The Option Investor Newsletter Thursday 8-19-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 8-19-99 High Low Volume Advances Decline DOW 10963.84 - 27.54 10995.50 10873.29 680,499k 1,382 1,643 Nasdaq 2621.43 - 36.30 2657.74 2612.28 870,696k 1,650 2,094 S&P-100 687.83 - 5.27 692.36 683.97 Totals 3,032 3,737 S&P-500 1323.59 - 9.68 1331.83 1315.37 45.0% 55.0% $RUT 432.77 - 0.33 433.10 429.88 $TRAN 3166.30 - 20.06 3187.34 3143.71 VIX 25.46 + 1.42 27.00 25.08 Put/Call Ratio .80 ************************************************************* Same market. Different day. Good night. Actually, the widening trade gap was the first falling domino that sparked a chain reaction culminating in a loss for the DOW and NASDAQ in today's trading. Oh no! Not another economic explanation, you say? Yes, but we'll keep this really simple. Here's how it works. In short we all awoke to find that our imports far exceeded our exports last month, part of an accelerating trend, where we buy more stuff than we sell to other nations. As a result, it means that the dollar weakens (trust us on this). If the dollar weakens, foreign goods and services become more expensive. That sounds like inflation. Yep. . .sure is. From previous updates, you now know that inflation's handmaiden is the bond rate, which will, of course, rise too. Rising rates equal lower profits, which equal cheaper stocks. There, now wasn't that simple? That's the domino chain for today. Now everyone is worried about the weakness of the dollar and Greenspan's hypothesized reaction to it. The supposition is that it may mean 1) a greater rate hike on August 24; 2) another rate hike after August 24; 3) a tightening bias to boot; 4) a boost in the federal funds rate AND the discount rate; 5) make up your own "sky is falling" story; 6) all of the above. Frankly, this is making a mountain out of a molehill, and should demonstrate to all of us that there is a significant lack of other financial news that allows anything to fill the information vacuum. Nature abhors it; so does the market. Don't fall victim to the smokescreen. The fact is all eyes are acutely focused on August 24, Tuesday's FOMC meeting, wherein the market expects a 25 basis point rate hike, period. In front of that meeting, nobody wants to open a new position, but they are not worried sufficiently to sell what they already own. Investors are simply sitting on the sidelines waiting for the Fed's cue. In a nutshell, that is why there is no appreciable volume. There is simply no reason for the market to go up, and yet no selling pressure to bring it down. And so it goes; hurry up and wait. As for today's market, here goes. . .the DOW took a nosedive to 10,900 during amateur hour in a fearful response to the trade deficit numbers. After bouncing around within 25 points on either side of 10,900 for most of the morning, the DOW took off like a freshly hooked fish toward 11,000 following the lunch hour. Though it made it to 10,995, a reversal ensued bringing it back down to 10,900, where it firmly bounced north again. In the final half-hour, the DOW recovered 63 of its previously lost points to close at 10,963, down 27 points on weak (again) volume of 680 mln. shares. This should come as no surprise since most investors are sidelined waiting for the Fed meeting. Just so you know, the average volume is about 785 mln. shares. While early numbers showed decliners trumping advancers 2:1, the ratio narrowed to 4:3 by days end - a nice comeback, but still a negative day. New lows are becoming fewer, as only 90 issues claimed that dubious distinction today, while new highs remained flat at 42. Technically speaking, that magical 10,900 number, where the market found lots of support today, just happens to be the DOW's 50-dma. That we had a strong bounce, with a close nearer to its high, is a good sign. The bad news is that 11,150 seems to be the upper end of the trading range. That leaves only 250 points of trading range - a pretty narrow span from which to snag profits. Can you say range-bound? Sure, we knew you could. Again, keeping your powder dry is important. But for those who MUST play in a sideways market (a capital muncher if there ever was one), pay close attention to the trading range. Be prepared to go short (play puts) at the top, and go long (play calls) at the bottom, and exit quickly if a trade moves against you. The NASDAQ experienced a bit more pain today, as it gapped down about 30 points to 2637 from yesterday's already weak close. Not stopping there, it kept going down to 2612 before it stabilized around 2620. Shortly after lunch, somebody opened the bullpen, as the NASDAQ made a lunge for 2640, which didn't last long. In a continuing display of weakness in what appeared to be orderly profit taking, internets, telecoms, and financials dragged the index back down to close at 2621, off 36 points for the day. Another lackluster volume day here too at only 871 mln. shares traded. NASDAQ won't go anywhere without a substantial volume increase. Decliners kept there lead over advancers about 5:4, while new lows were statistically even with new highs, 55 to 54, respectively. Though equity and index options expire tomorrow, which would normally prop up the market temporarily, the Nasdaq couldn't hold its 50-dma and closed near its low of the day (not a good sign if you are looking for a strong Friday). If it can't keep above this, then it may test the 2500-2550 range again. With only Greenspan on the horizon for Tuesday, August 24, we expect to remain range-bound between 2550 and 2700. You may want to consider waiting to open a new call position until we get a clean bounce off or strong break over the 50-dma (2650) or, a reversal following a descent to the 2500-2550 range. As we've said before, it's tough to play a range-bound market for a profit. For those with a bit more tolerance for risk who just aren't comfortable sitting out, it's still a tradable market. You just need to be agile. Still, in front of the Fed meeting Tuesday, you may want to consider opening a hedged OEX position so that you profit on a breakout in either direction. We might suggest playing puts, but there's an old adage on Wall Street that you never short a quiet market. You need other sellers to join in order for that to work, something that isn't likely to happen before Tuesday (and maybe not after, depending on the Fed's comments/actions). The fact is that volumes are likely to remain low, not just in front of the FOMC meeting, but until after the labor day weekend when traders return from vacation. Until then, volume (necessary for a breakout to the upside) will remain light and we will likely remain range-bound for the next 2 weeks. Now truly is a good time to go on vacation. Looking into the crystal ball, what do we see? Given that tomorrow is double witching day (index and equity options expire), we expect to see a bit of support tomorrow, just not a barnburner, but still fraught with higher than usual volatility. If you trade over the next 2 days (Friday and Monday), pay close attention to the trading ranges of the market indexes and take positions in particular companies whose movement tends to be similar. September options will be a bit cheaper on Monday. For the real aggressive, you can always sell puts on a breakout tomorrow with the idea that they will expire worthless in something less than 7 hours. Remember to tighten up those stops if you are sitting on profits. You won't want to lose them on ill-timed volatility. In short, trade using support and resistance if you must play, or