The Option Investor Newsletter Thursday 8-26-99 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) ************************************************************ 8-26-99 High Low Volume Advances Decline DOW 11198.45 - 127.59 11333.00 11191.48 719,010k 1,155 1,799 Nasdaq 2774.62 - 30.98 2819.90 2774.11 1104,691k 1,711 2,128 S&P-100 714.60 - 9.23 723.83 714.07 Totals 2,866 3,927 S&P-500 1362.01 - 19.78 1381.79 1361.62 42.2% 57.8% $RUT 436.02 - 1.84 438.25 436.02 $TRAN 3213.86 - 95.39 3310.09 3213.86 VIX 22.33 + 1.66 22.66 20.91 Put/Call Ratio .65 ************************************************************* Four steps forward, one step back! After four straight days of advances the Nasdaq rested. After gaining more than +7% in the last four days the Nasdaq finally gave up -31 points in a pause to refresh on its effort to best the previous high of 2864. The rollover on the Nasdaq was all the bears needed to drop the Dow for a -127 loss. No one is concerned about the pullback and simply view it as a normal cycle. After the Fed blessing on Tuesday, we view it as the calm before the rally. Look at the charts above and you will see several points of interest. First the advance/decline line has stopped its free fall descent but advances did get beaten by declines today by a margin of 6 to 4. Secondly we try to convince readers constantly that the markets move in tandem and these charts are a prime example. Each includes the Fed spike, the Thursday/Friday sell off last week and the drop today. Also note the GE chart. Do you see any similarities? They are all the same. Stocks follow (or lead) the market. The reason for this quick lesson is to remind readers that any good call plays we currently have or pick in the next couple of days, MAY go down before they go up in the expected Labor Day rally. They can still be good plays but they will follow the market. Sorry for the sideline here but we have a lot of new readers from the Money Show and we want to get them started off right. Back to the business. The Dow and Nasdaq dropped on simple profit taking from a great run. The chances of a -3% pullback on a +7% gain is almost 100% under normal circumstances. In reality we view any pullback here as a buying opportunity after the Fed blessing. -3% would be -84 points so we are sure not going to gripe about a -31 today. Part of the drop today was fueled by the drop in oil stocks as well. Oil stocks are reeling from news that Germany is planning to sell 30 mln bbls from its reserves and Iraq pumped more oil last month than any month since the gulf war 10 years ago, 18.8 mln bbls. The news prompted a -.89 drop in oil prices yesterday and only a +.35 recovery today. There is worry that OPEC will now ramp up production to try and capture some revenue while the price is still high. After curtailing production to get prices back up, they don't want Iraq grabbing all the dough. This of course would slam prices back to where they were several months ago and start the process all over again. Retailers took a hit today after a downgrade from Merrill Lynch but they are expected to rebound quickly. Consumer spending is still running rampant as evidenced by that component of the GDP report today. Actually the GDP was market positive with a weaker than expected +1.8% growth. The previous estimates were for +2.3% growth. While this was market positive the business inventories could have been seen as market negative. They came in less than expected and it is widely believed that manufacturers will now have to ramp up production to build inventories for the holiday season approaching. Consumers have more spendable income and are not holding back. While this could be inflationary the Fed is not expected to do anything else this year. Bonds were very positive today with yields dropping to 5.86% before bouncing to close at 5.90% on profit taking as well. Volume was strong today on the Nasdaq with over 1 bln shares traded again but the NYSE was only moderate with 715 mln shares. Strong volume on a down day is not a good sign but we feel the Nasdaq volume was helped by bargain hunting in the Internet sector. Internets were mixed but mostly positive and many are starting to break out again. Of growing interest in the technical analysis circles is the wide divergence between the Transports and the Dow. Dow theory, as many of you know, requires the transports to confirm any Dow move. If the transports are dropping it will be hard for the Dow to sustain any rally. The index had rallied on Tue/Wed based on the drop in oil prices but dropped -96 points today. The big news today was the Cisco Systems purchase of Cerent for $6.9 bln. Cerent makes multiplexors for telecoms. Specifically they make a box that takes high speed voice and data from copper wire lines and converts it to fiber and then back again on the receiving end. The technical features of this box are thought to be a breakthrough in the industry. Some industry watchers are very skeptical and concerned that CSCO would pay $7 bln for a company with inception to date sales of less than $10 million. $10 MLN !! Lets see, if I could get that kind of multiple for OIN then we would be worth $10 bln or more. Yes, for that price I am for sale. (I can dream can't I?) The CSCO purchase sent TLAB stock plummeting but analysts rushed to prop up TLAB. Calling for a buy of TLAB on any weakness and reiterating an $80 price target the stock did manage to close for only a loss of -$5.31. TLAB actually has a bigger market than Cerent based on client types and market share. In 1997 CSCO was selling into a $25 bln data market. With the addition of Cerent and several others recently they expect their market to be $150 bln by 2002. Speaking of price targets and upgrades, DLJ is really pounding the table on Priceline.com (PCLN) now $72 with a price target of $190. The news stopped a downward slide with a +7.44 gain. Still we need to see a continuation of the upward move before making it a play. Got any dirty money? How about some IMF loans you want to skim. If so then call the Bank of New York. The big story out today was news of more than $15 bln in money that had been laundered by the Russian Mafia through the Bank of New York. When you hear Mafia you automatically think of the criminal enterprises of gambling and protection among others. In Russia they evidently think big. There are many rumors that the scam may have gone all the way to the Kremlin and involved misdirecting IMF loan money to finance elections and personal fortunes. I hope they got their moneys worth, I thought you could buy Russia for less than $15 bln last summer. Now if you have some money lying around, dirty or otherwise, then it is about time to put it to work. If you have been reading this commentary for long then you know I am expecting a rally after Labor Day. Actually the bargain hunting should start next week as the early birds try to get a head start. Tom Galvin with DLJ came out today with a 10,800 target for the DOW. He is basing the target on third quarter earnings which are expected to be better than any 3Q for the last four years. This, along with the Fed blessing should propel the market strongly for the next six weeks. If you have cash then start looking for places to put it next week and look at any weakness as a buying opportunity. Pick