIO $69.88 -0.75 (-1.43) We just can't hold onto VRIO any longer. The bearish market is slowly, but surely taking its toll on a stock that pinnacled at $85 just a couple of weeks ago (July 19th). VRIO started showing some weakness last week and we recommended caution. Over the past two days, it's made a definitive move below its 30 dma (at about $72) and this is not a good sign. Plus time is becoming a factor. Earnings are this Friday, August 6th before the bell (the conference call will be held at 9 AM ET) and we never recommend holding over an earnings announcement. However, if the broad market reverses, VRIO could have a split run. The stock is expected to split 2:1 on or about August 20th. VISX $92.63 -8.12 (-8.63) Well it finally happened and we hope you had your stops in place. The bears jumped all over VISX today dropping it $8.12 on volume of 2.65 mln. shares. As we suggested Sunday the steam finally ran out on VISX. VISX traded sideways for most of the session Monday, closing down $0.50 for the day. Today VISX opened $0.19 higher and then someone turned out the lights. VISX was not a big mover, but it did give us plenty of opportunity to make a profit. The healthcare industry has fallen upon hard times recently, so we will dismiss VISX and look for other opportunities. PUTS: ****** GM $63.06 +1.19 (+1.93) The July sales numbers were posted for the auto-makers today, and they had a strong month, as expected. GM's numbers, which just met analysts' estimates, look particularly strong, with nearly 63% growth over last year's strike-crippled sales. However, GM missed its 30% target market share, even though it spent an average of $1,907 per vehicle in incentives, 27% higher than the rest of the industry offered. GM July sales, may be the 1999 high point, as sales are expected to decline next quarter. Still, the stock has moved up the last 2 days in anticipation of these numbers, which GM released at the end of the day. If investors react positively tomorrow as they did today to Ford's and Chrysler's sales numbers, which were released earlier in the day, the stock could keep rising. We have to drop GM. XRX $48.50 -0.63 (-0.38) With the volatile markets lately, some stocks have held up better than others. Xerox has been one of those stocks that made a short run for us but lately has found some support. We felt that the downgrade of XRX by Deutsche Banc, and weakness in its oversees operations in Japan and Brazil would have effected the stock more than it did. XRX for the last week has traded between a price range of $48.50 and $50.00, not really going anywhere. Considering that we have other put plays with so much more potential, we decided to end this put play on XRX. CA $46.44 -1.12 (+0.56) We believe CA could still have a little potential as a PUT play, however "little" is the key word here. The trend technically is still south. The problem is that it's having to work way to hard at it. Support as we said Sunday is at $43.78 and even if you got in at an ideal point, option premiums are starting to decay and the chances at this point of having CA go down enough to make it a profitable play is not worth the risk. CA could be forming a base in this area for a move back up, at this point we will look for other plays. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Tuesday 8-3-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** SNE $123.38 -1.63 (-1.81) Sony has held up well relative to the broad markets this week despite a bit of profit-taking to end the day on Tuesday. The stock rallied right to the new high established 2 weeks ago before rolling over in a weak market. This may be the entry point we are looking for since it is most likely nothing more than market jitters. We have seen lots of stocks that have upside momentum pausing while traders stop to figure out this market. Any sort of good news should put SNE back in rally mode. The stock remains above support from the 10-dma at $120 and this will be the mark we are watching. If we can stay above $120, the momentum should stay with the stock. Any move below should be a signal for your stops to exit you from the play. CSCO $61.13 -0.69 (-1.00) The NASDAQ has really taken it on the chin for about 300 points since it reached new highs just over 2 weeks ago. While not completely immune from the sell-off, CSCO has managed to tread water and base from $61-$64 during the same period. While we expect a technical bounce given that the index has been down 4 days in a row, the play here is based on a run to earnings due out August 10 after the close (1 week from today). Add these 2 things together (basing and earnings run) and we have the potential of a nice little rise. Volume has been up just fractionally this week, signaling that investor interest is perhaps surfacing again. Don't hang your hat on this though, as continued overall market weakness may preclude a noticeable run. As always, volume accompanying any increase will be the key. In the end, downward pressure will likely remain until employment figures are released on Friday, giving CSCO only 3 trading days to work its magic. A lot depends on Friday's outlook. Countering this sentiment though is still a large number of open interests telegraphing investors' expectations of $70 by expiration on August 20. Tread carefully if you enter a play. DELL $39.44 -0.50 (-1.44) As we noted Sunday, Dell's next support is in the $37-$38 range, but that we would be comfortable buying dips at $40. Here we are. If buying dips is your M.O., then we would consider this a buying opportunity. Why now when the market looks weak? First, DELL's volume has been exceptionally weak since last Thursday, telegraphing that nobody is in a hurry to sell, despite investors' conviction to jettison other technology/Internet issues. Second, DELL announces earnings August 17th after the close, and an earnings run will likely ensue (market willing) between now and then. Of course, not even DELL will escape a "black hole" sell-off. But while already insidiously