The Option Investor Newsletter Sunday 8-29-99 1 of 7 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment ******************************************************************* MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ******************************************************************* WE 8-27 WE 8-20 WE 8-13 WE 8-6 DOW 11090.17 - 10.44 11100.61 +126.96 10973.65 +259.62 + 58.88 Nasdaq 2758.90 +110.57 2648.33 + 10.52 2637.81 + 89.84 - 90.52 S&P-100 707.97 + 11.38 696.59 + 7.77 688.82 + 14.69 - 9.16 S&P-500 1348.27 + 11.66 1336.61 + 8.93 1327.68 + 27.39 - 28.43 RUT 432.45 - 1.93 434.38 + 0.33 434.05 + 6.01 - 16.73 TRAN 3171.35 + 20.62 3150.73 - 28.34 3179.07 - 40.96 -113.21 VIX 23.21 - 0.85 24.06 + 1.68 22.38 - 4.98 27.36 Put/Call .73 .69 .72 .72 ******************************************************************* The Fed giveth and the Fed Chief taketh away. Just when you thought it was safe to go back into the market Alan Greenspan launched another precision guided talk bomb over the airways. With a kindler, gentler version of his famous "irrational exuberance" speech, Alan spoke out on the over priced market and warned that the Fed was still vigilantly watching for signs of inflation and would not hesitate to raise rates again. He also said the Fed would have to watch the over inflated markets closely as well for signs of speculative bubbles. Oops! What happened to the "no more raises this year" stance that everybody read into the FOMC comments earlier in the week? The same thing that happened to the "neutral bias" stance from the previous increase. The FED fired again last Tuesday while still under the white flag of the "neutral" bias from the last meeting. Most Fed watchers had deciphered that bias change as notice that there would not be another rate increase but the subtle shifts in some of the inflation reports over the last month pushed the Fed back to the brink and they took action anyway. The strong statements by Alan on Friday quickly rekindled the inflation worries and sent buyers running for cover. The lack of volume the next to last summer Friday only made the impact worse. Friday was the lowest volume day of the year on the NYSE and the Nasdaq only posted 718 mln shares. Note also that the advance decline line set a new 52 week low. Before I go any further I need to correct a statement made on Thursday night. I quoted Tom Galvin as having set a 10,800 target for the Dow this year. This was a typo. The real target price was 11,800. Thanks to all the readers who pointed out my error. I agree with Tom and do expect the market to climb into the October earnings period. Hopefully it will get to 11,800. After the Greenspan restatement of a previous ambiguity into the present veiled threat, I am not so sure. Bonds, often touted as the best indicator of future Fed policy, dropped a full point at the close and raised yields back to 5.98%, up from 5.86 on Wednesday. With bond yields climbing stocks will have a tougher time. Don't get me wrong. I think the Greenspan speech was simply a rehash of his previous statements. He has been calling the market over valued since 6500. This was nothing new. Everyone knows where he stands. I think he was frustrated that the market rose unexpectedly +650 points before the rate increase last Tuesday. He is also frustrated that stronger measures by the Fed could also tank the market this close to Y2K more than he wants. He is in a economic quandary and talk is about his only weapon right now. Next week is looking a little touchy. With the Fed blessing turned into a curse again and the economic calendar stacked against us, we could have a rocky week. The non-farm payroll report on Friday will be the next major Fed milestone. Strong jobs and falling unemployment could ramp up the Fed worry again just in time to squelch the third quarter earnings run. On the flip side the market is still liquid and buyers are still lurking on the sidelines. Even after two days of triple digit losses the Dow is only -240 points away from its Wednesday high. Every century mark we pass on our downward travel creates another level of buying interest. The Dow finished negative for the week by about -10 points and only about +100 points over where it was on Friday two weeks ago. Yes, we dropped -250 from the high but another -250 points would be very tough. Don't look now but the Nasdaq still tacked on another +110 points this week! We are still looking for any dip to be a buying opportunity but the key is not trying to pick a bottom. Unless you have an inside track to Karnac and know exactly where the bottom will be then your best bet is to watch for the bounce. We expect a post Labor Day rally but we expect some pre-Labor Day bargain hunting to occur. Any bounce from below 11000 would be buyable but a bounce from below 10900 would be even better. If you can hold off until Thr/Fri then your chances of buying on the uptrend will be greater. Waiting for next week may not be the answer for buyers of AMTD or EGRP. The online brokers were tossed for a loss Friday on a downgrade by Lehman Brothers. Lehman said their $300 per customer acquisition costs and excessive valuations were the reason for the downgrade. Before you start feeling sorry for Ameritrade shareholders at $21, down from $42, you should know the 52 week low was $1.88. Etrade had a high of $44 and a low of $2.50. The flushing of electronic brokers is even more strange since Gomez Advisors recently finished a survey showing that online brokerage accounts are poised to triple in the next year. Assets held by electronic brokers could increase by over $1 trillion. Looks like a buying opportunity for these stocks to me. Again, don't try to pick the bottom. Leaps are cheap on AMTD but could get cheaper by year end. Some high profile upgrades from Friday include Intel, upgraded by Morgan Stanley to a price target of $95. Also, AAPL by Warburgh Dillon Reed to $75 and NXLK to $125 by JP Morgan. Intuit (INTU) was the winner with multiple upgrades to strong buy and a +8.19 gain. On the downside Dave and Busters got busted to the tune of -$11, from $24.50 to $13.75 after the company warned of lower than expected earnings and falling same store sales. Multiple brokers dropped them like a hot potato. AOL looked to be recovering from their recent drop but we think the future is not bright. Based on the news that AltaVista signed up +225,000 new users to their free Internet service in the first two weeks it may be tougher for AOL to maintain its high growth rate. If the wave of companies offering free Internet access continues to climb then AOL revenues may suffer. Dell, Microsoft and many others are viewing Internet access as another hook to snag and hold surfers by creating branded portals and discounting access. The handwriting may be on the wall for AOL as competition heats up. Their PE of 172 will be very hard to maintain should subscriber growth start to suffer. There is a rumor around that AT&T is going to drop their TDMA approach to wireless and adopt Qualcoms CDMA system. The rumor is that funds are taking large call option positions in front of a possible surprise announcement from QCOM on Sept 7th. Just a rumor but we added QCOM as a play tonight. If you are going to play calls for the October earnings then you should be lining up your prospects now. I would start by trying to target shoot your favorites next week at about 50% less than current prices. Any significant downdraft could cause intraday dips and get you filled at a good price. Any day with a strong 100+ point or more drop intraday and a quick recovery back to positive ground could mark the end of the current weakness and the start of the rally. Be cautious and market aware and your plays will come out better in the long run. Pick your entry points carefully. Just because the newsletter comes out on Sunday does not mean all the plays are good for Monday. Pick your targets and then pick YOUR entry points for those plays. Market orders before the open on Monday are NOT an entry point! Good luck, sell too soon. Jim Brown Editor *********** JIM'S PLAYS *********** I was still on vacation and working around the house this week and only made one trade. After the Fed meeting I could not resist the post meeting spike and I bought some SEP-OEX-700 puts for $8.00 and sold them an hour later for $10. I told you last week that Vodaphone was on my post Fed meeting shopping list if it held over $184. I blinked and missed a great move. It gapped up Monday to $188 and never looked back. The high for the week was $208 on the news of a possible Bell Atlantic joint venture. Gateway did move up nicely through Wednesday but then rolled over. Again, I was not trading because my market view was negative and I expected to pick up stocks cheaper this week after my vacation was over. I am going to change my reporting in this column based on input from readers. I am going to try and point out stocks I am looking at playing in advance and then try and pick entry points as examples. Just reporting on some of my trades after the fact is not a good way to help new traders. Picking entry points and then knowing when to sell are the two hardest things about trading. If I can teach you this then everything else should be easy. My targets next week are: OEX under 700 QCOM at $180 JDSU at $108 EXDS at $80 SFA at $50 DCLK at $100 GTW at $94 (maybe optimistic with $95 holding well) Jim ************* COMING EVENTS ************* Monday: New Home Sales July Forecast: 916k Previous: 929K Tuesday: BTM Schroders 8/28 Forecast: -- Previous: -0.5% LJR Redbook 8/28 Forecast: -- Previous: 0.7% API Oil Stocks 8/27 Forecast: -- Previous: -4.07M Chicago PMI Aug Forecast: -- Previous: 60.5 Consumer Confidence Aug Forecast: 135.0 Previous: 135.6 Wednesday: NAPM Index Aug Forecast: 54.6% Previous: 53.4% Construction Spending July Forecast: 0.5% Previous: 0.5% Leading Indicators July Forecast: 0.2% Previous: 0.3% Thursday: Jobless Claims 8/28 Forecast: 290k Previous: 283K Factory Orders July Forecast: 1.6% Previous: 0.7% Productivity Q2-rev Forecast: 0.9% Previous: 1.3% Unit Labor Costs Q2-rev Forecast: 4.7% Previous: 3.8% Money Supply 8/23 Forecast: -- Previous: $4.0B Friday: Non-farm Payrolls Aug Forecast: 201K Previous: 310K Unemployment Rate Aug Forecast: 4.2% Previous: 4.3% Avg Hourly Earnings Aug Forecast: 0.3% Previous: 0.5% Avg Work Week Aug Forecast: 34.5 Previous: 34.5hrs NAPM Non-manuf. Aug Forecast: -- Previous: 59.5 ************** MARKET POSTURE ************** As of Market Close - Friday, August 27, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 11,090 Neutral 7.20 SPX S&P 500 1,320 1,420 1,348 Neutral 8.17 OEX S&P 100 675 735 708 Neutral 8.13 RUT Russell 2000 440 465 432 BEARISH 8.06 NDX NASD 100 2,250 2,468 2,403 Neutral 8.13 MSH High Tech 1,125 1,250 1,199 Neutral 8.13 XCI Hardware 1,035 1,050 1,072 BULLISH 8.24 CWX Software 725 844 807 Neutral 8.13 SOX Semiconductor 515 520 524 BULLISH 8.24 NWX Networking 555 625 584 Neutral 8.13 INX Internet 500 580 451 BEARISH 7.20 BIX Banking 690 710 643 BEARISH 7.23 XBD Brokerage 410 440 391 BEARISH 7.23 IUX Insurance 645 660 624 BEARISH 7.23 RLX Retail 915 960 856 BEARISH 7.23 DRG Drug 360 390 368 Neutral 8.24 HCX Healthcare 740 785 752 Neutral 8.24 XAL Airline 180 190 157 BEARISH 5.21 OIX Oil & Gas 285 310 301 Neutral 8.26 Posture Alert Profit taking continued Friday as investors went to cash for the weekend. Volume was moderate on the Nasdaq, and light on the NYSE. Sectors that held up on Friday include Semiconductors, Software, Hardware, and the Morgan Stanley High Tech Index. The Brokerage sector continued its slide, trading down another -2.60%, followed by Healthcare -1.94%, Internet -1.70%, and Drug -1.66%. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture **************** MARKET SENTIMENT **************** Trends, Friends, and Robbers! A phrase that is always mentioned with the stock market is the Trend is your Friend. Looking at the last several weeks, the trend on investor sentiment was really bearish. Now from a contrarian standpoint, this is bullish. When looking at the Investors Intelligence survey, you have seen a nice drop in Bullishness across the board. More importantly, is the large increase in Bearishness. This has been the trend for many weeks, and we have highlighted this before. Another interesting statistic is that the amount of Bullish Futures traders was the lowest last week since October of 1998 (the bottom of the market). Anyway, this last week, we saw the smallest decrease/increase in both sides of sentiment for the Investors Intelligence Survey. This could indicate that we might have reached a bottom/top (bullish/bearish) on both respective sentiments. If this were the case, we could be poised for a strong rally in the next several weeks. Several things that we need to see over this time frame would include: 1) Short sellers running for cover and closing out positions, which we have already started seeing. 2) Short sellers getting squeezed (stock getting called away from them even though they don't want to cover). Traders know when a squeeze is on and definitely take advantage of it. It is usually the reason when a stock is up +15 on crummy volume with no news. 3) Investors who have been on the sidelines, going long across the board with their new found bullish sentiment (giving strong volume that this market needs). 4) New money inflows being put to use by Professional Money Managers, adding further volume and breadth. There are several things that we need to maintain, for this scenario to happen, and for a continuation of the rally. First of all, we need the yield on the 30-yr Treasury to maintain its steady course and keep us from using the word: Inflation! We would preferably like the yield to stay below the 6% benchmark. The CBOE Market Volatility Index (VIX) has been driven below our key benchmark of 25, after a couple of intraday flirtations in the danger zone above 30, which we highlighted several weeks ago. We would like to see the VIX stay below 25, and possibly get into the teens, which would indicate further market strength. Lack of Economic Indicators suggesting further interest rate adjustments. The one funny thing about Wall Street, is the short-term memory. Right now, everyone believes that there will be no more interest rate hikes for the remainder of the year. This may be the case, but should we have a negative CPI or PPI or Jobless Claims or whatever, we might as well throw in the monkey wrench because the focus will change very quickly. These last couple of days of profit taking was probably just a speed bump, before jumping on the highway. But to insure that this market is going higher, and not forming a double top, will we need to see confirmation on some of the issues above. If we do get confirmation, which we think will happen, then we could be in store for a very nice fourth quarter. Pinnacle Capital Advisors Who wins the Dumbest Robber Award? 1) In Jackson, Mississippi, police noticed Darryl Ellis publicly urinating and arrested him on a disorderly conduct charge. However, at the station, a more serious charge was added. When Ellis was asked to empty his pockets before being taken to his cell, he handed police a holdup note that he had used earlier that week in a nearby bank robbery. 2) After getting off a plane in Spain, a robber grabbed the luggage of one of its passengers. The robber took off, had about a 20-meter head start, and was caught (by a friend of the passenger's) about 30 meters out. That person who caught him was Maurice Green, the world's record holder in the 100 meters. The Spanish newspapers dubbed this robber the Stupidest Robber in the world. He definitely has some competition though. 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 on peak open interest is clocking in at 1.7, 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 (735-780) is now reaching levels of extreme optimism. From a contrarian standpoint, resistance is building in this area, and should the market advance further, this was mark the beginning of overhead resistance. Market Posture: Many indexes have not participated in the rally, and very few have broken new highs as of late. 