your entry points carefully, sell too soon. Jim Brown Editor *************** Market Posture *************** As of Market Close - Thursday, August 26, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 11,198 Neutral 7.20 SPX S&P 500 1,320 1,420 1,362 Neutral 8.17 OEX S&P 100 675 735 715 Neutral 8.13 RUT Russell 2000 440 465 436 BEARISH 8.06 NDX NASD 100 2,250 2,468 2,417 Neutral 8.13 MSH High Tech 1,125 1,250 1,197 Neutral 8.13 XCI Hardware 1,035 1,050 1,070 BULLISH 8.24 CWX Software 725 844 801 Neutral 8.13 SOX Semiconductor 515 520 520 BULLISH 8.24 NWX Networking 555 625 586 Neutral 8.13 INX Internet 500 580 459 BEARISH 7.20 BIX Banking 690 710 647 BEARISH 7.23 XBD Brokerage 410 440 401 BEARISH 7.23 IUX Insurance 645 660 633 BEARISH 7.23 RLX Retail 915 960 863 BEARISH 7.23 DRG Drug 370 400 374 Neutral 8.24 HCX Healthcare 750 800 766 Neutral 8.24 XAL Airline 180 190 158 BEARISH 5.21 OIX Oil & Gas 285 310 302 Neutral 8.26 * Posture Alert The broad market finally blew off some steam, as investors took handsome profits off the table. The selling became contagious in the last hour, with many people selling their winners at the same time. The loser board was led by Airlines (-4.05%), Oil & Gas (-2.80%), Banking (-2.52%), and Retail (-2.48%). With Thursday's action, we have downgraded Oil & Gas to Neutral. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** Double Top Formation, or Breakout? Is there anything worse than being too cautious, and then watching the market make a big move and not participating with 100% of your equity? These last three weeks, going into the Fed meeting, were cautious times for Professional Money Managers and Investors alike. Many investors decided to wait until the day after the Fed meet, before making any purchases. This was the smart way to play, even though the market made a big run prior to the meeting. But is there something worse than being too cautious? Yes, being too aggressive and not setting stops. Many investors watched their accounts get chopped in half (or worse) in July, and then watched the market come back to where they should have set stop losses originally. To play the "wait until I get break-even game" is probably one of the worst things you can do. The last thing you really want to do, is make the same mistake twice! Obviously, no one can predict the future, or we'd all be gazillionaires (spell check had no clue what this word was supposed to be). Several things that were missing with this latest run-up ahead of the Fed, was good volume, and market breadth (advance/decline). The volume has picked up recently, which is good, however, there are still numerous stocks and sectors that haven't participated (see Tuesday's letter). When looking at some of the charts of the indexes, one technical term that comes to mind is a double top. Looking at the chart below of the Nasdaq 100 (NDX), you can see potential for a double top. If this is the start of a failed rally, you want to be prepared. NOW, WE ARE NOT SAYING THAT THIS IS GOING TO HAPPEN. The whole point of bringing up the double top issue is to show you both sides of the coin (both bullish and bearish). So if you made some mistakes back in July (not setting stops, not selling to soon, using too much leverage, not hedging), we hope to help you from avoiding the same mistakes again. When you hear us hammering about confirmation of the rally, what we want to see is higher highs and higher lows w/good volume and breadth. This is a fairly common pattern, and should follow a major trend. It is formed when prices reach the same level twice, but are unable to move higher. A move below the neckline is needed to confirm the double top formation. Now we can talk about the potential breakout. Here at Pinnacle Capital, we always try to use our industry sources to our benefit and yours. What we are hearing lately is that lots of new money is starting to flow into this market. Whether it's coming from CD's, checking accounts, overseas, whatever, cash is building up on the sidelines for this market. Many people missed this latest rally, and want to jump on board. These investors might not have bought in yet, but many are waiting for a significant pullback. This will give nice support for the market, and should give more confidence for everyone. If we do see a big pullback, followed by a strong snap back up (i.e. Nasdaq down -50 in the morning, yet closing positive +40), then we should have confirmation of the purchasing power and sentiment of investors, and then, we should see a nice breakout to new highs. Another positive is that we are starting to see large moves in numerous high tech's (i.e. many stocks up +15 or up +20 in a day). The short sellers are getting "SQUEEZED", and are also getting buried by the growing positive sentiment. Their reluctance to hold onto any short position will only add fuel to the fire. When you combine these above issues with the fact that the "FEAR FACTOR" of higher interest rates has subsided, and the "GREED FACTOR" from everyone is starting to kick-in, you have potential of a strong breakout. If we do get a pullback, with no significant bounce (failed rally), then remember the double top formation, and don't make the same mistakes twice. BULLISH Signs: Investor Intelligence: As a contrarian indicator, the amount of Bullish investors is at a recent low, and bearish investors is at a recent high. Interest Rates: The yield on the 30-yr Treasury is still below the 6% benchmark, which if held, could prove very positive to this market. Peak Open Interest: The contraian OEX put-call ratio clocking in at 1.9 suggesting bearish sentiment picking up steam. Mixed Signs: Volume: The Dow broke new highs, but on very lackluster volume. To truly break out to the upside, we need better volume to confirm the move. BEARISH Signs: Pinnacle Index: The Pinnacle Index for the OEX (725-755) 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. Advance/Decline Line: The A/D line has already rolled over, and has slowed down, but is still in negative territory. OTM Call Analysis As we move through the September expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 700-800 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 700-800) 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% September Expiration Cycle OEX OTM Call Analysis (Open Interest September 690-780) Date Open Interest Change % Alert Friday, August 20 41,346 - Market Sentiment at a Glance Friday Tues Thurs Indicator (8/20) (8/24) (8/26) Alert Pinnacle Index (OEX): Overhead Resistance (725-755) 60.0 57.0 28.4 Underlying Support (690-720) 1.8 1.4 1.1 Underlying Support (630-680) 2.8 3.8 4.4 Put/Call Ratios: CBOE Total P/C Ratio .7 .6 .5 CBOE Equity P/C Ratio .6 .4 .4 OEX P/C Ratio 1.1 1.7 .9 Peak Open Interest (OEX): Puts 650 660 660 Calls 710 690 760 P/C Ratio 1.60 1.62 1.91 Market Volatility Index (VIX): CBOE VIX 22.33 Investors Intelligence: Bullish 44.50% * Bearish 31.10% * 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 (8/20) (8/24) (8/26) Overhead Resistance (725-755) 60.00 56.96 28.40 OEX Close 696.59 713.56 714.60 Underlying Support (690-720) 1.78 1.42 1.09 Underlying Support (630-680) 2.76 3.81 4.39 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 725/755 level while the underlying support is holding at the OEX 690/720 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (8/20) (8/24) (8/26) CBOE Total P/C Ratio .67 .56 .55 CBOE Equity P/C Ratio .56 .38 .44 OEX P/C Ratio 1.08 1.74 .92 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (8/20) (8/24) (8/26) Puts 650 / 9,547 660 / 11,479 660 / 12,304 Calls 710 / 5,828 690 / 7,078 760 / 6,440 Put/Call Ratio 1.64 1.62 1.91 (VIX) Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 05, 1999 Bottom? 