sloughing off 300 points on NASDAQ, the probability becomes less likely. Third, after 4 days of losses, NASDAQ is due for a technical bounce, even if it is just a 1-day breath of air. This is still a precarious market not well suited to the risk-averse. But if you are going to play DELL, it's much safer to do it when the price is in the $30's and earnings are on the 2-week horizon. (By the way, Dell just passed up Hewlett Packard to become the biggest seller of Intel-based workstations in the U.S., based on unit shipments and revenue!) JDSU $90.44 -3.56 (+0.06) After yesterday and last week, we are not surprised to see JDSU give back part of its recent gains. We are not dropping JDSU as it is still $2-$3 away from major support. Given the recent run up of over $11.00 last week JDSU could conceivably retrace to the $85-$86 area and maintain its positive trend. We would view any bounce off these levels as a potential buying opportunity. Keep in mind however, that even though the semiconductor industry found a little strength last week, it could certainly be short lived if the sell-off in the broader markets gets worse. JDSU has been doing better than many of the stocks in its industry; but it can't go it alone forever. Make sure if we get a bounce in JDSU, that it is accompanied by strong volume before considering any new plays in JDSU. If you currently have a play in JDSU move you stops up tight to protect any profits you may have. AMGN $76.63 -2.13 (-0.25) AMGN started the week of with a bang. Monday AMGN rose $1.88 on better than average volume of 7.09 mln. shares. Today investors decided to take it back. AMGN lost $2.13 today on volume of 5.8 mln. shares. Here's the key for the next couple of days. AMGEN came down to touch its 10 dma of $75.18 at its low today. We feel it needs to now stay above the recent trading range it had been in to continue to make it a viable play. Don't forget the Healthcare and Drug industry has taken a drubbing in the recent weeks and AMGN has held its own. Amgen came with $1.38 of reach its 52 week high yesterday, and has been moving up on solid volume the past few sessions, which may be enough to help AMGN continue its upward trek. If the industry or the NASDAQ breaks down any further it may not be able to hold it together. If you are in AMGN, keep your stops tight and let the market do the rest. INTC $72.94 +1.63 (+3.94) Intel has made a new 52 week high in each of the last two days. INTC gained $2.31 on very strong volume Monday with 38.7 mln share exchanging hands. Today Intel gained another 1.63 on volume of 37.7 mln shares. Can it keep going? Several analysts seem to think so, having raised their price targets to over $80. Apparently, the thinking is that INTC is undervalued, compared to some of the other stocks in the technology sector. The recent drop in the price of PC's under $1000.00, coupled with INTC's recent price restructuring and the release of their new Pentium and Celeron processors, and the perceived demand such a change will make has driven INTC to new highs. Technically INTC looks strong and should continue higher in the near term. However, don't forget how the broader markets may begin to influence even the strong stocks. A close below Monday's low could tarnish our view of INTC. Keep your stops tight. VOD $208.94 -0.94 (-1.56) Like we said Sunday VOD needed to come down to the $205-$206 area. Well it did. About 12:45 p.m. ET today VOD hit $205.56 and turned back up. Like clock-work for one more time it bounced off its 50 dma. Volume on the advance the last three hours of trading also increased. VOD has a strong upward trendline beginning back in late March. As we have previously mentioned VOD has been building an ascending bullish triangle and it will break out in one direction or another. An ascending triangle is a bullish sign. When it finally breaks out we are looking for VOD to go higher. There is still nothing new on VOD's ex-date for what in essence is a 5:1 stock split. We will stay on top of it and let you know what information we receive. In other news VOD and Bell Atlantic Corp(BEL) announced today they have entered into an agreement to restructure their ownership interests in PrimeCo Personal Communications, a partnership that was formed by the two companies in 1994. **************** PICK NEWS - PUTS **************** QLGC $76.63 -5.75 (-6.81) What a fun stock! The rules have really applied to QLGC, first with a textbook split and earnings run, then the classic post split depression. Yesterday could have caused one to wonder if it was going to come. We did get a drop mid-morning yesterday, but it looked pretty resilient at $82. Today's market pressure was too much for the stock to withstand. We got a steady drop from $83 to $76 on above average volume as investors chose to protect their profits and exit for better days. We are currently sitting on our 10 dma so use caution. This could be support and cause for a bounce. If we break through this level on the down side, it's a green light for more profit taking. At this point, tighten your stops and confirm the break through on volume below $76, and a negative market, before starting a new play. GNET $49.13 -5.56 (-9.62) If you are surfing the GNET wave, this trend is turning into the BIG KAHUNA on the downside. GNET's chart shows a nice and steady downtrend, on increased volume that started late Monday, and continued nicely today. Today showed a slight mid-afternoon recovery that wouldn't hold, as we closed near the days low on nearly 2x's normal volume. In our current strong negative trend, our resistance is chasing us. GNET is due for a bounce, based on it's chart patterns. Any market rebound will attract some bargain hunters, so protect your profits. A market analyst on Bloomberg today said that the internets have corrected a lot; but, we still have some room to go. GNET should continue to follow the sector. In the news, GNET will soon get a new face. They recently signed a deal to move in the spring of 2000, into an 