The Option Investor Newsletter Sunday 9-5-99 1 of 7 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment ******************************************************************* MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ******************************************************************* WE 9-3 WE 8-27 WE 8-20 WE 8-13 DOW 11078.45 - 11.72 11090.17 - 10.44 11100.61 +126.96 +259.62 Nasdaq 2843.11 + 84.21 2758.90 +110.57 2648.33 + 10.52 + 89.84 S&P-100 713.89 + 5.92 707.97 + 11.38 696.59 + 7.77 + 14.69 S&P-500 1357.24 + 8.97 1348.27 + 11.66 1336.61 + 8.93 + 27.39 RUT 435.97 + 3.52 432.45 - 1.93 434.38 + 0.33 + 6.01 TRAN 3156.90 - 14.45 3171.35 + 20.62 3150.73 - 28.34 - 40.96 VIX 21.39 - 1.82 23.21 - 0.85 24.06 + 1.68 - 4.98 Put/Call .57 .73 .69 .72 ******************************************************************* Do you remember the last time the Dow ended with upside curbs? The Dow turned in a stunning performance on Friday with a +235 point move but the hero of the day was the Nasdaq. The Nasdaq posted a the largest one day point gain ever with +108.87. This is equivalent to a +525 point Dow move. YeeHaw, get out your ropes and spurs, this bull is in stampede mode. The Dow is now just a little over 200 points away from its recent high but the Nasdaq is only 20 points away. The fourth quarter has historically been good for the Nasdaq leaders like INTC, MSFT, DELL, CSCO. Odds are very good we will break out to a new high on the Nasdaq this week. Actually, it would probably take another case of Fed speak to prevent it. More later on those possibilities. "Curbs in on the upside", maybe I can get Bill Griffith on CNCB to send us a voice clip that we can load on our computers in place of "you have mail". Seriously, the rally was broad based with strength across all sectors. It was more like an explosion than a rally. After the very benign numbers in the non-farm payrolls report were made public, the euphoria was rampant. New jobs clocked in at only +124,000, only about half of the expected 215,000. Unemployment was 4.2% and the average hourly wage rose only a very anemic +$.02. Inflation, what inflation. The bond market posted the biggest one day rally in almost a year with bonds up +1.5 points and the yield dropping to 6.02%. It is amazing how fast things reverse course. The bonds, which had been dropping into a black hole since the attack of Kellyspan, stopped on a dime and gave nine cents change. Financials, which had been avoided like the plague, rocketed as investors rushed back into the beat up stocks like gnats to a picnic. DOW component American Express, which had dropped -16 in the last two weeks gained back +6 and JP Morgan recaptured almost +8 of the recent -15 point drop. Airlines, retail and telecoms also came off the shelf and back into investors portfolios. Internets soared on the feeling that there would be no more rate hikes this year. EBAY gained +12, YHOO +13, RNWK +8. While all Nasdaq stocks were not created equal, most profited from the rush of money back into the market. One of our favorites however did not take part. QCOM, who had been thrashed severely last week after an analyst had some negative things to say, failed to rally back in the shopping spree on Friday. On a day that QCOM was voted most likely to soar, it didn't. While we still like it, we NEVER advise going against a trend. We dropped it this weekend which of course is a sure signal for it to bounce on Tuesday. Once momentum leaves these high PE stocks the future is bleak. Wait for the bounce. Why tech stocks? Tech stocks are the first to fall and the first to rise. Tech stocks are the field of dreams for most investors and the economy in general. Without literally hundreds of tech companies you would not be reading this newsletter today. According to some the Internet is just now leaving the stone age in terms of its future potential. Techs are the wave of the future and after today we are surfing! Because of the high PE of tech stocks they are very sensitive to interest rates. The recent leaders of the Internet revolution are solid tech winners. Investors flock to tech stocks in good times to try and catch the next record move. In the last twelve months tech leader Intel has soared over +150%, MU +250%, TXN +258%. These incredible returns have made millionaires of thousands of investors but the same big gains are not gains until they are sold. Thus the flight out of techs on profit taking on any market downturn makes investors fair weather friends indeed. Right now the trading light on tech is green and the fourth quarter has been good to most tech leaders in the past. Not all stocks took part in the rally on Friday. KO took part in the warnings cycle by posting one of their own. Coke said the European contamination scare would knock down profits by -.02 cents but analysts also say they are losing market share in many foreign countries. Russia, Turkey, China, to name a few. Not all things go better with Coke it appears. Markets up, interest rates are down, no Fed rate increase in sight so break out the party hats and lets rock and roll, right? Not so fast boys and girls. If you thought the Kellyspan sell off last week was not fun then you had better take a look at the calendar for this week. We have four (4) Fed appearances this week topped off by the PPI report on Friday. Wed - Meyer - Philadelphia Wed - Greenspan - Grand Rapids Thr - Gramlich - Boise Thr - Ferguson - Washington Fri - PPI It is enough to make Freddy Kruger cry. While we do not expect the Fed heads to individually make as much impact on the market as Ed Kelly did last week, the sheer numbers are sure to cause some concern. Also, for those of you with a memory longer than a market day, you will remember that of the last seven inflation reports only one, non-farm payrolls, was in our favor. Other recent reports have suggested that inflation is alive and well but currently only creeping in around the edges of the economy. The jobs report did put a nail in the rate hike coffin but did NOT drive a stake in the heart of inflation. Don't get me wrong. I still think the markets will go up over the next several weeks, contrary to all the "don't you know September is a down month" Emails I have been getting. This third quarter is looking like the best 3Q in years and this will not be lost on investors. It is just the fourth quarter I don't like, but that is another story. I just want readers to be aware of market moving events and be prepared for more Fed bombs and economic potholes. So spend that cash but protect yourself with stops. Good luck, happy holiday, sell too soon. Jim Brown Editor Be sure to check out the "Traders Corner" on Sunday, Tuesday and Thursday. Janar Wasito has been doing an excellent job of explaining the pschology of trading and explaining his own trades on a play by play basis. We have had many great Emails about Janar and we welcome him to the team. PS. If you would like to join the OIN team in some way, please Email kimo@OptionInvestor.com. *********** JIM'S PLAYS *********** What a week to come back from vacation. Up 200, down 200, yo-yo trading for sure. Following the change in trading focus for this column it was a rough week. A good week for target shooting but just like skeet shooting, some of them just kept on going. The QCOM story was a heart breaker. Some of you jumped the gun and felt like you were shot by the starter. I think Janar took a serious hit to the tune of -66%. Fortunately I was waiting for QCOM to hit my $180 target when the news came out on Wednesday. I decided to wait for the bounce but it did not come. I decided that it had to trade through $175 again before I would trust it and I felt sure that Friday would be the day. I was amazed to see QCOM trade down on such a big Nasdaq day. Somebody really wants out bad to hold this stock down. There was not a lot of volume in QCOM on Friday so I am sure there are a lot of others waiting on the sidelines as well. I would like to see it trade and hold above $170 again before I tempt fate with a long position here. JDSU - Yes, a real entry point example. JDSU had spiked up last Thr/Fri and looked like it was due for some profit taking. On Monday JDSU dropped through my target of $108 as the market dropped as well. Tuesday after the Dow dropped over -200 from its high and started to recover, so did JDSU. As it crossed $106 going up I bought the Sept-100 call UNQ-IT for $9.50. I sold them at the open on Friday for $14.38. A perfect play except for the drop at the open on Thursday. I was real close to pulling the sell trigger but held on. EXDS - Target $80 Again, EXDS had spiked up last week and was looking tired. The target was $80 and after trading as low as $75 on Tuesday's drop I thought I had another winner. When it crossed $78 on the upside after the big drop/recovery on Tuesday I bought the Sept-75 call EXF-IO for $8.50. The rest is history. After a nice spike EXDS contiued to trend down and when the real time chart started dying on Wed afternoon I bailed for $6.50. The plan was good but the follow through on the stock just did not happen. Sure I could have held on for some eventual recovery but there was none in sight. SFA - Target $50 - No play, close but no cigar. GTW - Target $95 Wednesday night GTW was moving down and the market was moving up. Not a good sign. Thursday however GTW dropped with the market and then started up when the market was still down. Still not a good play. When both started to firm Thursday PM I elected to wait until after the non-farm payrolls on Friday before making a play I was not confident would succeed. After the gap up at the open on Friday I dropped it as a possible. Missed money is better than lost money. DCLK - Target $100 DCLK dropped into range on Monday and traded back through the target at 3:PM Tuesday. The ticks were weak and the Dow looked like it might roll over again (which it did). I elected to wait until Wednesday and hope for better conditions. Wise move! (lucky really) DCLK rolled over and never made it back to the $100 target. Dropped as a possibility. OEX - Target 700 The best play of the week. After trading under the 700 target on Monday and touching it again on Tuesday I was again ready to pull the trigger but the market internals were weak and advance/declines were worsening. I held off to see if it would hold and within 15 min it rolled over and fell off the cliff. I wanted to see it hold and advance over 700 before I started the play. After coming close on Wednesday I was again breathing a sigh of relief on Thursday morning after the gap down at the open. The market sold off to sub 10750 and recovered to the 10850 range before selling off again. After the second run at 10750 in the afternoon I thought it looked like a double bottom and I thought the downside risk was minimal. Even with a mediocre jobs report I did not think it would sell off again. Just too much bullish support and the market was very oversold at that level. When it bounced the second time I bought the SEPT-700 call OEZ-IT for $8.00. The gap open on Friday surprised me as well but I gladly sold for $18.00 and did not even look back. Analysis: A pretty good week for showing that not all rules are cast in concrete and some good trades do go wrong. (EXDS) It never hurts to pass on a trade if all the factors do not "feel" right. Remember to take into account the ticks, advance/decline, markets, pending economic reports and of course the stock in question. Also, contrary to many traders I don't feel that "touching" a target is a valid play. Ideally I like to see it trade under and then move back through the target to constitute a play. Never catch a falling knife or dropping stock. Wait for the bounce and hold. The radar scope for next week is cloudy. Most stocks I am watching spiked off the charts and my targets are too far below to expect a hit. I am afraid to raise them too much because I don't want to get hit that high. Does that make sense? This will probably be a week of playing "follow the market." My targets next week are: SFA at $52 AMZN at $60 - maybe some post split depression? EXDS at $80 - if it can hold over SUNW at $82 - wishful thinking QCOM at $160 - really wishful thinking Jim ************* COMING EVENTS ************* Monday: Holiday - none scheduled Tuesday: Post Holiday - none scheduled Wednesday: BTM Schroders 9/4 Forecast: -- Previous: -0.5% LJR Redbook 9/4 Forecast: -- Previous: 0.4% API Oil Stocks 9/3 Forecast: -- Previous: 2.57M Wholesale Inventories July Forecast: 0.3% Previous: 0.3% Consumer Credit July Forecast: $6.0B Previous: $2.8B Fed Gov Meyer speaks in Phil PA. Alan Greenspan speaks in Grand Rapids MI. Thursday: Jobless Claims 9/4 Forecast: 285k Previous: 289K Import Prices August Forecast: 0.5% Previous: 0.9% Export Prices August Forecast: 0.2% Previous: -0.2% Money Supply 8/30 Forecast: -- Previous: $17.4B Fed Gov Gramlich speaks in Boise Fed Gov Ferguson speaks in Washington Friday: Producer Price Index Aug Forecast: 0.3% Previous: 0.2% Next week's economic releases (preliminary) September 14 Retail Sales - August September 14 Retail Sales Ex. autos - August September 14 Atlanta Fed Index - August September 14 Current Account Gap - Q2 September 15 Business Inventories - July September 15 Consumer Price Index - August September 15 CPI ex. food & energy - August September 15 Real Earnings - August September 16 Capacity Utilization - August September 16 Industrial Production - August September 16 Philadelphia Fed Index - September September 17 Building Permits - August September 17 Housing Starts - August September 17 Michigan Sentiment - September ************** MARKET POSTURE ************** As of Market Close - Friday, September 3, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 11,078 Neutral 7.20 SPX S&P 500 1,320 1,420 1,357 Neutral 8.17 OEX S&P 100 675 735 714 Neutral 8.13 RUT Russell 2000 440 465 436 BEARISH 8.06 NDX NASD 100 2,320 2,400 2,507 BULLSIH 9.03 * MSH High Tech 1,120 1,200 1,248 BULLISH 9.03 * XCI Hardware 1,035 1,050 1,125 BULLISH 8.24 CWX Software 750 800 851 BULLISH 9.03 * SOX Semiconductor 515 520 561 BULLISH 8.24 NWX Networking 555 625 594 Neutral 8.13 INX Internet 500 580 458 BEARISH 7.20 BIX Banking 690 710 638 BEARISH 7.23 XBD Brokerage 410 440 398 BEARISH 7.23 IUX Insurance 645 660 612 BEARISH 7.23 RLX Retail 915 960 833 BEARISH 7.23 DRG Drug 360 390 376 Neutral 8.24 HCX Healthcare 740 785 767 Neutral 8.24 XAL Airline 180 190 154 BEARISH 5.21 OIX Oil & Gas 285 310 307 Neutral 8.26 Posture Alert Friday's monster gain marked a record for the Nasdaq, which closed up +108.87 or +3.98%. All sectors participated, and were led by the Internet (+7.11%), Semiconductor (+5.20%), Software (+4.92), NDX (+4.77), and the Morgan Stanley High Tech (+4.67%). With Friday's action, we have upped our posture to BULLISH from Neutral on the Nasdaq 100, Morgan Stanley High Tech, and Software. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** MARKET SENTIMENT **************** Sunday , September 05, 1999 How Quickly We Forget! Fed Gov. Edward Kelley? Your 15 minutes in the spotlight are over! It never ceases to amaze us how quickly Wall Street can forget! Anyway, he should have never been in the spotlight to begin with, so good riddance! Friday's market action was very powerful and impressive, and above all good for a long holiday weekend. Several sectors have broken into new highs, including the Nasdaq 100, Morgan Stanley High Tech, Hardware, Software, and Semiconductors. Volume was good on the Nasdaq, which set a record up day, but light on the NYSE. To see true confirmation, we need to have a follow-through to Friday's action with good volume across the board. We were watching CNBC Friday morning like everybody else, waiting for the job reports. The CNBC commentator was speaking to one of the bond traders on the floor, and was stating that sentiment was extremely negative and all the traders were negative this, and negative that, and blah blah blah. We heard negative about a half dozen times! The sentiment was so bearish (thanks to Greenspan last Friday, and then Kelleyspan), that a rally in bonds and then stocks was the most probable outcome! The economic indicators then came out a little later, and you know the rest. This is one of those perfect examples of when we highlight negative sentiment, and state that the negative is actually a positive. This can directly correlate to the Investors Intelligence Survey, Put/Call ratios, Pinnacle Index, and other forms of sentiment analysis. For 2 months now, the Investors Intelligence Survey has steadily increased in bearish tone. Currently, bullish/bearish sentiment stands at 42.9% and 31.9%, respectively. During the last several months, we have witnessed several indexes breaking into All-Time-Highs, several other indexes treading water, and a few others losing significantly. What would happen to this market in the next couple of months, should Bullish/Bearish sentiment change to 60% and 25%? We think you know the answer, and we think you will enjoy the answer. Stick to the strong sectors, and you will have a good 4th quarter. 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 1.3, suggesting bearish sentiment picking up steam. Market Posture: Several indexes have broken new highs, including the Nasdaq 100, Morgan Stanley High Tech, Software, Hardware, and Semiconductors. Volatility Index: The VIX broke is below the 25 benchmark, after flirting in the danger zone. 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: 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. Russell 2000: Even with the strong rally, the RUT is still below the 50 and 200 day moving averages. If this trend continues, this could prove very bearish. Pre-Earnings Season: September is the start of pre-release season. 9 times out of ten, companies usually let Wall Street know some sort of negative news. We have already started to witness the negative pre-announcements this last week. Advance/Decline Line: The A/D line is still looking negative, even with this latest rally. 