32.12 August 26, 1999 22.33 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 Aug 25, 1999 44.5 31.1 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 11198.45 199.15 -16.46 42.74 -127.59 97.84 Nasdaq 2774.62 71.24 32.80 53.23 -30.98 126.29 $OEX 714.60 13.34 3.63 10.27 -9.23 18.01 $SPX 1362.01 23.61 3.28 18.29 -19.78 25.40 $RUT 436.02 2.87 -0.13 0.74 -1.84 1.64 $TRAN 3213.86 47.69 36.48 74.35 -95.39 63.13 $VIX 22.33 -0.85 -0.73 -1.62 1.66 -1.54 Calls Mon Tue Wed Thu Week VRSN 110.50 7.94 5.81 5.56 4.25 23.56 Going up! AMZN 128.56 4.94 1.69 12.81 -4.31 15.13 New EXDS 86.25 6.19 5.25 -0.44 -0.13 10.88 Momentum BVSN 102.88 6.00 -1.88 11.06 -8.06 7.13 Entry point? GTW 97.00 3.19 3.31 1.69 -1.69 6.50 Strong buy PMCS 97.00 4.06 2.69 1.50 -2.69 5.56 Drifting CSCO 68.94 1.63 0.63 2.25 0.31 4.81 Breakout SFA 51.13 1.63 0.81 0.81 1.31 4.56 New IDPH 129.75 11.13 -1.56 -3.56 -2.25 3.75 Accumulate SLR 75.44 2.50 2.13 1.75 -2.63 3.75 Bounce!! HGSI 65.63 5.81 0.81 -0.63 -2.50 3.50 Pullback LXK 78.06 1.38 -0.69 3.69 -1.56 2.81 Profitable ERTS 66.88 1.94 0.94 -1.50 0.00 1.38 Strength INTC 81.06 3.00 0.19 0.56 -2.63 1.13 Promising UIS 44.69 0.06 0.31 0.50 -0.13 0.75 Opportunity MMCN 52.25 1.38 -1.31 3.06 -3.75 -0.63 Volatile ATML 38.31 1.44 0.56 -2.75 -0.81 -1.56 Dropped SNE 128.25 -3.81 0.13 -0.44 -3.88 -8.00 Reversed Puts TWX 62.44 -0.63 -4.56 1.13 -0.31 -4.38 Holding on ANF 35.31 -1.31 -1.38 0.63 -0.94 -3.00 Weak sector IP 51.50 0.06 -1.50 -1.94 0.50 -2.88 On schedule WLP 76.13 -1.94 -0.31 0.81 -0.38 -1.81 Indecisive NVLS 56.94 1.75 1.69 -0.06 -0.88 2.50 Rolling over T 49.94 0.38 -0.63 2.63 0.69 3.06 Still alive WCOM 78.31 2.69 2.38 2.25 -3.06 4.25 New **************** 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: ****** ATML $38.31 -0.81 (-1.56) It seemed like everyone was having a fun, profitable day yesterday after expected news from the Federal Reserve. So what happened to ATML? Well it got hit by weakness in the semiconductor sector. Many in the sector had similar drops yesterday. Today however, many of those same stocks had significant gains and ATML did not participate as robustly as we would have liked. We were up for most of the day until the late afternoon selling pressure took us down and unfortunately out. We dropped below our support level of $39 from the 10-dma. This has negative technical indicator has forced us to look for an exit point. We feel our money can be better allocated in other areas so ATML is a drop for now. PUTS: ****** No dropped puts today. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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 8-26-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** INTC $81.06 -2.63 (+1.13) After an early sag yesterday, INTC managed to tack on $0.56. Today however, INTC couldn't fight the market's downturn and wound up losing $2.63. Other chip makers were mostly lower, except Micron, which was up $0.25 on an upgrade and Motorola was up $0.94. CBS MarketWatch quoted Montgomery Scott's head stock analyst, Jim Meyer, who is not concerned with today's lower stock prices for the chip makers. He said business is "extraordinarily good for them" and that today's action was profit-taking. Analysts are seeing strong demand for Intel's chips for the foreseeable future. That demand, coupled with an interest rate picture that tech investors like, should help Intel continue higher. Wait for the profit-taking to end before starting new positions. In the news: Intergraph, which won an injunction against Intel earlier this year, claims Intel is not complying with the court injunction, which INTC denies. Also, Oki Electris and Intel KK, Intel's Japanese unit, have announced that they will work together in developing computer telephony products. SNE $128.25 -3.88 (-8.00) Well we've seen this before from Sony but it still makes us uncomfortable every time it happens. What we are talking about it is SNE breaking below the 10-dma. You will notice this phenomenon every couple of weeks on the chart. It acts like it is technically breaking below support and then reverses to head on to new heights. So instead of abandoning ship right away, we will give it one more chance to repeat this pattern. But be advised that we are very cautious on the stock right now. Any firm move below $128 is the indication that it is time to exit the play. We have searched relentlessly for any sort of news to be causing this pullback after Friday's bullish sentiment but without any luck. The Nikkei has dropped below 18,000 this week and the yen is holding at relatively high levels but we still feel these are short-term developments. Remember the $128 level will be the key to keeping this play. IDPH $129.75 -2.25 (+3.75) A Merrill Lynch rating change has put IDEC into a consolidation phase. We hesitate to even use the term downgrade because Merrill is maintaining the long- term buy rating but they changed the short-term rating to an accumulate from a buy. They said that their only concern is due to the valuation which has exceeded projections. They aren't the only one either as Prudential did the same thing with their rating but didn't give any reason. This is why we have seen IDPH pullback to the 10-dma for the past two days. From here we would want to see the stock bounce off this key support on strong volume before opening new plays. There is no way to tell at this point whether or not these developments will change sentiment on the IDEC or just give us another entry point. So watch for confirmation and use stops if you are in current plays. PMCS $97.00 -2.69 (+5.56) As goes the NASDAQ, so goes our play of PMC-Sierra. That sentence alone pretty much summed up the action of PMCS. It moved up on Wednesday and then slowly drifted lower all day Thursday, picking up steam near the end. This may be a blessing in disguise for investors looking to get in on a new play. The stock is now very close to 10-dma at $95. We all know that history is not a future indicator of success but PMCS has held tightly to its 10-dma since the start of June so it should be considered for a new entry point. The big news in our play this week was on Tuesday when the company announced they have struck a deal to acquire Abrizio Inc. On Wednesday, BancBoston Robertson Stephens spoke out to reiterate their Strong Buy rating on PMCS. They said the deal was a good move and another step to extend franchise positioning at the core of the networks. LXK $78.06 -1.56 (+2.81) Lexmark continues to be a profitable play for us. Rising almost $13 since our pick, Lexmark has performed like a long distance mountain climber, especially over the last two days. Yesterday the stock forged ahead, bouncing off support of $76 to achieve a new interval high of $79.75 and today seemed to establish a base camp around 78.50. Considering the light volume and volatility of the market today, LXK held up quite nicely. Many analysts are expecting