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 - Friday, August 27 78,026 +88.7% Market Sentiment at a Glance Friday Indicator (8/27) Alert Pinnacle Index (OEX): Overhead Resistance (735-780) 134.1 Underlying Support (710-730) 1.6 Underlying Support (630-690) 3.2 Put/Call Ratios: CBOE Total P/C Ratio .6 CBOE Equity P/C Ratio .5 OEX P/C Ratio 1.1 Peak Open Interest (OEX): Puts 660 Calls 760 P/C Ratio 1.68 Market Volatility Index (VIX): CBOE VIX 23.21 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 Benchmark (8/27) Overhead Resistance (735-780) 134.09 Overhead Resistance (710-730) 1.59 OEX Close 707.97 Underlying Support (630-690) 3.21 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is huge at the OEX 735/780 level but very light at the 710-730 range. Put/Call Ratio Friday Strike/Contracts (8/27) CBOE Total P/C Ratio .65 CBOE Equity P/C Ratio .46 OEX P/C Ratio 1.10 Peak Open Interest (OEX) Friday Strike/Contracts (8/27) Puts 660 / 12,400 Calls 760 / 7,379 Put/Call Ratio 1.68 (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 27, 1999 23.21 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 * ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an Email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 *********** DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter 8-29-99 Sunday 2 of 7 OPTION CLUB UPDATE ****************** WANT TO HAVE PEOPLE TO DISCUSS YOUR IDEAS AND QUESTIONS WITH? JOIN A TRADING CLUB TODAY!! If you would like to join contact us at Visit@OptionInvestor.com and Organize@OptionInvestor.com. We are in need of Organizers in the following cities: Los Angeles, Minneapolis and San Francisco. If you would be interested in organizing a group send mail to: Organize@OptionInvestor.com. UPDATE FROM BOSTON, MA: *************************** We're now almost up to 80 members and going strong, with new people signing up almost every day. This Saturday, (August 28), we are holding a special luncheon presentation at the Holiday Inn Crowne Plaza to honor Andy Aronson, author of OIN's Brokers' Corner and highly recommended options specialist, who is flying in from Chicago to speak with us. On August 10 we had an incredibly successful Put Sellers Workshop, lead by Tom Keane, a BOIC mamber and very knowledgeable put seller. 25 of us showed up at the local public library which rented us a conference room. After hearing Tom's excellent talk about put selling and the methods he uses, we broke into teams and tried to pick some puts to sell based on charts of selected stocks, such as LU, MSFT, and CSCO, that Tom handed out. Our teams selected puts for LU and MSFT to sell for September and October. Tom reports that if they expire worthless (which it looks like they will) this exercise would yield a $1500 profit for that night's work! Anyone who is interested in signing up or attending our events, please contact me: Kim Lemaire at Contact Support. LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Index Last Week Dow 11090.17 -10.44 Nasdaq 2758.90 110.57 $OEX 707.97 11.38 $SPX 1348.27 11.66 $RUT 432.45 -1.93 $TRAN 3171.35 20.62 $VIX 23.21 -0.66 Calls VRSN 102.38 15.44 This stock is the big blue chipper AMZN 128.50 15.06 Merrill Lynch upgrades to accumulate DCLK 103.13 12.19 New, this is going to be one to watch QCOM 183.75 8.81 New, looking good as a split candidate BVSN 104.13 8.38 It continues to prove its strength JDSU 110.19 8.25 New, we can't hide it, we love it!! EXDS 82.75 7.38 This play is not for the faint-hearted GTW 96.19 5.69 Looks like there may be entry points ADI 51.31 5.44 New, it's showing signs of greatness HGSI 67.38 5.25 We are riding the prospects of success LXK 80.19 4.94 Bucking the market trend and going up SFA 51.50 4.94 The stock continues to reach new highs LGTO 44.44 4.88 New, Celestra Consortium propel stock CSCO 68.50 4.38 It's largest acquisition in history! PMCS 95.81 4.38 Continues holding support on the 10-dma IDPH 130.25 4.25 Waiting, but a lot more upside to go INTC 83.00 3.06 Semi-conductors are still moving ERTS 67.94 2.44 Technically speaking, this is the play SLR 73.75 2.06 Look for a strong earnings run here SUNW 76.19 1.94 New, Strength from desktops and servers UIS 44.63 0.69 Momentum play kicks into high gear MMCN 51.69 -1.19 Dropped, it couldn't break through IP 51.06 -3.31 It hit its support and ready to move SNE 128.56 -7.69 Sony is still holding its support Puts TWX 61.50 -5.31 This one keep going and going and... ANF 33.38 -4.94 Consumer spending effecting retailers WLP 75.25 -2.69 Not the fastest but it stays steady JCP 39.63 -2.00 New, higher end competitors squeeze stk. T 47.50 0.63 Another great performance by Mr. T NVLS 57.06 2.63 Dropped, sector is too hot to handle WCOM 78.50 4.44 Will the stock make the turn around? PICK SUMMARY ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. STOCKS ADDED TO THE PICK LIST ***************************** CALLS: ADI - Analog Devices, Inc. DCLK - Doubleclick, Inc. JDSU - JDS Uniphase Corp. LGTO - Legato Systems, Inc. QCOM - Qualcomm, Inc. SUNW - Sun Microsystems, Inc. PUTS: Please confirm downward motion before playing. With the market in rally mode any beat up stock starts looking like a value play. JCP - Penney (J.C.) Company, Inc. PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS: MMCN $51.69 (-1.19) It's amazing how much power one man can posses. When I refer to one man, I am referencing the all- powerful Alan Greenspan. Just when technology stocks were looking like there may be some life in them, Greenspan, sensing that we still may have an overzealous market, decided he better once again cool it down by hinting there may be more interest rate hikes in the future if needed. Unfortunately, a good portion of the cooling was the Internet and technology sectors. This did not help matters with our play on MMCN, which attempted but could not breaking through its 52-week high at $57. Due to the fact the stock cannot seem to break this threshold and Friday's announcement by Greenspan, we decided to end this play and look for better plays elsewhere. PUTS: NVLS $57.06 (+2.63) Once again a semiconductor stock proves to be a tough stock to play puts on. This is mostly likely caused by the lack of trends thanks to the quick spikes we commonly see among the second-tier names like NVLS. We did get a small play off NVLS as it rolled over off the 200-dma at $58 but the drop wasn't sustained as it quickly bottomed at $55.50. The stock recovered from that low on Friday to close up despite the dip in the markets. There were also some news reports late in the week that stated analysts are somewhat bullish on the sector even though they were mainly referring to the big names like INTC and AMAT. So we are getting out while we still have some profit to take with us. STOCK SPLIT CANDIDATES *********************** IDPH - IDEC Pharmaceutical (current play) SNE - Sony Corp. (current play) QCOM - Qualcomm, Inc. (current play) PMCS - PMC-Sierra, Inc. (current play) SLR - Solectron, Inc. (current play) STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date TER - Teradyne 2:1 08-31-99 ex-date 09-01 AMZN - Amazon.com 2:1 09-01-99 ex-date 09-02 (current play) GTW - Gateway Comp 2:1 09-07-99 ex-date 09-08 (current play) KIDE - 4Kids 2:1 09-13-99 ex-date 09-14 SMTC - Semtech 2:1 09-14-99 ex-date 09-15 MCRL - Micrel 2:1 09-15-99 ex-date 09-16 LSCC - Lattice Semi 2:1 09-16-99 ex-date 09-17 CEFT - Concord EFS 3:2 09-22-99 ex-date 09-23 MDT - Medtronic 2:1 09-24-99 ex-date 09-27 VOD - Vodaphone 5:1 09-30-99 ex-date 10-01 TYC - Tyco 2:1 10-21-99 ex-date 10-22 SEBL - Siebel Systems 2:1 11-12-99 ex-date 11-15 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. SPECIAL SHORT TERM SPLIT PLAYS ******************************* We always recommend selling the day of the actual split or earlier. Profit taking will drive down the price on an average of 7 of 10 splitters immediately after the split. They may come back in a week or two but why risk it ! AMZN - Amazon.com $128.50 (+15.06) Splits 2:1 on 09/01 See details in sector list Chart = http://quote.yahoo.com/q?s=AMZN&d=3m ***** GTW - Gateway Inc $96.19 (+5.69)(+8.75) Splits 2:1 on 09/07 See details in sector list Chart = http://quote.yahoo.com/q?s=GTW&d=3m THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call play of the day: GTW - Gateway Inc $96.19 (+5.69)(+8.75) Running the split-run race, GTW is leaving other stocks in the dust. See details in sector list Chart = http://quote.yahoo.com/q?s=GTW&d=3m ****** Call play of the day: SFA - Scientific Atlantic Inc. $51.50 (+4.94) Hold on to your hats, SFA has been rocketing higher. See details in sector list Chart = http://quote.yahoo.com/q?s=SFA&d=3m ****** Put play of the day: ANF - Abercrombie & Fitch $33.38 (-4.94) ANF is 'Greenspooked' with the rest of the retailers. See details in sector list Chart = http://quote.yahoo.com/q?s=ANF&d=3m ****** Put play of the day: JCP - Penny J.C. Company Inc. $39.63 (-2.00) How low can you go? And I am not referring to the limbo. See details in sector list Chart = http://quote.yahoo.com/q?s=JCP&d=3m CALLS ***** Hardware ********* GTW - Gateway Inc $96.19 (+5.69)(+8.75) 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. Players have just one more week to take advantage of this split play. GTW will split 2:1 on September 7th following the long Labor Day weekend. You'll want to consider having all positions closed by then. It's very risky to hold over a split date and OIN never recommends it. GTW was a gangbuster for the first three days of the week setting new highs one right after the other. The stock then peaked at $100.68 in a late afternoon rally on Wednesday, setting the newest 52-week record. Besides the evident momentum driving up the stock that day, Kimberely Alexy, analyst for Prudential, reiterated a Strong Buy rating and issued a $124 target price. The negative market sentiment and some likely natural consolidation pulled down GTW on Thursday and Friday. With the stock well above its last established support level of about $82 this is not unusual. It's welcoming in the sense that this retreat offers some entry points as we go into next week's trading. The market may be fickle prior to the holiday weekend so consider having stops in place. Also be aware, that Argus Research Corp cut GTW to a Hold from a short-term Buy, yet left the long-term rating a Buy. The analyst offered no other comments to justify its partial downgrade. New readers, if you are considering opening new positions on GTW next week please first confirm both the stock direction and market sentiment and remember this play is over by next Friday at the latest. BUY CALL SEP- 90*GTW-IR OI=1326 at $ 8.63 SL=6.50 BUY CALL SEP- 95 GTW-IS OI=2326 at $ 5.75 SL=4.00 BUY CALL SEP-100 GTW-IT OI=1793 at $ 3.38 SL=1.75 BUY CALL OCT- 95 GTW-JS OI= 155 at $ 8.63 SL=6.50 BUY CALL OCT-100 GTW-JT OI= 191 at $ 6.25 SL=4.50 Picked on Aug 19th at $89.25 PE = 35 Change since picked +6.94 52 week high=$100.37 Analysts Ratings 12-8-1-1-0 52 week low =$ 36.12 Last earnings 06/99 est=0.55 actual=0.56 surprise=1.82% Next earnings 10-21 est=0.68 versus=0.51 Average daily volume = 1.68 mln Chart = http://quote.yahoo.com/q?s=GTW&d=3m ***** LXK - Lexmark International $80.19 (+4.94)(+4.69) Ever wanted someone to see things your way? Well LXK has made a business of it! By understanding customers needs and perceptions, they have become one of the leaders in providing printing solutions such as Laser, Ink Jet, Dot matrix, and all types of printers. They develop, manufacture and supply their extremely high quality products to 150 countries. They have taken their revenues up to 3 billion in 1998. LXK may just have success in their genes since they are a spin off of IBM and have retained innate values that contribute to their success. Values that focus on everything from customer value, relations, service and response. The company is continually seeking to raise the level of their playing field by providing firsts in quality and standards for the home and business printing industry. As an example, they were the one to introduce the first 1200x1200 dpi for laser and ink-jet printers. As LXK keeps up on their high resolution standards, we'll all be seeing and reading a little clearer. No news, no volume, no problem! LXK didn't need them as it bucked the market trend and headed higher. Setting a new high at $80.25 and closing up over two dollars, this stock continues to perform as we would like. Just imagine what will happen when we combine market cooperation and volume. We expect to watch this cake continue to rise. Having already taken some of profits in this play, we were hoping for a pullback for new entry points. If we do get a pullback, we should see support at the 10-dma at $76. Keep in mind that we may not see renewed volume in the market until after Labor Day and this could intensify any selling by profit-takers. Protect your gains and then use the dips as new buying opportunities after reconfirming a positive market direction. Remember patience and savvy are some of a traders greatest assets. Another quiet couple of days in the news. We expect to see new news after Labor Day and the close of the summer doldrums. BUY CALL SEP-70 LXK-IN OI=272 at $11.13 SL=8.75 BUY CALL SEP-75*LXK-IO OI=333 at $ 6.88 SL=4.75 BUY CALL SEP-80 LXK-IP OI=442 at $ 3.75 SL=2.25 BUY CALL OCT-80 LXK-JP OI=106 at $ 6.13 SL=4.25 Picked on Aug 12th at $66.75 PE = 39 Change since picked +13.44 52 week low =$25.38 Analysts Ratings 4-5-1-0-0 52 week high=$80.25 Last earnings 07/99 est=0.49 actual=0.55 Next earnings 10-18 est=0.55 versus=0.41 Average daily volume = 994 K Chart = http://quote.yahoo.com/q?s=LXK&d=3m ***** SLR - Solectron $73.75 (+2.06)(-2.69)(+8.25) Solectron is a provider of customized manufacturing services to OEM manufacturers. Solectron's services encompass product design, systems assembly, software duplication and warehousing. Solectron's client base currently includes Hewlett-Packard, Cisco Systems and Mitsubishi. For the first 3 quarters of 1999's physical year, net sales rose 67% to $6.01 bln and net income expanded by 44% to $205.1 mln. These results reflect higher sales volume and the acquisitions from Ericsson, NCR and IBM's ECAT. SLR's performance on Friday seemed to be a reflection of overall market sentiment. They might as well have a scheduled a holiday with the NYSE turning the lowest volume of the year. SLR lost $1.69 to close the trading session at $73.75. Volume on the stock was weak, in conjunction with the markets. Only 1 mln shares change hands during Friday's trading session. We are still positive on this play though. SLR releases its earnings report on Sep 13th and we expect a strong earnings run. The building momentum on SLR is also from recent news developments. The stock reached an all-time high last week with the news of a 3-year agreement to produce printer boards for IBM. This major announcement has continued to bring buyers into SLR. The market weakness that occurred late in the week will offer new entry points for plays of SLR but let the market selling run its course and confirm upward momentum before jumping in. In the news, there was disagreement over plans to expand SLR's presence in Romania. On Friday Romania's ARD (Romania's foreign investment promotional body) spokeswoman Gabriela Baicu stated "Solectron plans to gradually transfer its entire European business in Romania, targeting a turnover here of around $3 billion in the third or fourth year of operation." However according to SLR's spokesman Michael Donner this statement was incorrect. Mr.Donner said it was unclear where the figures cited came from but they were untrue. He went on to say that Solectron will continue to operate all of its facilities within Europe, in addition to its expanded campus in Romania. Figures released by SLR for further investment in Romania in the near term are expected to around $50 mln. BUY CALL SEP-70*SLR-IN OI= 290 at $6.13 SL=4.25 BUY CALL SEP-75 SLR-IO OI=1545 at $3.38 SL=1.75 BUY CALL SEP-80 SLR-IP OI= 135 at $1.56 SL=0.75 High Risk! BUY CALL OCT-75 SLR-JO OI= 549 at $5.50 SL=3.75 Picked on Aug 15th at $74.38 PE = 68 Change since picked -0.63 52 week high=$78.94 Analysts Ratings 6-11-5-0-0 52 week low =$19.41 Last earning 06/99 est= 0.29 actual=0.29 Next earning 09-13 est= 0.32 versus=0.23 Average Daily Volume = 1.30 mln Chart = http://quote.yahoo.com/q?s=SLR&d=3m ***** UIS - Unisys Corp $44.63 (+0.69)(+2.25) Unisys designs, manufactures and markets information technology solutions focusing on systems integration and related support services which represents almost 70% of its sales. Unisys competes in the global market, its clients include Huntington Bancshares, BellSouth, Eli Lilly and the US government. This momentum play first kicked into gear after a block trade on the ominous Friday the 13th. We then got technical the confirmation as UIS broke through and so far has held above the 30-dma at $42, an indicator which seems to act as benchmark support. Thus we can observe that the uptrend is still considered intact, just somewhat laggard this week which is evident by decline in trading volume and smaller advances. The stalemate is conceivably resulting from the topsy-turvy market and the stock's very close overhead resistance at its 52-week high of $46.18 set just last month. Even though UIS is showing strength by firmly holding its ground, we need a bounce on strong volume for some validation to continue with this play. So if you have open positions keep your eye on the $42 level because if UIS starts slipping below this point you will want to your stops to take you out of the play. Hitting the press this week, Unisys sealed a $500 mln. multi- year contract with the state of Pennsylvania. Unisys will consolidate 20 state agencies and provide ongoing management and operational support. The project will start immediately and should be completed within a year. In the merger arena on Wednesday, shareholders of PulsePoint Communications approved its acquisition by Unisys (originally announced back on June 15th). The deal is a tax-free, stock-for-stock merger where PulsePoint