The Option Investor Newsletter Thursday 9-2-99 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) ************************************************************ 9-02-99 High Low Volume Advances Decline DOW 10843.20 - 94.70 10934.10 10732.70 687,703k 834 2,077 Nasdaq 2734.24 - 16.56 2750.82 2698.18 833,036k 1,420 2,354 S&P-100 693.71 - 4.50 696.77 684.82 Totals 2,254 4,431 S&P-500 1319.11 - 11.96 1328.48 1304.80 33.4% 65.6% $RUT 427.42 - 3.57 430.99 425.48 $TRAN 3077.78 - 26.66 3103.59 3050.85 VIX 25.44 + 1.70 28.11 25.02 Put/Call Ratio .69 ************************************************************* Recipe for disaster. Would everyone who would like all the Fed heads to stay off the airways and keep quiet, please call 1-900-NO-SPEAK and we will use the $1.00 contribution to pay the Fed heads to be seen and NOT heard. In case you live under a rock and did not hear, the market tanked again today after Fed member Edward Kelly said "it would be premature to assume the Fed is done raising rates for this year. The Fed remains intensely vigilant in seeking out inflation and monitoring U.S. asset price bubbles." That coupled with earnings warnings from several high profile name knocked over -200 points off the Dow in the first hour of trading. The good news was the rebound off 10740 not once but twice and the appearance of strong support at this level. The Nasdaq also dropped over -50 points but came roaring right back to finish only -16 for the day. Besides the verbal thrashing the market got from Mr. Kelly, the minefield of earnings warnings took its toll as well. Starting off the morning was Dow component Sears with a strong warning that they would miss estimates substantially due to slow sales and increased competition. Sears promptly dropped more than -10% to a new multiyear low. Rumors began circulating that Sears was in danger of being dropped from the Dow. OOPS! Right behind Sears was Martin Marietta Materials with a warning of their own. Citing lower construction demand and the impact of hurricane Dennis on coastal quarries they said the drop could be as much as -.19 per share. Rounding out the trio of market bombs today was JC Penny who announced their version of the "poor business blues" after the close. Batten down the hatches people, we are just getting started and this earnings warning season and storm clouds are in the forecast. Yes, the market cratered on news events today but the volume was lousy and nobody still trading this week wanted to place any big bets the night before the August non-farm payrolls. Take equal parts of sharply rising wages in July, production slowing, earnings warnings and negative Fed speak. Mix together and simmer overnight. Tune in at 8:30 ET tomorrow and see if your recipe turned into a breakfast, fit for a king, or a serving of rotten eggs. With labor costs last month up +4.5%, the highest in five years, investors are hoping it was a statistical abnormality. If so then costs should drop in tomorrows report and average out safely. Back to back spikes in the labor costs would guarantee another rate increase and a retest of recent market lows. Reports out today showed that productivity for 2Q had dropped to only +.6% instead of the +3.6% previously. Productivity was the focal point for no rate hikes for months as higher productivity and low wage increases provided Mr. Greenspan with a puzzling picture of inflation growth. With the numbers turning negative on this recent trend the Fed is likely to react strongly and maybe one more increase in October is not enough. Numbers very far away from the estimates in either direction tomorrow may have you reaching for the Rolaids to help this meal go down better. Other major market events include the continuing dollar/yen battle. Cheaper dollars make goods imported into the U.S. more expensive. This is another thorn in the bulls hoof. After the close today a high ranking Japanese official with the nickname of Mr Yen, because of his influence on the Yen, came out against a stronger Yen at this time and raised the possibility of government intervention to prop up the dollar and ease the building concern. IBM declared war on Intel again today. IBM announced a new chip for networking which is programmable even after it is installed. IBM claims it's chip is superior to the Intel chip announced earlier this week but what else would you expect? IBM claimed it was dedicating 350 scientists and engineers to this chip project. IBM does not want a repeat of the microprocessor saga. One company, Intel, captured almost the entire market and everyone else was captive to their architecture for a decade. Micron (MU) was upgraded by Gruntal today and they said it was possible for MU to double again in the next 12 months, even after the great run they have already had this year. The reason for the upgrade was the rise in memory chip prices. The price for a 64 megabit chip is now around $10 and up from lows of around $4. This represents the demand placed on memory by Internet and networking applications. If you liked Qualcom at $193 on Tuesday, you have to love it at $157. After an almost $40 haircut on negative comments by one analyst, the stock tanked big time on profit taking from it's recent record run. It is amazing since the analyst is still expecting great things from QCOM and his estimates are +.01 over the street average. He just said that cheaper cell phones may put pressure on margins and QCOM simply may not be able to beat estimates by as wide a margin as in the past. We spent a lot of time researching QCOM to decide if we should drop it tonight and could find no valid reason. If you look at the volume in the sell off and the very heavy volume today on the dip which was met by heavy buying then we feel you will agree. This COULD be an incredible buying opportunity BUT sentiment is the key. The business did not change, just the view of one analyst. BUT, if it does continue down, DO NOT HOLD IT! Never fight the trend. The key for tomorrow and next week is simply the non-farm payroll report tomorrow morning. That will be the signpost. The next mile markers will be the PPI due out next Friday. Cautious investors should wait until next Tuesday before starting any new positions. Traders should be back from end of summer vacations and the market should start returning to some semblance of normal. "Normal markets", now there is an oxymoron. Pick your entry points carefully, sell too soon. Jim Brown Editor *************** Market Posture *************** As of Market Close - Thursday, September 02, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,843 Neutral 7.20 SPX S&P 500 1,320 1,420 1,319 Neutral 8.17 OEX S&P 100 675 735 694 Neutral 8.13 RUT Russell 2000 440 465 427 BEARISH 8.06 NDX NASD 100 2,250 2,468 2,393 Neutral 8.13 MSH High Tech 1,125 1,250 1,192 Neutral 8.13 XCI Hardware 1,035 1,050 1,081 BULLISH 8.24 CWX Software 725 844 811 Neutral 8.13 SOX Semiconductor 515 520 533 BULLISH 8.24 NWX Networking 555 625 576 Neutral 8.13 INX Internet 500 580 428 BEARISH 7.20 BIX Banking 690 710 611 BEARISH 7.23 XBD Brokerage 410 440 382 BEARISH 7.23 IUX Insurance 645 660 592 BEARISH 7.23 RLX Retail 915 960 815 BEARISH 7.23 DRG Drug 360 390 365 Neutral 8.24 HCX Healthcare 740 785 748 Neutral 8.24 XAL Airline 180 190 149 BEARISH 5.21 OIX Oil & Gas 285 310 302 Neutral 8.26 Posture Alert The market continues to be locked in a narrow trading range, as the posture board's closings were almost identical to Tuesday's. Sectors that closed in the green (even though marginally) were Hardware, Semiconductors, Brokerage, and the Morgan Stanley High Tech. Losers were led by Banking (-2.10%), Oil & Gas (-1.40%), and Retail (-1.29%). No changes to the posture board. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** Thursday, September 02, 1999 Who, What, and Where? Waking up this morning and trying to figure out why S&P Futures were down so heavily was the mystery of the morning. Several news and media sources blamed it on weak overseas markets. Others pointed the finger at the dollar vs. yen situation, yet others blamed it on negative pre- announcements by several companies including Sears. Who was to blame? What was said, and where was it stated? The answer for this latest market overreaction was an interview with Fed Gov. Edward Kelley by Market News' Steven Beckner. Kelley made the unremarkable comments that the Fed will "have to watch (inflation) very closely" and that "of course" it's premature to assume that the Fed is done for the year. Well, isn't that special! Is Kelleyspan trying to take over his bosses position, or is he running for political office in the future and needs more name recognition? What about Beckner, the author of "Back from the Brink: the Greenspan Years." Are book sales sluggish? Amazon not pushing your books? This market already took it on the chin from Greenspan this last Friday; there was no new news here. Anyway, you obviously know our feelings on today's sell-off and are probably tired of our sarcasm, so now back to sentiment! The latest Investors Intelligence Survey showed that pessimism is still alive and kicking, and actually increasing. Bullishness decreased 1.6%, and bearishness increased .8%. This is something that we hoped for. The CBOE Put/Call Ratio for equities, indexes, and the OEX are all in bearish territory. From a contrarian standpoint, these statistics are really making a bullish case for the market. However, the interest rate situation still holds the deck of cards. This week, we have seen the 30yr Treasury break the 6% benchmark and are now getting close to the danger zone. The Volatility Index has also broken the key 25 number, and hit a high of 27.81 today. Inflation (and higher rates) hang over this market like a thunderstorm cloud. Combine this with the fact that we are getting close to pre-release season, and you have much uncertainty, so set your stops, and continue to watch the bond. 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 1.4, 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, hitting a high of 27.81. If the VIX continues to hold above this mark, 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, 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 Tues Thurs Indicator (8/27) (8/31) (9/02) Alert Pinnacle Index (OEX): Overhead Resistance (735-780) 134.1 148.0 154.0 Underlying Support (710-730) 1.6 1.9 2.5 Underlying Support (630-690) 3.2 3.4 3.7 Put/Call Ratios: CBOE Total P/C Ratio .6 .6 1.0 CBOE Equity P/C Ratio .5 .5 .9 OEX P/C Ratio 1.1 1.5 1.4 Peak Open Interest (OEX): Puts 640 Calls 720 P/C Ratio 1.24 Market Volatility Index (VIX): CBOE VIX 25.44 Investors Intelligence: Bullish 42.90% * Bearish 31.90% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index OEX Friday Tues Thurs Benchmark (8/27) (8/31) (9/02) Overhead Resistance (735-780) 134.09 148.00 154.00 Overhead Resistance (710-730) 1.59 1.92 2.53 OEX Close 707.97 692.24 693.71 Underlying Support (630-690) 3.21 3.36 3.71 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 Thurs Strike/Contracts (8/27) (8/31) (9/02) CBOE Total P/C Ratio .65 .64 .98 CBOE Equity P/C Ratio .46 .51 .89 OEX P/C Ratio 1.10 1.47 1.36 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (8/27) (8/31) (9/02) Puts 660 / 12,400 660 / 12,350 640 / 11,596 Calls 760 / 7,379 720 / 7,982 720 / 9,329 Put/Call Ratio 1.68 1.55 1.24 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 September 02, 1999 25.44 Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10843.2 -176.04 -84.85 108.60-94.67 -246.96 Nasdaq 2734.24 -46.21 26.66 11.45-16.56 -24.66 $OEX 693.71 -12.73 -3.00 5.97 -4.50 -14.26 $SPX 1319.11 -24.25 -3.61 10.66-11.96 -29.16 $RUT 427.42 -5.09 0.47 3.16 -3.57 -5.03 $TRAN 3077.78 -51.20 -44.05 28.34-26.66 -93.57 $VIX 25.44 1.76 0.27 -1.50 1.70 2.23 Calls Mon Tue Wed Thu Week MU 75.25 0.38 5.63 -2.25 2.63 6.38 New TXN 84.75 0.88 1.69 -0.31 3.00 5.25 Breakout HGSI 71.63 0.56 0.13 3.31 0.25 4.25 Opportunity SUNW 79.94 -0.56 3.88 0.25 0.19 3.75 Battle mode ERTS 70.88 -1.00 1.69 0.50 1.75 2.94 True winner INTC 85.31 -0.75 -0.06 1.25 1.88 2.31 New plans ADI 52.75 -1.50 1.69 2.25 -1.00 1.44 Its crawling VRSN 103.44 3.00 2.94 -0.38 -4.50 1.06 Strong buy GTW 96.75 -0.81 1.56 -1.06 0.88 0.56 Splitting SLR 73.88 0.25 4.25 -3.00 -1.38 0.13 Dropped SFA 51.44 0.88 -1.06 1.06 -0.88 0.00 New highs? CSCO 68.25 -1.75 1.06 1.13 -0.69 -0.25 Entry point UIS 44.13 -0.88 -0.75 -0.50 1.63 -0.50 Bounced MSFT 91.81 -1.00 0.31 -0.19 -0.56 -1.44 Tech rally? LGTO 42.88 -1.78 0.41 1.56 -1.75 -1.56 Gearing up LXK 77.38 -2.56 1.13 0.94 -2.31 -2.81 Waiting JDSU 107.06 -4.47 0.34 3.94 -2.94 -3.13 Holding on PMCS 92.38 -1.31 -1.50 2.25 -2.88 -3.44 Dropped BVSN 99.31 -6.75 2.19 1.94 -2.19 -4.81 Target rise AMZN 60.19 -9.25 5.13 -5.31 0.66 -8.78 Dropped EXDS 73.63 -6.63 4.25 -4.47 -2.28 -9.13 Dropped DCLK 93.50 -8.38 5.13 -6.00 -0.38 -9.63 Dropped QCOM 167.25 -0.75 9.19 -23.50 -1.44 -16.50 Sinking Puts HRB 45.94 -0.94 0.63 -4.63 -5.06 -10.00 New DOW 115.25 -2.00 -4.19 0.38 1.25 -4.56 Consolidate WCOM 74.69 -2.44 -0.31 0.25 -1.31 -3.81 Plagued ONE 38.56 -1.00 -0.88 -0.19 -1.38 -3.44 New JCP 36.44 -0.94 -2.44 1.88 -1.69 -3.19 Gloomy PVN 81.25 -2.81 -3.38 3.75 -0.13 -2.56 Bottomed? WLP 72.75 -2.38 0.00 0.06 -0.19 -2.50 Its sideways TWX 60.00 -1.25 -0.88 2.50 -1.81 -1.44 Extinguished T 47.00 -1.50 -1.00 2.38 -0.38 -0.50 Looks bad ANF 37.63 -0.44 2.31 2.19 0.19 4.25 Dropped *************** PLAY OF THE DAY *************** INTC - Intel Corp $85.31 (+2.31)(+3.06)(+0.19)(+8.19)(+2.56) see details online Chart = http://quote.yahoo.com/q?s=INTC&d=3m **************** 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: ****** PMCS $92.38 -2.88 (-3.44) We have been getting mixed signals from both the market and PMCS lately. As you can imagine, we were discouraged by the breaking of the 10-dma to start the week off but this market is mostly to blame. PMCS didn't fall far either which we take as a positive since it didn't look to have support on the charts until $80. We did have good news on Wednesday to help support the stock when Banc of America started coverage of PMCS with a Strong Buy rating. This pushed the stock back above the 10-dma but its stay there was brief. We are now back below the 10-dma and with a jittery market it is better to say goodbye to our play while we still can. So look for an exit point during an intraday rally. AMZN $60.19 +0.66 (-8.78) It's been a tough few days for Amazon. With the market pounding us from the wrong direction, we really didn't get the run into the split that we would have expected. Needless to say, we are dropping AMZN. Hopefully everyone read the Tuesday update and sold positions before the split. If you didn't and your stops survived this mornings gap down, you may have had some relief with today's slight gain. However, we are dropping AMZN as indicated due to the historical precedence of a post-split depression. That along with the fact that the market is on pins and needles, trying to sort through all the economic information and interest rates. So for now we are following Monty Pythons recommendation to "run away". We'll look for more profitable plays. EXDS $73.63 -2.28 (-9.13) Exodus is heading for the exit. The last 2 days have been torturous for EXDS traders, yesterday from general volatility and today from a lack of it within a lower trading range limited to $3.75. Given today's particularly nasty A.D line, low volume and negative market tone in front of the employment figures tomorrow, we were not surprised to see the $75 support fall back to $72.50, from which EXDS bounced on 2 occasions today. However, it wasn't very convincing. While we fully expect interest rates to rule the market in the short-term, we also expect a new wave of cash and thus buying to show up next week as traders return after the holiday weekend. But with today's drop in volume and lack of recovery at the close, this risky play just isn't exhibiting enough strength to justify the risk. We're dropping EXDS tonight but may pick it up later if it again shows strength. DCLK $93.50 -0.38 (-9.63) Well we are still waiting. For the last two days shares of DCLK have traded for the most part in a narrow $5-$6 range. What we have seen is a softening in the