the general market to trend higher into September, mostly after the Labor Day holiday. With this being the case, any pullback to support could be a buying opportunity. With possible skittishness prevailing until the holiday, please be cautious of starting new positions as a pull-back may occur. Wait for it and then confirm market direction. HGSI $65.63 -2.50 (+3.50) Bloomberg stated that the market was led lower today by healthcare and drug stocks. It's no wonder then that we got a pull-back on HGSI. Actually it is quite nice, as it is getting us closer to another entry point for those who have chosen to protect their profits and exit plays after the recent run up in price. But the late afternoon drop in the stock is something to note and watch. We never like to see the losses in the market or stock start picking up towards the close. Since we might continue to see light volume and volatility in the market until after Labor Day, those that have open positions need to protect those profits with stops. The stock could dip down to our support of $64, thus offering new entry points. Realize that the gains we have seen recently have be due to the general trend of the stock. Any positive news should give us an additional boost to the momentum we have seen. BVSN $102.88 -8.06 (+7.13) There's a fun new ride at Universal Studio's Islands of Adventure theme park in Florida. It's called the Incredible Hulk. It rocket's you up from 0 to 60mph in about 3 seconds and then drops you almost straight down on the other side. Does this remind you of any stock of late? Just like with the Hulk, BVSN has thrown us all over the place but it is a fun ride, if you know what to expect. We took off yesterday rising from $99 to $110 in a very quick rise before dropping us to back to earth from $115 to $103 today. Did you have fun? The answer could be no if you didn't set your stops and protect yesterdays gains. BVSN is typical of this type of ride and provides great opportunities to profit if you are prepared. Also worthy to note, is that there was over 2 times the normal volume yesterday, indicating a lot of people were riding this one. With that much weight, the drops can really take you down as investors protect profits. So here's the scoop, we are still in a very profitable play so protect your positions. The outlook for the stock is also still positive so use the drops as opportunities once the stock and market confirms that we're headed up again. We expect more volatility so choose your entry points wisely and hold on for the ride. SLR $75.44 -2.63 (+3.75) Our SLR play has seen better days but with the late day weakness in the broad markets, today's relative performance has not dashed our hopes. SLR finished the day in negative territory losing $2.63 to close at $75.44. SLR closed just under its 10-dma today but there wasn't any indication of panic by investors. The negative movement we witnessed today appears to be a combination of tiring market sentiment and possible profit-taking after the strong gains experienced earlier this week. Remember, on Tuesday SLR hit a 52-week high of $76.31 so some profit-taking may be warranted. There was also one item of news today. SLR was in the spotlight with an audio release. Titled "Thriving in the High-Tec Shadows", SLR gives a synopsis of the company's core operations and discusses the position of SLR in the industry, along with the extensive growth rate experienced by the entire sector. GTW $97.00 -1.69 (+6.50) The momentum on this split play extended into Wednesday as GTW gained $1.69 on exceptional volume of 3.89 mln. For the third consecutive day, this stock reached new heights during intraday trading. The newest 52-week high was set at $100.68 in the late afternoon rally. Kimberely Alexy, analyst at Prudential, also helped spice things up. She reiterated a "strong buy" rating for GTW and set a 12-month target price of $124. Today we got a slight pullback more likely due to the negative market than anything stock specific. Nonetheless, the pullback offers a variety of entry point opportunities. Please keep in mind as you plan your strategy that GTW's last established support level is at $82, which is well above the current price. So you'll still need to be prepared for some natural consolidation even though the excitement for 2:1 stock split on September 7th will likely sustain itself. UIS $44.69 -0.13 (+0.75) The daily spread is narrow and the uptrend has been a bit laggard this week as UIS comes face to face with its overhead opposition at $46.18, the 52-week high set last month. However even during today's market correction, the stock barely lost any ground while volume fell to less than 50% of normal. Also UIS is maintaining its position above the venerable 30-dma at $42. Remember this indicator appears to act as benchmark support. Still it's best to look for a better show of upward movement before initiating a new play. In the news yesterday, Unisys sealed a $500 mln multi-year contract with the state of Pennsylvania. The company will provide ongoing management and operational support while consolidating 20 state agencies' data centers. The project will start immediately and should be completed within a year. Also, PulsePoint Communications confirmed shareholder approval of the Unisys acquisition announced back on June 15th. The deal is a tax-free, stock-for-stock merger where PulsePoint shareholders will get .162 shares of Unisys for every 1 share they presently own. About 2.2 mln common shares of UIS will be exchanged in the merger deal. VRSN $110.50 +4.25 (+23.56) And the show goes on. VRSN is still climbing full-speed ahead advancing an awesome 27% since Monday. The very strong trading volume is backing up the bullish gains this momentum play has made. Coming off a record high yesterday, VRSN peaked at $114 today to set another 52-week record. Besides the evident dynamics driving VRSN to new heights, analysts' remarks pumped up the volume too. SG Cowen started VRSN with a "buy" and set a $120 target price around noon today. Also, SunTrust Equitable Securities initiated a new "long-term attractive" rating. Another event that helped propel VRSN upwards was Cisco's welcome announcement of its $6.9 bln purchase of privately held, Cerent Corp. Remember the wide intraday swings are certainly providing a multitude of entry points however, the volatility can be lethal. Stops may be very difficult to use yet it's known what goes up can definitely come down - very quick! So if you are playing this HIGH RISK INTERNET play, BE CAREFUL and give it very close attention. MMCN $52.25 -3.75 (-0.63) How much longer can this roller coaster ride continue? After reaching a new 52-week high to open the trading session this morning, like the broader NASDAQ market, the stock decided to give up some of yesterday's gains and a little more. These recent fluctuations in the stock have been driven by the markets as investors try to decide whether this tech rally is for real. Be cautious as the stock approaches its new highs because MMCN does show some signs of resistance at this level. Confirm the overall direction on the tech sector before placing a trade since momentum is such a big influence at this time. We decided to keep this play and finish the week out to see if we can get any spark. If MMCN breaks below