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% Friday, September 3 104,700 +153.2% Market Sentiment at a Glance Friday Tues Thurs Indicator (9/3) (9/7) (9/9) Alert Pinnacle Index (OEX): Overhead Resistance (735-780) 179.0 Underlying Support (710-730) 2.4 Underlying Support (630-690) 4.0 Put/Call Ratios: CBOE Total P/C Ratio .7 CBOE Equity P/C Ratio .5 OEX P/C Ratio 1.1 Peak Open Interest (OEX): Puts 660 Calls 720 P/C Ratio 1.33 Market Volatility Index (VIX): CBOE VIX 21.39 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. OEX Pinnacle Index Friday Benchmark (9/3) Overhead Resistance (735-780) 179.00 Overhead Resistance (710-730) 2.37 OEX Close 713.89 Underlying Support (630-690) 3.99 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 (9/3) (9/7) (9/9) CBOE Total P/C Ratio .69 CBOE Equity P/C Ratio .54 OEX P/C Ratio 1.12 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (9/3) (9/7) (9/9) Puts 660 / 13,325 Calls 720 / 10,042 Put/Call Ratio 1.33 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 5, 1999 Bottom? 32.12 September 3, 1999 21.39 Investors Intelligence 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 7, 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 4, 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 Sept 1, 1999 42.9 31.9 ** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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The Option Investor Newsletter 9-5-99 Sunday 2 of 7 ****************** TRADERS CORNER ****************** The OODA Loop The Marines teach their officers about a decision making cycle: Observation, Orientation, Decision, Action. An Air Force Colonel observed that, even though American planes were faster, the Russian MIGs beat the Americans in dog fights in Korea because the MIGs had tighter turning radiuses. The North Korean pilots could observe what the Americans were doing, orient on the situation, decide how to manuever, and act to get behind the American. Consequently, the Americans developed Top Gun and other training programs to become the best dog fighters in the world. The OODA principle is applied to all aspect of military decision making. Marine Lieutenants, cruising Georgetown bars for women, tell their buddies, "I got inside your loop," when they score the babe before their friend when conducting the inevitable Monday morning debriefs. So, what does this have to do with option trading? Well, I am sitting here at a Mexican breakfast joint a few hundred meters from Venture Capital central in Silicon Valley's Sand Hill Road, in a pit stop while moving my final load out of my apartment. The market is up huge, and I have just sold my QCOM calls for a 66% loss. And I'm happy about it. Why? Because I am doing what the Vulture Capitalists don't get a chance to do with their losers -- recover some capital, and ride my winners. Observation/ Orientation. I woke up before the open, and the jobs report, suprisingly, was good. Great open. My 8 positions were performing well. But EXDS was beginning to retrace, and the newsletter had dropped it, so I closed that position. I want to trim my losers and reinforce my winners as I go into next week's probable rally, thus making it easier to manage my profit taking. I was driving by the Pacific, and I checked my quotes on my NOK cell phone, and everything was pushing to new highs... except QCOM. Give me some help, technical analysts, huge market move up, stock down 2 points. Bad Juju. Closer to Palo Alto, I check my quotes by cell phone again. Market still at DOW+220, NAS+88, and now QCOM is down 5. Really bad juju. I know all about QCOM, and this action makes no sense. Are there going to be analysts meetings in the next two weeks before options expire? Given the last analyst coverage, I don't even know if I am looking forward to it, even if it is a suprise. Stocks move with the market, and this one is down huge. Royalties will be the key to future revenues, but the PE says it will take 250 years of present earnings to pay for the current price; stock is up 600% this year; Cramer is right -- if this one ain't got the mo, it ain't got the go. Decision. I have been burned before. In June, I bought EGRP calls and I KNEW that they would have a huge earnings run. EGRP had a huge earnings run in April, therefore... Well, the stock and the market just is. And EGRP had no earnings run, at least not one that got me back in the money. QCOM at 165 means my Sept 175s are pure premium. I'd rather have that cash to invest in better Oct calls in about a 10 days when the post labor day rally goes into a 2-3 day dip. I'd rather not have a big 100% loss than a 66% loss. Action. Sell QCOM calls. Got the executions before the Steak Ranchero arrived. On another level, the OODA loop is how you develop as a trader. It is more long term than what happened over the last 4 hours. It takes months. Observation/ Orientation. First of all, not everyone is meant to trade options, much as everyone is not meant to be a fighter pilot. Start small. Make sure what you put into a play you can afford to lose. Don't get in a position where a single bad trade or day can knock you out of trading for months, or forever. I called my buddy who first recommended the newsletter on the January morning when Brazil blew a fuze and futures were lock limit down. Should I sell? It was 5:30. He's a more level headed guy and had been trading for a year. What should I do? Go back to sleep. And the market tanked... then sprang right back up... and I made 100% profits on some of the AOL, MSFT and DELL plays that the newslette recommended. Once I got past that initial few weeks of gut wrenching moves of hundreds... thousands of dollars... I started to systematically analyze my trades. I read Jim's Plays, and used a format from his plays... QTY CONTRACT SYMBOL SOLD PRICE BOUGHT PRICE %GAIN COMMENTS on a MSFT Excel spreadsheet. I analyzed each play, tried to follow the 10 rules, and tried to learn from each play by making comments. Decision/ Action. I knew I had to take steps to improve my trading. I switched brokers so that I could use stop orders. I switched brokers again so that I could get better speed and execution. I joined a local club set up by the newsletter. I subscribed to qcharts (www.qcharts.com) and used Jim's newsletter about how to set up the program to get started. I moved money at down periods, and concentrated my capital in a single option trading account completely separate from my core stock holdings. And I am still learning. I am going to explore the more advanced strategies, so at least I have those lower risk techniques in the tool box. I am still fiddling around with techniques for putting 5/30 day moving average on individual stock an average stocks to determine entry/ exit points -- a technique we have been bouncing around the local club on our Email list. One of the most important lessons is that you have to develop a trading style that fits you. As Sun Tzu put it, if you know your self and your enemy, in a thousand battles, you will never be in jeopardy. On the other hand, if you don't you're screwed (slight modification of the original Chinese translation). My Plays. OEX 710. Miraculous jobs report induced recovery. In the money. Now up 17% on the play. Riding em into next week. Setting a limit sell at about 60% profit. As with the other limit sells described below, letting those limit sells ride into next week's rally, modifying as circumstances dictate. SUNW Sept 80. Beautiful Play. 207% return. Got em at 1 5/8, limit sell at 6. Going to let them ride into the NASDAQ lead rally next week. May raise the limit on the sell. Wish I had grabbed more yesterday. JDSU Sept 110. 26% profit. Letting it ride into next week's tech rally. Traders returning from the Hamptons still might have to figure out the magnitude of the CSCO/ Cerent/ JDSU connection. The only Red Hot to survive the week in my Great September Campaign. MSFT Sept 95. 20% profit. Just getting going. I could see Mister Softee testing its high at 100 in the next few weeks. Limit sells at 100% and 150% profits going into next week's NASDAQ lead rally. CSCO Sept 70. In the money this morning. 60% gain. Letting it run into next week's tech rally. Looks like the MSFT, CSCO, SUNW strategy of out of the money calls will pay off. Reinforced this CSCO play yesterday on the fed speak sell off. CSCO was strong in a down market, backed up the truck. GTW Sept 90. 8% return. Some split run, then again, it is better than down -20%. or -66%. Taking 20% of my positions off the table to build up some cash. And that's it. Started the week by shooting my wad too early on Monday. Might still make this a positive week. But very well positioned for next week with 3 NASDAQ generals. Had 7, then 8, positions, now down to 6, and I will be completely out of GTW by Tuesday afternoon. That will leave 5 to run to Thus or Friday. PPI Friday? Anyone else notice that the PPI/ CPI reports in June and August were positives for the market? Anyway, I want to exit all my Sept calls by next Friday, when the post holiday rally, if it goes, will probably begin to cycle down for a few days, and when I still have a week of time premium on my plays. But that is a week, and a lifetime in option trading away. Janar Wasito Janar@OptionInvestor.com ****************** OPTION CLUB UPDATE ****************** Sunday, September 5, 1999 CLUBS ARE GROWING BY LEAPS AND BOUNDS!! We currently have 72 active clubs with over 600 regular attendees. If you would like to join contact us at Visit@OptionInvestor.com and Organize@OptionInvestor.com. UPDATE FROM ATLANTA, GA: **************************** Great meeting everyone! Record crowds! Exponential growth from 7 to 14 to 31! We can thank such growth to experienced option traders that are willing to share their insights. As well as excellent presentations like the ones we've received Wednesday. Brad, thank you for your insightful presentation on your 10dma/50dma end-of-day selection system. It seems simple enough that even us part timers can use it with success. Francis, thank you for presenting your 4dma with follow thru selection system. Your 85%-90% accuracy is impressive. The award for the funniest line goes to Chris Brennen (I believe). He said: "I use support and resistance. If I buy a stock, I find I am the only one supporting it. And I am resistant to sell." George Selin announced that he is willing to teach his system to a few of us on a Saturday Sep-11. I am grateful to his offer. If he was on the seminar circuit he'd be collecting the big bucks. But for his OIN Denny's buddies - gratis. We've already reached capacity, but some people may cancel. So reply to this e-mail if you'd like to participate Saturday Sep-11. If we have large demand, we might talk George into an overflow Saturday. How about Jim Brown's comments: If you are going to play calls for the October earnings then you should be lining up your prospects now. I would start by trying to target shoot your favorites next week at about 50% less than current prices. Live, love, laugh, and leave a legacy Peter Sandek - email@example.com ************** BROKERS CORNER ************** Which role will your broker play today? Trading is very simple when you cut through the hype, fear and greed that push our emotional buttons and force us to make poor decisions. Three things can happen to a stock; it can go up, it can go down, or it can go sideways. As a trader, all of your decisions should logically follow which path your research has determined to be most probable. A good broker does not make money or lose money for their clients. It is their duty to ensure that the customer is educated about the risks, informed about the events that may affect their positions and most importantly EXECUTE THE PLAN. Any trade is worth doing as long a disciplined plan is created and followed. For example, entry price, profit taking point and stop-loss exit. We can help you formulate these essential parts to a successful plan. No one knows where the market is going to go, and for that matter what any individual stock is going to do. All we can do is take a disciplined approach to trading, one that is reasonable based on our market expectations. We help you choose the right option based on your individual strategy and style; but at the same time, stress using the variables of time and strike price in order to increase the mathematical probability of success. As live option brokers, we play many roles on a daily basis. (1) The Coach: teaches basic trading fundamentals that must be practiced until they become second nature. (2) The teacher: educates as to the different option strategies available based on market expectations. (3) The Psychologist and Counselor: help to relieve anxiety by creating contingency plans for unexpected events by using stops and profit orders. (4) The Comedian: make people laugh at the randomness of the market and the inability to control it. (5) The Clergyman: encourages faith in decisions right or wrong and most importantly to continue your path to success. Alan Knuckman & Andrew Aronson (888) 281-9569 ************* PICK SUMMARY ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Index Last Week Dow 11078.45 -11.72 Nasdaq 2843.11 84.21 $OEX 713.89 5.92 $SPX 1357.24 8.97 $RUT 435.97 3.52 $TRAN 3156.90 -41.11 $VIX 21.39 -1.82 Calls Week MU 80.13 11.25 Best Performer in the S&P 500 Index CHKP 85.56 10.31 New, this one is definitely a looker HGSI 77.00 9.63 Remember the biotech upgrade on Wed? SUNW 84.50 8.69 Drawing the line, challenging Microsoft DISH 85.88 8.63 New, it's back; red hot and soaring TXN 87.88 8.38 Semiconductors continuing to rally on FLEX 63.13 7.63 This one is showing incredible strength VRSN 109.69 7.31 Tremendous opportunities ahead?? ERTS 74.75 6.81 Investors and managers buy this one! INTC 89.31 6.31 Their defending its 48% market share BVSN 109.50 5.38 Use the dips for buying opportunities CNXT 76.38 5.13 New, setting a record high and going up JDSU 113.25 3.06 Their enjoying profit margins of 23% MSFT 96.00 2.75 The anticipated rally for next week CSCO 70.94 2.44 We said this is a buying opportunity DELL 49.44 2.38 New, showing a strong breakout pattern GTW 98.50 2.31 Dropped, the split is here, time to go ADI 53.56 2.25 Looking for momentum to reach the top SFA 53.44 2.00 Investors like clinging to this stock LGTO 45.25 0.81 Momentum play gets a shot of adrenaline UIS 43.81 -0.81 Dropped, this one fell off the edge CMGI 86.25 -0.88 New, potential earnings run candidate LXK 79.19 -1.00 Dropped, this play has lost its luster QCOM 163.38 -20.38 Dropped, this was no longer a blowout Puts HRB 46.75 -9.19 Buying Olde Brokerage is just too much DOW 115.38 -4.44 Just as the seasons change, fall will come KO 57.38 -4.38 New, troubles around the world haunt KO JCP 36.31 -3.31 This one hurting along with the sector ONE 39.48 -2.53 This performance is definitely anemic WLP 73.81 -1.44 Breaking its support and heading lower TWX 61.19 -0.25 Dropped, the bulls got the best of us WCOM 78.50 0.00 Dropped, no longer going the right way T 48.13 0.63 Dropped, it was a fun ride but it's over PVN 85.50 1.69 Dropped, this one turned with the rally STOCKS ADDED TO THE PICK LIST ***************************** CALLS: DELL - Dell Computer CNXT - Conexant FLEX - Flextronics CMGI - CMG Info Svcs DISH - EchoStar CHKP - Check Point Software PUTS: Please confirm downward motion before playing. With the market in rally mode any beat up stock starts looking like a value play. KO - Coca-Cola PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS: QCOM $163.38 (-20.38) QCOM has had quite a week. One visit with an analyst at the company headquarters in San Diego, CA and twenty four hours later, a loss of just under $3.8 bln in the company's market cap. All of this because the are not expected to "blow out" analyst estimates for this quarter. Investors didn't seem to care that their earnings will continue to grow at approximately 170% compared to the 10% estimated for the Telecomm Equipment industry. Shares of Qualcomm stock fell $23.50 Wednesday. Also with the strength in the broader markets Friday, QCOM ended the day down $3.88 at $163.38. The bounce should come sometime next week however it may not. We do believe that QCOM will be back on our list again but we will stand aside for now. LXK $79.19 (-1.00) Well, LXK is looking like a stunt airplane. After some incredible maneuvers and giving us a profit of over $12 since our pick, it looks like we're ready to stall. Despite the strong market Friday, it looks like we are at resistance at $80, so we're going to drop LXK for now. This is being confirmed with slowing momentum in our technical indicators. Also the stochastics and MACD are turning negative. Remembering the successful investor who said, "I never stayed in too long", we'll follow his advice. Content with a good profit, and ready to invest them in some momentum stocks poised to participate in a post-Labor Day rally. Kudos to a good play! GTW $98.50 (+2.31) GTW has provided us with $9.25 in gains since we picked it up on August 19th but now it's time to end this split play. The stock will split 2:1 after the bell on Tuesday and you should have your call positions closed by then if you haven't already. OIN never recommends holding over a split date because generally speaking, a stock will decline. It's just not worth the risk. UIS $43.81 (-0.81) If there are any players left with open positions, your stops should protect you from the stock's threatening reversal. After UIS's performance on Thursday, we kept it on our call list expecting another solid bounce towards its overhead resistance at $46.18 especially if the market rallied. Well we got a very exciting market rally on Friday but unfortunately without any upward movement from UIS. Needless to say UIS is being dropped this weekend for lack of enthusiasm. PUTS: PVN $85.50 (+1.69) Friday's positive employment report signaled an end to our play of Providian. The stock gapped open sharply on the word that new jobs created for August were only half of what analysts were expecting. This sent the 30-year bond yield plummeting and financial stocks soaring. Whether or not PVN will be able to hold the gains from Wednesday over the short- term is left to be determined but we expect sentiment to carry over this week. Therefore we are recommending to close out put plays on PVN. The stock is right at resistance at the 10-dma and any move above that will considered bullish. So look for an exit point and we will look for new put plays. WCOM $78.50 (+0.00) We had cautioned that with any market strength on favorable Friday employment numbers, WCOM would follow the market. Furthermore, WCOM was having a hard time getting south of $73, our next targeted entry point. As if that weren't enough, the telecom sector developed a real hot streak. So it's time to hang up on that noise. We're cutting the line on WCOM as a put play but may bring it back as a play if the sentiment changes. They really are well positioned in the sector and investors may decide to rally the price. T $48.13 (+1.13) The time has come to drop T from our current play list. AT&T closed above its 10-dma on Friday and appears to have an improving technical picture, along with momentum. With market sentiment turning bullish, thanks to easing rate hike fears, we feel this Dow component has relief rally spelled all over it. We've had some nice moves to play on AT&T but feel the momentum changing. Like always, we'll keep an eye on T's movement in the future so we can bring any further plays to your attention. Look for an exit point on an intraday dip if your stops haven't already taken you out. TWX $61.19 (-0.25) The bulls showed just how strong they were on Friday. Unfortunately, our current play decided to join in and flex its muscle as well. It was not necessarily the size of the gain that worried us but the fact that it managed to once again bounce off its $60 dollar support level. Looking at a chart you will see history speak for itself. In late December, January and February you will see the same pattern. Each time the stock hit the $60 support, it bounced. For this reason and the fact the market is showing signs of rejuvenation we have decided to end the play. STOCK SPLIT CANDIDATES *********************** IDPH - IDEC Pharmaceutical (current play) SNE - Sony Corp. QCOM - Qualcomm, Inc. PMCS - PMC-Sierra, Inc. SLR - Solectron, Inc. