The Option Investor Newsletter Tuesday 8-31-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 8-31-99 High Low Volume Advances Decline DOW 10829.28 - 84.85 10982.20 10782.11 845,462k 1,304 1,667 Nasdaq 2739.35 + 26.60 2739.90 2671.67 973,402k 1,865 1,971 S&P-100 692.24 - 3.00 701.07 685.38 Totals 3,037 3,169 S&P-500 1320.41 - 3.61 1333.28 1306.91 46.6% 53.4% $RUT 427.83 + .47 428.13 424.22 $TRAN 3076.10 - 44.05 3130.95 3074.70 VIX 25.24 + .27 27.57 24.16 Put/Call Ratio .72 ************************************************************* Surprise, surprise! The market rallied back early in the morning from three days of sell off on Greenspan comments. Knock, knock! Who's there? NAPM NAPM who? National Association of Purchasing Managers with our survey numbers. BUT...you are not scheduled until Wednesday! Why are you here early? Greenspan sent us. (just kidding). You know the rest of the story. The NAPM numbers were released a day early, AGAIN, by a computer glitch and it was not a pretty picture. (makes you wonder how they are going to handle Y2K when they can't tell the difference between August and September?) The NAPM numbers were much stronger than expected. The base number was not bad with August posting 54.2 over the 53.4 for July. The real market killer was the "Prices Paid" component. This number jumped from 54.7 to 59.8, a whopping 5 point jump. This was the biggest jump in the price component in five years. Unfortunately Prices Paid is the component that shows inflation in prices at an early stage. So much for market rally! The Dow dropped over -200 points to a low of 10782. The -200 point drop from the high of the day and +168 point climb back qualified as an entry point in my mind. I wrote in the Sunday newsletter to watch for a 100+ point drop and recovery intraday and if it was below 10900 even better. We got our wish. However by the end of the day I was becoming concerned. The -100 point drop just before the close was nerve racking but understandable. The month end portfolio adjusting was taking its toll. Most portfolio adjustments occur at the end of the quarter but some fund managers do cleanup at month end also. Today must have been a big month for adjustments. Volume today on the NYSE was 845 mln and 85 mln came in the last ten minutes. Order on close orders were very heavy and mostly sell orders. Hopefully the damage is over. Helping fuel my optimism is a healthy inflow of cash into mutual funds over the last two weeks. Almost $8 bln came in and this market drop is a great opportunity for fund managers to put it to work quickly. Since tomorrow starts a new month and the last month of the quarter it would be a good day for the rally to begin. Another reason for a September rally would be the strong earnings forecast by First Call for a +21% rise in profits. Past quarters have been between +13-15% and the 3Q is not normally a strong quarter. Things are looking very good. The bond rally after the Fed meeting last week was dead on arrival today after the NAPM release. Bonds dropped hard and yields went as high as 6.10%. The good news was the drop back to 6.06% by late day. The bond market and stock sell off was a knee jerk reaction to the NAPM numbers. It is interesting however to note that the Dec bond futures are now indicating another +.25% increase is already factored into the market. The Dec Euro/Dollar futures are showing a 6% Fed funds rate which would be three more +.25% increases. While we do not think this is likely, futures traders are obviously concerned. Dow theory followers are also concerned about the falling transportation average. Since last Wednesday the transports have dropped -234 points or -7%. We feel this is simply the impact of $22 oil but without a turnaround in the transports the Dow will struggle to move much higher. The bright spot in todays market was the Nasdaq. As usual the Nasdaq is leading us out of the sell off wilderness. Techs are the first to fall and the first to rise from the ashes. After a drop of over -40 points after the announcement the Nasdaq closed up +26 for a miraculous recovery. Some of the leaders were Dell Computer +2.50, QCOM +9.19 (Monday's play of the day recommendation), DISH +8.09 and NTOP +12.38 on news of yet another big deal signing with AT&T which will allow it to expand to 17 countries. Internets were mixed but mostly positive. Still a positive Nasdaq is a first step toward a positive Dow. It did not hurt to have several big news announcements in the tech sector. IBM and CSCO announced a $2 bln agreement to share technology and integration services over the next five years. Competitors however took a pounding. MMCN dropped over -$19 to $30.75 after saying product development by competitors could impact revenues. IBM and CSCO were big customers for MMCN. Separately Apple Computer (AAPL) announced their new G4 PC. Actually, according to Steve Jobs, the PC is a "super computer" able to complete over one billion instructions per second. This PC is claimed to be more than twice as fast as Intel's fastest Pentium III. Secondly Steve said the orders for the new notebook computer had exceeded 140K and much more than expected. Intel was down fractionally on the news but is expected to recover when it announces a new processor this week at the technology conference now in progress. Intel is expected to announce a 700 MHZ P3. Intel and Microsoft also released news that Windows2000 is now booting and running on the new 64bit Merced processor. The Merced is the next major step up for Intel and will offer significant processor speed jumps. Chip makers were buoyed by an analyst upgrade of Micron (MU) today and did well. PC makers had a good day led by Dell. Actually three of the top PC makers have had some good moves since mid August. GTW +28%, DELL +15%, AAPL +15%. Oh, I forgot, CPQ -4%. Still a Dell takeover target in my mind. SunMicro fired another shot towards Microsoft today. They announced they were buying Star software, a privately held maker of office productivity software. While the market liked the deal, SUNW +3.88, they may still have trouble getting users to switch from Word, Excel and Powerpoint. SUNW however has one thing going for this effort. It will distribute the products FREE over the Internet. After checking out the price of Office2000, FREE may be worth a look for the millions of home users of Microsoft products. Merrill Lynch named SUNW its "Focus One" stock of the week. As if we did not have enough problems with the wall of worry being built over interest rates, we are now entering "earnings warning season." Yes, we have to trade through the minefield of warnings to get to earnings. The biggest company to drop a stink bomb today was Office Depot. They warned that earnings would be about -.24% less than expected. Scratch them off the earnings run list along with the "guilty by association" list of Staples (SPLS) and OfficeMax (OMX). With the Labor Day holiday only hours away, depending on how early this week you quit working and leave the office, it might be good to focus on several key points. The DOW rally from 10550 on August 10th to 11353 on August 24th was +803 points in ten trading days. The retracement from 11353 to 10829 was -524 points in only five trading days. We have now given back -65% of those gains. The average retracement is between 50-75%. We are there. The market is tremendously oversold and is due for a technical rebound even if there is no follow through. I am looking for the bargain hunting to begin tomorrow assuming the end of month sellers are done. Today could have been a great entry point. With the market already down -500 points the downside from here is very limited. News after the market closed that the IMF had made a deal with Ecuador could have a positive impact on the market tomorrow as well. The Ecuadorian Mafia is not nearly as well organized as the Russians and the Ecuadorian people may actually see some of the money. (just kidding) The next major market hurdle is the Non-Farm Payroll Report on Friday. This could rock the market either way and would be one reason we may not see much upside movement before next week. Minor upside is ok. We just want to see a bottom here to provide a launch point for next week. As always, please pick your entry points carefully. Good Luck, Sell too soon. Jim Brown Editor Be sure to check out the new "interactive charting" on our website. It is in the left margin under "traders tools" Customize your own charts using the indicators you like. *************** Market Posture *************** Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,500 11,320 10,829 Neutral 7.20 SPX S&P 500 1,320 1,420 1,320 Neutral 8.17 OEX S&P 100 675 735 692 Neutral 8.13 RUT Russell 2000 440 465 428 BEARISH 8.06 NDX NASD 100 2,250 2,468 2,397 Neutral 8.13 MSH High Tech 1,125 1,250 1,194 Neutral 8.13 XCI Hardware 1,035 1,050 1,074 BULLISH 8.24 CWX Software 725 844 813 Neutral 8.13 SOX Semiconductor 515 520 522 BULLISH 8.24 NWX Networking 555 625 574 Neutral 8.13 INX Internet 500 580 442 BEARISH 7.20 BIX Banking 690 710 623 BEARISH 7.23 XBD Brokerage 410 440 376 BEARISH 7.23 IUX Insurance 645 660 594 BEARISH 7.23 RLX Retail 915 960 817 BEARISH 7.23 DRG Drug 360 390 364 Neutral 8.24 HCX Healthcare 740 785 744 Neutral 8.24 XAL Airline 180 190 152 BEARISH 5.21 OIX Oil & Gas 285 310 304 Neutral 8.26 Posture Alert Another volatile day ended with the Nasdaq taking charge and closing positive on decent volume. We will be closely watching for any Hammer reversals, which the Nasdaq may be showing, but the divergence on the major indexes is giving a mixed signal. Sectors showing good strength were Software (+2.60%), Internet (+2.61%), Morgan Stanley High Tech (+1.51%), and Hardware (+1.47%). No change to the posture board. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** A day at the Beach? A large part of sentiment analysis is figuring out what people expect and applying those outcomes to good use. Sentiment analysis is quite easy, when bullish or bearish feelings dominate. However, when sentiment is stuck in the middle, you need to be more careful, because anything can happen. Currently, everyone is at a loss, in terms of where interest rates are going. One week ago, after the Fed meeting, it was pretty unanimous that interest-rate hikes were done for the rest of this decade. Not so anymore. I would equate this to a day at the beach (or golf course). You have the day planned out, wake up that morning to see a beautiful sunny day, and once you arrive at the beach (or golf course), the sky turns gray. You can't tell if you should take cover because it's about to rain all over you, or if it will blow over very shortly. Right now, this market is in the same situation. People's perceptions change rapidly, especially on Wall Street. Since the market is stuck in the middle right now, we need to concentrate on what will bring us sun or rain....INTEREST RATES! A higher rate brings rain, lower or stable rates bring sunshine. This week, we have seen the yield on the 30yr bond break the 6% benchmark. We have also seen the Volatility Index break over the 25 benchmark; however, it did close below this number. With the long bond, 6% was minor resistance, with 6.272% being major. If the latter level were to break, significant damage could be done to this market. If we hold, then bring on the sun. For sentiment readings on the OEX, we have stated for the last several weeks, that this market would be trading range bound. It has done like we thought. With the OEX currently at 692, we are seeing large volume of put buying just below this level. Based on the sentiment reading, and taking a contrarian standpoint, major support for the OEX is 685- 690, and to see a bounce here would be very likely. Excessive bullish sentiment doesn't begin until 720, so there is plenty of potential for the upside in the next couple of weeks. 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. Peak Open Interest: The contraian OEX put-call ratio on peak open interest is clocking in at 1.5, suggesting bearish sentiment picking up steam. Mixed Signs: Interest Rates: The yield on the 30-yr Treasury is now above the 6% benchmark, but still below the 6.272% high. Any break below 6% would be positive, while any break into new highs would be extremely negative and take this market significantly lower. 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: Volatility Index: The VIX broke above the 25 benchmark, before retracing back to 24.73. If the VIX moves above this mark, and holds, further market weakness should be expected. 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, we are 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 Tues Indicator (8/27) (8/31) Pinnacle Index (OEX): Overhead Resistance (735-780) 134.1 148.0 Underlying Support (710-730) 1.6 1.9 Underlying Support (630-690) 3.2 3.4 Put/Call Ratios: CBOE Total P/C Ratio .6 .6 CBOE Equity P/C Ratio .5 .5 OEX P/C Ratio 1.1 1.5 Peak Open Interest (OEX): Market Volatility Index (VIX): CBOE VIX 24.73 Puts 660 Calls 720 P/C Ratio 1.55 Investors Intelligence: Bullish 44.50% * Bearish 31.10% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Tues Benchmark (8/27) (8/31) Overhead Resistance (735-780) 134.09 148.0 Overhead Resistance (710-730) 1.59 1.92 OEX Close 707.97 692.24 Underlying Support (630-690) 3.21 3.36 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 Tues Strike/Contracts (8/27) (8/31) CBOE Total P/C Ratio .65 .64 CBOE Equity P/C Ratio .46 .51 OEX P/C Ratio 1.10 1.47 (OEX) Peak Open Interest Friday Tues Strike/Contracts (8/27) (8/31) Puts 660 / 12,400 660 / 12,350 Calls 760 / 7,379 720 / 7,982 Put/Call Ratio 1.68 1.55 VIX) Market 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 31, 1999 24.73 Investors Intelligence Survey Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 07, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 07, 1999 52.6 27.2 July 14, 1999 55.2 26.7 July 21, 1999 54.1 27.9 July 28, 1999 53.6 24.6 Aug 04, 1999 52.2 27.8 Aug 11, 1999 50.0 29.3 Aug 18, 1999 45.8 31.3 Aug 25, 1999 44.5 31.1 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Week Dow 10829.28 -176.04 -84.85 -260.89 Nasdaq 2739.35 -46.21 26.66 -19.55 $OEX 692.24 -12.73 -3.00 -15.73 $SPX 1320.41 -24.25 -3.61 -27.86 $RUT 427.83 -5.09 0.47 -4.62 $TRAN 3076.10 -51.20 -44.05 -95.25 $VIX 25.24 1.76 0.27 2.03 Calls Mon Tue Week QCOM 192.19 -0.75 9.19 8.44 Another 50-week high VRSN 108.31 3.00 2.94 5.94 A Strong Buy rating SLR 78.25 0.25 4.25 4.50 Definitely a favorite SUNW 79.50 -0.56 3.88 3.31 Buying Star Division TXN 82.06 0.88 1.69 2.56 New, leading the techs GTW 96.94 -0.81 1.56 0.75 Price target raised! ERTS 68.63 -1.00 1.69 0.69 Starting to wane a bit HGSI 68.06 0.56 0.13 0.69 The race is heating up ADI 51.50 -1.50 1.69 0.19 New digital converter SFA 51.25 0.88 -1.06 -0.19 Eight straight highs CSCO 67.81 -1.75 1.06 -0.69 Announced $2 bln deal MSFT 92.56 -1.00 0.31 -0.69 New, looking to rally INTC 82.19 -0.75 -0.06 -0.81 New chip released soon SNE 127.31 -0.94 -0.31 -1.25 Dropped, Yen to strong LGTO 43.06 -1.78 0.41 -1.38 Possible entry point LXK 78.75 -2.56 1.13 -1.44 It's leaner and meaner UIS 43.00 -0.88 -0.75 -1.63 Advising caution here EXDS 80.38 -6.63 4.25 -2.38 Price target at $138! PMCS 93.00 -1.31 -1.50 -2.81 Dippping below 10-dma IDPH 127.06 -2.50 -0.69 -3.19 Dropped, turned around DCLK 99.88 -8.38 5.13 -3.25 Its a favorable outlook AMZN 124.38 -9.25 5.13 -4.13 The split is coming JDSU 106.06 -4.47 0.34 -4.13 Upgraded to Strong Buy BVSN 99.56 -6.75 2.19 -4.56 Looking for a trend **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS ****** IDPH $127.06 -0.69 (-3.19) Despite an upgrade and a strong market rebound this afternoon, IDPH still closed lower and broke key support from the 10-dma. Today Lehman Brothers raised their rating to a Buy and increased both the earnings estimates and price target. The earnings projections were revised to $3.54, up from $3.33, for fiscal 2001 and the price target was raised to $155, up from $103. Unfortunately this wasn't enough to overcome comments on Monday from the analysts at Morgan Stanley who said the stock is looking tired after the run from $40 this Spring. This caused IDPH to break the 10-dma which now paints a weakening technical picture. IDPH did rebound with the market after painting the tape with a day-low of $120 but a downtrend may be forming and the risk is weighing too high versus the return so we are dropping IDEC as a play. SNE $127.31 -0.31 (-1.25) The dollar is back in the spotlight this week and for good reason. We normally hear about currency fluctuations with the markets are lacking for news but we all now that there is plenty of market news and action today. So why the dollar? Well it is under the 110 level against the yen which is considered bearish for foreign stocks who import to the U.S. This is what is holding SNE down recently. Some analysts think that the yen may remain strong for awhile thanks to a recovering Japanese economy. So while a strong yen would be ok as long as domestic investors in Japan begin buying local stock with the improving economy, it will hamper our play for the short-term. Therefore, we are dropping Sony until we see more signs of strength from the stock. IP $47.06 -2.81 (-4.00) How quickly things change! Well it is said that the only constant is change, so change we will. Just last week, we were stating how predictable IP was with it's channel. We'll no more! Monday precipitated the slide that did us in. We continued Tuesday breaking below our 200-dma. Be grateful for stops! Due to this downward break, we must drop IP for obvious reasons. PUTS: ****** No dropped puts today. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an Email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Tuesday 8-31-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. *************** Traders Corner *************** Sometimes you're the bat, sometimes you're the ball. And the difference is planning. Yesterday, I watched the close at a little family owned (since 1937) diner overlooking the Golden Gate and I was horrified. I had taken big positions midday when the averages went down and appeared to bounce back... but, not so fast, they dropped hard. Today, I was paying attention between moving stuff from my Silicon Valley grad student apartment to my new apartment in San Francisco. Today, at the close, I am finishing a root beer float, at the same diner, watching a much, much better close. Jim Brown asked whether I was interested in writing a column for the newsletter. So, I guess my best contribution would be some general thoughts on the emotional aspects of trading, and my approach to planning my trades. I've been trading options since January of 1999, and I have subscribed to the newsletter since a friend recommended it. I've had ups and downs in the January and April earnings season, and really improved my trading this summer by following the newsletter closely. I've also become involved with a local investor group organized by the newsletter, and have picked up some techniques from the armchair pros, some of whom have done very well, to the tune of $1,000,000, in one case. Anyway, I plan my trades pretty exhaustively. I make plans, revise plans, load them into my qcharts program, and share them with the investor group through a Email discussion list. I used to be a Marine platoon commander and we used a simple framework to make plans -- SMEAC. Situation, Mission, Execution, Admin & Logistics, and Command & Control. This is a pretty good way of thinking about getting ready to trade options, I think. Come to think of it, alot of what we did in the Marines, on a planning/ staff level, was to create options for different courses of action. In battle, those options become your leverage. Situation. I try to think through where the market is and where it might be headed. Jim has been saying we are looking at a post labor day rally for a few weeks. This is a good entry week. I looked at charts for the averages and individual stocks like MSFT last Sept, and the Sept before that, and it does seem to be a trend. Traders come back, volume picks up, American companies continue to do very well. I think we are looking at a post Labor Day Rally. Mission. What are my investment goals? Well, on a general portfolio level, my options trading pool is about 45% of my financial assets. The rest is in a TIAA-CREF mutual fund (I used to teach high school), and a portfolio of about 20 stocks (now currently 