The Option Investor Newsletter Sunday 8-15-99 1 of 6 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment ******************************************************************* MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ******************************************************************* WE 8-13 WE 8-6 WE 7-30 WE 7-23 DOW 10973.65 +259.62 10714.03 + 58.88 10655.15 -255.81 -298.88 Nasdaq 2637.81 + 89.84 2547.97 - 90.52 2638.49 - 53.91 -172.08 S&P-100 688.82 + 14.69 674.13 - 9.16 683.29 - 15.59 - 34.91 S&P-500 1327.68 + 27.39 1300.29 - 28.43 1328.72 - 28.22 - 61.84 RUT 434.05 + 6.01 428.04 - 16.73 444.77 - 3.61 - 16.88 TRAN 3179.07 - 40.96 3220.03 -113.21 3333.24 - 48.25 - 20.38 VIX 22.38 - 4.98 27.36 25.83 23.76 Put/Call .72 .72 .72 .58 ******************************************************************* Are we suspicious of the rally? You bet. But enjoy it while you can. We may see it for a few more days until the euphoria wears off. In the meantime, thank goodness for favorable PPI numbers. While bearish tones gripped the market with force early last week, the bulls just couldn't take it any more and put the PPI up as the Holy Grail for the rally that ensued. In truth, the key to the whole battle was that bears moved to the sidelines to wait it out, while bulls were looking for any excuse to run the market up. However, based on still sub-1 bln. share volume in both the NASDAQ and DOW, We think the markets movement is based on lack of selling, not a new bullish trend. Let's take a closer look. In short, Friday's action was borne of a flat Producers Price Index (PPI). By its name, you can infer that it's a reflection of prices at the wholesale and producer level. The Consumer Price Index (CPI) by contrast is a reflection of retail price levels, or the prices that we all pay for goods and services in our daily lives. It's the same comparison between a bushel of corn in a field of many, and an ear of corn from the produce section of your favorite grocery store. The big difference in the readings is that the CPI is about 58% weighted in services, which are nowhere to be found in the PPI. So there's still a bit of a wild card in the CPI, thanks to its inclusion of services. We'll have to wait until Tuesday morning's release of those figures before we can offer any comment. Anyway, the PPI reflected a flat 0.0% increase at its core rate. Yes, energy (a.k.a. oil) was up a whopping 3%, which in our book is a big red flag of future inflation. After all, as we've said before, oil is the economic engine of the western world - without it, we'd be living in caves still trying to catch dinner with a pointy stick. In what to us is a major surprise, OPEC is closely adhering to its prescribed limits, moving the price of oil up. We need it no matter what it costs. But the market is willing to overlook that for now. The truly good news was that on every other level, from food to cars to computers, prices actually fell. The overall PPI figure was +0.2% compared to the market's expectation of +0.3%, which anybody would have to view favorably. And so they did. The bond market led the way by shedding about 16 basis points throughout the day on Friday to close at 6.10%. If you can believe it, there was actually talk the Fed may not raise rates at the August 24 FOMC meeting. Yeah right. . .fat chance. While we would agree on principal that a rate hike isn't necessary and shouldn't be implemented, based on the lack of inflationary signs (except oil, which we've already touched on), it's still all but sure to happen anyway. Even so, the positive PPI numbers remove another inflation indicator from the Fed's "keep-your-eye-on-it-list" and also ease the fear of a disturbing CPI figure on Tuesday. The DOW gapped up about 100 points on Friday's open to 10,900, its Thursday high (before the power went out). From there, a steady ascent to 10,981 ensued before backing off slightly to finish the day at 10,973, up 185 points. The A/D line looked great as advancers skunked decliners all day. In the end, 1952 advancers cleaned the clock on 1037 decliners, with volume of only 692 mln. shares. This is actually pretty low. But for a Friday in August, it moves up a notch on the importance scale, but still nothing to write home about. Unfortunately, there were just 42 new highs compared to 158 new lows. Aside from unconvincing volume, if there was a weak spot in the internals, this was it. These are not the signs of a sustainable rally. If you need proof, just take a look at IBM. At one point today, it was reported that it took 20 minutes to move just 50,000 shares - no inspiration here. For the technical chartists in the group, on one hand, the DOW is at its 50-dma and could bounce south, while on the other hand, it's already bounced north off its 100-dma. You choose. We think in the grand scheme of things though, sentiment will mow down any chart average on the planet. In this case, it's better to pay attention to the trading environment than a line on the chart. The NASDAQ, home of most technology stocks, and consequently the more rate sensitive index had a big day too, reflecting the substantial bond yield drop. The index gapped and climbed to close at 2635, up 88 points, which looks good when viewed through 1-week goggles. However, the weeks of April 19, May 10 and June 21 show this level as a peak from which the market went down. The gains in July were earnings driven. Not trying to scare you - just pointing it out. See what we mean on the graph. We are still cautious here. Nonetheless, today's rally, based on relevant PPI data looked OK. Like the DOW, advancers tap-danced all over decliners 2432 to 1467. The good news is that new highs actually outpaced new lows 86 to 58. We haven't seen that in a while (take a bow). Volume was respectable for a Friday in August at 937 mln. shares, but far less convincing than the 1 bln. shares we'd like to see for a strong move up. Honestly folks, no matter what you think of volume, it's the only thing that's going raise the price of a stock. Without volume, advances are subject to pullbacks and we remain in trading ranges. Breakouts mean very little without volume. Let's put a little more highlight on the volume issue. A few sectors put on great performances today. Retail, technology (including Internets), financials and Drugs. Take the drug issues, in particular Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY). Their respective average daily volumes are 4.93 mln., 7.08 mln., and 2.87 mln. Today's volumes exceeded these averages by strong margins: 7.08 mln. (numerical coincidence), 10.25 mln. and 3.35 mln., respectively. When this happens, especially on a Summer Friday, you can be pretty sure, it's not from folks pulling off the road in their motor homes to call Schwab with an order. This kind of volume is the trail that funds and money mangers leave behind. It's not just the high tide floating all boats. Now contrast this with the Internet sector's AOL, AMZN, YHOO and CMGI. Respective average daily volumes here are 22.12 mln., 8.49 mln., 9.25 mln., and 6.22 mln. However, note their volumes today of just 14.53 mln., 5.39 mln., 6.12 mln., and 4.79 mln. Is this indicative to you that a big rally is at hand? Not even close. This is clearly a case of the tide floating the boat (interest rate driven, not buying pressure driven). Don't get us wrong; we're all for big price moves that Internets give us. The point we are trying to convey is that Internets are not as likely to sustain their rally compared to other sectors, as conveyed by an absence of volume relative to their daily averages. Beware the head-fake. In condensed version, here's other news of interest. Red Hat Software (RHAT) continues to rocket ahead from its $14 IPO on Wednesday only to close at $85 on Friday. Iridium (IRID), the satellite-based telephone system was forced into chapter 11 bankruptcy by its creditors. Intel set another new high of $79.75 - about a 60% move in 2.5 months (profit taking anyone?). Finally, a competing bid to Alcoa's bid for Reynolds metals surfaced today from Michigan Avenue Partners, a scrappy and much smaller rival of Alcoa. All clutter, theory, and hyperbole aside, we were due for a small reprieve and this is pretty good. The PPI has removed an element of fear, while investors await the CPI on Tuesday morning. Aside from the price of oil, which the market appears willing to overlook, the CPI will most likely give investors another reason to cheer, though something could fly out of left field to spook the markets back down. But we don't think so. Monday should be an up day, but may see a pullback late in the afternoon prior to the CPI release. Assuming no surprises from the CPI, sentiment is likely strong enough to carry the market further up. In short, we could get 2 days of price gains on Monday and Tuesday. However, we want to stress that you use caution. One CPI hiccup, and we'll head right back where we came from. We will anyway; it will just be delayed a couple of days. The fact is the Fed will still most likely act to raise rates, despite benign PPI and CPI. That hasn't changed. What also hasn't changed is that earnings season isn't until late September, and it's usually a weak quarter. To boot, we've still got that pesky oil price moving insidiously up, and 138 days remaining until Y2K. There just aren't any events on the horizon to cause much enthusiasm. Remember, the market is a great humiliator and strives to embarrass as many people as possible. Don't get caught in the euphoria. It shouldn't last long, and when it's over (probably soon), the trend will be down. Form a plan and stick to it, using stops if the trade moves against you. Of course, sell too soon. Buzz Lynn Research Analyst ************* COMING EVENTS ************* Monday: None Scheduled Tuesday: Consumer Price Index July Forecast: 0.3% Previous: unch CPI ex. food & energy July Forecast: 0.2% Previous: 0.1% Housing Starts July Forecast: 1.60M Previous: 1.571M Building Permits July Forecast: 1.60M Previous: 1.621M BTM Schroders 8/14 Forecast: -- Previous: 0.2% Industrial Production July Forecast: 0.5% Previous: 0.2% Capacity Utilization July Forecast: 80.6% Previous: 80.3% Real Earnings July Forecast: -- Previous: 0.7% LJR Redbook 8/14 Forecast: -- Previous: 0.6% API Oil Stocks 8/13 Forecast: -- Previous: -3.16M Wednesday: None Scheduled Thursday: Jobless Claims 8/14 Forecast: 290k Previous: 284K International Trade June Forecast: -$20.0B Previous: -$21.34B Philadelpia Fed Index Aug Forecast: 10.5 Previous: 7.8 Money Supply (M2) 8/9 Forecast: -- Previous: -$6.2B Friday: None scheduled ************** MARKET POSTURE ************** As of Market Close - Friday, August 13, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,973 Neutral 7.20 SPX S&P 500 1,330 1,420 1,328 BEARISH 7.30 OEX S&P 100 675 735 689 Neutral 8.13 * RUT Russell 2000 440 465 434 BEARISH 8.06 NDX NASD 100 2,250 2,468 2,307 Neutral 8.13 * MSH High Tech 1,125 1,250 1,164 Neutral 8.13 * XCI Hardware 920 1,090 1,020 Neutral 7.20 CWX Software 725 844 754 Neutral 8.13 * SOX Semiconductor 450 535 520 Neutral 7.20 NWX Networking 555 625 570 Neutral 8.13 * INX Internet 500 580 411 BEARISH 7.20 BIX Banking 690 710 650 BEARISH 7.23 XBD Brokerage 410 440 387 BEARISH 7.23 IUX Insurance 645 660 597 BEARISH 7.23 RLX Retail 915 960 855 BEARISH 7.23 DRG Drug 370 400 346 BEARISH 7.20 HCX Healthcare 750 800 709 BEARISH 7.22 XAL Airline 180 190 155 BEARISH 5.21 OIX Oil & Gas 285 310 315 BULLISH 8.10 Posture Alert What inflation? The bond market had its best day in months on Friday, which led to a powerful rally in equities. Many sectors bumped above key support levels, which were broken only recently. With Friday's action, we have turned Neutral (from Bearish) on the S&P 100, NASDAQ 100, Morgan Stanley High Tech, Software, and Networking. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture **************** MARKET SENTIMENT **************** It's not over, yet! Friday's bump up was the sort of relief that many investors were looking for. All sectors participated with Internet, Software, and the NDX leading the move. However, we believe there are still some hurdles to overcome before this race is over. On Monday, most will investors will probably be cautious going into Tuesday's CPI. We do have several big names that will be reporting their quarterly report, so technology stocks have the potential to add to further gains. The interest rate game is not nearly over, but August 24 (Fed meeting) is right around the corner so stay tuned. Below is an updated list of equities and our Pinnacle Index for those particular stocks. We have now also included their expected earnings, the infamous whisper number (if available), and their estimated earnings release date. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. Company Symbol Pinnacle Expected Whisper#: Estimated Index: Earnings: Date*: Dell Computer DELL 4.23 +.17 +.17 8/17 Hewlett Packard HWP 2.80 +.80 +.82 8/16 AppliedMaterials AMAT 0.92* +.52 +.57 8/17 Novell NOVL 10.18* +.13 +.14 8/19 Intuit INTU 1.38 -.33 -.30 8/23? Ciena CIEN 2.92 -.01 -.00 8/19 Autodesk ADSK 1.17 +.17 +.17 8/26 Wind River WIND 1.55 +.15 +.15 8/19 Earnings season will officially be over soon for a couple of months, but we have several big names going off this week. These companies can definitely give more fuel-for-the-fire in the bulls camp. Numerous retail stocks will continue to report, however, none of them fell under our stock picking criteria. On the high expectation side is Novell, coming in with a PI of 10.18. Not only is Novell already expected to beat by a penny, but the option speculators are betting a major run in the short term. Novell has lagged behind the market (and Microsoft) for many years, but evidently there is a large following that believes they will crush numbers, and will also do so in the future. Large overhang remains at 30 on NOVL.Low expectation stocks include Applied Material, Autodesk, Wind River, and Intuit. These stocks would be good candidates for a contrarian play. Intuit, obviously has been beaten up with its association as an Internet stock, but the company has been reporting stellar numbers for the last several quarters, so more upside potential is there. The stock did pop for 5 ½ on Friday, so an oversold bounce may have already occurred. Autodesk and WindRiver are lower expectation stocks, but also have a lesser following. If either of these software companies hints of Y2k not hurting their results as much as expected in the future, and you could see a potential rally. AMAT has a large following, and could make a big run, but unfortunately, the company's whisper number is already a nickel higher than expected, so they will have to have a phenomenal conference call to make a big run. Dell and HP can make some big waves. Unfortunately, both stocks have sentiment that is not giving any extremely bullish or bearish sentiment. HP's whisper number is 2 cents higher, but has a medium PI (Pinnacle Index). Dell's has a higher PI, but a whisper that is in- line. Both stocks can make major moves either way, but we think both companies will report stellar numbers. Overhang on DELL is at 45, and 115 for HP. These two numbers will be hard to break before the August options expiration. Have a good trading week, Pinnacle Capital Advisors. BULLISH Signs: Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased 2.2% and Bearish sentiment increased 1.5%. Mixed Signs: Interest Rates: The yield on the 30-yr Treasury is still above key 6% barrier, but off the highs of 6.272%. BEARISH Signs: Pinnacle Index: The Pinnacle Index for the OEX (715-745) is now reaching levels of extreme optimism. From a contrarian standpoint, resistance is building in this area, and may indicate a short term top. Russell 2000: Broke below both the 50 and 200 day moving averages, proving very bearish. Peak Open Interest: The contraian put-call ratio clocking in at 1.2 suggesting bullish sentiment picking up steam. Market Posture: Several indexes have just rolled over, including the Dow, OEX, SPX, networking, and software. Market Posture 2: Several indexes continue on their bearish decline, including drugs, healthcare, brokerage, banking, airlines, Russell 2000, Insurance, and Internet. 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 690-780 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 690-780) Date Open Interest Change % Alert Friday, July 16 32,285 Friday, July 23 62,455 +93.4% Friday, July 30 74,895 +131.9% Friday, Aug. 06 113,258 +250.8% Friday, Aug. 13 117,620 +264.3% Market Sentiment at a Glance Friday Indicator (8/13) Alert Pinnacle Index (OEX): Overhead Resistance (715-745) 8.0 Overhead Resistance (680-710) 2.3 Underlying Support (630-670) 4.4 Put/Call Ratios: CBOE Total P/C Ratio .7 CBOE Equity P/C Ratio .5 OEX P/C Ratio 1.2 Peak Open Interest (OEX): Puts 670 Calls 700 P/C Ratio .9 Market Volatility Index (VIX): CBOE VIX 22.38 Investors Intelligence: Bullish 50.00% * Bearish 29.30% * 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 (8/13) Overhead Resistance (715-745) 8.03 Overhead Resistance (680-710) 2.33 OEX Close 688.82 Underlying Support (630-670) 4.36 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 715/745 level while the underlying support is holding at the OEX 630/670 level. Put/Call Ratio Friday Strike/Contracts (8/13) CBOE Total P/C Ratio .69 CBOE Equity P/C Ratio .49 OEX P/C Ratio 1.21 (OEX) Peak Open Interest Friday Strike/Contracts (8/13) Puts 670 / 13,875 Calls 700 / 15,403 Put/Call Ratio .90 (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 05, 1999 Bottom? 32.12 August 13, 1999 22.38 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 Aug 04, 1999 52.2 27.8 Aug 11, 1999 50.0 29.3 * ****************** 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 8-15-99 Sunday 2 of 6 OPTION CLUB UPDATE ****************** CLUBS ARE GOING WILD!!! If you would like to join contact us at Visit@OptionInvestor.com and Organize@OptionInvestor.com. UPDATE FROM ST. LOUIS: ************************ We had a very successful third meeting this past Monday evening. Our attendance continued to grow with 17 members in attendance. For those who couldn't make it we look forward to you attending the next meeting. As I previously noted, our next meeting will be August 23 again at 7:00 pm in the same location. I will be sending a reminder closer to the time. We will not be meeting Labor Day which would be our regular date. We are meeting every other Monday at 700 pm. The first portion of our meeting featured Denny Fischer giving a discussion about the seminar presented by Online Investors Advantage and then giving a presentation about research assets available through Wall Street City in conjunction with OIN. Denny showed how chart features could be customized to identify entry and exit points for stocks and their corresponding options. We then divided up into three randomly selected groups to work our paper portfolios. The mission, in case you missed my last memo, is to pick a $10,000 paper portfolio of options between this meeting and the next and price them at the close of trading the day of our next meeting. That would give everybody time to discuss their choices and come up with a team portfolio. The only guidance was to select options that expire no sooner than October and no later than February so we can develop charts and pick entry and exit points. At our next meeting each team will present their portfolio and explain how and why they chose the options they did. Also for the next meeting I am looking for some more discussion leaders to present on topics I previously identified or any of their choice). Doing the research to make a presentation is a great way to learn and that's what we are all about. Remember, this is one activity that you will truly only reap what you sow and the yield is in cash. Best of luck. Maris - email@example.com LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Index Last Week Dow 10973.65 259.62 Nasdaq 2637.81 89.84 $OEX 688.82 14.69 $SPX 1327.68 27.39 $RUT 434.05 6.01 $TRAN 3179.07 -23.84 $VIX 22.38 -4.98 Calls Week BVSN 93.50 21.50 New, vertical ride with new highs NXLK 97.63 14.13 Selling overdone and unwarranted VRSN 83.00 12.75 New, top-tier internet play SNE 129.44 9.44 Poised to spring higher MMCN 49.88 9.38 New, gaining over 23% this week LXK 72.63 8.75 LXK added to the S&P 500!! INTC 79.75 8.19 Continuing to set new highs. TXN 150.31 7.81 Spliting on Monday, so look out SLR 74.38 6.25 New, relentless positive momentum VISX 95.50 5.75 New, looking to make a run LSI 58.88 5.50 Gaining over 10% this week NOK 85.75 4.06 New, making its move ready to break SLB 65.25 1.94 Oil prices reach new 22-month high DELL 41.44 1.63 Earnings announced on August 17 HGSI 60.13 -0.38 Is this the calm before the storm? Puts ATHM 37.00 -5.56 New, AT&T deal with AOL instead? AHP 40.88 -4.00 New, lawsuits and more lawsuits NITE 35.50 -1.13 Dropped, pushed by market pressure TAN 43.81 -0.88 Has Tandy put in a bottom yet? AMR 61.88 -0.06 Labor negotiations this week U 32.75 0.31 USAir cannot hold altitude TBH 74.38 0.38 Ready to move with the CPI DH 59.75 1.38 Channeling, looking for a breakout CMGI 81.50 4.50 Dropped, rebounding too much AMZN 97.44 7.88 Dropped, bouncing with PPI report MWD 91.69 9.56 Dropped, too hot to handle BRCM 120.06 11.06 Dropped, no chance to even try EBAY 98.00 14.75 Dropped, bouncing with Internets 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 ADV = Average Daily Volume 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: BVSN - Broadvision, Inc. MMCN - Mmc Networks, Inc. NOK - Nokia Corp. SLR - Solectron Corp. VISX - VISX, Inc. VRSN - Verisign, Inc. PUTS: Please confirm downward motion before playing. With the market in rally mode any beat up stock starts looking like a value play. AHP - American Home Products Corp. ATHM - Excite@home 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: No dropped calls today. PUTS: AMZN $97.44 (+7.88) The stock market's rally off recent lows has brought life to Internet plays like AMZN. On Friday the PPI report came in better than expected showing no signs of inflation in the core rate. That all the markets needed to hear and they were off and running. As you all know by now, the Internet and other high-growth sectors have the most to gain from such announcements and therefore made some of the largest gains on Friday. This was the fourth straight gain for the sector and traders are now looking back at Thursday, August 5 as being the short-term bottom. We couldn't agree more and are dropping AMZN as a put play. Amazon has the potential to rally back to the 200-dma near $120 and we not want to get caught in the way. BRCM $120.06 +6.69 (+11.06) The market really gave us the Old one, two punch on this play. We're not just down for the Count now, we're TKO'd. It's time to drop BRCM. The market really never gave us a chance to enter this play. The stall in recovery on the low's that initiated our play bounced and shot us straight through our resistance. We're sitting just below the 50-dma but investors like the outlook of BRCM and are using this as an opportunity to get out. If you did play this stock, your stops should have saved you. It's better to take a small loss but survive to get back into the ring for the next bout with another play. MWD $91.69 (+9.56) Unfortunately it wasn't just a head- fake, MWD followed the positive market again on Friday and flourished under the glow of tame PPI numbers. This is not to say MWD could once again reverse with the CPI data coming out on Tuesday and the FOMC in a couple of weeks. However considering the $8.38 in gains in the past 3 days, this not the optimum time to initiate a new position. Remember the technicals too. MWD did bounce off the 200 dma at $89 but in the wrong direction for a put play! MWD did provide us with lots of profits since we picked it up on July 25th but now the current has changed direction. We must drop this play from our put list. EBAY $98.00 (+14.75) The Internets are like Timex watches - they take a licking and keep on ticking. The sector recovery continued in full-force on Friday after the non- threatening PPI numbers drove interest rate sensitive stocks upwards. In EBAY's case, it tacked on another $6.63 moving closer to the 200-dma at $118. Since EBAY is a bellwether for the Internet sector, we obviously don't want keep it as a put play consideration in this changed market. NITE $35.50 (-1.13) The writing is on the wall. NITE is moving upward in relief generated by the Internet recovery and the positive broad market pressure. After dropping through long-time bottom support of $34-35 on Monday, the stock began to edge back towards the 200-dma at $34. On Friday it popped over this mark signaling to us it's time to move on. So even though NITE is still negative for the week, we're dropping it to make room for better plays. CMGI $81.50 (+4.50) What better to fuel an inflationary feared market than economic numbers that show some slowing in the economy. The Labor Department reported that producer- price index for finished goods rose 0.2% in July after easing 0.1% in June. Economists were expecting the overall index to rise 0.3%, which does not sound like that much of a difference but enough to convince us to drop CMGI as a put play. After being on the down side for three weeks, the Labor Department's release of good economic news was enough to ignite the stock from stall mode into rally mode. Despite the comeback, stop loss orders should have ended the play for most of you. STOCK SPLIT CANDIDATES *********************** 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 ADVS - Advent Software 3:2 08-16-99 ex-date 08-17 LGTO - Legato 2:1 08-16-99 ex-date 08-17 PMA - PMI Group 3:2 08-16-99 ex-date 08-17 TXN - Texas Instrument2:1 08-16-99 ex-date 08-17 (current play) RFMD - RF Micro 2:1 08-19-99 ex-date 08-20 VRIO - Verio 2:1 08-20-99 ex-date 08-23 VERT - Vertical Net 2:1 08-20-99 ex-date 08-23 CLX - Clorox 2:1 08-23-99 ex-date 08-24 NXLK - Nextlink Comm 2:1 08-27-99 ex-date 08-30 (current play) AMZN - Amazon.com 2:1 09-01-99 ex-date 09-02 (current play) TYC - Tyco 2:1 10-21-99 ex-date 10-22 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. SPECIAL SHORT TERM SPLIT PLAYS ******************************* We always recommend selling the day of the actual split or earlier. Profit taking will drive down the price on an average of 7 of 10 splitters immediately after the split. They may come back in a week or two but why risk it ! NXLK - Nextlink Communications $83.50 (-28.63) Splits 2:1 on 08/27 See details in sector list Chart = http://quote.yahoo.com/q?s=NXLK&d=3m ***** TXN - Texas Instruments $142.50 (-1.50)(+2.00) Splits 2:1 on 08/16 See details in sector list Chart = http://quote.yahoo.com/q?s=TXN&d=3m THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call play of the day: INTC - Intel Corp $79.75 (+8.19)(+2.56) Sit back and ride the semiconductor wave. See details in sector list Chart = http://quote.yahoo.com/q?s=INTC&d=3m ****** Call play of the day: SNE - Sony Corp $129.44 (+9.44)(-5.19)(+8.19) The DVD craze has propelled Sony to a new 52-week high. See details in sector list Chart = http://quote.yahoo.com/q?s=SNE&d=3m ****** Call play of the day: TXN - Texas Instruments $150.31 (+7.81)(-1.50) One last day to play TXN before it splits Monday after the close. See details in sector list Chart = http://quote.yahoo.com/q?s=TXN&d=3m ****** Put play of the day: U - USAir Group Inc. $32.75 (+0.31)(-3.19)(-2.56)(-2.00)(-4.81) Mayday! Mayday! Oil is rising and USAir is falling. See details in sector list Chart = http://quote.yahoo.com/q?s=U&d=3m CALLS ***** Hardware ********* DELL - Dell Computer $41.44 (+1.63)(-1.06)(-0.12)(P4W +4.06) 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%. Thanks to the better than expected PPI numbers released by the Labor Department Friday, Dell, like most of the NASDAQ components, finished the week on the upside. The stock managed to regain most of its Thursdays losses brought on by comments made by a Merrill Lynch analyst. In that statement he warned that the race between PC makers would hurt future company profits. This was a one day setback however and we