Internet index but not a real down-turn or a blow out. The internet indexes were down again today less than 1%. DCLK and many of the Internet stocks seem to act like they want to move higher and continue the strength they were showing late last week. Just when they look like they may begin to move, someone sneezes concerning inflation or a member of the FED makes a comment letting the investing public know they are still going to be vigilant in their efforts to squash it. We chose DCLK based on the strength in the Internet index as well as the strength it showed at the end of last week. The index is not showing a whole lot of promise as of the close today and neither is DCLK. We believe the long-term potential for DCLK is still good but is somewhat cloudy for the short-term. We will let DCLK go for now. SLR $73.88 -1.38 (+0.13) It appears SLR is beginning to show technical signs of weakness over the last couple of days. The stock closed just below its 10-dma and we now feel that future potential profits do not warrant the risks. So we feel its time to drop SLR from our recommended play list. This stock has performed well for us over the last couple of weeks and has shown great resilience in the ability to out perform the market, even under volatile conditions. As of right now SLR is a drop but we'll keep an eye out for any future profit opportunities this stock can provide. PUTS: ****** ANF $37.63 +0.19 (+4.25) Despite the overall weakness in the retail sector, ANF moved to higher levels over the past two days. The recent analyst comments at the beginning of the week plus another Strong Buy from Prudential yesterday gave ANF the boost that killed this play. There's no question. With all the hype about promising back-to-school sales and ANF's recent trading performance, the chance of ANF moving back towards its near-term lows around $33 is not likely in the cards so ANF is officially dropped. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an Email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 9-2-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** INTC $85.31 +1.88 (+2.31) We told you in Tuesday's letter that INTC would unveil its plans for a new networking chip at the Intel Developers Forum this week. The new chip was introduced the next day and shares of INTC gained $1.25 on Wednesday. Today INTC rose another $1.88, making the 2-day gain about 5%. Investors like the news that INTC is diversifying into the lucrative communications chip market, which is expected to grow about 25% per year. A giant like Intel has the muscle to compete fiercely in this market and some of the existing makers of networking chips sold off on the news. MMC Networks, for instance, fell 13% on Wednesday to add it's 40% dip on Monday and dropped further today. Reportedly, Cisco, Newbridge Networks and Cabletron Systems have lined up to buy Intel's new programmable chip, which will replace the more expensive microprocessors that currently make up the backbone of the Internet. The networking chip will also make networks "faster and smarter". This chip, along with the coming 700+MHz Coppermine Pentium III chip and the Merced chip due out next year, reveal INTC's resolve to push the performance envelope in its battle against AMD and, at the same time, to expand into new growth markets. INTC has established a $200 mln fund, which will provide seed money to small companies working on products compatible with its new networking technology. It also just bought NetBoost, adding to a string of acquisitions (including Level One) that will help the company move into the rapidly growing networking market. INTC will have serious competition, however, since IBM has now also entered the market in a big way with its own programmable network chip. In other news, INTC's decision to slow down its switch to Rambus memory caused Rambus shares to plummet. SFA $51.44 -0.88 (+0.00) Following the broader markets, SFA decided to give back yesterday's gains closing the day in the red. These losses can be attributed to Federal Governor Ed Kelley's statement saying investors should not prematurely determine there will be no further rate hikes. This news along with the fact the stock is coming off new highs warranted investors to take some profits. However, considering recent market conditions SFA has held up quite well, remaining unchanged for the week. If the market turns to the upside, look for the stock to make a move as well, possibly reaching new highs which are at $52.94. Some important economic news is being released tomorrow that may influence our play. Before the markets open, the jobs report for August will be released, so look for another volatile day of trading. For those opening new positions, you should confirm the market direction before placing a trade. TXN $84.75 +3.00 (+5.25) Once again this morning the markets were spooked, this time it was do to comments made by Fed. Governor Kelley. Kelley stated that investors should not presume there would not be additional rate hikes for the rest of the year. This comment sent most stocks lower however, TXN, the resilient stock that it is, dipped briefly then streaked forward ending the day with a new 52-week high. Helping the stock today was the latest semiconductor sales report for July. Sales increased by 19 percent from last year's July sales, brightening investors views towards the sector. Both fundamentally and technically speaking, TXN looks very strong. The stock continues to trade above all its moving averages and is poised to set additional highs. However, because important employment numbers are being released tomorrow morning, choose your entry points selectively, its looking like another volatile day for the markets. Just as a side note, in the news Texas Instruments has been identified by Working Mother magazine as one of the 100 Best Companies for Working Mothers for the fourth straight year. LXK $77.38 -2.31 (-2.81) Like a seal trapped beneath the ice, LXK has not been able to break through the markets icy bearishness this week. The caution light is most definitely on now as we closed below our support of $78. In addition to the support break, we also turned negative on our MACD. It's always good to remember after hours, when the emotions of the market do not play with our decision making, why we are playing this stock. It is because it was added to the S&P 500 and we think that fund manager and institutional interest will propel the stock higher. Well, the fund managers weren't buying today. There's too much uncertainty and lack of volume in the market. Will they buy? Most certainly if they have index funds that need to mirror the S&P 500 but it will be after things calm down and the market chooses a direction. With this in mind, we will take a wait and see approach to LXK, making sure that our profits are protected. Don't start any positions until the market and stock are confirmed. HGSI $71.63 +0.25 (+4.25) HGSI was a stock of opportunity today! It provided us another entry point as it approached our support of $68 early this morning and then gave us over a $3 gain within three hours. The interest (volume), support (confirmation) and direction (profit) were manifest today. So what gave us this resistance to turmoil today? As we've stated in the past, news moves HGSI. Wednesday the Biotech's got an upgrade in price targets and Credit Suisse First Boston upgraded HGSI's price target from $70 to $90. Wa-hoo! Aren't you glad you're along for the ride? But it's still a speculation play so all check your risk tolerance before jumping in. Just keep in mind, the news helped us today but it may not tomorrow. So use stops and use caution! HGSI has been bouncing off support well, so don't start anything new until we return to support and get positive market confirmation. BVSN $99.31 -2.19 (-4.81) Gap up! Gap Down! It's enough to make the most savvy of investors uneasy. That pretty much describes BVSN's movement over the last few days. Wednesday we gapped up over support and slid back to support. Thursday we gapped below support and rose back to it. The problem is we closed