get hedged for Tuesday. You won't be penalized for waiting either. As always, sell too soon. Buzz Lynn Research Analyst *************** Market Posture *************** As of Market Close - Thursday, August 19, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,963 Neutral 7.20 SPX S&P 500 1,320 1,420 1,324 Neutral 8.17 OEX S&P 100 675 735 688 Neutral 8.13 RUT Russell 2000 440 465 432 BEARISH 8.06 NDX NASD 100 2,250 2,468 2,279 Neutral 8.13 MSH High Tech 1,125 1,250 1,141 Neutral 8.13 XCI Hardware 920 1,090 1,005 Neutral 7.20 CWX Software 725 844 757 Neutral 8.13 SOX Semiconductor 450 535 492 Neutral 7.20 NWX Networking 555 625 561 Neutral 8.13 INX Internet 500 580 422 BEARISH 7.20 BIX Banking 690 710 657 BEARISH 7.23 XBD Brokerage 410 440 391 BEARISH 7.23 IUX Insurance 645 660 610 BEARISH 7.23 RLX Retail 915 960 854 BEARISH 7.23 DRG Drug 370 400 351 BEARISH 7.20 HCX Healthcare 750 800 717 BEARISH 7.22 XAL Airline 180 190 155 BEARISH 5.21 OIX Oil & Gas 285 310 313 BULLISH 8.10 Posture Alert Pre-Fed Blues? Thursday’s lackluster action will probably be viewed as a big trading day, in comparison to the next two sessions before the Fed meets. The Internet (INX) sector led the Nasdaq down, posting a -6.18% drop, followed by Networking (NWX -1.65%), and the Nasdaq 100 (NDX -1.67%). Drug and Healthcare sectors were the only positive indexes, posting small gains. No changes to the posture board. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture **************** Market Sentiment **************** Sentiment Blues! Wow! The latest Investors Intelligence Survey showed that bulls decreased by -4.2% this last week and bearish investors increased by +2%. This is a very large change for one week, and this statistic probably has a correlation to the upcoming Fed meeting. Bullishness has now decreased by 16% from the highs in June, and bearish sentiment has increased 6.5% since mid-July. From a contrarian standpoint, this is exactly what you want to see. We will probably need to see these percentages go even farther before this market has truly bottomed out, but this is a good start. Below is an illustration on sentiment for Dell Computer. As you already know, Dell had a blowout quarter and handily beat expectations for the first time in several quarters. The stock rallied hard, but had an extremely tough time getting through the 45 barrier. Not only had Dell bumped off of 45 numerous times before, which would serve as technical resistance, but sentiment for August was too great at this key benchmark as well. Hopefully, this illustration will better help you understand why Dell did not break that benchmark with such good news and heavy volume on the day of their earnings. Dell Computer (DELL) Open Open Put/Call Month/strike/symbol Interest: Month/strike/symbol Interest: Ratio: Aug 35 DLQ HG 11,296 Aug 50 DLQ TG 26,052 2.306 Aug 37 1/2 DLQ HU 15,002 Aug 50 DLQ TU 20,684 1.378 Aug 40 DLQ HH 51,141 Aug 40 DLQ TH 39,541 .773 Aug 42 1/2 DLQ HV 46,709 Aug 42 1/2 DLQ TV 12,709 .272 Aug 45 DLQ HI 87,751 Aug 45 DLQ TI 8,282 .094 Aug 47 1/2 DLQ HW 21,625 Aug 47 1/2 DLQ TW 3,292 .152 Aug 50 DLQ HJ 43,842 Aug 50 DLQ TJ 3,223 .073 Total: 277,366 113,783 .410 Looking at the above illustration, at the 35, 37 1/2, and 40 strikes, there was a large group of bearish investors, who were betting that Dell would take a large tumble after earnings. With sentiment being so heavily bearish at these three strike prices, what you want to imagine is an artificial support in this range, due to the bearish sentiment. Now granted, many of these contracts may be naked positions, spreads, straddles, and other sorts of hedging, but for hypothetical purposes, we are assuming only long option positions. As we move up in strike, you will notice the bears disappearing, and the bulls coming out of the woodwork. At the 45 strike, there are a whopping 87 thousand contracts outstanding, correlating into over 8.7 million shares of Dell stock, if exercised. This 45 strike is the overhang that we mentioned in Sunday’s letter. This is a huge amount of calls, especially compared to the puts at this respective strike. With the option traders hedging themselves whenever someone trades an option, you can only imagine the large hedge position that some market-maker or firm has on Dell. With such a short time until the August expiration, you should be able to put 2 and 2 together to realize the resistance that Dell has at this number. Once August expiration is done with, we will closely watch to see if everyone tries the September series. If the bullishness is not nearly as great (between 45-50 for SEP), then the lid may be lifted off of Dell, if not, look for a trading range bound stock. BULLISH Signs: Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased 4.2% and Bearish sentiment increased 2.0%. Mixed Signs: Interest Rates: The yield on the 30-yr Treasury is still above key 6% barrier, but off the highs of 6.272%. Market Posture: Several indexes are starting to show signs of bottoming out, including the Dow, Healthcare, Software, Networking, and Internet. 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 1.3 suggesting bullish sentiment picking up steam. 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 Tues Thurs Indicator (8/13) (8/17) (8/19) Alert Pinnacle Index (OEX): Overhead Resistance (715-745) 8.0 9.4 9.8 Overhead Resistance (680-710) 2.3 1.5 1.3 Underlying Support (630-670) 4.4 5.9 6.9 Put/Call Ratios: CBOE Total P/C Ratio .7 .6 .6 CBOE Equity P/C Ratio .5 .5 .4 OEX P/C Ratio 1.2 1.1 1.2 Peak Open Interest (OEX): Puts 670 650 650 Calls 700 700 700 P/C Ratio .9 1.1 1.3 Market Volatility Index (VIX): CBOE VIX 25.88 Investors Intelligence: Bullish 45.80% * Bearish 31.30% * 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. OEX Pinnacle Index Friday Tues Thurs Benchmark (8/13) (8/17) (8/19) Overhead Resistance (715-745) 8.03 9.42 9.80 Overhead Resistance (680-710) 2.33 1.51 1.30 OEX Close 688.82 699.28 687.83 Underlying Support (630-670) 4.36 5.94 6.87 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 Tues Thurs Strike/Contracts (8/13) (8/17) (8/19) CBOE Total P/C Ratio .69 .62 .63 CBOE Equity P/C Ratio .49 .48 .44 OEX P/C Ratio 1.21 1.09 1.23 (OEX) Peak Open Interest Friday Tues Thurs Strike/Contracts (8/13) (8/17) (8/19) Puts 670 / 13,875 650 / 15,466 650 / 14,382 Calls 700 / 15,403 700 / 14,381 700 / 11,473 Put/Call Ratio .90 1.08 1.25 (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 19, 1999 25.88 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 Aug 18, 1999 45.8 31.3 *** Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10963.84 73.14 70.29 -125.70 -27.54 -9.81 Nasdaq 2621.43 7.47 25.94 -13.49 -36.30 -16.38 $OEX 687.83 3.85 6.61 -6.18 -5.27 -0.99 $SPX 1323.16 3.09 13.39 -11.32 -9.25 -4.09 $RUT 432.77 -0.23 2.18 -2.90 -0.33 -1.28 $TRAN 3166.30 33.10 -6.66 -19.15 -20.06 -12.77 $VIX 25.46 0.57 -0.42 1.51 1.42 3.08 Calls Mon Tue Wed Thu Week GTW 89.25 2.88 0.63 5.75 -1.75 7.50 New LVLT 60.88 5.38 3.50 -0.88 -1.63 6.38 Bounce VRSN 88.25 2.81 3.44 1.31 -2.31 5.25 Potential SLB 67.25 -0.50 1.88 -0.81 1.44 2.00 Not out! LXK 73.94 1.75 -0.50 0.06 0.00 1.31 Roller MMCN 50.88 4.13 0.13 -4.38 1.13 1.00 Ride it! NXLK 98.13 0.38 5.19 -8.50 3.44 0.50 Split? HGSI 59.81 -0.06 0.06 -0.75 0.44 -0.31 Support! IDPH 123.25 -1.25 -6.50 2.94 3.31 -1.50 New BVSN 91.94 1.38 9.06 -4.75 -7.25 -1.56 Wild ride SNE 127.88 -0.31 2.25 -1.19 -2.31 -1.56 Cycle NOK 83.50 0.00 1.44 -1.06 -2.63 -2.25 Keeper INTC 77.31 -1.19 0.44 -0.50 -1.19 -2.44 Hold on LSI 56.25 -0.38 -2.00 -1.06 0.81 -2.63 Upturn SLR 70.38 -2.13 0.31 -1.56 -0.63 -4.00 Going up VISX 89.94 1.63 -1.56 -6.44 0.81 -5.56 Dropped Puts Mon Tue Wed Thu Week TBH 69.63 -0.63 -1.25 -2.50 -0.38 -4.75 Bearish AMR 60.19 1.13 0.25 -1.75 -1.31 -1.69 Go pilots T 48.19 -0.19 0.69 -1.13 -0.44 -1.06 New AET 78.25 0.69 0.94 -1.69 0.00 -0.06 New IP 54.00 -0.75 1.13 -1.63 1.25 0.00 New U 32.81 0.81 0.00 -0.44 -0.31 0.06 Patience AHP 45.63 -0.06 1.06 2.63 1.13 4.75 Dropped **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** VISX 89.94 +0.81 (-5.56) Goodbye VISX! There just doesn’t seem to be anything on the horizon that will move this stock. Currently, the stock has turned south and does not meet our standards of a productive call play. VISX, along with the entire vision healthcare sector, seem to have lost there drive this week due to increased competition which may mean lower selling prices for their product. Today VISX has moved to its 50-dma and is just too speculative to keep on our play list. With the tone of the markets and a FOMC meeting on Tuesday, a search for an exit point would be considered a prudent strategy. If any further option plays present themselves in regards to VISX, we will be the first to let you know. PUTS: ****** AHP $45.63 +1.13 (+4.75) Doom and gloom was the outlook for American Home Products when we first chose the stock as a put play. With thousands of lawsuits filed against the company by individuals that used there dietary supplements Pondimin and Redux claiming it caused heart valve damage, we thought there was little hope for the stock. Even when US Regulators approved its drug Sonata for adult insomnia, it was not enough to help the dying stock. However, Wednesday’s news release about merger rumors with Glaxo Welcome was enough to entice investors back into the stock. The stock has made a large enough U-turn that we have decided to end this play. If you are not already out, look for an exit or let your stops pull you out of the play. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an Email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 8-19-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** SNE $127.88 -2.31 (-1.56) Sony has dropped for the past two days but those of you that have been following our play know that this is standard procedure. SNE has gone through these cycles for the past couple weeks. It will rally for a week and pullback for a week. What we like to see is the highs getting higher and the lows getting higher and that is just what Sony has given us. It also typically drifts lower on weak volume which is another positive indicator. In fact this is likely to be an opportunity for some new plays. But the one wild card to watch out for is the dollar which is continuing to fall against the yen. This makes Sony’s products more expensive in the U.S., thus hurting sales and profits. We don’t expect that the yen will be able to hold at such a high mark against the dollar but keep your on it just in case. Remember, a weak dollar = a weak Sony. LVLT $60.88 -1.63 (+6.38) Yesterday LVLT moved up to an intra- day high of $64.94, until the end of the day, when it fell back $2.50 to close at $62.50. A gap down this morning didn't help either, as LVLT continued its descent to $58.63 before reversing course to close at 60.88. Volume was weak yesterday and only average today. The real strength of this play lies in the bounce off its 30-dma of $58.63, despite the lack of any heavy buying volume on the rebound. While the market headed south for most of the afternoon, LVLT's volume did pick up but the price remained flat into the close - a show of relative strength. LVLT currently rests right on its 200-dma and looks poised to bounce from there tomorrow. Dips to $59 appear to be buying opportunities if you can stomach a bit more risk. For those in the more conservative camp, resistance is at $65 and you may want to wait for a breakout over $65 before taking a position. Since tomorrow is expiration day, generally we can expect the market to remain volatile. If you buy tomorrow, be prepared for a flat Monday in front of the Tuesday FOMC meeting. Unless the dip is too good for you to pass up, perhaps waiting until Monday will give you a better entry. Again it is more safe to wait on the side ahead of Greenspan if LVLT is showing a lack of direction. SLB $67.25 +1.44 (+2.00) As the bears took control of the last couple of sessions, Schlumberger was one of the few stocks to emerge on the positive side. This morning, after the trade deficit numbers were released, investors, seeing the potential for higher inflation, decided to head to less interest rate sensitive stocks like SLB. Despite oil prices being mixed the past two days and Tuesday’s gasoline inventory rising 337,000 barrels, investors consider it a safety play rather than buying rate sensitive technology and Internets. Since there is a lot of uncertainty in the near future for rate sensitive stocks, SLB is a more conservative play. Also keep in mind that the balance of power can shift just as fast back to high-tech if the momentum changes. In case this was to happen, make use of your stop loss orders to be safe. All in all, with oil prices hanging around $22 a barrel, SLB should have more upside potential from here. NOK $83.50 -2.63 (+2.25) With the market being so interest rate sensitive right now, any economic data hinting inflation is enough to have investors running for the doors with there tail between there legs. This is what happened this morning when the latest trade deficit numbers were released. The increased deficit put pressure on both the weakening dollar and rising bond yields, increasing the possibility of future rate hikes. These worries did not help our play, however, this may be a buying opportunity if the market turns. NOK is still trying to break though its 50-dma at $85 and until it does use extreme caution and choose your entry points wisely. Continue to watch the general sentiment of the market, it’s a great indicator for this particular play. INTC $77.31 -1.19 (-2.44) INTC equaled its all time high on Wednesday at $79.81 during the first hour of trading before consolidating for the balance of the day, closing down only $0.50. Intel is down only $2.44 for the week. It appears as though the institutions have not given up on the chip maker as the selling has come on light volume, averaging only 16.5 million shares per day so far this week. INTC gave up just $1.19 in today's trade making a low of $76.81 after the first hour of trading. The basic story here seems to be the same as in the broader markets, no new buyers and not many sellers. What is left is a stock that is trading sideways, looking for some leadership. If you haven't been stopped out yet, keep your stops close. Again we would suggest not entering a new play on Intel until some fresh buying enters the market, or in other words, a good move up accompanied by, you guessed it, VOLUME. In the news, Analyst Scott Randall at Soundview Technology Group did reiterate Intel as a strong buy Wednesday morning. Also Intel announced Thursday it has decided to stop making its discrete "stand alone" graphics chips, but does intend to continue with its integrated chipset production, focusing on the integrated solutions. NXLK $98.13 +3.44 (+0.50) We are keeping NXLK as a call play even though we would have hoped you were stopped out yesterday. Nextlink gave up $8.50 in yesterday's session closing just under $95. Right out of the gate this morning NXLK dropped another $5.69 hitting $89 in the first 15 minutes of trading. Again this is why Jim has that