the 10-dma tomorrow, we will likely be removing it from the call list. EXDS $86.25 -0.13 (-0.56) "This play is purely momentum based. As long as volume remains in the stock, the limited supply will keep the price rising." Remember that from Tuesday? Well, unfortunately volume fell off substantially yesterday to the point where today it traded roughly 1.9 mln shares compared to its ADV of 2.4 mln. So much for Breakout City. Surprisingly, EXDS has held up really well, giving up less than $1 combined loss over the last 2 days. It's holding up well near its all-time closing high of $86.81. This indicates that current owners aren't lining up to sell this stuff. We actually have a nice base of $84 forming. A dip to that level appears buyable. On a day when the NASDAQ was down 30 points, EXDS's low of the day was higher than its low yesterday (a big day for NASDAQ). While it didn't show any conviction today, a return of volume will keep EXDS on the rise. Beware, Fridays are typically lighter in volume overall but EXDS has a mind of its own and can act positively in a weak market anyway. This play is not for the lily-livered, Gunslingers only. ERTS $66.88 0.00 (+1.38) Given that ERTS didn't lose a cent today while the rest of NASDAQ fell 30 points is testimony to its strength. But that's not the whole story. ERTS was up almost $4 to $70.19 half an hour before the close, when what looks like a huge sell order hit the trading floor. ERTS sank like a stone to finish even for the day. The long-term technicals still look strong but today's big rise and fall is resembling an upside down "T" on the chart and is a waving, red-flag negative. Normally we'd chalk it up to profit-taking if the volume were lower but today's return to even money raises a bit of sweat on our brow, as ERTS sits right at 5-day short-term support of $67. While the bigger trend is looking strong, it could go either way. Cautious investors will sell on any opening strength, not wanting to risk losing a profit, or worse, taking a loss. Risk takers should wait for upward movement with volume to reappear as a confirmation of the direction. If you still want to play this conservatively, wait for the breakout over $70 (it must hold, not just get there). Only want to paper-trade as an experiment? This is a good one to practice your trading psychology but you must first form your own conviction, based on your own risk profile. CSCO $68.94 +0.31 (+4.81) Now up 6 days in a row, CSCO broke out of its shackles to set a new closing high today of $68.94 on volume twice that of its ADV. This was no easy feat since CSCO's ADV already exceeds 17 mln shares per day. What's driving the volume and thus CSCO to new highs? Two barely known, yet pivotal acquisitions announced this morning. First, CSCO will acquire Cerent, a closely held optical networking company founded in 1997, for $6.68 bln in CSCO stock. What makes this deal particularly interesting is that Cerent's revenues were just short of $10 mln last year but expected to be $100 mln this year. That is nothing short of explosive growth and places a giant validation stamp on the whole optical networking industry. Second, they will also acquire Monterey Networks (an optical network capacity booster) for $501 mln to be paid by the issuance of 7.3 mln CSCO shares. In short, that is why other optical network related issues also rose today. CSCO has just deemed it the future and backed up its statement with 107 mln new shares of CSCO stock to be issued. Like Babe Ruth, CSCO has just pointed to where the next home run will be hit. Tellabs, Lucent, Nortel and, to a lesser extent, Ciena need to take notice of the 800 lb. Gorilla that they hoped wouldn't show up for a while. **************** PICK NEWS - PUTS **************** NVLS $56.94 -0.88 (+2.50) Today produced the bounce off of resistance that we were looking for. The stock opened at the high and it was downhill for the rest of the session. This was purely a technical move from resistance from the 200-dma at $58 since we saw no relative news and volume was only average. If you have been following the play, you know that this was the signal we were looking for to open new plays. We now expect NVLS to retest the lows of last week at $54. You should use caution though as this sector is prone to move together based on sentiment, despite the divergence we've seen lately. The moves are quick and you need to have you entry and exit points planned out to avoid being caught in a reversal. So keep an eye on the sector and use stop losses. IP $51.50 +0.50 (-2.88) Wouldn't it be great if all plays could be as predicable as IP. It's amazing how this stock has channeled so quickly to meet our expectations. Although we did receive a significant amount of help yesterday from the news on lower forest product prices and the fact that the Fed's decision on rates may eventually curtail economic expansion in the cyclical industry, of which IP participates. As we stated in our original play, we were looking to bottom between $50-$51. Now that we have reached our channel target, we are checking for confirmation of upside direction and looking for entry points on calls. Most of today afforded us with the opportunity to see the stock making this upside move however, use caution because the market will not be as predictable into Labor Day. Volume may remain light causing volatility until that time when most fund and money managers return to the market. WLP $76.13 -0.38 (-1.81) What happened to our play today? WLP was off and running today as it made the turn lower in its current channel. This channel is highly visible on the chart for the past two months. But midday the stock was able to halt the slide and trend up for the remainder of the day. This is disappointing after the profits we were ringing up early in the day but the trend is definitely still in tact. There has been no news on WLP to trade from so we expect to continue to drift lower. As long as the highs and lows keep getting lower, this stock has lots of plays left in it. That means we are playing the game of entry and exit points. Choose wisely and there is money to be made in intraday moves like we saw today. T $49.94 +0.69 (+3.06) Well, it was an up day for AT&T this Afternoon as trading volume was on the heavy side with 12.2 mln shares changing hands. This morning the Public Utility Commission ruled that companies such as AT&T, will be allowed to compete with Bell Atlantic in Pennsylvania's local phone markets. AT&T currently has a strategy to broadly penetrate the local phone service market by the beginning of next year. "With this decision, Pennsylvania has taken a leadership position in creating one of the best climates for telecomm competition in the nation," said Jim Ginty, President of AT&T-Pennsylvania. Furthermore, one indirect benefit that is expected from this event today will be lower long distance prices. In other news, we had an analyst report released yesterday on AT&T. Kevin Roe of ABN-AMRO started coverage on the long-distance carrier and gave it a outperform rating. He set a 12-month price target for the stock at $60 a share. Also, there were some whispers today that T may be considering splitting it stock into cable and phone segments. This revives talk on this topic from about seven months ago by CEO Michael Armstrong. At