80,000 sq. ft. space in Seattle's historic Pier 70 district. The move will allow GNET to add new jobs, and accommodate their rapid growth. Again, watch for the bounce, and confirm market direction before entering a new play. TERN $35.19 -1.19 (-3.94) This technical play continues to reward its players. TERN has given up almost $4 in just the last 2 days based on overall market weakness and last week's violation of its $40 support. With a nice profit now achieved, it's a good time to place a trailing stop order, as TERN approaches support of $33. You don't want to be caught by a market bounce that may follow 4 negative trading days on the NASDAQ, thus wiping out your gain. You can always reenter the play later, market permitting. Just so you know, if TERN breaks through $33 on the downside, the next stop is about $27. Volume has been steadily increasing too since last week. Beware the reversal and continue to enjoy the ride. TBH $75.88 +1.25 (-1.00) Telebras is falling further below its 10 dma, and is now below its 200 dma as well, although it did see a bounce today, along with most of the Latin American ADRs. According to reports, the Mexican, Argentinean, and Brazilian ADRs all traded higher today. This is likely just a technical bounce, and we believe that TBH has further to fall. This would be especially true if the U.S. markets, from which they take their cue, continue to lose ground. Technical indicators for TBH are all negative, and today's bounce was probably a good entry opportunity for puts. U $36.81 -1.69 (+1.19) In case you didn’t notice, there was some news on Monday concerning USAir. The company’s single largest shareholder has filed with the SEC to explore a possible sale or merger for the company. Tiger Management, a hedge fund, owns approximately 22% of USAir and feels the company’s intrinsic value is not being realized in U’s stock price. There are many reasons as to why Tiger made this announcement. Perhaps they are really interested in becoming more involved and finding strategic alliances to help the company succeed. Or maybe they want to start unloading shares and felt this would be the best way to support the stock in the short-term. Either way the downtrend was re-ignited today and we see the stock likely re-testing the lows of last week again barring any surprise company announcement. SCH $37.75 -4.69 (-6.31) What a week for the online brokers! You might think after being the leading sector among losing stocks for the past month that they would be due for a bounce, right? Nope, there is not a lot of logic sometimes on Wall Street. Nevertheless, it is great for our play as we’ve just let it lead the way down. It was triggered by a report from CSFB that stated July activity for online trades came in well under forecast. They also said that the 3Q could show the first ever sequential drop in earnings. The drop in the stock price has even exceeded our expectations. We were looking for a bounce at support at $40 but never got it. The stock is now resting below the 200-dma at $38 and it’s likely SCH will bounce initially from this level so be careful opening new plays from here. Whether or not it holds this support over the period of the next week or so will depend on the markets so tighten down your stops for protection and watch for signs of a rally. AOL $88.81 -4.06 (-8.31) AOL is under the key support line of the 200-dma that it has held for the past few years. We talked about it over the weekend and what strong support the 200-dma has been to AOL in the past but the stock moved right through it this time without even a pause. For investors that are long the stock, this has to be disheartening and could prove to be the catalyst for a lengthy Internet sector correction. Only time will tell but in the short-term, we expect more downside. Also we are watching for the impending bounce. It is just a matter of time until investors think they see a bottom and jump back in. So watch out and plan your stops accordingly. There has been no other relevant news, both good or bad, to drive the stock this week. LVLT $51.69 -1.50 (-2.00) Once again the market has been conducive to put buying this week. After the broad markets rallied for most of the day on Monday, the sellers came back in full force to end the day lower. This was very similar to what we saw in LVLT trading too. The stock went back above the $54 level which was unsettling for our play but in the end, it was just another entry point. The stock fell on Tuesday as well and hit an intraday low of $50.19. All of this came despite positive news from the company on Monday. They announced they were buying a state-of-the-art building in New York City to keep up with growing demand. The news of strong growth is no surprise. LVLT has been talking up their growth along but it is still not enough to alter the current trend. The stock is lacking any technical support at this level which may be why it was recommended as a short play in another economic newsletter this past weekend. This is just another positive development for our play. Remember to use stops because momentum can change on a dime. MSPG $29.56 -1.44 (-4.00) Look out below! MSPG is really taking it on the chin, as the Internet stocks are getting hammered from interest rate worries. As a put play, it's great news! The stock is continuing down, and approaching our support of $28. A look at the daily chart shows a steady decline for weeks. Be cautious! We know that a positive day has to be at hand. MSPG is known for some big jumps up when they come, so protect what you've made with stop losses. The stochastic indicator is also showing signs of an oversold condition but we could still see more downside. We gapped up this morning, and showed a small bit of buying towards the close, so have your stops in order. It's not often that we see analysts not throwing out buy recommendations as of late; however, Morgan Stanley initiated coverage of MSPG with a neutral. Good reason to continue down. Reuters also listed MSPG as