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date GTW - Gateway Comp 2:1 09-07-99 ex-date 09-08 KIDE - 4Kids 2:1 09-13-99 ex-date 09-14 SMTC - Semtech 2:1 09-14-99 ex-date 09-15 MCRL - Micrel 2:1 09-15-99 ex-date 09-16 LSCC - Lattice Semi 2:1 09-16-99 ex-date 09-17 CEFT - Concord EFS 3:2 09-22-99 ex-date 09-23 ROSS - Ross Stores 2:1 09-22-99 ex-date 09-23 MDT - Medtronic 2:1 09-24-99 ex-date 09-27 VOD - Vodaphone 5:1 09-30-99 ex-date 10-01 TYC - Tyco 2:1 10-21-99 ex-date 10-22 SEBL - Siebel Systems 2:1 11-12-99 ex-date 11-15 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** DELL - Dell Computer $49.44 (+2.38) Is it time yet? A non-earnings run? Chart = http://quote.yahoo.com/q?s=DELL&d=3m ****** SFA - Scientific Atlantic Inc. $53.44 (+2.00)(+4.94) See details in sector list Chart = http://quote.yahoo.com/q?s=SFA&d=3m ****** ADI - Analog Devices Inc. $53.56 (+2.25)(+5.44)(-2.13) See details in sector list Chart = http://quote.yahoo.com/q?s=ADI&d=3m ****** Put play of the day: ******************* NONE *********** CALL PLAYS begin in section three *********** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 9-5-99 Sunday Part 3 of 7 *************** Hardware *************** DELL - Dell Computer $49.44 (+2.38) Dell is the direct sales model leader and pioneer of the online retail business. They sell PC's notebooks, servers and work stations built to order direct from their factories worldwide. Dell also markets a variety of peripherals and software for other manufacturers. They are growing at an annual rate of 41% with margins that are the envy of the industry. Their return on equity is a whopping 79%. Almost 70% of its systems are sold to government entities and large businesses. They are the world's leading direct computer systems company and one of the top five computer vendors in the world. Strong momentum and a good relative performance to the broad markets has brought Dell back to our call list. You may remember we played Dell for their earnings run up to Aug 17 and, like always, had to let them go in fear of a post-earnings depression. But after 6 months of consolidating and basing between $35 and $45, a strong breakout pattern has emerged. The computer sector has lead the way for the NASDAQ as most sector participants are at, or near, new all-time highs. We expect the momentum for Dell to continue in part thanks to the release of the bullish employment report on Friday and we are also heading in the strong season for computer sales, spurred by back to school sales. Dell is moving up along the 10-dma and hit a new short-term high on Friday. Once we clear $50, resistance should be light until we reach the all-time high at $55. Buying on the dips to the 10-dma has proved to be extremely successful during the past month. You may want to consider this for possible entry points. Another catalyst for our play is strong earnings and revenue projections from analysts. Dell was stuck in a re-valuation phase for the past six months as revenue increases had begun to flatten out. This caused the high P/E multiple, which Dell had been able to command in the past, to shrink. Analysts were encouraged by this most recent quarter since revenue percentage increases had stabilized. The most recent 8 changes to analyst ratings have been upgrades. ***2 weeks remaining until September expiration*** BUY CALL SEP-45 DLQ-II OI=61303 at $4.75 SL=3.25 ITM BUY CALL SEP-50 DLQ-IJ OI=56339 at $1.31 SL=0.00 BUY CALL OCT-45*DLQ-JI OI=15138 at $5.88 SL=4.25 BUY CALL OCT-50 DLQ-JJ OI=22602 at $2.88 SL=1.50 Picked on Sep 5th at $49.44 P/E = 73 Change since picked +0.00 52 week high=$55.00 Analysts Ratings 13-12-7-0-0 52 week low =$20.38 Last earnings 08/99 est= 0.17 actual= 0.19 Next earnings 11-12 est= 0.20 versus= 0.14 Average daily volume = 24.8 mln Chart = http://quote.yahoo.com/q?s=DELL&d=3m ***** SUNW - Sun Microsystems Inc, $84.50 (+8.69)(+1.94) Sun Microsystems is the largest computer maker that uses its own chips. Probably their most talked about product is "JAVA", a programming language which is intended to create software that can run unchanged on any kind of computer. SUNW is also a leading maker of UNIX-based workstation computers, storage devices and servers. They compete with the biggest on the block in Microsoft, IBM and Compaq. SUNW markets its hardware and software products to primarily in the telecommunications and financial industries. General Electric is on of their better customers and accounts for approximately 14% of their sales. The institutions like SUNW and so do we. The latest check on institutional ownership shows that over 1600 institutions are invested in Sun Microsystems. They account for approximately 67% of the ownership of SUNW stock. Comments from Fed Governor Kelley and the negative tone in the markets earlier in the week didn't really shake up SUNW. Tuesday morning SUNW opened at $79.50 and continued higher for the balance of the week, making a new high at $84.69 in the last hour on Friday. SUN drew a line in the sand and challenged Microsoft to step over it, when they announced the acquisition of Star Division Corp and its StarOffice productivity suite. The StarOffice software is apparently completely compatible with the MS Office family of products including Word and Excel and is designed to make the transition from Microsoft's products to Sun's products much easier. Microsoft has been scrambling and announced it is intensifying its efforts to offer its own web-based office productivity services. Just how many people will really make the switch is yet to be determined but several analysts feel SUNW poses very little threat to Bill Gates and company. With many investors returning from vacation this week we are looking for SUNW to continue higher as many feel the "Big Boys" will be back in the saddle again and will bring with them a burning desire to push the technology stocks higher. Remember nothing goes straight up or down so pick your entry points carefully. If you are currently in a play on SUNW, move your stops up. In other news Wednesday Lehman Bros. raised its price target For SUNW from $80 to $95. One other note, chat rooms on the Internet are a buzz about a potential stock split for SUNW. There is nothing confirmed by the company but they do have enough shares available if they want to split. ***2 weeks remaining until September expiration*** BUY CALL SEP-80*SUQ-IP OI= 8388 at $5.63 SL=4.00 BUY CALL SEP-85 SUQ-IQ OI= 2407 at $2.50 SL=1.25 BUY CALL OCT-80 SUQ-JP OI=11014 at $8.00 SL=6.25 BUY CALL OCT-85 SUQ-JQ OI= 4400 at $5.13 SL=3.25 BUY CALL OCT-90 SUQ-JR OI= 1987 at $3.13 SL=1.50 Picked on Aug 28th at $76.19 P/E = 67 Change since picked +8.31 52 week high=$84.69 Analysts Ratings 10-9-3-0-0 52 week low =$19.19 Last earnings 07/99 est= 0.47 actual= 0.48 surprise +2.13% Next earnings 10-14 est= 0.31 versus=-0.25 Average daily volume = 7.96 mln Chart = http://quote.yahoo.com/q?s=SUNW&d=3m ******** Software ******** ERTS - Electronic Arts, Inc. $74.75 (+6.81)(+2.94)(+5.75) Electronic Arts, headquartered in Redwood City, is the world's leading interactive entertainment software company. Founded in 1982, Electronic Arts posted revenues of more than $1.2 billion for fiscal 1999. The company develops and publishes approximately 100 games and distributes over 1000 software titles worldwide for personal computers and video game systems. Electronic Arts markets its products under seven brand names: Electronic Arts, EA SPORTS(TM), Maxis(TM), ORIGIN(TM), Bullfrog(TM) Productions, Westwood Studios(TM) and Jane's Combat Simulations. Sony Playstation software accounts for about 40% of its sales. EA has distribution centers in 75 countries and derives nearly half its sales internationally. Watch them buy. . .not just customers buying ERTS's electronic games but money managers buying all the shares in site. How do we know? While we can't be 100% certain, we do know that ERTS is already 95% institutionally owned, leaving very few buyable shares in float. On a normal day, ERTS will trade about 715 K shares. Friday, ERTS traded over 1 mln shares on an otherwise light volume day for the rest of the markets. After all, it was a summer Friday prior to a 3-day weekend, making that excess volume all the more impressive. As we've noted before, when volume exceeds the ADV, that's not the retired couple pulling off the road at the nearest phone booth to call their broker. Of course, with limited supply and extra demand buyers will have to pay up for the shares, and voila!. . .a rising price! What drives demand? Simple. ERTS is gearing up to produce and sell a record number of e-games this quarter and next quarter for the holiday season, which means ERTS doesn't suffer from the same slow third quarter so endemic to other goods and services providers. With the unofficial end of summer following the Labor Day weekend, we expect the market to be up this week, as money managers and traders return to their offices. Extra volume is great for this play. The only thing to be on the lookout for is profit-taking, since ERTS has been up 5 days in a row on a rocky week. With such a thin float, it shouldn't be down for long, though the nearest support is way back at $67. Consider it a buying opportunity if it gets back there. For those wanting to play, but fearing you'll wait forever while the stock runs away, the best suggestion we can make is to buy the dip that appears to occur with regularity after amateur hour. Of course, confirm market direction first and remember those stops just to be safe. Oh yes, did we mention this is a significant breakout, setting a new all-time high? Watch for new strike prices on Tuesday morning. ***2 weeks until September strike expiration*** BUY CALL SEP-70*EZQ-IN OI=107 at $6.13 SL=4.25 BUY CALL SEP-75 EZQ-IO OI= 0 new strike, pricing unavailable BUY CALL OCT-70 EZQ-JN OI= 49 at $8.63 SL=6.50 BUY CALL OCT-75 EZQ-JO OI= 84 at $5.88 SL=4.00 Picked on Aug 22nd at $65.50 P/E = 63 Change since picked +9.25 52 week high=$70.19 Analysts Ratings 8-4-1-0-0 52 week low =$33.25 Last earnings 07/99 est= 0.01 actual= 0.04 surprise +300% Next earnings 10-22 est= 0.25 versus= 0.17 Average daily volume = 714 K Chart = http://quote.yahoo.com/q?s=ERTS&d=3m ***** LGTO - Legato $45.13 (+0.69)(+4.88) Legato Systems is a developer, manufacturer and seller of network storage management software for large-scale enterprises and client/server computing environments. Their products are designed to work with a wide range of storage, client and server hardware based on Windows, NT, UNIX, OS/2, DOS, Netware and Linux operating systems. LGTO remained convincing as it consolidated for the better part of the week above its firmly established support level of $42. More importantly it never dipped below the 10-dma (now also at $42), a mark that has proven to be a solid entry point and excellent gauge. Remember we cautioned that a slip below this level should raise red flags, especially since LGTO has usually traded above this indicator during its recent run-up. After much patience, our momentum play got a shot of adrenaline during the powerful broad market rally on Friday propelling it literally onto its overhead resistance. LGTO advanced $2.25 and closed smack on $46.13, the 52-week high set on August 27th. Assuming we get a continuance of a bull market after the holiday, there should be nothing to hold LGTO back from breaking out to new heights. As always, put as many odds in your favor and confirm market and stock direction before beginning a new play. Remember nothing is guaranteed so be prepared and consider using stops. In the news this week, the company announced a Legato Continuum. For the first time this enables an enterprise-wide information continuance through an established infrastructure of both data and application requirements across business units, technologies and geographical boundaries. ***2 weeks until September strike expiration*** BUY CALL SEP-40 EQN-IH OI=2611 at $5.75 SL=4.00 BUY CALL SEP-45*EQN-II OI= 366 at $2.06 SL=1.00 BUY CALL SEP-50 EQN-IJ OI= 22 at $0.63 SL=0.00 High Risk! BUY CALL OCT-45 EQN-JI OI= 594 at $4.00 SL=2.50 BUY CALL OCT-50 EQN-JJ OI= 23 at $2.06 SL=1.00 Picked on Aug 29th at $44.44 P/E = 119 Change since picked +$0.69 52 week high=$46.13 Analysts Ratings 11-6-1-0-0 52 week low =$13.75 Last earnings 06/99 est= 0.26 actual= 0.29 surprise+11.54% Next earnings 10-14 est= 0.16 versus= 0.08 Average Daily Volume = 913 K Chart = http://quote.yahoo.com/q?s=LGTO&d=3m ***** MSFT - Microsoft Corp. $95.88 (+2.75) 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. Friday's market direction moved us into a lot of positives for MSFT. As we get ready to take advantage of the anticipated tech rally, this puts us in a good position to profit from any upward move. The positives are these: a new six-week high of over $96, a positive daily price gap, and positive breakouts on our MACD. We also got a good last hour kick on increased volume Friday, showing anticipation of a rally next week. It would be nice if we could be sure of this rally however but such is not our luxury. We must continue to be careful of the pending interest rate increases and the PPI and jobless claims report which will be our clues to the future during the week. Any negative news in these reports could put the lid on our hopes so use caution. Support is now at $93, use this as a benchmark for stock direction and possible entry and exit opportunities. Espionage by Microsoft or another conspiracy theory? News that a web site posted news of Microsoft working with the Federal government to spy on individuals spread quickly on Friday. MSFT has denied the fact and assures us that we are safe! Remember your psych classes on relativity? Who really knows? Will we ever know? There was more information about the growing ASP industry or Application Service Provider. You can rent applications online for your specific needs. Some see this as a threat to MSFT but really! MSFT has already begun steps to offer there products online so it should continue to be a fact of user preference. ***2 weeks until September strike expiration*** BUY CALL SEP- 90 MSQ-IR OI=27893 at $6.63 SL=4.75 BUY CALL SEP- 95*MSQ-IS OI=26552 at $2.88 SL=1.50 BUY CALL OCT- 90 MSQ-JR OI=15597 at $8.38 SL=6.50 BUY CALL OCT- 95 MSQ-JS OI=18507 at $5.38 SL=3.25 BUY CALL OCT-100 MSQ-JT OI=25984 at $3.00 SL=1.50 Picked on Aug 31th at $92.56 P/E = 65 Change since picked +3.31 52 week high=$100.75 Analysts Ratings 13-18-2-0-0 52 week low =$ 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 = 25.8 mln Chart = http://quote.yahoo.com/q?s=MSFT&d=3m ***** CHKP - Check Point Software $85.56 (+10.31) Corporate security has come a long way since the days of night watchmen patrolling the grounds. Most sensitive information is on networks, which must be protected from hackers, both from within and outside the company. Check Point Software is the leader in firewall products, which help corporations protect their networks from unauthorized access (hackers). Check Point makes products which verify remote users, controls user access, blocks viruses, clears congestion on crowded Internet and intranet links and enables companies to set up private networks for secure internal and remote communications. Based in Israel, Check Point has subsidiaries in Europe, North America and the Pacific Rim. Check Point has been on a roll lately. Its products are in high demand and several companies, including Intel and GTE have recently introduced new products using Check Point's technology. Benefiting from the surge in the NASDAQ, CHKP broke out to a new 52-week high on Friday on above average volume. Even with CHKP's recent run-up, it still has not reached the astronomical multiples common among many tech stocks. As we look for a post- Labor Day rally in stocks and tech stocks in particular, look for CHKP to continue to outperform and set new highs. With CHKP and the broad market spike on Friday, entry points may be tricky. CHKP has been moving up nicely with pullbacks in the neighborhood of the 10-dma. This has provided solid entry points in the past so should be considered for new plays. If the market moves up again next week, the best bet may be to buy on intraday dips As Check Point has been rising, it