hope to see a small run by Dell before its after-the-bell earnings announcement on August 17. Because we are writing Dell as an earnings run candidate, this will be the final update and we expect investors to end their play sometime before the announcement. Keep in mind that on Tuesday more economic data is going to be released that could effect our play. The CPI figures will be released so us caution and trade accordingly. BUY CALL SEP-40*DLQ-IH OI=16465 at $3.63 SL=1.75 BUY CALL SEP-45 DLQ-II OI=17797 at $1.50 SL=0.75 BUY CALL NOV-40 DLQ-KH OI=15021 at $5.63 SL=3.75 BUY CALL NOV-45 DLQ-KI OI=18074 at $3.25 SL=1.63 Picked on July 22 at $39.63 PE = 67 Change since picked +1.82 52 week low =$20.38 Analysts Ratings 12-9-12-0-0 52 week high=$55.00 Last earnings 05/99 est 0.16 actual 0.16 Next earnings 08-17 est 0.17 versus 0.13 Average daily volume = 24.0 mln Chart = http://quote.yahoo.com/q?s=DELL&d=3m ***** LXK - Lexmark International $72.63 (+5.88)(+8.75) Ever wanted someone to see things your way? Well LXK has made a business of it! By understanding customers needs and perceptions, they have become one of the leaders in providing printing solutions such as Laser, Ink Jet, Dot matrix, and all types of printers. They develop, manufacture and supply their extremely high quality products to 150 countries. They have taken their revenues up to 3 billion in 1998. LXK may just have success in their genes since they are a spin off of IBM and have retained innate values that contribute to their success. Values that focus on everything from customer value, relations, service and response. The company is continually seeking to raise the level of their playing field by providing firsts in quality and standards for the home and business printing industry. As an example, they were the one to introduce the first 1200x1200 dpi for laser and ink-jet printers. As LXK keeps up on their high resolution standards, we'll all be seeing and reading a little clearer. Kudos to those of you who got in on the LXK play. Friday's move caused the momentum trend of this stock to cross-over to bullish. Even though the volume was lower than Thursday's session, it is still above average and should continue to rise as more fund managers move into this stock for their index funds after this week's announcement of LXK being added to the S&P 500. One point of caution on LXK though. When a stock breaks above it's top Bollinger band, it's wise to watch the movement the following day. If the stock gaps down significantly, it is usually followed by a few days of profit taking. It's mostly by those who got in Thursday at the low price who are taking profits. If this happens, wait for a turn-around and use it as a buying opportunity! Our current support is $66 and we have a bullish stochastic and MACD breakout. Yesterday the stock open up over a dollar from Thursday's close, probably more on the PPI news than anything. LXK saw a steady upward trend all day with a boost in the afternoon, sending it to a new short-term high. The 52-week high is now less than $2 away. Any pull-back, followed by upward momentum, is a cue to enter this play. Remember the caution above and protect your profits if you got in on Thursday with stops. In the news, Kraemer of Morgan Stanley said that investors should be "an aggressive buyer now" of LXK and that he sees compelling valuation and an under-appreciated business model. BUY CALL SEP-65 LXK-IM OI=124 at $9.50 SL=7.50 BUY CALL SEP-70*LXK-IN OI= 98 at $6.25 SL=4.38 BUY CALL SEP-75 LXK-IO OI= 92 at $3.75 SL=2.50 BUY CALL OCT-70 LXK-JN OI=290 at $8.25 SL=6.50 Picked on Aug 12th at $66.75 PE = 33 Change since picked +5.88 52 week low =$25.38 Analysts Ratings 4-5-1-0-0 52 week high=$74.38 Last earnings 06/99 est 0.49 actual 0.55 Next earnings 09/99 est 0.55 versus 0.41 Average daily volume = 935 K Chart = http://quote.yahoo.com/q?s=LXK&d=3m Software ******** SLR - Solectron $74.38 (+6.25) Solectron is a provider of customized manufacturing services to OEM manufacturers. Solectron's services encompass product design, systems assembly, software duplication and warehousing. Solectron's client base currently includes Hewlett-Packard, Cisco Systems and Mitsubishi. For the first 3 quarters of 1999's physical year, net sales rose 67% to $6.01 bln and net income expanded by 44% to $205.1 mln. These results reflect higher sales volume and the acquisitions of Ericsson, NCR and IBM's ECAT. SLR had tremendous positive momentum on Friday, along with the entire tech sector. SLR gained $4.13 to close at $74.38 with 1.26 mln shares changing hands. This stock has shown relentless positive momentum over the last two weeks. This is in-spite of the tremendous volatility we have seen due to interest rate uncertainty. On Friday, SLR broke through resistance from its old 52-week high and ended the trading session at a new 52-week high. We expect the momentum to continue for SLR. If we get good CPI numbers that propel market sentiment, SRL should continue to post new highs but use caution ahead of the report. Many stocks spiked higher on Friday, leaving us short of an entry point. The trick will be, if the CPI is good and market sentiment remains bullish, finding good entry points. We would like to see SLR pullback closer to the 10-dma at $68 before entering plays. There is some recent news appearing over the wires on SLR. On Friday, SLR finalized an agreement that was first announced last April with Trimble Navigation Ltd. This is an agreement to acquire a 55,000-sq-ft plant in Sunnyvale California. As of Friday SLR will assume all manufacturing responsibilities for global positioning systems as well as radio-frequency products over the next three year. Furthermore, it has be reported that most tech analyst's concur that the price for memory chips has bottomed out and stronger profit margins should follow into next year. The recent price declines are attributed to an oversupply of memory chips and has strongly impacted the profit margins of manufacturers. BUY CALL SEP-70 SLR-IN OI=264 at $11.13 SL= 8.75 BUY CALL SEP-75 SLR-IO OI=209 at $ 4.50 SL= 2.75 BUY CALL OCT-65 SLR-JM OI=241 at $12.50 SL=10.00 BUY CALL OCT-70 SLR-JN OI=133 at $ 9.00 SL= 6.75 Picked on Aug 24 at $74.38 PE = 68 Change since picked 0.00 52 week high=$ 74.75 Analysts Ratings 6-11-5-0-0 52 week low =$ 19.41 Last earning 06/99 est 0.29 actual 0.20 Next earning 09-13 est 0.32 versus 0.23 Average Daily Volume = 1.30 mln Chart = http://quote.yahoo.com/q?s=SLR&d=3m Internet ******** BVSN - Broadvision, Inc. $93.50 (+21.50) What happens when you develop great relationships? Chances are you make friends and doing business with friends is fun, secure, and long term. This is the business of BVSN. They provide Internet software applications that focus on business relationships. These application solutions address issues such as company business processes, secure online transactions, improving speed and performance and Internet communications. These solutions are directed specifically to a companies customers, employees and partners. Another key advantage of Broadvision applications is that they can integrate into a company's existing system. These software applications are finding great success in the e-commerce and financial markets which have attracted over 275 customers such as American Airlines, Ernst & Young, Fingerhut, Hartford, HWP, Oracle, Toyota and Visa, among others. With friends like these, you can see that Broadvision's strategies are working. Revenues grew 83% last year to $18.5M and the company is now in the earnings black at $2.9M. Here's a bull that shot out of the gate since earnings on July 23 and has almost been vertical since. Investors are hanging on for this ride! The stock did not even exhibit a post earnings pull-back and has continued to set new highs. What really impresses us with BVSN is the fact that through all the market correction when most Internet issues were 50% to 70% off their highs, this Internet stock did not ever break below it's 50-dma. The strong management team has turned things around and they are now even in positive earnings territory. The momentum and timing as of late has been very good and the recent gains have been confirmed on above average volume. BVSN has shown signs of staying power as it broke above the top Bollinger band but has continued up the following two days, another bullish sign for BVSN. Keep in mind with all this bullish news, that the last four days have been very strong and cycles tell us that we need to use caution and watch for a pull back. The current support sits at $80 from the 10-dma. Confirm direction and use the recent volatility to your advantage. It's not the news of late that is moving this company since there hasn't been much. There have been a few articles listing BVSN as a buy rating in investment opinions. In fact the last 5 analyst moves have been upgrades to a buy rating. BUY CALL SEP-85 QVB-IQ*OI=249 at $13.38 SL=10.50 BUY CALL SEP-90 QVB-IR OI= 0 at $1O.50 SL= 8.13 Fri vol=22 BUY CALL SEP-95 QVB-IS OI=223 at $ 8.38 SL= 6.33 Picked on Aug 15th at $93.50 PE = 241 Change since picked +0.00 52 week low =$ 9.25 Analysts Ratings 8-10-1-0-0 52 week high=$97.50 Last earnings 06/99 est 0.11 actual 0.12 Next earnings 10-22 est 0.13 versus 0.07 Average daily volume = 549 K Chart = http://quote.yahoo.com/q?s=BVSN&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 8-15-99 Sunday Part 3 of 6 CALLS CONTINUED *************** Internet ******** VRSN - VeriSign Inc $83.00 (+12.75) VeriSign provides Internet-based trust services that will authenticate and protect data so secure transactions and communications can be conducted over the Internet, intranet and extranets. Websites, enterprises, government agencies and even individuals use VeriSign's digital ID's (digital certificates) with the encrypted information as cyber- safeguards for such activities as e-mail, home banking and credit card transactions. Visa represents 14% of total sales. VRSN is a pure momentum play as day traders first pumped up the volume on August 5th and VRSN advanced $11.19! Some institutional buying has also contributed to VeriSign's recent comeback. However according to Stephen Sigmond, analyst for Dain Rauscher Wessels, a "top-tier Internet play like Verisign which is dominant in its market and on the verge of profitability, is the type of company that does the best when there's a rebound from a correction" and also added that VRSN is known for snapping back the hardest from a correction. In this spirit the stock made $17.55 in gains, a breathtaking 27% since Tuesday! These advances are certainly impressive, but it's also intimidating because just as quickly as this Internet can recover, so can it make corrections. Technically near-term support and the 10-dma indicator are both in the range of $70 and have been far surpassed. This is a VOLATILE INTERNET STOCK and after such gains you should expect some consolidation. We would prefer to get a pullback before entering new plays but if the momentum continues, use an intraday pullback to jump in. On Monday, VeriSign announced a partnership agreement with CoSine Communications, a leading provider of managed IP service delivery platforms. Together they will rapidly bring Network based VPN services to clients who don't want to build and manage their own PKI infrastructure, which is essential to having a Virtual Private Network. At the end of July, BBRS reiterated a "buy" rating for VRSN prompted by record 2Q results and Dain Rauscher Wessels upgraded the stock to a "strong buy aggressive". BUY CALL SEP-80 YVR-IP OI=455 at $11.50 SL= 9.25 BUY CALL SEP-85*YVR-IQ OI=225 at $ 9.13 SL= 6.75 BUY CALL SEP-90 YVR-IR OI=144 at $ 7.13 SL= 5.50 BUY CALL DEC-85 YVR-LQ OI= 45 at $18.13 SL=14.25 BUY CALL DEC-90 YVR-LR OI=325 at $16.38 SL=12.75 Picked on Aug 15th at $83.00 PE = N/A Change since picked +0.00 52 week high=$96.75 Analysts Ratings 5-6-3-0-0 52 week low =$ 9.69 Last earnings 06/99 est= -.02 actual= .00 Next earnings 10-22 est= .02 versus= -.09 Average daily volume = 1.15 mln. Chart = http://quote.yahoo.com/q?s=VRSN&d=3m Semiconductors ************** INTC - Intel Corp $79.75 (+8.19)(+2.56) 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. Intel got an added shot in the arm this week. The tech stocks got a boost after the "Beige Book" report from the Federal Reserve showed no signs of that nasty old "I" word. The report seemed to ease investor's worries that the Fed will raise interest rates at their upcoming meeting on August 24th or at least no raise again after that. Also lending a hand to the strength of the sector wide move was Cisco Systems. They reported earnings showing surprisingly strong fourth-quarter profits. Comments from Paine Webber suggesting a strong second half of the year for PC sales also added fuel to the fire for Intel. INTC jumped $4.25 on Wednesday after the news, making a new high at $76.25. Volume was extremely strong on the advance at 40.4 mln shares. Thursday and Friday it was back to business as usual for Intel as it forged ahead making a new high at $79.81 in the last 15 minutes of trading Friday which should be a positive sign going into next week. Volume did decline late in the week averaging just under 24 mln shares, not a negative but worth noting. We would like to have seen the volume remain solidly higher with the price extending as it did. What's in store for next week? Monday could be quiet with investors awaiting the release of the CPI numbers Tuesday morning. Most analysts are looking for the numbers to be in line with the PPI, confirming the lack of inflationary pressures. If it plays out that way, we would expect INTC to continue to make its way higher. We would be cautious about entering a new play in INTC until after the CPI numbers come out Tuesday. Move your stops up and have patience. In other news Paine Webber also raised its price target for Intel from $80 to $95. Citing the acceptance of the high end Pentium III processor and the belief that INTC may beat the third quarter estimates and come in near $0.58 per share. BUY CALL SEP-75*INQ-IO OI=13538 at $7.13 