the time, he promise investors that T would continue to add value for its investors regardless of whether it splits up the company. Some analysts believe this action will make it easier for investors but much more difficult for AT&T to meet expectations. ANF $35.31 -0.94 (-3.00) ANF has lost over 15% of its share price just this month and has continued to show weakness since it reported solid 2Q earnings on August 10th. Overall the retail sector isn't faring too well and specifically, ANF investors are concerned about the reassignment of Michele Martin from the head of design in the women's division (which makes up 45% of sales) to the special product division. What we also need to consider is whether or not the back-to-school shopping season will reverse this play. Technically, ANF is below the 'safe haven' of the 200-dma but a further slip would provide better evidence before opening a new put position. Only time will tell - if you do start any plays use stops for protection. TWX $62.44 -0.31 (-4.38) What a crazy market this week, just when new highs are established on the Dow, profit-takers step in and wipe out a good percentage of those gains. The news concerning Time Warner this week has been just about as crazy. Merrill Lynch analyst Jessica Reif Cohen lowered her 1999 and 2000 earnings estimates on the entertainment giant sending the stock as low as $60.44 in Wednesday's morning trading. By that afternoon, a broad market rally was enough to pull the stock back, finishing the day on the positive side. That evening after market close, a news article was released that two different brokers were upgrading TWX. Going against Jessica Cohen's view, brokers ING Barings and SG Cowen upgraded TWX from a buy to a strong buy. Even with this good news, Time Warner ended fractionally lower today, supporting the fact that TWX has little ground to support itself. Remember that the trend is your friend and even though TWX's trend right now is definitely on the downside, protect yourself with the recommended stop loses. It's a wild market with little direction. ************** NEW CALL PLAYS ************** SFA - Scientific Atlantic Inc. $51.13 +1.31 (+4.56 this wk) Scientific-Atlanta provides satellite-based and terrestrial- based networks to a range of customers in a variety of applications and provides network management and systems integration. They are also a leader on top of the TV market. The company is one of the largest makers of set-top boxes used by subscribers to receive cable TV programming and interactive services such as movies-on-demand and e-mail. Will this market please decide which way its wants to go? Despite the uncertainty of the market, our latest play, Scientific Atlantic has given us an unmistakably upward trend since the beginning of the month. Even today's profit-taking in the broader markets was not enough to scare investors from this stock. SFA closed at its 52-week high, adding to its gains that have been accumulating since August 4 when it closed at $33.94. Those investors that have held the stock during this time frame have been rewarded handsomely and we see more chances to profit in the short-term. SFA is currently trading well above its 50-dma and 200-dma and has a strong technical chart. The only resistance in the future lies in the question of how high will it go. Considering how the stock has performed under the current market condition, we see no reason why the stock couldn't reach higher highs in the near future. This is mostly a momentum driven play that we are trying to catch a ride on. Watch for a good entry point and place the recommended stop losses to be safe. In the news, last Friday the board of directors of Scientific Atlantic announced a regular quarterly cash dividend on its common stock of one and one-half cents ($.015) per share. The dividend is payable on or about September 16, 1999, to shareholders of record as of September 1, 1999. Besides the divided announcement, there was no recent news on the stock. BUY CALL SEP-45 SFA-II OI=960 at $7.00 SL=5.25 BUY CALL SEP-50*SFA-IJ OI=378 at $3.63 SL=1.75 BUY CALL SEP-55 SFA-IK OI= 31 at $1.13 SL=0.50 BUY CALL OCT-50 SFA-JJ OI=117 at $4.63 SL=2.75 BUY CALL OCT-55 SFA-JK OI= 37 at $2.50 SL=1.25 Picked on Aug 26th at $51.13 P/E = 38 Change since picked +0.00 52-week high=$51.69 Analysts Ratings 7-7-2-0-0 52-week low =$11.75 Last earnings 08/12 est= 0.33 actual= 0.59 Next earnings 10/22 est= 0.28 versus= 0.38 Average Daily Volume = 1.3 mln Chart = http://quote.yahoo.com/q?s=SFA&d=3m AMZN - Amazon.com $128.56 -4.31 (+15.13 this wk) Amazon.com has become the icon for e-commerce, as they have expanded from books to include CD's, online auctions, video's, etc. They also have invested in companies offering online pharmacy, groceries and pet supplies. We're talking online diversification here. Sales have grown to $608 million as of the last quarter, up from $203.3 million. This growth is due to Amazon's unique methods of retaining customers and servicing those customers like no other online site. CEO Jeff Bezos started Amazon in 1995, they now have more than 10.7 million customers that they sell to. Anyone who listens or watches the financial community is privy to the fact that many analysts are pointing out that the Internet correction has been significant and that now may be the time to re-enter the higher profile companies that show potential. AMZN looks now to be in position to take advantage of this news. Fundamentally the company is risky however, technically we are looking good and technical momentum is what drove the last bull-run with AMZN. On Aug 11, the stock started a new upward trend. It then confirmed this direction to us by breaking through it's moving averages one by one. Yesterday AMZN broke through its last upward hurdle, it's 100-dma. Even today, despite the drop in price, the stock managed to remain above the 100-dma at $128.87, thereby establishing a strong argument for support. Also backing us up on this are positive breakouts in the Stochastic, and MACD. Given the fact that the market may be on pins and needles until after Labor Day, use caution and confirm the market direction before entering this play. Look for support from the 100-dma for potential entry points. In the news, AMZN continues to offer customers with incentives to visit it's site. Free music downloads from well known artists in the Warner Group label. Another reason AMZN is the master at customer attraction and retention. AMZN is also mentioned in numerous articles as the one to compete with. News like this supports that Amazon is the generic name for success in e-commerce. BUY CALL*SEP-125 YZZ-IE OI=1860 at $12.13 SL= 9.50 BUY CALL SEP-130 YZZ-IF OI=2506 at $ 9.63 SL= 7.25 BUY CALL SEP-135 YQN-IG OI=1732 at $ 7.50 SL= 5.75 BUY CALL OCT-135 YQN-JG OI= 667 at $14.13 SL=11.25 Picked on Aug 27th at $128.56 PE = N/A Change since picked +0.00 52 week low =$ 21.16 Analysts Ratings 12-6-4-0-0 52 week high=$221.25 Last earnings 07/99 est -0.50 actual -0.51 Next earnings 10/28 est -0.57 versus -0.49 Average daily volume = 9.0 mln Chart = http://quote.yahoo.com/q?s=AMZN&d=3m ************* NEW PUT PLAYS ************* WCOM - MCIWorldcom $78.31 -3.06 (+4.25 this wk)(-4.63) MCI WorldCom is a global leader in communications services with 1998 revenue of more than $30 