shareholders get .162 shares of Unisys for every one share of PulsePoint for a total about 2.2 mln common shares of UIS being exchanged. BUY CALL SEP-40*UIS-IH OI= 564 at $5.25 SL=3.50 BUY CALL SEP-45 UIS-II OI= 664 at $1.88 SL=1.00 BUY CALL SEP-50 UIS-IJ OI= 188 at $0.38 SL=0.00 High Risk! BUY CALL OCT-45 UIS-JI OI=1726 at $3.00 SL=1.50 BUY CALL OCT-50 UIS-JJ OI= 591 at $1.19 SL=0.00 Picked on Aug 22nd at $43.94 PE = 29 Change since picked +0.69 52 week high=$46.18 Analysts Ratings 8-2-2-0-0 52 week low =$17.62 Last earnings 06/99 est=0.34 actual=0.38 surprise=11.76% Next earnings 10-15 est=0.36 versus=0.26 Average daily volume = 1.38 mln Chart = http://quote.yahoo.com/q?s=UIS&d=3m Software ******** ERTS - Electronic Arts, Inc. $67.94 (+2.94)(+5.75)(+3.13) Electronic Arts, headquartered in Redwood City, is the world's leading interactive entertainment software company. Founded in 1982, Electronic Arts posted revenues of more than $1.2 billion for fiscal 1999. The company develops and publishes approximately 100 games and distributes over 1000 software titles worldwide for personal computers and video game systems. Electronic Arts markets its products under seven brand names: Electronic Arts, EA SPORTS(TM), Maxis(TM), ORIGIN(TM), Bullfrog(TM) Productions, Westwood Studios(TM) and Jane's Combat Simulations. Sony Playstation software accounts for about 40% of its sales. EA has distribution centers in 75 countries and derives nearly half its sales internationally. Whew! Disaster averted. Remember that upside down "T" on Thursday's chart portending a potential downturn? It didn't happen. Instead, ERTS tacked on $1.06 on 90% of its ADV, which is perfectly acceptable on the lowest volume day of the year. Especially since at this level, it's at its second highest closing price ever. Besides that, we'll take a gain any day we can get it. The long term technical chart is still MACD, momentum and RSI positive. Nothing fancy about this. It's just a darn solid chart. Typically, the third quarter is a yawner for most companies. But that's when ERTS begins its heavy shipping to vendors in anticipation of the year-end Holiday Season. It's revenue gets much stronger then. It also benefits from 95% institutional ownership of its shares. Unless they have a reason to dump it en masse, we think the downside is limited. ERTS has short-term support at $66.50 to $67. Bounces were strong form that level all week. We think it's buyable there. If your risk profile is a bit more conservative, wait for a breakout over $70 with good volume before entering. Another interesting note is that over 3 of the last 4 days, buying at the end of amateur hour and selling an hour before the close would have yielded a nice daily profit. BUY CALL SEP-65*EZQ-IM OI=213 at $5.38 SL=3.50 BUY CALL SEP-70 EZQ-IN OI= 92 at $2.88 SL=1.50 BUY CALL OCT-65 EZQ-JM OI= 7 at $7.88 SL=6.00 low OI BUY CALL OCT-70 EZQ-JN OI= 33 at $5.25 SL=3.50 Picked on Aug 22nd at $65.50 PE = 59 Change since picked +2.44 52 week low =$33.25 Analysts Ratings 8-3-1-0-0 52 week high=$70.19 Last earnings 7/99 est=0.01 actual=0.04 surprise=300% Next earnings 10-22 est=0.25 versus=0.17 Average daily volume = 685 K Chart = http://quote.yahoo.com/q?s=ERTS&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 8-29-99 Sunday Part 3 of 7 CALLS CONTINUED *************** Software Continued ****************** LGTO - Legato $44.44 (+4.88) Legato Systems is a developer, manufacturer and seller of network storage management software for large-scale enterprises and client/server computing environments. Their products are designed to work with a wide range of storage, client and server hardware based on Windows, NT, UNIX, OS/2, DOS, Netware and Linux operating systems. The combination of Legato's strong momentum and the recent announcement of its Celestra Consortium have propelled it to new heights. After just splitting 2:1 on August 16th, LGTO has been consistently trading above its 10-dma and steadily making headway. However the announcement on Thursday of the formation of the Celestra Consortium which promotes an open and integrated architecture that optimizes data movement and management within Storage Area Networks (SAN) really perked things up. This Consortium allows Legato to introduce its Celestra architecture for strategic partnerships and alliances to evolve. According to Kent Smith, Legato System's executive vice president of Strategic Alliances, the "openness and interoperability between vendors are vital in order to provide meaningful, cost-effective solutions to the fast growing IT community and to exploit the rich market potential of SANs, which is estimated at $13 billion by 2002". LGTO is comfortable in this proximate range and the only opposition standing in the way is the 52-week high set on Friday at $46.13. So look for LGTO to continue forging ahead under appropriate market conditions of course. Next week may be hard to play coming into Labor Day weekend so you should be prepared for anything and keep those stops in place. Analyst John F. Powers of BBRS came forward on Thursday and concurred that the new Celestra Consortium has powerful implications and believes it "positions the company as an industry pacesetter for the server-less backup arena that will be a critical component in the SAN industry". He reiterated a Strong Buy rating for LGTO. On Friday, SG Cowen also reiterated a Strong Buy rating citing Legato has solid prospects for beating revenue and earnings per share estimates for the 3rd quarter. BUY CALL SEP-40 EQN-IH OI=3629 at $5.75 SL=4.00 BUY CALL SEP-45 EQN-II OI= 120 at $3.13 SL=1.50 BUY CALL OCT-40 EQN-JH OI= 23 at $7.00 SL=5.25 BUY CALL OCT-45 EQN-JI OI= 171 at $4.25 SL=2.75 Picked on Aug 29th at $44.44 PE = 120 Change since picked +0.00 52 week high=$46.13 Analysts Ratings 11-5-1-0-0 52 week low =$13.75 Last earnings 07/99 est=0.26 actual=0.29 surprise=11.54% Next earnings 10-14 est=0.16 versus=0.08 Average Daily Volume = 855 K Chart = http://quote.yahoo.com/q?s=LGTO&d=3m Internet ******** AMZN - Amazon.com $128.50 (+15.06) 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. On Aug 18th, Merrill Lynch upgraded AMZN to accumulate and indicated that they thought it would be one of eight Internet stocks that would do quite well as we enter into the fall. You know, holiday season and all. We may be seeing some hints of AMZN's intentions and truth to the statement by Merrill. Friday, despite the weak volume and volatility that the market offered us, Amazon held up quite well. In fact it is holding right near our 100-dma, which is one of the reasons we like this play. The main reason though is still the pending split which is ex-date on the Sep 2nd. That means we only have a few days left to play the stock. Trading this week should be extra volatile going into the split so look for entry and exit points intraday. A check of the chart shows that despite the general down trend all day in the market, AMZN was range bound and determined to show it's strength towards the end of the day. In our current position, AMZN looks set to jump at the first sign of our next market gain. Even the best runners can have a false start so confirm a positive market before starting your play. Purchase circles? Sounds like a gentlemen's club for retailers. In fact it is an information service that Amazon has offered to it's customers, showing the buying habits of certain groups. For example, what books are most popular at Harvard or American Express, etc. Well some think that this is a bit too nosey and have complained "privacy violation!" No problem for AMZN though. They have simply offered individuals and companies the choice to participate or not. A very diplomatic solution that will keep peace among the ranks, while allowing the continued customer service we've come to expect. BUY CALL SEP-125*YZZ-IE OI=1919 at $12.00 SL= 9.50 BUY CALL SEP-130 YZZ-IF OI=2952 at $ 9.50 SL= 7.25 BUY CALL SEP-135 YQN-IG OI=1856 at $ 7.00 SL= 5.75 BUY CALL OCT-130 YZZ-JF OI=2851 at $16.25 SL=12.68 BUY CALL OCT-140 YQN-JH OI=2811 at $12.38 SL= 9.50 Picked on Aug 27th at $128.56 PE = N/A Change since picked -0.06 52 week low =$ 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 ***** BVSN - Broadvision, Inc. $104.13 (+8.38) What happens when you develop great relationships? Chances are you make friends and doing business with friends is fun, secure, and long term. This is the business of BVSN. They provide Internet software applications that focus on business relationships. These application solutions address issues such as company business processes, secure online transactions, improving speed and performance and Internet communications. These solutions are directed specifically to a companies customers, employees and partners. Another key advantage of Broadvision applications is that they can integrate into a company's existing system. These software applications are finding great success in the e-commerce and financial markets which have attracted over 275 customers such as American Airlines, Ernst & Young, Fingerhut, Hartford, HWP, Oracle, Toyota and Visa, among others. With friends like these, you can see that Broadvision's strategies are working. Revenues grew 83% last year to $18.5M and the company is now in the earnings black at $2.9M. Like a specialist weaving it's way among the market carnage, BVSN continues to prove its strength to us. Even though the last two trading days have been corrective in the market, Broadvision is continuing on a positive trend. The formation on the chart appears to be getting close to the apex of the triangle. Any break above this should prove to be strong! Keep in mind, that if it does break below, that move could be strong as well. The triangle has actually indicating slowed momentum by both bulls and bears and indecision in the market can very often be fatal, so place those stops and protect those profits. Remembering the reason for our play here, was the stock's staying power and momentum. BVSN is being held up by a strong 10-dma, according to the recent trend. If we see any action contrary to this will be reason for caution. Thursday's move on huge volume proved the potential so we'll hope for a new high but always prepare for the low with stop losses. It's been pretty quiet in the news. Several companies are listing BVSN as play recommendations and one of the top momentum stocks. When you perform as BVSN has, it's hard to stay hidden. So let them come aboard as we're on a momentum train. BUY CALL SEP-95 QVB-IS OI=228 at $13.13 SL=10.50 BUY CALL SEP-100 QVB-IT OI=104 at $ 9.88 SL= 7.25 BUY CALL SEP-105*QVB-IA OI= 97 at $ 7.38 SL= 5.75 BUY CALL SEP-110 QVB-IB OI=384 at $ 5.25 SL= 3.50 BUY CALL OCT-110 QVB-JB OI= 10 at $ 9.25 SL= 7.00 low OI Picked on Aug 15th at $93.50 PE = 264 Change since picked +10.63 52 week low =$ 9.25 Analysts Ratings 7-12-1-0-0 52 week high=$116.38 Last earnings 06/99 est=0.11 actual=0.12 Next earnings 10-22 est=0.13 versus=0.07 Average daily volume = 576 K Chart = http://quote.yahoo.com/q?s=BVSN&d=3m ***** DCLK - Doubleclick Inc, $103.13 (+12.19) Doubleclick provides comprehensive global Internet advertising solution. With headquarters in New York, N.Y. the online advertising firm uses its DART technology that measures Web traffic and ad effectiveness, and in turn provides data to both the web publishers and the advertiser. With over 1300 sites in its network Doubleclick delivers ads in websites such as AltaVista, Egghead.com, and U.S. News Online. Two of its bigger advertisers include AT&T and IBM. Doubleclick has agreements to buy consumer-purchasing data information provider Abacus Direct and software firm NetGravity. DCLK competes primarily with America Online, 24/7 Media, and Flycast Communications. After its IPO in February of 1998, DCLK has already built an impressive track record. As with so many of the Internet stocks, DCLK has yet to show a profit. At least they are getting close. Current analysts estimates show that they will be in the black by the end of 2000 or into early 2001. DCLK has trended lower ever since their skyrocketing surge last April. Just as almost every other Internet stock has as well. However, it appears that DCLK bottomed at $60.50 near August 5th. While many Internet analysts feel the recent sell off from April to August was overdone, DCLK has staged a decent comeback. This week has produced some positive technical moves as DCLK broke through both the $100 mark as well as its 100 dma on strong volume this Thursday. Even better, it retested the $100 dollar level during Friday's sell off in the NASDAQ and still managed to close above its 100 dma ($101.90). Since the Fed meeting, many market analysts believe that the Fed will be unwilling to raise rates again for the remainder of the year. This means, investors will be highlighting growth stocks and Internet names will be top on the list. Everyone knows that tech stocks usually lead the charge either up or down in bull and bear markets. If the market is going to provide another leg up, DCLK looks ready to run. Be careful, Greenspan's speech on Friday afternoon my have some unfavorable affects as traders digest the news over the weekend. But, DCLK's performance on Friday was very encouraging. Next week is a pre-holiday week, so we expect volume to be light. Support for DCLK is in the $100.00 area and then again at $97.50. With the holiday coming we would use patience in entering a new play on DCLK. Confirm direction on Monday before opening any positions. Assess your risk profile as the Internet stocks can be volatile. There is new found optimism for DCLK in that #2 online directory Lycos Inc. will license Doubleclick's technology for providing targeted ads. Lycos currently uses software from Engage Technologies (one of CMGI's ventures, as was Lycos). If they do make a move it would be viewed as a solid endorsement for DCLK. Investors were impressed by the release of the information as this seemed to fuel the increase Thursday. In the first six months DCLK, has added over 250 new clients and doubled the number of ads served by its DART technology. BUY CALL SEP- 95*QWE-IS OI= 597 at $12.50 SL=$10.00 confirm direction BUY CALL SEP-100 QWE-IT OI=1090 at $ 9.38 SL=$ 7.00 BUY CALL SEP-105 QWE-IA OI= 597 at $ 7.00 SL=$ 5.25 no volume yet on the SEP-110s BUY CALL OCT-100 QWE-JT OI=1300 at $14.75 SL=$11.75 BUY CALL OCT-110 QWE-JB OI= 498 at $ 9.88 SL=$ 7.50 Picked on Aug 28th at $103.13 PE = N/A Change since picked +0.00 52 week high=$176.00 Analysts' ratings 8-6-0-0-0 52 week low =$ 6.75 Last earnings 6/99 est=-0.13 actual=-0.13 surprise=0% Next earnings 10-08 est=-0.13 versus=-0.14 Average daily volume = 3.10 mln Chart = http://quote.yahoo.com/q?s=DCLK&d=3m ***** EXDS - Exodus Communications $82.75 (+7.38)(+8.13)(+16.75 s/a) EXDS offers server hosting and Internet connectivity, among other services, which let businesses outsource management of their Internet sites. Exodus has 13 Internet Data Centers (8 more planned by year-end) where clients store their servers in secure vaults. Often, these are called "server farms". In addition to providing storage space, the company furnishes connections and maintenance of its clients' networks. Its client list includes CBS Sports, eBay, Yahoo!, Johnson & Johnson and MSN Hotmail, and is growing at an average rate of 2 major customers per day. Exodus is expanding its geographic penetration. Their growth comes from acquisitions and development of new server farms or data centers. With last weeks trading range between $77.50 and $89.75, we want to warn again that playing EXDS is not for the faint- hearted. Brush up on your cat-herding skills and be prepared for volatility. This play is momentum based only, which stems from its explosive growth in revenues. In short, many companies are finding it cheaper to outsource their server operations than maintain and operate them in-house. As a leader in the industry, EXDS wins a lot of business. As for the play, technically EXDS is overbought and has been catching its breath the last 4 days, mostly due to the influence of decreasing volume. We'll cut it some slack since up to a third of the normal number of traders are reported to be "on vacation" until after the Labor day weekend. On Friday, EXDS dropped $3.50 on just 58% of normal volume - not a conclusive enough reason to drop the play. Most likely, that was just profit-taking from getting "Greenspooked". Be aware that support comes in a wide range. Last week, support was solid at $81-$82. If you are in the play already and you haven't yet been stopped out, it will be important to have a stop limit order set if EXDS gets below $81, since we don't see support again until $72. EXDS is very interest rate sensitive right now so if you play it, keep an eye on the bond market. A rate spike may be a clue to exit the play. Of course, if you are a gunslinger, a bounce off $81 is just what you'll be looking for to enter, especially if accompanied by renewed volume. Once you are in, keep a trailing stop set. EXDS can move down as fast as it moves up. Again, this play is not for the risk averse. In the news, EXDS is now 1 of 18 stocks on J.J. Cramer's "Red Hot Index". That piece may help to bring out the momentum investors this week. Let's hope so. Early last week, EXDS announced they were teaming up with Compaq and Sun Micro to help companies set up, maintain and expand their Web sites. Finally, thanks to a 2:1 split on August 13, another one isn't likely soon. However, EXDS was at $86 when they announced their previous split on January 27 of this year. We're almost there now. If EXDS can comfortably get over $90 by October earnings, there are enough shares to authorize another 2:1. This is not a split play yet. Don't let that cloud your good judgement. BUY CALL SEP-75 EXF-IO OI=546 at $12.25 SL= 9.75 BUY CALL SEP-80*EXF-IP OI=790 at $ 9.25 SL= 6.75 BUY CALL SEP-85 DUB-IQ OI=356 at $ 6.75 SL= 5.00 BUY CALL OCT-80 EXF-JP OI=179 at $13.50 SL=10.75 BUY CALL OCT-85 DUB-JQ OI= 55 at $11.00 SL= 8.75 Picked on Aug 22nd at $75.38 PE = N/A Change since picked +7.38 52 week low =$ 3.88 Analysts Ratings 10-7-1-0-0 52 week high=$89.75 Last earnings 7/99 est=-0.52 actual=-0.51 surprise=1.92% Next earnings 10-29 est=-0.55 versus=-0.45 Average daily volume = 2.42 mln Chart = http://quote.yahoo.com/q?s=EXDS&d=3m ***** VRSN - VeriSign Inc $102.38 (+15.44)(+3.94)(+12.75) VeriSign provides Internet-based trust services that will authenticate and protect data so secure transactions and communications can be conducted over the Internet, intranet and extranets. Websites, enterprises, government agencies and even individuals use VeriSign's digital ID's (digital certificates) with the encrypted information as cyber- safeguards for such activities as e-mail, home banking and credit card transactions. Visa represents 14% of total sales. VRSN is an Internet momentum play that has provided HIGH RISK players with stellar opportunities to cash in big profits. Even with the sector slip on Friday (VRSN gave up 7.4% of its recent gains) this stock is still up over 17% for the week! Importantly, the strong trading volume is corroborating the bullish gains VRSN has made recently. According to Danny Rimer, an Internet researcher for Hambrecht & Quist, he attributes VeriSign's "hearty gains to a growing awareness that the stock is the blue chipper among the business-to-business companies" and further adds that "93 percent of e-commerce sites use Verisign's services". I'd say that certainly qualifies the company as the having the dominant market share in this leading-edge Internet business service. On Thursday, VRSN came off a record high to once again set a new 52-week high. This mark at $114 is the only overhead resistance going into the market next week. It's likely trading will be a bit rocky, plus remember this stock tends to behave in somewhat of a volatile manner intraday, so practice CAUTION. On one hand this scenario gives us an abundance of entry points during the trading sessions but on the flip side stop losses become difficult to use because the wild intraday movements can inadvertently stop you out of your position. Therefore it would be wise to give this HIGH RISK INTERNET play your devoted attention. Thursday turned out to be a very good day for VRSN. SG Cowen started coverage with a Buy and put a $120 target price on VRSN and SunTrust Equitable Securities also initiated a new long-term Attractive rating. In other news this week VeriSign announced a new Internet-trust product called Go Secure! for Web Applications. This new software allows enterprises a way to instantly replace insecure passwords, securing the infrastructure of the digital certificates within their large- scale applications. On the global front, VPN Tech and LGS Group are joining the Canadian Imperial Bank of Commerce as financial affiliates in VRSN's pursuit of the Canadian market. BUY CALL SEP- 95 YVR-IS OI=221 at $12.38 SL=10.00 BUY CALL SEP-100*YVR-IT OI=791 at $ 9.38 SL= 7.00 BUY CALL SEP-105 YVR-IA OI=136 at $ 6.88 SL= 5.25 BUY CALL SEP-110 YVR-IB OI=388 at $ 5.00 SL= 3.25 BUY CALL OCT-105 YVR-JA OI= 58 at $12.88 SL=10.50 Picked on Aug 15th at $83.00 PE = N/A Change since picked +19.38 52 week high=$114.00 Analysts Ratings 5-6-3-0-0 52 week low =$ 9.68 Last earnings 06/99 est=-0.02 actual= 0.00 Next earnings 10-22 est= 0.02 versus=-0.09 Average daily volume = 1.17 mln Chart = http://quote.yahoo.com/q?s=VRSN&d=3m Semiconductors ************** ADI - Analog Devices Inc. $51.31 (+5.44)(-2.12) Analog Devices, Inc. is a semiconductor company that designs, manufactures, and markets high-performance circuits used in analog and digital signal applications. Its normal linear ICs translates pressures, temperatures and sound into digital as well as analog signals. The chips are used in communications equipment and computers. Other arenas where the chips are implemented are in engineering, medical and scientific instruments. We have picked up a new player as it nears an all-time high. The stock had bullish momentum all last week as it closed in positive territory every day. ADI's achievement on Friday truly demonstrated its ability to overcome the bearish market sentiment and stand on its own two feet. Recently, the semiconductor industry seems to be a mixed bag of performers and under-performers. We haven't seen a lot of clearly defined direction by the industry as a whole. But ADI is one of the companies that are doing well. On August 20th, analyst Adam Harkness gave ADI the thumbs up when he rated the stock as an Accumulate. On Aug 23rd, Bear Stearns also stated its analysis of ADI and gave it an Attractive Buy rating. The technical picture on this play over the past 6 months is excellent. The key is to start looking for entry points. It would not be surprising to see ADI retreat some after last week's stellar performance. If this is the case, we have short-term support at the 10-dma at $48. But if the momentum continues, try to jump in intraday after confirming market direction. In recent news, ADI on Friday unveiled its new 16-bit AD7707 sigma delta analog-to-digital converter. This is the newest member of the company's 3-generation AD770x ADC family. It is also the first product to use the company's new thin-film on CMOS process. The AD770x has an analog front end and is intended for low-power, low-voltage and low-frequency measurement operations. On Aug 16th, ADI announced the company's industry leadership in providing silicon solutions used to implement ADSL (Asymmetric Digital Subscriber Line). This announcement is founded on recent analyst reports from Dataquest. Also, Allied Business Intelligence also cites ADI's leadership in ADSL in a recent report. Dataquest Inc, ranked ADI number one in sales according to a report entitled, DSL and Cable Modem Chip Markets Race Ahead. BUY CALL SEP-45 ADI-II OI= 7244 at $7.25 SL= 5.75 BUY CALL SEP-50 ADI-IJ OI= 594 at $3.88 SL= 2.50 BUY CALL SEP-55 ADI-IK OI= 308 at $1.63 SL= 0.75 BUY CALL OCT-55 ADI-JK OI= 60 at $2.94 SL= 1.50 Picked on Aug 28th at $51.31 PE = 57 Change since picked +0.00 52 week high=$51.94 Analysts Ratings 8-6-1-0-0 52 week low =$12.00 Last earning 08/18 est=0.29 actual=0.30 Next earning 12-02 est=0.35 versus=0.16 Average Daily Volume = 1.01 mln Chart = http://quote.yahoo.com/q?s=ADI&d=3m ***** INTC - Intel Corp $83.00 (+3.06)(+0.19)(+8.19)(+2.56) Its best customers are Compaq, Dell, and IBM. Intel is the world's #1 chip maker. The powerful Pentium and low-end Celeron are Intel's claim to fame. These microprocessors have provided the brains for IBM-compatibles since 1981. Recently INTC has began a major push into communications products such as servers and networking devices. Their microcontrollers and flash memories are used in products for communications, industrial equipment, and military markets. Semi-conductor makers are enjoying rising stock prices that come from increasing demand for their products. PC sales have been strong this year and that means a need for more chips. Dropping chip prices is also fueling demand. Although July semi-conductor orders were down from June orders, as they often are in the summer, the demand for chips is generally seen as growing. While Intel did not meet earnings estimates for last quarter, the company was so upbeat about the rest of the year that investors have sent the stock to new highs. Every few days, another analyst suggests that current earnings estimates for Intel may be too low for this quarter. The latest was Morgan Stanley's analyst, who increased his earnings estimates and set a new price target for INTC of $95. Investors view the recent rate hike as possibly the last for a while and that view is another positive for tech stocks like INTC. There are negatives to concern us however. First, while INTC did set a new high on Tuesday, trading action was a bit choppy for the week and it just managed to remain above its 10-dma on Thursday. In addition, competition is growing from Advanced Micro Devices in both the high and low-end markets. AMD's Athlon chip may actually outperform the Pentium III. Fortunately for Intel, AMD still can't deliver the volume of goods needed in a timely enough manner to steal away market share. INTC bucked the trend of the rest of the market on Friday, which was down on comments from Alan Greenspan that suggested overvaluation. Following a dip on Thursday that had brought INTC close to its 10-dma, positive comments from Marc Edelstone sent the stock higher. The Morgan Stanley Dean Witter analyst raised his earnings estimate for 1999 from $2.25 to $2.30 per share and his 2000 from $2.55 to $2.60. His 12-month price target went from $80 to $95. He believes that Intel will benefit from strong PC sales, which were up 15% to 20% in the first half. Also in the news: competitor AMD has introduced a 500 MHz version of its K6-2 processor, which competes in the budget market against Intel's Celeron chip. Intel had released a Celeron 500 earlier in the month. Finally, beginning on September 1st, the Pacific Exchange will list options on INTC. They were formerly listed only on the AMEX. BUY CALL SEP-80*INQ-IP OI=18851 at $5.25 SL=3.25 BUY CALL SEP-85 INQ-IQ OI=14571 at $2.38 SL=1.25 BUY CALL SEP-90 INQ-IR OI= 9181 at $0.88 SL=0.00 High Risk! BUY CALL OCT-80 INQ-JP OI=18973 at $7.13 SL=5.25 BUY CALL OCT-85 INQ-JQ OI=10201 at $4.38 SL=2.75 BUY CALL OCT-90 INQ-JR OI= 3120 at $2.56 SL=1.25 Picked on July 31st at $69.00 PE = 38 Change since picked +14.00 52 week high=$84.50 Analysts' ratings 14-15-6-0-0 52 week low =$34.88 Last earnings 6/99 est=0.54 actual=0.51 surprise= -5.56% Next earnings 10-13 est=0.56 versus=0.44 Average daily volume = 23.2 mln Chart = http://quote.yahoo.com/q?s=INTC&d=3m ***** PMCS - PMC-Sierra Inc. 95.81 (+4.38) PMC-Sierra is in the business of designing, developing, and supporting high-performance semiconductor system solutions for the communications market. The company is a leading provider of high speed internetworking component solutions emphasizing ATM, Ethernet, SONET/SDH, T1/E1 and T3/E3 applications. The company's products are used in broadband communications infrastructures and high bandwidth networks. Other network equipment manufacturers integrate the company's products into their own system for Internet, remote-access and corporate data networking applications. PMCS pulled back with the market during the later part of the week but they are holding support on the 10-dma and we are scouting for entry points. The pullback we are seeing right now in PMCS is being felt by most stocks as the NASDAQ takes a breather from a strong run of late. In fact, even with the late week selloff, the NASDAQ is still up 4.3% for the week. We are impressed by PMC-Sierra's ability to maintain support once again on the 10-dma at $95. It has hugged this line tightly ever since the first of June when the stock was at $50. Granted we have seen a big run up, 207% year-to-date to be precise, but most analysts feel this is still the tip of the iceberg. For example, you would usually expect analysts to downgrade a stock or at least revise earnings expectations after a purchase/merger announcement. This is because the acquiring company will usually pay a premium and suffer one- time charges while they integrate the businesses. But when PMCS announces the acquisition of Abrizio this week, we didn't have any such worries. Instead the opposite happened when Merrill Lynch came out and reiterated their short and long- term Buy of PMCS and raised their price target to $120. It is this kind of optimism that should keep driving PMC-Sierra higher. Remember if PMCS does pierce the 10-dma, we would not recommend holding onto your position. This could scare some investors into selling and next support isn't until the 50-dma which is currently below $80. Here is some of the comments from Merrill regarding the state of PMCS after the merger announcement. "PMC continues impress us despite the fact that the stock has appreciated sharply in the past two weeks, exceeding our previous price objective, we are staying with our Buy rating. Our new price objective is $120, or 25x year-forward revenues, in line with what the market is paying for other successful communications-oriented IC companies such as Broadcom." BUY CALL SEP- 90 SQL-IR OI=374 at $9.75 SL=7.25 BUY CALL*SEP- 95 SQL-IS OI=222 at $6.75 SL=5.00 BUY CALL SEP-100 SQL-IT OI=246 at $4.38 SL=2.75 BUY CALL OCT-100 SQL-JT OI=189 at $7.88 SL=6.25 Picked on Aug 24th at $98.19 P/E = 91 Change since picked -2.38 52-week high=$102.25 Analysts Ratings 9-6-0-0-0 52-week low =$11.44 Last earnings 07/99 est=0.19 actual=0.22 Next earnings 10-15 est=0.24 versus=0.15 Average Daily Volume = 929 K Chart = http://quote.yahoo.com/q?s=PMCS&d=3m PLAYS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 8-29-99 Sunday 4 of 7 CALLS CONTINUED *************** Semiconductors continued ************************ JDSU - JDS Uniphase $110.19 (+8.25)(+4.88) JDSU is a laser subsystem and equipment manufacturer for the photonic/electronic industry. Their products reside in telecommunications, signal processing and laser-based semiconductor wafer inspection and analysis equipment. Their chips increase the carrying capacity of fiber optics. They also make dense wavelength division multiplexers (DWDM) which monitor network capacity and boost their performance. Their sales are primarily to telecom companies, central switching stations, research labs and bar-code scanning manufacturers. 40% of its sales are derived outside the U.S. We can't hide it. We love this stock. It's 1-year chart shows a steady and strong ascent from the lower left to the upper right with little deviation. George Gilder refers to it as the Intel of the photonics age. But it too isn't for the weak-kneed. After reaching as high as $120.88 on Wednesday, it has since given back a good part its spike. Why the spike? Cerent and Montery, CSCO's new acquisitions, will give JDSU a huge new client to whom it can market its goods. Technically, the 1-year and the 3-month chart look great. MACD, momentum and RSI are all in the positive, even after a $10 fall on significantly better than average volume, which is a legitimate retracement. After bouncing south of its Bollinger band channel, it looks ready to bounce back north off its 10-dma at about $108.50, which also happens to be its intra-day support on Friday. We think dips to this level are buyable. As traders return from vacation, barring a market reversal, volume should fill the stock again. It's only resistance is $120.88. A rise over $115 with volume would indicate a pending break for higher ground and a good entry for the more conservative trader. Again, evaluate your tolerance for big price moves in both directions before playing and use stops to protect yourself from losing a gain or incurring a loss. Friday, Sound View downgraded JDSU from Strong buy to Buy only for valuation reasons since they believe the recent price momentum can't be sustained. But the fundamentals remain unchanged. JDSU is also 1 of 18 stocks on J.J. Cramer's "Red Hot Index". BUY CALL SEP-105 UNQ-IA OI=846 at $ 9.13 SL=6.75 BUY CALL SEP-110*UNQ-IB OI=325 at $ 6.25 SL=4.25 BUY CALL SEP-115 UNQ-IC OI=238 at $ 3.63 SL=2.00 BUY CALL OCT-110 UNQ-JA OI= 61 at $12.50 SL=9.75 low OI BUY CALL OCT-115 UNQ-JB OI=379 at $ 9.63 SL=7.00 Picked on Aug 29th at $110.19 PE = N/A Change since picked +0.00 52 week low =$15.62 Analysts Ratings 11-9-0-0-0 52 week high=$120.88 Last earnings 07/99 est=0.21 actual=0.24 surprise= 14.2% Next earnings 10-27 est=0.24 versus=0.12 Average daily volume =1.46 mln Chart = http://quote.yahoo.com/q?s=JDSU&d=3m Telecom/Communications/Networking ********************************* CSCO - Cisco Systems $68.50 (+4.38)(+0.57) Cisco builds 85% of the routers and switches that make the Internet work. They are the leading supplier of products that link local and wide area networks. The company's other products include dial-up access servers and network management software. Cisco has been on an acquisition binge (about 37 since 1993) to broaden its product line. It also derives revenue by licensing products as it seeks to widen the reach of its Cisco Internetwork Operating System (Cisco IOS) software, in hopes of making it an industry standard. They have strategic relationships with the industry's