one of the stocks that "did not help the case for Internet stocks", due to their high levels of spending and questionable future earnings. Make sure you confirm market and stock direction before buying more puts. SEPR $69.63 -3.13 (-3.88) Sepracor, reacting as expected, continued down even further to start the week. Of course, with the help of a market that doesn’t seem to be able to sustain any sort of rally doesn’t hurt the play either. On July 23, the release of SEPR's earnings with widening losses during the second quarter has substantially hurt the stock ($1.11 vs. $0.62). Sepracor related those losses to costs incurred through research and development of new drugs. Since mid-July the stock has followed a distinct path down. First it encountered resistance at its 100 dma which pushed it back through its 200 dma, last week if fell below the 50 dma, and it continues to fall closer to its next support level around the $60-$65 range. With the technology sector weak and the bad news about the earnings, we might even see a break in this next level of support. To be on the safe side, just in case the stock decides to turn of us, place your stop loss orders to end the play if needed. ELNK $41.44 -3.44 (-6.88) Two great sessions for ELNK this week as the stock rode the coat-tails of the Internet sector even lower. On Monday, news was released that EarthLink was going to sue low-priced PC maker Microworkz for allegedly failing to pay money owed under a deal to supply Internet access with one of Microworkz's cheaper computers. Microworkz in retaliation said it would counter sue Earthlink, alleging it supplied faulty software and did not adequately educate its technical staff about the program. Look at Aug. 2nd's news in Yahoo Finance, under ELNK, for a full report. With the recent downturn in the Internet sector and new litigation news, Investors are weary and it shows in the stock's current price. On Monday, ELNK broke through support at $47 and continued downward. The stock is pushing even farther below its 200 dma and 50 dma. The next support level for the stock is around $36, so watch the stock as it approaches this level to see if its another breakthrough or actually finds support. Use your stop losses to protect yourself if ELNK does decide to bounce upward. DCLK $74.50 -3.63 (-6.50) NASDAQ violates 50-dma and DCLK sinks. This is turning out to be a great play. Support for the sector continues to dwindle as supply (from IPO's) continues to increase. However, we want to be careful here since, potentially we could get a bounce tomorrow or Thursday, following 4 negative days of NASDAQ losses. Not only that, but DCLK is approaching support of $70, but DCLK may never get there, assuming the market gives us a small bounce tomorrow. If there was ever a time to protect your profits with a trailing stop order, this is it. Volume has picked up a bit since last week, indicating that the selling may not be over. But if you already have a nice profit, consider taking the money and run. CMGI $81.88 -6.44 (-10.31) Same Internet story; different stock. CMGI followed the NASDAQ's break of its 50-dma, tacking on nice gains for investors in this put play. Now is the time to protect those profits with trailing stop orders. If CMGI continues to drop, you can always move the stop up. You simply don't want to give up what was so hard to earn. Keep in mind too that CMGI is approaching support at $77. With volatility so prevalent in the sector, it may not get there if we get that bounce, following 4 days of losses. Otherwise, if it drops below $77 on significant volume, the next stop is in the $40's (don't hold your breath just yet). MER $67.25 -1.38 (-0.75) After the early morning rally on Monday, MER continued to move farther away from its 200 dma up at $75. Today it moved toward a bottom support level (daily low $66.69) not seen for months. The stock bottomed out at this mark in May/June and prior to that, back in February. We expect the market to be weak, but still confirm sentiment and direction before opening a new position. In the news, Andy Collins, analyst for ING Barings, reported he believes Chase Manhattan (CMB) may be looking for a "merger of equals" with the likes of Merrill Lynch or Morgan Stanley Dean Witter (MWD). MWD $87.44 -1.13 (-2.82) MWD offered some nice entry points as it climbed upwards Monday morning responding to the lower-than-expected NAPM Index numbers. This rally was short-lived and MWD's reverse carried through into Tuesday as well. The stock is now poised just below its 200 dma. Another day below this support would denote a strong bearish signal. Be prepared for a bounce. Volume is still moderate at about 85% of its normal levels. In the news, the SEC is charging a former 24 year-old analyst at MWD and his friend for insider trading. Apparently, the trading scheme was in place prior to the analyst beginning employment with the company NITE $37.03 -4.22 (-5.10) The internets are still plunging to lower levels this week. And today, this market maker fell even farther in sympathy with online brokerages like Schwab (SCH). NITE shed -$4.22 placing it merely points away from its 200 dma at $32 and what volume! Trading volume was more than double with 10.02 mln. shares exchanged compared to its ADV of 4.47 mln! This is usually a good indication of firm direction, but be careful there may not be too many sellers left. Take a look at a 6-month chart and you can see how NITE bounced off of $34 back in April. EBAY $84.38 -6.88 (-13.31) For the EBAY put player, profits piled up early this week. EBAY is already over $13 in the hole and it appears the descent could continue. The fears of rising interest rates have gripped the Internet sector by the throat and is most assuredly squeezing the life out of it. A brief reprieve came on Monday morning when the NAPM Index reported sharply lower numbers than expected and the market puffed up for a few hours. Then after reality came back to the forefront (employment #'s are also due this Friday), and