SL=$5.50 BUY CALL SEP-80 INQ-IP OI= 7935 at $4.00 SL=$2.75 BUY CALL SEP-85 INQ-IQ OI= 1170 at $1.88 SL=$0.75 BUY CALL OCT-75 INQ-JO OI=11663 at $8.50 SL=$6.50 BUY CALL OCT-80 INQ-JP OI=15690 at $5.75 SL=$4.50 Picked on July 31st at $69.00 PE = 38 Change since picked +10.75 52 week high=$79.81 Analysts' ratings 18-13-7-0-0 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 = 22.1 mln Chart = http://quote.yahoo.com/q?s=INTC&d=3m ***** LSI - LSI Logic Corp $58.88 (+5.50)(+3.00) LSI Logic Corporation designs, manufactures, and markets semi-conductor products specifically integrated circuits, and also storage systems solutions. Logic's central design process is CoreWare. This program enables a client to build a complete customized system on a single chip combining microprocessor, logic, and memory functions. They have global operations in Canada, Hong Kong, the UK, and the US. Primary customers are equipment manufacturers in computers, networking, telecommunications, consumer products, and storage systems. Sony Corp accounts for 12% of their sales. Specialized chip-maker LSI gained over 10% this week on strong trading volume. Except for the squeeze on Thursday when Merrill Lynch comments pummeled the PC sector and the chips ultimately fell in sympathy but the losses wouldn't last. For instance, take a look at the mother of all chip makers, Intel (a current play), and you can see its strong recovery too. LSI hit new 52-week highs four out of five days this week! The latest record was set during the last hour of trading on Friday. The stock spiked up and crested at $58.88, bullishly finishing smack on the daily high! This week support was established right around $54, which is just above the 10-dma of $51. Now if the hefty advances continue into next week's market, keep these points of reference in mind when planning your strategy. If the stock begins to consolidate, you'll want to see it stay above these levels and then bounce again before initiating a new position. In the news on Tuesday, Banc of America Securities started coverage for LSI with a "strong buy" rating. There was no other company specific news to affect trading. BUY CALL SEP-50 LSI-IJ OI=1698 at $10.25 SL=7.75 BUY CALL SEP-55*LSI-IK OI=1110 at $ 6.25 SL=4.50 BUY CALL SEP-60 LSI-IL OI= 74 at $ 3.88 SL=2.50 Low OI BUY CALL OCT-55 LSI-JK OI= 577 at $ 7.88 SL=6.25 BUY CALL OCT-60 LSI-JL OI= 722 at $ 5.25 SL=3.50 Picked on Aug 8th at $53.38 PE = N/A Change since picked +5.50 52 week high=$58.88 Analysts Ratings 10-5-3-0-0 52 week low =$10.50 Last earnings 07/99 est= N/A actual= .21 Next earnings 10-21 est= .29 versus= .14 Average daily volume = 1.79 mln. Chart = http://quote.yahoo.com/q?s=LSI&d=3m ***** TXN - Texas Instruments $150.31 (+7.81)(-1.50) TXN sold its defense electronics and memory chip units almost 2 years ago to focus their digital signal processor business. TXN is the world's largest supplier of DSP's, commanding over 45% of the segment. You will find them in over half the world's cell phones, modems, cars and camcorders to name a few items. In addition, they manufacture microcontrollers, microprocessors and analog and logic chips. Only one third of its business is in the U.S. 75% of its revenues is derived from semiconductor sales. TXN splits Monday after the close so our play is quickly coming To an end. Shares of Texas Instruments bounced off its 50-dma at $137.63 on Tuesday and began our anticipated split run. TXN opened $2.75 higher Wednesday morning and didn't look back. We had positive economic data released Wednesday which gave renewed strength to the semiconductor industry. The industry stalled somewhat after Wednesday due to some negative analyst comments from Merrill Lynch, however TXN continued its march to higher ground. Technically TXN looks very strong as the MACD and Stochastics have both turned positive now that we are past the recent decline. However with the stock splitting after the close of business on Monday we can't recommend holding on to TXN into Tuesday's trade. We can only suggest you pay close attention to the action on Monday and exit the play prior to Monday's close. IF we don't get a post split depression and the semiconductor industry remains strong following the release of the CPI numbers Tuesday, we will keep our eye on TXN for new opportunities. Again plan to exit the play some time on Monday. There is no other news at this time. BUY CALL SEP-145*TXN-IW OI= 431 at $11.50 SL=8.75 BUY CALL SEP-150 TXN-IV OI= 602 at $ 8.75 SL=6.75 BUY CALL SEP-155 TXN-IX OI= 164 at $ 6.88 SL=5.25 BUY CALL OCT-150 TXN-JV OI=1586 at $12.50 SL=9.75 BUY CALL OCT-155 TXN-JX OI=4767 at $10.38 SL=8.00 Picked on Aug 5th at $139.63 PE = 67 Change since picked +10.69 52 week high =$155.68 Analysts Ratings 13-9-6-1-0 52 week low =$ 45.38 Last earnings 07/99 est 0.86 actual 0.92 surprise = 6.9% Next earnings 10-20 est 0.85 versus 0.41 Average daily volume = 2.51 mln. Chart = http://quote.yahoo.com/q?s=TXN&d=3m Telecom/Communications/Networking ********************************* MMCN - MMC Networks $49.88 (+9.38) MMCN is in the computer peripherals sector. The company develops and supplies network processors. These high- performance, software-programmable processors form the core silicon engines of LAN and WAN switches and routers. The PS1000 for Fast Ethernet networks, or the ATMS2000 for asynchronous transfer mode networks and the AnyFlow 5000 modular processors for network flexibility are some of the company's products. Although most of MMCN's sales come from within the US, the company also operates in Asia, Europe, the Middle East and North America. Investors added MMCN to their lists of stocks to buy this week. With the release of positive economic data and the wall of worry concerning interest rates crumbling somewhat, MMCN gained over 23% this week. Since releasing earnings in the middle of July, MMCN had lost ground and since has been consolidating in the $38 to 42 area. Wednesday that all changed with the release of the "Beige Book" from the Federal Reserve and the release of strong fourth quarter results from their top customer CISCO Systems. Since Wednesday MMCN has gained $10.94, closing at its high of the day Friday at $49.88. MMCN is closing in on its 52-week high of $51.50 and is being supported by strong volume. Volume the past three days has averaged over 1.10 mln shares or more the double its normal days business. The CPI is due out Tuesday morning and is expected to reflect the same as PPI with little or no inflation, giving us little need to worry about interest rates at least for the immediate future. We expect MMCN to continue it's move higher given the strength of the recent move. Monday may be quiet with perhaps a small amount of profit taking. On Tuesday if the economic data remains positive we are looking for MMCN to continue its recent ascent on its old high. Do make sure you check the action in the broader markets and the CPI numbers before initiating a new play in MMCN. As always, assess your risk profile and set your stops accordingly. Earlier this week MMCN received an upgrade from AG Edwards to a buy rating and was reiterated a buy from analyst Alvin Kressler at Kaufman Brothers. Both companies raised their price target to $60 per share. MMCN also announced they had formed a partnership with Lara Technology to develop highly coupled search engine and network processor solutions. BUY CALL SEP-40 CMQ-IH OI=30 at $10.63 SL=$8.25 BUY CALL SEP-45 CMQ-II OI=37 at $ 7.00 SL=$5.50 BUY CALL SEP-50*CMQ-IJ OI= 9 at $ 4.50 SL=$3.25 BUY CALL OCT-50 CMQ-JJ OI=12 at $ 5.88 SL=$4.50 BUY CALL OCT-55 CMQ-JK OI= 3 at $ 4.25 SL=$3.00 Picked on Aug 14th at $49.88 PE = 125 Change since picked 0.00 52 week high=$51.50 Analysts Ratings 4-7-1-0-0 52 week low =$ 7.75 Last earnings 6/99 est 0.11 actual 0.12 surprise=+9.09% Next earnings 10-15 est 0.13 versus 0.09 Average daily volume = 471 K Chart = http://quote.yahoo.com/q?s=MMCN&d=3m ***** NOK - Nokia Corporation $85.75 (+4.06) Nokia is a supplier of telecommunications systems & equipment. Its core businesses include the development, manufacture & delivery of operator-driven infrastructure solutions and end- user-driven mobile phones. Having caught the Web wave, Nokia also offers phones with Internet access using wireless application protocol. What a comeback! And the question is will it continue? With the help of lower than expected PPI numbers, the tech-heavy NASDAQ Composite Index surged 85.67 to 2635.16 on Friday, its fourth-largest point gain ever. In connection with the surge in the Nasdaq, our new play, NOK couldn't help but join in on the festivities. Turning around from its low for the month on August 4 at $78.75, the stock has climbed its way back to its 50-dma. We expect the stock to breakthrough its 50-dma and continue its climb toward $95, its next resistance level. This rally is based on the fact that many sidelined investors finally found a reason to get back into the market with Friday's rally and many are headed back into telecoms like Nokia. Keep in mind there is more important economic information that will be released on Tuesday when CPI numbers will be announced. Because of these unknowns and a volatile market, use caution during this play and make your trades accordingly. We would not recommend any new plays until NOK breaks firmly above the 50-dma at $86.50. There was some good news about NOK was on August 12. For the second year in a row, the editors of Industry Week magazine have named Nokia one of Industry Week's 100 Best Managed Companies worldwide. Winning companies were evaluated for growth in profit-margin, sales-turnover, revenues, inventory- turnover, profits, profit margin, leverage, return on assets, return on equity, total revenues, earnings per share and net income. BUY CALL SEP-80*NAY-IP OI= 149 at $8.88 SL=6.50 BUY CALL SEP-85 NAY-IQ OI= 577 at $5.63 SL=3.75 BUY CALL SEP-90 NAY-IR OI= 356 at $3.50 SL=1.75 BUY CALL OCT-85 NAY-JQ OI=2309 at $7.38 SL=5.50 Picked on August 14 at $85.75 PE = N/A Change since picked 0.00 52 week low =$29.53 Analysts Ratings 10-6-1-0-0 52 week high=$99.38 Last earnings 06/99 est 0.49 actual N/A Next earnings 10-21 est 0.50 versus 0.49 Average Daily Volume = 2.8 mln Chart = http://quote.yahoo.com/q?s=NOK&d=3m ***** NXLK - Nextlink Communications $97.63 (+14.13)(-28.63) Nextlink communications provides local facilities-based telecommunication services with a focus on delivering switched services to commercial customers. They compete with some big names such as US West, Bell Atlantic, and SBC Communications. Providing services in 38 major U.S. markets, NXLK offers access services to long-distance carriers and automated call centers. They build fiber-optic rings in cities to provide local and long-distance phone service mainly to smaller businesses. How high can it bounce? Shares of Nextlink stock rebounded $14.13 this week from the free fall of the previous week of $28.63. For you technical types that's a retracement of about 50%. After making a mid-week low of $77.00, buyers decided that the little guys may have a chance after all. As one analyst remarked, the recent sell-off of NXLK stock seemed to be overdone and completely unwarranted. Analyst Micheal Renegar of Banc of America Securities said "Investors had a Sell-first-and-figure-out-the-news-later mentality." The release Friday of the positive economic data concerning inflation and interest rates seemed to be just what the doctor ordered for NXLK. Nextlink jumped over $20 per share from its Wednesday low to a high of $97.94, closing near the high at $97.63 on Friday. Volume was a little better than normal, averaging about 665K per day Thursday and Friday. This leads us to believe that at this point the recovery is bounce and not yet a and not a change of trend. As long as inflation and interest rate scenario remain in check NXLK could continue its upward movement. Many of the smaller local phone exchanges are very capital intensive and need huge amounts of financing, which is why interest rates can have such a large influence on the price of their stock. It's hard enough for them to compete against the "big boys", and higher interest rates make it that much harder. For the week ahead, it's a mixed bag. We are awaiting the release of the ex-date for the 2:1 split which looks like it should be around August 27th, which gives credence to a split run and a continuation of higher prices. Although technically, the recent bounce may be a bit overdone and we could see NXLK pullback to the $90-92 area. However, Tuesday brings us the release of the latest CPI numbers which should confirm the lack of inflation or the need to raise interest rates. If that's the case NXLK could continue its assault back to higher ground. If we do get a pullback, WAIT for a bounce with good volume before considering a new play. If you are in a current play, move you stops up to protect your profits, and wait for the numbers. There is no other news at this time. BUY CALL SEP- 95 QNF-IS OI= 53 at $10.25 SL=$8.00 BUY CALL SEP-100*QNF-IT OI=190 at $ 7.88 SL=$6.00 BUY CALL SEP-105 QNF-IA OI= 20 at $ 6.13 SL=$4.75 BUY CALL OCT-100 QNF-JT OI= 64 at $11.13 SL=$8.75 Picked on Aug 7th at $83.50 PE = N/A Change since picked +14.13 52 week high=$115.38 Analysts' ratings 8-2-3-0-0 52 week low =$ 10.56 Last earnings 6/99 est-2.41 actual -2.24 surprise=+7.05% Next earnings 10-22 est-2.61 versus -1.57 Average daily volume = 598 K Chart = http://quote.yahoo.com/q?s=NXLK&d=3m Drugs/Biotechnology ******************* HGSI - Human Genome Sciences, Inc. $60.13 (+0.12)(-0.37) If you think there are a lot of Jeans on the market (Levis, Guess CK etc.), wait until you see what HGSI is discovering. The company started in 1992 and has a passion for discovering Genes; only, Human genes. Since their inception they have Been first in the discovery of many of our genes, over 6,300. The great thing is that they then use this knowledge and apply it to form gene and protein based medications and treatments. This is exciting technology and tends to bring us full circle! HGSI just may be the ones to show us that the answers to our medical