biggest players (including Alcatel, Microsoft, Qwest, and U S WEST) that are boosting Cisco's influence on the networking industry. In short, Cisco Systems is the worldwide leader in networking for the Internet. It was a big week for CSCO as it announced not just the largest acquisition in its history but probably the largest dollar volume acquisition of a privately held company ever. If you haven't already heard, CSCO announced last week that it would buy Cerent Corp, maker of fiber-optical networking gear, in exchange for 100 mln shares of CSCO stock, or about $6.8 bln (with a "b"). At the same time, they also agreed to buy Monterey Networks for $500 mln payable with 7 mln shares of CSCO. But don't look at these as just more expensive mergers. They will prove to be significant in the history of not just CSCO but the development of communications systems worldwide over the next 20 and probably more years. John Chambers, who is CSCO's CEO knows it. These acquisitions have already acted to show the investment world, not just the communications world, that the future of communications will be photon based, not electron based. This isn't just good news for the future of CSCO. It also puts the seal of approval on many other companies in the fiber-optic industry, like JDS Uniphase for instance who will provide laser subsystems to Cerent, as CSCO grows Cerent's revenue from $10 mln this year to over $100 mln next year. Enough reverence. . .after a steady rise through on Thursday, CSCO found support at $68 on 3 occasions Friday. Resistance isn't far away at $70. A move over $70.31 puts it in blue sky territory. If the market cooperates and volume increases back over the ADV of 17.4 mln shares, this will continue to be a great play. Be careful though as CSCO will still move with the market on a short-term basis. Confirm direction before taking a position. The news is incorporated above but here's a bit more detail on Cerent. Cerent's equipment acts as a bridge between traditional copper phone lines and newer, high-speed fiber- optic cable and the purchase will save Cisco time in developing the equipment and customers on its own. BUY CALL SEP-65 CYQ-IM OI=16140 at $4.63 SL=2.75 BUY CALL SEP-70*CYQ-IN OI=20207 at $1.69 SL=0.75 BUY CALL SEP-75 CYQ IN OI= 5952 at $0.44 SL=0.00 feel lucky? BUY CALL OCT-65 CYQ-JM OI=13243 at $6.38 SL=4.50 BUY CALL OCT-70 CYQ-JN OI=21340 at $3.38 SL=1.75 BUY CALL OCT-75 CYQ-JO OI=10009 at $1.50 SL=0.75 Picked on Aug 24th at $62.50 PE = 111 Change since picked +6.00 52 week low =$20.56 Analysts Ratings 19-13-0-0-1 52 week high=$70.31 Last earnings 08/99 est=0.20 actual=0.21 surprise=5.0% Next earnings 11-09 est=0.22 versus=0.16 Average daily volume =17.38 mln Chart = http://quote.yahoo.com/q?s=CSCO&d=3m ***** QCOM - Qualcomm Inc, $183.75 (+8.81) Headquarted in San Diego, California, Qualcomm Inc. is a leader in the design and development of code division multiple access(CDMA) technology, an industry standard for mobile communications. This technology is used in cellular phones, wireless telephone system equipment and satellite ground stations. QCOM's OmniTRACS global positioning system is relied on heavily by the trucking industry to monitor truckers while traveling. They are involved in a joint venture with Loral Space and Communications in developing the Globalstar system of low-orbiting satellites, which will eventually offer telecommunications services around the world. QCOM was added to Fortune's 100 fastest growing companies list again this year. Fortune announced Wednesday that QCOM had jumped from #74 in 1998 to #16 on their list of the fastest growing companies in America. Qualcomm was recognized for its growth in profits, revenue and total stock market return. Investors were happy to have recognized QCOM, as well. QCOM split 2:1 in early May. After the normal post split depression shares of QCOM have moved steadily higher, only pausing to catch its breath from mid July into early August. We are adding QCOM to our pick list as we believe we will see continued strength in communications equipment giant. We may see continued profit taking first or a consolidation in the coming week as it is a pre-holiday week, with volume expected to be light. QCOM would appear to be an ideal split candidate. The last split was announced in mid April with shares of QCOM trading in the $160 area. However there is one problem with that scenario. They don't have enough shares for a 2:1 split. With 300 mln. authorized and approximately 160 mln. outstanding, they do have room for a 3:2 but we doubt it would happen. The next annual shareholders meeting for QCOM, is not scheduled until February 2000, and at this time no announcements of a "special" stockholders meeting have been released. What we are trying to say is if you want to play you'll have to pay the going price. Qualcomm blew away earnings estimates in March by 41% and topped the analysts estimates again in June by 19%, with earnings at $0.75 per share. Estimates for the current quarter are for continued growth at $0.85 compared to $0.27 for same period last year. Again, this is another one of the tech stocks that will blossom if traders continue to feel that the Fed will not raise rates through the rest of the year. Technically, QCOM looks strong as well, with MACD and momentum pointing north. However, stochastics and RSI are showing an overbought position. Despite the fact that their 10 dma is sitting at $176.79 and the 30 dma is back at $160.41, QCOM may be giving us an entry point soon. Friday's profit taking has been a much needed pullback. Let's assume that the market doesn't gap down due to Greenspan's bubble bursting comments on Friday. We think QCOM looks like a trade with a bounce off of $180 (where it spent its time early last week). If it does break $180, next stop will be its 10 dma. You'll need to confirm both market and stock direction before playing. Part of what may be pushing the stock price is a rumor that AT&T might be chucking it's current technology and moving to CDMA. Who better to provide it than QCOM and ERICY? Also in the news, Qualcomm and Autotrac Comercio e Telecomunicacoes S.A. of Brazil announced Tuesday the formation of a joint venture to bring the OmniTRACS mobile information system to Argentina. This OmniTRACS system monitoring, and will provide two-way satellite communications, including real-time global positioning system to allow the transfer of data to and from vehicles while in route to their destinations. BUY CALL SEP-175*AAO-IO OI= 551 at $14.63 SL=11.50 if dips to $180 BUY CALL SEP-180 AAO-IP OI=1349 at $11.63 SL= 9.25 BUY CALL SEP-190 AAO-IR OI=1713 at $ 7.50 SL= 5.75 BUY CALL SEP-195 AAO-IS OI= 271 at $ 5.38 SL= 3.50 aggressive BUY CALL OCT-190*AAO-JR OI= 776 at $13.38 SL=10.50 BUY CALL OCT-200 AAO-JT OI= 368 at $ 9.63 SL= 7.25 Picked on Aug 28th at $183.75 PE = 295 Change since picked +0.00 52 week high=$198.63 Analysts' ratings 8-9-2-0-0 52 week low =$ 18.88 Last earnings 07/99 est=0.63 actual=0.75 surprise=+19.05% Next earnings 11-09 est=0.85 versus=0.27 Average daily volume = 7.83 mln Chart = http://quote.yahoo.com/q?s=QCOM&d=3m ***** SFA - Scientific Atlantic Inc. $51.50 (+4.94) 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. Even Chairman Alan Greenspan's comments on Friday could not hold SFA back. Though the stock gains were minimal, it was one of the few stocks ending the day on the positive side. Adding to our delight, SFA managed to end the week with a new 52-week high at $51.50. Not to shabby considering the volatile markets we experienced last week. We continue to use Scientific Atlantic as a momentum driven play. The stock is up over a whopping 50% since its August 4 close at $33.94. Because the stock has gone up so far so fast, please take precautions if SFA continues to set new highs by increasing the price of your stops orders. We may also get some profit- taking if the market has continued weakness which may take us down to the 10-dma at $48. For those looking to open new plays, you will either need to confirm direction on strong volume or wait for the pullback to the 10-dma. There was no new news to report on SFA this weekend. However, to reiterate the last news, on August 20 Scientific-Atlanta announced that its board of directors has declared a regular quarterly cash dividend on its common stock of one and one- half cents ($.015) per share. The dividend is payable on or about September 16, 1999, to shareholders of record as of September 1, 1999. BUY CALL SEP-45 SFA-II OI=852 at $7.63 SL=5.75 BUY CALL SEP-50 SFA-IJ OI=688 at $4.00 SL=2.50 BUY CALL SEP-55 SFA-IK OI= 83 at $1.25 SL=0.00 BUY CALL OCT-50 SFA-JJ OI= 64 at $5.25 SL=3.50 BUY CALL OCT-55 SFA-JK OI= 55 at $2.75 SL=1.50 Picked on Aug 26th at $51.13 P/E = 38 Change since picked +0.38 52-week high=$51.50 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 ***** SUNW - Sun Microsystems Inc, $76.19 (+1.94) Sun Microsystems is the largest computer maker that uses its own chips. Probably their most talked about product is "JAVA", a programming language which is intended to create software that can run unchanged on any kind of computer. SUNW is also a leading maker of UNIX-based workstation computers, storage devices and servers. They compete with the biggest on the block in Microsoft, IBM and Compaq. SUNW markets its hardware and software products to primarily in the telecommunications and financial industries. General Electric is on of their better customers and accounts for approximately 14% of their sales. SUNW ranks fourth in sales of the high-powered servers that run computer networks. This past Monday SUNW took another big step in its push to become a one-stop shop for e-commerce software and computers when they agreed to buy Forte Software, in a deal worth about $540 million in stock. Like many of the tech sector, SUNW peaked in mid-July following their earnings report. They announced earnings of $0.48 per share on July 22, only beating the street by a penny and have been basically consolidating and edging higher since. The profit- taking in the broader markets hasn't seemed to show up in the price of SUNW. Their recent strength in revenues has reflected the continued strong demand for low end desktop products and workgroup servers. Sun has also been able to keep selling and administrative costs down which are showing up in the bottom line. Earlier this month SUNW announced they will introduce a new group of processor chips that will enable complex graphics, voice and video, in an attempt to challenge Intel. Last month Basically investors seem to like what they see going on inside of Sun Microsystems and they have been reward with gains in the stock, even while the major indices have shown some profit- taking. In considering a new play in SUNW, be patient since this week could be slow with many investors and traders on vacation. Technically there is support for SUNW around $75.50 and $74.50. If the broader markets do make an attempt at a new leg up next week, we would expect SUNW to join in. Assess your risk profile and again be patient picking your entry point. In other news, SUNW received word last Monday that software giant Microsoft won an appeal and a reversal of a preliminary injunction that had prevented MSFT from shipping products using a modified version of SUNW's Java programs. This was a temporary negative for SUNW but didn't move the stock much as investors know the battle is far from over. BUY CALL SEP-70 SUQ-IN OI= 5862 at $7.25 SL=$5.50 BUY CALL SEP-75*SUQ-IO OI= 5770 at $3.50 SL=$1.75 BUY CALL SEP-80 SUQ-IP OI= 5841 at $1.31 SL=$0.00 High Risk! BUY CALL OCT-75 SUQ-JO OI= 3202 at $5.88 SL=$4.00 BUY CALL OCT-80 SUQ-JP OI=10535 at $3.50 SL=$1.75 Picked on Aug 28th at $76.19 PE = 60 Change since picked +0.00 52 week high=$77.94 Analysts' ratings 9-9-4-0-0 52 week low =$19.19 Last earnings 7/99 est=0.47 actual=0.48 surprise=+2.13% Next earnings 10-14 est=0.31 versus=0.25 Average daily volume = 7.74 mln Chart = http://quote.yahoo.com/q?s=SUNW&d=3m Biotechnology/Pharmaceuticals ***************************** HGSI - Human Genome Sciences, Inc. $67.38 (+1.75)(+5.25) If you think there are a lot of Jeans on the market (Levis, Guess CK etc.), wait until you see what HGSI is discovering. The company started in 1992 and has a passion for discovering Genes; only, Human genes. Since their inception they have Been first in the discovery of many of our genes, over 6,300. The great thing is that they then use this knowledge and apply it to form gene and protein based medications and treatments. This is exciting technology and tends to bring us full circle! HGSI just may be the ones to show us that the answers to our medical problems actually do lie within us. The company already has three of their products undergoing human clinical trial. These products hope to aid in vascular regeneration, treatment of breast and ovarian cancers, tissue repair and more. This appears to be a very promising company, that will be able to provide natural solutions to humanity. Remember the early morning bump and excitement in the market on Friday? Well this helped us get a small gain in HGSI and then everyone left the party. We're talking low volume folks. Usually an ingredient for volatility and swings but, for us we kept the morning bump and stayed in a $67.25 to $68 range. The low volume is hurting our momentum, as confirmed by the Stochastic and a triangle formation in the daily chart. This will require caution on our part. Most of us have had some fair gains, so protect them with stops. Remember however, that the reason for this play is the prospects of success HGSI has to offer. For that we need news. Even though we haven't seen the news, the anticipation of it and momentum have carried us up. We expect that when the news comes, we should see a significant reward. Be patient and remember this is a speculation play. Short-term support is at $64. Wait for a pull back and positive market direction before starting any new positions in HGSI. A hunting we will go, a hunting we will go! For news that is. Maybe after all the traders come back from their holidays, we'll see something. For now we'll be content to wait. BUY CALL SEP-60*HQI-IL OI=61 at $9.13 SL=6.75 BUY CALL SEP-65 HQI-IM OI=62 at $5.75 SL=4.00 BUY CALL SEP-70 HQI-IN OI=55 at $3.13 SL=1.50 BUY CALL OCT-65 HQI-JM OI=48 at $8.13 SL=6.25 Picked on Aug 8th at $60.50 PE = N/A Change since picked +6.88 52 week low =$22.75 Analysts Ratings 1-3-2-0-0 52 week high=$69.00 Last earnings 07/99 est=-0.20 actual=-0.10 Next earnings 10-29 est=-0.30 versus=-0.09 Average daily volume = 422 K Chart = http://quote.yahoo.com/q?s=HGSI&d=3m ***** IDPH - IDEC Pharmaceutical $130.25 (+4.25)(+1.25) 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. Despite two trivial downgrades by Merrill and Prudential, we feel IDPH has more upside to go. The downgrades put a crimp in our profits this week as IDPH was up over $15 after a day and a half but we still managed to stay positive on the week. Both Merrill and Prudential based their short-term downgrades from a Buy to Accumulate on valuation. We can see how this would be a concern due to the extent of the recent run but it is still a poor reason for a downgrade. Granted both firms have kept a long-term Strong Buy on IDEC because of the growth potential of the stock. We still like IDPH as a stock split candidate. The company only has 12.8M shares outstanding and should be looking to increase the float. This prospect has some traders holding on to their shares for an announcement, thus making an already thin float even thinner. We are also encouraged by IDPH holding the 10-dma at $129. We have gotten good support from this moving average ever since the stock was trading down at $50 three months ago. Of course, if we were to see IDPH fall below this key support line, it would be time to exit the play so set your stops accordingly. IDPH wasn't the only company downgraded by Merrill this week as they lowered the boom on lots of bio-tech companies like Amgen, Genzyme and Medimmune. This event sent these stocks lower initially and then into consolidation for the remainder of the week. Hopefully when this news wears off, we will see IDPH resume the rally. BUY CALL SEP-125 IDQ-IE OI= 235 at $10.38 SL=7.75 BUY CALL SEP-130*IDQ-IF OI=1044 at $ 7.63 SL=5.75 BUY CALL SEP-135 IDQ-IG OI= 13 at $ 5.38 SL=3.75 low OI BUY CALL OCT-130 IDQ-JF OI= 17 at $12.25 SL=9.50 low OI Picked on Aug 19th at $123.25 P/E = 82 Change since picked +7.00 52-week high=$141.25 Analysts Ratings 6-5-1-0-0 52-week low =$17.25 Last earnings 07/22 est=0.79 actual=0.80 Next earnings 10-20 est=0.41 versus=0.08 Average Daily Volume = 480 K Chart = http://quote.yahoo.com/q?s=IDPH&d=3m Electronics *********** SNE - Sony Corp $128.56 (-7.69)(+6.81)(+9.44)(-5.19)(+8.19) Sony is a consumer electronics and multimedia entertainment company. It sells products like TVs, VCRs, MiniDisc systems, stereos, digital camcorders, DVD video players, and the Playstation home video game system. It is also in the process of strengthening its position in the music and image-based software markets. Some of Sony's entertainment