has caught the attention of several analysts. Sands Brothers recently initiated coverage with a Buy rating. Check Point hit a major milestone two weeks ago when it licensed its 10 millionth licensed user of its VPN-1 SecuRemote client of the year, another indication that Check Point is positioned to lead its field for a long time. ***2 weeks remaining until September expiration*** BUY CALL SEP-80*KEQ-IP OI=200 at $7.63 SL=5.75 BUY CALL SEP-85 KEQ-IQ OI= 4 at $4.50 SL=2.75 low OI BUY CALL OCT-85 KEQ-JQ OI= 20 at $8.75 SL=6.50 BUY CALL OCT-90 KEQ-JR OI= 0 at $6.25 SL=4.50 just opened Picked on Sep 5 at $85.56 P/E = 41 Change since picked +0.00 52-week high=$86.13 Analysts Ratings 9-8-0-0-0 52-week low =$10.89 Last earnings 07/99 est= 0.50 actual= 0.53 Next earnings 10-20 est= 0.56 versus= 0.45 Average Daily Volume = 600 K Chart = http://quote.yahoo.com/q?s=CHKP&d=3m Internet ******** BVSN - Broadvision, Inc. $109.50 (+5.38)(+8.38) What happens when you develop great relationships? Chances are you make friends and doing business with friends is fun, secure, and long term. This is the business of BVSN. They provide Internet software applications that focus on business relationships. These application solutions address issues such as company business processes, secure online transactions, improving speed and performance and Internet communications. These solutions are directed specifically to a companies customers, employees and partners. Another key advantage of Broadvision applications is that they can integrate into a company's existing system. These software applications are finding great success in the e-commerce and financial markets which have attracted over 275 customers such as American Airlines, Ernst & Young, Fingerhut, Hartford, HWP, Oracle, Toyota and Visa, among others. With friends like these, you can see that Broadvision's strategies are working. A cardinal rule for traders is to not become emotionally involved in their trades. Easier said than done! But it was nice to see BVSN regain its strength of early August. It has moved us once again above the 10-dma to positive breakouts on stochastic and MACD. It looks like a rally during the week could send us to a new high. The down side is that with such wide daily swings, and the ever decreasing average hold time of investors, it's inevitable that money will be taken off the table from Friday's gain. With a post Labor Day rally expected, use the dips as buying opportunities but, confirm market and stock direction so you don't get caught short. Also keep an eye on volume next week. BVSN is a stock with a lot of potential and as investors come back into the markets, volume will indicate the intensity of that interest. Use it to your advantage. There was some good news in an article by Loren Fox from Upside Media. Reiterating the potential for technology stocks to rise As investors come back from vacation, the article also notes that BVSN is having a special shareholders meeting on Sept.17th, to raise it's authorized shares to 500 million. Potential stock split anyone? This could be fun! ***2 weeks until September strike expiration*** BUY CALL SEP-105*QVB-IA OI=266 at $ 8.75 SL=6.50 BUY CALL SEP-110 QVB-IB OI=435 at $ 6.25 SL=4.25 BUY CALL SEP-115 QVB-IC OI= 74 at $ 4.00 SL=2.50 BUY CALL OCT-110 QVB-JB OI= 14 at $11.50 SL=8.75 low OI BUY CALL OCT-115 QBV-JC OI= 21 at $ 8.88 SL=6.75 low OI Picked on Aug 15th at $93.50 P/E = 255 Change since picked +16.00 52-week high=$116.38 Analysts Ratings 6-12-1-0-0 52-week low =$ 9.25 Last earnings 07/99 est= 0.19 actual= 0.22 Next earnings 10-15 est= 0.24 versus= 0.15 Average Daily Volume = 564 K Chart = http://quote.yahoo.com/q?s=BVSN&d=3m ***** CMGI - CMG Information Services Inc $86.25 (-0.88) CMGI invests in, develops, and integrates advanced Internet, Interactive and database management technologies. The company's venture capital arm is called @Ventures and boasts a portfolio of over 30 Internet companies such as Lycos and Raging Bull. One of the more prominent additions to its portfolio is a 83% acquisition of search engine, Alta Vista. The majority of CMGI's revenues (80%) is derived from fulfillment and mailing list services. CEO David Wetherell has about 19% stake in CMGI. We're adding CMGI to our list of calls purely as a potential earnings run candidate. Historically, CMGI has run-up prior to its earnings announcement. Take a look at a 6-month chart and you can easily see the spike in early April. So if CMGI responds in the same manner, now is a good time to find an entry point before momentum carries it too much higher. CMGI is expected to report 2Q earnings in just a few weeks on Friday, September 24th and we will confirm this date as soon as the information becomes available. From a technical standpoint, $80 has proven to be a solid support level for CMGI in this topsy-turvy market with near-term resistance at $93. This overhead opposition was a daily high hit on August 26th after a Strong Buy rating and a $147 target price issued by analyst Paul Merenbloom of Prudential. We saw CMGI advance $6.13 (7.7%) in Friday's explosive market as it followed the sector out of a two-day slump. If the fund managers start snapping up the Internets next week we could easily see share prices continue to rise. Analyst Keith Benjamin of BBRS believes "the whole group will generally rise through September, heading toward old highs by year-end". Please consider your tolerance for risk before opening any positions. This play is not for the faint-hearted! In the news, CMGI's capital venture arm, @Ventures has provided initial funding to Intelligent/Digital, a provider of e-commerce software solutions. Intelligent/Digital furnishes market making technologies and services in a Real Time environment to buying and selling business-to-business communities. ***2 weeks remaining until September expiration*** BUY CALL SEP-80 QGW-IP OI=2593 at $8.13 SL=6.25 BUY CALL SEP-85*QGW-IQ OI=2853 at $4.88 SL=3.25 BUY CALL SEP-90 QGW-IR OI=3055 at $2.50 SL=1.25 BUY CALL OCT-85 QGW-JQ OI= 236 at $9.50 SL=7.25 BUY CALL OCT-90 QGW-JR OI= 500 at $7.38 SL=5.75 Picked on Sep 5th at $86.25 P/E = 141 Change since picked +0.00 52-week high=$165.00 Analysts Ratings 2-8-0-0-0 52-week low =$ 8.87 Last earnings 04/99 est=-0.19 actual=-0.27 surprise -42.1% Next earnings 09-24 est=-0.20 versus= 0.32 Average Daily Volume = 6.17 mln Chart = http://quote.yahoo.com/q?s=CMGI&d=3m ***** VRSN - VeriSign Inc $109.25 (+6.88)(+15.44)(+3.94)(P4W -11.25) VeriSign provides Internet-based trust services that will authenticate and protect data so secure transactions and communications can be conducted over the Internet, intranet and extranets. Websites, enterprises, government agencies and even individuals use VeriSign's digital ID's (digital certificates) with the encrypted information as cyber- safeguards for such activities as e-mail, home banking and credit card transactions. Visa represents 14% of total sales. VRSN's momentum is continuing to provide the HIGH RISK INTERNET players with tremendous opportunities for big profits. On Monday, Sands Brothers & Co kicked-started VRSN with a reiteration of a Strong Buy rating setting the stage for gains topping 6% through Tuesday. The slight downdraft that followed then provided players with solid entry points. Despite this descent on Thursday, Dain Rauscher Wessels prescribed a positive point of view. They upgraded VRSN with Strong Buy Aggressive rating and cited the company's business momentum is accelerating, thus providing upside potential for investors. Once the markets got the green light from the lower-than-expected Jobs numbers on Friday, VRSN responded just like clockwork. It bounced off its 10-dma springboard at $103 and hopped on the bandwagon gaining $5.81 by the finish. Notably the volume picked back up to levels above its ADV moving it back towards overhead resistance at $114, the 52-week record set on August 26th. If the broad rally continues after the holiday, you may want to target-shoot for an entry. The common wide intraday swings present an abundance of entry and exit points but use caution with stops in this VOLATILE play since the wide swings can inadvertently stop you out of your position. Therefore you want to give this HIGH RISK INTERNET play very close attention. Plus keep in mind VRSN faces some opposition at $114 and the stock is certainly not immune to consolidation. On Monday, MindSpring Enterprises (MSPG) reported VeriSign will be the preferred on-line security provider for their Web hosting division. The following day 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 allowing their broad range of clients more choice and control regarding their security requirements. On Wednesday VeriSign disclosed a joint venture with Ideal Technology Solutions. They have agreed to join forces in providing Internet trust services for the Automotive Network Exchange (ANX) enabling auto manufactures like Ford and GM to conduct business-to-business transactions with suppliers. ***2 weeks until September strike expiration*** BUY CALL SEP-105 YVR-IA OI=196 at $ 9.00 SL= 6.75 BUY CALL SEP-110*YVR-IB OI=759 at $ 6.00 SL= 4.25 BUY CALL SEP-115 YVR-IH OI=113 at $ 4.25 SL= 2.75 BUY CALL OCT-110 YVR-JB OI= 99 at $13.38 SL=10.75 BUY CALL OCT-115 YVR-JH OI= 45 at $11.13 SL= 9.00 low OI Picked on Aug 15th at $83.00 P/E = N/A Change since picked +26.25 52 week high=$114.00 Analysts Ratings 5-7-3-0-0 52 week low =$ 9.68 Last earnings 06/99 est=-0.02 actual= 0.00 Next earnings 10-22 est= 0.02 versus=-0.09 Average Daily Volume = 1.16 mln Chart = http://quote.yahoo.com/q?s=VRSN&d=3m ************** Semiconductors ************** ADI - Analog Devices Inc. $53.56 (+2.25)(+5.44)(-2.13) Analog Devices, Inc. is a semiconductor company that designs, manufactures, and markets high-performance circuits used in analog and digital signal applications. Its normal linear ICs translates pressures, temperatures and sound into digital as well as analog signals. The chips are used in communications equipment and computers. Other arenas where the chips are implemented are in engineering, medical and scientific instruments. Well, we had a bounce on Friday from Thursday's $1.00 loss as ADI rebounded $0.81 points to close once again in positive territory. The stock closed at $53.56 on relatively heavy volume of 1.5 mln shares. This move can be attributed to market momentum initiated by a weaker than expected employment rate released by the Labor Department. Although we would have hoped for a stronger showing Friday considering the market. But currently ADI is still showing technical strength, closing well above its 10-dma of $50.50. Furthermore, the stock is once again moving closer to a new all-time high of $54.94 and if market momentum carries over to next week, a new high is possible. In the news this week, an internal review told of how the company will meet its long-term business strategies and represents the company's focus on management resources to achieve their corporate goals. Let the stock show some relative strength before opening any new plays. The big news for the week on ADI was announced on Sep 1st. ADI unveiled the ADP3421 and ADP3410 converter chips that will be implemented in Intel's Mobile Voltage Positioning technology. This will be the industry's first DC/DC converter chip used by Intel. This technology primary function is to decrease power consumption of the Intel mobile processor. This announcement was made at the Intel Developer Forum in Palm Springs, California. The new technology was developed by Intel and refined by ADI. ***2 weeks until September strike expiration*** BUY CALL SEP-45 ADI-II OI=7244 at $9.00 SL=6.75 BUY CALL SEP-50*ADI-IJ OI= 925 at $4.75 SL=3.25 BUY CALL SEP-55 ADI-IK OI=1062 at $1.88 SL=1.00 BUY CALL OCT-55 ADI-JK OI= 331 at $3.75 SL=2.50 Picked on Aug 28th at $51.31 P/E = 59 Change since picked +2.25 52 week high=$54.94 Analysts Ratings 8-6-1-0-0 52 week low =$12.00 Last earning 08/99 est= 0.30 actual= 0.30 Next earning 12-02 est= 0.35 versus= 0.16 Average Daily Volume = 1.01 mln Chart = http://quote.yahoo.com/q?s=ADI&d=3m PLAYS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-5-99 Sunday 4 of 7 *************** CALLS CONTINUED *************** INTC - Intel Corp $89.31 (+6.31)(+3.06)(+0.19)(+8.19)(+2.56) Its best customers are Compaq, Dell, and IBM. Intel is the world's #1 chip maker. The powerful Pentium and low-end Celeron are Intel's claim to fame. These microprocessors have provided the brains for IBM-compatibles since 1981. Recently INTC has began a major push into communications products such as servers and networking devices. Their microcontrollers and flash memories are used in products for communications, industrial equipment, and military markets. INTC set a new all-time high of $89.50 on Friday and a new closing high of $89.31. It is now up 130% in the last 12 months. It is up about 30% just since we added it once again to the newsletter at the end of July. There are four main reasons for this phenomenal price appreciation. First, the investment climate for tech stocks has been incredibly good. Fortunately, the jobs report released on Friday will help to maintain that climate. Second, the demand in general for chips has soared. In July 1999, global sales of semiconductors were $11.55 bln, up 19.3% from the previous year. Analysts see continued growth for the foreseeable future. Third, Intel has worked aggressively to defend its own dominant 85% market share in PC chips. It has responded to competition from the likes of AMD with accelerated new product introduction and with price cuts on existing chips. Its new 700+ Coppermine Pentium III will be out in October, and a prototype of the next generation Merced chip is already being shipped. Fourth, and perhaps most importantly, INTC is not content to rely on PC chip sales for future growth. No, instead the king of computer chips is jumping into the lucrative communications chip market in a big way. This market is said to be worth between $28 and $29 bln and is expected to grow between 15% and 25% annually, depending on which analyst you listen to. INTC also unveiled its reprogrammable networking chip last week. The chip will replace the current much slower chips used in the switches and routers that make up the backbone of the Web. INTC is investing heavily in networking technology. This includes a string of acquisitions and a just-established $200 mln venture fund. Finally, analysts continue to join the INTC upgrade parade and that helps keep the momentum in this stock going. Most news is contained in the paragraph above. We must mention again that INTC has serious competition from AMD in the PC processor market and from multiple companies in the networking market, the newest of which is another giant--IBM. On Friday, John Lazlo, of Paine Webber, reiterated his Intel Buy rating and $95 price target. Warburg Dillon Read's analysts also made positive comments about Intel's foray into the networking business. ***2 weeks until September strike expiration*** BUY CALL SEP-85*INQ-IQ OI=18511 at $5.50 SL=3.75 BUY CALL SEP-90 INQ-IR OI=13527 at $2.19 SL=1.00 BUY CALL OCT-85 INQ-JQ OI=12060 at $7.50 SL=5.75 BUY CALL OCT-90 INQ-JR OI= 5811 at $4.75 SL=2.75 BUY CALL OCT-95 INQ-JS OI= 5586 at $2.69 SL=1.25 Picked on July 31st at $69.00 P/E = 40 Change since picked +20.31 52 week high=$86.00 Analysts' ratings 14-15-6-0-0 52 week low =$37.28 Last earnings 06/99 est= 0.54 actual= 0.51 surprise=-5.56% Next earnings 10-13 est= 0.56 versus= 0.44 Average daily volume = 23.2 mln Chart = http://quote.yahoo.com/q?s=INTC&d=3m ***** MU - Micron Technology Inc $80.13 (+11.25) 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 was the BEST PERFORMING stock in the Standard & Poor's 500 index for the past week showing gains of +15.9%! Micron had started picking up its momentum after the company presented industry samples of its 133MHz 128Meg DRAM components which offer cost-effective solutions for a wide variety of current applications using high-bandwidths. The product announcement was followed by an abundance of positive comments by analysts. This popped MU out of its support level of $68 and since then the stock has perpetually climbed upwards. On Friday, the day after we added MU to our call list, it led the Philadelphia Semiconductor Index to a 5.2% rise to close at a new all-time high of 560.90. MU had advanced a whopping $4.88 (6.5%) on strong volume to bring it just fractions away from breaking overhead resistance at $80.56, the 52-week high set in February. The stock presented a nice finishing touch as it bullishly closed just a few cents under its daily high. Expecting the market to continue its rally after the holiday, you'll have to look for a daily bottom to jump into this play. In a report by DLJ's Kevin McCarthy on Friday, the price of Micron's DRAM chips jumped $0.75 to $9.90 in just one day on Taiwan's spot market, the biggest one-day jump in a year. Since many electronics dealers are adding to their inventory due to a tight supply likely attributed to more demand in the US market, the price of Micron's components could hit $10 next week, subsequently fueling the stock's rising share price. And furthermore, according to analyst John Lazlo of Paine Webber, the DRAM market "is expected to expand faster than any other sector, driven by above average growth prospects in many segments such as wireless and networking". Also, the World Semiconductor Sales are tooting a 19.3% rise for July. On the analyst front this week, Gruntal & Co reiterated a Strong Buy rating on Tuesday 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 current earnings estimates for Micron. On Wednesday, Soundview upgraded MU to a Strong Buy from a Buy and also, ABN Amro reiterated a Buy rating and upped the stock's target price to $90. ***2 weeks until September strike expiration*** BUY CALL SEP-75 MU-IO*OI=3634 at $6.88 SL=5.25 BUY CALL SEP-80 MU-IP OI=2919 at $4.00 SL=2.50 BUY CALL SEP-85 MU-IQ OI= 801 at $2.06 SL=1.00 High Risk! BUY CALL OCT-80 MU-JP OI=2426 at $7.88 SL=6.25 BUY CALL OCT-85 MU-JQ OI=1670 at $5.75 SL=4.00 Picked on Sep 2nd at $75.25 P/E = N/A Change since picked +4.88 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 = 5.20 mln Chart = http://quote.yahoo.com/q?s=MU&d=3m ***** JDSU - JDS Uniphase $113.25 (+3.06)(+8.25)(+4.88) JDSU is a laser subsystem and equipment manufacturer for the photonic/electronic industry. Their products reside in telecommunications, signal processing and laser-based semiconductor wafer inspection and analysis equipment. Their chips increase the carrying capacity of fiber optics. They also make dense wavelength division multiplexers (DWDM) which monitor network capacity and boost their performance. Their sales are primarily to telecom companies, central switching stations, research labs and bar-code scanning manufacturers. 