problems actually do lie within us. The company already has three of their products undergoing human clinical trial. These products hope to aid in vascular regeneration, treatment of breast and ovarian cancers, tissue repair and more. This appears to be a very promising company, that will be able to provide natural solutions to humanity. Is this the calm before the storm or a fishing trip we're on? In either case, it appears patience and waiting are the keywords. There hasn't been anything to move HGSI this last week. That being the case, our trade momentum on the stock remains above average but is deteriorating every day we experience these lulls. This is somewhat characteristic as shown on a daily chart. We see periods of range bound trading, followed by brief and significant rallies. It's during these light periods that we still notice increased daily activity during amateur hour in the morning and during the last hour. For the time being, our resistance level is looking to be around $61 with support at $58. Watch your August positions closely! As we sit here waiting for a move, our options are like ice in the water, slowly melting away to nothing. So protect yourself and keep your stops set tight, especially if you have any August positions. We want news! We want news! After reviewing the sources, there is not much to be found that hasn't already been reported. As mentioned earlier, news is what will move us either up or down on this stock. Again, it's only a matter of time until some more positive gene news comes so hang in there. BUY CALL SEP-55*HQI-IK OI=41 at $8.13 SL=5.88 BUY CALL SEP-60 HQI-IL OI=56 at $5.00 SL=3.75 BUY CALL OCT-55 HQI-JK OI=17 at $9.50 SL=7.25 BUY CALL OCT-60 HQI-JI OI=32 at $6.75 SL=5.25 Picked on Aug 8th at $39.63 PE = N/A Change since picked -0.38 52 week low =$22.75 Analysts Ratings 1-3-2-0-0 52 week high=$64.25 Last earnings 05/99 est -0.20 actual -0.10 Next earnings 09/99 est -0.30 versus -0.09 Average daily volume = 356.1K Chart = http://quote.yahoo.com/q?s=HGSI&d=3m ***** VISX - Visx Inc $95.50 (+5.69)(-11.00) Visx is engaged in the design, marketing, and sales of its Star S2 excimer laser correction unit. This was the first FDA approved laser eye surgery machine that is used to correct near-sightedness, astigmatism, and far-sightedness. Surgeons who correct other defects and diseases of the cornea in an outpatient procedure also use this machine. VISX is coming off a strong week and it has caught the attention of our researchers as a viable call play. The stock was up strong on moderate volume on Friday. VISX ended the trading session right at its daily high of $95.50, which is considered a bullish sign. VISX seems to have positioned itself for a strong rebound and after losing some momentum the last two weeks. The reason for the drop was more than just the broad market decline. There were rumors that the price of the laser machine may be dropping to increase sales. The initial reaction by investors was not good but after a review of the numbers by the analysts, it appears that more sales could actually increase profits. There are no present signs of slowing its positive momentum and SG Cowen has upgraded the stock to a strong buy. Expect a health surge in the stock if economic data next week promotes the bullish market sentiment. BancBoston Robertson Stephens (BBRS) senior medical analyst Wade H. King restates his buy rating for VISX. Mr. King feels there is no comparable growth and investment opportunity today in the medical device industry. Furthermore, BBRS is advising investors that any deflation in the price of VISX should be viewed as a buying opportunity and should be acted upon swiftly. BUY CALL SEP-90 VFS-IR OI=1167 at $10.00 SL=7.50 BUY CALL SEP-95 *VFS-IS OI=1086 at $ 7.50 SL=5.75 BUY CALL SEP-100 VFS-IT OI= 501 at $ 5.25 SL=3.50 BUY CALL SEP-105 VFS-IA OI= 431 at $ 3.75 SL=2.50 Picked on Aug 13 at $95.50 PE = 81 Change since picked 0.00 52 week high=$103.88 Analysts Ratings 6-3-2-0-0 52 week low =$ 10.50 Last earning 07/99 est 0.32 actual 0.15 Next earning 10-14 est 0.33 versus 0.16 Average Daily Volume = 1.85 mln Chart = http://quote.yahoo.com/q?s=VISX&d=3m Oil Services ************ SLB - Schlumberger Limited $65.25 (+1.94) Schlumberger is one of the world's largest and most diversified oil services firms, operating in more than 100 countries. Its Oilfield Services unit provides practically everything needed for finding oil, including interpreting seismic data, drilling rigs and services, wireline logging, constructing wells and project management. Its Measurement & Systems unit, which makes smart cards and other measurement and transaction systems, is a world leader in gas, water, and electric meter manufacturing. As oil prices continue to rise so does the potential for our current play on SLB. Oil prices ended a busy week with a climb to a 22-month peak Friday at $21.67 a barrel, extending a six-month rally fueled by shrinking crude and gasoline supplies in the U.S. Despite this great news, when the Labor Department released the lower than expected figures for the PPI on the same day, many investors decided to leave this safe haven and jump into the beaten tech sector. Even though the tech sector had their day, with the price of oil reaching new highs and inflationary uncertainty within the market, we feel Schlumberger's stock price has room to grow, hopefully surpassing its high of $68.50 it set on August 12. Please use caution on the play because the Labor Department will release the CPI numbers on Tuesday and, like on Friday, it could effect our play. There was no new news reported on SLB for Friday but just to reiterate Wednesday's news, Bear Stearns initiated coverage on SLB at a buy rating. BUY CALL SEP-65*SLB-IM OI= 824 at $3.50 SL=1.75 BUY CALL SEP-70 SLB-IN OI=2915 at $1.44 SL=0.75 BUY CALL NOV-65 SLB-KM OI=3922 at $6.00 SL=4.25 BUY CALL NOV-70 SLB-KN OI=8683 at $3.75 SL=1.75 Picked on Aug 10th at $66.38 PE = 76 Change since picked +1.13 52 week low =$40.06 Analysts Ratings 7-9-8-1-0 52 week high=$68.50 Last earnings 07/99 est 0.25 actual 0.63 Next earnings 10-22 est 0.26 versus 0.13 Average daily volume = 3.2 mln Chart = http://quote.yahoo.com/q?s=SLB&d=3m ******************************* PLAYS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE *******************************
The Option Investor Newsletter 8-15-99 Sunday 4 of 6 CALLS CONTINUED *************** Electronics *********** SNE - Sony Corp $129.44 (+9.44)(-5.19)(+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. Last week we said Sony was poised to spring higher and it did not despite us. It was one of the few stocks that was moving up since Monday and therefore was in a great position when the market started to move on Wednesday. We had lots of positive news to help fuel the stock as well, starting with an upgrade from Merrill Lynch. They raised their price target for SNE due to cost-cutting efforts and restructuring that will help the company's bottom line. There was also a report on Thursday that Sony will work with Nippon Zeon to develop plastic disks for computer hard drives which helped drive the stock but the good news doesn't end there. Friday morning Sony had a press release stating they would start selling music on the Internet in Japan. The new site would feature music from Japan's top producers and singers. So what do you get if you combine all this news together? A new 52-week high! It broke above the old high of $126.88 on Friday and closed at $129.44, just under the day-high. These are all bullish signs but it will be interesting Monday to see if the market can hold its gains. Don't commit to any new plays if the market seems jittery. We mentioned all the pertinent news above but wanted to expand on the plastic hard drive news. The press release states that the cost of making plastic disks with a storage capacity of five gigabytes would be 30 to 40 percent lower than other conventional aluminum disks. SNE is in talks with Castlewood Systems Inc, among others, on commercialization of hard disk drives using plastic based disks. Leave it to Sony to find a better and cheaper way to improve electronic products. BUY CALL SEP-125*SNE-IE OI= 58 at $ 9.13 SL=6.75 BUY CALL SEP-130 SNE-IF OI= 22 at $ 6.13 SL=4.25 BUY CALL OCT-125 SNE-JE OI= 74 at $11.38 SL=9.00 BUY CALL OCT-130 SNE-JF OI=325 at $ 8.63 SL=6.50 Picked on July 2nd at $125.19 P/E = 30 Change since picked +4.25 52-week high=$129.50 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 **************** AMR - AMR Corporation $61.88 (-0.06)(-2.94) American is the #2 airline in the United States behind UAL's United Airlines. AMR is a leader in air transportation, in the development and application of information technology for aviation, and travel and tourism. American serves about 180 destinations in the Americas and Europe with hubs in Chicago, Dallas/Fort Worth, Miami, and San Juan, Puerto Rico. They offer a wide range of other aviation-related activities, including management services, training and consulting. AMR also provides commuter service through American Eagle and owns Reno Air, which operates primarily in the western US. AMR has a busy week and month ahead as they continue to try and iron out problems with their pilots. They will go back to bargaining table again this week to try to settle the issue of pay for Reno Air pilots. Reno Air is the company they have agreed to buy in a transaction listed to settle at the end of the month but a deal needs to be struck first. The problem is AMR pilots get paid double that of Reno Air so management is left to try and incorporate a new salary plan to make both sides happy. This event should take center stage this week and we will be watching for headlines that affect our play. The other main event is the continual rise in oil prices. It closed the week just under $22 a barrel or double what it was just seven months ago. This is the catalyst that caused AMR to drop through the 200-dma a week ago. The stock has rebounded and is trying to claw its way back above this key support line but the light volume is signifying that investor interest is just not there. So watch for confirmation that the stock does roll over after hitting the 200-dma and consider this a possible entry point. Also don't forget your stops in case there is a surprise announcement concerning labor talks. BUY PUT SEP-65*AMR-UM OI= 94 at $4.88 SL=3.25 BUY PUT SEP-60 AMR-UL OI=214 at $2.44 SL=1.25 Average Daily Volume = 940 K Chart = http://quote.yahoo.com/q?s=AMR&d=3m **** DH - Dayton Hudson Corp $59.75 (+1.38)(-6.31) Dayton Hudson is a general merchandise retailer. Presently, they operate 851 Target's, 268 Mervyns, and 63 other department store locations throughout the US. DH also has a catalog unit, Dayton Hudson's Rivertown Trading and an apparel supply unit, Associated Merchandising. However, Target is the force behind the corporation and accounts for over 75% of total sales. Overall, the prospect of another interest rate increase at the FOMC meeting on August 24th coupled with the potential of rising consumer prices put a damper on the retail sector this past week. However, the lower-than-expected PPI data presented a bullish sentiment on Friday and the broad markets rallied strong. Let's take a look at the stock's position from a technical standpoint. The 200-dma at $60 has established itself as overhead resistance and bottom support has formed around $58. For the most, part DH has been channeling in this range since a week ago Thursday. Using this information, it'd be best to see the stock drive through $58 before beginning a new play. Plus consider two important events that occur this Tuesday. First, Dayton Hudson will report earnings which are expected to be strong so look out for a spike upwards. Second is the CPI numbers which will show if inflationary costs are being passed to the consumer. Remember the PPI data was lower-than-expected altogether, yet the housing sector indexes rose and this is an underlying concern. A conservative player will likely wait and see how the hand plays out before opening any new positions. BUY PUT SEP-60*DH-UL OI= 37 at $3.38 SL=1.75 BUY PUT SEP-55 DH-UK OI=115 at $1.38 SL=0.75 Average Daily Volume = 1.54 mln Chart = http://quote.yahoo.com/q?s=DH&D=3m **** TAN - Tandy Corp. $43.81 (-0.88)(-6.63) They are one of the leading electronic retailers in the U.S., with over 7,000 company-owned or franchised RadioShack stores. They compete with the likes of Best Buy, Circuit City and CompUSA. Tandy stores sell electronic parts, audio and visual equipment, cell and conventional phones, computers and a vast array of batteries and antennas. They have added the concept of a "store-within-a-store" by bringing in products like Compaq computers, Sprint phone products, and RCA electronics. In an attempt to keep the black in their bottom line, Tandy has sold their unprofitable electronic chains, Incredible Universe, McDuff and Computer City chains. Has Tandy put in a bottom yet? We don't think so. The recent bounce after Tuesday's low of $37.38, we believe, is just that a bounce. Tandy has dropped over 34% since its high of $56.75 made on July 13th. It is not unreasonable to expect a bounce back to resistance from its recent low. Since being picked TAN has given us the opportunity to make a small profit but a profit none the less. We are now waiting for our next chance. The overall trend though is still down. Currently Tandy's stock is in a 'What have you done for me lately mode.' The answer is nothing! Sales are still soft. They are trying to recoup from the losses connected to the sale of their Computer City chain. They do have potential on the horizon which may bring the electronic retailers back in favor with analysts and investors. Their merger with Amerilink Corp took effect July 30th. Amerilink is a leading provider of installation and cabling services. This move will enhance Tandy's opportunities in the home-connectivity arena, however that is in the future. Currently we are patiently waiting for TAN to make its next move south. TAN did move up to its 10-dma at its high