15, since I sold 5 to raise cash and make room for end of the year Y2K buying; a finace professor said that 20 stocks gives you 95% of the diversification value of 8000 stocks). So, I don't ever risk my entire financial position on option trading. But, that said, I trade to maximize my gains. I want to increase my option trading portfolio in Sept/Oct by 100%. Generally, I think I can make 100% gains in each of the next 4 earnings season. Next summer, I graduate from law school, and I would like to have a big financial cushion so I never feel like I have to accept any particular job because of the money. Execution. I read the newsletter, and I take each of the call plays and enter them into a qcharts quote sheet, one for stocks, one for options. I have the left side of my qcharts set up with SP100, Nasdaq, DOW, NYSE AD, NASDAQ AD, 30 YR Bond, VIX, and SP Futures charts. Down the middle I have quote sheets for my plays (or targets of opportunity). On the right side, I have charts for my stocks. I have a broker that allows me to jump right from the qcharts quote sheet with the option symbols to the trading program. On Sunday mornings, after the newsletter comes out, I print it out, read it, highlight it, scribble in the margins, and set up my qcharts program for the following week. This past week, Jim said to look for 100 point drops followed by bounce backs to signal a possible bottom. He also put a list of targets and prices in his play section. I had those plays noted, with the amounts that I wanted to put into each on my quote sheet. Unfortunately, I pulled the trigger early yesterday when the DOW was down 100 and started to bounce back. Fortunately, the stocks I played were solid, and weathered todays downturn well. By the end of the day, I was in positive territory for the week, particularly on the strength of QCOM and GTW. I am heavy in GTW (50 contracts) because of the upcoming split, but intend to take profits by the end of the week and to reinforce winning positions going into next week. Since the end of June, I have followed a more systematic approach to making a WEEKLY plan for option trading. In every week since then, I have made profits, including in the ugly mid July reversal. Admin & Logistics. I am sitting in a cafe. Trading options. I have a wireless modem equipped IBM 600 Thinkpad (with 128 megs of RAM); I have qcharts; QCOM Eudora; Netscape (AOL) Navigator on the lap top. I have a NOK cell phone with QCOM CDMA technology inside. I am a mobile, hostile, agile option trading fool. When I start classes again next week, I won't be taking notes. I will be making money. I am going to put a DSL line into my apartment, so I can watch Maria Bartiromo hype MU at the open and get streaming quotes and pull down Jim Cramer's latest at huge bandwidth. I have had my greatest success option trading in AOL, NOK, IBM, SUNW, QCOM because, like Peter Lynch says, I trade the stock I know (though he agrees with Buffet that options should be outlawed). Command & Control. As I said above, I trade through my laptop. I also have the NOK cell phone as a back up. I've gone through 2 brokers this year, and now I am where I am comfortable. I Email the local option group frequently. I Email Jim, or my high school buddies, including the guy who got me into option trading, and another buddy who is a broker, and can't trade his own account aggressively (has to hold for some minimum period). I like being a non-professional. I like getting the lower rate for qcarts. I like not being restricted (yet) by my employment in the types of crazy trades I can make. So. Today. QCOM. Got into the Sept 175s yesterday. Glad I bought deep ITM. Big move today back above 190. Pure in the money move. Very nice. EXDS. I bought out of the money Sept 80s yesterday. Now, they are ITM, and ready to run into next week and a rally, I hope. Despite the weakness yesterday and today, this one, like its fellow Red Hot QCOM has advanced nicely. SUNW. I bought out of the money Sept 80s yesterday. Now they too are ITM, and I got em cheap. Those suckers will move nicely when SUNW gets decisively ITM later this week and next. Big news today: SUNW is going head to head with MSFT office. Good for me. GTW. Split 9/7. My biggest position. Started to move today. With an improving mkt, should run nicely to Friday. JDSU. Sept 110 Call. Hit my target yesterday. Got into my positions. Stock treading water around 105. CSCO. Sept 70s. Out of the money. With a general tech move, I think this breaks 70 easy. OEX Sept 710. Got killed on these. Were looking better with a half hour to go, then the DOW died. Overall, up for the week, and my entry was bad. Should have waited until this morning. That would have been beautiful. But then it is always easy to second guess yourself. If I waited until this morning, I would have missed moves in QCOM, GTW, SUNW. Bottom line is the only safe investment is money markets, and that isn't safe because all the other people bidding for houses own stocks that have appreciated tremendously. If your gonna play this game, you have to be comfortable with risk. In my system, I minimize risk by reading the newsletter, and studying my plays. As Sun Tzu, the ancient Chinese military philosopher would say, the possibility of victory lies in the offense. Or as my buddies in the Corps would say, if you want to run with the big dog, you gotta get out from under the porch! Janar Wasito janar@OptionInvestor.com ***************** PICK NEWS - CALLS ***************** GTW $96.94 +1.56 (+0.75) GTW eeked out a couple more dollars of profit today as it moves towards its split date this week. The stock will split 2:1 on September 7th and it's advisable to have your positions closed out by then. Generally speaking, 7 out of 10 stocks will depress after a stock split and there's no need to take that added risk. AG Edwards downgraded GTW from a Buy to an Accumulate yesterday based solely on price appreciation and at the same time raised the target price to $110-120 from $85. Today Solomon Smith & Barney's analyst report boosted the stock's price. Analyst Richard Gardner cited back-to-school sales should support the 3Q estimated revenues of $2.2 bln and added that Gateway's pursuit of other avenues of revenue such as related computer products found in its showrooms and targeting larger corporate accounts will keep the company in the forefront of the industry. He also reiterated his Buy rating and upped the target price to $120 from $85. UIS 43.00 -0.75 (-1.63) The fractional losses suffered the past two days have edged UIS closer to its support level at $42 (the 30-dma). Last time the stock slipped below this mark it declined for about a week before launching upwards again. So if you haven't already moved on, at least keep stops in place to take you out of the play in case it doesn't rebound tomorrow. We're advocating CAUTION. In the news, Unisys announced the Aquanta ES5000 server specifically designed to enhance the dependability and performance for those clients using PeopleSoft solutions. Also the company has created the Natural Language Understanding (NLU) Services organization. It's designed for consultation and application development for Call Center solutions relating to customer service channels via the telephone, e-mail and Web arenas. VRSN $108.31 +2.94 (+5.94) You've got to love it. VRSN has already advanced another 6% this week and importantly on strong volume. The stock got a boost on Monday when Sands Brothers & Co reiterated a Strong Buy rating. In other news that day, MindSpring Enterprises (MSPG) announced VeriSign will be the preferred on-line security provider for their Web hosting division. Today VeriSign announced an expanded strategic relationship with Security Dynamics Technology (SDTI). Together they will provide simple way for enterprises to establish an open security foundation in combination with SDTI's Keon security application services with VRSN's managed services. This alliance allows the broad range of clients more choice and control regarding their security requirements. Now back to the play. Overhead resistance is still at $114, the most recent 52-week high set on Thursday. And as you've seen over the past couple weeks, this momentum play is volatile during intraday trading providing lots of room for profit (and loss). So if you're preparing to jump into this play, please have a solid trading plan in place prior to opening any new positions. It's also important to be prepared for inevitable pullbacks. This is a HIGH RISK PLAY and not for the faint- hearted. To the diehard Internet players - hang onto your hat and enjoy the ride. LGTO $43.06 +0.41 (-1.38) The trading volume over the past two days remained strong while LGTO consolidated just below its overhead opposition. The resistance is the 52-week high of $46.13 set on Friday. Since August 16th when it split 2:1, LGTO has been consistently trading above its 10-dma. This pullback places it precariously close to this mark providing a solid entry point. A more conservative player will practice patience and wait for a bounce before beginning any new plays. Look for upward momentum to pick up again when we see a more positive broad market and bear in mind stock cycling is part of the natural pattern. This week may be hard to play with inflation fears rearing its ugly head again and the upcoming holiday weekend. PMCS $93.50 -1.50 (-2.81) Today was an interesting day for the markets as they were back and forth all day. This was the same for PMCS too as traders seemed unsure when to buy and when to sell as the NAPM report slipped out a day earlier than expected. In what seems to be a reoccurring event, the an important economic report was released by accident one day early. There have been other reports from federal agencies, etc accidentally posted early in recent months as well. As for PMCS, we are definitely discouraged by the dip below the 10-dma today at $94. This is normally a bearish indicator for the short-term but we are keeping it as a play thanks to the strong NASDAQ rally late in the day. We expect a rebound from this level and it could certainly be conducive to call buying in the technology sector. Of course, we still need good entry points and a confirmation of direction