billion and established operations in over 65 countries encompassing the Americas, Europe and the Asia-Pacific regions. MCI WorldCom provides facilities-based and fully integrated local, long distance, international and Internet services. MCI WorldCom's global networks, including its pan-European network and transoceanic cable systems, provide end-to-end high-capacity connectivity to more than 40,000 buildings worldwide. WCOM is starting to inhale canal water and appears headed under water for now. WCOM bumped its head on its 200-dma while trying to dig its way out of the recent hole with no such luck. After opening this morning at yesterday's closing price of $81.81, it descended $3.06 on steady and heavy volume into the close. It's clear there are money managers who are selling. That it couldn't get back over its 200-dma is a big technical negative. Not even a coverage initiation by ABN AMRO with a "buy" rating and $97 price target could save it. The next potential support level is $73 and after that, the mid-$60's. Friday's aren't typically that busy and sellers could really take hold tomorrow, especially after the market's run over the last 2 weeks. Also an indicator of investors' lack of faith in the future, yesterday 11,000 SEP-80 puts were traded and over 11,000 calls were traded - 5000 sold in 1 order. Do you think that seller is just speculating? It's not likely. Confirm downward direction before making the play. In the news, the FCC approved WCOM's acquisition of Skytel on Thursday. That's all folks! BUY PUT SEP-80*LDQ-UP OI=22918 at $3.75 SL=2.25 BUY PUT SEP-75 LDQ-UO OI=12517 at $1.56 SL=0.75 Picked on Aug 26 at $78.31 PE = N/A Change since picked +0.00 52 week low =$39.00 Analysts Ratings 19-5-4-0-0 52 week high=$96.75 Last earnings 07/99 est 0.44 actual 0.44 Next earnings 10-28 est 0.53 versus 0.21 Average daily volume = 12.06 mln. Chart = http://quote.yahoo.com/q?s=WCOM&d=3m *************** PLAY OF THE DAY *************** The pod is AMZN, which is a new play. ********** SEE DISCLAIMER IN SECTION ONE **********
The Option Investor Newsletter Thursday 8-26-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ********* STRADDLES ********* STRADDLE RECAP - August 26, 1999 Downside breakouts resumed today as news continued to push our straddle stocks lower. Amazing how even commodity prices can effect stocks even after blow-off moves are ending. Lets look at Sunday's plays, and where they have gone for the week. Symbol Title Bid Ask XON Exxon Corp 80.00 80.5625 XON-JP XON Oct 80 Call 3.25 3.625 XON-VP XON Oct 80 Put 2.25 2.625 No real move and options have decayed by a point this week from last weeks price of 7. DOW Dow Chemical 117.813 118.188 DOW-LF DOW Dec 130 Call 3.25 3.625 DOW-XF DOW Dec 130 Put 14.125 14.875 Different story here - the stock was at 130 when published. Now this straddle, which was trading around 15 last week, is now up to around 17 1/2. Not a bad move for one week and no directional bias. BPA BP Amoco Plc 110.00 110.75 BPA-JD BPA Oct 120 Call 1.50 1.6875 BPA-VD BPA Oct 120 Put 10.375 10.875 Here is another example of a stock that moved big in the last week. Notice how much the puts are compared to the calls. These options were a bit higher last week trading at 10, but are now asking 12 1/2. CHV Chevron Corp 92.3125 92.9375 CHV-LS CHV Dec 95 Call 4.875 5.25 CHV-XS CHV Dec 95 Put 6.5 6.875 Not too much of a move here, as this stock bobbed up and down like a fishing float. Problem here is volatility has declined and so has the options by about 2 points. ARC Atlantic Richf 85.6875 86.875 ARC-JS ARC Oct 95 Call 0.9375 1.1875 ARC-VS ARC Oct 95 Put 9.375 9.875 Trading at 8.75 last week, this straddle is being offered now at 12 for a gain of 3.25. What I am showing you here is really the exception to the rule. Looking at just this week's trades, you can see a net change of 4.75 for the week. I normally don't see quick profits like this in less than one week. I normally have to hang onto these positions for several weeks now. Well folks, I will only gloat for a day or so. The saying on the street is that you are only as good as your last trade. So what has to happen to make these positions get better. Well first, I would like to see the price of oil continue to slide. That would put more selling pressure on the oil services industry. Straddle Mailbag for Today The biggest question I got this week was concerning exit strategies (I wonder why???). Questions came in to specific exits on trades, to a general exit strategy for straddles. While I cannot give specific trading advice, I can tell you my ideas for exiting straddles. First, I am very flexible to exiting straddles and news and patterns have a lot to do with it. If I were to take a totally objective form of exiting, I would look at two exit plays. First, I would take a profit objective (I like 50% above the straddle cost). The second would be a time stop such as exiting no more than 30 days after the entry of the straddle. If I have learned anything in this business, I have learned that people are different. We all wear different shoes, clothing, hats, etc., and we all trade differently. Your biggest competitor in the markets is no one else but you. Control yourself and you control the biggest killer of profits. Sell too soon folks. Tom Gentile ***************** COMBINATION PLAYS ***************** Time For A Breather.. U.S. stocks closed lower Thursday on profit-taking, a day after the Dow finished at a new record. Wednesday, August 25 Stocks moved higher on Wednesday with technology stocks taking up the slack while financial issues faltered after a profit warning from Bank One (ONE). The Dow industrials rose 43 points to a new record of 11,326. The Nasdaq composite rose 53 points to 2805. Advancing issues led declines 1,611 to 1,382 on moderate volume of 840,824,360 shares. The 30-year U.S. Treasury bond was up one point, lowering the yield to 5.86%. Tuesday's new plays (positions/opening prices/strategy): Coulter Pharm. CLTR OCT25P/SEP25P $0.62 debit calendar Coulter (CLTR) traded in a very small range for most of the day with almost no option volume. The average price observed was $0.68. In the afternoon, the stock price fell lower and traders moved into the September positions. The target debit of $0.62 should have been easily achieved. Portfolio plays: The market endured a relatively favorable day after the Fed's interest rate adjustment and investors are once again focusing on earnings. The big tech issues continued to move higher with Cisco (CSCO), Solectron (SLR), Sun Micro (SUNW) and MCI-Worldcom (WCOM) all participating in the rally. The large-cap safety and cyclical stocks also moved skyward with the renewed buying. Our positions that benefited were Proctor & Gamble (PG), General Electric (GE) and Johnson & Johnson (JNJ). Drugstore chain Rite Aid (RAD) rallied over $3 after announcing it is involved in talks involving possible corporate deals. The company said its analyst meeting scheduled for 9/2/99 has been postponed until September 22 in light of the possible deals. Our calendar spread on RAD moved back to profitable territory on the news. International Paper (IP) faded almost $2 on Wednesday and the front month option premiums fell significantly. The October calendar spread could have been closed at a $0.62 profit during the