just below that support of $101 and turned negative on our MACD. So what's our outlook? We still think that the tech's will rally if we get positive job numbers tomorrow and get through the Labor Day weekend. We also have some great news with today's announcement from Bank of American, raising Broadvision's price target up to $123. Even though our reasons are justified for staying in BVSN, use caution here. The market is very unpredictable as of late. Protect the profits from that uncertainty with stops and confirm market direction before entering any new plays. MSFT $91.81 -0.56 (-1.44) Hey everyone, we're sitting smack dab on support. In fact we couldn't get much closer! Sitting right between our 10-dma at $91.50 and our 50-dma at $92. Let's hope that these two indicators will provide us the safety and support we need in these trying market times. MSFT stayed pretty range bound today between $91.50 and $92.50. It appears to be preparing itself for a post-Labor Day tech rally (at least we hope). We do need to tread lightly, as we do have a negative emergence on our stochastic and, of course, lots of uncertainty in the market. It appears that reasons are accumulating for another rate hike in October however, it may take more evidence than what's been given us so far. Friday's job report should prove critical, as well as the market outlook after Labor Day. In a move to counter Sun Microsystem's announcement of Star Office, MSFT today announced the appointment of Steve Ballmer to head up the online consumer and e-commerce group. All part of their Internet strategy. They are planning to offer Microsoft Office online as part of their Web based productivity suite. They also announced the release of Money 2000, the money management software that will integrate with MSN's online money central, providing one of the most powerful interactive systems available. Be careful and confirm an upward trend in the stock and market before playing. ERTS $70.88 +1.75 (+2.94) ERTS is behaving like a true winner. Technically, this electronics game maker and distributor looks great on the chart, sporting positive MACD, RSI, momentum and stochastic. To boot, ERTS set another all-time closing high on volume 40% greater than normal, while everything around it was going to the dogs. No news to spark the price, but remember that ERTS is 95% institutionally owned, meaning that it's pretty hard for another institution to get a piece of it without paying up. As goes volume, so goes price when there aren't that many shares available. We look for ERTS to continue its ride, since it is just now beginning to sell many Nintendo, Sega and Playstation games for the holidays. Well, now we've seen that clean breakout over $70. If the market cooperates and investors start a buying spree next week, feel free to take a dip. The water looks nice. CSCO $68.25 -0.69 (-0.25) Yesterday, it was hard for any stock to look bad, as volume and prices picked up. CSCO, still riding high on its pact with IBM and recent purchase of Cerant, joined the crowd. Fortunately, it didn't give back much today and is only down slightly this week. The volume is just below its ADV, but with the return of money mangers and traders next week, we expect volumes to rise, giving rise to the stock price too. Trading wise, CSCO nose dived to $66.75 then bounced after the rush hour yesterday, which made a nice entry for the risk takers, especially those who can stomach the negative tone and low volume volatility in front of the employment figures tomorrow. Call it a contrarian entry, where market sentiment is so negative, your experience tells you it won't stay there forever. Tomorrow could be a rocky day though if the employment news isn't well received. You'll want to keep a stop in place, as even CSCO won't be immune to marketwide repricing of equities. However, if CSCO can break through $68.93 with volume, that would make a good entry for the conservative player. Wait for market direction, then make your move. JDSU $107.06 -2.94 (-3.13) The market didn't seem to care much about those price target upgrades to $130 and $185 earlier this week. Technically, though still in the positive, this chart is starting to weaken. Yet, if history is any indicator, JDSU has had a perfect saw-tooth ascent, with this recent 5-day flattening giving us the groove on another tooth. It could be getting ready for another move up. If this were any other company, weakness here would be an issue. However, JDSU has been branded the Intel of the next century, thanks to the photonic-age's dependence on its products. That's a market that will continue to grow. So as long as traders return next week, bringing volume back into the market and we clear tomorrow's employment figures hurdle, JDSU should bounce nicely off 30-day support of $105. We consider this buyable, so long as there is a bounce and the market cooperates. Still JDSU can be volatile; thus you'll need to protect yourself on the downside with stops if it goes much lower. Better to preserve the capital sitting on the beach than to ride the wave under water. QCOM $167.25 -1.44 (-16.50) Plummeted, dropped like a rock, the bottom fell out. That pretty well describes that action for shares of Qualcomm stock on Wednesday. Everen Securities analyst Mark Roberts, met with QCOM management Tuesday and his comments started the ball rolling. Roberts wrote, "Although the company has substantially beat estimates the last couple of quarters, we doubt the company has the ability to exceed fourth-quarter expectations to the same extent." He added "falling prices and a parts shortage may prevent Qualcomm from repeating its performance of the past three quarters, when it topped per-share forecasts by an average of 28 percent. A drop in cell-phone prices has accelerated to as much as 30 percent from 15%-20% during the past few quarters, cutting into QCOM's profit." (Bloomberg) Well that's it in a nutshell, with those comments shares of QCOM opened $4.69 lower and the selling didn't stop until after making a low of $165.13 and closing down $23.50 for the session at $168.69. The selling continued this morning, opening another $7.13 lower and fell to a low of $157.25 in the first 15 minutes of trading. The bargain hunters then stepped in and helped QCOM regain its footing, driving QCOM back up to a high of $172.78 before closing at $167.25 down only $1.44 for the session. We did mention Tuesday that the rest of week might be volatile but we didn't expect this. One bright spot today, analyst Pete Peterson of Volpe, Brown Whealan & Co. reiterated his buy rating of QCOM, with a 12-month price target of $200. After recovering the way QCOM did today we believe this may be a good time to buy calls. Shares of Qualcomm have declined over 18% in two days. QCOM will still have impressive earnings and is still a great stock. So we are looking for a bounce however, only enter on a positive move in the stock, combined with solid volume and please keep your stops CLOSE. SUNW $79.94 +0.19 (+3.75) Let the battle begin. Sun plans to give their software away and now MSFT is intensifying their efforts to "rent" software over the Internet. Earlier this week SUNW said it would acquire Star Division Corp. to obtain StarOffice, which produces word-processing and other spreadsheet software similar to Microsoft Office. But many analysts feel there is very little risk and it poses almost no threat to Bill Gates and company. After making a new 52-week high yesterday at $81.50, SUNW held up fairly well today, especially considering the negative tone in the broader markets by closing up $0.19 for the day on a little better than average volume of 8.9 mln shares. SUNW opened about a $1 lower and fell to support in the $78 area, when the investors stepped in to help make SUNW a bright spot in an otherwise gloomy session. Yesterday SUNW agreed to use Linuxcare Inc.'s software support services for their StarOffice products. If we can get through the employment and wage reports tomorrow without any damage to current positions, Sun Microsystems should find new strength when investors and traders