from the markets tomorrow so be careful. Any rollover from here would be the signal to let your stops pull you from the play. SLR $78.25 +4.25 (+4.50) There was no current news today that should have propelled or supported SLR but we will take it. When you look at its performance over the last couple of days, it's unbelievable. The stock defied market trends, interest rate fears and some would say logic to post gains both days this week. Volume was better than average especially as the market recovered late in the day, showing signs of buying interest. Investors over the next several weeks (maybe until the October Fed meeting) will need to be selective in picking their stocks and SLR has been a recent favorite. With a new $300 mln agreement with IBM to manufacture printer control boards in Scotland and the purchase of a 55K sq-ft production facility from Trimble Navigation to produce global positioning system (GPC) hardware, SLR is positioning itself as a major player in hardware manufacturing. SLR has shown its ability to stand in the face of bearish market momentum and that says a lot but always be on guard for a changing tide. INTC $82.19 -0.06 (-0.81) Many stocks were down yesterday and Intel was no exception. Today however much of the tech sector, including many chip stocks, was up while Intel slipped $0.06. INTC is now resting on its 10-dma once again. We are looking to several positive things to help pull INTC out of its sideways trading trend. First, it now plans to release its "Coppermine" Pentium III processor in October and to bring it out at 700 MHz or better. Analysts had expected the chip to come out at only 600+ MHz in November (a delayed date) so a 700 MHz October release is good news in the race against AMD. The smaller, faster chip will also have 256 Kilobytes integrated with the chip. Second, Intel has just shipped prototypes of its next generation processor, the Merced chip. Third, INTC will lay out its plans for entering the lucrative communication chip market at the Intel Developer's Forum this week in California, beginning with a new networking chip. Fourth, the resolution to the server format standard dispute, which we wrote about last week, was finalized over the weekend. And finally, another analyst joined the Intel bandwagon, as Credit Suisse First Boston's Charlie Glavin upped his INTC price target from $75 to $100. ADI $51.50 +1.69 (-0.25) Are you dizzy from watching the market on Tuesday? Well, you wouldn't be if you had your eyes on ADI all day. That's because the stock held its bullish position right up until the close of the trading session. ADI gained $1.69 Tuesday to close the day at $51.50. Trading was on the high side with 1.4 mln shares changing hands. There were some new developments to report on ADI over the last couple of days. First, ADI announced Tuesday that it will launch a state-of- the-art third generation analog to digital converter. The new 16-bit-AD7707 model (which is the company's first thin-film on CMOS method) has be fitted with a complete analog front end. This system has been designed for low-power, low-voltage and low frequency measurements. Second, on Monday Arithmos Inc announced a partnership with ADI to produce its new Digital/ Analog Dual Input DVI flat panel monitor. ADI will supply Arithmos with its AD9884A high-speed digital converter along with its low jitter PLL. The results of this partnership are to provide customers with a cost effective monitor, of the highest image resolution. Furthermore, the new markets are expected on the market soon. Look for an entry point intraday if the market continues on Tuesday's bullish finale or watch the 10-dma at $49 on any pullback. SUNW $79.50 +3.88 (+3.31) Although they deny they are going after Microsoft, Sun Microsystems took a giant step forward today after it was announced they were buying Star Division, a German supplication software provider. Sun announced they were launching the StarPortal, which will provide word processing, presentation graphics, spreadsheet and other office software tools. This sounds similar to the "Microsoft Office Suite" products if you ask us. SUNW has pulled some heavy hitters in to help in the effort too. Names like AT&T, America Online and Bell South will be involved. In the news, Reuters reported this morning that Merrill Lynch added SUNW to its Focus One list. If you entered a position in Sun yesterday you may have gotten stopped out late in the day after SUNW dropped to a low of $75, which was the support level mentioned in the Sunday update. But Sun gave us another opportunity to join in this morning on the announcement of the Star Purchase, as volume today expanded to over 17.6 mln shares. If you have not entered a play in SUNW, we believe there is more room for the computer maker to advance, market willing, as it made a new 52-week high today at $80.63, closing in the high end of its range for today at $79.50. Pick your points carefully and assess your risk profile before enter a new play in SUNW. QCOM $192.19 +9.19 (+8.44) QCOM gave us the consolidation we mentioned yesterday and today it gave us a chance to jump in with both feet. Just after 2 P.M. EST buyers emerged, driving shares of Qualcomm higher to finish the day up over 5% for the session. Again we will remind you that we will take a positive move anytime, however volume was very light on the advance at only 3.98 mln shares. The move may be for real as QCOM is closing in on its 52-week high of $198.63, however it may also be end of the month "window dressing". If QCOM can sustain the strength from the last hour of trading, we would look for it to make a run at the previous high made last Thursday. Initial support is in the $186 area. Qualcomm did receive good news yesterday in its ongoing litigation against Motorola. A District Court Judge in San Diego ruled that Qualcomm's "Q" phone does not infringe two Motorola patents on the appearance of Motorola's StarTAC phone. The Judge basically said that the "Q" phone is an original design and Motorola does not own exclusive rights to the clamshell form for wireless phones. There is still pending litigation between the two communications giants which we will have more on later. Until then keep your stops close on QCOM and have patience as the lack of liquidity could provide us with a volatile rest of the week. DCLK $99.88 +5.13 (-3.25) As we suggested Sunday, patience would be required this week. Yesterday shares of DCLK fell through intraday support levels dropping $8.38 to $94.75 on light volume of just over 2.0 mln shares. DCLK regained its composure somewhat today picking up $5.13 in the final two hours of trading. The Internet index had softened in the past three sessions, however we believe with the strength in the broader markets the last hour of trading today, that DCLK will provide us with an opportunity to buy calls. DCLK was up over 20% last week so some profit-taking is to be expected. The fundamentals concerning DCLK have not changed. It is still adding new clients daily, the Lycos deal is still in the works and DCLK still maintains a 33% market share in its industry. As volatile as the Internet sector is, patience is always a virtue. We encourage waiting for the right time to enter a play on DCLK. If we get an advance in the major indices going into the weekend, chances are the Internet sector will join in. EXDS $80.38 +4.25 (-2.38) Let's see. . .trading range between $75 and $83 in 2 days. . .yep, it's volatile. BancBoston Robertson Stevens reiterated their Buy rating on Exodus and updated their twelve-month price target to $138, based on 25 times fiscal year 2000 revenues. They cited increasing demand for outsourced business to business access, and application services. The total of which they expect to grow to $36 billion by fiscal year 2001. While the coverage was nice, it appeared to have no effect on the stock. The real cause for EXDS's movement has been directly related to the schizophrenic bond rate, derived of last week's "Greenspooking" and Tuesday's accidental pre-release of NAPM figures. EXDS broke south through previous support of $81 quite easily, which should have stopped you out if you were already in the play. Over the last 2 days, the lower range support has moved up a bit from $73 to roughly $75. Volume has come into the stock on both those occasions. Resistance is still way up $86. With the high volatility associated with this play, we suggest target shooting at a level which suits your personal risk profile. After gaining back $5 this afternoon from its low, don't just blindly buy this at the open tomorrow. Wait for a pullback to get in. We still have to get through Friday's employment report before the real fun begins. ERTS $68.63 +1.69 (+0.69) Losing only $1 yesterday on just two thirds its ADV, ERTS traded right at its ADV today, returning $1 worth of cake plus $0.69 in frosting, to eke out (by $0.31) a new closing high. We'd like to see the volume increase if were going to hold and exceed these levels. Technicals, though still positive, are starting to wane a bit. With 95% of the stock under institutional ownership, support near this level is pretty good. Feel free to add to or get into position with any market strength - ERTS has a strong selling season coming up. Just protect the downside with a stop loss order in case the market heads south, or (gulp!) money managers sell to capture profits. Remember, Friday is employment figures day, which may cause jitters until then, or real damage if the news isn't well received. Conservative types should wait for a clean breakout over $70 with volume. CSCO $67.81 +1.06 (-0.69) "CSCO will still move with the market on a short-term basis. "Greenspooking" could put the brakes on even this play." No sooner had we said that on Sunday, when on Monday, CSCO began a descent with the rest of the market in response to investors' belief that another rate hike was indeed on the way. That $68 support level gave way quickly, as CSCO descended to $66, where it again found a measure of support. But there is nothing like strong positive news to help a company gain support in down market. That's just what we got this morning, as CSCO announced a $2 bln deal with IBM over the next 5 years, wherein