pesky ‘1st hour of trading’ rule. Just after noon ET, NXLK regained its composure and mounted its assault back up the hill making a high of the day at $99.50. That is a $10 range in less than three hours and the very reason we love to play NXLK. The stock has been extremely active recently creating lots of opportunities to profit. NXLK held up better than many of its partners in the Telecomm industry. There seemed to be quite a bit of concern today with the initiation of the recent price wars and the pending interest rate increases. We will continue to watch NXLK, as we are anticipating a split run for the 2:1 split, which we anticipate to be around August 27th. The $94-$95 area should provide support for Nextlink. Please use caution in opening a new play in NXLK as the recent action may be too much for conservative players. MMCN $50.88 +1.13 (+1.00) Talk about falling out of bed. After starting the day out higher Wednesday morning, MMCN stubbed its toe and drifted sideways to lower for most of the rest of the session. As we said for "most" of the session, however in the last 20 min of the day MMCN lost $2.38 to close at $49.75. With the momentum to the downside already built in MMCM opened down $0.38 this morning and lost another $2.57 to make a low of $46.81 before catching up with itself. Shortly before 11 ET investors decided enough was enough and stepped in to run MMCN back up to a high of $52.50 before settling at $50.88 up $1.13 for the session. What a ride! We are not sure if the wild is out of MMCN yet and caution should still be advised here. But given the strength of the recovery today we still believe MMCM will make its way higher. Volume has been a little better than average the past two days at about 600K which is more than you can see for the broad markets where volume has been anemic. Before considering a new play in MMCN wait for positive movement accompanied by new buyers (volume) and keep your stops close. One positive was Needham & Co analyst David Wong who reiterated his strong buy rating of MMCN Wednesday morning. SLR 70.38 -0.63 (-4.00) Well, it was not a hearty day for SLR on Thursday. The stock lost 0.63 points to end the trading session at 70.38. Volume today was well beneath its daily average of 1.28 million with only 673 thousands shares changing hands. After some further analysis today, it would be wise for participants in this play to use caution, at least until the Fed meets next Tuesday. Currently, SLR is sitting on its 10-dma. This should be monitored carefully, because if the stock penetrates this barrier the momentum could continue on a downward spiral. Also, pay close attention to the correlation between overall market performance and SLR’s stock price. We want to see signs of SLR outperforming the market before any new plays are opened. LSI $56.25 +0.81 (-2.63) The sharp decline by fellow chip maker Applied Materials (AMAT) put a wrench in the trading yesterday as LSI lost $1.06 on low volume. But this call play driven by the general upturn in the semiconductor sector fared better today. The volume picked up slightly and LSI closed within a fraction of its daily high. Both are good signs as LSI is consolidating at its support level of $56 from the 10-dma. Gruntal & Co is also confident on LSI. On Wednesday, they reiterated their strong buy rating for the stock and set a 12-month target price of $80. Still the conservative player will want to wait for a solid bounce out of support with a show of volume before initiating a new position. Keep your eye on other stocks in the sector for signs of movement since this is a tightly knit group. VRSN $88.25 -2.31 (+5.25) This momentum play has slowed down a bit on Thursday to take a much needed break. VRSN finally pulled back to consolidate after 7 consecutive days of gaining a total of $22.75 or 35%. Volume also dropped to about 75% of its normal levels the past couple of days. This pullback offers an opportunity to jump in the game if you are one of those HIGH RISK INTERNET players. There's still potential for profits, market permitting of course, with overhead resistance over 8 points away at $96.75 which is the 52-week high set in mid-July. You may have noticed that potential today as the stock bounced back and forth. Today alone gave investors a chance for multiple plays. BVSN $91.94 -7.25 (-1.56) The market giveth and the market taketh away. May your stops have triggered today to save your hard earned profits. Today we got taken on a ride down with BVSN. The stock opened today with a severe negative price gap before recovering a bit to plateau at around $97 and then lost it in the last two hours of trading. We are still above our 10-dma so a positive confirmation in the market could provide an entry opportunity. The drop today did turn some of our technical indicators negative. The news for BVSN is also in the negative with two analysts downgrading the stocks future outlook. The sharks are in the water so be careful! LXK $73.94 +0.00 (+1.31) Considering the skiddish market of late, LXK is holding it's own. Investors should remain cautious, as the market is, until the FOMC meeting sheds light on our direction from here. Today our market was on course for being a very light volume day and this translates into volatility. LXK followed suit, looking like a roller coaster on it's daily interval chart. Our 10-dma support is slowly catching us and as it approaches, may create another good buying opportunity next week. The sidelines aren’t such a bad place to be when uncertain and market uncertainty is certainly what we have. Be patient and LXK should provide some more good plays. HGSI $59.81 +0.44 (-0.31) HGSI was like a scary ride today! The morning looked like we were done for as we dropped below support. The afternoon provided relief as a late day bump kept us above support at $59.50. We did say this play was speculative, so check your risk tolerance (and your blood pressure.) HGSI turned negative on the MACD today, so set your stops as well. The stock is coming dangerously close to losing its spot on the call list. But there are reasons to keep your eye on HGSI. One reason is the company announced the hiring of a great asset today. Dr. Vivian Albert will direct the Molecular Biology division. She has an impressive record and three patents. She should prove to be beneficial as the company progresses towards a break through. As my youth soccer coach said, "When in doubt, kick it out!" Prudence would indicate doubt in the market so don't throw in a new play until some positive certainty is confirmed. **************** PICK NEWS - PUTS **************** U $32.81 -0.31 (+0.06) Trading has been pretty quiet lately in USAir. The stock is acting like it is ready to rollover after finding resistance from the 10-dma but it has downturn has been less convincing than normal. The stock has been drifting around on light volume this week. This is probably from a lack of news, which is the first time in awhile. We are still expecting a retest of the lows from last week but the low trading activity makes this a game of entry and exit points. Use patience on your entry and don’t be afraid to take a small profit. There is still money to be made while the stock drifts lower. AMR $60.19 -1.31 (-1.69) The news of a failed deal with their pilots has sent AMR to the lows for the week. The news came out on Wednesday that the pilots have again rejected a deal to incorporate pilots from Reno Air, which AMR has agreed to purchase, into a salary arrangement. This news sent AMR off of its highs of $64.50 yesterday