40% of its sales are derived outside the U.S. Here's a problem every company should have. Kevin Kalkhoven, the CEO of JDSU, revealed on a CNBC interview on Friday morning that they are trying to keep up the 60% annual growth rate, but can't produce their products fast enough to satisfy demand. Not only that, JDSU is enjoying profit margins of 23%. That's after paying all expenses except the amortization of goodwill from acquisitions. That partially explains why they tacked on over $6 on Friday. JDSU has only 2 other competitors, SDLI and ETEK, both of them smaller and in need of a merger to gain the scale they need to remain competitive in the business. With giant seal of approval stamped forever on the forehead of photons, JDSU appears more and more to be the Intel of the photonic age. Technically, JDSU's chart is the perfect picture of a saw-toothed ascent. They aren't made any prettier than that. Support was at $103 (which also happens to be its 30-dma), where we saw a nice bounce on Wednesday. As we've noted in the past, this is also a volatile play, and difficult to enter too, with an $11.50 trading range last week. After such a strong gain on Friday, our inclination is to wait for another pullback, perhaps to a new support level of $105-$106. Exercise a little caution, since volume, though still above average, is starting to taper off a wee bit. However, with a strong week anticipated, you may want to consider buying in on any mid-day weakness. Remember, JDSU can have some wild gyrations and shouldn't be played unless you can stomach a 7-course meal of risk. You'll have to pick your own entry where you feel comfortable. As long as volume keeps up, a breakout over $115 might make a good entry if you are trying to masquerade as a conservative option investor. The next likely stop would then be former intra-day resistance of $120.88. SG Cowan issued a Strong Buy rating last week with $130 price target. Gruntal and Co also issued a Strong Buy rating but with a larger price target of (gulp!) $185 (don't hold your breath for this week). ***2 weeks until September strike expiration*** BUY CALL SEP-105 UNQ-IA OI=1876 at $10.25 SL=7.75 BUY CALL SEP-110*UNQ-IB OI=1157 at $ 6.75 SL=5.00 BUY CALL SEP-115 UNQ-IC OI= 563 at $ 3.63 SL=2.00 BUY CALL OCT-110 UNQ-JB OI=1056 at $11.00 SL=8.75 BUY CALL OCT-115 UNQ-JC OI= 166 at $ 8.50 SL=6.50 BUY CALL OCT-120 UNQ-JD OI=1400 at $ 6.38 SL=4.50 Picked on Aug 29th at $110.19 P/E = N/A Change since picked +3.06 52 week high=$120.88 Analysts Ratings 10-10-0-0-0 52 week low =$ 15.62 Last earnings 07/99 est= 0.21 actual= 0.24 surprise +14.2% Next earnings 10-27 est= 0.24 versus= 0.12 Average daily volume = 1.58 mln Chart = http://quote.yahoo.com/q?s=JDSU&d=3m ***** TXN - Texas Instruments Inc. $87.88 (+8.38) 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. If you looking for a stock that's on a roll, TXN is the play for you. With the technology sector rebounding and the semiconductors leading the way, the near-term outlook for our play has good potential. Part of this potential is due to the spark provided by the latest jobs report, investors dusted off their rally caps and went on a buying spree. The reason why investors were so zealous was that a mere 124,000 jobs were added in August, much lower than the 220,000 expected by economists, giving the Fed a reason not to raise interest rates in the near future. With this hope and semiconductor sales increasing by 19% for the month of July, TXN investors have reason to be excited. The stock continues to trade well above its 50 and 200-dma and closed the week with a new 52-week high, showing its continued strength. As a momentum play, if the sector continues the rally into next week, expect TXN to be one of the leaders. Because TXN reached a new high and market conditions remain volatile, use the recommended stop losses. There was no additional news to report on TXN for the week however, the semiconductor sector in general has had good coverage indicating stronger sales in the chips and rising prices of many semiconductor stocks. ***2 weeks remaining until September expiration*** BUY CALL SEP-80 TXN-IP OI=3543 at $ 8.75 SL=6.50 BUY CALL SEP-85*TNZ-IQ OI=3653 at $ 4.75 SL=3.00 BUY CALL OCT-80 TXN-JP OI=3000 at $10.75 SL=8.50 BUY CALL OCT-85 TNZ-JQ OI= 507 at $ 7.13 SL=5.25 Picked on Aug 31st at $82.06 P/E = 76 Change since picked +5.82 52-week high=$88.00 Analysts Ratings 14-8-5-1-0 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 ***** FLEX - Flextronics International $63.13 (+7.63) FLEX is a specialist in their field of electronics, manufacturing electronic circuit boards and components. In the three months of their latest quarter, the company's sales grew to $530 million (a 41% increase) by providing design and engineering, state of the art manufacturing, distribution and inventory solutions to their OEM clients. They were able to keep $18 million of this, to increase net income 51%. FLEX specializes their services in the telecommunications, medical device, electronic components and networking industries. They have strategically located their facilities across the globe, to provide customers with the most efficient and cost effective solution to their electronic component needs. On Aug 6th, FLEX broke through it's first resistance level to start a new positive trend. It has continued to rise quite impressively, breaking through all major resistance levels to hit a new high of $63 on Friday. Keep in mind that while most stocks have been hampered by the recent market woes, FLEX's chart shows incredible strength, with only two minor pullbacks to its 10-dma. This has confirmed a good support at the 10-dma of $58, with a strong momentum to our upward trend. Earnings outlook continue to be good however, it's a bit early to expect an earnings run. The next report date is estimated to be Oct 8. Given our current position of strong momentum, good value and stability, we expect FLEX to continue it's trend higher on a post-Labor Day rally. Watch for the jobless claims and PPI report next week to determine market direction. Use caution on negative numbers, even though FLEX has bucked the downtrends recently. Ride the wave and choose a positive market and stock trend before playing. Since part of FLEX's business is helping customers with inventory and distribution solutions, the recent article by Darrell Dunn on Y2K and the need for stock piling critical electronic components merits our attention. Mike Webb of FLEX downplayed the need to stock pile, stating that it is a very expensive proposition. The pressure from the industry and lack of several countries to Y2K prepare however, may force some padding of inventories. These concerns however, if properly managed could help the bottom line with increased demand. ***2 weeks remaining until September expiration*** BUY CALL SEP-55*QFL-IK OI=1004 at $ 8.88 SL=6.50 BUY CALL SEP-60 QFL-IL OI= 64 at $ 4.63 SL=2.75 low OI BUY CALL OCT-60 QFL-JL OI= 159 at $ 6.50 SL=4.75 BUY CALL OCT-65 QFL-JM OI= 203 at $ 4.25 SL=2.50 Picked on Sep 5th at $63.13 P/E = 42 Change since picked +0.00 52 week high=$63.38 Analysts Ratings 9-8-1-0-0 52 week low =$11.00 Last earnings 07/99 est= 0.34 actual= 0.34 Next earnings 10-08 est= 0.37 versus= 0.30 Average daily volume = 752 K Chart = http://quote.yahoo.com/q?s=FLEX&d=3m ********************************* Telecom/Communications/Networking ********************************* CSCO- Cisco Systems $70.94 (+2.44)(+4.38)(+0.56) Cisco builds 85% of the routers and switches that make the Internet work. They are the leading supplier of products that link local and wide area networks. The company's other products include dial-up access servers and network management software. Cisco has been on an acquisition binge (about 37 since 1993) to broaden its product line. It also derives revenue by licensing products as it seeks to widen the reach of its Cisco Internetwork Operating System (Cisco IOS) software, in hopes of making it an industry standard. They have strategic relationships with the industry's biggest players (including Alcatel, Microsoft, Qwest, and U S WEST) that are boosting Cisco's influence on the networking industry. In short, Cisco Systems is the worldwide leader in networking for the Internet. The future of communications, networking and net-surfing is based on photons, not electrons, and CSCO is riding the light wave. Having made 2 smart acquisitions the previous week (Cerent and Monterey Systems), CSCO announced this past week that it entered a $2 bln pact with IBM in order to get a hold of IBM's chip and patent know-how, in effect putting the seal of approval on the photonic age with it's 800 lb. gorilla grip. CSCO is king of the beach in this hot and relevant sector. On volume that exceeded its ADV by 17% on Friday, CSCO finally broke through and held over previous resistance of $70.31. We noted that this would be a buying opportunity. We still think so, since money managers and traders returning from vacation will begin spending some of those pent up $$$, seeking a return. CSCO, as the third largest company on the NASDAQ will be a target. Particularly gratifying was the support CSCO seemed to find at $70 during Friday's mid-day lull, prior its ascent to a new all-time trading and closing high (again, on strong volume) of $70.94. This should be considered a very positive technical development. We would consider any weakness buyable. Should CSCO trade back under $70, there is even stronger support at $68, then again at $66.25. Just in case, protect your profit with stop loss orders, and confirm market direction before starting a play. The only news of notoriety is the previous week's acquisition announcements of Cerent and Monterey, plus the pact with IBM this week. ***2 weeks until September strike expiration*** BUY CALL SEP-65 CYQ-IM OI=16590 at $6.38 SL=4.50 BUY CALL SEP-70*CYQ-IN OI=29684 at $2.50 SL=1.25 BUY CALL SEP-75 CYQ-IO OI= 8949 at $0.56 SL=0.00 feel lucky? BUY CALL OCT-70 CYQ-JN OI=22635 at $4.38 SL=3.00 BUY CALL OCT-75 CYQ-JO OI=11325 at $1.94 SL=1.00 Picked on Aug 24th at $62.50 P/E = 110 Change since picked +8.44 52 week high=$70.94 Analysts Ratings 20-13-0-0-1 52 week low =$20.56 Last earnings 08/99 est= 0.20 actual= 0.21 surprise +5.0% Next earnings 11-09 est= 0.22 versus= 0.16 Average daily volume = 17.8 mln Chart = http://quote.yahoo.com/q?s=CSCO&d=3m ***** CNXT - Conexant $76.38 (+5.13)(+5.66) Spun off as the electronic chip division of Rockwell Intl in December 1998, Conexant is a major manufacturer of 56K PC modem chips and is now the largest communications semiconductor manufacturer in world, with estimated 1999 revenues of $1.4 bln. With 56K modems reaching saturation, CNXT has expanded its product line to include chips for personal imaging (fax machines, office peripherals, video systems), wireless communications (cordless phones, global positioning system receivers), digital infotainment (cable modems, set-top boxes) and network access (corporate hubs and multiplexers). Network access is another name for DSL and Wide area network transport. Competitors are Broadcom, Texas Instruments and Intel. Customers include Compaq and Ericsson. What we have here is a great player in a hot sector. As semiconductors, benefiting last week from favorable analyst comments, really lit up investors' radar screens. CNXT has steadily marched up from $56 in early August. While volume remained light last week, CNXT set a new record high of $76.50 on Wednesday and fell just $0.13 short of that during Friday's close. What we found particularly impressive was the $1 price gain in the final 30 minutes of Friday's trading, coupled with increased volume. On the technical chart, MACD and momentum are both positive. Support has been strong in the $72 range. Fundamentally, each of CNXT's 4 divisions is growing revenues at least 35% per year. Internet trafficking semiconductors (WAN products) and DSL chips grew 75% from the previous quarter (!), thanks to a brisk business with local exchange carriers eager to implement DSL for their customers. Look for that to continue. Profitability has caused Morgan Stanley Dean Witter to raise their 1999 estimates from $0.45 to $0.58 per share. We expect trading volume to pick up with the return of money managers and traders from the Labor Day weekend, adding to the sector's momentum. Now, it's on a hot streak so the only caution we can offer is to be on the lookout for profit taking. RSI is looking slightly tired, indicating CNXT may need a day or 2 of rest. Other than that, confirm market direction before jumping in Banc of America Securities earlier this week began coverage with a strong buy rating and a new price target of $100. There isn't any other news that will move the price. ***2 weeks until September strike expiration*** BUY CALL SEP-70*QXN-IN OI=940 at $8.00 SL=6.25 BUY CALL SEP-75 QXN-IO OI=558 at $4.88 SL=3.00 BUY CALL SEP-80 QXN-IP OI=337 at $2.56 SL=1.25 BUY CALL OCT-75 QXN-JO OI=138 at $7.88 SL=6.00 BUY CALL OCT-80 QXN-JP OI=208 at $5.38 SL=3.50 Picked on Sep 5th at $76.38 P/E = N/A Change since picked +0.00 52 week high=$76.50 Analysts Ratings 5-6-0-0-0 52 week low =$13.00 Last earnings 08/99 est= 0.17 actual= 0.24 surprise +41.2% Next earnings 10-20 est= 0.26 versus= N/A Average daily volume = 1.55 mln Chart = http://quote.yahoo.com/q?s=CNXT&d=3m ***** SFA - Scientific Atlantic Inc. $53.44 (+2.00)(+4.94) Scientific-Atlanta provides satellite-based and terrestrial- based networks to a range of customers in a variety of applications and provides network management and systems integration. They are also a leader on top of the TV market. The company is one of the largest makers of set-top boxes used by subscribers to receive cable TV programming and interactive services such as movies-on-demand and e-mail. What a comeback! It's amazing what a few economic numbers can do for the heart and soul. Investors rejoiced when the latest jobs report was released on Friday indicating that the economy may not be over-heating. The non-farm payroll numbers came in below expectations giving the Federal Reserve some room to not raise interest rates later in the year. Relishing this good news was the technology sector, which includes our play SFA. The stock rebounded nicely closing just below its 52-week intraday high at $53.88. With a little help from the broader markets we expect SFA to breakthrough this level and continue even higher. We are playing Scientific Atlantic as a momentum play and slowly but surely it been paying off. Investors are clinging to the stock and it shows by the number of new highs set during the past few weeks. How does 7 new highs in the last 10 trading sessions sound? Not too shabby. Because of the fact we are looking at new highs, use the recommended stops and enjoy the ride while we have it. Remember, the trend is our friend. There was very little news to report on SFA this weekend but one small article mentioning that there accounts with Time Warner and MediaOne account for 11% of sales. ***2 weeks remaining until September expiration*** BUY CALL SEP-45 SFA-II OI=971 at $8.88 SL=6.75 BUY CALL SEP-50*SFA-IJ OI=688 at $4.63 SL=2.50 BUY CALL SEP-55 SFA-IK OI=284 at $1.44 SL=0.50 BUY CALL OCT-50 SFA-JJ OI=126 at $6.13 SL=4.25 BUY CALL OCT-55 SFA-JK OI= 98 at $3.25 SL=1.50 Picked on Aug 26th at $51.13 P/E = 40 Change since picked +2.31 52-week high=$52.94 Analysts Ratings 8-8-2-0-0 52-week low =$11.75 Last earnings 08/12 est= 0.33 actual= 0.59 Next earnings 10-22 est= 0.28 versus= 0.38 Average Daily Volume = 1.30 mln Chart = http://quote.yahoo.com/q?s=SFA&d=3m ***** DISH - EchoStar Communications $85.88 (+8.63) Located in Littleton, CO is the second-largest provider of satellite broadcasting. EchoStar operates the DISH Network and offers more than 300 channels of digital TV and audio programming. They have over 2.4 million subscribers and also provide satellite delivery of local network stations in several large markets. DISH has formed a partnership with Microsoft to provide WebTV access through its DBS system. They compete with industry heavy-weights DIRECTV, Time Warner and AT&T Broadband & Internet Services. After a post-split depression, we believe DISH is on the move again. Shares of EchoStar split 2:1 back on July 20th and suffered through the normal decline into mid August. After bottoming in the $56 area shares of the satellite broadcaster has been moving higher and so has the interest in the stock. In the midst of the summer doldrums, volume in the third week of August picked up to average over 1.1 mln shares per day, well above the 736 K norm. Most of the recent increase in the shares of DISH stock can be attributed to their strong second quarter showing. It's funny how Wall Street works, follow us on this one; EchoStar's loss compared to the same period last year widened from $0.61 per share to $0.80 per share. Revenues rose 42% from $245 mln to $349 mln. They're marketing expenses more than doubled to $152 mln to attract new users. Still with us? OK, here's the kicker, even though they lost $0.80 per share, analysts had expected them to loose about $0.93 per share. In the second quarter they added 332,000 new subscribers and anything over 100,000 was considered very positive. DISH is not expected to be in the black until well into 2000 or 2001 but investors seem to realize the potential and are willing to to accept the losses for the time being. Analysts seem to like DISH too, with several reiterating their Buy and Strong Buy ratings in the last few weeks. DISH is fast approaching its split-adjusted high of early July at $88.25 and the