CSCO will buy network hub and router technology, chip technology, 200 patents and computer services from the Big Blue Behemoth. After rising up to $68.63 on the news this morning, CSCO took another nosedive to $66, where it again found support for the second time in as many days. With jitters plainly visible on the street until after the employment figures release, our suggestion is to target shoot CSCO on any weakness and don't look for any huge profit this week. With what we think will mark the return of buyers next week, CSCO should rally with newfound volume. If you do get in, just be sure to set a stop loss in case the market does its best imitation of Chernobyl Nuclear Power Plant (meltdown). JDSU $106.06 +0.34 (-4.13) OK. . .yesterday was ugly and today didn't give us too much of a recovery. Volume was well below its ADV on both days. With inherent volatility, we still continue to caution those with weak stomachs to pass up this play, though we still love this company. Apparently, others do too. Gruntal & Company upgraded JDSU to a Strong buy from a Buy and readjusted its price target from $120 to $185, citing strong sector dynamics and expected earnings. Not only that, SG Cowan initiated coverage with a Strong buy and $130 price target. No matter, support came today at $103, from which it recovered well. Resistance is way up at $120. Interest rate sensitivity may keep JDSU wobbly until Friday's employment figures announcement. Like CSCO, target shooting according to your own risk tolerance will make for the best entry. Unless we get some positive news to break the interest rate stranglehold, the return of buyers from vacation next week will likely yield the profits we'll be looking for. Of course, protect your downside with a stop loss until then. We've seen too many examples lately of what can happen when you say "everything's fine - I'll just be gone a short while". SFA $51.25 -1.06 (-0.19) The eight day run of SFA finally came to an end today as inflation fears were just too strong. We guess you could say that today's slight pullback in the stock was not only expected but healthy. SFA had managed to fight off the broader market moves earlier in the week and set a new high for the eighth straight day. There are few stocks that could make this claim during the same time period. As a momentum play, SFA has worked out beautifully. We expect this run to continue as the market adjusts for inflation fears and investors buy back into the market. Continue to look for more volatile trading sessions in the near future, if history is any indication of the future, SFA should be able to hold its ground. Wait and see if Scientific Atlantic can bounce back from this slight stall and continue its path to new highs. For those looking to open new plays, today's pullback may be the entry point you're looking for. Confirm the direction of the stock before placing a trade and use the recommended stops to protect yourself from profit-taking. LXK $78.75 +1.13 (-1.44) Scared you today, didn't we? From Mondays open at $80.94, to today's low of $75.13 we got a near six point scare. Hopefully you hung in there, as we closed above our support of $77. If you got stopped out, you should have made a nice profit also. So are we at a buying opportunity, or starting a new downward trend? Remember that these swings are expected. The volume is anemic and we'll stay in this mode until around next Tuesday. If you can manage the swings, patience may prove profitable. The close above support today is a good sign and we're hoping that it continues tomorrow. Of course, you want to be cautious in choppy water. Don't over do it and confirm the conditions before hurting yourself. LXK is striving to be leaner and meaner. They announced Monday the installation of Digital Market's, Digital Buyer software to help LXK cut costs and better manage their production facilities. Just in time, as the companies demand for their popular color inkjet printers explodes. So much so that they are breaking ground for a new plant in Chihuahua, Mexico. Keep it up LXK! HGSI $68.06 +0.13 (+0.69) We have potential! Yesterday we temporarily broke out of the low momentum range and touched a high of $71, so we know we can do it. We couldn't hold it though as the uncommitted, interest worried, inflation jumpy market beat us down. Oh well, we don't recommend ever fighting the momentum! We'll simply use this as an opportunity. Because of the low volume, HGSI has dipped very close to our support of $66. An opportunity for the speculative at heart! Recent news articles point out that the race is heating up between the four companies in the Human Genome project. They are Celera, Incyte, Millenium and Human Genome. Within two years, the industry expects some remarkable break through from these companies, of which HGSI is a part. Investor interest is also picking up as a result of this news. Now let's look for market cooperation. Some volume and positive direction would be nice. Confirm both of these before starting any new plays! ***** Play updates continued in section three ***** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Tuesday 8-31-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. *************** Calls Continued *************** BVSN $99.56 +2.19 (-4.56) Yesterday the markets chart looked like at least an intermediate downhill ski slope. Unfortunately this run was enough to take BVSN down with it. With a stock like BVSN, one that has a high standard deviation in price movement, it necessitates stops to protect your profits. Only you can determine the best location for these, based on your risk profile; however, make sure you have them. Hopefully most of you were able to protect the profits at the high level. Use extreme caution at this point, since we have broken out to the downside of our triangle, trend, support and 10-dma. Only re- enter on positive market and stock confirmation. It's always nice when you're the power behind success. BVSN announced that Hewlett Packard's hpshipping.com site was rated #1 in terms of retail revenue, helped in part by BVSN's technology. Interpath also launched their eCommerce suite package that uses the BVSN platform. Anyway, you get the idea. Today's news was packed with customers using the success of BVSN. AMZN $124.38 +5.13 (-4.13) Like a bear walking on thin ice, we are treading lightly, hoping to get some stability and momentum now from this week's stock split. Due to market weakness, AMZN dropped below our 100-dma of $127. The 100-dma support is one of the reasons we entered this play, so the caution light is on. But we are holding this play now for it's possible split run merits. So, here's the question of the day class... What do we do before a split? That's right, we surely won't hold over it so close your position ahead of it. Don't hold over the split! Historically AMZN is not as predictable as most stocks. On the June 1998 split, the stock showed a post split depression and then climbed on the infamous Internet rally. On January 1999 we got a post split depression, a rebound and then the Internet sell-off. So what's in store? Common denominator is definitely a post split depression. After that AMZN could look pretty bearish. Mostly due to current business struggles and increased operating costs. A recent article by Herb Greenburg titled "Has Anybody Taken a Really Close Look at Amazons Latest Quarter?" sheds some light on why we should be very cautious in the future. For now, be cautious into the split. Let the market and the stock work together in a positive direction before playing. **************** PICK NEWS - PUTS **************** WLP $72.88 +0.00 (-2.38) Right on schedule, WLP broke through their short-term support at $75 on Monday. This opened the door for a new wave of selling which brought WLP to a low of $72.63. Once again, there was no news to report which means we will probably stay in this trend for awhile. It would not be surprising to see WLP jump back to the top of the range before finding resistance from the 10-dma. This should then be considered for a new entry point. Our target for stronger support will be at $70 where the stock has bottomed out four times in the Spring of 1999. T $45.00 -1.00 (-2.50) If you haven't heard by now, the big news affecting T's stock price is not only market sentiment but its latest 7 cents a minute long-distance plan. T dropped the price of long-distance calls to compete with rivals Sprint and Worldcom in acquiring new long-distance customers and to stifle the exodus of current customers seeking cheaper rates. T's new plan will allow customers to place a 7 cents a minute any time of the day, or night, seven days a week. A monthly fee of $4.95 will be charged for the plan if the customer currently use T for his or her residential services and a $5.95 charge for customers who do not. AT&T plans to market the new long-distance service, by emphasizing its straight forwardness and simplicity. However, many traders perceived this price cut as a green light for further pricing declines within the industry and to be the catalyst for a price war. There are serious concerns whether or not the new pricing structure will cut into T's bottom line, thus hampering the growth of the stock. Furthermore, current market sentiment initiated by more worries over interest rate hikes by the Fed is working to propel T's stock to further weakness. Right now T is experience trading resistance at its 10-dma of $44.79, and is still below its 50-dma of $45.19. Tighten your stops to protect your profits. ANF $35.25 +2.31 (+1.88) We're holding onto this put play but are expressing some caution. Recent analyst comments slightly affected the stock's share price this week. On Monday, Parker Hunter started a new Buy and issued a target price of $46. Then today Robinson & Humphrey initiated a short-term and long-term Buy with a target price of $47; followed by Raymond James Financials citing back-to-school sales and solid company fundamentals for their justification of upgrading ANF to a Buy from Accumulate. Nonetheless the rising interest rates and inflation fears are still concerns amongst investors and the retail sector is weak overall. So if ANF is still on your play list, put as many odds in your