morning session. Pacific Gateway (PGEX) fell $2 and with the recent volatility, it is also an early exit candidate with a two week return of $0.56. Oil stocks slumped and with their recent highs we expect further consolidation. Halliburton (HAL), Diamond Offshore (DO), Noble Drilling (NE), Baker Hughes (BHI) and Unocal (UCL) moved lower. Our short-term calendar positions on BHI and UCL are profitable and can be closed to limit potential losses. As the oil issues went down, the airline stocks rose and United Airlines (UAL) was the leader of that group, climbing almost $4.43 to recent high near $67. Thursday, August 26 U.S. stocks closed lower Thursday on profit-taking, a day after the Dow finished at a new record. The industrial average fell 127 points to 11,198 and the Nasdaq fell 30 points to 2,774. In the broad market, declines led advances 1,782 to 1,165 on volume of 709.16 million shares on the NYSE. The 30-year U.S. Treasury bond fell 22/32, pushing the yield up to 5.90%. Portfolio plays: DoubleClick (DCLK) was our big mover today, up $8 to $106 and now in a profitable position on our combination straddle. The stock price needs to finish above $97.50 at the October expiration for maximum profit. 3COM Corp (COMS) was another rallying issue, up almost $2 to recent resistance near $25. Our October $25 calendar spread is already $1.25 ITM. Echostar (DISH) appears unfazed by the wavering market and the move to $80 may be a signal for the next up-leg. General Motors (GM) is also enjoying a small rebound and that usually indicates some underlying strength in the Dow. Coulter (CLTR) closed higher today as new investors climbed on board the speculation train but when the (September) put options fell, our play actually moved towards profitability, closing near break-even. This is a good example how implied volatility changes (and can be used in your favor) with the influx/exit of traders in option positions. J.P. Morgan (JPM) finally relented, giving back $4.38 to $135. The new direction (and our action) for this issue should be determined in the next few sessions. Intel (INTC) and EMC Corp (EMC) both back-pedaled after recent gains but our short-term positions in each of the issues are safely ITM. One stock that we are currently focusing on is Polaroid (PRD). It appears to be unaffected by the market volatility and is moving higher on a daily basis. Our LEAPS/CC's position is short at $25 and we may need to close that option early if PRD breaks through resistance near $29. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* RSLC - RSL Communications $20.81 *** On The Move! *** RSL Communications is a rapidly growing multinational telecom company which provides a broad array of international & domestic telephone services to both carrier and commercial accounts. These services include international long distance calling to countries all over the world and calling card, private line and value-added telecommunications services. The company focuses on providing international long distance voice services to small & medium businesses in key markets. RSLC reported improving earnings in mid-July and some recent news stories along with the rumors of a spin-off/IPO of their new division, Deltathree.com, has boosted the share value. Deltathree.com is expecting to capitalize on the advancement of Internet telephony technology and now manages the world's largest network dedicated entirely to Voice over Internet Protocol. The company's mission is to use its network as a backbone to offer customers a full suite of personalized, web-based communications services. They recently announced a new agreement offering high quality Internet telephony services through a co-branded area at XOOM.com, a leading direct e-commerce company. The new offering provides XOOM.com members access to PC-to-Phone service for calls from computers to regular telephones worldwide and its Phone-to-Phone service for calls from regular telephones. Users can also send friends or business associates voice greeting cards. The PC-to-Phone service allows users to 80% percent over standard international telephone rates. They also recently announced that its subsidiary, RSL COM Spain, has fully interconnected with Spain's dominant local carrier. The new interconnection will expand RSL COM Spain's services and enable the company to significantly lower its cost of originating and terminating telephone calls in each of the 17 countries where RSL COM subsidiaries have achieved interconnection. The efficient combination of extensive domestic interconnection and a global network will allow RSL COM to keep its costs among the lowest in the industry. The 150 dma is near $23.50 and that should provide some short-term resistance for the sold position in each spread. The bullish play offers excellent risk/reward for continued upward movement while the calendar spread has low risk with a neutral/bullish outlook. PLAY (aggressive - bullish/diagonal spread): BUY CALL OCT-20.00 QRL-JD OI=439 A=$3.50 SELL CALL SEP-22.50 QRL-IX OI=40 B=$1.31 INITIAL NET DEBIT TARGET=$2.00 TARGET ROI=25% PLAY (conservative - bullish/horizontal spread): BUY CALL JAN-22.50 QRL-AX OI=583 A=$4.00 SELL CALL SEP-22.50 QRL-IX OI=40 B=$1.31 INITIAL NET DEBIT TARGET=$2.50 TARGET ROI=50% (4 months) Chart = http://quote.yahoo.com/q?s=RSLC&d=3m ***** COMS - 3Com Corp. $25.31 *** Buy-Out Rumors *** 3Com has evolved from a supplier of discrete networking products to a broad-based supplier of local area network (LAN) and wide area network (WAN) systems for large enterprise, small business, home, and service provider markets. Following its recent merger with U.S. Robotics, the world's leading provider of modems and remote access products, 3Com offers customers a broad range of data networking solutions that include routers, hubs, remote access systems, switches, adapters, modems, connected organizers and telephony products. Upcoming earnings and buyout rumors are driving COMS higher again after today's announcement that Germany's Siemens AG and 3Com have given up plans to form a joint venture making equipment to handle voice calls on data and video telecoms networks. A Siemens spokesman said cost reasons was the official cause of the split, and that the two companies had come to the conclusion together, opting to develop new products independently from each other. Now the speculation is that a buy-out offer is in the works from another European company, possibly GE England or Ericsson. With the speculation of better-than-expected earnings, the company is believed to be ripe for takeover and it is certainly an excellent candidate for the right purchaser. A European company would most certainly benefit from their established infrastructure and the success of the Palm Pilot. Once again, the 150 dma is near our sold strike and that should provide some short-term resistance. The options are at a premium and the recent volatility offers an excellent risk/reward ratio for this low-cost speculation play. PLAY (aggressive - bullish/horizontal spread): BUY JAN-27.50 THQ-AY OI=1007 A=$3.00 SELL SEP-27.50 THQ-IY OI=1710 B=$0.62 INITIAL NET DEBIT TARGET=$2.25 TARGET ROI=50% (four months) Chart = http://quote.yahoo.com/q?s=COMS&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. 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