to close only fractionally off the day-low today of $60.19. The silver lining in the news is that AMR will go ahead with their plan to purchase Reno Air on August 31, thus avoiding another setback. But until they strike a deal with the disgruntled AMR pilots, they will constantly have a dark cloud hanging over their stock price. This will obviously help our play. Technically, AMR bounced off resistance from the 200-dma at just over $64. We talked about this last weekend as being a good entry point. If you are in a play, it may be time to tighten down the stops after the nice two-day drop. TBH 69.63 -0.38 (-4.75) TBH is still showing us bearish movements that investors can profit from. The ADR closed down 0.38 to finish below seventy dollars at 69.63. Volume today was slightly on the heavy side with 2.5 mln shares changing hands. Political concerns, and the sliding dollar, are developments that should place continuing pressure on TBH. Historically, TBH has an unprecedented correlation with the Dow. With so many uncertainties facing the Dow of late, it should be apparent to all of our market savvy investors that bearish momentum should continue until the first part of next week before the FOMC meeting. Since last Friday TBH has lost more than 4.75 points off its trading price and as of this afternoon, there is no new news or developments to propel the ADR. ************** NEW CALL PLAYS ************** IDPH - IDEC Pharmaceutical $123.25 +3.31 (-1.50 this wk) IDEC Pharmaceuticals focuses on the commercialization and development of targeted therapies for the treatment of cancer and autoimmune diseases. The company's only approved product, the best-selling Rituxan, treats non-Hodgkin's lymphoma which afflict approximately 240,000 patients in the United States and rheumatoid arthritis, which afflicts almost 2 million people in the United States. IDEC's antibody products act chiefly through immune system mechanisms, exerting their effect by binding to specific, readily targeted immune cells in the patient's blood or lymphatic systems. One look at the chart and you know we are looking at a mover and a winner. The question is, can it continue? Anyone who bet against it during the past 3 months has lost and lost big. We think the trend will continue as the momentum behind the stock soars and it is soaring for good reason. IDPH owns the rights to the popular drug, Rituxan, which they developed. The sales for Rituxan grew by 112% to over $68 million in the second quarter. They also get royalties for sales of Rituximab which IDEC discovered but is marketed by Genetech. The bottom line is that sales are booming as the drug is now widely accepted. Also IDPH only has 12.8 million shares in float. This is making it difficult for institutions to gather the number of shares they want. That brings us to where we are today only $3.00 from a new high and a 300% return year to date. The stock has a history of consolidating for awhile and then spiking up. We want to open plays as the spike begins but it will require quick judgement. Due to the steep rise, the premiums are expensive so be careful. You don’t want to be holding during the consolidation phase and losing precious premiums. Today’s relative strength could be a sign a new move coming so plan your strategy accordingly. There has been no news this week but there are rumors about a possible stock split coming as soon as September. These are nothing more than rumors at this point but common sense would lead us to believe it is highly possible. They are authorized for 50M shares and have less than 25M outstanding so they could split the shares right now without a vote by the shareholders. BUY CALL SEP-120 IDQ-ID OI=1126 at $10.00 SL=7.50 BUY CALL SEP-125 IDQ-IE OI= 720 at $ 7.50 SL=5.75 BUY CALL SEP-130 IDQ-IF OI= 1 at $ 5.25 SL=3.50 BUY CALL OCT-125 IDQ-JE OI= 6 at $11.13 SL=9.00 Picked on Aug 19th at $69.69 P/E = 78 Change since picked +0.00 52-week high=$126.31 Analysts Ratings 6-5-1-0-0 52-week low =$17.25 Last earnings 07/22 est= .79 actual= .80 Next earnings 10/20 est= .41 versus= .08 Average Daily Volume = 446 K Chart = http://quote.yahoo.com/q?s=IDPH&d=3m GTW - Gateway Inc $89.25 -1.75 (+7.50 for the week) Gateway is the #2 direct marketer of PCs in the US only behind global leader, Dell Computer. Instead of using resellers, Gateway takes orders via phone or Web site and ships directly to the computer user saving the customer markup costs. They develop, manufacture, and support a broad product line of desktop and portable PCs, digital media PC's, servers, workstations, and other PC-related items. The company has also expanded into the Internet access market (gateway.net) and is continuing to add new Gateway Country showrooms across the US. Its array of customers include individuals, businesses, government agencies and educational facilities. Chairman and founder, Ted Waitt, still owns 41% of the company. Gateway is our new split play. On August 10th Gateway announced a 2:1 stock split and investors responded in an undeniable, positive manner. On strong volume, GTW has popped out of its comfortable support at $75. The momentum continued and GTW tacked on a couple more points over the next few days. But yesterday when Dell surged up following its great earnings report and a host of upgrades, GTW reached new heights with $5.75 in gains! Plus during intraday trading on Wednesday it peaked at $91.25 to set another 52-week high. With the strong sector news from Dell and the pay date for the stock split only a couple of weeks away on September 7th, GTW's momentum should continue to build. The slight pullback today should provide opportunities for solid entries over the next couple of trading days. Watch out for a pullback as the next support is at $82 from the 10-dma. In the news, Gerard Klauer Mattison & Co reiterated a "buy" rating and set a $100 target price on GTW. BUY CALL SEP-85 GTW-IQ OI=1297 at $ 8.00 SL=6.25 BUY CALL SEP-90 GTW-IR OI=1125 at $ 5.13 SL=3.00 BUY CALL SEP-95 GTW-IS OI= 935 at $ 3.13 SL=1.50 BUY CALL DEC-90 GTW-LR OI= 38 at $11.50 SL=9.25 BUY CALL DEC-95 GTW-LS OI= 52 at $ 9.38 SL=7.00 Picked on August 19th at $89.25 PE = 30 Change since picked +0.00 52 week high=$91.25 Analysts Ratings 13-7-1-1-0 52 week low =$36.12 Last earnings 06/99 est= .55 actual= .56 surprise=1.82% Next earnings 10-21 est= .68 versus= .51 Average daily volume = 1.58 mln. Chart = http://quote.yahoo.com/q?s=GTW&d=3m ************* NEW PUT PLAYS ************* IP - International Paper Co. $54.00 +1.25 (+0.00 this wk) International Paper has helped provide paper and associated paper products to the world for over 100 years. Despite the fact that the "electronic age" has come, diversification and combinations are allowing IP to stay competitive. Diversifying by providing several forest products such as lumber, photo- sensitive films, and chemicals, and combination through merger and acquisition with companies like Union Camp which they recently purchased. This business strategy has allowed IP to realize a 2% revenue gain, despite the recent "hard times" experienced in the paper and forest products industry. IP is committed to providing their global clients with value added products and ideas on a continuing basis. IP is almost like a long volley in a tennis match. Bouncing almost consistently between $55 at the high and $50 at the low for the last three months. We feel this play will continue to channel based on the anticipated market conditions. The stock is currently close to the high in the channel at $54. If the market continues to