favor. Wait for ANF to drift back towards its near-term lows of $33 for better proof of the stock's direction and look for a negative market sentiment to boot. WCOM $75.75 -0.31 (-0.75) Time to exercise a bit of caution. WCOM is nearing that support area around $73-$74 where it has bounced firmly in the past. Now's a good time to start taking some profit. Technically, if we want to make another WCOM play, it will be a bit safer to wait for a descent below $73 to take a new position. The last 2 days have provided us only small drops of profit, still not a bad thing. But yesterday's minimal loss of $0.44 in the wake of an otherwise ugly day should have raised an eyebrow. In fact, today WCOM announced they would be the preferred data, local calling, voice and Internet services carrier for Xerox in 20 states. "This is a huge vote of confidence for our local service capabilities," said Ed Franklin, vice president of Global Accounts, MCI WorldCom. No kidding, especially after their frame relay woes of 2 weeks ago. Set your trailing stops so you don't give any profits back to the grim profit reaper. Again, enter only on a clean break below $73. TWX $59.44 -0.88 (-2.13) Going down? Ask this question about individual stocks these first two sessions and in most cases the answer is Yes. The real question on every investor's mind is how long this downward trend will continue. For our play on TWX, current market conditions couldn't be better. Today's early release of the NAPM Index numbers, coming in higher than expected, increased fears that the Fed may hit us with another rate hike. These fears, along with the overall weakness of the stock makes the short-term outlook on our play that much stronger. Today, TWX broke through the $60 mark, bringing the stock closer to its next support level around $57. With the help of inflationary fears in the air, see if we have enough momentum to break this level as well. Today, there was a news wire released that you would want to be aware of. Barrington Research Associates Inc. mentioned that analyst James Goss had upgraded Time Warner Inc. to Strong Buy from long-term Buy, based on the stock's decline over the past several months. Take this information for what its worth, and use of the recommended stop loss orders to be safe. JCP $36.25 -2.44 (-3.38) This play only knows one direction, and that direction is down. With investors worried about the possibility of future interest rate hikes, many are heading for the exits once again. The latest economic report to fuel the fire was today's early release of the NAPM Index figures that came in above expectations. As inflation fears increase and slower than normal summer sales for retailers continue, the outlook for our play on JCP is very good. Just this afternoon an article was released stating that analysts expected retailers to report sales below expectations for the four weeks ended August 28. Upon release of the article, shares of JCP tumbled, closing the day just above its 52-week low at $35.38. Now the question is whether we have enough momentum to break through this next support. Even though the cards are in our favor, take precautions and keep your stops tight, just incase the stock decides to bounce. ************** NEW CALL PLAYS ************** TXN - Texas Instruments Inc. $82.06 +1.69 (+2.56) Texas Instruments is a global semiconductor company and a leading designer and supplier of digital signal processing solutions. TXN has a 45% share of the market for digital signal processors. DSPs convert signals such as sound and light into digital form and are used in cellular phones, VCRs, camcorders, cars and modems. The company also makes analog chips, logic chips, microprocessors and micro- controllers. It's pioneering digital light processor uses tiny mirrors to create an ultrasharp display for TVs, PCs and movie theaters. Once again TXN has caught our eye as a call play. With all the volatility in the market lately sending most technology stocks lower, our new play has held its ground and actually managed to reach new highs. Closing today at a new 52-week high, we feel TXN is poised to extend these gains. With the NASDAQ bouncing at the end of the day, many investors are feeling that the sector may be oversold. With technology stocks making up a good portion of the market sell off, if they come back, look for Texas Instruments to lead the way. Technically speaking, the stock has established a base for the past week trading within a range of $80-$80.25. Today the stock broke through this base leaving the question of how high will it go. Because of the fact TXN reached a new high and market conditions remain volatile, confirm the market direction before placing a trade. As a reminder, for your protection use the recommended stop losses. There has been a lot of news on TXN lately, the latest being today. This afternoon, TXN said it completed its previously announced $435 million stock swap acquisition of Telogy Networks Inc., a closely held provider of embedded communication systems. The company said the acquisition will strengthen its presence in the Internet telephony market, which uses Internet technology to send voice and data communication over the Internet. Monday, an article was released that TXN announced the addition of MystiCom's MystiPHY110 digital Ethernet physical interface to its digital signal processor (DSP)-based TImeBuilder(TM) ASIC portfolio. Combined with Texas Instrument's world-leading DSPs, the PHY will enable TI networking customers the ability to integrate multiple Ethernet PHYs onto a digital MAC, making it ideal for applications such as network interface cards (NICs), hubs, routers, switches and systems capable of sending voice- over-the-Internet (VOIP). BUY CALL SEP-80*TXN-IP OI=3200 at $4.25 SL=2.75 BUY CALL SEP-85 TXN-IQ OI=3074 at $1.88 SL=0.75 BUY CALL OCT-80 TXN-JP OI=2739 at $6.88 SL=5.25 BUY CALL OCT-85 TXN-JQ OI= 229 at $4.25 SL=2.75 Picked on Aug 31st at $82.06 P/E = 71 Change since picked +0.00 52 week high=$82.06 Analysts Ratings 13-8-5-1-0 52 week low =$22.69 Last earnings 06/99 est= 0.80 actual= 0.92 Next earnings 10-19 est= 0.43 versus= 0.41 Average daily volume = 3.40 mln Chart = http://quote.yahoo.com/q?s=TXN&d=3m ****** MSFT - Microsoft Corp. $92.56 +0.31 (-0.69) Like the monolith in 2001 A Space Odyssey, Microsoft Corp. seems to be the guardian and overseer of the ever expanding computer industry. Initially providing us with state of the art operating systems, MSFT has also expanded to provide applications and software to service operating systems, software development, business, server and Internet. The company is ever vigilant in finding new and expanding niches and appears to be leading the way in "enhanced services" as the computer and Internet markets grow. With a year to date growth of 26% and revenues topping thirteen billion, Microsoft is positioned to continue as guardian of the high tech universe. Lately the market has been low volume, doom and gloom. But some analysts are increasingly stating that a tech rally is looming in the wings. MSFT is fundamentally and technically ready to participate in this rally. The market weakness has provided us with a possible entry point close to support at $90. A convergence of our 10 and 50-dma's could very well be our spring board into the post Labor Day rally. The catalyst for the rally which brought MSFT out of consolidation was a court decision that sided with MSFT in Sun Micro's case against them. This was followed by positive analyst comments and MSFT was off and running. In addition to this, MSFT is ranking high in combination of momentum, value and safety. A slight breakout in the MACD is indicating that when the market rallies, MSFT should participate nicely in the tech recovery. Because we are still late in the summer doldrums, use caution. Wait for the market and MSFT to confirm positive direction before trading MSFT. With MSFT always reporting more news than we can print, we'll give you the exciting tid bits. Well MSFT and SAP are working on solutions to get you more mobile than ever. As our fast paced world necessitates the ability to have our desktop conveniences on the road, these two companies are allowing the Windows CE 3.0 and Biz talk to access SAP applications using any mobile device. Another great breakthrough is MSFT's Microsoft Reader. A software application to help us get rid of those red computer eyes. The goal is to transform the screen to a more readable medium similar to paper. This will expand the opportunity to read books and detailed documents over the Internet in a much more user friendly way. BUY CALL SEP-85 MSQ-IQ OI=20321 at $8.25 SL=6.38 BUY CALL SEP-90*MSQ-IR OI=24419 at $4.13 SL=2.50 BUY CALL SEP-95 MSQ-IS OI=22745 at $1.56 SL=0.50 BUY CALL OCT-90 MSQ-JR OI=15289 at $6.38 SL=4.38 BUY CALL OCT-95 MSQ-JS OI=17825 at $3.75 SL=1.75 Picked on Aug. 15th at $92.56 P/E = 65 Change since picked +0.00 52 week high=$100.75 Analysts Ratings 14-17-1-0-0 52 week low =$ 43.88 Last earnings 06/99 est= 0.36 actual= 0.40 Next earnings 10-19 est= 0.34 versus= 0.28 Average daily volume = 25.81 mln Chart = http://quote.yahoo.com/q?s=MSFT&d=3m ************* NEW PUT PLAYS ************* PVN - Providian Financial $77.63 -3.38 (-6.19 this wk) Providian Financial provides secured credit cards to customers with bad credit history. By using a blend of technology and engineering, Providian can customize a range of lending products that offer financial solutions to customers. These products can help clients get borrow money from savings accounts for fees or interest. Providian has full service support centers around the country that provide support for the VISA, Mastercard, home equity loans and high-yield deposit accounts. They have nearly 10 million customers nationwide. If you watched the fall of Bank One last week and have seen what the news has done to the sector, then you already know why we are adding PVN as a put play. The Bank One stock price collapse after warning of an earnings shortfall last Wednesday put a damper over the sector. The warning pointed to declining receivables and net interest margins in its cards unit. This instantly brought downgrades from analysts for all companies in the sector. US Bancorp and Piper