Friday of $44.81. The next area of resistance is in the$46-$47 area. Look for TAN to meet resistance and resume its downward movement. Consider a new play in TAN if this move is accompanied by better than average volume. Be careful, option open interest is very low! BUY PUT SEP-40 TAN-UH OI=45 at $1.19 SL=$0.50 BUY PUT SEP-45*TAN-UI OI=13 at $3.50 SL=$2.25 Average daily volume = 1.04 mln Chart = http://quote.yahoo.com/q?s=TAN&d=3m **** TBH - Telebras $74.38 (+0.38)(-2.38) Telebras is a holding company for the telecommunications sector in Brazil. In essence, it is the AT&T of Brazil. However, as a foreign Corporation, TBH trades in American Depositary Receipts (ADR). An ADR is a share of ownership of a foreign-based company held in a vault of a U.S Bank that entitles shareholders to all dividends and capital gain. In September 1998, the company spun off its telecommunications business into 12 new holding companies. ADR's represent ownership in all 12 companies. TBH was up $1.63 on Friday to close out the week at $74.38. Volume today was slightly below average with 1.46 mln shares changing hands. There was limited news released on TBH today but it is a safe assumption to project negative momentum by traders in anticipation of Tuesday's release of the CPI. TBH has still not penetrated its ten day moving average and will not likely do so on Monday. If CPI data on Tuesday comes in below expectations, it would be prudent to use caution on TBH. In fact, your stops should be set tight to take you out of the play on any rally over $75. However, if the CPI does show signs of undermining the bullish momentum that the markets experienced on Friday, we should be in good shape. TBH has still performed poorly relative to the market and is showing signs of further weakness. BUY PUT*SEP-75 TBH-UO OI=1493 at $4.50 SL=2.75 BUY PUT SEP-80 TBH-UP OI=1607 at $7.63 SL=6.25 Average Daily Volume = 1.77 mln Chart = http://quote.yahoo.com/q?s=TBH&d=3m **** U - USAir Group Inc. $32.75 (+0.31)(-3.19)(-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. For the first time in six weeks U has ended the week higher, although not by much. The stock dipped down to $30.63 by mid week before rebounding with the market to end up fractionally. For some it may have triggered your stops to exit the play but we are not ready to concede any future plays on U. The reasoning is simple. USAir rallied with the markets based on the benign inflation and improving overall sentiment. In reality it was more likely to continue dropping based on oil prices which closed near $21.84 on Friday. That is the high close for the week, month, year, etc. This has to be unsettling to the airlines which will have higher fuel costs. We also get the sense that the Dow Transport rally late in the week was more of a technical bounce from the drop it took at the start of the week. So look for an entry point on USAir as it heads down from the 10-dma at $33. The stock has failed to hold above that mark in over a month. Keep your eye on the price of oil as well since it will dictate the direction of the airline sector. BUY PUT SEP-35 U-UG OI=245 at $4.25 SL=2.50 BUY PUT SEP-30*U-UF OI=499 at $1.50 SL=0.75 Average Daily Volume = 859 K Chart = http://quote.yahoo.com/q?s=U&d=3m ****************************** PUTS CONTINUED IN SECTION FIVE ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 8-15-99 Sunday 5 of 6 NEW PUTS ******** AHP - American Home Products $40.88 (-4.00) AHP is engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in 3 business segments: Pharmaceuticals, Consumer Health Care and Agricultural products. Among AHP's products is an estrogen replacement drug Premarin and such familiar consumer products as Advil, Robitussin, and Preparation H. AHP also owns a majority stake in biotech firm Immunex Corp. American Home Products has seen better times, even last weeks rally in the market was not enough to help this wounded stock. These wounds derived from recent lawsuits against the company involving Pondimin and Redux, dietary supplements used to help individuals loose weight. Several people that have used of these drugs claimed it caused heart valve damage, and are now seeking restitution. About 20 of the cases have been settled out of court already, however, about 4000 lawsuits have been filed against the company. With such bad news, can you blame the stock for being as depressed as it is? Since its high in April at $70.25, AHP has continued a downward trend ending Friday near its 52-week low of $40.50. The stock continues to fall further below its 50 and 200-dma, which is not a good sign. We expect this downward trend to continue as the lawsuits persist, however, do use caution on this play because the stock has taken such a beating. Look for an entry point once the stock has fallen below the $40 range. BUY PUT SEP-40 AHP-UH OI= 246 at $1.75 SL=1.00 BUY PUT SEP-45*AHP-UI OI=1032 at $4.75 SL=2.75 Average Daily Volume = 6.20 mln Chart = http://quote.yahoo.com/q?s=AHP&d=3m **** ATHM - Excite@home $37.00 (-5.56) ATHM was formed with the combination of two Internet power houses, Excite and AtHome. They merged in the Spring of 1999. The combined entity uses cable TV systems to provide high- speed Internet access to consumers and businesses and operates the Excite Internet portal. The Company's primary offering, the @Home service, allows residential subscribers to connect their personal computers via cable modems to the Company's new high-speed Internet. They market their services to over 500,000 customers and has 15 million visitors to the Excite site monthly. The portal features search services, online shopping, and content on topics such as careers and travel not to mention e-mail, voice mail and fax messages. The rally was no relief to AtHome as rumors circulate that AT&T is talking about allowing AOL to have greater access to AT&T's networks. This would diminish the role ATHM would play for AT&T. The news broke on Monday in a New York Times article that cited "executives close to the companies." Speculation has swirled for months that AT&T might be shopping around but this is the first news that an alliance is in the works. AT&T reiterated its commitment to ExciteAtHome Corp. and denied that it was in talks for a deal with Internet leader America Online. AT&T Corp.'s race to wire America with fast Internet service over cable lines is quickly turning into the Web's most complicated business deal. AT&T is spending $120 billion to buy cable TV lines, in large part to offer speedy Web hook- ups to customers all over America. Needless to say this is far from over. We are adding ATHM as a put play due to its poor relative performance this week. The stock should retest the lows set earlier in the week at $33. Watch for an entry point and expect more volatility. BUY PUT AHQ-UH*SEP-40 OI=2477 at $6.00 SL=4.25 BUY PUT AHQ-UG SEP-35 OI= 640 at $3.13 SL=1.50 Average Daily Volume = 7.57 mln Chart = http://quote.yahoo.com/q?s=ATHM&d=3m COMBOS ****** Markets Rally On Tame PPI Report.. U.S. stocks staged a broad based recovery Friday on the news that a key inflation gauge rose only modestly in July. While experts on the street anticipate the Federal Reserve will raise interest rates at its August 24 meeting, investors were cautiously subdued after the announcement with new expectations of nothing more than a small future increase. The Dow ended 184 points higher at 10,973 and for the week, it was up 260 points. The Nasdaq index jumped 85 points to close at 2,635. In the broader market, advancing issues beat decliners by a 2-1 margin on moderate volume of 694 million shares on the NYSE. The benchmark 30-year Treasury bond rose more than a point and its yield, which moves in the opposite direction to the price, fell to 6.09%. This week's new plays (positions/opening prices/strategy): Nielsen Media (NMR) SEP25C/SEP30C $3.12 debit bull-call J.P. Morgan (JPM) SEP140P/130P $8.00 debit bear-put Intl. Paper (IP) OCT55C/AUG55C $1.75 debit calendar Dupont (DD) LJAN80C/AUG80C $0.00 debit LEAPS/CC's Dupont (DD) was the only unavailable position in Tuesday's new plays. The stock price opened down $1.75 and the premiums for the AUG-$80 call options quickly evaporated. Portfolio plays: Some good news finally arrived Friday as the Producer Price Index came in below expectations and softened investor's fears that the recent climb in crude prices would push the key inflation measure higher. Despite the tame overall and core price readings, experts remained convinced the Fed will boost interest rates at its next meeting to head-off future inflation. The real issue is whether or not the Federal Reserve will follow up on any August increase with another move at its subsequent meeting in October. Regardless of future interest rate moves, today was nice change of pace from the recent trend. With a renewed investor interest, many of our slumping long-term positions moved back into their previous trading ranges and a few of the previously closed (to limit losses) plays are now profitable. Here is a brief synopsis of the spreads/combos portfolio by category: Calendar spreads: The week-ending rally moved many of our horizontal positions back to the sold strike prices (the area of maximum profit). The best performing plays in this group are Baker Hughes (BHI), 3Com Corp (COMS), Cisco (CSCO), IMC Global (IGL), International Paper (IP), Newmont Gold (NEM) and Unocal (UCL). Our star performer in this portfolio was Macromedia (MACR), which gapped up $3.31 to finish at $35. There were also a few bearish positions that we closed earlier in the week to lock-in profits (or limit losses). Those plays included HealthSouth (HRC), Intimate Brands (IBI), Ralston Purina (RAL) and Apria Healthcare (AHG); which made a nice rally on Thursday to let us exit with a small consolation bonus. The diagonal spread on AtHome (ATHM) was moved forward into September with a $1.00 credit against the overall cost basis. Credit Spreads: Costco (COST) was a big mover during the week, climbing to a high near $77 on Thursday, and allowing us to close the position at a debit of $1.12. They rest of the credit positions are comfortably OTM and we expect them to finish profitably. Debit Spreads: Many of the August debit plays were closed previously but today's rally did provide us the opportunity to roll the Cyberian Outpost (COOL) position into September with a $10 covered-combo. The new cost basis is $8.50. One position that we are watching closely is the J.P. Morgan (JPM) bear-put spread. The stock price moved up to the $130 range on the positive (PPI) economic report. Neutral Positions: We managed to trade out of the bearish position on British Telecom (BTY) for a small loss ($2.00) during the week but today the stock gapped up $5 to finish just below $160. With our luck, it will now move back into the previous range near $170 (Murphy's Law). Robert Half (RHI) and Gaylord Entertainment (GET) were also closed early to limit losses with the time-to-expiration approaching one month. Our debit butterfly on Torchmark (TMK) is trading at a 100% profit and the probability of a higher return at expiration next Friday is excellent. Long-Term Plays and LEAPS/Covered-Calls: Most analysts are convinced that today's rally was simply a short term technical bounce and with a rate increase expected next week, we decided to roll forward some of our bullish time spreads into September. The best performers in this group were Solectron (SLR), Sun Microsystems (SUNW), Johnson & Johnson (JNJ), Medtronics (MDT) and General Motors (GM). A complete list of the current positions will be published after the monthly expiration next Friday. Good Luck! ****************************************************************** - NEW PLAYS - This week, the spreads/combos editor is attending the "Money Show" in Seattle, Washington. There will be no "New Plays" until next week but this is an excellent opportunity to publish another educational narrative on spread and combination trading. ****************************************************************** Today we will begin a discussion on the techniques of stock index spreaders and the mechanics of intra-market arbitrage. Before we begin, it is important to understand that the spreader's trading philosophy differs from the hedger's because the spreader never assumes a position in the underlying instrument; rather he tries to combine a long contract with an offsetting short contract to achieve profits on market price differences. First, About Indexes.. Stock indexes are portfolios which are composed of many different company's shares. Different indexes have different values because of the composite shares' performance and the way they are weighted in the index. The S&P 500 Index for example, is a value weighted combination of 500 different companies, representing approximately 80% of the value of all the shares traded on the New York Stock Exchange. Each company's weight in the index is determined by its relative market importance and their values are then computed by multiplying each company's number of outstanding shares of common stock by the share's current cash market price. These values then are summed and compared to a 1941-1943 base period to determine the final cash value. The cash market values of the S&P 500 Index represent the interaction between a market-wide rate of return and the average growth rate in earnings (and dividends) and will accurately reflect the overall market supply and demand factors. And Now The Futures.. In addition to acting as general market indicators, indexes have been widely adopted as underlying instruments for futures. The underlying interest may be anything from grain to gold and silver or Treasury bonds. In the case of a futures contract, the seller agrees to provide an underlying commodity (or instrument) at a specified price and time while the buyer of the futures contract agrees to buy the product on the same terms. Historically, the need for futures grew out of America's agricultural economy of the early 1900's. Farmers would agree to sell their crops, when harvested, at some specific future