correct into the FOMC meeting on Tuesday, we think IP will provide investors a put play as it channels down to around $50. Then as the market turns positive again, we will adjust positions to calls and ride the channel to $55. Keep in mind that this play is based on past patterns and we may need to adjust as we go. But for now we expect IP to once again hit $50 in the short-term. This is the kind of play that you will want to map out your exit and stop loss orders as soon as you enter the play. Confirming IP's commitment to providing the industry with new ideas and products, the company announced the introduction of a product called LamMate. This product will provide users with a more cost effective solution to the commonly used high pressure laminates. Costs are reduced in the new product due to improved and innovative manufacturing processes. IP also announced the acquisition of Argentina's Bolsaflex company. The company is involved in the flexible packaging market and allows IP, through Union Camp, to capture this market area. BUY PUT SEP-55 IP-UK OI=317 at $2.81 SL=1.50 BUY PUT SEP-50 IP-UJ OI=159 at $0.88 SL=0.00 Average daily volume = 1.79 mln Chart = http://quote.yahoo.com/q?s=IP&d=3m T - AT&T Corp $48.19 -0.44 (-1.06 this wk) AT&T furnishes voice, video and data services which includes cellular phone and Internet services. AT&T targets businesses, private consumers and most government entities. In its quest toward telecom market dominance, AT&T has bought the #2 cable operator TCI (now AT&T Broadband & Internet Services). The company intends to use cable to dramatically expand its customer base by offering local as well as long distance phone services. Currently, AT&T serves more than 90 mln consumers, and is now forming a partnership with British Telecomm that will solidify a strong global position. The juggernaut of the telecommunications industry has made it to our put list. T gave us the green light today when it finally penetrated its 10-dma and is showing strong signs of continuing to head south. After reviewing several charts, it appears that T has not ended the trading session above fifty dollars since Aug 09. With the chaotic state of the Dow over an interest rate hike, and no positive sector support, it looks like today’s penetration could be the catalyst for declining stock performance in the short-term. Today, AT&T lost $0.44 to end the trading session at $48.19. Trading volume was well below its average of 9.56 mln shares and closed the day with only 6.91 mln changing hands. As a Dow component, this type of performance should be no great surprise today or tomorrow if the bearish momentum continues to play out its hand. AT&T appears to show lots of indications of loosing ground over the short-term, so it maybe wise to implement a little due diligence and see if this play is right for you. BUY PUT T-UJ SEP-50 IO=4959 at $1.50 SL=0.75 BUY PUT T-UK SEP-55 IO=2338 at $7.13 SL=5.75 Average Daily Volume = 9.56 mln Chart = http://quote.yahoo.com/q?s=T&d=3m AET - Aetna Inc. $78.25 -0.75 (-0.81 this wk) Aetna is a leader in the managed health care industry. Their products are centered around three different areas, healthcare, retirement services and international business. AET provides group and individual health care products, life and health insurance and financial services. There retirement services include investment products, along with administrative and pension plan services. In an attempt to solidify their position in the Insurance and financial services industry Aetna has recently purchased U.S. Healthcare, New York Life's NYLCare, and Prudential Healthcare. To say that AET has been struggling lately would be an understatement. AET started its slide back in early May, after hitting a 52 week high of $99.88. AET has not been able to keep up with others in the insurance industry. The industry index peaked about the same time and then flat- lined until late July. At the end of July Aetna released second quarter earnings of $1.10 per share, compared to analysts estimates of $1.09. This equals an increase of about 12% compared to the same period last year. Total revenues grew 23 percent. It would appear as though Aetna is in for a good year, however apparently not good enough for Wall Street. AET has been recently trading in the $80 area which seemed to be providing support for the health care company. Honestly we don't see anything in the near future that could prop it up. Earlier this month AET did attempted to surpass the $84.00 mark only to be greeted by a wave of selling. The scenario seems to be no new interest and sooner or later AET falls under its own weight. Even though the "wall of worry" concerning interest rates and inflation may be waning it hasn't helped AET. We would look for further weakness in AET as an opportunity to buy puts. Technically there is no support until the $74-75 area and then $65-67. As always confirm market direction and assess your risk profile before entering any new position. In other news, a report issued August 9th, in Bloomberg cited more than half of the U.S. health maintenance organizations lost money and the industry as a whole reported a loss of $490 million. On July 30th SG Cowen did reiterate a strong buy rating for AET, citing a 12-month price target of $110.00. BUY PUT OCT-75 AET-VO OI=131 at $2.50 SL=$1.50 BUY PUT OCT-80 AET-VP OI=250 at $5.00 SL=$3.75 BUY PUT OCT-85 AET-VQ OI=114 at $8.38 SL=$6.50 Average daily volume = 571 K Chart = http://quote.yahoo.com/q?s=AET&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. 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The Option Investor Newsletter Thursday 8-19-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ********************* PLAY OF THE DAY - PUT ********************* AMR - AMR Corporation $60.19 -1.31 (-1.69this week)(-0.06)(-2.94) Sunday's Write Up 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. Tuesday's Update AMR $63.25 +0.25 (+1.38) Despite higher oil prices, American is soaring this week. Well soaring is a little strong maybe but it's much better than the sentiment of late. AMR started the week on a positive note by sending letters to all frequent flyers apologizing for delays and including 2500 free sky miles as an apology. This is a step in the right direction for a company that has lost the faith of its customers. But the big news this week will be labor talks that are going on with the company's pilots. Any resolution to this issue will be considered a positive for AMR's stock. But more problems with a new salary structure is bound to translate into losses on Wall Street. So keep an ear tuned to the news wire for any recent developments and use stops to avoid a rally sparked by the two sides reaching an agreement. Thursday's Update AMR $60.19 -1.31 (-1.69) The news of a failed deal with their pilots has sent AMR to the lows for the week. The news came out on Wednesday that the pilots have again rejected a deal to incorporate pilots from Reno Air, which AMR has agreed to purchase, into a salary arrangement. This news sent AMR off of its highs of $64.50 yesterday to close only fractionally off the day-low today of $60.19. The silver lining in the news is that AMR will go ahead with their plan to purchase Reno Air on August 31, thus avoiding another setback. But until they strike a deal with the disgruntled AMR pilots, they will constantly have a dark cloud hanging over their stock price. This will obviously help our play. Technically, AMR bounced off resistance from the 200-dma at just over $64. We talked about this