investors pulled back again. The morning rally did offer solid entry points for the prepared. EBAY consistently traded in a $96-98 range for a good part of the day and even hit $100. Today the stock plunged even deeper dipping to a daily low of $82.50 on almost double the normal volume. Again, this is an INTERNET PLAY and it is HIGH RISK; internets move sharply and are very volatile. Know your tolerance for risk before beginning a play on this stock. In the news, carclub.com, a comprehensive auto destination, has joined forces with eBay and will offer the community an array of automotive-related services. ************** NEW CALL PLAYS ************** CHKP - Check Point Software $72.00 +2.13 (+3.56 for the wk) Check Point develops, markets, and supports secure enterprise networking solutions that enable customers to implement centralized policy-based management with enterprise-wide distributed deployment. Their software solutions include network security, traffic control, and Internet protocol address management. Check Point's largest customer is Sun Microsystems' SunSoft unit which represents about 20% of its sales. The company has subsidiaries in Europe, North America, and the Pacific Rim. CHKP is bucking the trend. It's gaining more momentum as time passes in spite of the negative broad market and the downtrend of the Nasdaq. Until the middle of July, CHKP was comfortable at $55 and $57. Then 2Q earnings came out on July 20th. The report was respectable at .53 p/s meeting the estimates and rising sales (due to the higher demand for Check Point's Internet security systems, or virtual private networks (VPN's). That same day BBRS upgraded CHKP to a "buy" from a "long-term attractive". The stock then traded primarily in the $60-65 range for the next two weeks always hitting overhead resistance at $65 level. Volume was only moderate; but the upward momentum was intact. Finally on Friday, CHKP broke through the resistance and pushed upwards of $68. More bullish confirmation came yesterday and today as CHKP advanced another $3.56 in a strongly dissenting market. Even if the market turns positive, confirm stock direction. CHKP hit a new 52-week high today on exceptionally high trading volume of 1.02 mln. shares. In the news today, Check Point Software announced they are extending their open platform (OPSEC) demonstrating their leadership in advanced VPN's and strengthening authentication security. Note: There are no strikes above 70 for AUG or OCT. BUY CALL AUG-65 KEQ-HM OI=840 at $ 8.63 SL=6.75 BUY CALL AUG-70*KEQ-HN OI=903 at $ 5.13 SL=3.50 BUY CALL SEP-70 KEQ-IN OI=169 at $ 8.13 SL=6.25 BUY CALL SEP-75 KEQ-IO OI=166 at $ 5.63 SL=4.00 Picked on August 3rd $72.00 PE = 37 Change since picked +0.00 52 week high=$72.50 Analysts Ratings 8-7-1-0-0 52 week low =$10.87 Last earnings 07/20 est= .53 actual= .53 Next earnings 10-20 est= .56 versus= .45 Average daily volume = 785 K Chart = http://quote.yahoo.com/q?s=CHKP&d=3m ************* NEW PUT PLAYS ************* VRSN - Verisign Inc. $65.25 (-8.88) VeriSign, Inc. provides digital certificate services designed to enable Web sites, enterprises, and individuals to conduct secure electronic commerce and communicate over Internet- protocol networks. The company's Web-site Digital Certificate services are used by over 400 of the Fortune 500 companies, and by all of the top 25 electronic-commerce Web sites listed by Jupiter Communications. The company also offers the VeriSign OnSite service, which enables enterprises to develop and deploy customized digital certificate services for use by its employees, customers, and business partners. VeriSign, along with most of the Internet sector has taken a dive leaving its investors wondering if it can get any worse. Taking into consideration the current trading pattern of the stock, the answer we feel is, yes. On July 16, VRSN set its 52-week high at 96.75. However, since this new high, investors have decided to take profits by heading for the exits. With the amount of shares trading above the average volume during this time period, it doesn’t reflect well for the stock. VRSN recently broke through its 50 dma at $70, and does not show any real support until the $50 range (although it may pause at $60 with some psychological support). With the weak Nasdaq and a particularly strong downturn in the stock, look for VRSN to continue towards this next level. Even though we feel the stock will fall further, make full use of stop losses to protect yourself. BUY PUT AUG-65 YVR-TM OI=198 at $4.50 SL=2.75 BUY PUT AUG-70*YVR-TN OI=533 at $7.50 SL=5.75 Average Daily Volume = 997K Chart = http://quote.yahoo.com/q?s=VRSN&d=3m AXP - American Express Co. $126.69 -3.38 (-5.06) When we think of financially safe travel, we think of Travelers Cheques. Who better to provide them than American Express Co. AXP offers credit cards, Travelers Cheques, a brokerage service, insurance, financial planning and other money type services. They provide these services to individuals and corporations. But that's not all! They'll also help you with retirement, accounting, tax preparation, and even educate you about finances. They are the largest travel agency in the world! No wonder then that one can truly feel safe while traveling with all this experience behind them. Recent studies show that the X generation is accumulating more credit and debt than ever before. This has helped AXP continue their revenue growth at 10%. Recent earnings of $1.41/share reported on 7-26 were 14% better than the previous year of 25% net earnings growth. Basically, AXP has been a very long term, financially stable, industry giant. On 7-30, AXP negatively broke through major support of its 30 dma at $135. Since then it has continued to drop, and closed today below its 50 and 100 dma's. Not a good sign! This new trend is now confirmed with bearish signals in the MACD and Stochastic. The recent sell off has also been accompanied with larger than normal volume. The sell- off may be picking up steam. If AXP drops below $125, then $120 is just around the corner. Watch for bargain hunters entering in on any market turn-around. One thing about solid, safe, stable, long term companies, is that it is usually solid, safe, stable, long term employee's that helped them get there. No wonder then that when CFO, Richard Goeltz announced his retirement after 25 years of service, the market got nervous about AXP. The stocks drop in price coincides with the news. Couple this news with the interest rate worries, and recent job report, and it effects a large company in a large way. We see AXP continuing it's down trend, market willing, due to the news and recent drops through support. BUY PUT AUG-125 AXP-TE OI=1066 at $3.63 SL=1.75 BUY PUT AUG-130 AXP-TF OI=1003 at $6.25 SL=4.50 Average Daily Volume = 1.6 mln Chart = http://quote.yahoo.com/q?s=AXP&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Tuesday 8-3-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ******************* PUT PLAY OF THE DAY ******************* SEPR - Sepracor Inc. $69.63 -3.13 (-3.88 for wk) Sunday Write up 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. Tueday's Update SEPR $69.63 -3.13 (-3.88) Sepracor, reacting as expected, continued down even further to start the week. Of course, with the help of a market that doesn’t seem to be able to sustain any sort of rally doesn’t hurt the play either. On July 23, the release of SEPR's earnings with widening losses during the second quarter has substantially hurt the stock ($1.11 vs. $0.62). Sepracor related those losses to costs incurred through research and development of new drugs. Since mid-July the stock has followed a distinct path down. First it encountered resistance at its 100 dma which pushed it back through its 200 dma, last week if fell below the 50 dma, and it continues to fall closer to its next support level around the $60-$65 range. With the technology sector weak and the bad news about the earnings, we might even see a break in this next level of support. To be on the safe side, just in case the stock decides to turn of us, place your stop loss orders to end the play if needed. BUY PUT AUG-70 ERQ-TN OI=155 at $4.06 SL=2.50 BUY PUT AUG-75*ERQ-TO OI=154 at $7.14 SL=5.25 Average Daily Volume = 435K Chart = http://quote.yahoo.com/q?s=SEPR&d=3m ********* STRADDLES ********* WELCOME TO THE FIRST EDITION OF THE STRADDLE PLAY'S By: Tom Gentile Straddles are designed to take advantage of both a rising and falling market. The strategy is initiated when both a call and a put at the same strike price are bought with the same expiration date. The Straddle buyer expects the combined price of his call and put (Straddle) to rise over the time frame he holds the trade. To make a profit, the Straddle buyer would need to sell his straddle at a higher price than he originally paid for it. Prices of Straddles rise 2 ways. First, the underlying asset could make a big move that is greater than the price of the entire straddle, forcing it to gain value. Second, the Straddle can gain value by higher demand of the actual strike prices held. This means that the prices of both the call and put increase in value because of more buyers than sellers. This is called a volatility increase. The risk of holding a straddle is that time decay will set in causing the price of the straddle to drop in value. We have a 3 part system that we use in determining markets that have breakout potential for good straddle buys. The 3 criteria that we use are: 1 - Market consolidation - We scan optionable stocks and look for markets which appear to be consolidating. Market consolidation occurs when buyers and sellers come to the same agreement on price for a particular stock, which results in less violent moves over time. This gives the chart a look of a wedge or pennant formation. These wedges, while they are hard to predict exactly which way the market is going to break out to, will normally break out one way or another, which is great for straddle traders. 2 - Cheap option premiums - We are looking for the cheapest options premiums by looking at implied volatility lows relative to their high and low ranges over time. The great thing about buying options premiums when the implied volatility is lower is that you are further reducing your time risk over the life of the trade. Once this is determined, we merge this information with the rule 1 above to further filter the stocks down. 3 - Impending News - This can be anything from an earnings report to a government report, depending on the straddle play. After filtering stocks with our straddle criteria, we now have the few stocks that meet our low risk / high return strategy. Our Entry Strategy - To enter at the prices quoted below or better, using a limit order. Our Exit Strategy - If the Straddle gains a profit of 50% or more, OR, exit 3 days after the earnings report is released, whichever comes first. Keep in mind that by exiting this way, we still retain most of the premium on the straddle if we are wrong and the market does not move. MARKET POSTURE The market over the past two weeks has been showing consolidation across the board. Tech stocks as well as internet stocks have shown consolidation with classic wedge formations, although the option premiums have been a bit high. Retail stocks are also showing consolidation, and have been exhibiting cheap option premiums. Also PC makers such as DELL are showing relatively cheap premiums and to go along with that, impending news with earnings due out on the 17th of August. NEW POSITIONS FOR THIS WEEK DELL- Dell Computer $39.44 Implied volatility ranges - HI - 113, LOW - 48, LAST 50 (CURRENT = EXTREMELY LOW) STRADDLE QUOTES - Sep.40 straddle - $5.50 Nov.40 straddle - $8.25 Expected Earnings Announcement - 8/17/99 DELL designs, develops, manufactures, markets and services and supports a range of computer systems, including desktop, notebooks, and enterprise systems (includes servers and workstations). DELL also markets software, peripherals and service and support programs. For