return from vacation next week. If you are not currently in a play on SUNW, we would again suggest patience be exercised until next week. Only consider a new play when you see a positive move in the stock as well as the major indices. GTW $96.75 +0.88 (+0.56) GTW continues to trade sideways and consolidate this week. At times volume has been strong but has also dipped to levels as low as 50% of the norm, mainly due to slow trading ahead of Labor Day. Support remains firm at $95 and resistance is in the fractional proximity of today's high at $97.50. There's only a maximum of 2 days left in this play. GTW splits 2:1 after the bell on September 7th and it's not recommended to hold open positions over that date. If you are still inclined to buy GTW before the holiday definitely play with stops. LGTO $42.88 -1.75 (-1.56) Amidst a tough market, this momentum play continues to consolidate after reaching a new 52-week high at $46.13 last Friday. The 10-dma at $42 is proving to be solid support and an entry into the play. But any obvious movement below this point should raise red flags. Remember LGTO's run-up has consistently stayed above the 10-dma indicator. In all fairness, a more conservative player will wait for a bounce coupled with bullish market sentiment before initiating a position. If you're in the play, it's advisable to set stops. UIS $44.13 +1.63 (-0.50) Today's performance saved this momentum play from our drop list. UIS bounced on moderate volume off support at its 30-dma at $42 and proceeded to bullishly climb for the rest of the day. Another good sign was UIS closed just a fraction away from its daily high. This hints that the stock may have the gumption to flirt with overhead resistance at $46.18 tomorrow. Of course, keep in mind the Employment numbers are expected and this piece of economic date could shake things up. So keep on guard and consider tightening your stop losses to protect against a reversal. In the news, Unisys's ActiveLINC software has enabled Nature's Sunshine, a vitamin and health business, to connect its mainframe order and distribution processing to the Web. Also Premio Computers announced they will now cover their Puerto Rico and North American customers with Unisys acclaimed global on-site warranty maintenance service. ADI $52.75 -1.00 (+1.44) On Thursday, ADI was weaker along with the broad markets and gave back some of the gains it compiled throughout the week. However, even though ADI had a relatively soft performance on Thursday, it still closed above its 10-dma of $50. So technically, the stock still looks like a strong play. ADI has hit three 52-week highs in just over a week and as a whole, sentiment on the stock seems bullish. For example, on Wednesday ADI was up $2.25 to end the day at $53.75. Volume on Wednesday was 120% of average, with 2.35 mln shares changing hands. It is probable that this activity was instigated by the announcement of the new ADP3421 and ADP3410 converter chips. These are the industries first DC/DC converter chips set to incorporate Intel's Mobile Voltage Positioning technology. These chips can lower the power consumption of an Intel mobile processor. This announcement was made at the Intel Developer Forum being held in Palm Springs, California. As a precaution, pay attention to your risk tolerances during this time of market uncertainty. If you are uneasy with the volatility, you should wait until after the Labor Day weekend to open new plays. VRSN $103.44 -4.50 (+1.06) The momentum in this Internet play is still intact despite the slight downdraft today. Dain Rauscher Wessels concurs and upgraded VRSN today with a Strong Buy Aggressive rating. The analyst firm cited the company's business momentum is accelerating, thus providing upside potential for investors. Technically VRSN is now perched on its 10-dma, a point it has recently used as a springboard and the Momentum indicator shows a green arrow. Assuming of course VRSN doesn't tank unexpectedly, this is an excellent entry into this HIGH RISK INTERNET PLAY. For the new readers, VRSN is very VOLATILE during intraday trading and requires your undivided attention. In the news, VeriSign and Ideal Technology Solutions will provide Internet trust services for the Automotive Network Exchange (ANX) enabling auto manufactures like Ford and GM to conduct business-to-business transactions with suppliers. **************** PICK NEWS - PUTS **************** TWX $60.00 -1.81 (-1.44) Want to take a ride on the wild side? That was the picture today, painted by our friend, Fed. Governor Kelley. His statements sent the markets plummeting from the very open and sending investors for the exits. Fortunately, this negative market news was good for our play. On Monday, Time Warner made a technical bounce at $60 but Kelley's words were enough to extinguish any possibilities of a continuing run. Even though we pulled the rabbit out of our hats this time, its questionable of what will happen next. The stock continues to show support at this level so wait until it breaks trough before placing new trades. For those with existing trades, keep your stops tight just in case it decides to bounce. Last of all, there is more important economic news that will be released tomorrow morning. The latest job report numbers for August are expected and will most likely add fuel to the volatile markets, so be careful. JCP $36.44 -1.69 (-3.19) Once again JCP performs in a manner which we have come to expect. Yesterday's gains by JCP were relinquished today as the No.4 U.S. retailer announced its same-store sales (open at least one year) fell 3.2 percent in August. Decreases in sales were attributed to soft sales of national brand jeanswear in back-to-school categories. Also helping our play, competitor Sears, stated there third- quarter profits would fall 15 cents to 19 cents below the 82-cent consensus estimate of analysts surveyed by First Call Corp. This news sent a message to investors indicating how bad the situation is for retailers. Like the sales numbers confirm, JCP is hurting and it is showing in the stock price. We remain bearish with the stock however, JCP does show some support at the $35 level so use caution and make use of your stops. Let's see if we can break through this support and fall to new lows. WLP $72.75 -0.19 (-2.50) Here we are again on WLP. The stock has been trading sideways since Tuesday as it consolidates after the most recent downturn. This is the pattern we've been talking about all along. There is still a lack of news or volume to break WLP out of this trend which is fine by us. We do think we may be getting near the end though as we are quickly approaching the $70 support. We are expecting to get a bounce from this area and we will then reassess the position by the strength of the bounce. So you may want to plan your exit points to avoid being caught by the rebound. PVN $81.25 -0.13 (-2.56) PVN is at a crucial point in our play as it sits on support at $80. There is support here because PVN bottomed out at $80 after June's decline. We are obviously seeing some buyers here since PVN is holding on in a rough market on Thursday. We don't have any more fallout to report from the Bank one disaster but sentiment for major credit card issuers is still negative. There is a good chance the 10-dma, which is rapidly catching up to the stock, will provide us with the resistance for the stock. PVN has not traded above this point since the Bank One announcement of an earnings shortfall. WCOM $74.69 -1.31 (-3.81) Yesterday, even WCOM, plagued with a PR problem stemming from service outages 2 weeks ago, managed to reach a high of $77, which would have likely stopped you out of the play. We noted Tuesday that it was nearing support of $73-$74. Following today's negative market, the same is true and we may yet see another bounce north if tomorrow's employment figures are well greeted. With regard to declining long distance rates of the big 3 providers, WCOM's data transmission revenue comprises the biggest portion of total revenues than either AT&T or Sprint (and data revenues are growing like a weed). We