Jaffray both cut their rating on PVN. This triggered the latest wave of selling which is taking all major credit card issuers to their short- term lows. Today's close puts PVN in a dangerous technical position. We are well below all major moving averages and only have one target for support at $70. Cautious investors may want to wait until we are below that price. We do want to warn that the charts are pointing to an oversold position which is similar to the broad markets. We will want to watch PVN close tomorrow to see if it shows signs of a relief rally. On the flip side, PVN didn't rally in the final hour like most stocks. Look for further possible downgrades or profit warnings to scare out more investors and make an already weak sentiment worse. BUY PUT SEP-80*PVN-UP OI=436 at $5.63 SL=3.75 BUY PUT SEP-75 PVN-UO OI=294 at $2.94 SL=1.50 Average Daily Volume = 1.50 mln Chart = http://quote.yahoo.com/q?s=PVN&d=3m ****** DOW - Dow Chemical Co $113.63 -4.19 (-6.19) Second only to DuPont, Dow Chemical is a world leader in the production of plastics, chemicals, herbicides and pesticides. They are the number one maker of caustic soda, chlorine, ethylene, polyethylene and polystyrene. Now focusing on its chemical line and biotechnology market, Dow has sold its non- core pharmaceutical, consumer and engineering operations. Dow recently agreed to buy Union Carbide. One warning is all it took to let the air out of Dow Stock. Last Wednesday Lyondell a Houston, Texas based chemical company warned it would miss third quarter earnings, due to rising commodity prices and the cost of raw materials. Shares of Dow fell $6.00 on the news and have continued the decline closing today down another $4.19 at $113.63. The only levels of support for Dow are at its 200-dma at $109.64 and then down near the $100.00 level. Today's decline was on strong volume of 1.7 mln shares, or more than twice its norm. Analysts have not been kind to Dow either with Theodore Semegran of Brown Brothers Harriman cutting his near term rating on Dow from a Strong Buy to Neutral. The Union Carbide deal seemed to impress investors earlier in August as both Dow and Union Carbide rose on the news. Shares of both companies are now trading lower than when news of the merger was announced. In the overall scope of things, we are looking for possible strength to return to the broader markets, after suffering 4 days down. If we get a bounce, the tech stocks should rally first and put further pressure on the cyclicals, hence further declines for Dow and the chemical industry. We would view any further weakness in the chemicals as an opportunity to by puts. At this point there is really nothing holding Dow or the industry up, so we do expect further declines. BUY PUT SEP-115 DOW-UC OI=114 at $ 3.50 SL=$1.75 BUY PUT SEP-120 DOW-UD OI=278 at $ 6.88 SL=$5.00 Average daily volume = 940 K Chart = http://quote.yahoo.com/q?s=DOW&d=3m *************** PLAY OF THE DAY *************** SUNW - Sun Microsystems Inc, $79.50 +3.88 (+3.31 for week) 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. Sunday's Write Up 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. Tuesday's Update Although they deny they are going after Microsoft, Sun Microsystems took a giant step forward today after it was announced they were buying Star Division, a German supplication software provider. Sun announced they were launching the StarPortal, which will provide word processing, presentation graphics, spreadsheet and other office software tools. This sounds similar to the "Microsoft Office Suite" products if you ask us. SUNW has pulled some heavy hitters in to help in the effort too. Names like AT&T, America Online and Bell South will be involved. In the news, Reuters reported this morning that Merrill Lynch added SUNW to its Focus One list. If you entered a position in Sun yesterday you may have gotten stopped out late in the day after SUNW dropped to a low of $75, which was the support level mentioned in the Sunday update. But Sun gave us another opportunity to join in this morning on the announcement of the Star Purchase, as volume today expanded to over 17.6 mln shares. If you have not entered a play in SUNW, we believe there is more room for the computer maker to advance, market willing, as it made a new 52-week high today at $80.63, closing in the high end of its range for today at $79.50. Pick your points carefully and assess your risk profile before enter a new play in SUNW. BUY CALL SEP-75 SUQ-IO OI= 7982 at $5.75 SL=$4.00 BUY CALL SEP-80 SUQ-IP OI= 6647 at $2.63 SL=$1.50 BUY CALL OCT-75 SUQ-JO OI= 3298 at $7.88 SL=$6.25 BUY CALL OCT-80 SUQ-JP OI=10841 at $5.00 SL=$3.25 Picked on Aug 28th at $76.19 PE = 58 Change since picked +3.31 52 week high=$79.50 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 **** Combos and Straddles are in section four ******* ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Tuesday 8-31-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ********* STRADDLES ********* Straddles are used to take advantage of a breakout of the stock, either to the upside or the downside. Buying a call and a put at the same strike price with the same expiration date creates a straddle. An example of creating a straddle would be as follows: Winn Dixie - Stock Price = 39, so the closest straddle would be using the 40 calls and 40 puts, so: Buy 1 WIN Oct 40 call @ 2.00 (This is the Winn Dixie October 40 call for 2 points) Buy 1 WIN Oct 40 put @ 2.50 (This is the Winn Dixie October 40 put for 2.50 points) This straddle has a combined call and put price of 4.50 points to purchase. The cost and maximum risk of a straddle is the amount paid for combined position. Although it could happen, it is highly unlikely that a trader would sustain maximum risk on a straddle. The straddle becomes profitable if the stock moves away from the strike price. In the case above, Winn Dixie has dropped this week, causing the price of the calls to decrease and the price of the puts to increase. The current position is as follows. WIN Oct 40 call price - .25 bid, .375 offer WIN Oct 40 put price - 5 7/8 bid, 6 3/8 offer As you can see, the calls dropped in price, from 2 points originally, to .25 to sell them now. But look at the puts. They rose from 2.5 last week, to 5 7/8 to sell the bid. The combination straddle went from 4.50 to 6.375, or nearly a 50% increase in the price. All this and no directional bias. Now I am sure someone out there is saying, "yeah, but why not just by the put?" You can do that, but I don't have a crystal ball, so I will trade both sides instead. Here is the rest of the positions that were published on Sunday: Symbol Title Bid Ask Last MOB Mobil Corp 105 Straddle MOBJA MOB Oct 105 Call 2.375 2.6875 2.125 MOBVA MOB Oct 105 Put 4.25 4.625 4.125 Not much of a move here yet. Like I have said before, I like to be in these positions for 30 days, because it sometimes takes that long to get a move. Symbol Title Bid Ask Last AAPL Apple Computer 65 Straddle AAQJM AAPL Oct 65 Call 5.125 5.375 5.25 AAQVM AAPL Oct 65 Put 4.5 4.875 4.75 This one went up in premium today, thanks to comments from Steve Jobs about a faster processor in Apples G4 machines. Sometimes straddles will rise in price even when the stock doesn't move much. Its future perception that drives option volatility up. Symbol Title Bid Ask Last DELL Dell Computer 45 Straddle DLQJI DELL Oct 45 Call 5.375 5.625 5.5 DLQVI DELL Oct 45 Put 1.4375 1.5625 1.5 Dell looks like it wants to move higher. Let's hope so as we bailed out of our last position early. Symbol Title Bid Ask Last BAX Baxter International 70 Straddle BAXJN BAX Oct 70 Call 1.375 1.625 1.375 BAXVN BAX Oct 70 Put 4.125 4.5 Baxter is trading lower today even though they have filed patent lawsuits against rival Spectranics. Technically, the stock has broken and closed below its support and next support looks like the 65 area. Symbol Title Bid Ask Last UAL UAL Corp 65 Straddle UALJM UAL Oct 65 Call 3.25 3.625 3.75 UALVM UAL Oct 65 Put 3.125 3.5 2.875 Heres another cheap straddle, that so far, hasn't done anything. I am not worried about the airline industry. There is always something that makes this sector move one way or another. Positions that met profit exits today include: Symbol Title Bid Ask Last WIN Winn-Dixie Stores 33.875 34.1875 34 WINJH WIN Oct 40 Call 0.25 0.375 1 WINVH WIN Oct 40 Put 5.875 6.375 5 I mentioned this one in the example above. It has broken down quite a bit for a 40 stock to go to 34, and soon CNBC will be talking about it. That's the time to get out, when the public starts rejecting the stock. Symbol Title Bid Ask Last DOW Dow Chemical 113.438 113.875 113.625 DOWLF DOW Dec 130 Call 2 2.375 3.75 DOWXF DOW Dec 130 Put 17.25 18 11.25 Heres another one that is very imbalanced, with the stock falling from 130 to a close today of 113.625. Straddle is now worth almost 20 points, from 14 just 9 days ago. Everything else is a hold for now. Straddle Mailbag on Thursday. Buy before the rumor, and sell before the news Tom Gentile ***************** COMBINATION PLAYS ***************** Title: Markets Lack Direction As The End Of Summer Approaches.. Stocks ended mixed Tuesday as the blue chips fell on a surprise early release of the NAPM manufacturing survey while a rally in tech stocks boosted the Nasdaq. ************ MARKET RECAP ************ Monday, August 30 U.S. stocks fell lower Monday after an unfavorable report from the Commerce Department on sales of new homes. The Dow was down 176 points at 10,914 and the tech-driven Nasdaq index fell 46 points to 2,712. The 30-year U.S. Treasury bond's price swayed investors, falling 1-1/8 while its yield climbed to 6.06%, well above the psychological 6% level. Sunday's new plays (positions/opening prices/strategy): Advanced Micro AMD JAN15C/SEP20C $0.00 debit diagonal Qualcomm QCOM JAN140C/150C $7.25 debit bull-call Conexant CNXT OCT60C/SEP70C $9.00 debit diagonal Elect. Imaging EFII OCT45C/OCT55C $8.12 debit bull-call Intuit INTU OCT70C/OCT80C $8.50 debit bull-call Most of our new "readers write" plays were off to a good start. All of the positions were available at-or-below the suggested target prices with the exception of AMD. Advanced Micro Devices was a bullish diagonal spread based on the premium