assets include Columbia TriStar Motion Picture, Columbia TriStar Television, Sony Pictures Studio, and Columbia and Epic record labels. Other high-tech products include flat-screen TVs, digital TVs, CD-ROMs and digital cellular telephones. On Thursday we said that if Sony broke $128 that it would no longer remain on our call list but once again support has held. It is a strange phenomenon that exists with Sony where it will fall just below the 10-dma before bottoming. It has happened a couple times the last few months and then gone on to produce stellar results and it looks to be happening again. Bear in mind though that we are not out of the woods on this one. Cautious investors should stay out of SNE calls until this stock shows more direction. We anticipate a rebound if the sector starts to heat up ahead of earnings announcements from Circuit City and Best Buy in the middle of September. After all, it is Sony's products they are selling. The volume this week was also fairly light so we can't say the selling had any real punch behind. From here it is a matter of Sony confirming direction for us. We will also be watching for a rebound in the Nikkei which was down as well last week. In the news, Sony said that it plans a $150 million marketing campaign for its new Playstation to counter Sega's recent ad blitz. The Sony Playstation is the dominant video game console but Sega's new Dreamcast system represents a comeback attempt to regain lost market share for the number three video console maker. The campaign will include television, print, third party co-marketing, national promotional programs and product placements in television and movies. BUY CALL SEP-125*SNE-IE OI= 98 at $7.00 SL=5.25 BUY CALL SEP-130 SNE-IF OI=104 at $4.38 SL=2.75 BUY CALL SEP-135 SNE-IG OI= 73 at $2.31 SL=1.25 BUY CALL OCT-135 SNE-JG OI=130 at $4.88 SL=3.25 Picked on July 2nd at $125.19 P/E = 30 Change since picked +3.38 52-week high=$136.63 Analysts Ratings 0-0-0-0-0 52-week low =$60.25 Last earnings 07/29 est= N/A actual= N/A Next earnings 10-99 est= N/A versus= N/A Average Daily Volume = 190 K Chart = http://quote.yahoo.com/q?s=SNE&d=3m CHANNELING STOCKS ***************** IP - International Paper Co. $51.06 (-0.44)(-3.31) 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. We are now officially changing directions on this play. IP is now a call! Target #1 has been reached and successfully destroyed. IP has hit it's support and now looks ready for our next move to the upside. Look at the chart on this play. It almost looks like someone took a ruler and drew a line right across the $51 support level and investors have been using it since May 28th. The technicals are showing a positive momentum breakout based on Fridays performance, so we're looking good. The problem might be the lack of interest in trading right now and we don't think we'll be able to attract many investors until after Labor Day. Because of this, be cautious. This recipe of non-interest tends to drift markets lower. So confirm a positive direction before starting a new play. As you know, our upside target is between $54-$55. We found one fun article in the news about Bill Gates and his effect on paper stocks. He indicated that the computer would replace paper and then paper stocks went down. But most of us know it was just coincidence and primarily due to some recent analyst downgrades of paper stocks. In other news, IP lost its Vice-President of it's Xpedx division to Genesee Corp this last week, so they'll be looking for a replacement there. And who says that IP doesn't have our environment in mind? They just sold 407 acres of pristine land in MA by the Westfield river to that state for $415,000. It is worth over a million. BUY CALL SEP-50*IP-IJ OI= 671 at $2.69 SL=1.25 BUY CALL SEP-55 IP-IK OI=2074 at $0.68 SL=0.00 High Risk! BUY CALL OCT-50 IP-JJ OI= 367 at $3.75 SL=1.75 BUY CALL OCT-55 IP-JK OI= 749 at $1.38 SL=0.50 Picked on Aug 29th at $51.06 PE = 243 Change since picked +0.00 52 week low =$35.50 Analysts Ratings 3-7-4-0-0 52 week high=$59.50 Last earnings 07/99 est=0.24 actual=0.24 Next earnings 10-12 est=0.38 versus=0.25 Average daily volume = 1.7 mln Chart = http://quote.yahoo.com/q?s=IP&d=3m PUTS CONTINUED IN SECTION FIVE ****************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 8-29-99 Sunday 5 of 7 PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. Recommended Puts **************** ANF - Abercrombie & Fitch $33.38 (-4.94) Abercrombrie and Fitch purchases, distributes and sells upscale men's, women's and children's casual apparel. The company operates nearly 200 stores throughout the United States. They also publish the A&F Quarterly which is a combination of a magazine and store catalog. This play revolves around the overall weakness amongst retail stocks and a company event. In reality the rising interest rates and potential inflation are not affecting consumer spending. However, investor fears are not always based on reality and any glimmer of an economic downturn will drive investors out of the retail sector. And specifically, some investors showed 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. The losses really started picking up speed after ANF reported solid 2Q earnings (.17 p/s versus .10 same quarter last year) on August 10th. ANF has since lost 11% of its share price. This week alone it shed $4.94 firmly positioning the stock well below the 200-dma it had previously been hovering around. The $1.94 dump on Friday was a nice added touch too. There has been a lot of hype about the back-to-school shopping season reversing retail plays (and ANF is geared towards the youthful college students) so of course this cannot be easily dismissed. This is a good argument of why we recommend stop losses for added protection. Now if you are conservative and want more confirmation before jumping into this play, wait for ANF to descend a little further. Right now it's perched on near-term lows at $33 hit on August 10th. And of course, a negative market next week would certainly put more odds in your favor. BUY PUT SEP-40 ANF-UH OI= 758 at $7.00 SL=5.25 BUY PUT SEP-35 ANF-UG OI=1544 at $2.94 SL=1.50 BUY PUT SEP-30 ANF-UH OI= 71 at $0.63 SL=0.00 High Risk! Average daily volume = 1.71 mln Chart = http://quote.yahoo.com/q?s=ANF&D=3m **** T - AT&T $47.50 (+0.63)(-1.06) 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. Well, It was another great performance on Friday by T. The stock dropped $0.44 to end the trading session at $47.50. Volume today was slightly above average with 10.9 mln shares changing hands. It appears we can thank Alan Greenspan for the decline yesterday. With the weak support the entire telecom sector has been experiencing lately, compiled with Mr. Greenspan's comments Friday on "inexplicable stock prices", AT&T just could not sustain Thursday's minor gains. We are expecting bearish momentum is likely to put pressure on T next week. We expect that T has not reached the bottom yet and will not likely do so until there is qualified news to support the ailing stock. In other news, T plans to purchase additional infrastructure equipment from Lucent Technologies, Nortel Networks and Ericsson. This development is an effort to catch up with demand constraints on its wireless services throughout North America. T said the expanding relationships with the three companies will enable it to meet demands for network capacity for the next three years. The financial terms of the agreement were not released at this time. BUY PUT SEP-50 T-UJ OI=6357 at $3.50 SL=1.75 BUY PUT SEP-55 T-UK OI=2430 at $7.75 SL=6.00 Average Daily Volume = 9.90 mln Chart = http://quote.yahoo.com/q?s=T&d=3m **** TWX - Time Warner Inc. $61.50 (-5.31) Time Warner is a media and entertainment company with interests in filmed entertainment, television production and broadcasting recorded music, cable television programming, magazine and book publishing, direct marketing and cable television systems. This media giant includes Time Inc, Warner Bros., Warner Music Group, Home Box Office, Time Warner Cable, Warner Books, and the Book-of-the-Month Club (a top US book club company). Time Warner has not been the fastest moving put play but it has been consistent, slowly but surely continuing its path lower. To help our play, we ended the week with a few encouraging words from Chairman Alan Greenspan. He said that any "extraordinary" rise in the equities market may require a reassessment of how monetary policy is determined. Upon this speech, the broader markets turned to the downside and never looked back, finishing the day in the red. Investors, worried about additional interest rate hikes, decided to sit on the sidelines once again. But there is no sitting on the sidelines on this play. TWX has broken through several support levels the past few weeks and shows no technical signs it will turn. Now we would like to see if it can make it through the $60 price, which was the intraday low for TWX on Friday. Psychologically, sometimes it's tough breaking through even numbers but if we do, there should be little to stop this play. BUY PUT SEP-65*TWX-UM OI=2429 at $4.25 SL=2.50 BUY PUT SEP-60 TWX-UL OI=8645 at $1.25 SL=0.00 More risk Average Daily Volume = 2.3 mln Chart = http://quote.yahoo.com/q?s=TWX&d=3m **** WCOM - MCI Worldcom $78.50 (+4.44)(-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. Though it eeked out a gain on Friday, WCOM is still rolling over, unable to get back to its 200-dma - definitely a negative. The idea of reduced revenues from the descent of long distance rates is putting a crimp in WCOM's style (at least in investor minds). In the short-term, support is about $73. We'd have to go back to January to get any lower. Thus, if you decide to get in, it will be important to tighten up your stops as WCOM approaches $73. You won't want to give the profit back on a northerly bounce. The next stop after that is the mid- $60's. Why the price drop in the first place? As far back as July, WCOM had problems keeping portions of its frame relay network operational. More recently, there were disruptions on August 5, which lasted 10 days for some customers. Unfortunately, WCOM didn't handle it very well and kept quiet on the issue. That made for some very unhappy customers, who felt that 20 days of free service wasn't good enough compensation (maybe not considering AT&T offered 30 days free service for 2 days of outage, plus they went public right away). Though the short term problem is fixed (at least for now), there remains a long term PR problem as WCOM customers, tasting the bitter medicine, look to take their business to WCOM's competitors. You can bet that revenues will temporarily suffer. Price spikes to $81 and $83 look buyable. Just be sure to use a stop above these levels in case WCOM decides to participate in a market gain. Conversely, in a contrarian signal, the large OI at the SEP-80 strike may provide support for the stock at $80. More conservative types should wait for a clean break below $73. If it never gets there, you shouldn't feel any pressure to enter this play. ABN AMRO initiated coverage last week with a Buy rating and a $97 price target. BUY PUT SEP-80*LDQ-UP OI=22328 at $3.50 SL=1.75 BUY PUT SEP-75 LDQ-UO OI=12621 at $1.38 SL=0.75 Average daily volume = 12.06 mln Chart = http://quote.yahoo.com/q?s=WCOM&d=3m **** WLP - Wellpoint Health $75.25 (-2.69)(-2.25) Wellpoint Health Networks serves about 32 million individuals in the U.S. through HMOs, PPOs, and special networks such as dental, vision and mental health plans. The company operates as Blue Cross in California and UNICARE through the rest of the nation. Wellpoint also sells life insurance and third party administration to self-employed businesses. In 1997, they acquired the group health and related life business of John Hancock Mutual. Slowly but surely WLP is proving to us the reason it has made the put list. It's like we've said along with WLP, 'she isn't the fastest but she stays headed in the right direction.' OK we've never said that before but maybe we need to. If you look at the chart, this has been a very predictable mover over the past two months. It has been working its way down a very tight channel. The beauty in this play is the relatively inexpensive premiums for the action this stock will produce. The key is to open positions at the top end of the range. Technically, we don't see any support until $70, despite the fact that WLP keeps stopping at $75. This is again part of the pattern and should eventually drop through. Conservative investors will want to wait for the drop below $75 before entering but if you feel the pattern will repeat, look for an entry after a bounce off resistance at 10-dma. There hasn't been any news to report this week either on WLP and the volume has stayed light. So without any fundamental changes, expect more of the same. But use stops on all plays because the old rule of the thumb is that once a channel is discovered, it disappears! BUY PUT SEP-80*WLP-UP OI=227 at $6.13 SL=4.50 BUY PUT SEP-75 WLP-UO OI=140 at $3.00 SL=1.50 Average Daily Volume = 550 K Chart = http://quote.yahoo.com/q?s=WLP&d=3m NEW PUTS ******** JCP - Penny J.C. Company Inc. $39.63 (-2.00) J.C. Penny's retail operations include department stores and catalog, drugstores and insurance. JCP markets family apparel, shoes, home furnishings, jewelry and offers credit cards. The retailer operates about 1,150 J.C.Penney department stores mostly in the US but also in Chile, Mexico and Puerto Rico. J.C. Penney also owns about 2,900 Eckerd drugstores (the chain is ranked #4 by sales in the US). How low can you go? And I am not referring to the limbo. What I am talking about is the stock chart on our latest play, J.C. Penny. Who would have imagined that the summer months would be so depressing on the retail stock. If you look at the graph of JCP, notice that since June it has been nothing but down hill. The stock started the month in the lower $50 range, waited until July to break through its 50-dma and finally in August broke through its 200-dma. A key problem during this time period was that higher end competitors such as Federated Department Stores, Bloomingdale's chains, Macy's and upstarts such as The Gap's Old Navy stores were squeezing J.C Penney's sales which have grown at an anemic pace for the past two years. Considering the anemic sales growth and a recent down grade by Merrill Lynch from a Buy to Accumulate, we expect the slump in the stock price to continue a little longer. The next support level for JCP is around $35, which was the March low so place your stops accordingly and let's see if we can break through to newer lows. BUY PUT SEP-45 JCP-UI OI= 89 at $5.38 SL=3.50 BUY PUT SEP-40*JCP-UH OI=134 at $1.38 SL=0.00 Average Daily Volume = 450 K Chart = http://quote.yahoo.com/q?s=JCP&d=3m COMBOS ****** Investors Fearful Of Another Rate Hike.. Markets closed lower Friday after unexpected comments from Federal Reserve Chairman Alan Greenspan. The country's primary economic policy-maker surprised investors and analysts with new concerns about the speculation in U.S. equities. The Dow dipped 108 points to close the session at 11,090 while the Nasdaq fell 15 points to 2,758. The S&P 500 index slid 13 points to 1,348. In the broader market, decliners easily beat advancers 1,760 - 1,107 on the NYSE. Volume was light at 553 million shares. The 30-year U.S. Treasury bond fell 1-1/8 pushing the yield to 5.98%. Thursday's new plays (positions/opening prices/strategy): RSL Comm RSLC OCT20C/SEP22C $2.25 debit diagonal RSL Comm RSLC JAN22C/SEP22C $2.75 debit calendar 3Com Corp COMS JAN27C/SEP27C $2.38 debit calendar RSLC was "hot" right out of the box this morning, up almost $2 by the time options started trading. Premiums rocketed higher on the offered side as market-makers played the opening buyers. By the time amateur hour came to a close, RLSC had backed down to a small gain and it traded near that price for the rest of the day. Our targets were never really in play and the closest we came to a fill was a $2.25 debit on the bullish (diagonal) position; which is not very favorable in a $2.50 spread. Our calendar spread also remained slightly out of reach as implied volatility (and the price) increased exponentially on the long side of the play. We will record both estimated positions for the summary list but it's fair to say that these plays were not the ones to chase. COMS was very similar in movement but traders appeared much more conservative in their speculation. Market-makers were unable to demand extreme premiums for those options and our entry point on the bullish calendar spread was just above the target at $2.38 debit. Portfolio plays: Today was a strange market for stocks and some of you may have noticed it was the lightest trading session on the NYSE this year. Greenspan humbled investors with his new concerns but most analysts downplayed the day's losses, based on the light volume and the fact that many traders were exiting positions ahead of the weekend. The spreads portfolio remained fairly intact and there were actually a few positive surprises. Two of our recent bullish picks, Microchip (MCHP) and Chiron (CHIR), moved higher in quiet trading. Motorola (MOT) managed a small gain of $1.31 but more importantly, it closed above short-term resistance at $93. United Airlines (UAL) avoided the sell-off and now appears to be firmly clear of the recent trading range near $64. Intel (INTC) was one of the few large-cap tech issues that moved higher, up $2 on an upgrade from Morgan Stanley Dean Witter. No news appears to be good news for those speculating on the Bexxar filing for Coulter Pharmaceuticals (CLTR). Of course, our position is growing smaller but the opening edge that we achieved in the bearish OTM spread is allowing us to remain in the play. The current credit is $0.56 (for an early exit) and that's only a $0.06 loss. J.P. Morgan (JPM) is finally coming back to us, down $1.12 to $134. Our break-even point is near $132 so we will watch for signs of a rebound off the short-term support at $130. Monday's session should offer us further direction in this position. Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - This week I decided to offer some more "Readers Request" plays. These are spreads on well known positions that subscribers have Emailed to me for coverage in this section. Most of these are bullish positions (beware) and as you know, any favorable spread or combination play requires a number of factors to be present before it can be considered as a candidate. While these may not be at the top of my pick list, they all have a high probability of profit; in a reasonably stable market. Please review each play individually and make your own decision about the future outcome of the position. ***************** AMD - Advanced Micro Devices $19.68 *** Faster, Faster! *** AMD is a semiconductor manufacturer with manufacturing facilities in the U.S. and Asia and sales offices throughout the world. The company's products include a wide variety of industry-standard integrated circuits (ICs) which are used in many diverse product applications such as telecommunications equipment, data & network communications, consumer electronics, personal computers (PCs) and workstations. The chip sector is hot and the big news for AMD is the release of a new version of the K6-2 that will crank the processor up to 500 MHz. The 500-MHz K6-2, AMD's main chip before their next series (Athlon) is debuted, will even-up the speed race in the budget PC market. IBM will use the new K6-2 in an Aptiva system and Hewlett Packard is releasing a 500-MHz K6-2 system in Asia. The new K6-2 chip is expected to cost the same as the 500-MHz Celeron. AMD and Intel are expected to release additional mobile chips in September and the company's future line of chips, the Athlon series, will be brought to the consumer market next year. The recent bullish trend has brought some new traders into the front-month options and there is a favorable disparity for a low cost/long-term position. PLAY (conservative - bullish/diagonal spread): BUY CALL JAN-15 AMD-AC OI=3162 A=$5.62 SELL CALL SEP-20 AMD-ID OI=5241 B=$0.88 INITIAL NET DEBIT TARGET=$4.50 TARGET ROI=50% (4 MONTHS) Chart = http://quote.yahoo.com/q?s=AMD&d=3m ***************** QCOM - Qualcomm $183.75 *** An OIN Favorite *** Qualcomm is a leading provider of digital wireless communications technologies and services. QCOM designs, develops, manufactures, markets and sells wireless communications, infrastructure and subscriber equipment and Application Specific IC's based on its Code Division Multiple Access(CDMA) technology and has licensed its CDMA technology to major telecommunications suppliers for incorporation into their wireless communications products. This week Qualcomm set a new high and was named to FORTUNE's America's 100 Fastest-Growing Companies list. QCOM jumped to #16 on the list, up from #74 in 1998; based on growth in its profits, revenue and total stock market return. QCOM is now worldwide and expanding and most analysts believe it will soon be the dominant company in the industry. Qualcomm is a regular on the OIN and you can follow its progress in the main section of the newsletter. PLAY (very conservative - bullish/debit spread): BUY CALL JAN-140 AAW-AH OI=813 A=$53.50 SELL CALL JAN-150 AAW-AJ OI=2741 B=$46.12 INITIAL NET DEBIT TARGET=$7.25 ROI(max)=37% Chart = http://quote.yahoo.com/q?s=QCOM&d=3m ***************** CNXT - Conexant Systems $71.25 *** Chips Galore! *** Conexant is the world's largest independent company focused exclusively on semiconductor products for communications electronics. Formed in January as a spin-off to shareholders of Rockwell's semiconductor systems, CNXT has than 30 years of experience in developing communications technology. The company draws upon its expertise in mixed-signal processing to deliver integrated systems and semiconductor products for a broad range of communications applications. CNXT's products facilitate communications worldwide through wireline voice and data communications networks, cordless and cellular wireless telephony systems, personal imaging devices and equipment, and emerging cable and wireless communications networks. The company aligns its business into five product platforms: Network Access, Wireless Communications, Digital Infotainment, Personal Imaging, and Personal Computing. CNXT also provides component, radio frequency (RF) and full system solutions including Code Division Multiple Access (CDMA) and GSM, the two main technologies contributing to the proposed third-generation (3G) mobile communications standards. CNXT's expertise in both CDMA and GSM uniquely positions the company to play a leading role in 3G technology development. Some analysts consider this the blue chip of communications semiconductor companies because they have the largest product portfolio in all the future growth areas of communications including digital cellular, broad-band access through DSL and cable modems. PLAY (aggressive - bullish/diagonal spread): BUY CALL OCT-60 QXN-JL OI=454 A=$14.50 SELL CALL SEP-70 QXN-IN OI=960 B=$5.25 INITIAL NET DEBIT TARGET=$9.00 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=CNXT&d=3m ***************** EFII - Electronics For Imaging $61.50 *** Technicals Only *** Electronics For Imaging designs and markets products that enable high-quality color printing in short production runs. Its Fiery Color Servers are workstation class machines that incorporate software and hardware technologies to solve the complexities of printing color documents on computer networks by connecting color copiers with networks. An excellent bullish trend and the stock recently broke through short-term resistance near $60 to set a 52-week high. The cost basis for this position is near the 150 dma and the money-stream continues to lead the price higher. A very conservative position. PLAY (conservative - bullish/debit spread): BUY CALL OCT-45 EFQ-JI OI=104 A=$17.50 SELL CALL OCT-55 EFQ-JK OI=127 B=$9.12 INITIAL NET DEBIT TARGET=$8.12 ROI(max)=23% Chart = http://quote.yahoo.com/q?s=EFII&d=3m ***************** INTU - Intuit $91.06 *** Tax Time In August? *** Intuit develops, markets and supports personal finance, small business accounting, tax preparation and other consumer software products, and related electronic services & supplies that enable individuals and professionals to automate commonly performed financial tasks and better organize, understand, manage and plan their financial lives. Intuit shares surged last week after the company reported fiscal fourth-quarter sales that were $40 million stronger than what analysts were expecting. Analysts said that sales of QuickBooks accounting software for small businesses was far greater than they had expected, and that Internet-based revenue was growing exponentially. In fiscal 1999, Internet-based revenue across all of its businesses more than doubled and accounted for 15% of total sales. The company was quickly upgraded by a number of analysts and one of them commented that INTU is one of the few stocks you can invest in that has a solid business model along with the benefits of the Internet. The analyst also issued a target price of $115. We like the recent change in character and the deep ITM options offer a favorable/low-risk position. PLAY (conservative - bullish/debit spread): BUY CALL OCT-70 IQU-JN OI=57 A=$22.88 SELL CALL OCT-80 IQU-JP OI=169 B=$14.12 INITIAL NET DEBIT TARGET=$8.50 ROI(max)=17% Chart = http://quote.yahoo.com/q?s=INTU&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 8-29-99 Sunday 6 of 7 STRADDLES ********* RECAP FOR THE WEEK Well, if you read Thursday's column then you know what happened to the straddles from last week. We had a great move from the oil, gas, and chemical stocks. Should these stocks continue to move? I hope so, but anything is possible in the stock market. This week I am going to highlight a few stocks that are consolidating nicely that have good option premiums, and I am also highlighting what I call "Dirt Cheaps." These are options that are at the extreme bottom end of implied option volatility. They may or may not move, but dollar for dollar are the cheapest options in their sector currently. MARKET CONSOLIDATION - Remember my first golden trading rule for looking for markets to put straddles on? It was too look for patterns in which you don't have a clue as to which way the market is going to go. For some traders, that might be any pattern! Seriously though, the patterns I am looking for are market consolidation patterns. I find these by looking for markets that are angling together. Highs are getting lower, and lows are getting higher. Eventually the prices meet. Take a look at these stocks that are consolidating. These stocks have a high probability of breaking out of their wedge formations. The top consolidating markets are as follows: Stock Description, SYM, Last Stock Price 1) Mobil Oil Corp. (MOB) - Last Price 102 ¾ 2) Computer Sciences Corp. (CSC) - Last Price - 66 3/8 3) Apple Computer (AAPL) - Last Price - 64 ¾ Mobil Corp. is engaged in the worldwide exploration and production of oil and gas, the operation of a global marketing and refining complex and a network of pipelines and tankers, and the manufacture of petrochemicals, packaging films and specialty chemicals. Options are relatively cheap, and this stock hasn't broken down like the other oil stocks have. Closest straddles are at the 105 strike price. Computer Sciences provides information technology services through outsourcing (operating a customer's technology infrastructure); systems integration (designing, developing and implementing information systems); and IT and management consulting services. Look at the range of this stock over the past few months. Nearly a 20 point range. This shows that the stock is capable of movement. 65 is the strike price that is closest to the money. Apple Computer, Inc. designs, manufactures and markets microprocessor based personal computers and related personal computing and communicating solutions for sale to business, education, home and government customers. Even though I am a MS Windows man, I am liking this stock more and more. Not enough to be a buyer, but a straddle buyer. This consolidation is to the upside. Triangles don't have to be perfect. The strike that is closest to the money here is the 65 calls and puts. CHEAP OPTIONS PREMIUMS - Another filter is cheap 0ptions. Although the stocks consolidating above are cheap, they are not dirt cheap like the ones below. These stocks below offer ultra cheap premium when you compare the options premiums that they have been trading for over time. Stocks with some of the cheapest options for the following week are: Stock Description, SYM, High IV, Low IV, Current IV 1) Dell Computer Corp. (DELL) 82.18% 46.63% 47.44% 2) Baxter Intl, Inc. (BAX) 102.30% 25.25% 27.84% 3) UAL Corporation (UAL) 49.40% 34.32% 37.96% DELL designs, develops, manufactures, markets and services and supports a range of computer systems, including desktop, notebooks, and enterprise systems (includes servers and workstations). DELL also markets software, peripherals and service and support programs. These options are cheap due to the earnings report being out. Dell could make a run to the all time high back in February. The straddle position with Dell is best taken if the price were to move closer to the 45 or 50 strikes. Baxter International Inc. develops, manufactures and distributes a variety of products, systems and services used mainly in the health care field. Baxter has cheap options and 70 looks like the closest strikes to take a straddle position on. UAL is a holding company whose principal subsidiary is United Air Lines, which engages in commercial air transportation of people, property and mail. Closing close to 65 makes this one easy to Determine which calls and puts to choose. Ok, lots of stocks to pick from, but how do you pick the straddles? I tend to look for at-the-money stock options. This presents the best non directional view on the underlying stock. What if the stock price is between two strike prices? Well, that's anyone's guess, but I will normally take the high side (the strike that's just above the stock price) because if the market were to rise and take the little part of intrinsic value away from me, it will generally be replaced with a rise in implied volatility. If the stock drops, volatility tends to drop along with it, hence, at-the-money options premiums tend to drop. If your not sure about this, then check out what happened to the internet stocks. I am sure there are some of you out there who still own call options on some internet stocks and watched them rise up and fall back this year. What also happened is that since volatility has dropped, that has only added to the decay in the option premiums. What about time frame? I like to look at options that have at least 60 days until expiration for my straddle positions. I will exit the straddle if the days to expiration drop to 30 days. This saves me a lot of time premium if I am wrong about the position. Buy before the Rumor, and Sell before the News. Tom Gentile SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 8-29-99 Sunday 7 of 7 COVERED CALLS ************* Option Pricing Strategies.. Each week I get a number of Emails asking about the basics of pricing theory and how we determine which options are favorable. Most new traders that enter the derivatives market are quickly overwhelmed by the incredible number of choices to be made when selecting a position for a specific strategy. Even when we limit the candidates to short-term positions (90-days or less), there are still a large assortment of contracts from which to choose. With so many different options available, how can one hope to select the correct position for the underlying instrument with the highest probability of profit. The choices are so numerous that many beginning traders give up long before they have time to learn (and absorb) the various components of option pricing. The first requirement is to understand the basic laws of option theory and the four major factors that determine the price of an option: The price of the underlying stock The strike price of the option itself The time remaining until the option expires The volatility of the underlying stock There are 2 less important factors that also affect the price of an option: The current risk free interest rate (usually the 90 day T-Bill is used for this calculation) The dividend rate of the underlying stock An option's price is determined by mathematical equations that use variables from all of the factors affecting its value. Each aspect of option pricing is a separate component of the formula and they have Greek titles; Delta, Gamma, Theta, Vega, and Rho. The primary influence on an option's price is the movement of the underlying security. This concept relates directly to the first and most important of the Greeks; Delta. Delta measures the rate of change in an option's price compared to a one point movement in the underlying security. It can be thought of as a percentage of the movement of the stock price. If the stock price moves up $2 while the option on that stock gains $1, it has a Delta of 50 (or 50%). An at-the-money (ATM) call option will typically have a delta of 50. In-the-money (ITM) calls will have higher deltas; a greater percentage move, based on the change in the underlying issue. The opposite is true for out-of-the-money (OTM) call options; their Deltas are lower. The next important factor is time value, and that discussion is continued in this week's "Naked Puts" section. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI WSTL 7.75 7.94 Sep 7.50 1.25 *$ 1.00 15.4% 11.1% OLS 9.94 10.25 Sep 10.00 1.00 *$ 1.06 11.9% 10.3% MXTR 5.03 6.13 Sep 5.00 0.63 *$ 0.60 13.6% 9.9% VTS 19.25 17.44 Sep 17.50 3.25 $ 1.44 9.0% 9.8% IDTI 14.69 19.75 Sep 15.00 1.31 *$ 1.62 12.1% 8.8% TMAR 7.63 7.75 Sep 7.50 0.81 *$ 0.68 10.0% 7.2% NTAI 14.88 15.13 Sep 15.00 1.00 *$ 1.12 8.1% 7.0% IMNR 5.63 6.13 Sep 5.00 1.00 *$ 0.37 8.0% 6.9% PR 19.25 20.50 Sep 20.00 0.94 *$ 1.69 9.2% 6.7% PCYC 29.13 33.25 Sep 22.50 7.88 *$ 1.25 5.9% 6.4% MRVC 14.88 18.50 Sep 12.50 3.00 *$ 0.62 5.2% 5.7% IRF 16.00 16.13 Sep 15.00 1.81 *$ 0.81 5.7% 5.0% MOGN 11.88 12.00 Sep 10.00 2.31 *$ 0.43 4.5% 4.9% IDTI 18.88 19.75 Sep 17.50 2.13 *$ 0.75 4.5% 4.9% IDTC 18.88 27.38 Sep 15.00 4.50 *$ 0.62 4.3% 4.7% MRVC 14.50 18.50 Sep 12.50 2.63 *$ 0.63 5.3% 4.6% PESC 23.88 26.75 Sep 22.50 2.69 *$ 1.31 6.2% 4.5% RIGS 19.81 19.25 Sep 17.50 3.00 *$ 0.69 4.1% 4.5% NETA 17.56 15.56 Sep 15.00 3.50 *$ 0.94 6.7% 4.2% RNBO 13.88 12.38 Sep 12.50 2.19 $ 0.69 5.9% 3.7% PENN 9.88 9.38 Sep 10.00 0.75 $ 0.25 2.7% 2.0% FLC 13.13 12.13 Sep 12.50 1.19 $ 0.19 1.6% 1.7% ATML 39.88 37.75 Sep 40.00 2.63 $ 0.50 1.3% 1.5% USAI 45.94 43.00 Sep 45.00 3.50 $ 0.56 1.3% 1.0% TIE 11.19 9.00 Sep 10.00 2.13 $ -0.06 -0.7% 0.0% PXD 12.69 11.31 Sep 12.50 1.13 $ -0.25 -2.2% 0.0% MAK 13.69 11.38 Sep 12.50 1.81 $ -0.50 -4.2% 0.0% SBGI 20.31 16.81 Sep 20.00 1.69 $ -1.81 -9.7% 0.0% COMMENTS/OBSERVATIONS ON CURRENT PLAYS: OMQP - Great pick but un-playable on Monday mornings gap-up! SBGI - At 50% technical retracement/downward movement slowing? PXD - Short term consolidation, long term outlook positive. MAK - Nearing the bottom of its trading range. TIE - Worrisome if it moves lower, but near support USAI - Possible bearish change of character - watch closely! NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (Prc pd - Prm rec'd = CB, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) Sequenced by "Return Called": ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis LYNX 13.00 SEP 12.50 ULX IV 1.13 10 11.87 5.3% 5.3% KING 31.50 SEP 30.00 QBK IF 2.81 451 28.69 4.6% 4.6% ADAP 33.00 SEP 30.00 CQI IF 4.13 266 28.87 3.9% 3.9% CS 15.50 SEP 15.00 CS IC 1.06 5459 14.44 3.9% 3.9% PCTL 5.69 OCT 5.00 PTQ JA 1.19 514 4.50 11.1% 11.1% NVDA 26.00 OCT 25.00 UVA JE 3.38 5 22.63 10.5% 10.5% BRKT 15.88 OCT 15.00 BUQ JC 2.25 218 13.63 10.1% 10.1% RDRT 5.88 OCT 5.00 RDQ JA 1.31 687 4.57 9.4% 9.4% COMS 25.69 OCT 25.00 THQ JE 2.50 6749 23.19 7.8% 7.8% Company Descriptions ***** ADAP - Adaptive Broadband $33.00 *** Onward And Upward *** Adaptive Broadband manufactures & markets sophisticated systems and products used worldwide in satellite/wireless communications for the transmission of voice, data, facsimile and video. ADAP provides industry-leading solutions for satellite-based data communications and terrestrial wireless telemetry networks. New orders booked in the quarter were up 20% over last year, to a record $53.8 million. Recently signed a $100-million contract to sell AB-Access(TM) broadband wireless services to I3S Inc. SEP 30.00 CQI IF Bid=4.13 OI=266 CB=28.87 RC=3.9% RNC=3.9% Chart = http://quote.yahoo.com/q?s=adap&d=3m ***** CS - Cabletron Systems, Inc. $15.50 *** Still a Buy-Out? *** CS provides high-performance networking solutions and delivers dependable network access and communications through scaleable products designed for enterprise networks and service providers. Lots of news as Cabletron's new CEO works on rebuilding and positioning the company for a possible sale or partnership. The technicals remain strong as investors speculate on CS's valuation. Past rumors mention a telecom giant's interest and a price range of $20 a share. SEP 15.00 CS IC Bid=1.06 OI=5459 CB=14.44 RC=3.9% RNC=3.9% Chart = http://quote.yahoo.com/q?s=cs&d=3m ***** KING - King Pharmaceuticals $31.50 *** A New High *** King Pharm. is a vertically integrated pharmaceutical company that manufactures, acquires, markets and sells branded and generic form products. King seeks to capitalize on niche opportunities in the pharmaceutical industry created by cost containment initiatives and consolidation among large global pharmaceutical companies. On 8/19/99, King completed the acquisition of the antibiotic Lorabid® from Eli Lilly. Technicals remain strong as King closed at a new all time high on Friday. SEP 30.00 QBK IF Bid=2.81 OI=451 CB=28.69 RC=4.6% RNC=4.6% Chart = http://quote.yahoo.com/q?s=king&d=3m ***** LYNX - Lynx Therapeutics, Inc. $13.00 *** A Sleeper? *** Lynx is engaged in the development of unique, proprietary technologies designed to enable the simultaneous identification and analysis of all the DNA molecules or fragments in a single biological sample. Lynx surged on heavy volume shortly after naming a new president and CEO on June 30. Though Lynx entered a consolidation phase after reporting earnings in July, the overall up-trend remains intact. SEP 12.50 ULX IV Bid=1.13 OI=10 CB=11.87 RC=5.3% RNC=5.3% Chart = http://quote.yahoo.com/q?s=lynx&d=3m ***** BRKT - Brooktrout Tech., Inc. $15.88 *** Trading Range *** Brooktrout designs, manufactures and markets computer hardware and software for use in electronic messaging applications in the telecommunication and networking industries. Brooktrout reported a 29% increase in revenues last quarter and was recently added to the Russell 2000 and 3000 indexes. We favor the long term trading range between $11 and $20. OCT 15.00 BUQ JC Bid=2.25 OI=218 CB=13.63 RC=10.1% RNC=10.1% Chart = http://quote.yahoo.com/q?s=brkt&d=3m ***** COMS - 3Com Corp. $25.69 *** 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. On Thursday, Germany's Siemens AG and 3Com quit plans to form a joint venture and in response Coms price jumped. Next earnings are rumored to be better-than- expected and COMS is still ripe as a take-over candidate. Now the speculation is that a buy-out offer is in the works from another European company, possibly GE England or Ericsson. OCT 25.00 THQ JE Bid=2.50 OI=6749 CB=23.19 RC=7.8% RNC=7.8% Chart = http://quote.yahoo.com/q?s=coms&d=3m ***** NVDA - NVIDIA Corporation $26.00 *** 3D Chips *** Nvidia Corp. designs, develops and markets 3D graphic processors and related software that provide high performance interactive 3D graphics to the mainstream PC market. In July, NVIDIA and SGI announced a broad strategic alliance and settled their patent dispute. The future looks bright with Intel's announced exit from the 3D graphics chip market and Friday's announcement that HP has chosen NVIDIA's RIVA TNT 3D graphics processor as the standard motherboard graphics solution for the HP Pavilion 8580C and 8590C. OCT 25.00 UVA JE Bid=3.38 OI=5 CB=22.63 RC=10.5% RNC=10.5% Chart = http://quote.yahoo.com/q?s=nvda&d=3m ***** PCTL - PictureTel Corporation $5.69 *** Trading Range *** PictureTel develops, manufactures, markets and services visual communications and collaboration software that enables users to hold face-to-face meetings through a telephone. For the last two years, PictureTel has been in a trading range from $5 to $10. With earnings taking a hit, the company is actively working to reduce operating costs and increase sales of their core video- conferencing products and services. A safe long-term play. OCT 5.00 PTQ JA Bid=1.19 OI=514 CB=4.50 RC=11.1% RNC=11.1% Chart = http://quote.yahoo.com/q?s=pctl&d=3m ***** RDRT - Read-Rite Corp. $5.88 *** Bottom Fishing? *** Read-Rite is one of the world's leading independent manufacturers of magnetic recording heads, head gimbal assemblies (HGAs) and head stack assemblies (HSAs) for disk drives and tape drives. Wednesday, RDRT received a volume purchase order to supply giant magnetoresistive HGAs to Quantum's Hard Disk Drive Group and is currently ramping production of the HGAs, with initial shipments scheduled to begin in September. The growing speculation that hard drive prices have reached their bottom may be the salve read-rite needs to heal its financial wounds. The short term technicals look promising but more consolidation is expected. OCT 5.00 RDQ JA Bid=1.31 OI=687 CB=4.57 RC=9.4% RNC=9.4% Chart = http://quote.yahoo.com/q?s=rdrt&d=3m ***** NAKED PUT SECTION ***************** Option Pricing Basics.. An successful trader will always seek to improve the risk/reward characteristics of his position by looking for the trade with the greatest possible margin for error. In order to achieve this goal, a trader must be able to accurately assess an option's value. One of the most important components of option pricing is the concept of time decay. Time value and time decay are actually two of the easiest aspects of option pricing to understand. The time value of any option can be simply understood as everything but the intrinsic value. Time costs money and more time equals more money. The amount of time value in an option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. In a strictly mathematical sense, time value decays at its square root and this rate of decay is known as Theta. Time is a commodity and there is one very important concept that merchants of time (option writers) must understand; the laws of option pricing dictate time value is highest in the at-the-money (ATM) option. Time value decreases as the strike prices move in and/or out of the money (ITM or OTM). Strike prices deep in and/or out of the money have the lowest time value of all options. Option buyers (as well as sellers) need to have a firm grasp of pricing theory. Remember, the main attraction of options to most traders is they provide the buyer with leverage; one can realize a large percentage gain with only a modest change in the stock price. The concept of delta tells us that OTM calls offer greater reward potential if the stock moves substantially while ITM calls will perform better if the stock only moves moderately. Choosing the correct time frame of a position requires another difficult decision because the time closest to expiration costs the most and yet the less time remaining in the option, the greater the movement. With options, more time does cost more money, but the cheapest way to avoid time decay is to buy the most available. All of these variables must be clearly understood for a trader to profit on a consistent basis. One of the best ways to understand the geometric value of time is to study LEAPS. LEAPS are simply long-term options with expiration dates that are months or even years in the future. Time decay occurs very slowly for LEAPS, so buying LEAPS is an effective way to benefit from a stock's price movement without incurring the risk associated with an outright stock purchase. One of the easiest (and most popular) strategies associated with LEAPS is the covered call (calendar spread) with a (long) LEAP position. But, that's another subject.. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI CRUS 8.88 10.06 Sep 7.50 0.38 *$ 0.38 14.9% 13.0% ADAP 30.75 33.00 Sep 25.00 0.88 *$ 0.88 11.8% 12.9% MCOM 25.56 24.38 Sep 17.50 0.88 *$ 0.88 14.7% 12.8% PAX 15.31 13.75 Sep 12.50 0.44 *$ 0.44 11.7% 12.7% PCYC 29.13 33.25 Sep 20.00 0.69 *$ 0.69 10.6% 11.5% RIGS 19.81 19.25 Sep 17.50 0.63 *$ 0.63 10.1% 11.0% NETG 22.25 27.56 Sep 17.50 0.63 *$ 0.63 12.4% 10.8% CLTR 29.13 34.44 Sep 20.00 0.63 *$ 0.63 9.8% 10.6% ADAP 22.88 33.00 Sep 17.50 0.75 *$ 0.75 14.1% 10.2% VTS 19.25 17.44 Sep 15.00 0.38 *$ 0.38 9.0% 9.8% KING 28.63 31.31 Sep 25.00 0.69 *$ 0.69 8.1% 8.8% SCMM 47.88 42.56 Sep 35.00 0.75 *$ 0.75 7.3% 7.9% NMR 33.50 37.06 Sep 25.00 0.63 *$ 0.63 8.6% 7.5% PESC 23.88 26.75 Sep 17.50 0.50 *$ 0.50 9.5% 6.9% CORR 22.50 22.50 Sep 17.50 0.44 *$ 0.44 8.9% 6.5% BOBJ 47.19 46.50 Sep 35.00 0.75 *$ 0.75 7.4% 6.4% PLMD 17.88 27.50 Sep 15.00 0.31 *$ 0.31 6.8% 5.9% CSE 48.06 49.19 Sep 40.00 0.75 *$ 0.75 6.3% 5.5% USAI 45.94 43.00 Sep 40.00 0.81 *$ 0.81 6.1% 4.4% TDW 34.44 31.56 Sep 30.00 0.56 *$ 0.56 5.7% 4.1% DD 74.75 67.75 Sep 65.00 1.00 *$ 1.00 4.7% 3.4% SBGI 20.50 16.81 Sep 17.50 0.38 $ -0.31 -5.6% 0.0% COMMENTS/OBSERVATIONS ON CURRENT PLAYS: SBGI - At 50% technical retracement/downward movement slowing? USAI - Possible bearish change of character - watch closely! DD - Possible change of character - watch closely or own it! TDW - Possible change of character - but nearing support. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by Return On Investment: ****** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CMTO 18.81 SEP 15.00 CQH UC 0.75 250 14.25 16.6% CLTR 34.44 SEP 22.50 QCE UX 0.56 495 21.94 7.5% NVDA 26.00 SEP 22.50 UVA UX 0.56 65 21.94 7.5% NSM 28.56 SEP 25.00 NSM UE 0.63 802 24.37 7.4% ZRAN 30.63 SEP 25.00 ZUO UE 0.50 64 24.50 7.0% BEAS 24.25 SEP 20.00 BRQ UD 0.38 112 19.62 6.5% GNSS 24.06 SEP 20.00 QFE UD 0.38 297 19.63 6.3% CYMI 36.88 SEP 30.00 CQG UF 0.50 108 29.50 6.0% Company Descriptions ***** BEAS - BEA Systems $24.25 *** Software & Systems *** BEA Systems is a leading provider of mission-critical Web and transaction middle-ware solutions for the world's largest enterprises. BEA's product line enables end-to-end, integrated solutions for electronic commerce and business-critical systems. BEA also provides a comprehensive suite of consulting, education, & customer support offerings to preserve and maximize technology investments their products. Reported record quarterly earnings and a new up-trend has begun. SEP 20.00 BRQ UD Bid=0.38 OI=112 CB=19.62 ROI=6.5% Chart = http://quote.yahoo.com/q?s=BEAS&d=3m ***** CLTR - Coulter Pharmaceutical $34.44 *** FDA Filing *** Coulter Pharmaceutical is engaged in the development of novel drugs and therapies for the treatment of people with cancer. The company currently is developing a family of cancer therapeutics based upon two platform technologies: conjugated antibodies and tumor-activated peptide pro-drugs. The company's most advanced product candidate, the "B-1 Therapy," consists of a monoclonal antibody conjugated with a radioisotope. Recent controversy and concerns over Coulter's FDA filing for cancer antibody Bexxar has caused some new volatility in this issue. Speculation Only! SEP 22.50 QCE UX Bid=0.56 OI=495 CB=21.94 ROI=7.5% Chart = http://quote.yahoo.com/q?s=cltr&d=3m ***** CMTO - Com21 Inc. $18.81 *** Broadband Is Hot! *** Com21 is a leading global supplier of system solutions for the broadband access market. Their DOCSIS and ATM-based products enable cable operators and service providers to have the ability to deliver high-speed, cost-effective Internet and telephony applications to corporate telecommuters, small businesses, home offices and residential users. A unique company in a fast moving and highly competitive industry. SEP 15.00 CQH UC Bid=0.75 OI=250 CB=14.25 ROI=16.6% Chart = http://quote.yahoo.com/q?s=CMTO&d=3m ***** CYMI - Cymer Inc. $36.88 ** Chip Sector *** Cymer is the world's leading supplier of excimer laser illumination sources, the essential light source for deep ultraviolet (DUV) photolithography systems. DUV lithography is a key enabling technology which has allowed the semiconductor industry to meet the exact specifications and manufacturing requirements for volume production of today's advanced chips. Reported a net loss last earnings, but is expected to return to profitability next quarter and affirmed the bullish outlook with a strong order backlog. SEP 30.00 CQG UF Bid=0.50 OI=108 CB=29.50 ROI=6.0% Chart = http://quote.yahoo.com/q?s=CYMI&d=3m ***** GNSS - Genesis Microchip $24.06 *** More Chips *** Genesis Microchip designs, produces and markets highly integrated semiconductors for flat panel displays, home theater equipment, projection systems, video workstation gear and dozens of other applications. Various components using Genesis chips can be found in products from more than 200 companies. A recent deal with Panasonic and a new upgrade from Bank Of America Securities. SEP 20.00 QFE UD Bid=0.38 OI=297 CB=19.63 ROI=6.3% Chart = http://quote.yahoo.com/q?s=GNSS&d=3m ***** NSM - National Semiconductor $28.56 *** Smaller Chips! *** National Semiconductor provides system-on-a-chip solutions for the information age. Combining real-world analog and state-of the-art digital technology, the company's chips lead many sectors of the personal computer, communications, and consumer markets. Recent upgrades from numerous analysts and new price target near $40. Support is near the cost basis. SEP 25.00 NSM UE Bid=0.63 OI=802 CB=24.67 ROI=7.4% Chart = http://quote.yahoo.com/q?s=NSM&d=3m ***** NVDA - NVIDIA Corporation $26.00 *** 3D Chips *** NVIDIA Corp. designs, develops and markets 3D graphic processors and related software that provide high performance interactive 3D graphics to the mainstream PC market. In July, NVIDIA and SGI announced a broad strategic alliance and settled their patent dispute. The future looks bright with Intel's announced exit from the 3D graphics chip market and Friday's announcement that HP has chosen NVIDIA's RIVA TNT 3D graphics processor as the standard motherboard graphics solution for the HP Pavilion 8580C and 8590C. SEP 22.50 UVA UX Bid=0.56 OI=65 CB=21.94 ROI=7.5% Chart = http://quote.yahoo.com/q?s=NVDA&d=3m ***** ZRAN - Zoran $30.63 *** Need Dip With Your Chips? *** Zoran Corporation develops and markets integrated circuits, IC Intellectual Property (IP) cores, and embedded and PC software for digital audio and video applications enabled by compression. Zoran's product lines and IP include DVD and MPEG decoders, digital still camera system on a chip IC's, JPEG codecs and digital audio. Leading applications include many stand-alone consumer electronics found in today's homes. New coverage by Salomon Smith Barney and a bullish outlook. SEP 25.00 ZUO UE Bid=0.50 OI=64 CB=24.50 ROI=7.0% Chart = http://quote.yahoo.com/q?s=ZRAN&d=3m SEE DISCLAIMER IN SECTION ONE *****************************
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