think it may only be a matter of time until we see the reversal north. It's still time to exercise a bit of caution. Don't lose your profits. If you still think WCOM is a loser (for now), wait for a descent below $73 with volume before taking a new position. DOW $115.25 +1.25 (-4.56) We are not giving up on DOW. The chemical manufacturer has basically consolidated the past two days. Keep in mind this is a stock that that has dropped over 12% in the last eight trading sessions. Do we think DOW is turning around? NO. Consolidating with a possible bounce? PROBABLY. All of the fundamental information about the industry and the company remains intact. Commodity prices are still rising along with the cost of raw materials, chances of missing quarterly estimates are growing and no analyst upgrades, only downgrades. Yes the mega-marriage between DOW and Union Carbide is still on but the true benefits are yet to be seen. To us this is the sign of a stock that will probably continue its downward slide but we may be due for more of a bounce first. Initial resistance is in the $117-$118 area followed by the 10-dma at $120. Again keep in my mind stocks rarely go straight down or up. Today's bounce came on volume of only 694K, not exactly stellar volume. The real sign may come next week when investors return from vacation. Until then, we remind you that patience is a virtue. We will wait for our opportunity to buy puts on DOW. T $47.00 -0.38 (-0.50) This stock is still incapable of showing us why we should discontinue our put play. T had a pretty big bounce on Wednesday, and it briefly appeared that the stock may have reached bottom, but today the stock return to its negative trend. The 10-day moving average is continuing to show signs of downward pressure on the price and T's stock appears to be too weak to breakout. Technically, T may not have enough support to make any significant upward movement. Furthermore, the entire telecommunications sector is showing continuous bearish indications. Worldcom (WCOM) was down $1.31 on Thursday to end the day at $74.69 and rival Sprint (FON) was also down $0.25 to close at $43.69. The current trading environment still looks bleak for T and the rest of the Telecommunications sector. In recent news released on Thursday, AT&T and British Telecommunications (BTY) have just completed the purchase of a $1.9 billion stake in Japan Telecom Co. This is a another step in the consolidation of the international telephone industry. ********** SEE DISCLAIMER IN SECTION ONE **********
The Option Investor Newsletter Thursday 9-2-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************** NEW CALL PLAYS ************** MU - Micron Technology Inc $75.25 +2.63 (+6.38 this wk) Micron is the world's #2 maker of semi-conductor memory components, only behind Samsung. They design, develop, manufacture and market complex circuit boards, memory modules, system level assemblies and PCs. However, the dynamic random- access memory (DRAM) components and other chips account for almost half of the company's revenues. Texas Instruments and Intel both have interests Micron. MU got off on the right foot this week as it presented industry samples of 133MHz 128Meg DRAM components. These new components offer cost-effective solutions for a wide variety of current applications using high-bandwidth. Following Micron's product announcement, the stock was popped out of its support level at $68 amid bullish comments from analysts. Tomorrow may present solid entry points to get into this momentum play. Overhead resistance about 5 points away at its 52-week high of $80.56 so there's still room for profit. If we get a rally after the holiday, this resistance could easily be broken and then there'll be nothing to hold MU back. The analyst comments were abundant this week. On Tuesday, Gruntal & Co reiterated a Strong Buy rating and issued a $150 target price citing the continued rise in spot market DRAM prices as its leading factor. Banc of America also put in their two-cents and raised its earnings estimates for Micron. Yesterday Soundview upgraded MU to a Strong Buy from a Buy and ABN Amro also reiterated a Buy rating and upped the stock's target price to $90. Plus sector wide, the semiconductors are tooting a 19.3% rise in World Semiconductor Sales for July. BUY CALL SEP-70*MU-IN OI=5037 at $7.25 SL=5.50 BUY CALL SEP-75 MU-IO OI=3541 at $4.13 SL=2.50 BUY CALL SEP-80 MU-IP OI=2676 at $2.06 SL=1.00 BUY CALL OCT-75 MU-JO OI=2272 at $7.63 SL=6.00 BUY CALL OCT-80 MU-JP OI=2373 at $5.50 SL=3.75 Picked on Sep 2nd at $75.25 P/E = N/A Change since picked +0.00 52-week high=$80.56 Analysts Ratings 7-8-5-2-1 52-week low =$20.25 Last earnings 05/99 est= -0.01 actual= -0.10 Next earnings 09-20 est= -0.18 versus= -0.42 Average Daily Volume = 5.14 mln Chart = http://quote.yahoo.com/q?s=MU&d=3m ************* NEW PUT PLAYS ************* HRB - H&R Block $45.94 -5.06 (-10.00 for wk) Nobody loves April 15 more than our latest play, H&R Block, North America's leading tax preparer. The company also has tax operations in Canada, Australia and the UK. H&R Block operates from about 10,400 locations and nearly half are franchised. About 75% of its clients are return visitors. In addition to its tax preparation service, the company also provides mortgage services and operates H&R Block Financial Centers, which provide tax preparation, financial planning, investment advice and home mortgages. Our latest play is a stock that is falling and falling fast. If the current stock price is any indication of what is to follow, H&R Block may want to reconsider some recent decisions. The company announced Wednesday it will buy discount stock brokerage Olde Financial Corp. for $850 million. With this acquisition, HRB is seeking to expand its operation by offering one-stop shopping for a range of financial services and at same time broaden its customer base. While the acquisition fits into Block's plan of financial services, it is the company's largest ever, leaving legitimate concerns in the minds of both investors and analysts. These concerns have shown there ugly faces in the recent price of the stock. Since Wednesday when the announcement was made, shares of HRB have fallen just under $10 or 18 percent. We expect the downward trend to continue as investors not wanting to be left holding the bag decide to get out. If this wasn't enough, on Monday Barrington Research downgraded HRB from a Buy to a long-term buy. With all this questionable coverage lately, look for a very vulnerable stock. Because HRB has fallen so far so fast, use caution with this play and choose your entry points intraday. This should be considered a short-term momentum play that could change at any time so use stops. BUY PUT SEP-50*HRB-UJ OI= 10 at $4.63 SL=2.75 BUY PUT OCT-45 HRB-VI OI=523 at $2.06 SL=1.00 Average daily volume = 350 K Chart = http://quote.yahoo.com/q?s=HRB&d=3m ***** ONE - Bank One $38.56 -1.38 (-3.44 this wk) Bank One Corporation is a bank holding company and its subsidiaries operate a network of offices across the U.S. as well as 13 foreign countries. Bank One's purchase of First Chicago NBD, catapulted the company's industry ranking among the top five banks in terms of assets. Bank One is also the largest issuer of credit cards, surpassing Citigroup. Its other activities include corporate and individual banking, loans, bill-paying services, insurance, brokerage and investment services. ONE has had a tough couple of weeks so it wasn't a tough decision for us to add it as a put play. The stock has ended in negative territory for seven consecutive days and is indicating no signs of strengthening any time soon. The interest rate environment is not favorable for ONE either or the financial sector in general as the 30-year bond has crept up to 6.14%. The remarks made on Thursday by Fed Governor Edward Kelly sent the bond markets and stock markets sinking. Governor Kelly was quoted as saying the central bank remains "intensely vigilant" and it would be premature to assume policy makers will wait until next year to raise interest rates. It didn't help that these