disparity in the JAN-$15 call but the market-makers were quick to adjust the position on Monday morning. The best available debit ($6.25) was well above our target price of $4.50 and also more than the spread (between the strikes), which means the play would have no upside defense for the first month. The overall position can still be profitable and occasionally, we will we open that type of spread on the long-term plays. In this instance, it was just too far above our recommended entry position and the disparity was clearly gone. Portfolio plays: Coulter Pharmaceutical (CLTR) was our "play of the day" as the stock dropped more than 30% Monday amid fears that approval of its lead product, an experimental drug for treating lymphoma, could be delayed. In a statement, the company said the FDA had requested modifications to the marketing application filed two months ago for the drug, known as Bexxar. Investors feared the news might be a sign that marketing approval could be delayed and they starting selling even before the official open. The stock was down $10 when options started trading and our (OTM) calendar spread closed easily for a 100% profit; $1.38 credit. Most of the portfolio held up well under the selling onslaught but there are some current positions that need to be watched closely based on new technical indications. Dupont (DD) has moved to recent lows near $65 and a close below that price may signal another down-leg. Our January calendar spread at $70 is profitable now and can be closed for a $3.75 credit. National Semiconductor (NSM) and Novell (NOVL) have fallen back from recent highs and also appear headed for lower territory. NOVL is slightly below break-even while NSM is almost $6 ITM and they are both November positions. We have plenty of time to recover any losses but it may be prudent to use any rallies to exit early and move on to the next play. IMC Global (IGL) and Rite-Aid (RAD) are also in the "early exit" category and we are considering the sale of the long options in each of these positions. International Paper (IP) is treading water near recent lows and with the stock poised for a trip to $45, we suggest that you consider closing early. Our position was closed last week (8/25/99 - Portfolio Plays) when the option volatility fell significantly. There were some positive movers in the spreads section but they were few and far between. Johnson and Johnson (JNJ) and Proctor & Gamble (PG) managed to move higher (as safety issues usually do during market sell-offs). Microchip (MCHP) continued to lead the chip sector, climbing $0.75 to $55 and two of our long-term positions, Solectron (SLR) & Medtronics (MDT), also achieved minor gains. Tuesday, August 31 Stocks ended mixed Tuesday as the blue chips fell on a surprise early release of the NAPM manufacturing survey while a rally in tech stocks boosted the Nasdaq. The Dow Jones industrial average fell another 84 points to 10,829. The Nasdaq gained 26 points to 2,739 while the S&P 500 stock index slipped 3 points to 1,320. The price of the 30-year U.S. Treasury bond fell 1/8, pushing its yield up to 6.07%. Portfolio plays: We had some major movers today and Echostar (DISH) was one of the leaders, moving $8 higher to a new trading range above $80. QualComm was one of our new stars, climbing almost $10 to $192. Many of our high-tech and Internet issues also rallied including BroadCom (BRCM), Doubleclick (DCLK), Solectron (SLR) & Sun Micro (SUNW). A few smaller stocks issues rebounded as well; National Semiconductor (NSM) and Novell (NOVL) moved higher (those rallies we spoke of?) while Pacific Gateway (PGEX) held its ground at $20. Oil stocks made nice recoveries across the board and Baker Hughes (BHI) was a leader in that group, up $1.38 to $34. The short-term calendar position can now be closed for a $0.75 profit. Our plays on Chevron (CHV), Diamond Offshore (DO), Halliburton (HAL), Noble (NE), Exxon (XON) and Unocal (UCL) all benefited from the rally. J.P. Morgan (JPM) tested $130 a few times before finally closing near $129. There may yet be hope for this bearish play and we are monitoring the position daily. Our break-even is near $132. Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** CS - Cabletron Systems $16.80 *** A New Trend? *** Cabletron Systems develops, manufactures, markets, installs and supports a wide range of standards-based local area network and wide area network connectivity hardware and software products including intelligent switches and hubs, remote access devices, and sophisticated management software. CS delivers products to address the full range of networking technologies, including Ethernet, Fast Ethernet, Gigabit Ethernet, token ring, fiber distributed data interface, asynchronous transfer mode (ATM), integrated services digital network and frame relay. It appears that Cabletron is finally on the road to recovery as the stock broke-out to a new 52-week high today on heavy volume. Some say the new trend is based on the rumors that Nortel is in talks to buy the company. Other potential suitors mentioned in recent months include Ericsson and Nokia. These telecom firms have yet to invest in a data company and could benefit from CS's products. CS has been the focus of mergers many times in the past and the company CEO says he is open to any favorable partnerships. He plans to focus on the hot service provider market; technology for high-speed Internet access and will continue selling their network equipment to corporate offices. Cabletron also expects to spin-off its Spectrum software unit in order to concentrate on the remaining parts of the business; hardware like routers and switches. In time, the company plans to gear its services toward the connection between local area and wide area networks. The company is also looking at Web outsourcing, which includes renting software over the Internet or hosting Web content. Traders have been very active in this issue and that has left us with some attractive positions in the options market. PLAY (aggressive - bullish/diagonal spread): BUY CALL OCT-15.00 CS-JC OI=5938 A=$2.93 SELL CALL SEP-17.50 CS-IW OI=1325 B=$0.75 INITIAL NET DEBIT TARGET=$2.00 TARGET ROI=20% PLAY (LEAPS/Covered-Calls): BUY CALL JAN01-15.00 ZCJ-AC OI=1602 A=$6.12 SELL CALL SEP99-17.50 CS-IW OI=1325 B=$0.75 INITIAL NET DEBIT TARGET=$5.12 TARGET ROI=120% (18 months) Chart = http://quote.yahoo.com/q?s=CS&d=3m ****************************************************************** OXY - Occidental Petroleum $21.69 *** Speculation! *** Occidental Petroleum develops, produces and markets crude oil and natural gas; engages in interstate and intrastate natural gas transmission and marketing; and manufactures and markets a variety of basic chemicals, petrochemicals, polymers & plastics and specialty chemicals. OXY conducts its principal operations through three subsidiaries: Occidental Oil and Gas Corporation, MidCon and Occidental Chemical Corporation. The most current rumor in this issue is that Chevron (CHV) will resolve a legal battle with Occidental by purchasing the company. The Wall Street Journal recently reported that a legal dispute, which involved past acquisitions by the two companies, has cost Chevron nearly $1 billion and they are running out of appeals. The companies would not comment but the WSJ said analysts said Chevron could pay a premium of 30% to 50% over OXY's stock price and still come out ahead by getting rid of the legal judgment. The purchase would give Chevron "substantial chemical assets and add huge reserves in a California field where the company already is active. One the down side, a unit of Occidental Petroleum has recently agreed to pay $7.3 million to resolve claims that it underpaid royalties owing to the government for oil produced on federal and Indian lands. The settlement will resolve allegations that OXY systematically under-reported the value of oil it produced and thereby paid less in royalties than it owed. This position is based on the current premium disparity in the front-month options and the expectation that any agreement with Chevron will not be made this month. The short-term resistance near $22 should hold the stock price in-check for three weeks and we expect to move the position to a diagonal spread at the September expiration. PLAY (speculative - bullish/calendar spread): BUY CALL JAN-22.50 OXY-AX OI=2065 A=$1.50 SELL CALL SEP-22.50 OXY-IX OI=149 B=$0.31 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=OXY&d=3m ****************************************************************** MNTR - Mentor Corp. $23.37 *** Technicals Only *** Mentor develops, manufactures & markets a wide range of products for the medical specialties of plastic & reconstructive surgery, urology and ophthalmology. Plastic surgery products include surgically implantable prostheses for cosmetic and reconstructive surgery, principally breast implants and tissue expanders. Urologic products include disposable products for the management of urinary incontinence and surgically implantable prostheses, principally penile implants for the treatment of chronic male sexual impotence. Last week, Mentor agreed to sell the majority of its ophthalmic equipment business to Xomed Surgical for about $21 million in cash. Sales of products included in the deal were $20 million; roughly 10% of the company's total sales of $202 million during this year. Following the announcement, Medtronic (MDT) agreed to acquire Xomed Surgical Products for about $800 million in stock, creating one of the largest maker's of surgical products. This most recent news could be seen as beneficial or detrimental, depending on how you view the future of the company; increasing industry competition or potential merger candidate. Regardless, the current technicals are favorable and a reasonable amount of resistance exists at the sold strike. We are going to open this spread only if it becomes available at a $0.75 debit, to limit risk. PLAY (aggressive - neutral/calendar spread): BUY CALL OCT-25 MNQ-JE OI=26 A=$1.25 SELL CALL SEP-25 MNQ-IE OI=46 B=$0.37 INITIAL NET DEBIT=$0.75 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=MNTR&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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