last weekend as being a good entry point. If you are in a play, it may be time to tighten down the stops after the nice two-day drop. BUY PUT SEP-60*AMR-UL OI=559 at $2.75 SL=1.38 BUY PUT SEP-65 AMR-UM OI=320 at $5.88 SL=4.25 Average Daily Volume = 940 K Chart = http://quote.yahoo.com/q?s=AMR&d=3m ********* STRADDLES ********* Market Review for Thursday, August 19, 1999 Markets have continued to consolidate through the week, as choppy markets have lead to a non-decisive market. How long is this going to continue. The break-out picks for stock market consolidation are moving. Most of the stock picks for the last two weeks were moving down. The best breakout mover continues to be Maytag, as the stock is hovering around 65. Looking at all optionable stocks, my results show that nealy 34% of all optionable stocks are in their lowest range of volatility, when looking at the premium range for the last 2 years. Only 13% of all optionable stocks are considered very expensive. Most of this shift is due to the downslide in the Internet stocks. As prices of individual stocks head south, so do the implied volatility of most. There are some exceptions to the rule, such as when stocks reach new lows or fall very close to zero. The covered call and naked put section of this Email have mainly stocks below $20. Why is this? Because most stocks that fall below $20 per share start to rise in options volatility, mostly do to some dreamers that think the stock will return to past levels. These dreamers bid up the price of the options, making them more expensive than normal, therefore causing in increase in implied volatility. Straddle Mailbag for Today There was a great question on Implied Volatility Ranges that I wanted to answer to everyone. OI subscriber David writes, I'm wondering what IV Range means, and what last IV means. The IV is really the options premium converted into a percentage called Implied volatility. What we do is look at a range of up to 2 years. We look at the high, the low, and the current IV. Knowing your range Hi-low, and looking at today’s current, you can easily see where the current option premium is versus its long-term range. That tells you if the options are cheap when comparing them to a past time frame. While I cannot guarantee that the range will hold, its a safe bet that looking at implied volatility compared to its range would reduce risk. Using option -buying strategies when options implied volatility is at its range lows, and using option-selling strategies when implied volatility is at its highs will reduce risk. Hope it helps you. Check in Sunday’s edition for more breakout stocks that I look at for straddle positions, as well as stocks that have some cheap options relative to their highs and lows in Implied Volatility. Tom Gentile Optionetics ***************** COMBINATION PLAYS ***************** Rising Imports Spur New Inflation Fears.. U.S. stocks fell again Thursday after a report on the increasing trade deficit fueled fears the Federal Reserve may need to move aggressively to slow the strong economy. Wednesday, August 18 The markets moved lower amid profit-taking on Wednesday and blue chip issues were hardest hit with Hewlett Packard (HWP), AT&T (T) and American Express (AXP) causing half of the Dow’s losses. The most watched index of industrial stocks was down 125 points at 10,991. The technology-laden Nasdaq composite ended 13 points lower at 2,657. In the broader market, decliners beat advancers 3 to 2 on moderate volume of 676 million shares on the NYSE. The 30-year Treasury bond rose 8/32, lowering the yield to 5.99%. Tuesday's new plays (positions/opening prices/strategy): Echostar DISH DEC65C/AUG72C $14.00 debit diagonal Echostar DISH DEC65C/AUG75C $14.87 debit diagonal Polaroid PRD LJAN25/AUG25C $4.75 debit LEAPS/CC's Pacific Gtwy PGEX OCT25C/AUG25C $2.68 debit calendar OmniQuip OMQP SEP10C/AUG12C $2.38 debit diagonal Tuesday's new plays were a mixed lot. DISH opened $1.25 higher but fell almost immediately, down to an early low of $70. By 10 AM the stock had tested $71 successfully and appeared to be trading in a stable range. The difficulty of course, was which way to play the position; bullish or bearish. In this case, our personal outlook favored an upward bias but the market appeared to be trading near a recent resistance area. We decided to open the bullish spread (a slightly better theoretical price) but we will track both plays and discuss the common spread management techniques along the way. A target debit of $14.00 was easily achieved for the ATM play and a slightly lower (adjusted) target of $14.87 was the initial opening price for the OTM position. In the end, the stock recovered and closed near the opening price. Of course, we will watch this position closely until the Friday expiration. PRD was up and down in a small range throughout the day and our initial debit was a little higher than the positions that traded; a low of $4.62 was observed near noon. PGEX was also difficult from the start as limit orders (before the open) pushed the prices to the ends of our spread. Without actually trading it personally, I would estimate the best available opening price was near $2.68, about $0.19 short of our target. OMQP was also unique, trading down to the $10 range before rebounding to close up $0.12. It will be interesting to see if this position profits on Friday. Portfolio plays: Many of our portfolio stocks actually rebounded today and one of the best performers was Barnes&noble.com (BNBN). The stock moved up $2.50 to just above $19 on news of an upgrade by Henry Blodget, the Internet analyst at Merrill Lynch. Unfortunately, our positions had already been closed to preserve profits (or limit losses). Another of the smaller (and previously adjusted) issues Internet issues, Cyberian Outpost (COOL) moved higher with the group, closing near $9.25. Rainbow Technologies (RNBO) was the final participant in the rally of smaller web stocks and the positive move allowed us to roll forward the bullish calendar spread into September to a new debit of $0.68 on the OCT15C/SEP15C position. As the expiration period winds down, we are in the final stages of closing our remaining positions (both positive and negative) to prepare for the monthly summary. There are a few profitable August (ITM) spreads that must be exited before Friday. Those include: TNB (AUG50P/45P) and SQNT (AUG12C/15C); both at the maximum profit, and TMK (AUG 30C/35C/40C - butterfly) at $1.62 credit. ESV (SEP22C/AUG22C), was a short-term volatility play with an August position that will need to be closed on Friday along with the rest of our sold (short) option. It is currently trading near break-even on an older spread (and a small profit on a newer one) so we will recommend that you consider closing the play early. Many of the long-term positions were rolled into September today. Those positions (and the current bought/sold options) include: Home Depot HD AUG65C/SEP65C at $1.50 credit Johnson & Johnson JNJ AUG95C/SEP95C at $2.38 credit Johnson & Johnson JNJ AUG100C/S100C at $1.50 credit Motorola MOT AUG90C/SEP90C at $3.00 credit Sepracor SEPR AUG85C/SEP80C at $4.00 credit Worldcom WCOM AUG90C/SEP85C at $1.00 credit Thursday, August 19 U.S. stocks fell again Thursday after a report on the increasing trade deficit fueled fears the Federal Reserve may need to move aggressively to slow the strong economy. The Dow ended down 27 points at 10,963 and the technology-laden Nasdaq composite fell 36 points to 2,621. In the broader market, declining issues beat advances 1,610 to 