remarks were on the heels of the ever important employment report scheduled to be released on Friday. Furthermore, technically ONE appears to be extremely bearish as well. The stock is now down $6.75 below its 10-dma at $45.38. The company's earnings warning last week (which is mentioned in detail below) coupled by the financial sector weakness as a whole indicates that it may be time to start searching for an entry point for new put plays on ONE. The big news regarding ONE came on Aug 24. The company warned that its 1999 earnings were likely to be as much as 8 percent below street expectations. This was due to slower than expected growth in its credit-card division. ONE said its operating earnings per share probably would be between $3.60 and $3.65. The Street had expected 1999 profits of about $3.92 a share. These estimates were based on analysts polled from First Call. In more current news, Banc One Capital Markets Inc., (a division of ONE) has offered to pay $500K to settle an investigation of bond deals the company underwrote for an Illinois park district. In a recent report, Banc One proposed the settlement in return for releasing it from any claims regarding the bond issues. BUY PUT SEP-40*ONE-UH OI=4309 at $2.38 SL=1.25 BUY PUT SEP-45 ONE-UI OI=1641 at $7.00 SL=5.25 Average daily volume = 3.28 mln Chart = http://quote.yahoo.com/q?s=ONE&d=3m ********* STRADDLES ********* Straddle Recap for Thursday Most open positions for the Straddle plays continue to move higher in price, as the market seesawed its way back down from yesterday's gains. OEX option volatility (VIX) hopped up to 25.44, telling me that we have more breakout room to the downside to go. Fundamental reasons include comments made from the Fed Governor pertaining to another possible rate hike. 2/3rds of the open straddle positions have moved away from their original entry by more than 10%. Most of the ones that haven't were newer straddles published earlier this week. Our Oil, Gas, and Chemical stock straddles are working out the best, as they continue to drop thanks to the stabilized price in oil, as well as a continued drop in the transportation sector. Appliance stocks continue to help us, as Maytag continues its down drop. Even ZION and CNTO have moved more than 10%, increasing the straddles in value. Dell and Apple straddles were mixed as Dell moved lower, causing straddles in that stock to decrease, while Apple stock moved higher, causing these straddles to increase in value. Although I like to hang on to straddles for about 30 days, I do get concerned when the entire country is focusing on the employment report due out tomorrow. **************** Straddle Mailbag **************** What's your favorite indicator for low risk trades? It's funny how many people each use a different system, indicator, news event, or crystal ball to determine what the future will hold in the stock market. Once again, as a directional trader, it's important to remember the past to help predict future movement. As we head into the Labor Day Weekend, many traders are ready for a holiday rally. Traders who watch money flow are ready for gains based on the influx of money from institutional traders and money managers. Some traders look at the briefcase indicator held by Alan Greenspan. Still, others are looking at the stars and waiting for Jupiter to do something. Some of these are easier to understand and interpret into market movement than others. No insults to the star watchers, but I failed astrology, so that's one indicator I won't be looking at. One indicator that I do look at, is the The VIX stands for Volatility Index. This is the volatility index of the S&P 100, or OEX options. Smart volatility traders will tell you that when the VIX is high, its time to BUY, and when the VIX is low, its time to go (SELL). I look at the VIX, not only on a day by day basis, but looking back at time segments to determine a time to buy options and a time to sell them. Below is a current chart of the VIX, going back 2 years. One thing that sticks out like a sore thumb is the spikes up that occur between the months of September and October. If you were to look at a chart of the OEX, you will see a mirror image of the chart above. What I am trying to state here is that if there is ever a time to be a buyer of options, this is it. With the 3rd quarter earnings period coming up, coupled with the nervousness of another interest rate hike, it's a good bet to play one or even both sides of the markets. I haven't even mentioned that the October Crash Crew will be in full force, talking about the next crash to occur. Now I don't care where the market goes, but this pattern is what straddle traders live for. Also the bottom of this chart is at 18. If the VIX hits the low 20's again, it becomes a safe bet to play 90-day options for the next 30-45 days. Sell too soon folks. Tom Gentile ***************** COMBINATION PLAYS ***************** Markets Fall As Inflation Fears Rise.. Stocks closed lower Thursday as investor anxiety increased over the possibility of another interest rate hike later this year. Wednesday, September 1 Blue chip issues rebounded Wednesday in a session of light volume as traders fought back fears of higher inflation and increasing interest rates. The Dow Jones average closed 108 points higher at 10937 while the Nasdaq composite index rose 11 points to 2750. Market strength was broad, with 1686 advancers outnumbering 1085 decliners on 320 million shares traded on the NYSE. U.S. Treasury Bonds fell lower, with the benchmark 30-year issue down 9/32, to yield 6.086%. Tuesday's new plays (positions/opening prices/strategy): Cabletron CS OCT15C/SEP17C $2.06 debit diagonal Cabletron CS LJAN15/SEP17C $5.12 debit LEAPS/CC's Occ. Petro. OXY JAN22C/SEP22C $1.12 debit calendar Mentor MNTR OCT25C/SEP25C $0.81 debit calendar All three of the new positions traded in a small range for much of the morning and only one of the target prices was eventually achieved. Cabletron the first candidate and both of the plays remained slightly out of reach until the stock price fell near 10:45 AM. At that point the LEAPS/CC's position was observed at the target price and the short-term diagonal spread was a mere 1/16 away. Occidental Petroleum was much the same, moving less than a dollar in the first hour and the spread debit remained slightly above our suggested price for most of the day. Mentor was by far the most docile, moving in a $0.25 range the entire session. The initial target should have been available but we will record the opening debit at $0.81 (a five contract trade at that price was observed during the first hour of the day). Portfolio plays: The market recovered today but analysts are now expressing new concerns about the employment report due on Friday. Some say it may reflect increased inflationary pressure, which would raise the probability of another interest rate hike in October. That could certainly curtail any pre-holiday rally ahead of the long week-end and most investors are remaining on the sidelines in the interim. One of the big issues that made news today was Intel (INTC). The stock climbed almost $3 at midday to a new high at $85 after the company confirmed it formed a $200 million equity fund to invest in voice and data communications technology. The hi-tech giant is also expected to unveil a new design blueprint for developing networking chips. Other technology issues moved higher including Cisco, (CSCO) up $1.12; Conexant (CNXT) which climbed $4.56 to $76 and EMC Corporation (EMC), up $1.50 to $63. Sepracor (SPR) and Schering Plough (SGP) also participated in the small drug sector rally with favorable moves. One of the Dow's top gainers was International Paper (IP), up $2 in early trading after being upgraded by brokerage Paine-Webber. The new rally should offer a second chance to exit the calendar spread with a positive return. A few of our smaller issues were in today's recovery; Polaroid (PRD) moved up $1.25 to a previous resistance area near $28 and RSL Comm. (RSLC), a tracking-only play, climbed almost $2 to our sold strike at $22.50. The big relief