the 13 weeks ended 4/30/99, revenues rose 41% to $5.54 billion. Net income rose 42% to $434 million. Revenues reflect increased units sold. Earnings reflect higher margins due to component cost declines. Recently, Dell has engaged in adding ISP service to certain computers that are purchased. Since most ISP companies are losing money, Dell has designed a business plan to make ISP work for them in continuing to grow market share. NOTE - These options are extremely cheap when comparing implied volatility to the range. The September 40 straddles are quoted at 5 1/2. Our risk on this trade is only to earnings, which are scheduled to be released on 8/17/99. POSITION UPDATES FOR THIS WEEK There are no positions to update. Tune in Sunday for new weekly straddle picks. We will update our picks each Tue/Thr with our exit strategies for each. ***************** COMBINATION PLAYS ***************** Last Summer’s Correction Had Similar Signals.. U.S. markets ended mixed Tuesday as investors pulled money out of interest-rate-sensitive technology stocks and transitioned into defensive blue-chip issues. U.S. markets faded in late-day trading Monday after stocks were unable to hold onto gains from the morning rally. News that the economy may be slowing drove traders to speculate the Federal Reserve might hold off on raising interest rates again. The Dow ended down 9 points at 10,645 after an early gain of nearly 140 points. The Nasdaq index of technology stocks fell 14 points to 2,623. In the broader market, decliners led advancers 1,733 to 1,215 on moderate volume of 622 million shares on the NYSE. In the bond market, the 30-year U.S. Treasury bond's price was off 6/32 of a point and the yield moved up to 6.12%. Sunday’s new plays (positions/opening prices/strategy): BTY British Telecom AUG185C/180C $1.12 credit bear-call BTY British Telecom AUG165P/170P $1.38 credit bull-put ESPI E-Spire Comm. MAR10C/MAR10P $4.81 debit straddle GMST Gemstar AUG80C/AUG52P $1.62 credit strangle GD General Dynamics FEB70C/AUG70C $4.87 debit calendar LTD The Limited LJAN50C/AUG50C $6.50 debit LEAPS/CC's The British Telecom (BTY) spread had some interest as one trader opened both positions with five contracts at $2.31 credit. Our recorded entry was $2.38. The E-spire (ESPI) straddle also had volume in the morning and the initial debit target of $4.81 was available. Gemstar (GMST) was quoted incorrectly (CBOE) but the opening credit was still respectable at $1.62. General Dynamics (GD) opened down $2.25 and our target had to be adjusted. The position was available as low as $4.25 and our initial debit was $4.38. The Limited (LTD) play was slightly more expensive than expected; the opening price was $6.50. Portfolio plays: Another failed rally for the broad market and that's probably a good indication of things to come in the short-term. Few stocks were able to make headway in the wake of continued selling and most analysts believe we have more downside ahead. One of the technology stocks that bucked the trend was Intel (INTC). The chip company rose $2.31 after topping off its two PC processor lines with new high-end chips; the 600MHz Pentium III and the 500MHz Celeron. Sun Microsystems (SUNW) also advanced $1.56 to $69.43 after the company said it is working on a new family of computer chips for handheld computers, screen phones and video game machines. RF Micro Devices (RFMD) was a big winner, up $2.43 to $79 and well clear of our sold position at $65. Many safety stocks such as Johnson & Johnson (JNJ) were higher along with a couple of the big telecoms such as Motorola (MOT) but our favorite conglomerate, General Electric (GE), continues to struggle at $108. Most of our long term plays are weathering the storm but it may be some time before they are significantly profitable. On the down side, many Internet issues were lower and the stock that continues to fare worst is American Online (AOL). As we said Friday, AOL may be beyond help in the short-term and our current goal is to preserve capital in this falling market. The long side of our ITM bull-call spread was trading at $3.00 near midday and that may have been the last opportunity to recover a significant amount of the initial investment. Many smaller issues suffered in the sell-off such as Cyberian Outpost (COOL), Barnesandnoble.com (BNBN) and Rainbow Technologies (RNBO). Almost all of the bullish positions (and certainly any that are profitable) are being closed to prevent further losses and you will have to decide when/how your exits will be executed. It's very difficult to learn to close out losing plays early but the simple fact is there is NO reason to hang on to losing positions when there are so many other profitable plays that deserve your time and money. Accept your losses, learn from your mistakes by evaluating each one critically then move on. Tuesday, August 3 U.S markets ended mixed Tuesday as investors pulled money out of interest-rate-sensitive technology stocks and transitioned into defensive blue-chip issues. The Dow Jones industrial average was up 31 points to 10,677 while the technology-laced Nasdaq index fell 35 points to 2,587. In the broader market, declining issues swamped advances 1,882 to 1,091 on volume of 729 million shares on the New York Stock Exchange. Portfolio plays: Another down day for technology stocks and yet Intel Corp (INTC) was able to hold the line at $70 again! This area appears to be the new trading support and those that want to micro-manage the October calendar spread can move to the higher strike for about $4.00 debit. This will protect your position for further upside (on a market rally) and still leave you with some margin below; in case of an unexpected drop. Sun Microsystems (SUNW) climbed higher for the second consecutive day on news of a forthcoming Java-based chip architecture, MAJC (microprocessor architecture for Java computing). Many safety Issues continue to shine in the current fear-driven trading. Johnson & Johnson (JNJ) and Proctor & Gamble (PG) were two of our best performers today. Even General Motors (GM), a fundamental Dow indicator, managed a small ($1.19) gain. One of our previously closed issues, Qualcomm (QCOM) was the absolute worst performer in the portfolio. The stock was down $15 at the height of panic and ended near $140. Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - ****************************************************************** Sunday’s neutral plays garnered some (Email) attention and with the current uncertainty in the market, we are going to continue with that approach. Implied volatilities on most options are actually lower than normal so the appropriate position would be a debit straddle. We thought some of you might like to try a low cost, conservative combination strategy that works very well for volatile issues. The position combines a bull-call and a bear-put spread and it is often called a "Short Iron Condor". This type of spread has limited risk, limited profit potential and a small initial debit. Some traders prefer to leg into each position while others order the entire play with a debit "target" or "limit" through a discount broker to reduce commission costs. The initial goal will be to close one of the spreads when it has paid for the entire play, leaving the other with "free" profit potential. The entire position can also be held to expiration with maximum profit occurring outside either sold strike. A sample profit/loss graph for this strategy can be viewed at: http://www.optionmax.com/sic.htm 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. ******************************* DCLK - Doubleclick Inc. $74.50 *** Volatility Play *** DoubleClick is a leading provider of comprehensive Internet advertising solutions for advertisers and Web publishers. Their technology and media expertise enable it to dynamically deliver highly targeted, measurable/cost-effective Internet advertising for advertisers and to increase ad sales and improve ad space inventory management for Web publishers. DoubleClick offers three distinct Internet advertising solutions: The DoubleClick Network, DoubleClick's DART (Dynamic Advertising Reporting and Targeting) Service, and DoubleClick Direct. This stock has traded in a $100 range since March and while the trend has become somewhat subdued over the last two months, we still expect a significant amount of movement in the next 90 days. The most recent cycle exists between $70 & $100 but a break below the current bottom could send the stock price plummeting to the $50 range. PLAY (conservative - neutral and opposing/debit spreads): BUY CALL OCT-90.00 QWE-JR OI=521 A=$7.50 SELL CALL OCT-97.50 QWE-JU OI=3 B=$5.38 BUY PUT OCT-60.00 QWE-VL OI=200 A=$5.37 SELL PUT OCT-52.50 QTD-VX OI=58 B=$3.12 OVERALL INITIAL NET DEBIT TARGET=$4.00 ROI(max)=87% UPSIDE B/E=$94.00 DOWNSIDE B/E=$56.00 Chart = http://quote.yahoo.com/q?s=DCLK&d=3m ******************************* BRCM - Broadcom Corp. $111.87 *** Volatility Play *** Broadcom Corporation is a leading developer of highly integrated silicon solutions that enable broadband digital data transmission to the home and within the business enterprise. Their products enable the high-speed transmission of data over communications infrastructures, most of which were not originally intended for digital data transmission. Using proprietary technologies and advanced design methodologies, the Company has designed and developed integrated circuits for some of the most significant broadband communications markets. BRCM is another stock with a $100 trading range since early March. The most recent support/resistance area exists between $100 & $140 with some interim support near the current price. This issue is also poised for a big move with all indicators leading down to the 150 dma at $90. PLAY (conservative - neutral and opposing/debit spreads): BUY CALL NOV-135 RDZ-KG OI=32 A=$9.00 SELL CALL NOV-140 RDZ-KH OI=363 B=$7.62 BUY PUT NOV-90 RCQ-WR OI=298 A=$6.25 SELL PUT NOV-85 RCQ-WQ OI=530 B=$4.50 OVERALL INITIAL NET DEBIT TARGET=$2.75 ROI(max)=81% UPSIDE B/E=$137.75 DOWNSIDE B/E=$87.25 Chart = http://quote.yahoo.com/q?s=BRCM&d=3m ****************************************************************** - Speculation Only - ****************************************************************** ATHM - AtHome Corp. $43.38 *** Merger Rumors Abound! *** At Home Corporation is a leading provider of Internet services to consumers and businesses over the cable television infrastructure. Their primary offering, the @Home service, allows residential subscribers to connect their personal computers via cable modems to the Company's new high-speed "parallel Internet." AtHome soared in early morning trading on a report that powerhouse Yahoo! Inc. sought to buy the company. After the initial rally, ATHM officials downplayed the take-over rumors but acknowledged the two parties might form an alliance. BusinessWeek magazine had reported late Monday that the two companies held preliminary talks over the past several weeks. The ATHM president was quick to reply, telling an audience at a technology conference that discussions were about making one of those companies' home page the first thing that ExciteAtHome users would see when they log on to the service. Regardless of the denial, traders bid up the front-month options to extremes as shares of ATHM surged 14% before falling back to a closing gain of only $0.43. The current disparity in pricing will allow us to take a favorable, three month position on a stock with reasonable upside potential in the current bearish market. We expect the August positions to expire and will sell September options after the strike date to further reduce our overall cost basis. PLAY (speculative - bullish/diagonal spread): BUY CALL OCT-52.50 AHQ-JX OI=302 A=$3.25 SELL CALL AUG-50.00 AHQ-HJ OI=10526 B=$0.93 INITIAL NET DEBIT TARGET=$2.12 TARGET ROI=$25% Chart = http://quote.yahoo.com/q?s=ATHM&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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