1,377 on moderate volume of 673 million shares on the NYSE. The benchmark 30-year U.S. Treasury bond fell 14/32 with the yield rising to 6.03% from Wednesday's close of 5.99%. Portfolio plays: Lots of activity today, even in a down market. The big mover was one of our newest positions; Echostar (DISH), climbing $5 to $77. Of course the bullish move was happily welcomed but we would have preferred a rally NEXT week. Tomorrow we will have to close the sold (short) position and decide what bias to take in the coming month. Newmont Mining (NEM) has chosen expiration week to make a a final attempt at profitability. The stock price is trading at our sold strike and the play will produce a positive return if nothing drastic occurs tomorrow. National Semiconductor (NSM) also closed up $1.25 to $30 and our new sold position (September) will probably be at that (higher) strike price. Omniquip (OMQP) is holding steady at $12-$13 and we expect the position will be profitable after Friday’s close. RF Micro Devices (RFMD) split today and our credit spread (safely OTM) is now based on a the $27.50/$30.00 strikes. The oil stocks were up today (as they usually are when the broad market falters) and Unocal (UCL) made a nice move, climbing $2 to $43. Implied volatility was up and as the stock climbed, new call buyers piled on while some others bought cheap protective puts. Halliburton (HAL) and most of our other drilling/oil service stocks followed suit. Baker Hughes (BHI) finished right at $35, the sold strike, and we expect the position will remain near that price through Friday afternoon. That issue has routinely produced some of the best calendar spreads in our portfolio. A few more of the long-term positions were rolled into September today. The current plays include: Dupont (DD), Halliburton (HAL), Intel (INTC), National Semi (NSM) and Unocal (UCL). There are still a few remaining spreads to close/adjust or roll-forward on Friday and the complete summary of August positions will be posted in Tuesday’s newsletter. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - ****************************************************************** CHIR - Chiron Corporation $29.37 *** Merger/Take-Over? *** Chiron develops, manufactures and markets human healthcare products for treatment, prevention and diagnosis of disease utilizing innovations in biology & chemistry. CHIR has a strong commitment to research as an essential component of its product development effort. CHIR focuses their research and development on areas in which they have particular strengths; infectious diseases, cancer and cardiovascular diseases. Chiron recently filed updated survival data that reinforces the long-term benefit of their drug product Proleukin for patients with advanced-stage kidney cancer or melanoma. According to the company, the data shows that the drug, a recombinant form of interleukin-2, can extend cancer-free survival 10 years without further treatment in some patients with metastatic kidney cancer or metastatic melanoma. In a follow-up story, the company also announced that it has begun a Phase III trial to help define the potential added benefits of Proleukin when combined with other anti-HIV therapies and determine whether or not the drug can augment the immune system; resulting in a delay of HIV disease progression. In addition to the new drug developments, CHIR appears to be a takeover target of Novartis AG, a healthcare products company headquartered in Switzerland. The company is rumored to have an offer of $40 a share in the works. The new speculation has moved implied volatility and volume higher recently and the small disparity in September ITM options will provide us with a favorable speculation position. PLAY (aggressive - bullish/diagonal spread): BUY CALL OCT-25 CIQ-JE OI=2195 A=$5.12 SELL CALL SEP-30 CIQ-IF OI=1324 B=$1.62 INITIAL NET DEBIT TARGET=$3.25 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=CHIR&d=3m ****************************************************************** UCL - Unocal $43.00 *** Merger/Takeover? *** Unocal Corporation explores for and produces oil and gas in Asia and the United States Gulf of Mexico. The company also produces geothermal energy, provides electrical power, manufactures and markets nitrogen-based fertilizers, petroleum coke, graphites, and specialty minerals. Oil stocks rebounded today on bullish sentiment after the market discounted a small increase in gasoline that brought values down earlier in the week. Traders and analysts remained confident about the oil sector’s recent rally, based on the speculation that major producers would adhere to their output cuts, and reduce the global supply glut. Big draws on crude stocks in the latest weekly data also boosted the positive outlook for the sector. In today’s trading, gainers among oil and energy shares outpaced losers almost two to one and Unocal (UCL) was one of the group leaders, up almost $2 to $42.81 amid speculation of a possible merger with rival Texaco (TX). Officials from both companies declined to comment but trading volume and implied volatility in options increased as traders moved into bullish positions. We have heard this rumor before and there is really no way of determining its validity until the announcement occurs. However, it appears there is just enough disparity and time value in this position to overcome a fair sized move in either direction. With the standard negotiating delays and share value speculation that surround most mergers (even after they are announced), we are willing to take the plunge. PLAY (aggressive - bullish/calendar spread): BUY CALL JAN-45 UCL-AI OI=391 A=$4.25 SELL CALL SEP-45 UCL-II OI=95 B=$1.93 INITIAL NET DEBIT TARGET=$2.12 TARGET ROI=50% (five months) Chart = http://quote.yahoo.com/q?s=UCL&d=3m ****************************************************************** XON - Exxon $81.94 *** Portfolio Hedge *** Exxon's principal business is energy, involving the exploration for and the production of crude oil and natural gas in the US and over 100 countries worldwide. Additionally, Exxon manufactures, transports, and sells crude oil, natural gas, and other petroleum products. Exxon's chemical division is engaged in the exploration, mining, and selling of basic petrochemicals, including olefins and aromatics, and is a leading supplier of specialty rubbers and of additives for fuels and lubricants. Exxon also has interests in electric power generation facilities. In today’s market-wide slump, Exxon was one of the few Dow stocks that avoided the sell-off. The oil sector rally helped along with news of Exxon’s partnership with Enterprise Products Partners L.P. (EPD) in an agreement to own and operate a propylene concentration unit being built in Louisiana. The unit will refine propylene, a basic building-block petrochemical used in plastics, new synthetic fibers and foams. The outlook for the market is weak (at best) and most investors tend to move into hedge and safety issues when it falters. The long-term technical trend for this issue is favorable and with a historically stable range near the current price, it should be an easy position to manage, even for novice traders. PLAY (conservative - bullish/Covered-Calls On LEAPS): BUY JAN01-85 ZXO-AQ OI=189 A=$11.00 SELL SEP99-85 XON-IQ OI=1554 B=$1.00 INITIAL NET DEBIT TARGET=$9.75 TARGET ROI=150% (17 months) Chart = http://quote.yahoo.com/q?s=XON&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an Email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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