was Hambrecht and Quist (HQ) as it rebounded $1.93 to $40, with a few of the other active brokerages. Lehman Brothers (LEH) was also included in that group, up $1.62 to a previous trading range near $55. The big loser today was Qualcomm (QCOM), falling $23 on concerns over future profits in what is now considered a very competitive industry. Our current "readers request" position is still deep ITM but that kind of drop won't be recovered any time soon. One of the other slumping tech issues is Excite@home (ATHM) and with our (bullish) speculation play fading, we have decided to unload the long option (OCT-$52.50) and hope for a soft market in this issue over the next two weeks. Our current position is trading at a small loss ($0.12) and this may be the last opportunity we have to preserve capital. Thursday, September 2 Stocks closed lower Thursday as investor anxiety increased over the possibility of another interest rate hike later this year. The Fed, which raised short-term interest rates in June and again in August, has another policy meeting in October. The Dow Jones industrial average fell 94 points to end at 10,843. The Nasdaq composite index fell 16 points to 2,734. In the broader market, declines led advances by 2,077 to 834 on volume of 684 million shares on the New York Stock Exchange. The 30-year U.S. Treasury bond fell 23/32 pushing the yield higher to 6.13%. Portfolio plays: 3COM Corporation (COMS) was one of the portfolio movers today, up $2.25 to our sold strike at $27.50, as rumors resurfaced that the company is a takeover target. Volume and volatility surged again in the options as traders moved into speculative positions. Intel (INTC) continued its winning ways, climbing $2 to a recent closing high near $85 and International Paper (IP) also managed another positive day, up over a point to $50. Hambrecht and Quist (HQ) powered ahead for a second session, gaining $2.62 to the top of a previous range near $43. Most of the other issues in the portfolio simply floundered with the broad market and red was certainly the dominant color of our quote spreadsheet. In only a few cases is that favorable and one of those positions is J.P. Morgan (JPM). The stock fell $3.68 to $125 on news that Schroeder cut its recommended rating on the company to neutral from outperform. The (bearish) debit spread is now safely ITM and can be closed for a small profit. We suspect there is little chance of a short-term recovery to $132 and plan to hold the position for a few more days. Medtronics (MDT), Sun Micro (SUNW) and Cisco (CSCO) all moved lower and with each one of these positions trading above our current short options, we will watch for any favorable opportunity to close early and roll forward into October. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** USWB - USWeb/CKS $23.31 *** On The Rebound? *** USWeb/CKS is a professional services firm that was formed by the merger of USWeb Corporation and CKS Group. They work with leading edge companies to define strategies and implement innovative ways to build their businesses by combining the expertise of strategy, Internet technology and marketing communications. USWeb/CKS helps clients differentiate their products and services, strengthen customer relationships, leverage human capital, and their improve business efficiency in the new electronic age. USWB climbed for the second consecutive day on rumors of a buyout and a positive reaction to the recent article in Forbes magazine. The stock price climbed $2.38 and closed near the high on bullish short-term technicals. MACD, volume, and momentum are all moving towards a favorable "buy" position and the stock has moved above the 50 dma on solid buying pressure. Most believe the volume and price movement associated with a potential buyout situation would be much greater but the stock is still poised for a run to $25. Another reason for the renewed interest may be the recent article identifying USWB as one of IBM's Alliance Business Partners. Mike Colleary, director of worldwide partner development of IBM's Software Group says, "Only companies that Big Blue sees as market leaders become partners. We enable these partners with technology, joint marketing and public relations. With USWeb, we are looking at penetrating the e-business marketplace. We consider USWeb to be a market leader." He noted that his company has only three other strategic partnerships, with Cisco Systems, Microsoft and Intel. This is an excellent short term technical position with a very favorable risk/reward outlook. PLAY (conservative - bullish/debit spread): BUY CALL SEP-17.50 QWB-IW OI=425 A=$5.87 SELL CALL SEP-22.50 QWB-IX OI=1126 B=$1.62 INITIAL NET DEBIT TARGET=$4.00 ROI(max)=25% B/E=$21.50 Chart = http://quote.yahoo.com/q?s=USWB&d=3m ***** COMS - 3Com Corp. $27.06 *** More Buy-Out Rumors! *** 3Com has evolved from a supplier of discrete networking products to a broad-based supplier of local area network (LAN) and wide area network (WAN) systems for large enterprise, small business, home, and service provider markets. Following its recent merger with U.S. Robotics, the world's leading provider of modems and remote access products, 3Com offers customers a broad range of data networking solutions that include routers, hubs, remote access systems, switches, adapters, modems, connected organizers and telephony products. Upcoming earnings and buyout rumors are driving COMS higher again and the stock rose almost 10% today amid speculation that Lucent (LU) would be the takeover company. One analyst said Lucent would be interested in 3Com's enterprise data networking equipment, and particularly its Ethernet or local area network switches, along with the routers and core builder line products. 3Com Corporation recently announced that it had terminated plans with Germany's Siemens AG to form a venture making equipment to handle voice calls on data and video telecoms networks. A Siemens spokesman said that economic reasons was the official cause of the split, and that the two companies had come to the conclusion together, opting to develop new products independently from each other. That's about the time when all the merger rumors started. Other traders are speculating that COMS may be planning to spin off its palm-computing division in a move to boost shareholder value. Regardless of the nature of the new interest, implied volatility and volume vaulted higher and the overpriced October option premiums have presented us with a low-cost, bullish debit position. The OCT17C/OCT22C would be my #1 play but the ROI is a bit low for most traders. We will blend in some OCT-$25 calls to boost the return potential and still retain a fair amount of downside protection. PLAY (very conservative - bullish/debit spread): BUY (10) CALLS OCT-17.50 THQ-JS OI=167 A=$9.75 SELL (5) CALLS OCT-22.50 THQ-JX OI=2497 B=$5.12 SELL (5) CALLS OCT-25.00 THQ-JE OI=7420 B=$3.37 INITIAL NET DEBIT TARGET=$5.38 ROI(max)=39% B/E=$22.88 Chart = http://quote.yahoo.com/q?s=COMS&d=3m ******************** INDEX OPTION SPREADS ******************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and hedging or longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. ******************************************************************* OEX - S&P 100 Index $693.71 OTM Credit-Spreads The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Review the 'Market Sentiment' section for specific technical information on the S&P 100 Index. Aggressive... PLAY (Bearish): BUY CALL SEP-725 OEZ-IE OI=9329 A=$1.31 SELL CALL SEP-720 OEZ-ID OI=3312 B=$2.12 NET CREDIT TARGET=$0.81 ROI=19% PLAY (Bullish): BUY PUT SEP-660 OEY-UL OI=11538 A=$3.75 SELL PUT SEP-665 OEY-UM OI=1796 B=$4.50 NET CREDIT TARGET=$0.75 ROI=18% Very Conservative... PLAY (bullish - disparity/low ROI): BUY PUT SEP-645 OEY-UI OI=1785 A=$2.38 SELL PUT SEP-650 OEY-UJ OI=10133 B=$2.75 NET CREDIT TARGET=$0.38 ROI=8% (2 weeks) CHART= http://quote.yahoo.com/q?s=^oex&d=b ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an Email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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