date, at a profitable price. Speculators would purchase these contracts with the expectation of reselling the crops at even higher prices, thereby making a profit for themselves. In addition to market speculators, food processors and wholesale manufactures would purchase futures to guarantee the cost of raw materials for future production. In time, the futures contract has become a trading vehicle of its own and it is now offered on a host of underlying interests, including stock indexes. The problem with index futures is the actual delivery of the underlying instrument in the event the seller decides to "exercise" the contract. In reality, only a small percentage of futures are exercised, so physical delivery is not likely. Nevertheless, when a contract is exercised, the seller's duty is to deliver the commodity; wheat, orange juice, or pork bellies etc.. to the buyer. In the case of an index future, cash is the actual method of payment. The most common index futures traders in the market today are institutions (insurance companies, banks, and brokerage firms) that need to protect large positions in stocks and mutual funds. The portfolios for these types of investors generally include positions in many different instruments. By diversifying their stock holdings, they hedge the risk of loss if one issue drops in value. The gains on other components in the portfolio are used to offset such a loss. The problem with this practice is the lack of protection for a market-wide or across-the-board loss, in which the majority of the securities in a portfolio are affected by a major downturn. This is where index futures are most useful. Institutions purchase futures contracts on the indexes whose composition resembles the mix of stocks in their portfolio. The futures contract provides the necessary downside protection without exposing the stock portfolio to excessive risk and is used as a hedge against the loss of inventory value. In addition to the institutional "insurance" buyers, speculators and other position traders will attempt to profit by taking outright long or short positions in futures contracts. This type of activity helps maintain a mechanism of risk transfer mechanism for investments in farming, industrial goods, and other financial instruments. Next week, we will discuss the mechanics of index arbitrage, otherwise known as the "cash and carry". Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com STRADDLES ********* MARKET CONSOLIDATION REVIEW FOR THIS WEEK - Well a new week is dawning, and as parents start to shout hurrah as they put their kids on the school bus for another year. Sectors that are consolidating include energy stocks as well as the airline stocks. The cheapest options to buy right now are in the food sector as well as the the metals and mining stocks. Take a look at these stocks that are consolidating. They also offer cheap option premium straddle buyers. Stocks for the following week are as follows: Whirlpool (WHR) Last Price 69 7/8, IV range 31.63 - 57.08, Current 36.12 Were back! Whirlpool had another week of market consolidation. Remember that it may take 2-3 weeks for a stock that is in consolidation mode will attempt to break the boundaries of its wedge formation. Option volatility has not risen at all, and this still looks like a good stock that has straddle potential. No real news coming out for now, but with Maytag getting chopped up, this stock should react soon. Exxon - (XON) Last Price 81 9/16, IV range 22.55 - 38.55, current 22.55 Now here's a beauty... This stock has it all. Nice consolidation for the last several months. Also, the last 6 months range has been from 62 to nearly 90 per share. Look at the options implied volatility folks. Its on the lows of the year. Now it CAN go lower, but for how long. For XON to really move, it would mean a new high or a nice pullback of Oil prices. That could be a possibility in the near-term. Winn Dixie Stores (WIN) Last Price 38 9/16, IV range 59.09 - 33.23, Current 33.23 Winn Dixie operates food stores across the southern part of the US. Food stores in general, have some straddle criteria in that most have the cheap options premiums needed for a really cheap, low risk straddle. This one sure does. Look at the lows in implied volatility. We are scraping the bucket here. The recent drop the downside suggests a 50% profit from current straddle prices. Also, there is market consolidation when you look at the recent chart on WIN. Minnesota Mining and Manufacturing (MMM) Last Price 97 11/16, IV range 43.66 - 25.11, Current 25.11 Anyone that has "Post-It" notes in their workspace knows what made 3M a popular company. MMM also markets electrical and telecommunication products, medical devices, office supplies and major automotive parts. Merrill lynch just issued a buy on MMM and the stock, although consolidating, is at new highs. Either this stock is going to gain momentum and carry through, or it will pull back. Once again, as straddle traders, we don't care as long as it moves. Gannett Corp (GCI) Last Price 69 15/16, IV range 23.90-32.10, Current IV 27.00 Heres a company that not everyone knows. GCI publishes newspapers, operates broadcasting stations and cable television systems, and is engaged in marketing, commercial printing, a newswire service and data services. They currently have a 15 point trading range, which is nearly triple that of the 60 day options. They also have a dividend announcement soon. The options are very cheap, and this stock has been on our consolidation screen for a few days now. It's time to say goodbye to everyone that we met in Seattle. Thanks for all the comments you had on the straddle section. I will continue to answer questions in the Straddle Mailbag section, that will be published in Tuesday's and Thursday's updates. It's also time to say goodbye to DELL straddles, as the earnings report is due soon. As far as all straddles and any long option trades for that matter are concerned, they may have different names, but exit them the same. Pick a profit point to get out at, use a time stop that is 30 days to the expiration date of the options as a stop out for either a profit or loss, and like I have said before, buy before the rumor, and sell before the news... Tom Gentile ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 8-15-99 Sunday 6 of 6 COVERED CALLS ************* Technical Analysis Basics... Relative Strength Indicator (RSI) The RSI is a momentum indicator which measures a stocks price with relation to its past performance. It is front weighted thus it reflects a better velocity reading than other indicators and is less affected by sharp rises or drops in the stock's price. The best characteristic of this indicator is that it filters out some of the noise in a stock's trading activity. RSI's absolute levels are 0 and 100. Traditionally, buy signals are indicated at 20 to 30, and sell signals are triggered at 70 to 80 but these numbers will vary somewhat depending on the number of days used in the calculation. A shorter span of time will result in a more volatile indicator with extreme values while a longer period results in a less volatile reading with fewer extreme indications. Some analysts use the RSI indicator to compare multiple equities against each other but that is not an infallible system. Some stocks may retreat when their RSI indicator reaches one number while others react at slightly different levels. However, these levels are still relatively close to each other and the majority change direction near 30 and 70. RSI is a momentum indicator that can indicate changes ahead of price movements because the RSI treats price as a rubber band. The rubber band can be stretched to a certain point, and unless it breaks, the rubber band will contract. RSI also works well with trendlines, support and resistance lines, and divergence. One of the best characteristics of the RSI is the indication that is given when there is a divergence between price action and the RSI. When you observe an upwardly sloping price and downward sloping RSI, this generally indicates that price is about to move lower. The reverse is true for downward sloping price and upward sloping RSI. Learn more about technical indicators like RSI in "Technical Analysis from A to Z" by Steven B. Achelis. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI CYLK 5.06 5.63 Aug 5.00 0.56 *$ 0.50 11.1% 16.1% FRTE 11.63 13.63 Aug 10.00 2.75 *$ 1.12 12.6% 7.8% SQNT 17.50 17.38 Aug 15.00 3.88 *$ 1.38 10.1% 7.3% FUSE 5.69 6.50 Aug 5.00 1.00 *$ 0.31 6.6% 7.2% LIPO 20.88 24.81 Aug 20.00 2.38 *$ 1.50 8.1% 5.9% FRTE 13.69 13.63 Aug 12.50 1.81 *$ 0.62 5.2% 5.7% WSTL 8.97 7.69 Aug 7.50 2.00 *$ 0.53 7.6% 5.5% CS 14.81 13.75 Aug 12.50 3.00 *$ 0.69 5.8% 5.1% IRF 13.19 16.00 Aug 12.50 1.63 *$ 0.94 8.1% 5.0% NEWZ 8.13 7.38 Aug 7.50 1.06 $ 0.31 4.4% 4.8% LIPO 22.00 24.81 Aug 20.00 2.75 *$ 0.75 3.9% 4.2% NPIX 19.13 18.00 Aug 15.00 4.75 *$ 0.62 4.3% 3.7% BNBN 19.25 16.88 Aug 17.50 3.13 $ 0.76 4.7% 3.4% CIEN 37.13 34.00 Aug 35.00 4.38 $ 1.25 3.8% 3.3% AVL 16.75 14.44 Aug 15.00 2.19 $ -0.12 -0.8% 0.0% NOVT 22.75 19.00 Aug 20.00 3.50 $ -0.25 -1.3% 0.0% NFLD 13.25 11.75 Aug 12.50 1.25 $ -0.25 -2.1% 0.0% MESG 19.75 13.44 Aug 15.00 5.88 $ -0.43 -3.1% 0.0% IDTC 22.50 15.88 Aug 17.50 5.88 $ -0.74 -4.5% 0.0% NTPA 27.19 20.44 Aug 22.50 5.63 $ -1.12 -5.2% 0.0% GLFD 16.44 13.63 Aug 15.00 2.06 $ -0.75 -5.2% 0.0% CATP 18.13 15.56 Aug 17.50 1.69 $ -0.88 -5.4% 0.0% COOL 12.63 8.88 Aug 10.00 3.13 $ -0.62 -6.5% 0.0% ANET 15.56 11.13 Aug 12.50 3.50 $ -0.93 -7.7% 0.0% SYNM 9.44 8.25 Aug 10.00 0.50 $ -0.69 -7.7% 0.0% WSTL 7.75 7.69 Sep 7.50 1.25 *$ 1.00 15.4% 11.1% MXTR 5.03 5.03 Sep 5.00 0.63 *$ 0.60 13.6% 9.9% IDTI 14.69 17.50 Sep 15.00 1.31 *$ 1.62 12.1% 8.8% TIE 11.19 10.81 Sep 10.00 2.13 *$ 0.94 10.4% 7.5% TMAR 7.63 8.13 Sep 7.50 0.81 *$ 0.68 10.0% 7.2% PR 19.25 20.25 Sep 20.00 0.94 *$ 1.69 9.2% 6.7% PENN 9.88 9.94 Sep 10.00 0.75 $ 0.81 8.9% 6.4% SBGI 20.31 20.50 Sep 20.00 1.69 *$ 1.38 7.4% 5.4% PESC 23.88 26.94 Sep 22.50 2.69 *$ 1.31 6.2% 4.5% USAI 45.94 47.00 Sep 45.00 3.50 *$ 2.56 6.0% 4.4% NETA 17.56 16.56 Sep 15.00 3.50 *$ 0.94 6.7% 4.2% RNBO 13.88 11.88 Sep 12.50 2.19 $ 0.19 1.6% 1.0% You may consider closing on further weakness: NOVT - A good rally could rescue the position. NFLD - Sept 12.50C = $0.75... MESG - (The 15.00 strike), a rally may help. NTPA - New uptrend is promising, Sept 22.50c = $2.06. GLFD - If it fails to hold above $13.00. ANET - Market rally not helping...time to cut losses? SYNM - Long term play to sell OTM calls reducing cost basis. CATP, COOL and IDTC - The market rally should help. Previously closed: RRRR, MESG (17.50), PAMC, SNRS, ATVI*, CCCG, UBET, ARM, DGN* * Murphy's Law - now positive. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (Prc pd - Prm rec'd = CB, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) Sequenced by Company ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis OCLR 18.50 Aug 17.50 QLO HW 1.50 291 17.00 2.9% 2.9% IMNR 5.63 Sep 5.00 IMQ IA 1.00 0 4.63 8.0% 8.0% IRF 16.00 Sep 15.00 IRF IC 1.81 427 14.19 5.7% 5.7% MAK 13.69 Sep 12.50 MAK IV 1.81 10 11.88 5.2% 5.2% MRVC 14.50 Sep 12.50 VQX IV 2.63 45 11.88 5.3% 5.3% NTAI 14.88 Sep 15.00 QNA IC 1.00 130 13.88 8.1% 7.2% OLS 9.94 Sep 10.00 OLS IB 1.00 539 8.94 11.9% 11.2% PXD 12.69 Sep 12.50 PXD IV 1.13 95 11.56 8.2% 8.2% Sequenced by Return Called ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis OCLR 18.50 Aug 17.50 QLO HW 1.50 291 17.00 2.9% 2.9% OLS 9.94 Sep 10.00 OLS IB 1.00 539 8.94 11.9% 11.2% PXD 12.69 Sep 12.50 PXD IV 1.13 95 11.56 8.2% 8.2% NTAI 14.88 Sep 15.00 QNA IC 1.00 130 13.88 8.1% 7.2% IMNR 5.63 Sep 5.00 IMQ IA 1.00 0 4.63 8.0% 8.0% IRF 16.00 Sep 15.00 IRF IC 1.81 427 14.19 5.7% 5.7% MRVC 14.50 Sep 12.50 VQX IV 2.63 45 11.88 5.3% 5.3% MAK 13.69 Sep 12.50 MAK IV 1.81 10 11.88 5.2% 5.2% Sequenced by Return Not Called ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis OCLR 18.50 Aug 17.50 QLO HW 1.50 291 17.00 2.9% 2.9% OLS 9.94 Sep 10.00 OLS IB 1.00 539 8.94 11.9% 11.2% PXD 12.69 Sep 12.50 PXD IV 1.13 95 11.56 8.2% 8.2% IMNR 5.63 Sep 5.00 IMQ IA 1.00 0 4.63 8.0% 8.0% NTAI 14.88 Sep 15.00 QNA IC 1.00 130 13.88 8.1% 7.2% IRF 16.00 Sep 15.00 IRF IC 1.81 427 14.19 5.7% 5.7% MRVC 14.50 Sep 12.50 VQX IV 2.63 45 11.88 5.3% 5.3% MAK 13.69 Sep 12.50 MAK IV 1.81 10 11.88 5.2% 5.2% Company Descriptions ***** OCLR - Ocular Sciences, Inc. $18.50 *** 1 Week Play *** OCLR is engaged in the design, manufacture and distribution of contact lenses and conducts business under the name of Ocular Sciences/American Hydrox. Ocular recently introduced a lens marketed for daily disposal in Japan and Europe, and is evaluating the introduction of such a lens in the U.S. With recent option volume unusually high (call buyers) and no news, this one-week play offers a favorable entry point. Next month's options could further reduce the cost basis. Aug 17.50 QLO HW Bid=1.50 OI=291 CB=17.00 RC=2.9% RNC=2.9% Chart = http://quote.yahoo.com/q?s=oclr&d=3m ***** IMNR - Immune Response Corp. $5.63 *** Stage I Base *** IMNR is a biopharmaceutical company developing immune-based therapies to induce specific T cell response for the treatment of HIV, autoimmune diseases, gene therapy and cancer. IMNR took a hit in May after stopping a patient study of Remune AIDS Therapy. The 2Q loss widened as IMNR restructured and reduced its work force. IMNR plans on concentrating on developing HIV and arthritis drugs, which are in late-stage development. Sep 5.00 IMQ IA Bid=1.00 OI=0 CB=4.63 RC=8.0% RNC=8.0% Chart = http://quote.yahoo.com/q?s=imnr&d=3m ***** IRF - International Rectifier $16.00 *** Hot Sector *** IRF designs, manufactures and markets power semiconductors, including control integrated circuits, diodes, rectifiers, and power MOSFETS which are used for power conversion. IRF reported increasing income and revenues (4Q) before non-recurring charges and promptly had coverage upgraded/initiated to a BUY. The chart remains bullish as IRF has closed above resistance at $14 which completed a double bottom formation. Sep 15.00 IRF IC Bid=1.81 OI=427 CB=14.19 RC=5.7% RNC=5.7% Chart = http://quote.yahoo.com/q?s=irf&d=3m ***** MAK - Group Maintenance America $13.69 *** Break Out? *** Group Maintenance America is a nationwide provider of mechanical and electrical services, including heating, ventilation and air conditioning, plumbing and electrical services, to residential and commercial customers. MAK, citing strong same-store revenue growth and continued momentum of acquisition activity, reported that second quarter revenue increased 140%. MAK's tape is now improving and we like the cost basis below the July low. Sep 12.50 MAK IV Bid=1.81 OI=10 CB=11.88 RC=5.2% RNC=5.2% Chart = http://quote.yahoo.com/q?s=mak&d=3m ***** MRVC - MRV Communications, Inc. $14.50 *** Hot Sector *** MRV designs, manufactures and sells computer networking products, primarily Ethernet local area network switches, hubs and related equipment, and fiber optic components for voice, video and data transmission. MRV returned to profitability on increasing revenues during the second quarter. Technicals remain bullish and the cost basis is just above the 150 dma. Sep 12.50 VQX IV Bid=2.63 OI=45 CB=11.88 RC=5.3% RNC=5.3% Chart = http://quote.yahoo.com/q?s=mrvc&d=3m ***** NTAI - Nam Tai Electronics, Inc. $14.88 *** China *** Nam Tai based in China, is a full service contract manufacturer. NTAI provides hardware and software design, plastic molding, component purchasing, assembly into finished products or electronic subassemblies, post-assembly testing and shipping. On Monday, NTAI posted 2Q EPS $0.51 vs. $0.27 on increasing net sales, up 37%, and operating income, up 57%. NTAI has move out of a Stage I base on increasing volume and is nearing resistance at $15. A favorable long term play using overvalued OTM calls to reduce the cost basis. Sep 15.00 QNA IC Bid=1.00 OI=130 CB=13.88 RC=8.1% RNC=7.2% Chart = http://quote.yahoo.com/q?s=ntai&d=3m ***** OLS - Olsten Corporation $9.94 *** Take-over? *** Olsten Corp. engages in staffing services (providing assignment employees to business, industry and govt.), and health services (providing network services and healthcare personnel). Swiss- based temporary employment company Adecco SA, on Thursday, said it plans to announce a takeover next Monday. Olsten said on Wednesday, it was in talks with another company regarding a "possible significant corporate transaction." Hmmmm.... Next week should be interesting. Sep 10.00 OLS IB Bid=1.00 OI=539 CB=8.94 RC=11.9% RNC=11.2% Chart = http://quote.yahoo.com/q?s=ols&d=3m ***** PXD - Pioneer Natural Resources $12.69 *** Hot Sector *** PXD is an independent oil and gas exploration and production company with operations in TX, KS, OK, LA, NM, The Gulf of Mexico, Argentina and Canada. On August 2, Pioneer announced the closing transaction with CNG for $62.3 million for the sale of natural gas properties in South Texas. Proceeds will be used to retire bank debt, in line with the company's plan to reduce costs and debt. With the current strength in the oil sector, Pioneer is rallying from a consolidation area and nearing the May high. Sep 12.50 PXD IV Bid=1.13 OI=95 CB=11.56 RC=8.2% RNC=8.2% Chart = http://quote.yahoo.com/q?s=pxd&d=3m ***** NAKED PUT SECTION ***************** Technical Analysis Basics - Stochastics.. The stochastic oscillator compares the current stock price to its price range over a specifically identified period of time. This indicator is based on the theory that in an upward trending market, stocks tend to close near their highs and in a downward trending market, stocks tend to close near their lows. That would indicate that as an upward trend erodes, stocks close further away from the highs and vice versa. The stochastic indicator attempts to reflect when prices start to group around their lows in an upward market, and just the opposite in a down-trending market. The theory is that these are the conditions which indicate a trend reversal is about to occur. The stochastic indicator is plotted as two lines on a chart with values ranging from 0 to 100. They are the %D line and %K line and the %D line is considered the more significant of the two. Readings above the 80 line are strong and indicate that the price is probably closing near its high and likewise, readings below 20 indicate that price is closing near its low. Ordinarily, the %K line will reverse direction before the %D line but, when the %D line changes direction prior to the %K line, a slow and steady reversal in the stock price is usually indicated. A very powerful move is indicated when the plot approaches 0 and 100. When the stochastic nears these extremes following a pullback in price, a good entry point is generally indicated. Many times, when the %K or %D lines begin to flatten out, this is an indication that the trend will reverse during the next trading range. One of the simplest applications for the oscillator is to watch for the divergence on the chart. That is when the price is making higher highs but the stochastic oscillator is making lower lows, (or just the opposite). In either case, the indicator is usually demonstrating a change in price before price itself is reversing and this can help you determine when to enter or exit a position. Good Luck SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI ADAP 22.63 26.31 Aug 17.50 0.44 *$ 0.44 8.9% 12.8% MGCX 28.00 22.50 Aug 20.00 1.13 *$ 1.13 16.8% 12.2% NETS 19.56 24.63 Aug 15.00 0.75 *$ 0.75 16.1% 11.7% PCYC 27.75 26.75 Aug 22.50 0.69 *$ 0.69 10.6% 11.5% LYNX 14.63 13.88 Aug 12.50 0.31 *$ 0.31 7.7% 11.1% NETS 23.50 24.63 Aug 17.50 0.25 *$ 0.25 5.1% 11.0% PTVL 23.63 18.50 Aug 17.50 0.81 *$ 0.81 14.6% 10.6% QNTM** 24.56 23.19 Aug 17.50 1.00 *$ 1.00 16.9% 10.5% GISX 20.25 17.88 Aug 17.50 0.56 *$ 0.56 9.5% 10.3% AFCX 37.06 35.94 Aug 30.00 0.38 *$ 0.38 4.7% 10.1% ZRAN 24.50 24.88 Aug 20.00 0.38 *$ 0.38 6.7% 9.7% NETA 17.56 16.56 Aug 15.00 0.31 *$ 0.31 6.5% 9.4% GISX 21.13 17.88 Aug 17.50 0.56 *$ 0.56 10.4% 9.0% PMRY 14.50 14.25 Aug 12.50 0.25 *$ 0.25 6.2% 8.9% CDNW 19.94 15.25 Aug 15.00 0.56 *$ 0.56 12.3% 8.9% CLEC 27.00 24.19 Aug 22.50 0.56 *$ 0.56 8.2% 8.9% PERI 21.50 21.50 Aug 17.50 0.38 *$ 0.38 7.6% 8.3% LIPO 20.88 24.81 Aug 17.50 0.63 *$ 0.63 11.3% 8.1% ALKS 30.63 35.13 Aug 25.00 0.25 *$ 0.25 3.6% 7.9% HNCS 37.44 34.38 Aug 30.00 0.56 *$ 0.56 6.9% 7.5% PTVL 23.38 18.50 Aug 15.00 0.25 *$ 0.25 5.1% 7.3% MIPS 43.94 38.25 Aug 30.00 0.75 *$ 0.75 7.9% 6.8% VSTR 38.13 42.25 Aug 30.00 0.50 *$ 0.50 6.2% 6.7% CIEN 37.13 34.00 Aug 30.00 0.63 *$ 0.63 7.5% 6.6% ADAP 23.19 26.31 Aug 17.50 0.44 *$ 0.44 8.7% 6.3% DRIV 32.44 22.69 Aug 22.50 0.50 *$ 0.50 7.2% 6.2% MCOM 35.38 25.50 Aug 20.00 0.44 *$ 0.44 5.9% 5.1% PRIA 38.63 28.75 Aug 30.00 1.00 $ -0.25 -2.9% 0.0% PZX 10.94 9.19 Aug 10.00 0.69 $ -0.12 -2.9% 0.0% PSSI 12.00 9.38 Aug 10.00 0.44 $ -0.18 -5.6% 0.0% AMTD 38.19 23.75 Aug 25.00 0.75 $ -0.50 -6.0% 0.0% RNBO 13.88 11.88 Aug 12.50 0.25 $ -0.37 -8.4% 0.0% ADAP 22.88 26.31 Sep 17.50 0.75 *$ 0.75 14.1% 10.2% PESC 23.88 26.94 Sep 17.50 0.50 *$ 0.50 9.5% 6.9% CORR 22.50 24.00 Sep 17.50 0.44 *$ 0.44 8.9% 6.5% USAI 45.94 47.00 Sep 40.00 0.81 *$ 0.81 6.1% 4.4% TDW 34.44 34.50 Sep 30.00 0.56 *$ 0.56 5.7% 4.1% DD 74.75 72.75 Sep 65.00 1.00 *$ 1.00 4.7% 3.4% ** With the retirement of QNTM, shareholders will receive one-half share of HDD ($7.00) and one share of DSS ($21.31) for each share of QNTM. You may consider closing on further weakness: PRIA - Uptrend looks promising. PZX - Weakening further; test of April low likely. PSSI - Especially breaking support at $8.50. AMTD - Current rally may rescue position. RNBO - SEP-12.50 call could lower cost basis to $11.44. Previously Closed: PAMC, CDNW(17.50), RMII, BYND, IDTC, RSLC, SNRS, DRIV(25.00) NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by Company ***** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired BOBJ 47.19 Sep 35.00 BBQ UG 0.75 7 34.25 7.4% CRUS 8.88 Sep 7.50 CQU UU 0.38 75 7.12 14.9% CSE 48.06 Sep 40.00 CSE UH 0.75 35 39.25 6.3% MCOM 25.56 Sep 17.50 MQM UW 0.88 80 16.62 14.7% NETG 22.25 Sep 17.50 NUG UW 0.63 25 16.87 12.4% NMR 33.50 Sep 25.00 NMR UE 0.63 5 24.37 8.6% PLMD 17.88 Sep 15.00 PM UC 0.31 0 14.69 6.8% SBGI 20.50 Sep 17.50 JQO UW 0.38 20 17.12 6.8% Sequenced by ROI ****** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CRUS 8.88 Sep 7.50 CQU UU 0.38 75 7.12 14.9% MCOM 25.56 Sep 17.50 MQM UW 0.88 80 16.62 14.7% NETG 22.25 Sep 17.50 NUG UW 0.63 25 16.87 12.4% NMR 33.50 Sep 25.00 NMR UE 0.63 5 24.37 8.6% BOBJ 47.19 Sep 35.00 BBQ UG 0.75 7 34.25 7.4% SBGI 20.50 Sep 17.50 JQO UW 0.38 20 17.12 6.8% PLMD 17.88 Sep 15.00 PM UC 0.31 0 14.69 6.8% CSE 48.06 Sep 40.00 CSE UH 0.75 35 39.25 6.3% Company Descriptions ***** BOBJ - Business Objects S.A. $47.19 Business Objects S.A. develops, markets, and supports integrated enterprise decision support software tools which allow non- technical end-users to access, report and analyze information in relational databases. In July, BOBJ reported record 2Q results with revenues up 45% over the prior year. On July 29, Goldman Sachs upgraded BOBJ to 'Recommended List.' Bounced successfully off support (FEB-MAR highs) at $38 and nearing an all-time high. Sep 35.00 BBQ UG Bid=0.75 OI=7 CB=34.25 ROI=7.4% Chart = http://quote.yahoo.com/q?s=bobj&d=3m ***** CRUS - Cirrus Logic, Inc. $8.88 *** Stage I Base *** Cirrus Logic, Inc. designs and manufactures integrated circuits that employ precision linear and advanced mixed-signal processing technologies, enabling system-level applications in mass storage, audio and precision data conversion. On July 27, Cirrus Logic announced that its Crystal Semiconductor division was awarded $20 million in damages following its successful patent infringement suit against OPTi Inc. and TriTech Microelectronics. CRUS also acquired AudioLogic Inc., as it bolsters its position to be a leading supplier in the rapidly emerging Internet music market. Sep 7.50 CQU UU Bid=0.38 OI=75 CB=7.12 ROI=14.9% Chart = http://quote.yahoo.com/q?s=crus&d=3m ***** CSE - Case Corporation $48.06 *** Take-over *** Case Corporation designs, manufactures, markets and distributes farm and light to medium sized construction equipment such as loader/backhoes, farm tractors and self-propelled combines. New Holland (NH), which is controlled by auto maker Fiat, said it will pay $4.3 billion, or $55 per share, to buy CSE. A July 22 news release stated the deal was going ahead as planned and was expected to close this fall. Sep 40.00 CSE UH Bid=0.75 OI=35 CB=39.25 ROI=6.3% Chart = http://quote.yahoo.com/q?s=cse&d=3m ***** MCOM - Metricom, Inc. $25.56 *** New Up Leg? *** Metricom is a leading provider of mobile data networking and technology. The Company's Ricochet service provides mobile professionals with high-performance, cost-effective untethered access to the Internet, private Intranets, local-area networks, e-mail, and other online services. The infusion of capital - $600 million - from Vulcan and MCI Worldcom, should help plans to begin offering a national 128 kbps mobile data service by the middle of next year. Monday, MCOM announced the appointment of James Wall to CFO and by Wednesday the stock started to rally, perhaps signaling a new uptrend. Sep 17.50 MQM UW Bid=0.88 OI=80 CB=16.62 ROI=14.7% Chart = http://quote.yahoo.com/q?s=mcom&d=3m ***** NETG - NetGravity, Inc. $22.25 *** Take-over *** NetGravity, Inc. is a provider of online advertising and direct marketing software solutions. NETG develops, markets and supports a mission-critical Adserver family of software products. In July, DCLK and NETG reported that the companies signed a definitive agreement to merge in a transaction valued at $530 million where DCLK ($82.38) will issue 0.28 shares of its common stock for each share of NETG common stock (related value of NETG is $23.06). Shares of DCLK would need to fall $20 to $62.50 for NETG to be valued below the $17.50 strike. Sep 17.50 NUG UW Bid=0.63 OI=25 CB=16.87 ROI=12.4% Chart = http://quote.yahoo.com/q?s=netg&d=3m ***** NMR - Nielsen Media Research $33.50 Nielsen Media Research, the famous TV ratings company, is one of the leading providers of television information services in the U.S. and Canada, serving national and local customers including television networks, independent stations, syndicators, cable systems & affiliates, advertisers and their agencies. In late July, NMR announced that net income for the most recent quarter increased 15.3%, a sizable gain and well in line with analysts estimates. On Wednesday, NMR announced a 3-year agreement with Cox Communications to provide local cable television audience measurement services in 18 local markets across the country. Sep 25.00 NMR UE Bid=0.63 OI=5 CB=24.37 ROI=8.6% Chart = http://quote.yahoo.com/q?s=nmr&d=3m ***** PLMD - PolyMedica Corporation $17.88 *** Entry Point *** PolyMedica is a provider of direct-to-consumer specialty medical products and services, primarily focused in the diabetes supplies and consumer healthcare markets. In July, PolyMedica reported 1Q EPS rise of 92% on a 53% revenue gain. Accelerating customer shipments in the Company's direct-to-consumer diabetes supplies business is fueling the very strong start for fiscal 2000. The cost basis of $14.69 offers a favorable entry point for those with a long term outlook. Sep 15.00 PM UC Bid=0.31 OI=0 CB=14.69 ROI=6.8% Chart = http://quote.yahoo.com/q?s=plmd&d=3m ***** SBGI - Sinclair Broadcast Group $20.50 *** Own This One *** Sinclair Broadcast Group owns or provides programming services to 59 television stations in 38 markets. Sinclair is selling its radio stations and is concentrating on its TV operations looking towards digital integration and the convergence of television and the Internet. They beat street estimates in the 2Q and said the network compensation arrangements proposed by FOX and ABC would not stem cash flow as much as it had earlier anticipated. Sinclair has moved above the neckline of a double bottom and is showing fine technical strength offering a favorable long-term outlook. Sep 17.50 JQO UW Bid=0.38 OI=20 CB=17.12 ROI=6.8% Chart = http://quote.yahoo.com/q?s=sbgi&d=3m ***** SEE DISCLAIMER IN SECTION ONE *****************************
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