momentum seems to be gaining. DISH closed near its high Friday of $86.00, which is positive going into the new week. Should we get a pullback, support is in the $80-81 area. Pick your entry points carefully and assess your risk profile before entering any play. Next Friday at Cape Canaveral, a Lockheed Martin Atlas Rocket is scheduled to launch EchoStar V, which will enable EchoStar's DISH Network to expand direct-to-home television broadcasting services for its consumers. Tuesday DISH and Target, announced an alliance for the distribution and marketing of EchoStar's DISH Network at all 881 Target stores nationwide. ***2 weeks remaining until September expiration*** BUY CALL SEP-80*UAB-IP OI=718 at $8.13 SL=6.25 BUY CALL SEP-85 UAB-IQ OI=201 at $5.25 SL=3.50 BUY CALL OCT-85 UAB-JQ OI=257 at $9.00 SL=6.75 BUY CALL OCT-90 UAB-JR OI= 83 at $6.88 SL=5.25 Picked on Sep 4th at $85.88 P/E = N/A Change since picked +0.00 52 week high=$88.25 Analysts Ratings 9-6-0-0-0 52 week low =$ 8.75 Last earnings 08/99 est=-0.93 actual=-0.80 surprise +13.98% Next earnings 11-10 est=-0.83 versus=-0.68 Average daily volume = 736 K Chart = http://quote.yahoo.com/q?s=DISH&d=3m ****************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-5-99 Sunday 5 of 7 ***************************** Biotechnology/Pharmaceuticals ***************************** HGSI - Human Genome Sciences, Inc. $77.00 (+5.38)(+9.63) If you think there are a lot of Jeans on the market (Levis, Guess CK etc.), wait until you see what HGSI is discovering. The company started in 1992 and has a passion for discovering Genes; only, Human genes. Since their inception they have Been first in the discovery of many of our genes, over 6,300. The great thing is that they then use this knowledge and apply it to form gene and protein based medications and treatments. This is exciting technology and tends to bring us full circle! HGSI just may be the ones to show us that the answers to our medical problems actually do lie within us. The company already has three of their products undergoing human clinical trial. These products hope to aid in vascular regeneration, treatment of breast and ovarian cancers, tissue repair and more. This appears to be a very promising company, that will be able to provide natural solutions to humanity. Remember our Biotech upgrade last Wednesday? Well, with a little market help Friday, investors responded to the $90 target and shot the stock up to close near it's new 52-week high at $77. The move was also accompanied by increased volume of 150%, which is another good sign. All these good signs give us a little concern however. Remember, if things seem too good to be true, most times they are. Our recent runs to new highs put a lot of profit on the table and the relative strength index is showing HGSI in an oversold condition. We would advise caution at this point. Like a traveler at the fork of the road, HGSI needs to decide which way to go. We can either continue to new highs with a rally next week or we can consolidate and be cautious with the jobless claims and PPI reports to come. Just be careful and don't lose a good thing. In other words, use stop losses. We are showing a short-term support at $69 and at $66. If the market confirms positive, let your stops follow the gains. If HGSI corrects, protect profits and wait for the consolidation to reverse before entering again. Other than a re-iteration of the new price target of $90, there's not a lot of news to report. The recent gains in the stock, have brought it to the attention of many analysts and news groups. Most are confirming HGSI as a good play; however, speculative. ***2 weeks until September strike expiration*** BUY CALL SEP-70 HQI-IN OI=111 at $ 8.38 SL=6.25 BUY CALL SEP-75*HQI-IO OI= 11 at $ 4.75 SL=2.88 BUY CALL OCT-70 HQI-JN OI= 46 at $11.00 SL=8.75 BUY CALL OCT-75 HQI-JO OI= 0 at $ 8.25 SL=6.25 low OI BUY CALL OCT-80 HQI-JP OI= 26 at $ 6.00 SL=4.25 Picked on Aug 8th at $60.50 P/E = N/A Change since picked +16.50 52-week high=$77.13 Analysts Ratings 1-3-2-0-0 52-week low =$22.75 Last earnings 07/99 est= 0.19 actual= 0.22 Next earnings 10-15 est= 0.24 versus= 0.15 Average Daily Volume = 452 K Chart = http://quote.yahoo.com/q?s=HGSI&d=3m ***************** PUTS ***************** DOW - Dow Chemical Co $115.38 (-4.44) 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. Just as the seasons change, we still believe the fall will come. We are looking for DOW to make at least one more strong move to the downside, as the outlook hasn't changed. There is still the likelihood that DOW and others in the industry will miss earnings estimates due to rising raw materials prices. Also don't forget the recent downgrades. It's not that we want to see Dow struggle but at this point there is simply nothing on the horizon that would indicated a turnaround in the price of the stock. Remember volume has been light in the broader markets. When traders and investors return this week, they will probably jump in with both feet and add strength to the already established trends of various stocks and sectors. Even with the strength in the major indices Friday, DOW could only manage a gain of $0.13, mostly on the heels of DuPont which picked up about 2% Friday. The bounce may not be over yet as overhead resistance for DOW is at its 10-dma of $118.81 and again at $120. A return to the resistance areas would not seem unreasonable. Some investors may feel that DOW has become "cheap" given that it was trading in the $138 area back in early May however, we believe the near term outlook for DOW still appears bleak and we would look for any further weakness as an opportunity to buy puts. As always, assess your risk profile before entering new plays on DOW and tighten your stops. ***2 weeks remaining until September expiration*** BUY PUT SEP-120*DOW-UD OI=250 at $5.63 SL=3.75 BUY PUT SEP-115 DOW-UC OI=223 at $2.63 SL=1.25 Average daily volume = 983K Chart = http://quote.yahoo.com/q?s=DOW&d=3m ***** WLP - Wellpoint Health $73.81 (-1.44)(-2.69)(-2.25) Wellpoint Health Networks serves about 32 million individuals in the U.S. through HMOs, PPOs, and special networks such as dental, vision and mental health plans. The company operates as Blue Cross in California and UNICARE through the rest of the nation. Wellpoint also sells life insurance and third party administration to self-employed businesses. In 1997, they acquired the group health and related life business of John Hancock Mutual. 'It's not the fastest but WLP stays headed in the right direction.' This has turned into our theme for WLP and it is always good to be reminded why we are playing a stock. This week has ended with our pattern on WLP still in place. Even the monster rally on Wall Street couldn't take us back above the 10-dma. This indicator has proved to be an excellent entry point for the past three months. If you are new to the play, the pattern we keep talking about is the consolidating for a few days, hitting on the 10-dma and then moving lower. We were encouraged this week when WLP broke through the recent support at $75 to new short-term lows. Today's bounce with the markets was not all that convincing since the volume was low and it didn't break above the 10-dma at $74.50. Once again news was non-existent but since we are dealing in one of the weakest sectors on Wall Street lately it is not a stretch of the imagination to expect possible earning warnings from some companies in the sector. This would obviously help to dampen the sentiment even further. Consider new entry points at the current price and you should plan to cover at support at $70, unless there is a major negative announcement for either WLP or other long-term care and health coverage providers. ***2 weeks remaining until September expiration*** BUY PUT SEP-80 WLP-UP OI=110 at $6.88 SL=5.25 BUY PUT SEP-75*WLP-UO OI= 80 at $3.25 SL=1.75 Average Daily Volume = 550 K Chart = http://quote.yahoo.com/q?s=WLP&d=3m ***** ONE - Bank One $39.47 (-2.53) 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. It's no surprise to see a positive day for Bank One on Friday. The whole financial sector had an outstanding day due to the impressive employment report. ONE gained just under a dollar on active volume. But the performance was still poor relative to advances in the broad markets and financial sector. Others such as American Express (AXP) and Morgan Stanley (MWD) were up sharply on the employment report numbers. The stock is still showing us signs of weakness on several fronts. Technically, ONE is still well below its 10-dma of $44.50 and has shown no signs of support or achieving a short-term bottom. For investors not yet participating in the play, be cautious when choosing your entry point. Friday's rally was convincing and Labor Day usually signals the end of the summer doldrums. That means more volume and a possible rally. Be conscious of market and sector sentiment before opening new plays. Also watch the 30-year bond. If the yield keeps falling, that will help the financial stocks. You would be wise to keep your stops tight, thus avoiding any rally back to the 10-dma. ***2 weeks remaining until September expiration*** BUY PUT SEP-45*ONE-UI OI=1464 at $5.88 SL=4.25 BUY PUT SEP-40 ONE-UH OI=4392 at $1.56 SL=0.75 Average Daily Volume = 3.38 mln Chart = http://quote.yahoo.com/q?s=ONE&d=3m ***** HRB - H&R Block $46.75 (-9.19) 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. What a way a finish the week! To sum it up, the Dow opened higher, continued higher and ended even higher. Despite the impressive market run, the play on HRB faired quite well. The stock finished fractionally higher, which is impressive considering the market conditions and losses incurred earlier in the week. H&R Block was set up perfectly for a dead cat bounce under the right market conditions. Those conditions existed on Friday but instead of making a bounce, it was more like a bump. The reason is that investors are still too worried about HRB's announcement Wednesday to buy discount stock brokerage Olde Financial Corp. for $850 million. With this purchase, the company is broadening its financial services and customer base. The problem both analysts and investors have with such a large acquisition is how it will fit into the structured company. With this large of a acquisition it's guaranteed to be no picnic. We currently see these investors concerns in the price of HRB. The stock is trading well below all its moving averages and fundamentally speaking, poised to slip lower. However, technically the stock does show historical support around $45 area so use some caution. Right now, the fundamentals have the upper hand so see if we can breakthrough to even lower levels. ***2 weeks remaining until September expiration*** BUY PUT SEP-50 HRB-UJ OI= 18 at $4.00 SL=2.00 low OI BUY PUT OCT-45*HRB-VI OI=547 at $1.94 SL=1.00 Average daily volume = 350 K Chart = http://quote.yahoo.com/q?s=HRB&d=3m ***** JCP - Penny J.C. Company Inc. $36.31 (-3.31) J.C. Penny's retail operations include department stores and catalog, drugstores and insurance. JCP markets family apparel, shoes, home furnishings, jewelry and offers credit cards. The retailer operates about 1,150 J.C.Penney department stores mostly in the US but also in Chile, Mexico and Puerto Rico. J.C. Penney also owns about 2,900 Eckerd drugstores (the chain is ranked #4 by sales in the US). Not even a running of the bulls was enough to help this stock. As the broader markets rallied on Friday, JCP decided to sit this one out and depress its investors instead. The stock ended only fractionally lower but, taking into consideration the broadness of Friday's rally, to be left out is down right depressing. The reason for this depression is evident throughout the news lately. On Thursday, broker Merrill Lynch, downgraded JC Penney from a Buy to Accumulate. Hopping on the bandwagon on Friday was Prudential, downgrading the stock form Accumulate to Hold. These downgrades come about from sales figures recently reported by the company. They reported a 3.2% decline in same- store sales for the month of August at its department stores and warned that its third-quarter earnings would be lower than Wall Street estimates. To make matters worse, the future of JCP does not look that dandy either. Analyst, Alan Mak said he fears that higher interest rates will slow down consumer spending before and during the Christmas season, consequently hurting retailers. Despite all the bad press, technically speaking, the stock does show signs of support at $35. We may even break through this level but be cautious just the same. ***2 weeks remaining until September expiration*** BUY PUT SEP-40*JCP-UH OI=249 at $4.00 SL=2.50 BUY PUT SEP-35 JCP-UG OI=327 at $0.69 SL=0.00 Average Daily Volume = 450 K Chart = http://quote.yahoo.com/q?s=JCP&d=3m ********* NEW PUTS ********* KO - Coca-Cola Co $57.38 (-4.38) If you've never heard of Coca-Cola before, welcome to planet earth. Based in Atlanta, Coke is among the recognizable name brands in the world. As the world's largest producer and distributor of soft drink syrups and concentrates, Coke has over a 50% market share and sells their products in about 200 countries around the globe. Coca-Cola offers 160 brands of soft drinks including Sprite, diet Sprite, TAB, Fanta, Fresca, Mr. Pibb, Hi-C, Mello Yello, Barq's, Surge, Citra, POWERaDE, Fruitopia and specialty overseas brands, as well as all of the Minute Maid brand fruit drinks. Coke investors haven't been smiling lately. A DJIA component, KO has not helped at all during the Dow's recent push higher. Shares of Coke have fizzled down about 17% since the beginning of July. As you might remember, Coke recalled 17 million cases of beverages during June after some contaminated product made hundreds of people in France and Belgium sick. That recall, along with tough overseas markets, is expected to cut into profits this quarter. Domestic results are lackluster also, with volume growth in North America slowing to a trickle. Third expectations call for an increase of only 2% - 3%. On Friday KO announced that it will fall short of expectations, causing its shares to drop 2.13 to 57.38, on a day when the Dow Jones was up 235. KO hasn't been above its 200-dma since mid-June and has had trouble maintaining any sort of rally. We are in new ground for KO's share price, which usually has support at $60. With no other visible support, pick your entry points on intraday bounces and ride KO lower until we get a change in sentiment. ***2 weeks remaining until September expiration*** BUY PUT SEP-60*KO-UL OI=5958 at $2.63 SL=1.25 BUY PUT SEP-55 KO-UK OI=3089 at $0.44 SL=0.00 High Risk! Average Daily Volume = 3.20 mln Chart = http://quote.yahoo.com/q?s=KO&d=3m ****** COMBOS ****** The Market Deserves A Holiday... Friday, September 3 U.S. stocks soared Friday after a favorable jobs report soothed investors fears that interest rates are heading higher. The Dow Jones industrial average rose 235 to close at 11,078. The Nasdaq composite index rose a record 108 points to 2,843 while the S&P 500 index gained 38 points to 1,357. Advancers led decliners by a 3-to-1 ratio on volume of 654.5 million shares on the NYSE. The 30-year U.S. Treasury bond rose 1-1/2 points, pushing the yield back down to 6.02%. Thursday's new plays (positions/opening prices/strategy): 3Com Corp. COMS OCT17C/22/25C $5.50 debit bull-call USWeb USWB SEP17C/SEP22C $4.12 debit bull-call Both of our new positions opened higher with the morning rally and neither traded near the target prices for the first hour. The earliest possible opportunity came in the 3Com spread at about 10:30 AM, when the stock price faded from earlier highs. Our recommended price may well have been achieved in the three position spread (more flexibility for the broker/market-maker) but the best we observed was $5.50 debit. The target entry for the UsWeb spread was unavailable for most of the day until the stock price dropped in late afternoon trading. Once again, the suggested debit may have been available but our best quote was $4.12. Portfolio plays: Today was absolutely amazing as the Nasdaq set a new record for the largest point gain in a single session. The Dow also made one of its biggest 1-day moves in recent history. Analysts say the rally should continue into next week but expect the market to remain vulnerable to any negative economic news. Some scorn this recovery as simply a technical bounce based on the fact the market overall has lacked leadership, breadth has been weak and very few stocks are trading in their high ranges. Lots of activity in the spreads portfolio and almost all of it was favorable. Echostar (DISH) is one of the positions that has surpassed all possible expectations. The stock is up over $15 since our initial selection a few weeks ago and both diagonal spreads are trading at maximum profit. Intel (INTC) is another one of the major stars, up $20 since our original pick, and we plan to close it on Monday at maximum profit. The best overall performer in the past 90 days has been Sun MicroSystems (SUNW). Today the stock 'broke-out' of a previous trading range and we decided to roll-out (and up) in the LEAPS/CC's position to new October options. This was the only position we chose to adjust during the rally and we hope the old resistance will serve as new support near our sold strike at $80. Cisco Systems (CSCO) was another tech-stock that moved into a new range above our sold position but both of our spreads are diagonal and we have a greater margin for error on the upside. Each of the plays can be closed early for favorable profits if the stock fails correct over the next two weeks. National Semiconductor (NSM) has recovered nicely from the small sell-off a few days ago and is once again trading at the short option in our bullish spread. This $30 stock has also produced some of the best returns in our portfolio. One of the 'readers request' plays, Conexant (CNXT) has moved to maximum profit in just one week. The position earned 11% ($1/$9) and we want to thank the reader that sent in that candidate. Our bullish debit positions all remain profitable with the exception of Cyberian Outpost (COOL). This stock continues to slump with the secondary Internet issues and there is no reason to believe it will change direction soon. The best we can hope to achieve is a lower cost basis with the roll-out to October positions. J.P. Morgan (JPM) surprised us with a $7 move in the rebounding financial sector. It's quite possible that we should have taken the small profit yesterday (as we generally do) but at least the stock price is still near our current break-even; $132. Any new inflationary news should help drive it back down so we will just keep our fingers crossed on this one. Qualcomm (QCOM) is another frustrating position that may eventually fall into the 'losers' category. Our long-term position is currently ITM but the new outlook for the stock is less than outstanding. Lets hope that a positive change of character occurs soon. Positions that were closed this week include: Coulter (CLTR), a star performer; Dupont (DD), a generous profit; International Paper (IP) which rallied on the sector upgrade; Pacific Gateway (PGEX); a small profit and Excite@home (ATHM) a speculation play in which we are short the SEP-$50C. Rainbow Technologies (RNBO), Rite-Aid (RAD) and Novell (NOVL) were closed for small losses. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com *********** NEW PLAYS *********** NRES - Nichols Research $24.50 *** Takeover Rumors *** Nichols Research is a provider of technical and information technology (IT) services, including information processing, systems development and systems integration. They provide these services to a wide range of clients, including the U.S. DOD, other federal agencies, state and local governments, healthcare and insurance organizations, and other commercial enterprises. There has been no significant news on this company since July 1st when NRES posted third-quarter earnings of $0.33 a share, in line with the analyst estimates and a penny higher than a year-ago. Earlier in August there was some speculation about the company's proposed IPO (TXEN) but recent reports said that it was being delayed until this month, due to market conditions. One trader said the reason was the continued decline of TXEN operations. Apparently, the client base is dissatisfied with the quality of support and the cost of services. Others say the company is rumored to be in merger talks with Computer Sciences (CSC) or TRW Inc (TRW) and the CNBC story on information/security services last week may have also affected the stock price on Friday. Whatever the case, the stock jumped over $3 on extreme volume and a few option traders joined the crowd. There is a small disparity in the September (ITM) call options that will allow us to open a favorable speculation play. PLAY (speculative - bullish/debit spread): BUY CALL SEP-17.50 QNN-IW OI=10 A=$7.25 SELL CALL SEP-22.50 QNN-IX OI=70 B=$3.87 INITIAL NET DEBIT TARGET=$3.25 ROI(max)=53% B/E=$21.50 Chart = http://quote.yahoo.com/q?s=NRES&d=3m ***** RX - IMS Health $27.81 *** Sickness In The Health Sector? *** IMS Health is a world's leading provider of information solutions to the pharmaceutical and healthcare industries. RX's key products and services integral to customer day-to-day operations include: market research for prescription and retail pharmaceuticals; sales management information to optimize sales force productivity; and technology enabled selling solutions for sales & marketing; and technology systems and information services that support managed care organizations. Even though the sector remains bearish, there has been some very positive news for this issue over the past few weeks and yet the stock refuses to make any significant challenge at the current resistance level near $32. The company appears to have a dominant position in RX information market in the U.S. and internationally. Corporate insiders have recently purchased large blocks of stock and there is also solid institutional interest. Earnings remain strong and the company expects to charge more for their products in the future. With all of these positive issues, it's still confusing to see this stock mired in consolidation. The long-term (150 day) moving average is clearly defining the trend for the issue and this two week play (to close below the recent resistance at $32) offers a high probability of a small profit with limited risk. PLAY (aggressive - bearish/debit spread): BUY PUT SEP-35.00 RZX-UG OI=3 A=$4.50 SELL PUT SEP-30.00 RZX-UF OI=55 B=$0.88 INITIAL NET DEBIT TARGET=$3.38 ROI=47% B/E=$31.62 Chart = http://quote.yahoo.com/q?s=RX&d=3m ***** CSE - Case $49.31 *** Low Risk/Low Reward *** Case Corporation is a leading worldwide designer, manufacturer and distributor of agricultural and construction equipment, and offers a broad array of financial products and services. Case sells its products in 150 countries and markets its products under the names "Case", "Case IH", and "Case International". A merger plan between Case and New Holland N.V. is expected to create a $12 billion company that will serve construction and farm equipment customers worldwide. Case's and New Holland's product line strength and geographic sales distribution remain highly complementary and the brands of both companies and the distribution networks will be maintained following the merger. Just about everybody knows by now that Case is being purchased by New Holland N.V. and last month shareholders of Case Corporation approved the company's proposed merger. Almost 100% of those who voted approved the merger. Under the terms of the agreement, CSE shareholders will receive $55 per share in cash. The interesting issue is that regulatory problems and the FTC's request for more information have delayed the merger and it is not expected to close until later this year, or in the worst case, early 2000. Anytime there are concerns like these, the speculation rises and option premiums move higher. In this case, the $45 options in October appear to be slightly inflated on both sides of the market. We will use that to our advantage in an extremely conservative covered-combination. PLAY (conservative - bullish/covered combo): BUY STOCK - CSE ASK=$49.62 SELL CALL OCT-45 CSE-JI OI=3380 B=$6.12 SELL PUT OCT-45 CSE-VI OI=4356 B=$1.38 INITIAL (COMBINED) NET DEBIT TARGET=$43.50 ROI(max)=8% (margin) Chart = http://quote.yahoo.com/q?s=CSE&d=3m *************** TECHNICALS ONLY *************** These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock price. ***** LIPO - Liposome $23.31 *** A Recent Struggle *** Liposome develops and markets lipid-based pharmaceuticals for the treatment of cancer and other life-threatening diseases. One of their products, ABELCET, has been approved for sale in the U.S. and other foreign countries for the treatment of severe systemic fungal infections. The company is now conducting two pivotal U.S. Phase III studies of EVACET for the treatment of metastatic breast cancer. Another drug, TLC ELL-12 is also in preclinical development for the treatment of various cancers. Research is also ongoing in the area of bioactive lipids for their potential therapeutic activity. On Thursday, Liposome announced that it had received marketing approval for its 50-milligram vial from the FDA. The product will also be available in the United Kingdom immediately, with additional approvals forthcoming. The company says the new vial size will encourage more cost effective utilization of ABELCET and increase their penetration into the market, particularly for pediatric patients. Maybe that's the reason the stock moved higher on Friday but we believe it was probably just a small "oversold" bounce and the overall market character (bullish). Regardless, this drug issue remains in a comfortable downtrend (trading below the 50 dma), and a run to the sold strike in ten days seems highly unlikely. PLAY (conservative - bearish/credit spread): BUY CALL SEP-30.00 LPQ-IF OI=689 A=$0.43 SELL CALL SEP-27.50 LPQ-IY OI=222 B=$0.75 INITIAL NET CREDIT TARGET=$0.38 ROI=18% (two weeks) Chart = http://quote.yahoo.com/q?s=LIPO&d=3m ***** UCOMA - United International $73.75 *** A Trading Range? *** United International is a leading provider of multi-channel television services outside the U.S., owning and operating systems in over 20 countries around the world. UIH operates systems in Europe, through its subsidiary United Pan-Europe Communications; Asia, through its indirect subsidiary, Austar, the largest provider of multi-channel television services in regional Australia; and Latin America. Excellent earnings and a positive outlook for this issue were the driving force in July's rally but the stock has been moving sideways since the recent correction. News that the company's Australian subsidiary, Austar, had their strongest month this year for sales in August boosted the stock again in the short term and Friday's market rally halted the most recent decline. The current technical perspective reflects a "toppy" formation with UCOMA's recent rally getting little volume support as the "right shoulder" of a head-n-shoulder formation is being formed. Several indicators have produced a negative divergence with price which lends weight to a low probability of major upside movement. Next resistance is $80 and $84, assuming UCOMA can remain at the current level. PLAY (aggressive - bearish/credit spread): BUY CALL SEP-85 QUW-IQ OI=70 A=$0.75 SELL CALL SEP-80 QUW-IP OI=623 B=$1.43 INITIAL NET CREDIT TARGET=$0.81 ROI=19% (two-weeks) Chart = http://quote.yahoo.com/q?s=UCOMA&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 9-5-99 Sunday 6 of 7 ********* STRADDLES ********* SEPTEMBER 5, 1999 Man! - What a move the markets had on Friday - Good for people already in straddle positions, bad for our entry rules. It seems that when the markets move quickly in one direction or another, 2 things happen. First, most markets are no longer in consolidation mode. Second, option volatility's for individual stocks rise, creating more theta risk for traders who buy both sides of the market. Two great things that are setting up for some great autumn straddles this year include the 3rd quarter earnings reports that will start tricking out in a few weeks, as well as the October syndrome. General Market Volatility has dropped on the OEX significantly. This will translate into falling index options premiums across the S&P 100, however it doesn't mean all the individual stocks have dropped. If this trend continues, however, we should expect to see individual stock options drop in premiums as well. What does this spell for options traders. Well for buyers, it spells less premium risk and greater chance for reward. For options sellers, it spells the reverse. As option buyers and sellers, we have to choose our options carefully, looking at option premiums, not only at today's price, but where that premium stands versus its historical premium range. Straddle Plays 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: XYZ - Stock Price = 39, so the closest straddle would be using the 40 calls and 40 puts, so: Buy 1 XYZ Oct 40 call @ 2.00 (This is the XYZ October 40 call for 2 points) Buy 1 XYZ Oct 40 put @ 2.50 (This is the XYZ 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, XYZ 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. XYZ Oct 40 call price - .25 bid, .375 offer XYZ 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. Straddles this week are FEW in number, thanks to big moves across the board. We did find a few this week that met most of the criteria we look for. Here are the Straddle Plays for this week. ***** The AES Corp. operates and owns a diverse portfolio of electric power plants with a total capacity of 24,076 megawatts. This company will definitely move if the perception of Y2K rears its ugly head again. 3 month price range is about 15 points, or about half of the last combo price of the November Options. October options are cheaper, but also require an exit plan sooner. AES - Last Price 61.625 Option Type Strike, Last, Bid, Ask C NOV99 60.000 4.75, 5.125, 5.50 P NOV99 60.000 4.25, 3.375, 3.62 Combo Price 9, 8.50, 9.125 ***** Ethan Allen Interiors is a manufacturer and retailer of home furnishings, offering a full range of furniture products and accessories. The 3 month range on this stock is about 11 points, or close to 3 times the last combo price. The only problem I see here is that volume on this stock and its options is lower than most. Price of the straddle looks good though. Look at the consolidation on this chart! ETH - Last Price 29.75 Option Type Strike, Last, Bid, Ask C OCT99 30.000 1.50, 1.50, 1.75 P OCT99 30.000 2.00, 1.62, 1.75 Combo Price 3.50, 3.12, 3.50 ***** Unitrode Corporation designs, manufactures, markets and sells a range of analog/linear and mixed-signal integrated circuits, modules, and non-volatile products. Texas Instruments is said to by buying this company, but the offering price is not confirmed. You might see this chart and say its not consolidating, but the price ranges are getting smaller and smaller as the price climbs. This is one of those straddles in which I like the lower strikes better, because of the trend. UTR 43.625 Option Type Strike, Last, Bid, Ask P OCT99 40.000 1.75, .875. 1.125 C OCT99 40.000 2.75, 4.625 5.00 Combo Price 4.375, 5.50, 6.125 ************** Straddle Drops ************** The Straddles below have now changed direction and are now exits as the entire market looks to rebound through the next week. These straddles have moved extremely well and we don't want to see them return from where they came. Notice that all these stocks have something to do with the Oil / Gas Industry. Shareholders agreed to the ARC buyout from BPA. This and the possible rise in stock prices will only cause these straddles to lose value. AVY Avery Dennison - 57 (Oct 60 Straddles) DOW Dow Chemical - 115.375 (Dec 130 Straddles) BPA BP Amoco - 113 (Oct 120 Straddles) ARC Atlantic Rich - 88.25 (Oct 95 Straddles) As with any straddle position, the longer the time to expiration, the better. I necessarily don't like to buy out farther than 4 months because then there is a gluten of time that just gets replaced with intrinsic value. Also if there is any major upcoming news announcements, this also helps to retain most of the value in the options. A good rule of thumb is to try and exit when hearing any major news concerning the stock. That way you are selling high volatility as the amateurs are more than likely contributing to your profit potential. Good luck, buy before the rumor, and sell before the news... Tom Gentile ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 9-5-99 Sunday 7 of 7 ************* COVERED CALLS ************* Option Pricing Basics - Volatility Explained... The successful option trader must be able to identify potentially profitable strategies given the current market conditions. Before he can accurately assess a position's value, a trader must fully understand the components of theoretical option pricing. Two of the most common statistical measurements; implied and historical volatility, can help a trader determine if an option is cheap or expensive. The volatility component of option valuation is a measure of the range the underlying security is expected to change over a given period of time. The measurement of volatility is the standard deviation of the daily price changes in the security. In simpler terms, the more volatile the stock, the greater the price of the option. Historical volatility estimates volatility based on past prices. Because it can be so erratic from one day to the next, moving averages are generally used in pricing models to determine the fair value of an option. Once again, the larger the statistical volatility, the more an option is worth. Implied volatility starts with the current option price and works backward to calculate the theoretical value of volatility that is equal to the market price minus intrinsic value. It is a computed value that has more to do with the option price rather than the underlying asset. The plain English definition: implied volatility is the volatility value that makes an option's fair value equal to its actual market price. Most traders refer to implied volatility as premium even though the word premium refers to the option price relative to the price of the underlying security. What the trader is really referring to is the implied volatility. The moral of the story: when the implied volatility is low, options are effectively under-priced. When the implied volatility is high, options are effectively overpriced. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI WSTL 7.75 7.44 SEP 7.50 1.25 $ 0.94 14.5% 10.5% OLS 9.94 10.44 SEP 10.00 1.00 *$ 1.06 11.9% 10.3% VTS 19.25 18.00 SEP 17.50 3.25 *$ 1.50 9.4% 10.2% MXTR 5.03 7.31 SEP 5.00 0.63 *$ 0.60 13.6% 9.9% IDTI 14.69 20.38 SEP 15.00 1.31 *$ 1.62 12.1% 8.8% LYNX 13.00 13.13 SEP 12.50 1.13 *$ 0.63 5.3% 7.7% TMAR 7.63 7.63 SEP 7.50 0.81 *$ 0.68 10.0% 7.2% NTAI 14.88 15.00 SEP 15.00 1.00 $ 1.12 8.1% 7.0% IMNR 5.63 5.38 SEP 5.00 1.00 *$ 0.37 8.0% 6.9% PR 19.25 21.06 SEP 20.00 0.94 *$ 1.69 9.2% 6.7% KING 31.50 32.81 SEP 30.00 2.81 *$ 1.31 4.6% 6.6% PCYC 29.13 30.75 SEP 22.50 7.88 *$ 1.25 5.9% 6.4% MRVC 14.88 18.13 SEP 12.50 3.00 *$ 0.62 5.2% 5.7% ADAP 33.00 32.00 SEP 30.00 4.13 *$ 1.13 3.9% 5.7% CS 15.50 16.94 SEP 15.00 1.06 *$ 0.56 3.9% 5.6% FLC 13.13 14.00 SEP 12.50 1.19 *$ 0.56 4.7% 5.1% IRF 16.00 16.63 SEP 15.00 1.81 *$ 0.81 5.7% 5.0% MOGN 11.88 11.88 SEP 10.00 2.31 *$ 0.43 4.5% 4.9% IDTI 18.88 20.38 SEP 17.50 2.13 *$ 0.75 4.5% 4.9% IDTC 18.88 27.69 SEP 15.00 4.50 *$ 0.62 4.3% 4.7% MRVC 14.50 18.13 SEP 12.50 2.63 *$ 0.63 5.3% 4.6% MAK 13.69 12.88 SEP 12.50 1.81 *$ 0.62 5.2% 4.5% PESC 23.88 27.00 SEP 22.50 2.69 *$ 1.31 6.2% 4.5% RIGS 19.81 19.06 SEP 17.50 3.00 *$ 0.69 4.1% 4.5% RNBO 13.88 12.81 SEP 12.50 2.19 *$ 0.81 6.9% 4.3% NETA 17.56 18.13 SEP 15.00 3.50 *$ 0.94 6.7% 4.2% USAI 45.94 44.75 SEP 45.00 3.50 $ 2.31 5.4% 3.9% ATML 39.88 38.00 SEP 40.00 2.63 $ 0.75 2.0% 2.2% PENN 9.88 9.00 SEP 10.00 0.75 $ -0.13 -1.4% 0.0% PXD 12.69 10.94 SEP 12.50 1.13 $ -0.62 -5.4% 0.0% TIE 11.19 7.88 SEP 10.00 2.13 $ -1.18 -13.0% 0.0% SBGI 20.31 16.00 SEP 20.00 1.69 $ -2.62 -14.1% 0.0% NVDA 26.00 26.75 OCT 25.00 3.38 *$ 2.38 10.5% 6.5% BRKT 15.88 18.38 OCT 15.00 2.25 *$ 1.37 10.1% 6.2% RDRT 5.88 6.25 OCT 5.00 1.31 *$ 0.43 9.4% 5.8% COMS 25.69 27.09 OCT 25.00 2.50 *$ 1.81 7.8% 4.8% PCTL 5.69 4.84 OCT 5.00 1.19 $ 0.34 7.6% 4.7% COMMENTS/OBSERVATIONS: USAI - Consolidating, positive Market should help. ATML - Nice rebound with Market. PENN & PXD - Both threatening to break the 150 dma, but oversold. If Oil prices drop, expect further weakness. TIE - Aluminum buyouts over? You may consider closing on further weakness. SBGI - Market rebound to the rescue! Nice bounce on Friday. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (Prc pd - Prm rec'd = CB, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) Sequenced by Company ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis AERL 17.50 SEP 17.50 IQA IW 1.00 927 16.50 6.1% 6.1% GNSS 24.88 SEP 22.50 QFE IX 2.88 849 22.00 2.3% 2.3% NFLD 12.63 SEP 12.50 DHQ IV 0.75 106 11.88 5.3% 5.3% NPIX 18.94 SEP 17.50 XMQ IW 2.13 374 16.81 4.1% 4.1% NRES 24.50 SEP 20.00 QNN ID 5.13 140 19.38 3.2% 3.2% PILL 13.94 SEP 12.50 PQQ IV 1.88 474 12.06 3.6% 3.6% ENER 13.88 OCT 12.50 EQI JV 2.31 34 11.56 8.1% 8.1% NTMV 7.19 OCT 7.50 UFA JU 1.00 377 6.19 21.2% 16.2% TSK 17.50 OCT 17.50 TSK JW 1.63 47 15.88 10.2% 10.2% Sequenced by Return Called ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis AERL 17.50 SEP 17.50 IQA IW 1.00 927 16.50 6.1% 6.1% NFLD 12.63 SEP 12.50 DHQ IV 0.75 106 11.88 5.3% 5.3% NPIX 18.94 SEP 17.50 XMQ IW 2.13 374 16.81 4.1% 4.1% PILL 13.94 SEP 12.50 PQQ IV 1.88 474 12.06 3.6% 3.6% NRES 24.50 SEP 20.00 QNN ID 5.13 140 19.38 3.2% 3.2% GNSS 24.88 SEP 22.50 QFE IX 2.88 849 22.00 2.3% 2.3% NTMV 7.19 OCT 7.50 UFA JU 1.00 377 6.19 21.2% 16.2% TSK 17.50 OCT 17.50 TSK JW 1.63 47 15.88 10.2% 10.2% ENER 13.88 OCT 12.50 EQI JV 2.31 34 11.56 8.1% 8.1% Company Descriptions ***** AERL - Aerial Communications Inc $17.50 *** Wireless *** Aerial Communications (82% - owned subsidiary of TDS), was formed to acquire PCS licenses from the FCC, construct PCS networks in Minneapolis, Tampa, Orlando, Houston, Pittsburgh, Kansas City and Columbus-Ohio, and offer wireless services in these areas. No recent news as Aerial has rebounded to a new high after being downgraded in July. There is speculation that TDS may consider selling Aerial. SEP 17.50 IQA IW Bid=1.00 OI=927 CB=16.50 RC=6.1% RNC=6.1% Chart = http://quote.yahoo.com/q?s=AERL&d=3m ***** GNSS - Genesis Microchip Inc. $24.88 *** Strong Sector *** Genesis Microchip designs, produces and markets highly integrated semiconductors for flat panel displays, home theater equipment, projection systems, video workstation gear and dozens of other applications. Various components using Genesis chips can be found in products from more than 200 companies. A recent deal with Panasonic and a new upgrade from Bank Of America Securities. Genesis looks ready to make a run for a new high. SEP 22.50 QFE IX Bid=2.88 OI=849 CB=22.00 RC=2.3% RNC=2.3% Chart = http://quote.yahoo.com/q?s=GNSS&d=3m ***** NFLD - Northfield Laboratories $12.63 *** Speculation *** Northfield Laboratories is a leader in the development of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. NFLD has experienced significant delays in the development and clinical testing of their blood substitute PolyHeme. A symmetrical triangle appears in NFLD's chart suggesting the stock will trade around $12.00 as speculators await the news on PolyHeme. SEP 12.50 DHQ IV Bid=0.75 OI=106 CB=11.88 RC=5.3% RNC=5.3% Chart = http://quote.yahoo.com/q?s=NFLD&d=3m ***** NPIX - Network Peripherals, Inc. $18.94 *** Resting? *** Network Peripherals designs, develops, manufactures, markets and supports high performance client/server local area networking solutions based on advanced networking technologies. The recent up-trend started shortly after NPIX began shipping its Gigabit Ethernet switches. The stock is in a lateral consolidation and it must work though an old resistance area. SEP 17.50 XMQ IW Bid=2.13 OI=374 CB=16.81 RC=4.1% RNC=4.1% Chart = http://quote.yahoo.com/q?s=NPIX&d=3m ***** NRES - Nichols Research Corp. $24.50 *** What's Up? *** Nichols Research is a provider of technical and information technology (IT) services, including information processing, systems development and systems integration. They provide these services to a wide range of clients, including the U.S. DOD, other federal agencies, state and local governments, healthcare and insurance organizations, and other commercial enterprises. Could it have been the CNBC story on information/security services that caused the big jump in price and volume on Friday? An excellent cost basis here if you want to join the speculation crowd. SEP 20.00 QNN ID Bid=5.13 OI=140 CB=19.38 RC=3.2% RNC=3.2% Chart = http://quote.yahoo.com/q?s=NRES&d=3m ***** PILL - ProxyMed, Inc. $13.94 *** Take-Over? *** ProxyMed, based in Ft. Lauderdale, Florida, is a leading provider of Internet and private network-based healthcare connectivity services. PILL also provides e-commerce systems to physicians, payers, pharmacies, clinical laboratories and managed care organizations. Increased call volume in PILL's September options appears to be related to ProxyMed's old take- over rumor. We feel a cost basis of $12.06 is a reasonable price for those who wouldn't mind owning it in two weeks. SEP 12.50 PQQ IV Bid=1.88 OI=474 CB=12.06 RC=3.6% RNC=3.6% Chart = http://quote.yahoo.com/q?s=PILL&d=3m ***** ENER - Energy Conversion Devices $13.88 *** New Contract *** ENER is engaged in activities ranging from product development to manufacturing and selling products as well as designing and building production machinery with an emphasis on alternative energy and advanced information technologies. On Thursday, ENER's subsidiary Ovonic Battery, signed an agreement with Rare Earth High-Tech (China) for a series of major nickel metal hydride battery projects having a potential value of approximately $100 million. ENER's technicals remain bullish though it must work through an old resistance area. We favor the cost basis near the 50 dma. OCT 12.50 EQI JV Bid=2.31 OI=34 CB=11.56 RC=8.1% RNC=8.1% Chart = http://quote.yahoo.com/q?s=ENER&d=3m ***** NTMV - NetMoves Corporation $7.19 *** Business Commerce *** NetMoves Corporation provides enterprise-wide fax solutions which include computer-generated faxing, fax-to-Email, Email-to-fax, broadcast fax, and fax-enabling E-commerce websites. NetMoves was chosen one of the fastest-growing technology companies in the New Jersey Technology Fast 50 annual listing by Deloitte & Touche LLP. NetMoves is "moving" as the stock resumes its up-trend, offering a favorable long-term play. OCT 7.50 UFA JU Bid=1.00 OI=377 CB=6.19 RC=21.2% RNC=16.2% Chart = http://quote.yahoo.com/q?s=NTMV&d=3m ***** TSK - Computer Task Group, Inc. $17.50 *** Stage I Base *** TSK, an information technology services co., works with customers to develop effective business solutions through information systems and technology. Computer Task Group technicals have been improving with last quarter showing increasing revenues and net income. TSK, after forming a 6 month base with support around our cost basis, is another favorable long term play. OCT 17.50 TSK JW Bid=1.63 OI=47 CB=15.88 RC=10.2% RNC=10.2% Chart = http://quote.yahoo.com/q?s=TSK&d=3m ***************** NAKED PUT SECTION ***************** Option Trading Strategies - Risk vs. Reward... Option pricing is a complex and often misunderstood subject that usually requires a great deal of study to understand completely. The trader who perseveres will find there is a simple logic to most of the concepts. These knowledgeable traders earn the right to have less money at risk and greater potential for profits. As one becomes familiar with the components of pricing theory, he can he begin to formulate potentially profitable strategies. One of the primary considerations for most traders is risk versus reward. In the derivatives market, buyers of options have limited risk and unlimited reward while sellers of options have limited reward and unlimited risk. With this single perspective in mind, it's obvious why most retail traders simply 'buy' options. Most investors would never consider a position with unlimited risk and yet few understand that almost any trade that isn't fully hedged entails enormous speculation. A violent adverse move, which does not allow time for adjustments, can quickly reduce any position to a fraction of its initial value. With this in mind, it's hard to understand why traders would take outright long or short positions under any circumstances. The only possible explanation is that they believe the probability of catastrophic loss is very small and the potential for profit is worth the risk. The most important issue that successful option traders understand is that risk/reward characteristics of a position are not the only considerations. Equally important is the probability of profit or loss. When one evaluates a prospective position, the likelihood of each possible outcome must be factored into the assessment. Is the reward, even a limited one, sufficient to offset the risk? In option trading, risk comes in many forms. Luckily, there are also many ways to trade. To increase the probability of profit, the majority of successful option traders engage in some form of combination, position or spread trading. These methods are simply a way of enabling an option trader to take advantage of mispriced options, while at the same time reducing the effects of short-term changes in market conditions so that he can safely hold an option position to maturity. While there is no perfect position for the option trader, successful investors learn to hedge their risk in as many different ways as possible, thereby minimizing the effects of short-term bad luck. You may not be able completely eliminate risk, but you can reduce it to much less than that of a novice trader who does not utilize all of the available strategies. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI CRUS 8.88 11.50 SEP 7.50 0.38 *$ 0.38 14.9% 13.0% ADAP 30.75 32.00 SEP 25.00 0.88 *$ 0.88 11.8% 12.9% MCOM 25.56 24.25 SEP 17.50 0.88 *$ 0.88 14.7% 12.8% PAX 15.31 14.81 SEP 12.50 0.44 *$ 0.44 11.7% 12.7% PCYC 29.13 30.75 SEP 20.00 0.69 *$ 0.69 10.6% 11.5% RIGS 19.81 19.06 SEP 17.50 0.63 *$ 0.63 10.1% 11.0% NVDA 26.00 26.75 SEP 22.50 0.56 *$ 0.56 7.5% 10.9% NETG 22.25 26.38 SEP 17.50 0.63 *$ 0.63 12.4% 10.8% NSM 28.56 30.50 SEP 25.00 0.63 *$ 0.63 7.4% 10.7% CLTR 29.13 21.00 SEP 20.00 0.63 *$ 0.63 9.8% 10.6% ADAP 22.88 32.00 SEP 17.50 0.75 *$ 0.75 14.1% 10.2% ZRAN 30.63 35.69 SEP 25.00 0.50 *$ 0.50 7.0% 10.2% VTS 19.25 18.00 SEP 15.00 0.38 *$ 0.38 9.0% 9.8% BEAS 24.25 24.88 SEP 20.00 0.38 *$ 0.38 6.5% 9.4% GNSS 24.06 24.75 SEP 20.00 0.38 *$ 0.38 6.4% 9.3% KING 28.63 32.81 SEP 25.00 0.69 *$ 0.69 8.1% 8.8% CYMI 36.88 36.69 SEP 30.00 0.50 *$ 0.50 6.0% 8.7% SCMM 47.88 41.25 SEP 35.00 0.75 *$ 0.75 7.3% 7.9% NMR 33.50 36.88 SEP 25.00 0.63 *$ 0.63 8.6% 7.5% PESC 23.88 27.00 SEP 17.50 0.50 *$ 0.50 9.5% 6.9% CORR 22.50 24.25 SEP 17.50 0.44 *$ 0.44 8.9% 6.5% BOBJ 47.19 49.13 SEP 35.00 0.75 *$ 0.75 7.4% 6.4% PLMD 17.88 27.38 SEP 15.00 0.31 *$ 0.31 6.8% 5.9% CSE 48.06 49.31 SEP 40.00 0.75 *$ 0.75 6.3% 5.5% USAI 45.94 44.75 SEP 40.00 0.81 *$ 0.81 6.1% 4.4% TDW 34.44 32.13 SEP 30.00 0.56 *$ 0.56 5.7% 4.1% DD 74.75 66.38 SEP 65.00 1.00 *$ 1.00 4.7% 3.4% SBGI 20.50 16.00 SEP 17.50 0.38 $ -1.12 -20.1% 0.0% CMTO 18.81 12.56 SEP 15.00 0.75 $ -1.69 -37.5% 0.0% COMMENTS/OBSERVATIONS: SCMM - Still in a downtrend, watch closely. DD - Oversold bounce! Do you want to own it or exit early? SBGI - Market to the rescue! Nice bounce on Friday. CMTO - Didn't receive CableLab certification...may drift up slowly towards November (the next chance to pass). CLTR - Pre-open news (FDA has requested info on the BLA for Bexxar) on Monday made the new position unplayable. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by ROI ****** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired ENER 13.88 SEP 12.50 EQI UV 0.31 10 12.19 7.0% IRF 16.81 SEP 15.00 IRF UC 0.31 95 14.69 6.0% DUSA 15.50 OCT 12.50 QDU VV 0.88 260 11.63 21.5% CYBX 18.69 OCT 15.00 QAJ VC 0.69 1120 14.31 15.4% MYGN 11.88 OCT 10.00 GSQ VB 0.50 0 9.50 14.8% ORTL 18.88 OCT 15.00 OQE VC 0.44 0 14.56 10.4% PRTL 23.06 OCT 17.50 PQW VW 0.50 0 17.00 9.8% HELX 30.25 OCT 22.50 HHQ VX 0.50 10 22.00 7.6% KING 32.81 OCT 25.00 QBK VE 0.44 14 24.56 6.3% Company Descriptions ***** ENER - Energy Conversion Devices $13.88 *** New Contract *** ENER is engaged in activities ranging from product development to manufacturing and selling products as well as designing and building production machinery with an emphasis on alternative energy and advanced information technologies. On Thursday, ENER's subsidiary Ovonic Battery, signed an agreement with Rare Earth High-Tech (China) for a series of major nickel metal hydride battery projects having a potential value of approximately $100 million. ENER's technicals remain bullish though it must work through a resistance area. SEP 12.50 EQI UV Bid=0.31 OI=10 CB=12.19 ROI=7.0% Chart = http://quote.yahoo.com/q?s=ENER&d=3m ***** IRF - International Rectifier $16.81 *** Hot Sector *** International Rectifier is a major worldwide supplier of power semiconductors. These products switch or condition electricity at relatively high voltage and current levels in products such as power supplies, motor controls, computers/peripherals, portable phones & electronic lighting ballasts. IRF is in a strong up-trend and has yet to violate its 30 dma, a bullish chart. The $15.00 put offers a reasonable price to own IRF. SEP 15.00 IRF UC Bid=0.31 OI=95 CB=14.69 ROI=6.0% Chart = http://quote.yahoo.com/q?s=IRF&d=3m ***** CYBX - Cyberonics $18.69 Cyberonics, Inc. designs, develops and markets medical devices which provide a novel therapy, vagus nerve stimulation for epilepsy and other debilitating neurological disorders. Their NCP System reduces the frequency of seizures in adults and adolescents over 12 years of age. SG Cowen initiated coverage with a "buy" shortly after CYBX announced that MediCal will provide coverage and payment for the vagus nerve stimulation treatment. The chart remains bullish though with Cyberonics somewhat overbought, we favor the cost basis near support. OCT 15.00 QAJ VC Bid=0.69 OI=1120 CB=14.31 ROI=15.4% Chart = http://quote.yahoo.com/q?s=CYBX&d=3m ***** DUSA - Dusa Pharmaceutical $15.50 *** Stage II *** DUSA is a company engaged primarily in the development of photodynamic therapy & photodetection, utilizing Levulan, the company's brand of 5-aminolevulinic acid, for various medical indications. DUSA'S key achievement of the second quarter was the receipt of an "Approvable" letter from the FDA concerning their NDA for Levulan Photodynamic Therapy in the treatment of Actinic Keratoses of the face and scalp. Dusa is in a strong stage II climb and nearing "blue sky" territory. OCT 12.50 QDU VV Bid=0.88 OI=260 CB=11.63 ROI=21.5% Chart = http://quote.yahoo.com/q?s=DUSA&d=3m ***** HELX - Helix Technology Corp. $30.25 *** Stage II too! *** HELX is engaged in the development and application of cryogenic vacuum technology and provides innovative solutions to customer requirements in select markets worldwide. Helix business depends in large part upon the capital expenditures of semiconductor (Hot Sector) manufacturers. Last quarter's revenues increased 26% with net income more than doubling. Another technically strong stock that is just shy of reaching a new all-time high. OCT 22.50 HHQ VX Bid=0.50 OI=10 CB=22.00 ROI=7.6% Chart = http://quote.yahoo.com/q?s=HELX&d=3m ***** KING - King Pharmaceuticals $32.81 *** Yep, Stage II *** King is a vertically integrated pharmaceutical company that manufactures, markets, and sells branded & generic prescription products. King seeks to capitalize on niche opportunities in the pharmaceutical industry created by cost containment initiatives and consolidation among large global pharmaceutical companies. This week, King's shares spiked on news concerning the drugs it markets. The $25.00 put offers a reasonable cost basis to target shoot an entry point for those of us that don't like to pay retail! OCT 25.00 QBK VE Bid=0.44 OI=14 CB=24.56 ROI=6.3% Chart = http://quote.yahoo.com/q?s=KING&d=3m ***** MYGN - Myriad Genetics, Inc. $11.88 *** Stage I *** Myriad Genetics is a genomics company focused on the development of therapeutic and diagnostic products based on the discovery of genes involved in major common diseases. They have established two wholly owned subsidiaries -- Myriad Pharmaceuticals, Inc. and Genetic Laboratories, Inc. Myriad has established research collaborations with Bayer, Eli Lilly, Monsanto, Novartis, Schering AG and Schering-Plough. Mryiad appears to be exiting its year-long stage I base. We like the support near our cost basis. OCT 10.00 GSQ VB Bid=0.50 OI=0 CB=9.50 ROI=14.8% Chart = http://quote.yahoo.com/q?s=MYGN&d=3m ***** ORTL - Ortel Corporation $18.88 *** Take-Over? *** Ortel is a bandwidth-enabling company that designs, manufactures and supplies advanced solutions to OEM's for the transmission of video, voice and data. ORTL applies its core technology strengths in semiconductor optoelectronics, fiber-optic transmission and radio-frequency electronics to enhance capacity, increase bandwidth, facilitate Internet access, improve quality and lower costs for broadband cable television networks, as well as for satellite and telecommunications applications. With Ortel selling its wireless divisions, there are growing rumors that it is becoming ripe for a take-over. OCT 15.00 OQE VC Bid=0.44 OI=0 CB=14.56 ROI=10.4% Chart = http://quote.yahoo.com/q?s=ORTL&d=3m ***** PRTL - Primus Telecom $23.06 *** A New Upleg? *** Primus is a global facilities-based telecommunications company providing domestic and international long-distance voice, data, Internet, private network and value-added services. They provide services through an extensive global network of owned and leased transmission facilities. With last quarters record revenue, PRTL is poised to make a run for a new high. The chart remains bullish with some technical support near our cost basis. OCT 17.50 PQW VW Bid=0.50 OI=0 CB=17.00 ROI=9.8% Chart = http://quote.yahoo.com/q?s=PRTL&d=3m SEE DISCLAIMER IN SECTION ONE *****************************
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